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Financial Skeptic Bulletin, May 2010

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[May 14, 2010] Are For-Profit Markets the Cause of Volatility

Yes they create positive feedback loop and increase instability of the system...  Also "...most of our “problems” are borne of “culture” and not easily reversed overnight, and maybe not reversible at all. The Romans would tell you if they were still alive today."
May 14th, 2010 | The Big Picture

The Curmudgeon:

Why exactly does “someone have to provide liquidity”? Does he even know what “liquidity” means?

American Heritage, 4th:

liquidity: 1) the state of being liquid; 2) the quality of being readily convertible to cash.

So long as something is convertible to cash, it is liquid, even if the amount of cash that it gets in conversion does not meet the expectations of the converter.

Then what does it mean to provide “liquidity”? To provide cash? I thought cash is what market participants brought to the table, if the market is traded in cash and not on a barter system. There’s no reason any entity should be expected to make up cash/liquidity shortfalls. A liquidity shortfall is another way of saying somebody doesn’t have as much cash as they want, and well, isn’t that piece of information a part of the whole reason for the price-discovery mechanism that is a functioning market?

Mark E Hoffer:


seems a popular meme:

Slouching towards neofeudalism

“….If you really want to know why the cities and states are so broke, then you must first ask yourself where all the money went. Was the firefighter down the street from you buying vacation yachts for his tropical island? Probably not.
However, the guys on Wall Street who sold your school district, county, and state governments complicated financial derivative products are buying yachts for their tropical islands. Maybe we should start there instead.

Detroit Mayor Dave Bing is struggling to save his city from fiscal calamity. Unemployment is at a record 28% and rising, while home prices have plunged 39% since 2007. The 66-year-old Bing, a former NBA all-star with the Detroit Pistons who took office 10 months ago, faces a $300 million budget deficit—and few ways to make up the difference.
Against that bleak backdrop, Wall Street is squeezing one of America’s weakest cities for every penny it can. A few years ago, Detroit struck a derivatives deal with UBS (UBS) and other banks that allowed it to save more than $2 million a year in interest on $800 million worth of bonds. But the fine print carried a potentially devastating condition. If the city’s credit rating dropped, the banks could opt out of the deal and demand a sizable breakup fee. That’s precisely what happened in January: After years of fiscal trouble, Detroit saw its credit rating slashed to junk. Suddenly the sputtering Motor City was on the hook for a $400 million tab.

What most often happened is that Wall Street rating agencies, the same agencies implicated in corrupt business practices, downgraded the municipal bonds, thus turning the the financial deals into an albatross for broke cities, but a profitable one for Wall Street….”

[May 10, 2010] The tension between masses and elites is every bit as intense…

May 8  | FT Alphaville

But for now, the important thing is to understand that both Europe and the United States are facing fundamental challenges to the legitimacy of, if not the regime, then at least the manner in which the regime has handled itself. The geopolitical significance of this crisis is obvious. If the Americans and Europeans both enter a period in which managing the internal balance becomes more pressing than managing the global balance, then other powers will have enhanced windows of opportunities to redefine their regional balances.


I must get round to reviewing 'The collapse of complex societies': It is a model that really covers all of this territory very well.


it is a global political/financial/economic crisis quite right

It is time to take on the financial oligarchs and kick out the lobbyists and special interest groups.

[May 10, 2010] What Business Is Wall Street In

The best analogy for traders? They are hackers.

Seeking Alpha

Excerpted with permission from Mark Cuban's "Blog Maverick" weblog:

My last two posts were designed to stimulate discussion. But let's talk about the real problem that regulators, public companies, investor/shareholders and traders face. The problem is that Wall Street doesn’t know what business it is in. Regulators don’t know what the business of Wall Street is. Investor/shareholders don’t know what business Wall Street is in.

The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.

The best analogy for traders? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.

I recognize that one is illegal, the other is not. That isn’t the important issue.

The important issue is recognizing that Wall Street is no longer what it was designed to be. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days ?

...individual stocks become pawns in a much bigger game than I feel increasingly less comfortable playing. It is a game fraught with ever increasing risk.

The PIMCO guys (who I think are the smartest guys on the Street), talk about a new normal as it applies to today’s state of the world economy. I think just as important is the new normal as it applies to Wall Street. Wall Street is now a huge mathematical game of chess where individual companies are just pawns. This is money in the bank for the big players like Goldman (GS), Morgan (MS), etc. Why ? Because the game of chess is far too complicated for 99% of the institutions out there investing money.

[May 09, 2010] Staying sane in a crazy market

Great Keynes quote that is one of the best explanations of theory of reflexivity....


Let me frame my discussion of Thursday's drama in terms of two very different views of what your strategy might be for investing in stocks. One view was articulated by John Maynard Keynes on page 156 of his General Theory:

professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole;

so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one's judgement, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest.

We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.

Is there an alternative interpretation of what gives a stock value, apart from what others think that others think it might be worth? Most assuredly there is, and the easiest way to understand that value is to contemplate buying a stock with the intention of never selling it, simply passing it on to your heirs, and from them to their heirs. Is the asset, if used in this way, of any benefit to you? Sure is, because even if you never sell the stock, you and your heirs can expect to receive a dividend payment from the company four times a year as long as the company stays in business.



[May 30, 2010] The ECB Blasts Governmental Fear-Based Racketeering, Questions Keynesianism, Believes The Fed's Powers Are Overestimated by Tyler Durden

I like the reference to Fear-Based Racketeering
May 29, 2010 | zero hedge

In what could one day be seen by historians as a seminal speech presented before the Paul Volcker-chaired Group of Thirty's 63rd Plenary Session in Rabat, the ECB's Lorenzo Bini Smaghi had two messages: a prosaic, and very much expected one: of unity and cohesion, if at least in perception if not in deed, as well as an extremely unexpected one, in which the first notable discords at the very peak of the power echelons, are finally starting to leak into the public domain. It is in the latter part that Bini Smaghi takes on a very aggressive stance against not only the so-called "inflation tax", or the purported ability of central bankers to inflate their way out of any problem, but also slams the recently prevalent phenomenon of fear-mongering by the banking and political elite, which has become the goto strategy over the past two years whenever the banking class has needed to pass a policy over popular discontent.

The ECB member takes a direct stab at the Fed's perceived monetary policy inflexibility and US fiscal imprudence, and implicitly observes that while the market is focusing on Europe due to its monetary policy quandary, it should be far more obsessed with the US. Bini Smaghi also fires a warning shot that ongoing divergence between the ECB and Germany will not be tolerated. Most notably, a member of a central bank makes it very clear that he is no longer a devout believer in that fundamental, and false, central banking religion - Keynesianism.

First, a quick read through the "prosaic" sections of Bini Smaghi's letter.

Bini Smaghi, who is a member of the executive board of the ECB, has a primary obligation to defend the ECB's public image in this time of weakness and complete lack of credibility. And so he does. When discussing the ECB's response to the Greek fiasco and contagion, he is steadfast that the response, although delayed and volatile, was the right one. Furthermore, he claims that the hard path Europe has set on is the right one, as it will ultimately right all the fiscal wrongs, even without the benefit of individual monetary intervention. Ultimately, the ECB is convinced that not letting Greece fail, either in the form of union expulsion or partial default, was the right decision, as "this sill force euro area countries to address their fiscal positions earlier. It’s not easy. But it will be done, because it can be done and it has to be done in any case. And, last but not least, because there are no alternatives." Alas, while we agree that admission is the first step on the road to recovery, the subsequent steps will prove to be insufficient. The imbalances in Europe are of such great magnitude that hoping that countries eventually grow into their balance sheets by way of austerity is simply a ridiculous assumption, and as such does not merit extended overviews. We note this with irony, because apparently the ECB, contrary to elementary school rule #1, favors quantity over quality. As the ECB board member says:

Let me consider the arguments put forward by those who regard a Greek default as unavoidable.

Their first argument is economic. The adjustment programme is too harsh, given the level of the debt-to-GDP ratio reached in Greece. It will produce a debt spiral which will lead the country into a recession and deflation. The problem is made worse by the loss of competitiveness suffered by Greece over the last decade and the impossibility of devaluing the currency. Their reasoning is generally no more sophisticated than that. Some analysts have put together a few numbers to show that they are aware of the problem. But I have not seen a serious analysis of the 120-page report produced by the IMF which looks at the various aspects of the programme, including the impact of the structural measures on growth, the sustainability analysis or other features of the programme. Not one review of the realism of the assessments made by the staff of the IMF and the Commission. In fact, I suspect most market analysts have not even looked at the adjustment path for the primary surplus which is embedded in the programme, which aims to reach 6% of GDP in 2015, a level no different from the ones that other countries in the past have implemented to consolidate their public finances. It’s a level that a number of other countries – including some outside the euro area – will have to achieve if they want to stabilise their debt. Most market analysts and other observers have probably not even looked at the structural measures that are embedded in the programme, affecting for instance the labour market, or at several liberalisations, and their impact on economic growth. The inefficiencies in the tax collection system, which have been aggravated before the elections, have also been overlooked. The perception that the Greek programme will not work looks more like an assumption than the result of a serious assessment.

To summarise, I wonder which analysis is more serious and credible: the many one-pagers, very well publicised – I must admit – which probably aim to influence the rest of the market; or the IMF’s 120 pages of rather tedious analysis describing the contents of the programme, together with its risks.

To this we ask: if a collective brain trust is charged with the goal seeked, and well compensated by taxpayers, duty to put together a 1,200 page report that confirm the primary tenets of the trust itself, will Mr. Smaghi give it 10 times the credibility of the ECB's report? Or how about one million typewriter-armed monkeys putting together 1,200,000 page "analyses" claiming that the Greek default is inevitable? We hope someone has the facilities to conduct just such an experiment. Perhaps the futility of such a simplistic act is the very reason why not more than a one-pagers is required to refute the central bank dogma.

Thus the key axis of contradiction emerges: the ECB is willing to set off on the "demonstratedly" arduous journey of forcing its member states to right their fiscal (income statement) evils, yet while not acknowledging that the key missing link, balance sheet restructuring, is not necessary but critical. There is a reason why plain vanilla restructurings focus on the balance sheet, and not on the income statement: a company with a fresh start balance sheet can grow its income statement without its debts being a hindrance, on the other hand, rarely if ever, do income statements allow companies to grow into untenable balance sheets. This is the main flaw in the ECB's plan. And it is these very contradictions that force the European populace to lose its credibility in the ECB, a concern which even the central bank is all too aware of.

The balance of the "prosaic" part of the speech is along the same lines: merely a defense of the ECB's line of actions, driven primarily by a direct response to the market, and thus a very short-sighted and reactive, instead of proactive, policy response, which merely invites the market to test out the ECB's lack of resolve. And once again, the ECB is not naive and is fully aware of this, yet it redirects attention to other source of "market-test" weakness: "Financial markets are testing each country, one by one, to see whether they are willing to adopt the necessary budgetary measures, starting with those which seem to be facing the greatest hurdles to consolidation." Bini Smaghi is right and wrong here: the market will continue testing country by country, but not to determine fiscal resolve, only to take advantage of the lack a monetary one. And so from crisis to crisis, the market will continue reaching deeper until it finally tests the very core of the eurozone: Germany.

And speaking of Germany, this brings us to the other part of Bini Smaghi's letter. In one of the first open shots of public confrontation, we see that the ECB has been very much displeased not only by rampant fear-mongering, but by the words of Germany's Angela Merkel, whose recent repeat declarations that Greece could be allowed to leave the union, have undermined the bedrock of the ECB. Furthermore, as the WSJ reports, "in a rare show of defiance for the consensus-driven ECB, Germany's central bank head Axel Weber told the German newspaper Börsen-Zeitung that he viewed the bond-buying decision "critically" and that it carried "substantial stability risks." Is this the type of rancorous infighting between Europe's two main powers, that will seal the fate of the Eurozone experiment far more certainly than parliamentary stormings in Athens?

We read in Bini Smaghi's letter the first fingerpointing of displeasure by an ECB official aimed squarely at Germany:

A further dimension, in the European context, is the difference in cultures and sensitivities. They affect how issues are communicated within countries, in particular between politicians and their electorates. These are differences which totally disconcert financial markets. For instance, in one large euro area country it was thought that public support for swift action could be achieved only by dramatising the situation, for instance, by telling the public that “the euro is in danger” or by considering the possibility of expelling a country from the euro area. But it was not realised that, in the midst of a financial upheaval, such words are like fanning the flames and that the cost of the support package could only increase following such dramatic declarations. By contrast, in other countries, leaders want to be seen as being in control of the situation and taking all sorts of initiatives to reassure their electorates. The media, of course, have a field day reporting on such apparently inconsistent activities.

We hope that the ECB's displeasure by the kind of racketeering that Americans have grown to know and loathe, as it is performed either openly by politicians who directly threaten with end of the world scenarios every time they wish to get their way, or indirectly, such as when the market crashes a 1,000 points when it appears that the Fed is on the verge of losing its secrecy, is espoused by more individuals and organizations. On the other hand, we will closely follow the now open feud between German and Europe's Central Bank - if past experience is any indication, infighting between these two will only lead to mutual weakening, and result in an even faster forced reorganization of peripheral European countries, and, eventually the euro.

In this regard, perhaps Bini Smaghi's speech created far more damage than damage control: now that the public's, and more importantly, the market's, attention is be drawn to the duel between Germany and the ECB, this will merely destabilize the monetary union even more, now that monetary and political unions, and conflicts, are synonymous, a point not lost on the ECB executive himself: "As I said earlier, monetary union is de facto a political union."

And now that European monetary "politics" are the center stage, we find two other pearls in Bini Smaghi's speech.

Not too surprisingly, the ECB is now directly pointing a finger at the Fed, where conventional wisdom has long held the belief that due to its ability to determine independent monetary policy, backed by the world's reserve currency, the Fed can and always will easily inflate its way out of any complication.

To believe that an inflation tax can solve the problem posed by the mounting public debt is an illusion that some people like to cultivate. For several reasons. First, people are less naïve than some might think – they dislike an inflation tax as much as other forms of fiscal adjustment. Second, it’s not so easy to generate inflation, in particular ‘surprise’ inflation, without provoking a more-than-proportional increase in interest rates, also in light of the short average maturity of public debt in most countries. Third, a rise in inflation, and inflation expectations, would produce a major upward shift in the yield curve, inflicting major losses on the banks and financial institutions which have been heavily investing in these markets, potentially undermining the recovery.

This is probably the best encapsulation of the threats, or rather threat, that another QE episode by the Fed will bring with it. In essence the ECB is saying that should the Fed pursue another QE episode, the imminent explosion in short-end interest rates will lead to a solvency crisis within the US itself, monetary policy or not. Bini Smaghi points out one very critical truth: in not having a reserve currency, and thus protected by the belief that the ECB can inflate its way out of complication, it is forced to pursue fiscal reform, much sooner than the US will, which will only result in a much greater crisis in the US, once it becomes clear that the marginal influence of monetary policy will be drowned out by a sea of fiscal imprudence. And for the one true shining example of the latter, look no further than the CBO's 10 year budget deficit estimates.

In short, the impossibility of resorting to an inflation tax is forcing euro area countries to tackle the burden of public debt sooner rather than later. In other countries the illusion of being able to resort to the inflation tax might delay the adjustment, but the longer the treatment is postponed the harsher it’s likely to be. End of digression.

Was this the first shot across the bow in the the transatlantic central bank wars? Too bad the ECB will be insolvent overnight if the Fed decides to truly escalate and pull all its swap lines tomorrow. Why risk retaliation? This is easily the most important question needing answering over the next several weeks.

Last, but not least, are the following zingers that have no other intent than to poke at the ever larger holes appearing in the fabric of that one modern false economic religion known as Keynesianism.

In the aftermath of the Lehman failure, governments around the world seemed to rediscover Keynes. They injected huge amounts of borrowed money – public funds – to stabilise the economy after the shock of the Lehman failure. These policies worked, and averted a global depression. The success of those policies has led governments – encouraged by international organisations – to continue using expansionary fiscal policies to try pulling the economy out of the recession and getting it back to the pre-crisis level.

The strategy is based on a model which may turn out to be inappropriate in the current conjuncture. Let me discuss some of the underlying assumptions of the model. First, the initial fiscal impulse was successful in avoiding a depression because it helped to coordinate agents’ expectations, in the Keynesian or Knightian way of reducing uncertainty, thereby avoiding a vicious circle of recession and deflation. The direct impact on domestic demand may have been more modest, as shown in countries where the size of the fiscal stimulus was more contained but nevertheless fared equally well. Second, potential growth might have been severely affected by the crisis. As a result, the pre-crisis level of output, achieved in a bubble economy, would not represent a sustainable objective over the policy-relevant horizon. Third, the level achieved by the public debt in many countries may have impaired the effectiveness of further expansionary fiscal policy.

To sum up, while the fiscal expansion was successful immediately after the Lehman crisis, it may not be sustainable over time and may have to be corrected rapidly. Financial markets seem to be giving increasing attention to this hypothesis. And they have started to test it.

Is this the last degree of "religious" doubt before outright revulsion set in and the oligarchic heretics emerge? More so than the question of whether or not the euro is viable, is whether the beginning of the end for Keynesianism is approaching? If so, the imminent revolution in Western world economic thought will be unprecedented, and the resulting global reset will lead to a world where daily news will no longer be dominated by headlines about more record banker theft going unpunished, co-opted and facilitated by a cheaply purchased legislative, executive and judicial system.

Link to full speech by Lorenzo Bini Smaghi, Member of the Executive Board of the ECB at “The Group of Thirty”, 63rd Plenary Session, Session I: The Crisis of the Eurosystem, Rabat, 28 May 2010

[May 30, 2010]   Dave Rosenberg’s MARKET THOUGHTS

The Big Picture

One of our favourite equity valuation measures, the Shiller P/E ratio, slipped to 19.8x in May from a cycle-high 21.8x in April (the Shiller P/E uses the 10-year average of inflation-adjusted earnings). Even still, this metric suggests that relative to the long-run, which spans to the 1881, the market is overvalued by about 20% compared to over 30% in April. If history is a guide, when the Shiller P/E is at these levels, the 10-year annualized total return of equities is just over 5%

[May 30, 2010]   "The Impact of the Irrelevant on Decision-Making"

Bloggers (and Jon Stewart) need help:

The Impact of the Irrelevant on Decision-Making, by Robert H. Frank, Commentary, NY Times: Textbook economic models assume that people are well informed about all the options they’re considering. It’s an absurd claim... Even so, when people confront opportunities to improve their position, they’re generally quick to seize them. ... So most economists are content with a slightly weaker assumption: that people respond in approximately rational ways to the information available to them.

But behavioral research now challenges even that more limited claim. For example, even patently false or irrelevant information often affects choices in significant ways. ...

Lafayette :


{So most economists are content with a slightly weaker assumption: that people respond in approximately rational ways to the information available to them. }

No, not even this is adequate. More so, it does not justify the use of Disposable Income, aka Consumer Demand. (If you don't know why this is important, than maybe you are in the wrong blog?)

People's decision making can be tweaked around the irrational - and easily so. Impulse buying is one such tweaking that marketing experts employ with amazing usefulness. When you arrive at the check-out of a supermarket, why is there an array of sweets available for your delight. Or the latest "People" journal? Why aren't these products in their proper section? (Two reasons actually, the first of which is that they are "impulse purchases" and secondly they could otherwise likely go unnoticed.)

Thus, impulse and not rational propel you to purchase them - and this is just the simplest of examples.

Conspicuous Consumption has the same motivation that propels one to buy a Beemer or lunch at the most expensive restaurant in town. One MUST be seen only in the right places. Are these impulses rational?

Some would say yes, particularly if they lived in Hollywood, where they are conforming to a lifestyle that is all appearance and little substance. But what is their economic utility as consumption? That is considerably more difficult to substantiate.

(Far more so than, say, a Public Option for decent national Health Care insurance.)

Thus arises the pitfall of economic rationalization as regards our motivations that propel Demand. It ennobles mankind to assume that individual decisions were based uniquely upon logic and rationale. But, alas, those are not the only attributes underlying human decision making. There are others far more base that also propel us to demonstrate some pretty silly consumer behaviour.

[May 29, 2010] Attacking Science to Defend Beliefs

While I can agree with the main thrust of the argument; to label as science the on-and-off-again twenty year Anglo-Saxon campaign to kill the Euro is quixotic at best even if recently this campaign has been leaving some dark blue marks across the eurozone’s face. One area where I still hold suspicions though are the Dutch and German banks who bought all that subprime crap from Wall Street. Were they really just stupid euro-country bumpkins or was it more than that? The jury is still out on that one.
May 29, 2010 | naked capitalism
A disconcerting tendency that may also impair adaptability (and this seems to be particularly pronounced in the US) is the tendency to engage in black and white thinking. If (in someone’s mind) the only alternative to one view is its polar opposite, that makes it hard to adjust one’s perspective.

Ars technica presents a more specific example of this phenomenon, of how people defend their mental models in the face of confounding evidence. A study from the Journal of Applied Social Psychology looked into some of the mechanisms that individuals use to reject scientific information that is at odds with their views. Admittedly, this is a small scale study, so one has to be cautious in generalizing from it. But it does seem consistent with some of the strategies I routinely seem in comments.

From ars technica:

It’s hardly a secret that large segments of the population choose not to accept scientific data because it conflicts with their predefined beliefs: economic, political, religious, or otherwise. But many studies have indicated that these same people aren’t happy with viewing themselves as anti-science, which can create a state of cognitive dissonance. That has left psychologists pondering the methods that these people use to rationalize the conflict.

A study published in the Journal of Applied Social Psychology takes a look at one of these methods, which the authors term “scientific impotence”—the decision that science can’t actually address the issue at hand properly. It finds evidence that not only supports the scientific impotence model, but suggests that it could be contagious. Once a subject has decided that a given topic is off limits to science, they tend to start applying the same logic to other issues…

Munro polled a set of college students about their feelings about homosexuality, and then exposed them to a series of generic scientific abstracts that presented evidence that it was or wasn’t a mental illness (a control group read the same abstracts with nonsense terms in place of sexual identities). By chance, these either challenged or confirmed the students’ preconceptions. The subjects were then given the chance to state whether they accepted the information in the abstracts and, if not, why not.

Regardless of whether the information presented confirmed or contradicted the students’ existing beliefs, all of them came away from the reading with their beliefs strengthened. As expected, a number of the subjects that had their beliefs challenged chose to indicate that the subject was beyond the ability of science to properly examine. This group then showed a weak tendency to extend that same logic to other areas, like scientific data on astrology and herbal remedies.

A second group went through the same initial abstract-reading process, but were then given an issue to research (the effectiveness of the death penalty as a deterrent to violent crime), and offered various sources of information on the issue. The group that chose to discount scientific information on the human behavior issue were more likely than their peers to evaluate nonscientific material when it came to making a decision about the death penalty.

Yves here. I’m not certain whether the authors are being tongue in cheek in this section:

….it might explain why doubts about mainstream science seem to travel in packs. For example, the Discovery Institute, famed for hosting a petition that questions our understanding of evolution, has recently taken up climate change as an additional issue (they don’t believe the scientific community on that topic, either). The Oregon Institute of Science and Medicine is best known for hosting a petition that questions the scientific consensus on climate change, but the people who run it also promote creationism and question the link between HIV and AIDS.

Yves again. It is worth considering whether some of this “science can’t evaluate this area” meme exists is at least in part because it is being marketed. Perhaps I lead a cloistered life, but when I was younger, say 20 years ago, I can’t recall encountering this line of argument.

The book Agnotology: The Making and Unmaking of Ignorance gives a detailed account of how the tobacco industry first tried to keep research about smoking-related cancers out of the public eye, and when that started to fail, to attack the science (”Doubt is our product”). One of its late-stage techniques was to promote the idea that the topic wasn’t settled when a tally of the then-available research would say otherwise. Given that knowledge is often the product of political and cultural battles, promoting higher-order anti-science ideas (”science has very considerable limits, there are a lot of areas outside its ken”) gives those who would seek to reshape mass opinion more freedom of action.



For instance, early in the days of euro wobbliness, some readers in Europe would go a bit off the deep end at the suggestion that the Eurozone has serious structural weaknesses and that the austerity regimes required of the deficit countries looked unattainable (and even if they could be met, success would be a Pyrrhic victory). It wasn’t so much that these readers found weaknesses or shortcomings in the post; it’s that its conclusion was clearly deeply offensive to them.

Yes, it’s true that many people find the proposition morally deeply repulsive that the non-rich, already beleaguered by job destruction and the shredding of the safety net, should be crushed by “austerity” in order that the banks can be bailed out and the rich can continue evading taxes, such that even if there were reason to believe this course of action would bring broad prosperity 20 years from now they’d still reject the idea.

Of course neoliberalism has been dominant for c. 40 years now, and that broad “prosperity” remains just as much a vapor on the horizon today as it ever was, except to the extent that a debt ponzi scheme could temporarily prop up a version of it.

The fact is that we know by now, empirically, that neoliberalism’s version of the “sacrifice today so we’ll have utopia tomorrow” lie is the exact same Big Lie as when any other ideology or regime told it. We know for a fact that prosperity will never “trickle down”, and that it was never intended to trickle down.

So by now anyone who rejects the predatory prescriptions of the kleptocracy is acting based on the overwhelming evidence, therefore “scientifically” for purposes of this discussion, while anyone who still retains faith in trickle down is truly mired in a cult fundamentalist mindset.

So much for the proposition that broad-based prosperity can be attained by continuing down the neoliberal path. As for whether exponential debt can be forever zombified under any circumstances, let alone whether reality-based growth could ever again be attained, it’s the physics of energy which says No, while the cornucopianism of debt and energy is always reduced in the end to the religious proposition, “technology will save us; technology will always find a way”.

So there too, whatever emotions may go into the skeptical mindset, science is not on the side of the pollyannas.

Technology did not in fact find much of a way (by modern standards) prior to the fossil fuel age, and a scientifically sober mindset would start with the theory that it will not be able to sustain anything like this level of energy consumption and massive, top-heavy, high-impact centralization post-Peak Oil.

And then there’s every other resource limitation. There’s the stark unreality of the very concept of exponential growth. Really, it’s hard to imagine a less scientific mindset than that which believes there’s a way to “grow” out of this already absurdly unsustainable predicament.

JimS :

I think there is a difference between being anti-science with a small “s” and being anti-Science with a capital “S”. Few would argue that 2+2=4, but theoretical physicists seem to be evenly divided on string theory. Paradoxically the bigger the picture is, the more binary the beliefs. This is not due to disagreement with the data points but with the underlying principles. Consider the following familiar exchange:

Student: “I’ve run the regression analysis, and here is my model.”

Professor: “Very good, but are you sure you’ve identified all the variables that might be significant?”

People don’t question individual mechanisms; it’s whether or not the right mechanisms are being accounted for. In that sense the datum is irrelevant.

What do skeptics and good scientists have in common? They both question if all the significant variables have been found.

As for denial, well, people are fundamentally irrational–that is to say we are only rational to a certain point–but on top of that we’re less educated. A friend of mine observes that he learned debate in school, but not logic from which to debate. It seems to me that education is more formulaic these days, sacrificing critical thinking (even though all text books have those grey-background “critical thinking” boxes).

For the record, as a Christian I do not find God and evolution to be mutually exclusive; nor God and quantum physics for that matter. Can God bake a potato so hot that He can’t eat it? Is Schrödinger’s cat dead or alive?

Kevin de Bruxelles:

While I can agree with the main thrust of the argument; to label as science the on-and-off-again twenty year Anglo-Saxon campaign to kill the Euro is quixotic at best even if recently this campaign has been leaving some dark blue marks across the eurozone’s face. The fact is economics is nothing more than religion. And sure, like most religions it certainly contains some nuggets of wisdom. But to pretend that economics and the recent attacks on the euro has anything approaching objectivity is quickly proven wrong by the fact that similar data points in the US or UK are handled differently. For example where are the outcries of the break-up of the dollarzone since California and other US states are imposing austerity programs? Should the mid-western states that have growing ghost towns break off a hillbilly dollar? When the euro goes up it is a sign of disaster, when the euro goes down it is also a sign of disaster. When European trade increases it is called “beggar thy neighbour”; but when the eurozone by its very nature does not allow “beggar thy neighbour” between its members it is called an suboptimal currency area.

According to Robert Nozick, one cannot have knowledge of something if one does not accept that the opposite could also be true. For the eurozone critics it would go like this:

1.Statement Y: The eurozone is doomed to failure

2.Person X believes Y (the eurozone is doomed to failure)

3.If Y were false (the eurozone were not doomed to failure), Person X would accept the eurozone is viable if it were so.

4.If statement Y is true, Person Y would believe it.

Nozick uses the example of a father who “knows” his son is innocent of a crime. After the trial the father cannot really say he “knew” his son was innocent since if the kid had been found guilty he would still have believed him innocent. The same is true of some eurozone critics; they have “known” the eurozone would fail and they will keep on knowing it until the day it eventually happens, one way or the other. They can never accept that the eurozone could survive because this would blunt the force of their attacks. But this doesn’t mean that their critiques are false. For example some critics quite correctly point out that the European financial architecture is flawed. But the second anyone moves towards correcting any flaws, these critics will immediately scream about eurozone fascism. The point is that the many of the attacks are only meant to help bring the eurozone down. Other onslaughts against the euro are by the mouthpieces of Anglo-Saxon elites who are more concerned that European style social democracy never again raise its head in the US. They were scared by the recent health care debate where America’s unjust and inefficient health care system was openly compared to the more advanced and fair European systems. Anyone who knows how well the rich in America are cared for can understand why they don’t want to share any of their advantages with any other social class. The next time any American compares their social benefits to Europe they will be slapped down by the fact that the Euro has obviously collapsed all the way back to the midpoint of its historic value range.

No the battle of the Euro cannot be studied by science any more than the Eastern Front in WW2 could be. The way it has to be studied is as a power struggle.

And as a media campaign the only comparison in recent memory was the wall of noise heard before the invasion of Iraq. The only remaining question is which Anglo-Saxon economist will get to play Colin Powell and make the requisite speech before the UN giving Europe an ultimatum to dismantle the eurozone? And yes some euro-symps lash out and get angry by these insistent attacks on the euro. And this is understandable since arguably the eurozone’s recent troubles started when European banks started barebacking loads of infected American subprime paper from their Wall Street beaus. In more vulgar terms the US has given Europe the financial equivalent of a sexually transmitted disease and now as the eurozone’s sores and scabs become more apparent the Anglo-Saxon press is shouting with glee about what a skanky debt-ho Europe is! And as a result of the growing Anglo-Saxon infection Europe’s financial immune system is weakening and has to undergo some pretty drastic procedures, the shaming and ridicule has risen to a fever pitch.

But while outrage is understandable, people in Europe really need to put their energy into counterattacks and building defences while always understanding that the most natural thing in the world is for the powerful Anglo-Saxons to attack the less powerful Europeans. Thucydides described it well in the Melian Dialogue. The more powerful Athenians decided they were going to invade the island of Melos. They sent a delegation there to convince the local leaders to surrender. One of the arguments they used was:

For ourselves, we shall not trouble you with specious pretences- either of how we have a right to our empire because we overthrew the Mede, or are now attacking you because of wrong that you have done us- and make a long speech which would not be believed; and in return we hope that you, instead of thinking to influence us by saying that you did not join the Lacedaemonians, although their colonists, or that you have done us no wrong, will aim at what is feasible, holding in view the real sentiments of us both; since you know as well as we do that right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must.

In the end the Melians declined to surrender and they were subsequently overrun by the Athenians, who killed all the men, and raped some and enslaved all of the women and children.

So Europe has to decide whether it will stand up and fight for the Euro or weakly submit to the Anglo-Saxon attacks. European energy should not go into being outraged by the attacks on the eurozone since this reeks of naivety. Better that the hard decisions be taken. Since WW2 Europe has played the undisciplined child to the US’ parental role. Since Europe is still more or less living under the US’ roof is it wrong for the US to call the shots like abandoning the Euro? Is Europe ready to finally grow up, become fully independent move out and the US’s comfortable and protective house? It will be questions like this, not science, that will decide if the eurozone survives or not.

For example what would be the best European counterattack to the Anglo-Saxon onslaught? Exporting deflation? Perhaps. Which of the main global economic blocks is balanced and stable enough to come through a good bout of deflation? The US – never. China – hardly. Japan – perhaps. Europe – probably.

Kevin de Bruxelles at 6:29 am:


But as I said in my first sentence I agree with your arguments. In fact the Robert Nozick quote reinforces what you are saying. What separates science from belief is that in science you must allow for the possibility that you are wrong. In the world of belief there is no possibility of being wrong.

The only thing I objected to was the idea that economics was science and that therefore the euro vultures have objectivity on their side. But I see you have cleared this up. Since we are currently seeing a form of economic war and my fortunes for better or worse are locked into one side of this war, I was just trying to point out that it will be the principles of power which will determine who is right or wrong in the case of the euro, not science.

But viewed from a point of view of power, is it better to obstinate in your beliefs or to waver and prevaricate? Was Churchill wrong to disregard the power of Germany and hold out? It was not very scientific of him. Was Lincoln wrong to continue to battle the South after years of frustration and defeat? In the world of power and conflict true believers are sometimes required. Taken too far this type of rigidity will destroy a culture or movement. The best analogy I can think of is that obstinacy can serve as the reinforcing bars of the concrete of a society or organization at war. Too many reinforcing rods destroys the integrity of the culture just as quickly as too few. As with so much of life it is all a question of balance. So from a strategic point of view there is logic for both sides of the Euro war to stay locked into their positions but at the same time they must remain flexible to adapt to the ebbs and flow of the conflict.

People often demand their leaders show some spine. I only hope European leaders will muster some and show both a little irrational exuberance as well as some strategic smarts in defending the euro.

Kevin de Bruxelles:

Thanks AJ and I agree with your comment on the continuum.

Where I get frustrated with economists and some critics of the Euro is that they use floating and ever shifting criteria for their attacks. For example they decry deflationary austerity plans for Greece which try to correct obvious economic overshooting during the past ten years. But then they turn around and openly suggest Greece leave the eurozone. This would mean that the value of Greece as a whole would be cut in half (except their outstanding debt if there is any remaining). This would be wildly deflationary; Greek purchasing value would be cut in half! But of course Greek assets would also become dirt cheap and the vultures would flood in and buy up anything worthwhile in the new drachmas. Then they also say Greek could print its own money and export its way to full employment. But when the euro drops in value its all about beggaring thy neighbour and that the rest of the world will never buy all that olive oil.

But there are other economists who do use consistent criteria and do not necessarily have an ulterior agenda behind their words. These economists can indeed approach the level of science and European leaders would be wise to listen to them.


Kevin de Bruxelles,

I very much dislike your framing of the issue.

If Europe opts for austerity, which I and many of the posters on this blog believe will rip Europe asunder; it seems to me this is something Europe is doing to itself.

Your framing of the issue as European vs. Anglo-Saxon draws the battle lines in the wrong place. This is really a battle between rank and file Europeans vs. Europe’s financial elite.

Now granted, deficit hawkishness has been a permanent fixture of Anglo-Saxon thought. So I suppose if one wants to take the blame-the-Anglo-Saxon game to the next level, one could allege Anglo-Saxon cultural imperialism. But one must recall that it was a couple of immigrants from Europe—-Mises and Hayek—-who were most responsible for austerity’s revival, and this in the wake of lessons that we should have learned from the WWI-Great Depression-WWII era.

It is certainly true that the beliefs of Mises and Hayek are presented as “science,” and this claim to science gives them more cache than they would otherwise have. But you yourself said: “What separates science from belief is that in science you must allow for the possibility that you are wrong.”

Hayek’s and Mises beliefs are based on a phenomenon that happened in Europe in the first part of the 20th century, specifically in the Weimar Republic. They took this very limited amount of evidence and made sweeping generalizations. And then, when evidence mounted that these sweeping generalizations were wrong, or at least inadequate, did the Austrians admit they were wrong? No, quite the opposite, their original conclusions merely ossified into an unshakable dogma. Is this science?

This is not the first time that truth, or the quest for truth, has been sacrificed on the altar of specious political, philosophical and economic conceits, nor will it be the last time. But is the fact that this happens reason to abandon the quest for truth?

Kevin de Bruxelles:


My framing of the Anglo-Saxon / European conflict was based over the assault on the Euro. For the most part, besides a few European commentators working for Anglo-Saxon media organizations, the attacks on the Euro are from Anglo-Saxon sources.

But let me address your concerns on austerity. First of all, I totally understand where you are coming from. In Latin America or even America I would be against austerity programs. Austerity in an unfair society is unfair. But conversely, austerity in a just and fair society can very well be fair.

The question I would ask is whether the people in general have benefited from the previous good times? If so, if GINI scores are low, if benefits and salaries have been rising, then it is fair that austerity hits all classes. If all classes rise in the good times then they have to fall back together some in the bad times. But at the end of the cycle all classes will hopefully be better off than before.

But in America where the rich have been rising and the poor falling even in the good times is it fair to ask the poor to take the austerity hit alone? Hell no.

And believe me, I speak from experience about austerity. As an architect we live these cycles harder than most. During the goods times we are flying around doing towers in places like Moscow, creating insane mixed-use complexes in Dubai, doing huge housing complexes in London, off to Rio for a corporate campus, doing entire cities in China, next to Switzerland for some filthy rich international organization’s headquarters, etc. And you can be sure that during these times we try to push our still modest salaries up as high as we can and push to get nice bonuses. But then all of a sudden the recession hits and fifty percent of our colleagues are laid off. Those that survive get automatic 10% pay cuts, bonuses become ancient memories (which means a total of 25% pay cut) and we get excited to have the most humble sort of project to work on. In other words its winter time but the cycle of life goes on. Spring will eventually come and the cycle starts over again. As the days start to get sunnier, many of those colleagues come back. Some of the cool projects get the go ahead, and the 10% salary cut finally gets rescinded.

It’s currently economic winter in Europe but it is still fundamentally a fair and just society. So everyone must pull together to get through these trying times.

One area where I still hold suspicions though are the Dutch and German banks who bought all that subprime crap from Wall Street. Were they really just stupid euro-country bumpkins or was it more than that? The jury is still out on that one.


About 30 years ago, I realized that religious fundamentalism was on the rise in all the world’s major religions in botht the East and the West. I decided that it was less a return to traditional morals and more a flight from uncertainty. If you know what the truth is than you don’t have to suffer the insecurity of doubt. If your life is constantly being assaulted by economic and ideological forces beyond your control then embracing religious dogma can give you something to fix your life to. It can give you a kind of inner peace of mind, even as it sets you in conflict with everyone who does not believe as you do. It is not so much a rejection of the materialism of modernism (though there can be some of that) as the chaos and disempowerment associated with it. And in this regard science is the symbol of modernism, and hence the main target of those disenfranchised by it.

Now there can be counterweights to this, social progress for one with its greater material benefits, equality, fairness, and stability. But in the last 30 years what we have seen is only some increased material benefits and marked declines in all the others. Why has this been the case? Because our peculiar form of modernism has given rise to predatory elites. Chaos, uncertainty, insecurity, dislocation, these are not unavoidable, inevitable aspects of modernism. They are tools of our elites to shock us into numbness and inaction. They are meant to make us feel powerless. Our elites only think in the short term and about themselves. Good government and social progress take work. How much easier to loot a population permanently in shock. How simple to take up and espouse their fears, their anti-modernism, their anti-science, to keep them divided and ripe for the plucking.


Monetary theology is alive and well today as Ponzi preachers testify that god is prosperity and those chosen through their good works and predatory cleverness will inherit the spoils from the meek on earth.

Like Manna from heaven, money is created like a mirage in the desert as a gift from the elites with kleptomaniac powers that can steal money from the heavens and we, salt of the earths, humbly implore them to keep it comin’ at any cost.

Today, even as the lords of financial soothingly pontificate, our financial fidelity is being tested in the rough seas of structural chaos that only those with desperate faith are blinded by the increasing waves and graphs of grief, while those with theological doubts look to the ancient relic of barbarians and how to grow herbs for profit.

The great existential question of the moment is should we wait until the Red Sea parts or should we all get together and prepare for a Tsunami?

john bougearel:

Yves poses the question: “When dissonant facts start showing up, is it that the data is suspect or the model that is out of whack?”

Generally speaking, from empirical observation, the pro-cyclical [and other] models employed by the financial industry over the past 20-30 years proved to have been flawed. These flaws were readily exposed by counter-cyclical data.

I would suggest looking at the models and their frameworks when dissonant facts start showing up. Unfortunately, human nature is not naturally predisposed towards “bayesian updating” when new info contradicts. Not only is it naturally predisposed to ignore new information, most folks are hard-wired to not just ignore new info but to vehemently deny and discredit new contradictory facts. Global warming science is a good example of folks vehemently discrediting and denying new contradictory facts.

There are three planes of thinking in this world, linear, sequential and configural. Most folks do well with the first two, but configural thinking gets much more complex. Could the tendency towards black and white thinking make it difficult to incorporate new and contradictory info into one’s worldview framework? Certainly it could.

[May 28, 2010] The Deflationary Impact of the Coming U.S. Commercial Real Estate Bust

Seeking Alpha

Crippled banking systems tend to bring on deflations. And crippled banking systems seem to result from the bursting of asset bubbles because of the sharp decline in the value of the collateral backing bank loans.

–Paul Kasriel, Northern Trust[1]

We are on the brink of one of the worst commercial real estate financing markets ever. The banks are healing now, but the (CRE) industry is about to smack them next.

--Phillip Blumberg, CEO Blumberg Capital[2]

A thing long expected takes the form of the unexpected when at last it comes.

--Mark Twain

Though commercial real estate (CRE) has long been viewed by analysts as the “next shoe to drop,” it has been downplayed as an issue in recent months. "Commercial real estate is a train wreck, but it's already happened," the illustrious Jamie Dimon of JP Morgan Chase (JPM) said during a company-sponsored conference in January. He pointed to the 38% drop in CRE prices since 2007.

In early April, Alan Greenspan reiterated that argument: “With prices already down and adjusted, if we were going to get severe secondary reactions, they would have occurred, and they would have occurred if it weren’t for the fact that the rest of the economy is showing some degree of buoyancy.”[3]

Indeed he could point to a 1% uptick in overall CRE prices for January, the last month that had been reported. Delivered on March 22 by Moody's/REAL Commercial Property Price Index, the number capped two prior up months and suggested that --after 13 months of consecutive declines— the market was finally turning.

So did it?

In a word: no. The rebound suggested by January’s number never really materialized. In fact, January has been followed by two months of declines. The Moody's/REAL CCPI registered a 2.6% drop in February. March registered a .5% drop overall, with slight upticks for apartments and warehouses offset by significant declines in office (-3.2%) and retail (-4.7%) property prices. Commercial property values are now down 44% since the peak of October 2007.[4]

Other salient data points also look negative. The office vacancy rate rose to 17.2% in the first quarter of 2010, a level unseen since 1994. “Effective rent” in the last months of 2009 was 7.4% lower from a year earlier.[5] And compared to fourth quarter 2009, 1Q 2010 retail property prices for the top ten metro areas dropped 19%.

So what does it all mean? I will try to sketch out the impact that the commercial real estate bust will have on both our banking system and the economy more generally. I also will tease out those factors unique to the industry that might make the bust far more severe than anticipated.

... ... ...

Because commercial real estate loans typically have five-year terms, the industry’s loans are continuously being refinanced. The problem is that loans made at the height of the boom -- 2005 to 2008 -- were based on inflated asset values and often “easy” origination terms. Up until now, very few of these “boom era” loans have reached maturity --though the delinquency rate on all CRE loans is up.

So, what exactly is the magnitude of the problem? The total value of outstanding commercial real estate-backed loans in the US stands at $3.7 trillion. Between 2010 and 2014, about $1.4 trillion of these loans will mature and need to be refinanced. As the following graph suggests, the destructive height of this loan tsunami crests in 2012-2013:

Nearly half of the loans are presently “underwater” – i.e. the borrower owes more than the underlying property is currently worth. Commercial property prices have fallen more than 44% since the height of 2007.

Vacancy rates, which now range from 8% for multifamily housing to 17.2% for office buildings, are at levels not seen since 1994.

Rental rates fell an average of 0.8% in the first quarter of 2010, a less steep decline than seen last year. Asking rent fell 4.2% from a year earlier. Add in months of free rent and landlord contributions to space improvements for each tenant, and “effective rent” of 1Q 2010 was way down from the year before. And that pressure will likely to continue for six more quarters. According to Reis Director of Research Kyle MacLoughlin:

“As the labor markets stabilize we expect occupancies and rents to require another 12 to 18 months before showing signs of improvement, given the typical lags in commercial real estate.”[6]

PricewaterhouseCoopers also suggests that commercial real estate vacancies will increase in 2010.

So even if the recovery began last quarter, rents on CRE will “suck fumes” well into 2011 and perhaps 2012. These pressures already are choking operating incomes, causing defaults even before the re-financing crucible.

.... ... ...

The Weapons of Mass (Bank) Destruction:

So what will make the commercial real estate market of 2011-14 so devastating? Here are the three main issues:

1. Falling Operating Income As noted above, increasing vacancy rates and falling rental prices pressure all existing loans. Decreased cash flows will affect the ability of borrowers to make required loan payments. As vacancy rates climbed in some cities a full two years after the 2001 recession, it would not be unlikely to see a similar momentum this time. ....


2. Few lenders / more stringent underwriting standards

The frothy “easy liquidity” period (2004 – 2007) resulted in the origination of many commercial real estate loans based on weak underwriting standards. These loans assumed overly aggressive rental or cash flow projections sustainable under bubble conditions.... Offering more loan for less collateral, these are analogous to the famous “Alt-A” residential loans. ....

3. Falling Property Prices / Wrecked LVT Ratios This factor is the most punishing, and may cripple the economic prospects of the next decade.

Falling commercial property values result in higher “loan-to-value” ratios, making it harder for borrowers to refinance under current terms regardless of the soundness of the original financing, the quality of the property, and whether the loan is performing. The collateral is worth less than it was a few years back, placing the loan out of contention for refinancing. The owners are essentially locked out.

As one example makes clear, refinancing becomes impossible:

Adjusted property value: $80 million (down from $123 million in 2007)
Loan amount to be refinanced: $80 million
Maximum LTV ratio: 65 percent
Maximum new loan amount: $52 million (65 percent of $80 million)
Shortfall: $28 million
Result: impending bankruptcy[7]

All of the fundamentals of a good commercial real estate investment may still be intact – fully occupied, good tenants, positive cash flow, “location-location-location,” etc. The problem is not inherent to the building itself. It is the new pricing environment, but it's still deadly. ...

Goldman Sachs forecasts that the average commercial LTV ratio will reach 117 percent by 2010 and that 81 percent of commercial borrowers will be looking at negative equity.[8]  PricewaterhouseCoopers also suggests commercial property prices will ultimately fall further, dropping from today’s 42% to a full 50% of the 2007 highs.

This gives owners an incentive to simply walk away and cede an underwater asset to the bank, creating another terrible liability for the banks.

Death by a Thousand (Deflationary) Cuts: CRE’s Impact on America’s Regional Banks

Liquidity is a function of two factors, money supply and collateral. But the impact of available collateral is far more critical to maintaining liquidity than the money supply. A decline in the value of the entire asset base of the US Commercial real estate sector will have a real effect on banks. The Japanese experience is clear:

“When the bubble burst, the debtors could not keep current on their loans and turned back the collateral to the banks. The market value of the collateral was less than the amount of the loan outstanding, thereby inflicting huge losses of capital on the Japanese banks. With the decline in bank capital, the banks could not extend credit to the private sector, even though the Bank of Japan was offering credit to the bank at very low nominal rates of interest.”[9]

As residential lending and the CDO conveyor belt became a key part of the big banks’ profit center, the smaller regional players could not keep up. So instead they funded local commercial real estate projects. The big investment banks did some CRE, but only for the most prestigious projects.

So the coming CRE crisis will not implode Wall Street high rollers like Lehman or AIG. Unlike the residential mortgage meltdown or the derivatives blow-up, commercial property loans will hit the regional banks, not the big 20. And as 70% of total banking assets sit with the top 100 banks, the international financial system will thus stay intact. The center will hold.

But the “vast periphery” -- the 8,088 smaller banks -- will be ravaged. And these smaller banks are responsible for 40% of small business loans.

This is one of the main reasons that bank failures in 2010, 2011, and 2012 will be likely higher than 2009’s total of 140. As the chart from the preceding page suggests, a total of 2,988 Banks have been flagged with “CRE Concentrations” by the US government. Banks will continue to take on a defensive stance, bracing for this new wave of debt deflation to hits their shorelines.

They will not be able to lend.

At present, the banks have been reluctant to mark down the value of their CRE assets. Goldman Sachs estimates that banks are still carrying the commercial mortgages at an average of 96 cents on the dollar.[10] This might not be a problem for big banks with low CRE exposure – say Citibank (C), at only 3% of all loans. But regional banks out West look vulnerable: Las Vegas-located Western Alliance Bancorp (WAL) has 65% of its loans in CRE; Zions Bancorp (ZION) in Salt Lake City has 56%; Fifth Third Bancorp (FITB) has over 50% exposure. The list goes on.

The “stress testing” conducted last year was only for the 19 major financial institutions and their capital reserves were examined only through the end of 2010. The hungry, boom-town regional banks in places like Atlanta or Phoenix were never subjected to anything remotely like a stress test, and nothing that looked out to 2014.

A recent Congressional Oversight Panel calls for such assessments. The February report stated that for the nation’s roughly 7,000 community banks, those with less than $10 billion in assets, the average CRE exposure equals 288% of total risk-based capital.

To put that baldly:

The average community bank has about $3 in commercial real estate loans for every $1 set aside to cover possible losses. And the collateral for those loans just lost half their value.


There is a commercial real estate crisis on the horizon, and there are no easy solutions to the risks commercial real estate may pose to the financial system and the public.

--Congressional Oversight Panel, Feb. 2010

Bonds, real estate, and pension funds, ultimately, are all collateral – the primary engine of liquidity. Over the long-term, the only way to stabilize the value of collateral is to establish a sustainable positive cash flow.

--Edward Ring, CIV FI

So how bad will it be?

To put this in a global context, many regions around the world are already dealing with commercial vacancies of 15-20%. The US is not alone.

And there was not the predatory lending or insane “CDO squared” dicing that complicated the residential loan market. This market is mostly whole loans and some overpriced paper, so the bank wounds will be “clean cuts.” But they will be deep and they will be inflicted on the smaller players.

According to Real Capital Analytics, there are already 10,100 troubled commercial properties worth more than $205 billion in the US. That number will obviously rise as we hit the “refinancing” period of 2011 – 2014. Over the next few years, their report states, the banks alone could experiences losses nearing $300 billion.[12]

In this scenario, hundreds more community and mid-sized banks will face insolvency. These banks play a vital role in financing the small businesses that provide the majority of new job creation in the US. Their widespread failure will further winnow local communities, undermine a sustainable recovery, and pressure the economy into a second recession a few years from now.

In a recent speech, Atlanta Federal Reserve President Dennis Lockhart spoke of the “potential of a self-reinforcing negative feedback loop” involving bank lending small business employment, and commercial real estate values. No lending means that the small businesses dependent on that source of credit will be forced to shut their doors. This pushes up commercial vacancy rates in the local region, which pushes down on real estate prices. Those falling prices in turn will lead to additional write-downs in the bank's CRE portfolio.[13]

Worst case, this vicious cycle starts to hurt the local economies just as the municipal bond defaults start to occur, leaving no room for Keynesian responses. Worse case, the real estate industry in China goes bad and the two downturns hit the global economy over the same time frame. Worse case, today’s apparent bottom in property prices is a temporary respite, with a further fall mid-decade.

As has often been the case in history, the lag time between the CRE loan and the finished “shiny building” is the time delay between boom and bust. What is truly unique today is that fifteen years of financial globalization had instituted an astonishing “simultaneity” to world growth patterns. From Atlanta to Astana, from Barcelona to Beijing, from the OC to Hungary, speculative real estate was built.

The emerging economies saw real gains in purchasing power and industrial capacity. And decades of excessive monetary policy and credit expansion hid real wage declines in the developed economies. The world boomed in unity, but it may not recover in unity.

With no likelihood of higher US wages or pronounced demographic growth, the nation’s commercial real estate market will likely endure capacity overhang for years. This will continue to burden our smaller banks.

As the following graph of “real peaks” suggests,[14] it is unclear whether the US will escape the kind of period of deflationary pressure Japan experienced on the long road down:

[1] Paul Kasriel, “Interview with Michael Shedlock,” Dec. 11, 2006 (

[2] John Crudele, “Banks Worry about Next Wave of Loan Defaults,” New York Post, May 19, 2009

[3] Jake Tapper, “Greenspan: Commercial Real Estate has already Popped,” ABC News, Apr. 4, 2010

[4] Brian Louis, “Commercial Property Values Drop as Rebound Stalls,” Businessweek, May 19, 2010

[5] “US Vacancy Rate hits 17.2%” Fox Business News, Apr. 5, 2010

[6] John Keefe, “Rents Rise, sort of; another sign of slow recovery,” CBS Marketwatch, Apr. 6, 2010

[7] Greg Rand, “Commercial Real Estate Bust? Not for Everyone,” Entrepeneur, March 29, 2010

[8] James Stewart, “Commercial Real Estate: The Next Bubble?,” Smart Money, Nov. 23. 2009

[9] Paul Kasriel, “Letter to Mish Shedlock,” Dec. 11, 2006 (

[10] James Stewart, “Commercial Real Estate: the Next Bubble?” Smart Money, Nov. 23, 2009

[11] Ambrose Evans-Pritchard, “Deflation on the Prowl as Bernanke Shuts down his Printing Press,” The Telegraph, Apr. 4, 2010


[13] “Elizabeth Warren Warns about Commercial Real Estate,” Huffington Post, Feb. 11, 2010

[14] This graph is adjusted for inflation and aligns the Nikkei 1990 with the S+P 500 tops. Japan’s property prices started falling 2 years after the stock market; US property started to fall seven years after March 2000. The delay can be chalked up to the far larger US property market, demographics, and the immense liquidity measures the Fed used to fight the initial bust and deflationary symptoms in 2001- 2002.

Disclosure: No positions

Sean Daly has written extensively on Asian economic development, exploring issues as diverse as the CMI multilateral currency swap arrangements, energy geopolitics in Kazakhstan, and Singapore’s high-tech water industry. His equity approach is to chart the broader demographic issues of... More

[May 27, 2010] Meredith Whitney Sees Bleak Second Half in Stock Market, Small Business Credit Crunch, Double Dip in Housing, Says European Banks in Worse Shape AdvisorAnalyst Views

"She sees a double dip in housing, a bleak second half in the stock market and says European banks are in much worse shape than US banks."
In an interview with Maria Bartiromo, Meredith Whitney goes much further. She sees a double dip in housing, a bleak second half in the stock market and says European banks are in much worse shape than US banks.

Partial Transcript

Meredith: One of my biggest concerns over the last few years is you have a lot of regulatory change being crammed into the system, just at the time when you need more liquidity.
For example, banks obviously price for risk. But they have been told by the card act that they cannot effectively price for risk anymore. You have already seen $1.5 trillion in credit lines cut from the system. The proposed amendments are going to make it even more difficult to price for risk. … I think you will see at least another $1.3 trillion sucked out of the system.

Maria: You write that massive job cuts at the state level between 1 and 2 million over the next 12 months could also be part of this.

Meredith: That’s our estimate. You look at how grossly underfunded state and local budgets are 2.5 times what they were after the dotcom crash. There is no way to resolve this. … We are going to have a really dangerous, chronically high unemployment situation on our hands for a very long time. This is exactly what politicians ought to be focused on, not jamming down last minute regulation to appear to be tough on banks.

Maria: What’s your sense of the European banking situation? Would you put any new money to work in any of the European banks given this selloff?

Meredith: Not in a million years. The European banks are still underfunded, still carry assets that are worse marked than even the US banks. You have hundreds of billions of dollars of recaps that need to take place in Europe.

Maria: What kind of second half are you expecting for the stock market.

Meredith: I think it’s going to be bleak. I think that you have really no end demand from the consumer. I think you are going to see the double dip in housing take place in the second half and it’s going to be rocky sledding.

Read more:

[May 25, 2010] The bearish bandwagon by Mark Hulbert

Is he a Wall Street hired provocateur ?  Dirst he lured 401K lemmings by "new bull market talk" (llok at his position vs Rosenberg). Now what ?

Commentary: Huge shift from bullishness to bearishness over last two weeks  Mark Hulbert

OK, all of you who claim to be contrarian investors:

It's time to see if you walk the walk, not just talk the talk.

Here's how to find out: Are you about to step up to the plate and invest in the stock market?
Probably not, if you're like most investors. Investing more in equities is the last thing you have in mind right now -- especially after Friday's triple-digit gain was wiped out by Monday's late-day plunge. This leaves the Dow Jones Industrial Average 9% below its April 26 closing high.

But your reticence just goes to show how difficult it is to be a genuine contrarian. It's one thing in the abstract to say that you're willing to "buy when the blood is running in the streets," and quite another to be willing to do so in practice.

And let there be no mistake: The blood is definitely running right now on Wall Street. Consider the sentiment among those market timers I monitor who focus on the Nasdaq market in particular, an arena particularly susceptible to changes in investor sentiment. The last two weeks have seen one of the biggest shifts from bullishness to bearishness among these markets timers that I have ever witnessed.

Just a couple of weeks ago, these market timers were on average recommending that their clients allocate 80% of their Nasdaq-oriented portfolios to stocks. That was the highest level for this average since 2000, and was a contrarian warning signal that trouble laid directly ahead. ( Read my Apr. 30 column.)

Today, in contrast, the comparable average recommended exposure level is minus 45% (as measured by the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI). This negative level for the HNNSI means that these market timers on average are recommending that their clients allocate nearly half their Nasdaq-oriented portfolios to going short -- an aggressive bet that the market will continue declining.

[May 25, 2010] Regulation vs. Structural Change

"Structural change is harder than imposing new regulations."
The Baseline Scenario

Here’s Thoma’s conclusion:

Structural change is harder than imposing new regulations. The fact that legislators are shying away from the harder to impose types of change out of fear of losing reelection support from the financial industry points to the political power the industry still has, and to the need for structural change to reduce this political (and economic) power. If we cannot muster the political will to make such changes in light of the most devastating financial collapse since the Great Depression, that does not bode well for the future.”

[May 25, 2010] Why Your 401(k) Still Hasn't Recovered by Emily Brandon,

May 24, 2010 | Yahoo! Finance

Investors haven't given up on their 401(k)'s. Retirement account balances have rebounded this year, but are still below their 2007 peaks. 401(k)'s and IRAs held $7.9 trillion in the first quarter of 2010, up 23 percent since a trough of $5.9 trillion in the first quarter of 2009. Still, retirement account assets remain 17 percent below their 2007 value of just over $8.6 trillion and currently hold about the same amount they held in 2006, according to Urban Institute calculations.

The stock market's wild ride is also reflected in individual account balances. The average 401(k) plan balance rose from $57,150 in 2008 to $70,970 in 2009, according to a Hewitt Associates study of nearly 3 million employees at 120 large companies. However, that's still 11 percent below the average 2007 account balance of $79,570. Here's some insight into why your 401(k) still hasn't fully recovered.

[May 24, 2010] Satyajit Das The Human Touch

May 23, 2010 | naked capitalism


A number of these books are pre-financed (as in Wall Street-backed organizations), and too often stick with that misdirectional meme of “it just happened.”

I was riding my horse one day, and suddenly, by the side of the road, mysteriously appeared an “automobile” – whatever the hell that is…it just happened!

Nope, the only books I would currently recommend:

And puuuhlease, don’t anybody ever recommend that goddawful “13 Bankers” by the johnny-come-lately stooge, Simon Johnson (one of the guilty ones, rest assured).


At least as far as the mortgage part of the crisis goes, I would propose a book about the privately-held/closely held originators like ACC, NCF, the corporates like CFC and WFF and finally the late entry of HSBC. We’re not talking HBS, but I’m not sure I’d bet against these companies’ ability to identify talent, as oopposed to Lehman or ML. Maybe this has been done in Glengary, Glen Ross or the Boiler Room, but in a way it hasn’t. These guys (and girls, too, usually pretty hot) didn’t see those stories as cautionary, but as a guide.


The best book is free, its the FED’s little book of economic stats, for example that mortgage debt rose by $4.7 trillion from the end of 2000 through the third quarter of 2006,greater then the prior 40 years combined, according to the Fed’s Flow of Funds report other bits of information about declining family incomes during the past 20 years jump out of the pages not to mention the overall debt to GDP ratio’s.
Thanks for your review about what various financial writers claim to be the (problem)but as Paul Vocker recently said at Stanford the cure is pretty simple, a change in attitude.

“The United States must curb consumption and credit and boost production and savings, but its citizens and leaders so far lack the will to change, economist Paul Volcker said in an appearance at Stanford University.”

[May 24, 2010]   Seth Klarman More Worried About The World Than Ever Redux zero hedge

"Everyone has a plan until they get hit" - Mike Tyson


Fear is overblown. People/society will go on. It is easy to scare yourself into thinking the world is coming to an end. Yes, shit will hit the fan in one way or the other, but you gotta do what you gotta do. Even people in Argentina and North Korea have some order in their lives. Try to get some insurance that could ease the blow, like hard assets and canned foods.

At the end of the day, the less control you have, the less fear you should have. Whether it's natural disasters, car accidents, hyperinflation, life goes on, until it doesn't. Yes, we all gonna die anyways, try not to take everything so seriously. Life is short, don't forget to enjoy the ride!

Frankly, as scary as all this economic destruction is, I must admit it is also equally exciting.


I think the both of you are forgetting the human suffering and carnage that comes with economic collapse.  Look at the example of N. Korea given, people literally dying in attempts to flee the "orderly" form of society there, not to mention the lack of human rights and dignity in that society. 

So sure, society will go on, I don't think anyone is saying it won't.  But anyone not concerned in the least about what type of society will emerge from the rubble, has a very faint grasp of reality.


Why isn't the rest of America awake?

I think they are petrified. Frozen in place. Whole mobs are waking to the idea that the future is unthinkable.

The baby boomers are screwed -- it's too late in their earning years to "put something away". All governments are bankrupt. All pensions worldwide are bankrupt. The price of all assets is absolutely beyond the bounds of reality. No, there is no place to run.

Because everything is priced too high, we can only "guess" which boat to jump into, knowing they are all sinking. We can't even compute how fast they sink relative to each other, because seemingly random decisions are made on a daily and weekly basis about which boat to shoot with a shotgun.

Welcome to bazookanomics. There is no defense.


"By holding interest rate at zero"

The Fed does not hold onto anything. The Truth of the matter is even at the Feds Fund Rate at 0% nobody wants to take on additional credit. The ones that want it, want it fund their cash flow and probably have already defaulted. Yeah, have the Fed jack up the FFR up to 5% and let me know how the mushrooms clouds look up close.

"Everyone has a plan until they get hit"
- Mike Tyson

Stupid Mike Tyson figured out what most humans that think they are so smart can't. Humans are getting "hit" by the Truth, they think they can continue to ignore it and it will go away. It's not going to happen, Math always wins.

This guy isn't even as smart as Mike Tyson.

"And, said Mr. Klarman, one of the best ways to protect against a decline in purchasing power is to buy whatever is "out of favor, loathed and despised.""

Yes, keep on thinking you are going to buy your way out of this. There is no magic bean there is no Wizard of Oz. You will lose. The only way you could win or get otu is if you had an infinite number of Wizards of Oz.

Now if this guy would just tell me how you pay interest on $52T with negative growth rate in the credit system, let alone jacking up the FFR, until that time he isn't any better than Cramer,"Buy, buy, buy"! The guy is delusional, there is no out.

Oh Yes, he should be very "worried", to bad he still has failed to figure what Mike Tyson figured out over 20 years ago.


Jason Zwieg is a bit late to the reality party. Anybody who has read him over the years knows that his thinking is conventional in the extreme, constantly making little bitty adjustments in his WSJ columns to the now-discredited Harry Markowitz Efficient Frontier Stock/Bond/Cash Pizza-Pie.

Conventional thinking will get you dead in the next few years; waiting for cheap european stocks (or asian or american ones, for that matter) conveniently avoids the central question of why all stocks are going to get much cheaper: MUCH more expensive, and scarce, capital. A hurricane of global currency devaluations, distress in the bond markets, and panicky investors.

And, Mr. Klarman, like so many others, mistakes the role that gold will play in the recalibration of the global economic and monetary system, and hence misapprehends and why it is neither "trendy" nor "extremely expensive."

Klarman does not connect the dots between ultimate risks of the ZIRP environment he talks about, the high probability of a sovereign debt catastrophe he wants to hedge against with out-of-the-money bond puts, and a gold price which finally moves explosively higher as investors puke their guts out and move to the king of metals for preservation of their assets.

"Will money be worth anything," asked Mr. Klarman, "if governments keep intervening anytime there's a crisis to prop things up?"

Short answer: no. But gold sure as hell will.


Good commentary. Even Denninger (a smart guy that doesn't get gold) knows that you can't short holes.

Bonds have been in a 30 year bull yet this asshole says that gold is the " trendy investment "

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You know, I like and admire Denninger, both for his passion and for his obvious brilliance.

But he does seem to have curious sorts of prejudices--gold being one of them--that somehow get in the way of his thinking, and he stubbornly refuses to look at things from a different angle. I think he will be way wrong on gold, obviously. Time will tell. Place your bets.

Apocalypse Now:

If he has 30% of his investments tied up in high yield and the world is outlawing naked CDS, I can see why he is more concerned than ever before about the/his world.

His quote: "way out-of-the-money puts on bonds"—options that have no value unless Treasury bonds plummet. "It's cheap disaster insurance for five years out," seems naive in a way. If US Treasury bonds plummeted would an exchange even exist - perhaps he could buy them on a foreign exchange but everything is now connected right? Sometimes cheap is cheap for a reason. I liken this to purchasing life insurance despite being an orphan with no family, friends, or pets that you would leave money for (lottery ticket in case of death).

If the US follows the path of Japan, deflation most likely, over the long term treasuries will continue to drop in yield. The issue is lack of growth and that creates a situation where there is little opportunity cost.

In general I agreed with his concept to buy low (within reason - Fannie & Freddie were pretty despised but $1) and sell high with a longer term investment horizon. If European equities do drop on a pan-european margin call, it could be an opportunity to purchase good shares on the cheap (growth, dividends, low debt, high cash, necessities) if you have the cash and if the CB response is to inflate (similar to 09).

I find it impossible to believe that people at this level do not understand the currency role that gold has played in the international monetary system and Exeters inverted pyramid of asset classes. Gold is like gravity in the international financial system although it is not openly talked about. What is expensive, and what is cheap? His advice "one of the best ways to protect against a decline in purchasing power is to buy whatever is "out of favor, loathed and despised." is useful when the status quo continues - obviously buggy whips at one point were despised but we had a new technology that made them obsolete.


This oil spill is going to absolutely cripple the U.S at a time when they are effectively bankrupt already.

What if they try this "top kill" or whatever and it not only fails but makes the hole bigger?

Any idea what happens if the oil gets too thick for boats to operate in those ports? What happens when a hurricane blows all this oil all over the land?

Coupled with the earthquakes, volcanos, ash clouds over Europe, and now the water turning into oil

...this is fucking biblical.

If it starts raining frogs load up on puts.

[May 23, 2010]   Credit Indicators

Rob Dawg:

lawyerliz wrote:

Bottom up innovators tend to be very clever and sneaky.

Unfortunately in recent years the greatest innovation was in ways to circumvent the system. Peak civilization breeds its own internal seeds of destruction.

[May 23, 2010]   EconoSpeak Another Clumsy Attack on the European Social Model

One Salient Oversight:

I always appreciate reasonable criticism of Europe and the Eurozone. The problem is that many American commentators just seem to repeat the same old fallacies over and over and over again.

Obviously Erlanger didn't read this release from Eurostat, showing the comparison of unemployment rates between Europe and the US during the financial crisis.

Short summary: Unemployment in the US has pretty much doubled since the crisis began, while European unemployment has increased by around 50%. This means that the unemployment rates of the two economies has actually reached parity - the US recently had a higher unemployment rate than the EU and Eurozone.

And spare a thought for Japan: It's almost as if Japan has been in recession for 20 years if you believe what American commentators say. Certainly Japan has its problems, but unemployment there is half that of the US, and this despite some major downward hits on GDP.

My own research on Real Interest Rates indicate that the US is entering a period of monetary contraction - ie monetary conditions not being conducive to growth. By contrast the EU is entering a period of monetary expansion (monetary conditions being conducive to growth). I think we'll see a drop in EU27/16 unemployment rates over the next six months while US unemployment will either stagnate or rise.

[May 23, 2010]   Jim Rickards on King World News

Jim Rickards Interview on King World News - click here to listen.

  1. Financial Warfare - protectionism, excess savings, managing exchange rates.
  2. Beijing consensus: neo-mercantilism can lead to outright financial warfare
  3. Bernanke worried about deflation more than anything else
  4. Money printing in US and Euro is inflationary and balances China deflationary forces
  5. Gold does well in both inflation and deflation - well suited to times of uncertainty
  6. Pullback in gold due to liquidation to raise cash in current crunch
  7. Gold sellers are daytraders, speculators, but buyers look like strong hands
  8. His Price target on gold to $2,000 short term and $5,000 intermediate term
  9. Merkel ban on naked short selling was absolutely right - stand up to Wall Street
  10. The way CDS are being used they are not part of a free market, but a rigged game
  11. Greece, Spain, and Italy are important NATO allies - we are allowing our own US investment banks to assault them financially (economic hitmen)
  12. Speculation is fine, but it must be transparent, well funded, and regulated
  13. No money down, shadow CDS market is completely destructive
  14. Who are the Bullion Banks serving? Who are the longs and the shorts?
  15. JamesGRickards is posting on

There is a very important thought buried in the observation that Chinese deflationary forces and slack demand are deflationary, but being countered by money printing which is inflationary. That is a prescription for stagflation.

I thought he was rather easy on the Chinese who are egregiously manipulating their currency exchange rate to their advantage vis-à-vis the developed industrial nations of Europe and North America.

[May 22, 2010] Fed's Dudley on the Economy


From NY Fed President William Dudley's commencement speech at New College of Florida:

[T]he recovery is not likely to be as robust as we would like for several reasons.

First, households are still in the process of deleveraging. The housing boom created paper wealth that households borrowed against. This pushed the consumption share of nominal gross domestic product to a record high of about 70 percent. When the boom turned into a bust, those paper gains evaporated. In fact, many households now find that the value of their homes is less than the amount of their mortgage debt. This has created a difficult time for many families and has caused the hangover to last longer.

Second, the banking system is still under significant stress. This is particularly the case for small- and medium-sized banks that have significant exposure to commercial real estate loans. This stress means that banks have been slow to ease credit standards as the economy has moved from recession to recovery.

Third, some of the sources that have supported the nascent recovery are temporary. The big swing from inventory liquidation during the recession back to accumulation will soon end as inventory levels come back into better balance with sales. And fiscal stimulus from the federal government is subsiding and will soon reverse.
In this environment, finding a job will be tough, but when you hit the pavement remember that the job market is improving. Don't get discouraged.
A few comments:

First, the household "deleveraging" seemed to start last year, but consumers were back to spending more than they earned in Q1. Personal consumption expenditures (PCE) increased to over 71% of GDP in Q1 - higher than the 70% during the boom that Dudley mentioned. Some of this increase in PCE was due to government transfer payments (all of the increase in income in Q1 came from government transfer payments). I still think the personal saving rate will rise over the next year or two - and that will keep growth in PCE below the growth in income.

Second, I think the transitory inventory boost is about over.
There were hints of this in the manufacturing surveys last week from the Federal Reserve Banks of Philadelphia and New York - and also in the Census Bureau's Manufacturing and Trade inventories report for March. Also, as Dudley notes, the boost from the stimulus "is subsiding and will soon reverse" (the peak stimulus spending is right now - in Q2 2010).

These are significant headwinds, and I think growth will slow in the 2nd half of 2010.


the household "deleveraging" seemed to start last year, but consumers were back to spending more than they earned in Q1.

It is important to keep in mind that "deleveraging" is a complicated process:
- Some people delever gradually, by paying down their debt.
- Others delever in one fell swoop by defaulting on their debt (to be more precise, whatever debt they can default on)

This process is far from over.


Reading all the BP comments I was hit with an image that still lingers

A big empty plain. On it stands a phalanx of people all ages, 100 people wide, packed tight, and stretching to the horizon. I know this, no idea how, that this is people who are alive now and who will be in the future. Then a shadow falls over a significant portion of them and they are gone.

That is BP

A failing economy can be fixed in ten years or twenty. This is something else.

Relocation of people from coast = debt cards = good for the banks
2nd home and first homes soon to be fronting a toxic waste = bad for banks
End of an industry = bad for banks
End of a food source = good for farm raised fishies
Devastation of an ecosystem or two = priceless

Sometimes I think wearing about the economy is like picking up nickels in front of the bulldozer of eco change


picking up nickels in front of the bulldozer of eco change

Environmental damage if on a large enough scale is much more serious than financial damage.


pavel.chichikov wrote:

Environmental damage if on a large enough scale is much more serious than financial damage.

Ecology & economy - same root.

Juvenal Delinquent:

Nature is indifferent to the survival of the human species, including Americans. ~ Adlai E. Stevenson, Jr.


The Fed's misguided policies and mindless management created a housing boom that created paper wealth that households borrowed against...Second, the banking system is still under significant stress from bad lending encouraged by the Fed. This is particularly the case for small- and medium-sized banks which are not part of the Fed's inner circle and hence seen as targets of "consolidation" by their savvier betters...Third, the "extend and pretend" stunts authored by the Fed in conjunction with other tentacles of her such as the Treasury and FHA that have supported the nascent recovery are temporary...

Maury the Credit Responsibility Panda:

Fed Governor William Dudley said:

In this environment, finding a job will be tough, but when you hit the pavement remember that the job market is improving. Don't get discouraged.

"And when you take a job formerly held by someone twice your age for half the salary, understand that this is in no way deflationary; it's a productivity improvement. "


Maury the Credit Responsibility Panda wrote:

"And when you take a job formerly held by someone twice your age for half the salary, understand that this is in no way deflationary; it's a productivity improvement. "

I see the opposite more often - older workers taking jobs kids from college expect & would usually get for $X and doing it for $0.75X or less. The kids leave school thinking I'll be making $X so my loans won't be that bad... then get beat out for jobs paying less by mid-30 to mid-40 displaced 'mid-career' types. Where my wife works the layoffs were very heavy in the middle pyramid - white collar and 'information' workers. They are all - along with the kids - fighting for the bottom pyramid jobs.

And as before - this isn't deflation its 'deflationary pressure' - no money created or destroyed - but sure does drive down prices & dollar velocity [symptoms of deflation].

No surprise we see Ben pushing more money out to the EU - there will likely be a lot more of that. QE World Tour 2010 - I want the shirt.

wrote on Sat, 5/22/2010 - 8:09 am (in reply to...) Tagsdryfly wrote:

Where my wife works the layoffs were very heavy in the middle pyramid - white collar and 'information' workers. They are all - along with the kids - fighting for the bottom pyramid jobs.

From the recent report published by Rutgers U's Center for Workforce Development
March 2010 job situation of people who were unemployed in August 2009:
- 68% still unemployed
- 13% employed full time
- 7% employed part time
- 12% left labor force

Yet another reason to treat U3 numbers very cautiously


[May 22, 2010] Oil Arrives In Louisiana; Defense Booms Inadequate


"People in mainland Louisiana are seeing the beginnings of the oil's full effects on wildlife in the area. Sticky rust colored oil covers the reeds like a latex paint indicating that the efforts to lay miles of floating booms to keep it away from the fragile marshes are useless. They are experiencing what the Plaquemines (mouth of Mississippi River) saw last week and it now appears that their defenses were inadequate. Only time will tell how much more worse it can get as BP still scrambles for a solution. NPR also ran a story critical of Obama's 'scientific approach' that he promised to use in office and how well it's being applied and holding up during this crisis."

[May 22, 2010] House Committee on Homeland Security Seeks Cooperation from Max Keiser on Financial Terrorism  by Mish

May 21, 2010 | Mish's Global Economic Trend Analysis

Here is an email from a member of the House Committee on Homeland Security to Max Keiser regarding Financial Terrorism. Both the email and Max Keiser's response had me laughing my head off.

Hi Mr. Keiser,

My name is Chris Beck and I work on the staff of the House Committee on Homeland Security in Washington, DC. I have been reading and listening to you regarding the May 6 stock market plunge and the likelihood that this was an act of financial terrorism. I think this is a huge issue that has not been given enough attention, and may warrant oversight by our committee. I would greatly appreciate the chance to talk to you to make sure I understand the nuts and bolts, and to figure out what avenues may be available to correct what appears to be a massive fraud that could undermine U.S. National Security. Can you please contact me and let me know if you are available to talk?
Thank you,

Chris Beck, Ph.D.
Senior Advisor for Science and Technology
House Committee on Homeland Security
I asked Max Keiser how he responded.

Max Replied "I told him to investigate this financial terrorist crime happening right now! in real time!"

Max went on to say ...
I think it's really incredible how clueless these people are.

Given the recent track record of corrupt regulators in D.C. it's not hard to imagine that Chris Beck is wittingly or unwittingly just bird dogging intelligence that will be fed to Goldman and used to package ever more exotic Financial Terrorist weapons.

My position is the government IS Goldman and any info gleaned by this type of thing will end up helping no one BUT Goldman.
I am also told that homeland security was interested in talking with David DeGraw about his post on Market Oracle Financial Terrorism Operations: 9/29/08 & 5/6/10.

This reads like a spoof straight out of The Onion, but I have phone numbers and email address and a chain of emails to verify.

It is difficult to believe that anyone on a house committee on homeland security would have responded to those, but it happened.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post List


“Computerized Front Running: Another Goldman-Dominated Fraud

Keiser isn’t just speculating about this. He claims to have invented one of the most widely used programs for doing the rigging. Not that that’s what he meant to invent. His patented program was designed to take the manipulation out of markets. It would do this by matching buyers with sellers automatically, eliminating “front running” – brokers buying or selling ahead of large orders coming in from their clients. The computer program was intended to remove the conflict of interest that exists when brokers who match buyers with sellers are also selling from their own accounts. But the program fell into the wrong hands and became the prototype for automated trading programs that actually facilitate front running.”

Max Keiser is a former Wall Street broker and options trader. Having worked on Wall Street, he knows exactly what's going on.

Jekyll Island 7:

“Mish, here's a revised "Top 20 Financial Mobsters"

1) Alan Greenspan
2) Robert Rubin
3) Larry Summers
4) Ben Bernanke
5) Alan "Ace" Greenberg--CEO Bear Stearns
6) Henry Paulson
7) Sen. Chris Dodd
8) Con. Barney Frank
9) Dick Fuld--CEO Lehman Bros
10) Lloyd Blankfein
11) Jamie Dimon
12) Tim Geithner
13) George W Bush
14) Bill Clinton
15) Barack Obama
16) Chuck Prince
17) Angelo Mozilo
18) Hank Greenberg
19) Bernie Madoff
20) Robert Stanford


[May 20, 2010] Bill Gross Hedge Funds Liquidating To Preserve Capital

The selloff has brought out a rash of "crash" predictions...
zero hedge

Mako :

You will see wild swings in both directions as the global financial system continues it's collapse.

You will have to move quicker and quicker to stay a float.  Eventually the game of music chairs will end with no chairs left.  Everyone is running from the Truth, the lemmings always run from the Truth until there is nowhere else to run.

All Europe can do is effect the rate of decline, just like the US was able to do in 2008.  It's still going to collapse, that portion has always been known.

Some people lie to themselves right on public TV.  Larry Kudlow running from the Truth just like the rest of the lemmings.

BlackBeard :

Everybody's favorite asshole Bob Doll of Blackrock (evil) and his latest propaganda:

Just remember, this fucking assclown was on cnbc telling people to average all the way down in the fall of 2008.

{edit} Fuck I hate this guy. It makes me happy to see him nervous as shit, because he's levered long into all this bullshit.

Paul S.:

What the hell happened to the Total Return Fund's bund position? I thought I was going to get wiped out and PTTRX barely got touched. Not sure if they got out early or if they underrepresented their holdings.


[May 20, 2010] Germany’s Short Selling Bans Prudence, Populism or Bank Protection « naked capitalism

Now why do the Germans in particular feel a tad nervous? Well, Germany, like the UK and Switzerland, has a banking system so large relative to its economy that it cannot credibly backstop it if it goes seriously off the rails. The problem is more acute in Germany because it does not control its own currency (as it cannot simply throw whatever it takes at the banks and if need be, “print” later; by contrast, the risk to the UK and Swiss banking system comes from its banks’ foreign currency exposures).

Bloomberg gives tonight’s sighting of rising nervousness in interbank markets:

The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, widened to 25.3 basis points from 24.8 basis points yesterday, the biggest gap since Aug. 13. A basis point is 0.01 percentage point.

Short-term funding costs are a “good measure” of the concern in markets that Europe’s debt crisis might spread, [Jeff] Rosenberg [of Bank of America Merrill] said.

“Libor-OIS spreads are on the rise again and that tells you the systemic risk of a restructuring, as the outcome for the European sovereign credit crisis, has not been alleviated,” he said.


‘…taking a tough line with speculators looks like a desperate gesture to restore a semblance of cred.’

Or cling to power – after all, Merkel represents the free market, friendly to ‘Finazinvestoren’ part of the German political landscape.

Wait until you get a chance to see what a (still potential, with many practical hurdles to surmount) coalition of the real socialist SPD, the no longer so utterly radical (in Germany, at least) Greens, and the no longer real communist (according to them) Linke. None of those parties give a rat’s ass about what Wall Street thinks, and the Greens, at least, would love to kill the idea of growth at all costs (how is the Gulf looking these days?) with a wooden stake through its foul heart.

As for the FDP, the closest thing to an American understandable party representing financial/commercial interests – they lost, very big, in the ‘local’ NRW election, in much the same manner that the Linke won. A local election which just happened to mean that Merkel lost her majority in the Bundesrat, meaning that if she wants to get any (well, technically, most) legislation passed, she needs to get along with those states where the SPD, Greens, and Linke hold sway.

Right or wrong (and boy, do they have experience with wrong), the Germans have pretty much decided to no longer play along with Wall Street, the City, Zürich, etc. The results should be fascinating – personally, when the Masters of the Universe start boycotting Mercedes, Porsche, and BMW, we will know that the game is getting serious.


German financial regulator Bafin already banned naked short selling last year:
In March Bafin issued a notification decree on some short selling positions
“to take targeted action as required, sufficiently in advance and swiftly, against short-selling transactions that pose risks to the orderly conduct of securities trading and the stability of the financial system.”:

So hardly unexpected


Naked shorting is illegal in the US.

It was not enforced by regulators who were willing to turn a blind eye to blatant market manipulation.

Germany banned NAKED short selling, not just ‘certain types of short selling.’

This surprise to me just indicates how low our standards have fallen, and how given over to Stockholm syndrome so many are to the speculators and the banks.

I found it interesting that the heavy selling today in US equities, triggered by large trances of SP futures selling near the open, in addition to news indicating the recovery is not gaining traction, was tied by traders this morning over ‘unease the the Congress has not yet killed Blanche Lincoln’s amendment.’

I would that Obama had half the courage of Merkel. And that commentators would pull back from the status quo and realize the sorry state that their economy is in, held hostage by a bunch of spoiled brats and thugs.


It’s important not to conflate a (thus far) temporary and limited naked shorting ban (the actual German policy move) with straight shorting, which is still allowed. Bankers are pushing this straw man argument and many media reports are buying it without making the distinction. It’s all very hypocritical – in the depths of the financial crisis, Wall Street demanded and received from the SEC bans not only on naked shorting of their stock, but also bans on straight shorting.

Naked shorting is not illegal, but it ought to be. Reg Sho in the US restricts it, but did not eliminate it (there remains significant uncertainty as to how much of this activity moved out of the DTCC system to the ex-clearing system as Reg Sho was tightened).

In any case, even in the US, Reg Sho applies to stocks. Germany’s move was unique and surprising because it applies to some sovereign bonds, an area where naked shorting is prevalent (and even a qualifier for sovereign bonds to be included in certain government bond indexes; eg. South Koea recently allowed naked shorting of its government bonds so that it could be included in Citi’s world government bond index).

The only reason I have seen proffered by bankers as to why naked shorting in government bonds (or any other bonds or stocks) should be allowed is that it creates liquidity. That seems a poor counterweight to what is akin to counterfeiting.

Granted, the manner in which the German’s moved forward was ham-handed. The policy needs to be considered carefully, as it is not a straight line from banning naked shorting on stocks and bonds to applying the same to CDS and similar (do you then ban put option buying if not holding the underlying as well?).

kares jhangiani:

It is unfortunate that Yves Smith is beginning to sound breathless if not hysterical! This is Wall Street thuggery and they are trying to hamstring the little bit of regulation contained in the “Financial Services” bill in the Senate. With what right, does anyone not holding Euro assets have to “short” sovereign European bonds? All moronic, unnecessary speculation.

We need to reduce the size of the financial sector that has grown since Reagan’s deregulation kick, “get the government off people’s back”, the idiot’s baloney, just like George Bush’s nonsense.

Chancellor Merkel has done what was needed, and forget about “exporting deflation”. I wish that the current U.S. administration had the same sense/courage. The same thing with “Single Payer.” There is far too much speculation in the stock and commodity markets.

Why has the price of oil declined about $20/barrel in the last few weeks? Has oil consumption declined by 25% in the last few weeks? Of course not. At the same time, the price of gasoline is stuck at ~$2.90/gallon around where I live.

You think the oil companies with their computers don’t know that consumption has remained unchanged, if not declined somewhat? So, why is the price of gasoline sticky?

We live in the age of Monopoly Capitalism and their servants, the Congress and the Supreme Court, are there to do their bidding, that is to say, obstruct all sensible change in the name of “free markets” and anti-”socialism.”

It is unfortunate that unregulated, unfettered Britain lacking any manufacturing capability is their accomplice.

After some time, these markets will return to their senses and look for real organic growth in the different countries and act likewise because they do have to make profits before the quarter ends on June 30, 2010.

[May 20, 2010] Guest Post Call Of The Markets VIII zero hedge

The image I picked for today’s Thoughts is pretty bleak one. It is from a war-themed video game, and those of you with teenage kids have probably seen similar imagery as you walk through the family room while they are playing. I am amazed at the graphics, and I am even more sadly amazed at how desolate, bleak, and shell-like the cities are that serve as the battlefields for our well-armed teens. You see where I am going with this. Our secondary markets have become like that game.

Massive firepower and resources are devoted to the activity of evolved trading (scalping). Huge financial institutions called Exchanges cater to this activity so myopically, that they have lost all perspective of the real role of financial markets. And sadly, our regulators have allowed them to do so. In the name of evolution and “adapt or die” mentality, our markets have been hijacked and stripped of its most important role and function. We need to all adjust our thinking, because our economy demands it. We need to adjust our perspective, because our economy demands it. Markets need to be fair, and inspire confidence! That confidence is needed so that those with capital can feel confident in investing. This confidence is unfortunately on the wane. You hear it at parties, and you hear it on the street. Amazingly you hear it from brokerage firm executives (one who yesterday wrote an article suggesting that the source of our markets problems is the market order! Yes… he thinks the solution is to eliminate the market order and tell the world that our “most efficient and liquid markets” can’t handle the 100yr old market order!)

The confidence must be restored or investors (the owners of the market) will continue to flee, and then our markets will be left to the high freaks (the renters of the market), and exactly like the war video game pictured above, complete with shelled out buildings populated by well-armed kids.


The purpose of MArkets?

1. Social Mood manipulation - Psy Ops.

2. Political Tool: wnat to drill baby drill ? Get oil prices higher. etc. need emergency funds handed to banks - crash the stock market. etc.

3. Keeps a lot of people off the streets - trying to game the markets on their home computers. This is good. Because , sadly, we dont need most people to operate the world economy. ( Look up info on the Lexus plant in japan - run by robots) . 3% of American workers in agriclture - produce more than enough food to fee the US twice over - and does!

Actually this is the big underlying reality - most average people with good hearts and a willingness to work 8 hrs a day, with average skills in english and arithmetic - Just Are Not Needed.

The Alarmist :

This is why ZH needs an OpEd tab ... if you simply report the inanities of the markets, with perhaps a little editorial flair, then you are still in the realm of news, but if you start tossing around phrases like "Markets need to be fair" then you are clearly in the realm of opinion, which is far less entertaining.

Let's face it, aside from the Hokey Pokey, entertainment is what it is all about. If markets were fair, there would be little reason for us to seek to find thousands of angles to extract the little rents that will help us pay our bigger rents, and there would be no reason for ZH.

[May 20, 2010] FOMC Minutes On Greece

1 currency now -yogi

Some participants expressed concern that a crisis in Greece or in some other peripheral European countries could have an adverse effect on U.S. financial markets, which could also slow the recovery in this country.

What utter horseshit. US financial markets are preventing any recovery in this country.


What utter horseshit. US financial markets are preventing any recovery in this country.

I agree with this statement....Now I ponder the reason for it.

It's worth noting that the financial system's charter is to "create wealth" (new as in they didn't have before) for their customers, not for the nation at large. A high unemployment rate helps keep costs down and profit margins up. Additionally, a general economic malaise tends to result in more government assistance, i.e. free money. This along with ZIRP is a situation the financial markets like.....
This is one possible explanation-


Barley wrote:

energyecon - No my comment was about wealth creation and destruction. Name one single government that has "created" wealth.

Any one of them that ever operated post-riders and civil engineering. Any one that has operated an agronomy service or made the provision of public ports and locks.

Great Teacher help us all.

Please don't be a maniac.

The 'governments' those families existed in the context of, were nothing more than families. They certainly had no massive modern style professional establishments.

What is the actual difference between Power Group 1 which steals wealth, and Power Group 2, which creates it?

Position in the scheme of things, mostly?

Everyone is prince if he can be, because princes are great robbers and it's great to be one.

1 currency now -yogi:

Before governments there was all this wealth creation stuff. Farmers would plant and harvest their crops without any foolish regulation and taxes. Then hunters would kill them and eat the crops.


I was going to talk about political trends, nothing I haven't said before, but I don't want to fuel the recent fires...

however there is the fairly neutral topic of "brain drain" worth bringing up, it might be a leading factor in sovereign/economic distress because it happens when there is a lack of competitive commitment over the foreseeable future to funding for high knowledge/skillset individuals

there were constant headlines about "brain drain" in Canada over the 90s when the national govt was trying to pay down debt, interest rates were higher than elsewhere (Quebec concerns?) and commodities were cheap (at least I can vaguely remember that)


[May 19, 2010] Whopping $9 Billion In Equity Fund Outflows Following Flash Crash by Tyler Durden


ICI has reported the most recent fund flow data, and it's a doozy. In the week following the flash crash, domestic equity funds saw a whopping $8.6 billion in outflows. As a result, the YTD outflow is over $9 billion, so in essence after almost going back to breakeven before May 6, equity funds are now once again solidly in the red, even as Primary Dealers and HFTs continue to play "hot potato market" with each other.

In addition to the carnage in domestic equities, all other mutual funds saw an outflow in the prior week, including foreign equities ($3.7) billion, Hybrid ($0.7) billion, and total bond funds ($1.0) billion, for the first total net outflow across all products in over a year. We will bring you AMG/Lipper fund data once we get it, although we do not expect any notable discrepancies.

Leo Kolivakis

Scare the little retail suckers so the big hedgies can scoop up shares on the cheap. Never, ever fails! By the way, if another "flash crash" happens, the financial services industry is cooked. Game over.

SheepDog-One :

'Cheap shares', Leo? Using what standard of measure? Future bubble Ponzinomics?

Remove the Fiatsco pipeline and youve got a S&P of what, maybe 400 max as reflected by a present realistic P/E?


The script has changed this time Leo. Demographics are not on your side. Boomers will be net sellers of equities going forward... and I am fairly confident retail is scared Shi*less over the volatility they have been seeing.

Leo Kolivakis :

That is what worries me the most. I had lunch with a fund of hedge funds manager yesterday and we were talking about the "flash crash" and how it scares people off markets. In his own words "this could be a generational shift with profound implications".

The problem is where are people going to invest? It's a tough environment but you have to accept that volatility may be a harbinger of things to come.

The HFT and algos have ruined these markets. Retail can't compete with superfast multi-million dollar computers.

Turd Ferguson:

And I don't want to hear any shit about the average investor being stupid and how this is actually bullish and blah, blah, blah.

President B'rock O'bottom promised us a "fundamental transformation".

Well, here's a fundamental change for ya: Average investors have caught on the the Wall Street game/ripoff/ponzi. They are heading for the exits in droves.

This trend will not reverse. The stock market has become one great game of musical chairs, played exclusively by the trading desks of the TBTF banks.

[May 20, 2010]   Carried Interest: some senators want venture capitalists to get a CG ride on their compensation income

Posted by Rdan | 5/19/2010 10:45:00 AM



by Linda Beale
crossposted with Ataxingmatter

Carried Interest: some senators want venture capitalists to get a CG ride on their compensation income

Everybody knows by now that managers of partnerships who have "profit interests" have been claiming that they do not have compensation income but merely a return of capital on their "carried interests" (and that may be long-term capital, they claim, when they hold the profits interest for some time and there are long term gains in the partnership that are allocated to them).

Many tax experts, including myself, have argued that these profits should be taxed as compensation. At ordinary rates, like the janitors and clerks and other employees of the firm. Immediately and without deferral, like others who work for a living. And subject to payroll taxes (FICA, FUTA), since wages are supposed to be subject to payroll taxation.

Managers of private equity, hedge, venture capital, real estate and other partnerships have been able to avoid such real world consequences of working for a living in most part. They are generally paid a fee (usually about 2% of assets under management, in hedge and private equity firms) and a "carried interest" (usually about 20% of assets under management, each year, and sometimes amounting to 30% or 50%, for the really big-time managers). They do treat the fee as compensation, but claim that the carried interest is not.

[May 19, 2010]   Höllenmädchen Merkel und die Straßenschreier

Jesse's Café Américain

As an aside, the hysteria, or Straßenschreier, with which the actions of Germany to curb naked short selling were greeted was very funny last night, and highly entertaining.

As you may not realize, naked short selling has been illegal in the US for some time, as least as far as equities are concerned. It was not enforced as the regulators turned a blind eye to many abuses that crept into the 'naturally efficient markets' on their watch. It is tantamount to counterfeiting, and in the hands of a party with pockets deep enough to permit it to dominate small markets, it is a blatant form of control fraud.

By the way, I hear that there has been almost no coverage of William K. Black's highly credible and shocking revelations on the public media in the States, outside of a piece on Bill Moyers' Journal. Can anything be so obvious as the control wielded by the corporatists?

But what is of concern to the Wall Street demimonde are their beloved CDS, which are as foul a form of white collar criminal abuse as ever has been seen since the creation of the Federal Reserve Bank. Any attempts to limit them will be resisted with threats, promises of dire outcomes and ruin, and buckets of money for politicians and regulators.

The rest of the world is beginning to act with revulsion at the destructive corruption of Washington and New York, and the American oligarchs.

Merkel made them squeal with her own version of shock and awe, and it was music to many ears. You go, Höllenmädchen.

[May 19, 2010]   Germany Takes Lone Stand in Hobbling Riskiest Trades

Should NYT be renames the "Hedge funds voice" ? In reality, the only state that has courage to ban uncovered default swaps is the only state that is not under full control of financial oligarchy. were falling in response to Germany’s move late Tuesday against so-called naked short-sellers, closing down around 3 percent in much of Europe

“Close cooperation in the E.U. on all issues which have a strong market impact is very important and needs to be strengthened,” the E.U. president, Herman Van Rompuy, told a news conference in Madrid, Reuters reported. He said that he would raise the issue of naked short-selling at a meeting of finance ministers in Brussels on Friday.

In a short sale, an investor sells borrowed assets hoping to buy them later at a lower price and pocket the difference as profit. In a naked short, the investor does so without actually having possession of the assets. Many Europeans have attacked the practice as casino-style speculation that can unfairly disturb the markets.

A number of European countries, including France, Austria, Belgium and Spain, still maintain prohibitions against naked short-selling of shares in their own major financial institutions, first imposed in 2008. But outside of Austria, there appeared to be little immediate enthusiasm for following Germany’s lead into new areas of regulation, including of government bonds.

...the government’s new aggressive attack on speculators won her admiring headlines as the debate opened Wednesday.

The German financial regulator, BaFin, said Tuesday that it had banned naked short-selling of euro-zone government bonds and was reinstating a ban on naked short-selling in the shares of 10 German financial institutions — including Deutsche Bank, Commerzbank and Allianz — until March 31, 2011.

[May 19, 2010] "Is the European Crisis a Net Positive for the US"

Economist's View

First off, I think it unlikely that an export demand shock alone is sufficient to push the US economy back into recession. Menzie Chinn tackled this issue back in 2007, arguing at the time it was unlikely a rise in exports would stave off a recession. The reverse logic holds as well; US recessions look to be driven by sharp declines in domestic absorption, not exports.

That is not to say that slowing exports would not crimp US growth. The rising Dollar not only stresses US exports to Europe, but China as well. As Calculated Risk notes, European exporters are now more competitive in China compared to their US counterparts. Moreover, the falling Euro may delay any eventual loosening of Chinese currency policy, as policymakers fret about the effects of one falling currency, let alone two.

Now, it is perfectly reasonable to be concerned about the implications of falling net exports for growth given the supposed fragility of the US recovery. The Wall Street Journal reports the Goldman Sachs analysis:

Estimates of how much the government’s spending is actually stimulating growth vary wildly — some economists contend it has no net effect at all. But if you believe the economists at Goldman Sachs, who have spent a lot of time poring over the details, the effect is quite significant: about two percentage points of annualized growth in both this quarter and the last. Indeed, if one subtracts that stimulus effect and the boost from changing inventories — also a temporary factor — there’s been no recovery at all. Growth in the first and second quarters of 2010 would be zero.


A conservation program to keep oil prices low would be better for the US economy than having Europe tank. Low oil prices are helpful right now, but in the long term the US needs to prepare for much higher oil prices.

A decrease in demand in Europe will be a glut on on your markets.


Correct me if I misunderstood the post.

Is "growth" in the US economy based on the sale of US debt?  


Funny how Duy distinguishes between what information is important and what is not. When Chin notes that trade rarely makes the difference between recession and expansion, that is reason enough to stop worrying about how much changes to the trade outlook due to Greece might reduce US growth. Changes to oil prices and the US rate outlook due to Greece (Duy missed the impact of China's slow-down efforts?) are, on the other hand, a big deal. So big, in fact, that it drives Duy's conclusion, without ever laying out the magnitudes of various influences. The worst month for many of the broad "ex-" retail sales aggregates since September, as noted in the WSJ, is dismissed.

Duy isn't doing economics. He's doing sales, like always.


Duy is trying to predict. Always a dangerous thing to try. But we desire understanding nevertheless.

More importantly, we never ask the obvious question. How do we prepare?


PK chimes in:


I think you have hit the right points and are on target.

But remember, that we are probably all underestimating the risk of outright deflation.

[May 18, 2010] Merkel to The Banks and Hedge Funds Sprechen Sie Deutsche Then Droppen Sie Dead

Jesse's Café Américain

There is much surprise that the German government has declared a ban on naked short selling, including CDS, as of midnight tonight, with no prior notice and the courtly deference demanded by the Banks when government chooses to regulate them. This action seems to have perturbed some and confused many.

The reason for this may be quite simple.

After tonight, when hedge funds and The Banks call upon German financial firms and European governments to make payments on Credit Default Swaps or other financial instruments that are subject to the ban, the Germans will have a rather large hammer in hand to help them to negotiate the terms, and respond to any threats and coercion.

Since the CDS will be deemed to be no longer legal, at least in the quantity and leverage desired by those gaming the system, the opportunity to default on them with the backing of the government may be an option. This seems quite similar to the stance that the Chinese government took on behalf of some Chinese firms that were caught on the wrong side of energy derivatives.

I have heard from several sources that there was a general disappointment in Europe and in some parts of Asia at the lack of progress being made in the US Congress towards creating meaningful reforms in their financial system. In fact, there is a widespread belief that Washington is being dictated to by the Banks, and that their lobbyists are directing the conversation, and in many cases writing the actual legislation. The final straw was when the Obama Administration itself sought to water down and block key provisions of the legislation to limit the power and size of the Banks.

"To some degree this is a battle between the politicians and the markets," she said in a speech in Berlin. "But I am firmly resolved -- and I think all of my colleagues are too -- to win this battle....The fact that hedge funds are not regulated is a scandal," she said, adding that Britain had blocked previous efforts to do this. "However, this will certainly have taken place in Europe in three weeks," she said, without giving more details." Reuters 6 May 2010
"German Chancellor Angela Merkel accused the financial industry of playing dirty. 'First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to launch recovery packages, which increased our debts, and now they are speculating against these debts. That is very treacherous,' she said. 'Governments must regain supremacy. It is a fight against the markets and I am determined to win this fight.'"UK Telegraph 6 May 2010
The financiers have been saying that 'Europe cannot print money faster than Goldman Sachs can create naked Credit Default Swaps.' Well, Goldman can still create those swaps, but they may have trouble finding counterparties for them in Europe. And those who buy them may do so at their peril, since Europe is obviously seeking to isolate itself from the consequences of speculative excess by an overleveraged financial system.

Merkel said she was going to reassert the primacy of government over the multinational speculators.

This is only the opening salvo. It will not be effective without further effort. And it is likely to draw the ire and criticism of the corporate media in NY and London, and the financiers' well-kept demimonde.
"Oh no, naked CDS are essential to price discovery. Naked shorting adds liquidity. The system will fall apart if you do not let the Banks have their way with the global economy. Oh my God, someone in government actually did something that was not vetted and pre-approved by the Wall Street Banks. They have actually outlawed naked shorting, which is tantamount to legalized counterfeiting. How dare that headstrong and impertinent frau Dr. Merkel attempt to protect her people from the gangs of New York!"
But one has to admit that the lady has style, and, unlike her American counterpart, is not afraid to occasionally take the wheel and drive, rather than sit in the back seat offering platitudes, and fine sounding words, and toothlessly petulant criticism.
Germany to Ban Naked Short-Selling at Midnight

By Alan Crawford
May 18, 2010

May 18 (Bloomberg) -- Germany will temporarily ban naked short selling and naked credit-default swaps of euro-area government bonds at midnight after politicians blamed the practice for exacerbating the European debt crisis.

The ban will also apply to naked short selling in shares of 10 banks and insurers that will last until March 31, 2011, German financial regulator BaFin said today in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, the regulator said.

The move came as Chancellor Angela Merkel’s coalition seeks to build momentum on
financial-market regulation with lower- house lawmakers due to begin debating a bill tomorrow authorizing Germany’s contribution to a $1 trillion bailout plan to backstop the euro. U.S. stocks fell and the euro dropped to $1.2231, the lowest level since April 18, 2006, after the announcement.

“You cannot imagine what broke lose here after BaFin’s announcement,” Johan Kindermann, a capital markets lawyer at Simmons & Simmons in Frankfurt, said in an interview. “This will lead to an uproar in the markets tomorrow. Short-sellers will now, even tonight, try to close their positions at markets where they can still do so -- if they find any possibilities left at all now.”

Merkel, Sarkozy

Merkel and French President Nicolas Sarkozy have called for curbs on speculating with sovereign credit-default swaps. European Union Financial Services Commissioner Michel Barnier this week called for stricter disclosure requirements on the transactions.

Allianz SE, Deutsche Bank AG, Commerzbank AG, Deutsche Boerse AG, Deutsche Postbank AG, Muenchener Rueckversicherungs AG, Hannover Rueckversicherungs AG, Generali Deutschland Holding AG, MLP AG and Aareal Bank AG are covered by the short-selling ban.

“Massive” short-selling was leading to excessive price movements which “could endanger the stability of the entire financial system,” BaFin said in the statement.

The European Union last month proposed that the Financial Stability Board, the group set up by the Group of 20 nations to monitor global financial trends, should “closely examine the role” of CDS on sovereign bond spreads. Merkel said earlier today that she will press the Group of 20 to bring in a financial transactions tax.

Merkel’s ‘Battle’

In some ways, it’s a battle of the politicians against the markets” and “I’m
determined to win,” Merkel said May 6. “The speculators are our adversaries

Germany, along with the U.S. and other EU nations, banned short selling of banks and insurance company shares at the height of the global financial crisis in 2008. The country still has rules requiring disclosure of net short positions of 0.2 percent or more of outstanding shares of 10 separate companies.

The disclosure of the rules drew criticism from lawyers who said that they should have been announced well ahead of time.

“The way it’s been announced is very irresponsible, and it’s sent many market participants into panic mode,” said Darren Fox, a regulator lawyer who advises hedge funds at Simmons & Simmons in London. “We thought regulators had learned their lessons from September 2008. Where is the market emergency that necessitates the introduction of an overnight ban?”

Short-selling is when hedge funds and other investors borrow shares they don’t own and sell them in the hope their price will go down. If it does, they buy back the shares at the lower price, return them to their owner and pocket the difference.

Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy insurance on bonds they don’t own.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

[May 17, 2010] Young and Invested

Is the debt situation just something we are worried about in a downturn and something that’ll be much easier to control in once economic growth returns?

You are assuming that economic growth returns!  Growth will certainly resume someday, but I think that anyone who expects the kind of housing market performance we saw in the last 10 years anytime soon is delusional.  That housing bubble really affected all other aspects of our economic growth and juiced it way beyond normal levels. I mention housing because I think it was a huge part of the bubble in America – people spent paper profits on their homes, accruing debts in the process. MEW – mortgage equity withdrawal!!! It fuelled everything.  As long as we don’t have a downturn, you don’t have to worry about this debt – you just refinance it – MAGIC!  Of course, that MUST end at some point.

... ... ...

What are some of the other blogs you read for insights into new developments?

Calculated Risk – for not-too-opinionated, very educated, and very accurate interpretations of economic data points.  Barry Ritholtz – for more opinionated and less censored interpretations of the same.  David Merkel’s Aleph Blog, Paul Kedrosky’s Infectious Greed,  Tyler Cowen’s Marginal Revolution, Michael Panzner’s Financial Armageddon, for focused and always insightful pieces.  I think Felix Salmon has become one of the better mainstream writers – he is a journalist, but he gets the facts straight, doesn’t manipulate them, and accurately explains unpopular views in an attempt to educate, not to generate hype and hysteria.  Mike “MISH” Shedlock has also done a good job repeatedly focusing on the municipal debt problems we are facing – which no one seems to be talking about.

[May 16, 2010]  Not Hard to Believe at All

Financial Armageddon
"Executives Fear Double-Dip Recession, Poll Finds" (The Hill's On the Money)

An overwhelming majority of executives (84 percent) polled by consulting firm Deloitte are concerned that the economy will reverse course on its recovery and create a double-dip recession.

"Big Majority Believes US Still in Recession- Poll"

Fully 58 percent of Americans agreed with the statement, "Because of corporate corruption and broker practices, the stock market is no longer a fair and open way to invest one's money." Just 35 percent said the stock market remains fair and open.

[May 16, 2010]   Senator Kaufman Was Right – Our Financial System Has Become Dangerous

The Baseline Scenario

Update: link to Senator Kaufman’s speech yesterday

Senator Ted Kaufman (D, DE) is best known these days for arguing that, as part of comprehensive financial reform efforts, our biggest banks need to be made smaller.  His advocacy on this issue helped build support around the country and forced a Senate floor vote on the Brown-Kaufman amendment, which was defeated 33-61 last Thursday.

Senator Kaufman has also pushed strongly the idea that in recent years there was a pervasive “arc of fraud” within the mortgage-securitization-derivatives complex.  This thesis also seems to be gaining traction – according to the WSJ today, the criminal probe into this part of the financial sector continues to develop.

But the Senator’s biggest home run has been on a different issue: his warnings about the dangers of high-speed trading, involving “dark pools” of money, appear to have been completely vindicated – ironically enough, also last Thursday.

Think about it this way.  The US stock trading system, long-established and widely thought to be robust, crashed on Thursday afternoon.  Widely held stocks, traded with consistent liquidity, do not fall in value from $40 to 1 cent and then bounce back again – even in emerging markets, let alone in the United States.  It is true that complex systems crash, but given the infrastructure and back-up systems involved here, this is much closer to east coast air traffic control shutting down for 15 minutes than it is to your local cable company having a problem.

And here’s the most remarkable point – after 6 full working days (and top people do sweat this kind of issue on the weekend), we are still no closer to really understanding what happened.  To be sure, there are plenty of theories – and no shortage of proposals for avoiding a recurrence.  But, despite the evident resources thrown at this problem, we do not know what went wrong.

As Senator Kaufman points out, the SEC does not even routinely collect the data it needs to understand the actions and impact of large traders.

The Merkley-Levin amendment would also likely be a step in the right direction, in terms of reducing the socially dangerous casino nature of our financial markets.  But it is far from enough.

Selected Comments

Mark Forziati

Senator Kaufman is spot on but the “black box” high speed melt down happened before as well, in August 2007. The MIT magazine Technology Review wrote about in the Nov/Dec 2007 issue. The article written by Bryant Urstadt is titled The Blow-Up !! In 3 years nothing has changed.

Free repro is here:

Ted K

Thanks for the answer Mark. And erichwwk, you’re my new hero. I sincerely appreciate it, both of you. Here’s a terrific Op-Ed by Nouriel Roubini. It’s a relatively quick read and very insightful. Like scarily insightful.

Per Kurowski

I agree with Roubini when he writes “Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation.”

And that means not subsidizing risk aversion the way it is done with capital requirements for banks that are lower for what is perceived as having lower default risks, and therefore already pays lower interest rates.

But I absolutely disagree with Roubini on that nonsense of China taking over in ten year a role as a reserve currency, when it cannot even afford that the dollar loses that status. Yes there are very serious troubles awaiting the US and the dollar but, first, China at their current level of development, would not last one day suffering the “reserve currency curse” which would immediately halt their exports, and second, even if the US would default and their current dollar sink, the world would, the morning after, be willing to accept its New Dollars.

Mort Twain:

“Nothing has changed.” “Mistakes were made.” “Nobody could have predicted it.” Those are just some of the new excuse lines being used to explain away the collapse of the Roman Empire which is now us. Such stupidity and corrpution is always rewarded by nature by a process knowns as extinction.

Travis Bickle “It was a Perfect Storm…..”

Per Kurowski

No this storm was manmade by regulators. By allowing banks to lend with almost nonexistent capital requirements whenever it had something to do with triple-A ratings the markets did what they normally do when there is a great demand for it, they supplied triple-As, albeit fake triple-As… and here we are up to our tilt in lousy triple-As, mostly sovereign, in a world of uncertainty where a real triple-A is almost a specie in extinction.


You don’t think that it’s possible for the Renmimbi (sp?) to take over reserve status in 10 years if the current pace keeps up of China absorbing the world’s, particularly the US’s, manufacturing? At the current, or recent, pace, mind you, if something doesn’t change.

Per Kurowski

No I don’t. A reserve currency is one that is a strong currency and China has grown because the world has allowed it to be a weak currency. Also before there is not more fundamental political reform in China I do not see many but speculators wishing to place their life savings there.


Jon Stewart gives a fairly terse description of how it is now. The financial game has been rigged for a verey long time.

It seems to be political suicide to take on the banks politically, akin to bad-mouthing one’s employer

[May 16, 2010] Economist's View Shiller Fear of a Double Dip Could Cause One

I think that reorganization of the American society after WWII to fight the USSR did some long lasting damage the scope of which only now is becoming clear.

I think Shiller fascination with animal spirits does him a disservices. This is something different in the collapse of complex, ideologically driven societies that we live in.

Society as a whole is driven by ideology and if ideology is bankrupt like in the case with the USA, the society is in real trouble. It tend to continue the slide down the slope despite best efforts to cheer up unwashed masses by the bankrupt elite. Such a society is in deeper troubles then low level of those elusive animal spirits.

The United States are facing fundamental challenges to the legitimacy of the elite. This simultaneous a crisis of confidence of people and ideological and intellectual bankruptcy of the elite (for example Greenspan now look like a curious mixture of white collar criminal with a clown; Rubin and his gang are even worse) make the crisis different from any other. There is a real crisis of governance with Republican Taliban hell bent on defending the indefensible.

Peak oil is another factor -- might be an end of perma growth stage of the human colony on this planet.pof labor can not be usefully employed to build productive capital to produce those substitutes?

Or is the economy a zero sum game are the world economy has hit the ceiling and every gain in India and China requires a reduction in the US and Europe?

Perhaps the problem is the crisis of confidence Jimmy Carter talked about, and that Ron Reagan dismissed by saying "there's morning in America, what me worry, just keep believing oil will never go up in price, and that we never need to change anything."

If you read Jimmy Carter's address more than three decades ago, we are basically in the same place with no progress on any challenge in the US. In more than Europe, higher oil prices have limited direct impact for the price of oil incorporates much more of the real economic costs of using oil, so a jump in price of oil results in a much smaller price in energy. Of course, the shock in the US which Carter identified as something to eliminate, but Reagan chose to wish away, seems to hurt the economy which ripples throughout the global economy. Wouldn't the economies of the world be more stable if they quarantined the US economy?

[May 16, 2010] What is the Proper Libertarian Response to the Deepwater Horizon Oil Spill

The overt “libertarians” are just a particularly obnoxious tip of the whole neoliberal corporatist iceberg.
May 15, 2010

Tao Jonesing:


Your penultimate paragraph was AWESOME. The rest was darn good, too.

Answering Yves’ question: like everything else, the proper libertarian response is that the spill is the government’s fault!

In “Moral Politics,” George Lakoff argued that modern liberals share a “nurturing parent” attitude, while modern conservatives share a “strict father” attitude.

Personally, I think conservatives (including the libertarians) are actually children, not grownups. They insist on requiring something in their lives to take on a superhuman, godlike quality, and they blame that something when it fails to live up to expectations in order to shift blame from their own failings.

That something used to be women’s virtue: in spite of the fact that every man did his best to have “relations” with a woman out of wedlock, if the man actually succeeded, it was the woman’s fault and the man was blameless.

With the change of societal norms in the 1920s and 1930s, the government became target of impossible standards. Now, when the government gets debauched by a businessman pursing his own self interest, it is the government’s fault for not stopping the businessman, who we can’t punish because he was just pursuing his natural urges.

Demanding perfection of somebody else in order to excuse one’s own imperfection is very childish behavior, and libertarians are among the most petulant children I’ve come across.

That being said, libertarians are largely irrelevant to this discussion. They’re just the radical true believers of neo-liberalism (which is neither new nor liberal). While neo-liberal “thought” dominates both parties these days, there’s no way to argue that the liberetards are in charge.

Besides, casting blame is of no value. The real question is how to set policy in view of this tragedy? Neo-liberal doctrine faces a major challenge, and, as long as we don’t get distracted by beating on liberetards, it is an easy target. We need to focus on destroying the myths of the “free market” that Uncle Milty created to perpetuate a new form of feudalism while pretending to be a classical liberal.


I agree, the overt “libertarians” are just a particularly obnoxious tip of the whole neoliberal corporatist iceberg. (Although historically they had an outsize influence as ideologues and opinions leaders. So today anti-corporatists must replicate the plan and constitute the anti-Chicago.)


“We need to focus on destroying the myths of the “free market” that Uncle Milty created to perpetuate a new form of feudalism while pretending to be a classical liberal.”

Superb! This is the key point, as far as I’m concerned. We forget that Adam Smith wasn’t just opposed to “big gub’mint” like Sarah Palin, but rather was critical of the king’s government because the king was propped up by (and was propping up) a landed aristocracy that Smith found to be stifling trade and investment and, in modern terms, allocating resources unproductively.

The modern large-scale, government-coddled corporation is a legal “person” which contradicts, in almost every sense, what 18th-century Whigs thought a “citizen” should be. What these massive institutions really are doing is recreating a 21st-century aristocracy of corporate persons that is STIFLING entrepreneurship and personal independency (two things libertarians are supposed to like) as Adam Smith’s hated aristocracy never did. They are trying to construct a RENT economy based on property rights rather than a true capitalist economy based on making, selling, and buying things. They are, in effect, closing off the openness Smith tried so hard to wrest from the lords and barons of his time.


The other myth that needs to be destroyed, which is also very popular amongst the libertarians is the Self Made Man myth.

This myth has probably led to more destruction of our way of life the last 30 yrs than anything else, I contend. The ” I got mine now you work for yours” attitude has been taken to such an extreme, the proponents have lost all humility and sense of gratitude for what has been done by others.


This is the kind of thing that utterly defeats their lies, on many levels.

1. The oil, if it can be said to “belong” to anyone in the first place, belongs to the people, so on its face it was robbery to have anything other than a national oil industry, which might at most use private service companies as hired contractors only.

2. Undersea drilling is a monumental undertaking which could never find private funding with no massive government backing and backstops. Since by definition the project must either be corporatist or fully nationalized, again it’s clearly nothing but unproductive looting to allow anyone to extract a private rent.

A true libertarian, if any such existed, would say that if an economic project can’t be done without massive government “investment” and backstopping, it shouldn’t be done at all.

3. It was always a flat out lie when the likes of Milton Friedman flippantly said “tort law can handle all harms”. How could BP pay the infinite damages here even if it were willing to, the way the libertarians claimed it would be?

4. But of course rackets like this aren’t willing to pay for the destruction they cause, and they rig the system to absolve themselves of having to. Thus BP received every waiver imaginable, didn’t have to take out any insurance at all let alone the trillion dollar policy which should have been required. Meanwhile it’s apparently only subject to a $75 million liability cap, and as we speak the Democrats are allowing a bill to modestly raise this limit to be held up by Republican. That’s a perfect example of the rigged system the libertarians always lie and claim doesn’t exist.

There’s your Friedman tort safeguard in action, functioning exactly the way he always really meant when he told such lies, the way he always knew and intended it would function.

The fact is that economic libertarianism was never anything other than a stalking horse for the dictatorship of big corporations. The goal has always been to lift all responsibilities from the holders of concentrated wealth and property and remove all restrictions on their rapacity, aggression, and destruction, even while big government is maintained as a looting mechanism, to force the politically weak to be the initial cash cow and to take on the cost and the risk, and to aggressively uphold this property regime. (The lie that it’s possible to have large-scale concentrated property and wealth at all without a very big, aggressive government is intellectually identical to saying “Keep your government hands off my Medicare!”)

The result is the kleptocracy we have today. The result is Bailout America.


Excellent work attempter! And Tao Jonesing too (aside from clicking the wrong reply button ;-) ) Good observations on the childishness of expecting perfection from Them Out There. You might be interested in Charles Eisenstein’s thinking on transitioning from Mother Earth thinking (we always take from our mothers) to Lover Earth (we share with our lovers, and love them too).

Neoliberalism is dead in the water, to use an unfortunate and appropriate metaphor.’Freedom’ has just led to what, if things go very badly from here, could be an extinction level event. If things go ‘well’ we still have a crime against the ecosystem so appalling punishment is virtually beside the point. I’m thousands of miles away from this but it’s keeping me away at night. And almost as sickening as the crime itself are the justifications and casuistries employed to pass the blame around like some fetid turd. And Tony Hayward might lose his job. Oh how awful.

Obviously I hope they get this under control, and quickly. But I hope too this terrible event is the final impetus humanity needs to transition away from fossil fuels, and towards a new socioeconomic system capable of true sustainability. Getting some trust back into life might be nice too.


The demand for perfection is partially “sincere” childishness, but also a calculated plan. The “starve the beast” strategy is to demand government live up to all the things starry-eyed liberals allegedly claimed for it, while ensuring its complete failure by gutting it of funds, staff, resources. Then after the inevitable failure, claim it’s the failure of the idea itself.

And then we have the orphan defense, where at every level but especially from the bank flacks we see how, after the bank rackets engaged in a concerted strategy to corrupt legislators and buy deregulation from them, they now turn around and blamll the power we need by wearing those silly hats with the propellers on them and leave “Mother Earth” un-fouled.


Yea. And maybe we can create all the energy we need by capturing all the hot air given off by a bunch of arrogant, self-rightous, over-confident libertarians. These pompous know-it-alls have been in control of our government for the last 30 years, and what has it brought us: an earthly paradise for the rich, and elbows and assholes for everybody else.


“It was always a flat out lie when the likes of Milton Friedman flippantly said “tort law can handle all harms”. How could BP pay the infinite damages here even if it were willing to, the way the libertarians claimed it would be?”

Actually, limited liability through corporate form is a government sponsored fiction designed to encourage economic risk taking. If limited liability could not be judicially (governmentally) enforced and individual shareholders and their assets were on the hook for the Deepwater Horizon damages, there would be enough resources to pay the damages (which are surely not infinite; my tap poured clean water just a minute ago). And of course, if shareholders knew that they were personally liable for damages from disasters like Deepwater Horizon, the cost of raising capital for such a venture might quickly become prohibitive. I think that is the true libertarian argument you were looking for, no?

As you note very ably, Milton Friedman was not a libertarian. He was as much a corporate socialist as Keynes. The true libertarian you describe only exists outside the corridors of power.



Your argument is nonsense. It assumes that the threat of monumental personal loss is sufficient motivation to keep our masters of the universe from making bad decisions.

This is a half-truth, and half-truths form the heart and soul of libertarianism.

I had a poker buddy who was a pilot for a prominent independent oil firm in Midland, Texas. He took some of the muckety-mucks up to Hobbs, New Mexico one morning for a meeting. Bad weather set in, but that wasn’t enough to deter our masters of the universe from their plans. They thought they could fool mother nature.

They were wrong. The plane went down in a storm, and everyone aboard, including my friend, was killed.

People make bad decisions, even the masters of the universe.

And the notion that others don’t pay the price for the bad decisions of the masters of the universe is so nonsensical as to be laughable.


DownSouth: I am sorry that you lost your friend. The Masters of the Universe you describe were as much creatures of a society where reckless action has little to no consequence, where risk of loss is born by others, and where liability can be limited, as they were stupid. And, unfortunately, you cannot regulate human stupidity out of existence.

“[W]e must consider the impact of our decisions on the next seven generations.” The Great Law of the Iroquois Confederacy


A society where reckless action has little to no consequence?

You call losing your life “no consequence”?

These guys paid the ultimate price for their bad judgment.

It belies the entire libertarian assumption that the threat of losing money or property will prevent people from making bad judgments.

Andrew Bissell:

People make bad decisions, even the masters of the universe.

Everyone except the regulators, right?


Who ever said the regulators didn’t make mistakes?

I certainly didn’t.

But I did ask the question: Who paid the regulators to look the other way?

Lethal to the idologies of the libertarians is the fact that most people do have some sort of moral compass, and most judge crimes of commission more harshly than crimes of omission.

[May 15, 2010] 5/14 Michael Aronstein Cal

[May 15, 2010] ls European Rescue `Deflationary (video)

May 14, 2010 | Bloomberg

Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc., and Joshua Rosner, managing director for Graham Fisher & Co., talk with Bloomberg's Matt Miller and Carol Massar about Europe's sovereign-debt crisis and U.S. efforts at financial regulatory overhaul. Aronstein calls the rescue and austerity measures "deflationary."

[May 15, 2010] Greece Considering Legal Action Against U.S. Banks (Update1) -

I think European intelligence agencies should coordinate this investigation with FBI as in this case we are dealing with real financial terrorists.

Share | Email | Print | A A A

By Timothy R. Homan

May 15 (Bloomberg) -- Greece is considering taking legal action against U.S. investment banks that might have contributed to the country’s debt crisis, Prime Minister George Papandreou said.

“I wouldn’t rule out that this may be a recourse,” Papandreou said, in response to questions about the role of U.S. banks in the crisis, in an interview on CNN’s “Fareed Zakaria GPS.” The program, scheduled to air tomorrow, was taped on May 13. Neither Papandreou nor Zakaria mentioned any banks by name.

U.S. stocks fell and the euro slumped on concern that Europe wouldn’t be able to contain the debt crisis stemming from Greece. The Standard & Poor’s 500 Index declined 1.9 percent yesterday, while the euro fell below $1.24 for the first time since November 2008.

Papandreou said the decision on whether to go after U.S. banks will be made after a Greek parliamentary investigation into the cause of the crisis.

“Greece will look into the past and see how things went,” Papandreou said. “There are similar investigations going on in other countries and in the United States. This is where I think, yes, the financial sector, I hear the words fraud and lack of transparency. So yes, yes, there is great responsibility here.”


In the days leading up to the May 10 announcement of a loan package worth almost $1 trillion to halt the spread of Greece’s fiscal woes, European Union regulators were examining whether speculators manipulated the prices of bonds and equities and contributed to the crisis.

The Committee of European Securities Regulators said on May 7 it was investigating “exceptional volatility” in the markets and would work with other regulators, including the U.S. Securities and Exchange Commission, as part of a coordinated clampdown.

European Central Bank President Jean-Claude Trichet said May 6 that he was concerned about speculation in bond markets using credit default swaps. “By first buying the CDS and then trying to affect market sentiment by going short on the underlying bond, investors can make large profits,” he said.

Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy insurance on bonds they don’t own.

In the CNN interview, Papandreou said many in the international community have engaged in “Greek bashing” and find it easy “to scapegoat Greece.” He said Greeks “are a hard-working people. We are a proud people.”

“We have made our mistakes,” Papandreou said. “We are living up to this responsibility. But at the same time, give us a chance. We’ll show you.”

To contact the reporter on this story: Timothy R. Homan in Washington at

Papandreou Weighs Legal Action Against US Banks for Role in Greek Crisis « naked capitalism#comments#comments


I suppose it would be pandering to the electorate in the sense that his overall plan is to economically liquidate that same electorate in order to bail out the big Euro banks without having to tax the Greek rich, so in light of that the proposal to sue American speculators is just misdirective political theater. In the real thrust of policy Papandreou is a bankster flunkey.

But as for the substance of it, the speculators themselves are of course terrorists by any definition which includes economic attacks, and should be dealt with as such.

Do the rigged “laws” say otherwise? Probably – it’s characteristic of the kleptocracy, including its “war on terror” manifestation, that there is no rule of law, but just a humpty-dumpty might makes right regime. By definition it’s not terrorism when the rich do it.

I like the Orwellianism of how “protection” has become a bad word. It’s true that what are called protectionist measures are often actually aggressive, as in the way America and Europe act to “protect” their agricultural rackets at the same time that they seek to empower the predation and aggression of these rackets all over the Global South.

But protection can also still mean what it’s supposed to mean in the English language – prudence, vigilance, self-defense, and in this case real, not Orwellian, anti-terrorism.

[May 15, 2010] Mervyn King World's Worst Financial Crisis Ever zero hedge


Apostate 22:21:

Yeah, I tried to tell people back in '08 - when Soros says "this shit is retarded," as he did in a speech at Columbia, he will do his damndest to rip the balls off every penny ante government out there, so long as he's still breathing.

He fled the Nazis. He remembers. He takes no shit. I disagree with his approach in many respects (and I find his philanthropic efforts both misguided and damaging), but when he speaks, the only people who matter listen.

The media is just so deluded that they're not worth listening to. It's worse than Pravda in the USSR or even your typical Chinese paper. They're much, much dumber, much more corrupt, and most of these bastards fail to even turn a profit.

Bringin It  22:53:

Great post and I'm especially happy to see recognition of this - It's worse than Pravda in the USSR.  Because it's true.

I remember in the 60's mocking US news reels of what dumb gruel they had to swallow over there.  Now here we are with Americans trapped in their own glass bubble.

Augustus - 22:59:

The people reading Pravda all knew that is was pure propaganda.  They were much wiser that what we have for an educated American public.  It is self induced ignorance here.

akak - 00:21:

I used this exact same analogy with a friend a few days ago, comparing the captive US corporate media to the USSR's old Pravda and Izvestia.  He thought the comparison was extreme --- I told him it was probably much closer than most Americans could possibly realize.

But of course, most of us here already know that.

pak  - 04:22:


According to Orwell, "happiness can exist only in acceptance."

I would argue that even in former Soviet Bloc countries, the citizenry these days is much more delusional and naive than 30-40 years ago. Apparently, people enjoy being idiots because that essentially makes them happy.

ArmchairRevolut...  - 07:06:

This is absolutely true. Some people will get angry with you if you enlighten them, because it takes them from their happy (ignorant) place.

pak - 08:55:

You'll certainly like this one, also from Orwell:

"In a time of universal deceit - telling the truth is a revolutionary act."

The problem is - these days "the ruling circles" wouldn't try to suppress you or destroy you physically. Instead, they'd try to put a tinfoil hat on you. If you don't allow that, they'll call you "immature" or "populist". Just follow the financial reform debate, and you'll see how it works..

[May 15, 2010] SEC Chief's Big Bet on Goldman -

Vampire Squid is the product of fiat financial system and deregulation. They tried to hack financial system to extract parasitic rents and enjoyed success beyond imagination, but this is not a computer were damage is limited.  This is a society that sustained damage. So they cut the branch on which they were sitting. Now they need to be shut down and perpetrators need to go to jail. But it's easier said than done. Those are Mafiosi, or financial terrorists in the most exact meaning of this word including the secrecy of the planned operations. To penetrate inner circle of those companies you need three letter agencies and covert agents. Regular investigations will be subverted.

david b mullaney:

This whole thing was a fraud of absolutely massive proporions. Some charges need to come, and Goldman among others was very deep into alot of grey areas. If you have ever heard the term 'regulatory arbitrage' you know that these guys were playing a dangerous game. Whether that behavior is actually illegal needs to be tested in a court. By the way alot of these things need to regulated away. Synthetic CDOs provide completely useless leverage in most cases, they are not a mechanism of capital allocation and are not always used for risk mitigation, they were generally directional unhedged trades. Let the charges come, let the rules be tested in court and let the regulation come for poor products. No one wants to see this thing happen all over again.


Regulatory arbitrage occurred between insurance companies and Investment Banks. Insurance companies had different ways of valuing credit default protection, thus giving rise to the "Arb" which you refer to. The monoline insurance companies (AIG, AXA, ACE, AMBAC) always sold CDO tranche protection. I always thought it was underpriced. I noticed that AIG was on the other side of every single deal. When I raised this issue at Bank of America in 2001 I was told that I didn't understand this, AIG was AAA, and besides "we are making money". The guy who told me this was later fired for, among other things, selling equity CDO tranches to a retail Italian Bank - BoA settled for $80MM.

Peter Marlow:

Goldman is a criminal enterprise. The charges and investigations will make this obvious. And then, another obvious conclusion will follow:

Goldman Sachs must be SHUT DOWN!

Paul Shang

"a product of pure intellectual masturbation…which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price."

I am wondering if the investors who bought the CDOs share his sexual fantasy?

david b mullaney

I wish people, media in particular, would stop with the buzzwords and stupid comparisons and tell people what really happened. CDOs have an implied default rate in them at which investors of different tranches break even. However since each underlying mortgage is its own universe those are very difficult to guess. But there are two big factors which really matter, one is the overall direction of the economy and employment in particular which dictates housing prices and cash on hand to make payments. The second is correlation between the different mortgages. These led to two fatal assumptions in the way these things are priced. The two assumptions were that the economy would stay strong and this would support housing prices and ability to pay, the second was that mortgages in different geographical areas would have largely uncorrelated default rates. So if people in AZ couldn't pay, your people in Florida probably could, your CDO is more robust because it is diversified. There is huge amounts of historical data available about default correlations, home price behavior during different phases of the business cycle, etc. What people didn't realize is that when they were making these products, they made so many that they fundamentally altered the forces that created the data they were using to price the securities. Basically they unwittingly created a circular system that put the economy into seemingly virtuous cycle of rising home prices, strong economic performance, high employment etc. this reinforced the original assumptions and people engaged in more of this behavior. Of course we all know now that it was a vicious cycle of increasing risk and artificial returns that created an ever more unstable system. finally the wind blew and the straw house fell down.

Until it all fell apart people thought they could price these things. The theory of it is all there, but the theory of it is only as good as the data that theoretical models employ, and in their circular would their own activities affected the integrity of the data.

Synthetic CDOs are much more theoretical because they were one more step removed from reality. They just became a numbers game where you customized an asset to beat a model that a ratings agency was using. It really is a problem when the fox and the hound get too cozy, they are supposed to be adversarial. It's what keeps us all safe.

George Macdonald:

It was neither Freddit not Fannie who knowingly wrote bad mortagages, securitized them, and then paid off the ratings agenicies to give them AAA ratings.

True, Freddie and Fannie were doing the bidding of the Bush administration to suck some of those bad mortgages --- but they were not the root cause of the problem. It was the criminals at Countrywide, GS, Citibank, etc....

George Macdonald:

The Wall Street Financial Houses committed fraud on a massive scale -- Goldman was just one odf many. And, that massive fraud brought this nation to its knees -- and it may never recover from the damage that it (and the Bush Administration) have done to it...

The trouble is: NONE of them have admitted to doing anything wrong. And, most importantly, they are continuing the practices that got them and us into this financial crisis...

There is only one thing that will work: enforce the law: First, put some of the higher ups in jail and also take away the money that they stole from innocent investors who trusted the information that they were given when they bought into the scam these guys were running.

For those who cry" "Buyer Beware!" (i.e., that it is up to the buyer to figure out if he is being scammed): The NYSE cannot exist without some assurance that the representations made for the securities that are being sold are as they are represented to be. Anything else is fraud.

[May 14, 2010] Are For-Profit Markets the Cause of Volatility

Yes they create positive feedback loop and increase instability of the system...
May 14th, 2010 | The Big Picture

The Curmudgeon:

Why exactly does “someone have to provide liquidity”? Does he even know what “liquidity” means?

American Heritage, 4th:

liquidity: 1) the state of being liquid; 2) the quality of being readily convertible to cash.

So long as something is convertible to cash, it is liquid, even if the amount of cash that it gets in conversion does not meet the expectations of the converter.

Then what does it mean to provide “liquidity”? To provide cash? I thought cash is what market participants brought to the table, if the market is traded in cash and not on a barter system. There’s no reason any entity should be expected to make up cash/liquidity shortfalls. A liquidity shortfall is another way of saying somebody doesn’t have as much cash as they want, and well, isn’t that piece of information a part of the whole reason for the price-discovery mechanism that is a functioning market?

Mark E Hoffer:


seems a popular meme:

Slouching towards neofeudalism

“….If you really want to know why the cities and states are so broke, then you must first ask yourself where all the money went. Was the firefighter down the street from you buying vacation yachts for his tropical island? Probably not.
However, the guys on Wall Street who sold your school district, county, and state governments complicated financial derivative products are buying yachts for their tropical islands. Maybe we should start there instead.

Detroit Mayor Dave Bing is struggling to save his city from fiscal calamity. Unemployment is at a record 28% and rising, while home prices have plunged 39% since 2007. The 66-year-old Bing, a former NBA all-star with the Detroit Pistons who took office 10 months ago, faces a $300 million budget deficit—and few ways to make up the difference.

Against that bleak backdrop, Wall Street is squeezing one of America’s weakest cities for every penny it can. A few years ago, Detroit struck a derivatives deal with UBS (UBS) and other banks that allowed it to save more than $2 million a year in interest on $800 million worth of bonds. But the fine print carried a potentially devastating condition. If the city’s credit rating dropped, the banks could opt out of the deal and demand a sizable breakup fee. That’s precisely what happened in January: After years of fiscal trouble, Detroit saw its credit rating slashed to junk. Suddenly the sputtering Motor City was on the hook for a $400 million tab.

What most often happened is that Wall Street rating agencies, the same agencies implicated in corrupt business practices, downgraded the municipal bonds, thus turning the the financial deals into an albatross for broke cities, but a profitable one for Wall Street….”


I would say we got to this mess as a consequence of many factors:

I’m sure we could expand this list to fill a book.


@jjay: Which leads me to believe that most of our “problems” are borne of “culture” and not easily reversed overnight, and maybe not reversible at all. The Romans would tell you if they were still alive today.


[May 14, 2010] oh-those-evil-speculative-european-officials by Stacy-Marie Ishmael

"Wolfpacks” of speculators. Good term...

May 11, 2010 | FT Alphaville

FT Alphaville continues to be amazed at the hypocrisy of politicians and officials around the world, particularly as regards their attacks on so-called “wolfpacks” of speculators.

The most recent and rather brazen example of doublespeak — in which speculation regarding the solvency of a country or the strength of a currency is fine only when they’re doing it — comes courtesy of Jean-Pierre Jouyet, on the subject of the UK.

Quoth the chairman of France’s financial regulator, L’Autorité des marchés financiers, according to the Daily Telegraph on Tuesday:

“The English are very certainly going to be targeted given the political difficulties they have. Help yourself and heaven will help you. If you don’t want to show solidarity to the eurozone, then let’s see what happens to the United Kingdom,” he told Europe 1 radio.

(The UK, a non-eurozone state, declined to commit funds to the euro rescue plan. European policymakers are not pleased.)

This is same Jouyet who less than a week ago declared war on those who dared to “spread unfounded rumours” or bet against the euro:

French financial authorities will work with intelligence services to crack down on speculators seeking to profit from the debt crisis by spreading unfounded rumors, the head of the AMF markets watchdog said on Friday

Shades of Greece’s deputy prime minister Theodoros Pangalos casting aspersions on Portugal, and those US lawmakers who are fond of condemning short-sellers as “un-American” while blithely betting on falling stocks for their own accounts.

Way to get market participants — those investment banks who will arrange your bond offerings and the hedge funds you desperately need to buy your debt– on side, les gars.

(H/T Paul J Davies)

[May 10, 2010] The tension between masses and elites is every bit as intense…

May 8  | FT Alphaville

But for now, the important thing is to understand that both Europe and the United States are facing fundamental challenges to the legitimacy of, if not the regime, then at least the manner in which the regime has handled itself. The geopolitical significance of this crisis is obvious. If the Americans and Europeans both enter a period in which managing the internal balance becomes more pressing than managing the global balance, then other powers will have enhanced windows of opportunities to redefine their regional balances.


I must get round to reviewing 'The collapse of complex societies': It is a model that really covers all of this territory very well.


it is a global political/financial/economic crisis quite right

It is time to take on the financial oligarchs and kick out the lobbyists and special interest groups.

[May 10, 2010]  An Analysis of the Thursday Meltdown

naked capitalism


The stock market’s a collective terrorist entity, like a malevolent column of army ants.


I posted this further down: Barry Ritzholz does give some credibility to the conspiracy slant to the crash.


Well, I’ve been looking for an explanation of the drop that made sense. I guess this is it, but as a casual observer the graphs and buzz words are mostly gibberish. I think I get the general gist, though.

Wasn’t the original purpose of the stock market so that people could invest some money with companies that they thought might grow or at least generate steady income, in hopes of sharing in the rewards for the investment of their money?

Seems very clear to me that that simplistic idea is now abstracted beyond any recognition into a giant crap shoot casino game, where the actual companies really don’t matter much in driving the market up and down.

Quants and algos and schemes and ploys seem to be the whole purpose for the big fish in this cesspool. The incredibly fast drop and bounce back on Thursday made it pretty certain to me that the machines must be driving most of it. Especially with no special spark to start or stop it.

The game is all. Underlying reality of the actual companies hardly matters anymore.

In Vegas, card counting can get you thrown out of the game, not to even think of using a computer. The current Wall Street sham is like a bad Sci Fi movie where the geniuses have populated the world with robots to make our lives better, but alas, there is a flaw in the design and the robots start teaming together and killing us. Some of this could still be turned off if the masters could be awakened to the true demented nature of their creation.

I managed to accumulate a bit of money and was happy for a while thinking I could make safe investments and live happily ever after. As luck would have it, it now seems the whole game is rigged; a simple strategy makes me a guppy. The assholes running the asylum are living in their own insane reality. What are the rest of us to do?

jake chase:

Well, you can’t do anything except place a bet. Everything has a price but nothing has value, so tomorrow’s price is anybody’s guess. Once again the problem is leverage, derivative bets, quantum money. The idea that a specialist system could solve anything ersal masters of finance, grist for the bonemeal in the bread of the ogres of capital (to spawn a metaphor or two, hey!). Between massive but blunt government shadow interventions that only want assets to go up, high freqs with their death-of-a-billion-nanoctus shaving the coin on normal investors day in and day out, and CDS speculators completely distorting the function of equity markets—to raise liquid investment capital—into wholly predatory mulit-dimensional roulette jigs, these markets are no safe place to place or make money.

This is what we have come to from ‘financial innovation’: digital piracy. If we ultimately get functional reforms to change this state of affairs, it won’t be due to the ire of us in the blogosphere, I fear. It will come from the political revolt of the bulk of the investor class who are being grossly cheated by the Wide Boys and the upper government pay grades captivated by the same. It won’t be a populist revolt which brings change in short, but a capitalist one from those just outside the oligarchy. This can’t come too soon


Gaming platform pure and simple.

If your new or uninformed your a nub, after a bit some pros might throw you a bone (give up secrets), if your likable or assist them cheating the system/rules, then your a regular, if your driven enough and learn all you can, and apply it with success, you become a pro, and other pros will accept you for your ability to kill/score points. As long as you don’t go after them! Then they gang up and go after you! Which at that point you band together to kill the nubs with relish and glee.

The server nodes around the world for the markets, are just the same for gaming. Bigger/faster more populated platform’s make more money/get more kills for pros.

I can create key macros to the millisecond 10 keystrokes long or scripts to enact complicated action sets with out error…find exploits in the system, holes in the rendering missed by mappers (get under, inside, outside regulated play areas and kill with impunity) or do some grifting (go on opposite team to crate distractions or play poorly to effect the out come of the match)…HFT/darkpools any one.

Disclaimer: I personally play default, more of a challenge that way and it real pisses off the exploiters, to no end, when they spec me.

Kids don’t play these games, most are well educated males in technical or management positions…some mates of mine are nuclear plant engineers, work for Bechtel, security firms, own or run small/medium server nodes etc.

BTW over the last 10 years many of our young university mathematicians, computer hardware and software engineers start off their learning on gaming platforms. Hell even the HQ for Ernst & Young in my region, less that 2 years ago had in house Friday HL2DM (half-life 2 death match) tournaments between departments to sharpen the killer instinct, pull the trigger reflex.

Personally I find all this sophistry surrounding the markets, money creation and destruction, MMT, political nuance and any more steaming excrement you can find to pile on top of this epic fail, the mother of all snow jobs, a true blizzard of lies and deceit, of which your serf ass is slowly carved and steamed and placed before your betters for their gastronomic delight…Bon Appétit.

Disclaimer: I’m full out now, not one red cent invested, less than 5k in the bank, no credit cards/cash only, ZERO debt and will stay that way for ever after, and instructing my kids to do the same when they enter the real world.

Skippy…simple FPS (first person shooter) gaming platform-gaming psychology 101, that’s what Wall st has evolved into, added and abetted by the technology is always…the way forward crowd.

PS. how does it feel to have your life’s toil 401K, Insurance life/health, Mortgage/House, small to medium Business ranked nub status…if they want you, your dead…got that, every part of the system is in their favor, its their system, and every person out side the system control room is just electrons to be traded, from citizens to consumers to electrons…got that.

En Fin…proceed resumption of sophist nuance whilst Hannibal feeds you…your frontal lobe.


Very good and plausible explanation of the Big Dive. It puzzels me as to why the comments are so strident and crumpled aluminum hat oriented.

If you noticed, the bear market rally from the lows occured on relatively thin volume; i.e., not much buying strength and not much resistance because sellers had sold. Now comes a concerted move by the makers of the rally to capture profits; ergo, sell in May and Go Away.

As structured, the markets did what they were programed to do and voila, you have a nifty little 700 down and up move on the DOW. I’m not a Cramer fan and not especially enamored of CNBC, nonethless I just happened to see him opine on the P&G flop flip as it occurred. His observations on P&G are cogent in a way that is different than what he expressed directly. As I see it a knowledgable trader wouldn’t sell P&G down that deeply while an algo would. Similarly, knowledagble traders will buy into a selloff if the fundamentals for the asset and the economy are is stable to improving.

I am reminded of the day Kennedy was shot. Market sold off, we lost a whole train of soybean oil and trading was suspended. My little OTC book went very long taking all offers. Like it or not the sun was going to rise on the morrow and there is a very nice Constitutional provision for the contigency of the President’s death. Waited a week, went flat and pocketed a very nice profit and a lovely little bonus in an otherwise mediocre year.

Clearly there are flaws in the current market structure and the controls that are in place. It occurrs to me that eliminating volatility may not be an entirely desirable objective. I always wondered where the specialist went when we had major selloffs. Couldn’t get a bid from him and he’d have been a fool to offer one. Always felt that the liquidity function was a dodge.

Thanks again for this very helpful explanation.


Hopefully they can keep the food distribution system operating and the lights on! Clearly the political class has become disconnected from real time as they look further to paper over financial events with digital strokes but our JIT food distribution system only has a couple days of inventory which could could not be restocked by pushing a few buttons on the screen!


If you want a good laugh, check out today’s Dow Jones graph. No volatility whatsoever. Either everyone is on their best behavior, or computerized trading has been banned. The bad boys are just sauntering along with their hands in their pockets, whistling some innocuous tune — waiting for the next “big” opportunity. First time tragedy, next time farce. Thank you, Karl Marx.


See also Paul Kedrosky’s piece on the “Shadow Liquidity System” at

Interesting piece that echos these thoughts.

[May 10, 2010] Zombies

 May 9, 2010 | Financial Armageddon

I do not pretend to know what many ignorant men are sure of. -Clarence Darrow

This is the biggest block in our series on market manipulation.  We’re working toward an answer.  How do international banks manipulate the markets to service the U.S. war debt?  Make no mistake about the crash on Thursday.  That was no “fat finger” trader or an “M” accidentally being a “B” nonsense.  Unless you hear “international banks” and “leverage” and “unwind” in the same sentence, it’s not a valid explanation.  It takes hundreds of billions to make a wave in the equities market like that.  It was the fastest point drop in the history of the market.  Only something an international bank is capable of. The rest of us are just trying not to drown in their wake.

How to Lose Money Betting the Market Will Crash on the Day it Crashes

If George Carlin could could have designed an ETF it would be FAZ.  Maybe even with the same name.  It’s an ultra bear’s dream come true.  A way to profit as America circles the drain with Armageddon banker zombies roaming the streets while cities burn.  FAZ is a stock that can make +15% while the banks crash -5%.  You’d think it was the perfect stock to trade last Thursday.  It’s one of the fewer and fewer ways a retail trader can profit during a market crash.  There’s a catch.  The crash locked out anyone trying to exit with profit. By the end of the day, if you bought FAZ right before the crash, you actually had a loss.

How could this happen?  NASDAQ is the market maker for retail brokers in FAZ.  They control the bid/ask and retail orders go through them.  The problem is NASDAQ froze all exits on FAZ until the market closed.  They canceled trading in 256 namesWhat is suspect is FAZ, and many other frozen stocks, are not on that list. The only way to exit FAZ was to sell in the after hours market on Thursday or wait for Friday’s open.  Essentially Thursday’s crash created a no-bid market for FAZ and many other stocks.  How do you get zero bids on a stock that trades 165M shares in a day?

Max Keiser, the man who invented high frequency trading (HFT) source code, explains:

Remove all the buy orders that you control (since HFT traffic is 70% of the order flow, if you simply pull your HFT buy orders, you remove a huge chunk of the market – in a heartbeat – leaving a sudden price vacuum). If you wanted to scare congress to vote the way you wanted them to vote – a congress that is directly invested in stocks trading on the exchange and ETF’s tied to the prices on the exchange – just pull your buys. When they do what you want them to do–replace your buys. If you want to make the market go up–pull your sell orders. It works both ways. (It’s all detailed in my Virtual Specialist Technology patent –- how to make markets in an ‘infinite inventory environment.’) (Huffington Post)

Keiser is describing a perpetual cash machine for market manipulators.  We’ll cover that later in this story.  Another method to lockout FAZ is this:

The over-the-counter derivatives market could be a contributing reason why FAZ wouldn’t sell on Thursday.  Most ETFs are derivative products that mimic an index, which happen to trade on stock exchanges.  So you have an unregulated OTC instrument moonlighting on a regulated exchange.  If a swap blows up (as the Euro made a new low) it would logically effect ETFs.  Virtually none of the stock ETFs trade in equities.  They don’t own baskets of stocks.  They own baskets in swaps and futures contracts.

Fidelity has been marketing some 20 ETFs which their clients can trade for “free.”  How many of their clients got bent over a barrel this week?  The fine print is full of escape clauses.  These things aren’t insured and there’s no recourse if the exchange or the product fails.

Euro and Swaps

We’re facing a perfect storm loss/loss scenario from hedging activity.  It’s the same AIG shell game, just played on a different street corner that no one is watching.  It took people nearly a year to catchup and understand what subprime mortgage blow ups were doing.  Last week gave us a new bomb ripple in the subbasement of international banks.

Eurodollars are deposits denominated in U.S. dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the U.S., allowing for higher margins.

The Eurodollar futures contract refers to the financial futures contract based upon these deposits, traded at the Chicago Mercantile Exchange (CME) in Chicago. Eurodollar futures are a way for companies and banks to lock in an interest rate today, for money it intends to borrow or lend in the future.  Each CME Eurodollar futures contract has a notional or “face value” of $1,000,000, though the leverage used in futures allows one contract to be traded with a margin of about one thousand dollars. Trading in Eurodollar futures is extensive, and the market for them tends to be very liquid. The prices of Eurodollars are quite responsive to FED Policy, inflation, and economic indicators.

CME Eurodollar futures prices are determined by the market’s forecast of the 3-month USD LIBOR interest rate expected to prevail on the settlement date. The settlement price of a contract is defined to be 100.00 minus the official British Bankers Association fixing of 3-month LIBOR on the contract settlement date. For example, if 3-month LIBOR sets at 5.00% on the contract settlement date, the contract settles at a price of 95.00. (source)

On Thursday LIBOR hit  0.373% the highest since last August.  On Friday it hit 0.428% while the Euro crashed to a 14-month low against the dollar.  The gigantic interest rate swap market is based on LIBOR.  When the spread jumps 14% overnight someone is taking a massive hit. This concept is to today’s market what subprime was to the crash in 2008.  Let’s explore why derivatives are so important.

As the unregulated derivatives market grew the money that was in equities left for greener pastures.  Basically the U.S. stock market is like the post-apocalyptic landscape in the movie Terminator.  It’s wounded, illiquid, and controlled by Skynet’s hunter-killer HFT drones who prowl for resistance money.  On Thursday the computers drove the market into a no-bid situation that blew out tons of retail money.  In the vacuum of the program trading nuclear blast Skynet computers, doing one million orders per second, jumped into the void making billions of dollars at our expense.

[May 10, 2010]   SEC Exchanges agree on structural framework to strengthen circuit breakers


The explanation is that a market that trends significantly higher on the back of little real investment activity, but lots of algorithmic trading, has more trailing automatic stop losses than a low volume market can possibly handle if the cascade is triggered. Ponzi schemes tend to build over long periods of time, and evaporate overnight.


Tagsac wrote:

Anybody who watched these algorithms ratchet the market higher day after day on no volume knew this was coming (just not precisely when).

This was an expected outcome. No explanation is needed.

What was unexpected was who were the last ones out the door.


The interbank financing market was on the verge of seizing up again Thursday. The financial system only functions and the market only goes up on the back of ever increasing amounts of free central bank money - as soon as the liquidity gusher is even reduced the market has a Wile E Coyote moment.

aleister perdurabo:

Regulators have got to start to recognize that traders are not investors and vice versa and treat them differently. Different regulations. Different tax structure. Different oversight. Individual investors and the funds that just invest in stocks and bonds are not going to crash the market. Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk. We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy. That their stated value-add of liquidity does not compensate the US and World Economy nearly enough for the risk of collapse they introduce into the system.


Anyone who has their money in this con game deserves to have it taken from them.

And I agree wholeheartedly with Rob Dawg. It isn't the SEC's job to agree; their goddamned job is to DECREE.

I watched what happened last week and can tell you, if they'd fleeced me, you'd be reading about my response in the goddamned newspaper.

This is the craziest s*(t I have ever seen. What's even crazier is that everyone seems to be rolling over and saying 'please, do it again.'


Financial Armageddon Zombie ETF

con game indeed... good analysis of Thursday meltdown ponzi scheme...


Rob Dawg wrote:

Tax trades. How hard is this? 10% for a day trade, 1% for a month, 0.1% for a year. HFT does not add value. Tax it like cigarettes.


India has adopted a very interesting system. The have a small transaction tax on all exchange traded stocks - but have waived all capital gains taxes on stocks that were traded on an exchange. They collect as much via the transactional tax as they would if people paid capital gains with much less bother - because they now only have to police the brokers who have a hard time cheating since the stock exchange trades are all recorded. The individual is better off because they don't have to maintain reams of paper for tax purposes and long term investors are rewarded at the expense of short term traders.

Interesting Times:

If I were TPTB, I would be quite nervous.

1) The US has maxed out their bailouts.
2) The EMU has maxed out their bailouts.
3) The Dow can't break 11,000
4) The Euro is flat to negative
5) No real GDP will be generated from this
6) Austerity measures are spreading

Bazooka Ammo... depleted.

[May 10, 2010] What Business Is Wall Street In

The best analogy for traders? They are hackers.

Seeking Alpha

Excerpted with permission from Mark Cuban's "Blog Maverick" weblog:

My last two posts were designed to stimulate discussion. But let's talk about the real problem that regulators, public companies, investor/shareholders and traders face. The problem is that Wall Street doesn’t know what business it is in. Regulators don’t know what the business of Wall Street is. Investor/shareholders don’t know what business Wall Street is in.

The only people who know what business Wall Street is in are the traders. They know what business Wall Street is in better than everyone else. To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.

The best analogy for traders? They are hackers. Just as hackers search for and exploit operating system and application shortcomings, traders do the same thing. A hacker wants to jump in front of your shopping cart and grab your credit card and then sell it. A high frequency trader wants to jump in front of your trade and then sell that stock to you. A hacker will tell you that they are serving a purpose by identifying the weak links in your system. A trader will tell you they deserve the pennies they are making on the trade because they provide liquidity to the market.

I recognize that one is illegal, the other is not. That isn’t the important issue.

The important issue is recognizing that Wall Street is no longer what it was designed to be. Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings. What percentage of the market is driven by investors these days ?

...individual stocks become pawns in a much bigger game than I feel increasingly less comfortable playing. It is a game fraught with ever increasing risk.

The PIMCO guys (who I think are the smartest guys on the Street), talk about a new normal as it applies to today’s state of the world economy. I think just as important is the new normal as it applies to Wall Street. Wall Street is now a huge mathematical game of chess where individual companies are just pawns. This is money in the bank for the big players like Goldman (GS), Morgan (MS), etc. Why ? Because the game of chess is far too complicated for 99% of the institutions out there investing money.

So to keep up, they turn to Goldman, Morgan and the like to invent products for them. “You don’t know how to play the housing boom, let us show you.” “You think the housing boom is about to crash, let us show you how to play that.” “You think that PIIGS are in trouble because they can’t print money to pay debt holders, let us create a product to allow you to play that game.” The big houses have the best hackers in the business and they put together the games and sell them to the many, many institutions managing Billions and Billions of dollars. They are the ultimate Hackers selling their attacks to the highest bidder, regardless of which side they are on. That is a new normal.

Again, I’m not passing judgement one [way] or the other. I’m just recognizing what is going on in the financial world today.

It’s rare for companies to go public these days. Just as rare for secondary offerings. The only thing that keeps me in the market is that most of the stocks (not all) pay dividends or some other sort of cash payout. For the first time in my life, I bought outside the United States. I bought Australia in a big way because it is becoming increasingly hard to find new domestic investments that are not influenced by the “hackers” and the games being played on a macro level. It’s hard to believe, but evaluating countries as an investment is now easier than evaluating companies . Even with all the unrest in Europe. Or maybe because of it.

So back to the original question. What business is Wall Street in ?

Its primary business is no longer creating capital for business. Creating capital for business has to be less than 1pct of the volume on Wall Street in any given period. (I would be curious if anyone out there knows what percentage of transactions actually return money to a company for any reason). It wouldn’t shock me that even in this environment that more money flows from companies to the market in the form of buybacks (which I think are always a mistake), then flows into companies in the form of equity.

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business. Whether it's through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years. However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy. It won’t come from traders trying to hack the financial system for a few pennies per trade.

And solutions won’t come from bureaucrats trying to prevent the traders from hacking the system. The only certainty when bureaucrats step in is that the law of unintended consequences will smack us all in the head and the trader/hackers will find new ways to exploit the system that makes them big money and even more money for the big institutions that develop products for the other institutions that are desperate to play the game.

Regulators have got to start to recognize that traders are not investors and vice versa and treat them differently. Different regulations. Different tax structure. Different oversight. Individual investors and the funds that just invest in stocks and bonds are not going to crash the market. Big traders who are always leveraging up and maximizing the number of trades/hacks they make will always put the system at risk. We need to recognize that they do not serve much of a purpose other than to add substantial risk to the global economy. That their stated value-add of liquidity does not compensate the US and World Economy nearly enough for the risk of collapse they introduce into the system.

Wall Street as a whole needs to be in the business of creating capital for companies and selling shares to investors who believe they are shareholders. The Government needs to create incentives for this business and extract compensation from the traders/hackers for the systemic failure level of risk they introduce.

There will be another crash, because there are too many players looking for the trillion dollar score. They can’t all win, yet how many do you think wouldn’t risk everything, even what is not theirs, for that remote chance to score big? Put another way, there is zero moral hazard attached to any trade. So why wouldn’t traders take the biggest risk possible ?


One more consideration. If there are traders of any kind that are unregulated or unmonitored, and trade for their own account, how do we know how big they are and how much of a threat they pose to the system, individually and in aggregate? For any High Frequency or big leverage derivative folks out there--is it possible there could be firms that have billions at risk with questionable ability to make a margin call or fulfill their side of the trade if things went against them? Could there be hidden AIGs that few people know about or a bunch of AIG like situations, which in aggregate fail and put the system at risk? I have no idea. Just asking the question.

[May 09, 2010] Staying sane in a crazy market

For a few exciting minutes on Thursday, the Dow-Jones Industrial Average was down a thousand points, with some major stocks momentarily falling to a penny a share. The basic story appears to be as follows. Initial strong selling in some stocks such as Procter & Gamble led the New York Stock Exchange to halt trading temporarily in a few stocks until specialists could sort out what was going on. But trading in those stocks continued on other exchanges, where as a result of their thinner books, orders to sell at any price went far down the list of existing buy bids. These lower prices triggered further automatic selling that sent some stocks all the way through the list of outstanding bids until encountering basement bids at one cent a share.

One popular meme is to attribute these fireworks to the existence of multiple trading venues that didn't all get shut down simultaneously (e.g., WSJ or NYT). But I think we should also be taking a closer look at the folks who were sending the sell orders rather than just blaming the exchanges for carrying out the instructions they received.

Let me frame my discussion of Thursday's drama in terms of two very different views of what your strategy might be for investing in stocks. One view was articulated by John Maynard Keynes on page 156 of his General Theory:

professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole;

so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one's judgement, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest.

We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.

Is there an alternative interpretation of what gives a stock value, apart from what others think that others think it might be worth? Most assuredly there is, and the easiest way to understand that value is to contemplate buying a stock with the intention of never selling it, simply passing it on to your heirs, and from them to their heirs. Is the asset, if used in this way, of any benefit to you? Sure is, because even if you never sell the stock, you and your heirs can expect to receive a dividend payment from the company four times a year as long as the company stays in business. Those dividend payments will grow if the company's earnings grow over time. Even for a stagnant company that sells exactly the same number of units each year, in an inflationary world the dollar prices of those goods (and therefore the number of dollars you receive in dividend payments) should grow over time.

The average dividend yield on stocks in the S&P500 at the moment is about 1.8%. The yield on a 30-year Treasury Inflation Protected Security is also about 1.8%. On one dimension, with equal yields stocks might seem more attractive than TIPS, since nominal dividends will grow faster than inflation. On the other hand, stocks are much riskier, because nobody knows for sure exactly how big those future dividend payments are going to be.

Historically, investors have demanded as risk compensation a significantly higher average real return from stocks relative to bonds than is reflected in the current equality of dividend and TIPS yields; the average dividend yield on stocks over the last 30 years was 2.8%. That means that if we return to average historical evaluations, stock prices would fall. I made this point from some related calculations last December. There I suggested that when Professor Robert Shiller's long-term price-earnings ratio was above 20, it was time for caution. That ratio exceeded 22 at the April peak, but with last week's correction is now just above 20. Here's an update of the graph I discussed in December.

Blue line: Ratio of real value (in 2010 dollars) of S&P composite index to the arithmetic average value of real earnings over the previous decade, January 1880 to May 2010. Red line: historical average (16). Data source: Robert Shiller.


Whatever your stand on how to evaluate the tradeoff between risk and return, if you take the above perspective that the value of a stock ultimately derives from the stream of dividend payments that it delivers to its owner, then when the stock price goes down, it becomes a more attractive asset for you to buy, whereas when the stock price goes up, it is something you should consider selling.

But, you might ask, isn't is possible that other people know more about those future dividend prospects than I do, so if they're selling, maybe I should sell too? It's not just possible that others know more than I do, it's a certainty. But, let's suppose that one minute ago I was persuaded that ahead of us was normal dividend growth, and the next minute something caused me to change my mind and believe that dividends were about to go through a meat grinder like we experienced during the Great Depression of the 1930s. As I showed in illustrative calculations in March of 2009, that Armageddon-level revelation would reduce the rational price I'd be willing to pay for most stocks, in the sense that I've been sketching here, by about 25%. The news that actually arrives on a given day would of course have a vastly more modest effect on how your calculation should come out. If overall stock prices fall 10% in the space of a few minutes, you can almost be certain that it's not because anybody's rationally-calculated fundamental valuations have declined by that amount.

Alternatively, you might argue, if stocks were 10% (or more) overvalued on Wednesday, as indeed I've just suggested that they may well have been, then couldn't a dive of the magnitude we saw in the intraday excitement on Thursday be perfectly rational? Maybe so. But the Wednesday close and the Thursday intraday low price can't both be rational-- if one was right, then the other has to be wrong. More importantly, the time to make up your mind about that question is in the quiet of some Sunday afternoon, not when the crowd around you is suddenly panicking on a particular Thursday.

Let's take a look at one of the amusing examples of trading on Thursday. Exelon is a perfectly sound utility. The stock started and ended the day at about $42, yet at one point allegedly changed hands for a penny a share. If you are the owner of 100 shares of this stock on Wednesday May 12, the company will send you a dividend check for $55. They'll send you another $55 (and likely eventually even more) every 3 months thereafter, as long as you own the stock. What rational person would possibly prefer to have $1 on Thursday May 6 in preference to owning 100 shares of the stock, say, for at least another week?

No sane person ever would. I wonder how many of the sell orders came not from actual humans, but instead from instructions programmed to execute automatically by computers. Anybody following such a strategy is obviously not a subscriber to my theory of fundamental value, but instead seems to be playing Keynes' beauty contest game, having persuaded themselves, based on the historical correlations, that when the crowd starts to sell, if you can instruct your computer to sell at the "market price" faster than a human can even think, you'll come out ahead.

Economists and financial engineers seem to approach stock markets differently. The financial engineers often see the game as figuring out whatever the historical predictability has been and trying to get ahead of it. Economists tend to ask what the equilibrium in the market would look like if everybody played the game the way the financial engineers do. The answer to that second question is, if momentum-chasing algorithms come to rule the financial world, those who try to follow them will be the biggest losers.

Another notion that's popular with many financial gurus these days is the claim that you can eliminate certain risks to your portfolio with the right strategy of automatic trading and stop-loss sell orders. Again that claim invites an economic question-- if you are getting an insurance policy, who is selling it to you? I believe the implicit answer is, you are counting on the market-maker to insure you by taking the other side of your escape transactions. But the curious thing about such an insurance policy is that the market-maker gets to decide what premium to charge you after you ask to collect on the policy. You just might find that the state of the world when you and your buddies all most desperately want to cash in on your insurance is exactly the time when the premium proves to be ruinously expensive.

Or if I haven't persuaded you with these arguments, let me try a more modest suggestion-- those of you whose computer programs sent an order to sell Exelon even if you only get a penny a share might want to consider tweaking the code just a bit.

And my advice for sane humans trying to deal with such a crazy market is this: as a first step, ignore all the other beauty-contest judges, and ask yourself whether the flow of future dividends you expect to receive by itself would be adequate compensation to you for your investment, given the risk associated with not knowing exactly what those dividends are going to be.

If it is, then allow yourself to relax as the computer programs written by the other contest judges try to devour each other.

If it's not, then you're in the wrong place at the wrong time.

Posted by James Hamilton at May 9, 2010 03:20 PM


The tendency of the stock market to extract and control the disposition of most of the value created by the real economy is distressing. But I see no way to tame the beast.

Professor Hamilton gives me hope that the beast will self-distruct. I want to believe that. But that outcome is too easy. Thursday was an aberation. In addition, the stock market officials talk about erasing extreme trades. Apparently, no one is going to loose or gain enough to spoil play. The officials are going to do all they can to make sure that their baby does not self-destruct.

Using a high-yeild mutual fund as an income source is one way to follow Prof. Hamilton's logic.


Two points:

I think you are misinterpreting what's happening. The market-glitch story may explain the 1,000 point intra-day fall, but not what happened over the last ten days.

Posted by:  at May 9, 2010 06:14 PM

Professor Hamilton,

What would happen if we limit the role of stock exchanges to just sell IPOs? If that was the case, then only long-term investors would be attracted to the market (those that trully value stocks for their fundamental value).

Investors could always buy/sell stocks on a secondary market (but not in exchanges) in the same manner I buy my used car or sell my bike in craiglist.

The only function of the markets is to channel funds to productive investments. What is the economic contribution of stock price volatility (rational or irrational)?

[May 09, 2010]   PLUNGE! 1987 Style Sudden Drop in US Stocks Driven by Program Trading and a Ponzi Market Structure

May 6, 2010 | Jesse's Café Américain
This is highly reminiscent of the 1987 crash driven by a flawed market structure based on automated trading and bad theories.

The entire stock market rally which we have seen this year off the February lows resembles a low volume Ponzi scheme, and formed a huge air pocket under prices.

This US equity rally was driven by technically oriented buying from the Banks and the hedge funds. There was and still is a lack of legitimate institutional buying at these price levels. This was machine driven speculation enabled by the lack of reform in a system riddled with corruption, from the bottom to the top.

This is yet another indication that the US regulatory and market oversight organizations, especially the SEC and CFTC, continue to be disconnected from and remarkably ineffective in their responsibilities in guarding the public against gross market abuse, price manipulation, and insiders playing games with cheap money supplied by the NY Fed.

And as you might expect, the anchors on financial television are trying to excuse and blame the sell off on a 'fat finger' order that caused Procter and Gamble to drop 20 points in 45 seconds. Or a typist inputting an order to sell 16 million e-mini SP futures, and typing "B" instead of "M." Oops. Crashed the free world.
"Ordinarily, the financial risk in a market, and hence the risk to the economy at large, is limited because the assets traded are finite. There are only so many houses, mortgages, shares of stock, bushels of corn, [bars of silver], or barrels of oil in which to invest.

But a synthetic instrument has no real assets. It is simply a bet on the performance of the assets it references. That means the number of synthetic instruments is limitless, and so is the risk they present to the economy...

Increasingly, synthetics became bets made by people who had no interest in the referenced assets. Synthetics became the chips in a giant casino, one that created no economic growth even when it thrived, and then helped throttle the economy when the casino collapsed."

US Congressman Carl Levin
Even if any of this was true, it was just the spark that caused the market to plummet because of its highly unstable and artificial technical underpinnings. There is no longer any legitimate price discovery. The US financial system is a casino, dominated by a few big Banks and hedge funds, the gangs of New York.

[May 09, 2010]  Feds Probing JP Morgan Silver Manipulation as Merkel Sounds Defiance to the Banks

Fifty years from now people will recognize that the threat this generation of Americans needed to take seriously, but failed,  were banksters. What a depraved indifference to common people was recently demonstrated by GS during hearings."
"German Chancellor Angela Merkel accused the financial industry of playing dirty. 'First the banks failed, forcing states to carry out rescue operations. They plunged the global economy over the precipice and we had to launch recovery packages, which increased our debts, and now they are speculating against these debts. That is very treacherous,' she said. 'Governments must regain supremacy. It is a fight against the markets and I am determined to win this fight.'"

UK Telegraph
The story of this crisis is the people versus the banks. The largest mistake that Europe made was in bailing out the banks, and not simply nationalizing them. But that would not have resolved the problem of the gangs of the New York and London, and their partners in the hedge funds and the ratings agencies.

The same man who wrote, "Power tends to corrupt, and absolute power corrupts absolutely" also wrote:
"The issue which has swept down the centuries and which will have to be fought sooner or later is the People versus the Banks."

Lord Acton
I do not wish to sound pessimistic, but it will be a surprise if the US under the Obama Administration does anything meaningful and significant to curb the abuses of the large Wall Street firms. While the corruption in the campaign financial process and the revolving door between government and the Street remains open the progress to reform will remain a diversion at best.
NY Post
Feds Probing JPMorgan trades in Silver Pit

May 9, 2010

Federal agents have launched parallel criminal and civil probes of JPMorgan Chase and its trading activity in the precious metals market, The Post has learned.

The probes are centering on whether or not JPMorgan, a top derivatives holder in precious metals, acted improperly to depress the price of silver, sources said.

The Commodities Futures Trade Commission is looking into civil charges, and the Department of Justice's Antitrust Division is handling the criminal probe, according to sources, who did not wish to be identified due to the sensitive nature of the information.

The probes are far-ranging, with federal officials looking into JPMorgan's precious metals trades on the London Bullion Market Association's (LBMA) exchange, which is a physical delivery market, and the New York Mercantile Exchange (Nymex) for future paper derivative trades.

JPMorgan increased its silver derivative holdings by $6.76 billion, or about 220 million ounces, during the last three months of 2009, according to the Office of Comptroller of the Currency.

Regulators are pulling trading tickets on JPMorgan's precious metals moves on all the exchanges as part of the probe, sources tell The Post.

JPMorgan has not been charged with any wrongdoing.

The DOJ and CFTC each declined to comment, as did JPMorgan.

The investigations stem from a story in The Post, which reported on a whistleblower questioning JPMorgan's involvement in suppressing the price of silver by "shorting" the precious metal around the release of news announcements that should have sent the price upwards.

It is alleged that in shorting silver, JPMorgan sells large blocks of silver option contracts or physical metal -- actions that would bring down the price of the metal -- closely following news that would otherwise move the metals higher.

Last week, The Post got a telling e-mail the Justice Dept. sent to a concerned investor. "Thank you for your e-mail regarding allegations that JPMorgan Chase, and perhaps other traders, are manipulating the silver futures market," the e-mail read.

Telling, indeed, as the concerned investor, in an e-mail to Justice's Anti-trust division, never mentioned any companies or traders.

[May 09, 2010] The Emperors Strike Back

"if the working-class were to unite, one of the two political parties would be forced to accommodate and represent a voting bloc of such significant size, and our democracy might just find some balance." Financial oligarchy first won ideological victory against unions (Reagan) and then destroyed them by divide and conquer strategy. After that the nation wealth was plundered by playing games with the fiat currency system and fractional reserve banking...  And government is by-and-large is government of and by the ruling class. People like both Roosevelts are an exception to the rule.
May 9, 2010 | naked capitalism

Richard Kline

Rothkopt: “A boot on the throat is no way to do business.” This quote has a deeper level to it which is indicative both of the corpocracy’s strategy of the last thirty years and why the’re sweating under their collars just now. The corporate vehicles of individuals of great wealth, and their related propaganda institutes and captive mass media organs have been very successful in promoting the (ideological but never so stated) view that a function of government is ‘to do business.’

That governments should, promote business, talk to business, facilitate business, and operate like business; in its strong form, this ideology would suppose that this is the ONLY legitimate function of government, and where it cannot or will not ‘do business’ it should not exist at all.

This view has completely saturated the major media to the point that no viewpoint not compatible with it is given any airing except for a few distorted seconds before the canned derision is cued. When the Nude Democrats and the Nude Labor in the US and the UK, and even the SPD in DEU all capitulated grovelingly to spout this cant in the 1990s and since, any political opposition to it vanished from the discourse. If political parties wouldn’t ‘do business,’ they were at best obstructionist, and at worst anti-Western.

Yes, yes: it took the casuistry of neo-liberalism to put the ‘do business’ ethos into a form saleable to the mass bases of those political parties, but the effect was the same. And so certainly over the last twenty years, folks part of the Top Wealth Club to which guys like Immelt belong and Rothkopt toady became very confident in, very adapted to a discourse where only those who ‘did business’ counted, indeed only they were allowed to speak.

In the (formerly, nominally) liberal democracies the most of us reside in though, we’ve been indoctrinated otherwise. Ours is the impression that the function of government is to promote stability and justice. Those of us on the left have the view that a further function is to promote social justice—equality, more or less—and the suitability and sustainability of our physical environments. None of these things have anything much to do with ‘doing business.’ Indeed, doing business has a long, _proven_ record of being INIMICAL to all of those functions most of us actually believe government should perform . . . if it is government for us, the populace; not government for them, the wealthy few and government _of_ us the populace by the wealthy few.

The disconnect, indeed the antipathy, between these two perspectives has been badly papered over through the last twenty years. Partly because the media simply, and blatantaly sold out the populace and mouthed the cant of the wealthy, putting a dollar’s ass kissing spin on anything and everything so that ‘doing business’ seemed right, natural, and above all profitable for the mass of the populace when anything but has in fact been true.

Asset price speculation, pumped out and up by the wealthy did in fact deliver the opportunity for gain to much of the middle class in these same liberal democracties although the working classes were largely left out and progressively impoverished by the suppression of wage increases and the inflation of prices generally. But hey, the middle class has never been loathe to throw the lower class under the bus on the road to prosperity, so for twenty years the wealthy few have been able to sell the comfortable middle on the notion that government should ‘do business.’

Now, those asset price gains have proved to be illusory, but the debt levels that went with them have _not_ been expunged for the no longer comfortable middle. And that is a real problem for the Wealthy Few. Not because they are no longer comfortable and wealthy themselves but because the Big Lie that government should do business is right there in black and white billing statements before the formerly comfortable middle. And the votes are shifting on what government should do. Shifting where, nobody is any too clear, but out from under the cant of ‘doing business.’

And it is very clear that Big Wealth and their corporate vehicles don’t have a New Selling Campaign thought up yet, so they just keep repeating the old shibboleths though the same gaseous media blowholes about how the government has to ‘do business’ because that is good ‘for the economy.’ Economy of whom, one might ask, and that is exactly the question that Big Money is sweating some are starting to ask themselves. Many, not just clownish tea potters, and demanding that government STOP DOING BUSINESS AND START DOING GOVERNING AND _JUSTICE_. And that is very much not according the the script of Great Wealth.

The government has the power to crush the corpocracy and Great Wealth, but not the will nor the willing at the top. If Great Wealth and its lickspittles lose their lock on the discourse, though, all bets are off on the replacements, pending, of those now in power. That is what is so dangerous—for them, not us—about folks talking about something other than ‘doing business,’ about folks talking about doing governing. Because governing for the populace and doing business for the wealthy are fundamentally opposed options in any _functioning_ liberal democracy. So those of Great Wealth want at all costs to continue the dysfunctional, one-party, pro-corporate political system we have now and this ideological flatulance about ‘doing business for the good of the economy.’

—So don’t let them: Speak your mind, vote your conscience, don’t shake the hand of the corporate profiteer or financial speculator. Spit in it if you can get close enough to do so.

Dan Duncan:

This post is myopic and it’s a demonstration of an Out-Group Homogeneity Bias.

With exceptions, the anger of the Left and of the Right are expressed through “Progressives” and “Tea-Partiers”, respectively.

Take Yves’ paragraph that reads:

“But let’s return to the “populism” attack, which sticks in my craw. It’s a not-very-subtle way of denying the legitimacy of the populace’s anger. The taxpayers have just been the victims of the greatest looting of the public purse, and the perps have the nerve to lecture them about their anger?”

Simply substitute “populism” with “tea party” and you have the exact same phenomenon.

Just as the Left (and Progressives) marginalized the Tea-Party anger (which, overlaps Progressive anger in so many ways), the Right–and Tea-Partiers–are marginalizing the Progressives.

In the end, all of us in the middle, lose as a result.

But, Yves is playing the role of the hypocrite by claiming that this type of marginalization (against her group)…”well that’s just is not fair.”

Yet, Yves has absolutely no problem when the Tea-Partiers are mischaracterized. The reason for this is Yves’ susceptibility to the Out-Group Homogeneity Bias, referenced earlier.

Accordingly, her “in-group” (ie Progressives) is varied and diverse, thus the imposition of simplistic stereotypes is unfair. But the out-group (Tea-Partiers)…well they are seen as homogeneous, and thus any simplistic characterization is warranted.

It’s a worldview expressed by teenagers as they experience cliques for the first time. And it’s reinforced by a susceptibility to Confirmations Biases.

Until the Progressives and Tea-Partiers work together to end the cronyism between our government and our Ultra-rich Financial Class, each respective movement will be systematically marginalized. If you are a Progressive and you smile with satisfaction when Tea-Partiers are characterized as “racists”, you’re only setting your own movement back.

And if you are a Tea-Partier and you smile with satisfaction when Progressives are characterized as “Hugo Chavez loving miscreants”…you’re also hurting your own cause.

There will be ample time for Progressives and Tea-Partiers to fight over policy in the future, but they will never reach that point until BOTH the government and the financial class are put in their place.


Dan Duncan,

I disagree with your framing of the issue.

You put Yves on the left, yourself in the middle, and the Tea Partiers on the right.

I, on the other hand, put Yves in the middle, you on the far right, and the Tea Party Express (as distinct from the Tea Party Patriots) on the extreme far right. And in America there is no left.

The Tea Party Express is an astroturf organization—-a mouthpiece for the rich and powerful, and not a very transparent one at that.

To lump Yves in with some Marxist ideologue like Hugo Chavez is as laughable as you characterizing yourself as being a member of “us in the middle.”


What is meant by the appellations left and right, liberal and conservative? About fifty years ago I stopped trying to apply those little beauties. My conclusion then and now is that neither is beneficial and contributory to society. Each operates to achieve economic advantage to the detriment of all others.

It is not at all surprising that the fraudsters are fighting back with their propaganda. This blog, and others like it, are a direct threat to that which is the rice bowl of the fraudsters.

Why fraudsters as opposed to banksters? Are those who hold themselves forth as bankers not engaged in representing that a CDO can have a AAA rating? Is that not a fraud on its face? Please demonstrate how the concentration of the probability for default can lead to the mitigation of risk.

Similarly, the call for transparency falls short of what is required. Without the enforcement of contracts, transparency is irrelevant. Now just where and when did we reject the enforcement of contracts unnecessary?

It begins with the fraudsters inducing the legislature to repeal or ban regulations. It begins with some cockamamie idealogue who holds a position of considerable economic regulatory power positing that markets are efficient and that the prosecution of financial fraud is unnecessary because the market in its infinte efficiency will correct and thereby prevent fraud.

I believe that we can ban the CDO outright. Will such action cause some pain? Considerably more than a little, in fact a mild depression is quite probable. Isn’t a depression something that we should avoid? Not if you want to have a sustainable economy because we will have to create positive incentives that reward honesty and fair dealing. Implicit in that is the necessity of a currency that maintains its purchsing power over generations as opposed to devalued fiat dollar that we now employ.

As things are now, it appears to me that whether right or left, liberal or conservative or any other name, no one is willing to bear the cost of what has to occur if we are to achieve a sustainable economy. So long as that fact holds, we are a tower of Babel talking past each other. Our media are filled with sound and fury that accomplishing nothing. (Sorry Will).


Instead we have had a greater and greater centralization of political and economic power and an increasing disempowered citizen. Is there a political framework that would help to get us out of this dynamic?

In the face of both centralized kleptocratic tyranny and the unsustainable debt zombie AKA the global economy, which is really just a Tower of Babel; in the face of the structure comprising these two elements, the only framework that can survive beyond the collapse and perhaps offer some preparation, protection, and spiritual comfort in the meantime is relocalization. Politically, socially, culturally, economically. As much as possible.

It won’t be easy for most to accept that big corporations, centralized government, and consumerism have long been socially and politically malevolent and are now economically unsustainable, that in the short run we can expect only assaults from the top down, and in the long run there’s no future there at all, but this is going to happen anyway, one way or another.

It would be much better for us if as much as possible we now detached from the kleptocracy, by becoming as self-reliant and self-sustaining as possible, as individuals and as communities. So we should focus our positive economic and political efforts at that level.

But from the top down we can expect nothing but incompetence and disaster at best, and fascism at worst, and probably some combination of the two, so any political focus there should be negative, for example fighting further assaults on civil liberties.

Jim says:  (an interesting take on "either market or state" fallacy)


Certainly a more and more centralized state has disempowered its citizens as much as an unregulated market.

Don’t both parts of the equation–market and state–have to be reformed.

Unfortunately our political dialogue is obsessed with the supposed confrontation between market and state which only obscures the need for dramatic reform in both realms.

To me, populism, if real, is a crisis in political representation and must be dealt with on an economic, political and cultural level.

Culturally the market has reduced citizens to consumers and the state often reduces citizen to state-dependent personalities.

The result, from both the present configuration of the market and the state, is a citizenry unable to function without the administration and guidance of mangerial agencies in both the public and private sectors.

Because of a passive citizenry this professional managerial class becomes more and more unaccountable and more and more corrupt.

Doesn’t this cycle have to be broken somehow?

ray l love:

I think Dan has it right.

Somewhere along the way Americans have become confused about who is on whose side and I doubt that it is a coincidence that the working-class in this country has remained divided. Racism seems to be a key dividing factor although there are some aspects of this issue that don’t quite make sense. Blacks for example voted almost exclusively along racial lines in this past presidential election yet Whites are once again the race being accused of being prejudicial. Think of what the outcry might have been had 95% of Whites voted for McCain in this past election and that should give some basis for understanding which race has made some progress regarding racial bias and which race has not, and yet it is almost always ’some’ Whites who are labeled as ‘racists’. And of course it is nearly always the so-called ‘progressives’ doing the name-calling.

I grew-up in East-LA and learned at a very young age that there were certain Hispanic neighborhoods that were too dangerous to walk through for a White kid. As I got a little older and started to drive I also learned that there were certain neighborhoods that were almost exclusively inhabited by blacks and these were dangerous places just to drive through, and ‘forget about’ getting out of your car. As a matter of fact I learned these lessons the ‘hard way’ as did any adventurous white kid who lived in one of the poor parts of Southern California.

What seems too often overlooked is that poor Whites rarely have their own ‘turf’. The areas where I lived in LA, and where I live now in Texas, have a great many poor, working-class Whites, but they live in neighborhoods that are racially mixed and comparatively, as compared to the Black and Hispanic enclaves aforementioned, these areas are much less prone to racially motivated clashes between groups, or between individuals.

What the so-called ‘progressives’ are doing when they accuse the ‘tea-party’ folks of being racially motivated is what demagogues always do, they generalize, stereotype, distort by exaggerating and by excluding etc., and everyone sees this all around us so I won’t elaborate.

What is worth saying though is that there is an easy way to distinguish the actual progressive thinkers from the pretenders: genuine progressives, those who care deeply about ‘progress’, they understand that a divided working-class is what allows the balance of power to remain in the grasp of the investment-class, and so they most certainly do not do or say anything that exacerbates the racial divide in this country.

And especially not via low-integrity tactics such as generalizations, stereotyping etc., based on presumption. And of course there is no evidence that the Tea-Party folks are racially motivated yet that assumption has permeated our national discourse. So, ‘who benefits’ is the question that must be asked when the Democrats and the Republicans play their deceitful games? And there is usually a hint of ‘blind ambition’ involved regarding the messenger.

It is critical to understand also that if the working-class were to unite, one of the two political parties would be forced to accommodate and represent a voting bloc of such significant size, and our democracy might just find some balance. And as Dan suggested above, then the process of settling differences could continue but on a level playing field.

[May 08, 2010] Economist's View The Economic Rewards of Virtue

"The societal norms (SN) of a Wall Street banker are perhaps NOT the same societal norms as Jack 'n Jill Mainstreet. In fact, I doubt that they are at all similar." We continue to have banks operating under the Blankfein rule (Steal all you can. We’re doing God’s work.) 

Calabe Davis:

"Were we rational, it is the state of the world we would prefer to that characterized by satisfaction of irrational, short-term pleasures."
If we were this rational, we would still be hunter-gatherers.

Reality Bites

Two things,

1) Interesting how the author calls for norms and social pressure to shape individual behavior. However, the powers of social mores have been badly degraded over the last few decades. Today, it is no longer possible to use social shame to dissuade sub-optimal situations like out-of-wedlock birth, or receiving poor grades. We are told that we have no right to judge, no right to use the tool of stigma to reduce these negatives. We can only "help", which means subsidize the negative, as if that wouldn't make it even more common.

A more relevant example is with the sub-prime mortgage borrowers themselves. Instead of using social powers to shape future behavior through negative criticism and open displays of disdain, the reckless flippers and speculators who took out loans that could never be paid back without the bubble continuing, are given sympathy along with laws prohibiting foreclosure and fast eviction. That a person who gets a no money down, interest only loan with teaser rate, cannot be criticized at all and is called a victim instead, shows that the author's idea of using social powers to prevent unwanted behavior no longer can be executed in today's world.

2) We live in a world with imperfect information, so perhaps people are unable to maximize their utility all the time. However, the author makes the mistake that "social institutions" namely her and government I bet, are able to do maximize utility any better. Rarely would government or a social institution have perfect information on the marketplace (so rare that I'll say never from now on), but beyond that, they have even less information on the preferences of the individual! There is no way another person can know the likes and dislikes of the individual better than the individual.

So what she's after, like most of the obsessive control freaks of her kind, is a way to make everyone else behave and choose what SHE prefers. That is to make everyone use her utility curves and generate what she considers the maximum amount of utility. Of course what she likes and what she thinks is "good", pleasant, or fun, might not be for someone else. What we have is the classic, "I know better than you what you want and so I'm taking away your power to decide so that I can decide for you". Invariably this leads to a loss of freedom and a very unfree society where people have no other choices than the ones liked by those in power. For example, there still are people who insist car pool lanes provide

What makes people like Maxine Udall so nosy, so concerned with what others should want (and of course what they should want is what she wants)? A better question is what makes people like Maxine Udall so stupid that they can't understand that what she thinks what people should want and do may not be what those people actually want? What makes her so foolish that she thinks she knows better than the individual, his preferences? Or is it just myopic hubris, the same kind that makes her so obsessively concerned with controlling others' choices because she can't stand it that someone else is not living in the way she thinks is optimal?

Now there may be some who think my criticism of Udall is unfair since she didn't directly advocate that all individuals be forced to behave in the way she wants or even society wants. But that's implied, because what comes next is naturally the argument that only government can correct the failure of the person to maximize his own utility, or that only government can see what maximizes utility for society as a whole and so only government can protect the individual from himself. And to do that means restricting his ability to make choices, because he might make the "wrong" choice, and thus hurt himself and society. Therefore we need an institution that will make sure people make only the correct choice, the socially approved, government choice. It's for his own good.

Michael Pettengill :

"That a person who gets a no money down, interest only loan with teaser rate, cannot be criticized at all and is called a victim instead, shows that the author's idea of using social powers to prevent unwanted behavior no longer can be executed in today's world."

But it is ok for Goldman et al to reap large fees in constructing the deals the drove the demand for such borrowers, for those irresponsible mortgages would have been impossible without eager lenders.

Goldman executives repeatedly stated they had a responsibility for serving their clients who wanted the high risk of those mortgages. So, by the same token, those borrowers walking away from the loans are serving the very purposes of the Goldman clients who wanted the high risk mortgages to exist in order to profit from the certain defaults on the mortgages.

In language of Goldman, those borrowers were serving the market by creating the risk that others in the market sought, and it is wrong to criticize those borrowers, or Goldman, because the lenders making the sure to default mortgages possible were far more sophisticated than the borrowers you criticize for lacking moral character.

Peter T:


Economics has flourished - it dominates universities, councils presidents, shapes policies of all kinds, even intrudes into areas where the ignorance of the profession about the real world is on blatant display and publishes best-sellers. And all this was done by ignoring reality and usingmathematics a a sleight of hand. What sane economist would abandon riches, fame and prestige for the mere truth?



{Utility: the state of being useful, profitable, or beneficial; in game theory or economics the value of that which is sought to be maximized in any situation involving a choice.}

Do consumers think "utility", or intrinsic value, when they purchase underpants -- or do they just know they need them. Do consumers think "utility" when they prefer the purchase of a Ford instead of a Chevy? They know they want the Ford, even if most any care will fulfill their need.

But presume that there was no real need for a good/service and just a desire for it. The Ford and Chevy are comparable as regards satisfying the basic need, but desire manifests itself according to other criteria such as design, safety considerations, social status displayed, etc. One or several of these criteria often specify the object of our acquisition amongst the multiplicity of similar objects available.

In fact, we all confuse what we want with what we need, as we go up Maslow's Hierarchy of Needs. At the very bottom utility is maximized by procuring needs that are essential to sustain and maintain life. Higher up the hierarchy, we humans seem able to conflate the two easily. We "need" a million dollars to keep up with the Joneses who have also a million dollars. Or we thought we "needed" a BMW because someone convinced us it was better engineered than a Buick.

Only by extrapolation can we think that a desire is a need. But we do so very, very often in our propensity to spend. In fact, this Material World is rigged with many seductive entrapments convincing us that desire is in fact a need. Company publicity department thrive on making desires seem like absolute needs.

So, to "utility" is it possible to add the word "desire" and somehow remain within the much hallowed (and pristine) "economic models"? Or would it mess up the models?

"Utility" was a convenient way to express a notion; but if it certainly denotes "need", it still does not denote "desire" -- and most consumer propensity (to spend, in a developed economy) is found in the latter (desire) and not the former (need or usefulness) category.


Depending upon level of income, consumers often spend first on needs and later on desires -- which distinguishes non-discretionary from discretionary spending.

cm :

I reiterate my thesis of "comfort seeking" as opposed to "utility seeking". What you call a "want" or a "desire" can also be viewed as a "need" to comfort the ego. People are driven more than they are usually willing to admit by (how they think) others view them, which influences who they view themselves.


Yes, which was a foundation stone of Veblen's theory of Conspicuous Consumption in his book - published over a hundred years ago as "Theory of the Leisure Class".

From WikiP: {Veblen wanted economists to grasp the effects of social and cultural change on economic changes. In The Theory of the Leisure Class, which is probably his best-known work, because of its satiric look at American society, the instincts of emulation and predation play a major role.

People, rich and poor alike, attempt to impress others and seek to gain advantage through what Veblen coined "conspicuous consumption" and the ability to engage in “conspicuous leisure.” In this work Veblen argued that consumption is used as a way to gain and signal status. Through "conspicuous consumption" often came "conspicuous waste," which Veblen detested.}

Anyone want to talk about "conspicuous waste"?

Lafayette :


{If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected.}

Good in theory, but not-so-good in practice. Which "societal norms"?

The societal norms (SN) of a Wall Street banker are perhaps NOT the same societal norms as Jack 'n Jill Mainstreet. In fact, I doubt that they are at all similar.

Sociology is a bit like Economics in that it has its Macro and Micro aspects. The Macro Aspects of SNs might be, "Don't kill your fellow man or just retribution will be had". Or, "It's just fine to keep up with the Joneses, because conspicuous consumption is good for the economy". Or, "Democracy is goodness because it allows each one to speak their mind at the ballot box".

These SNs are thus established in sociological behaviour of the collective, most importantly as regulators. But at the micro-level a different set of norms can become established. This is what has happened over the past two or three decades, in the mad rush to Finance and MBA programs, where the accent was placed on Profit Making and Business Models that Succeed -- and ethics (a SN) be damned. There is NO SN regarding profit making, other than, "Hey, that's OK for me and I don't really care about how".

If one wants an SN of this nature, that is, one that establishes the notion of Income Equity (meaning “fairness”), but not necessarily Income Equality, then one must go to other countries. That is, where the notion of socialism has become ingrained to the point where individual behaviour is subject to collective behaviour and the latter is regulated in many circumstances, income being the most notable one.

Socialism is thus one manner in which “societal norms” are translated into the political methods by which such norms are both obtained and applied as regulators

If the US has no recognizable sense of socialism, it is because historically socialism was demonized, quite unlike the historical circumstance in much of Western Europe.

Thus, without any sense socialism (that is the primacy of the collective over the individual) then SNs are pretty much a matter of that which is derived from religious beliefs to those derived from whatever belief is prevalent at the moment – meaning faddish.

I will grant that SNs are a very important part of any society, because they regulate normative behaviour. But, in a society, such as the America’s, where there is no/little sense of regulating collective normative behaviour, out of a sense of individual rights that must prevail over collective rights, then SNs can indeed be arbitrary or idiosyncratic. Or, in other words, haphazard and motivated by forces beyond any control.

If that is what is meant by a Free Market, then you can have it. But that’s not called freedom, because when it goes wrong, there is no control mechanism … and it leads to what we call chaos.

And when chaos happens, it is the weak who suffer more than the strong. Which is just fine, if one thinks Darwinian principles of survival should prevail.


Regulator = A mechanism that controls or supervises behaviour/action by means of rules and regulations

Richard H. Serlin :

Interesting, just doing some late night work while watching Jerry McGuire. He's writing his mission statement, and he just writes, "fewer clients, less money". This gets him fired by managers that want more clients, more money, even though it means less attention to clients who are having some serious problems and could use guidance and advice.

The freshwater economists (and economics and finance in general sadly) have pounded into us that owners only care about maximizing profit (NPV), no matter what that means. But if I was a shareholder at Jerry's agency, I'd want to follow his advice. It's simply not true that no shareholder ever wants managers to do things which mean less profits in exchange for doing good, or being ethical.

If firms were truly democratic, if they had perfect corporate governance, we'd see this clearly, but with highly diffuse ownership and extremely high monitoring and information costs (time costs too of course), corporate governance is severely flawed -- as we painfully see all the time. But a big part of the problem is what freshwater economists have unfortunately so successfully sold over the last generation -- greed is always good because we live in a ridiculously unreal freshwater model.

[May 08, 2010] Markets Flat for 2010

May 07, 2010 | The Big Picture


Where will all that money go? With the interest rates still so low, people must be desperate for places to park their money. The previous post about bonds is a good lead in. Bonds are saturated, as are treasuries.

That leaves real estate or emerging markets, neither of which look great right now.

I suppose treasury yields could just keep getting lower and lower…

It seems this whole zero interest rates ideology pretty much guarantees some type of bubble.

How the Common Man Sees It Says:

Where will all that money go?

Let’s hope debt. What more people understand is that paying down debt is just as effective as earning an investment return.


All that “hard work” for nothing. What a shame.


“Dow was 10,336 on July 1, 1999. So, I’d say Market’s Flat for 11 years.”

And that doesn’t even include loss from inflation.

As an aside, how come historical prices are never quoted with reflect to inflation? During the 2008 crash, the media was comparing 2008 crash dow price with 1997 dow price. However, the 2008 dow price is obviously even worse than that due to inflation.

You occasionally see this taken into account in a gold article, but rarely with the stock market. Is it something that shouldn’t be factored for in a comparison or is it just laziness on behalf of the press?


Quantative easing –> Too much “money supply” –> Another bubble somewhere? Inflation imminent?

Yes, all that money have to go SOMEWHERE, right?

PIIGS can’t fly, and the Fed Reserve audit is coming. It’s going to be a roller coaster ride again for the rest of 2010, IMHO.


Just like this, you end up exactly where you started, but what a hell of a ride:

Harry Lime:

More bonuses!!

X on the MTA:

RE doesn’t really look that bad. It’s been bottoming out as the stock market rebounds. If you are looking for a store of value, it doesn’t really look bad to me at all. You bought stocks low, sold them high, now you can buy RE low. It might not really go anywhere, but it’s probably a great inflation hedge and unlike commodity ETFs, you can live in it

@How The Common Man Sees It
Like paying off a mortgage, maybe?

I wouldn’t be so quick. There’s a big demand for money and liquidity and safety right now. A bubble is not imminent until there is demand for loans. I am in the mid-term deflationary camp (as in money supply shrinking) although I wouldn’t be totally surprised to see price levels tick up in certain places as people demand “stuff” rather than investments. I’m pretty much with Koo on this one, Monetary Policy is starting to get a little powerless at this point, and it’s Fiscal Policy that would keep the momentum going. Even with all the sovereign debt panic, tsy yields are still dropping in times of crisis. If the Fed acts responsibly, there shouldn’t be a total threat to hyperinflation in the short term. As for the sustainability of all this… well, I don’t know. If you are panicky get yourself some land and cattle and a silo of grain and stockpile wine and canned goods and guns. Otherwise, just go with it and instead of running outside in panic, focus on doing your part by adding value to the economy instead of trying to make a buck in some game with low value-added. It’s the best you can do as an individual.


If yesterday’s selloff was caused by an error, and presumably that error was fixed, and now we’re down another 175 points today on the Dow, can I safely assume that somebody made another error?

Or is this just one of those run-o-the-mill buyer strikes?

Methinks it’s “B”.


Where will all that money go?

Maybe there is too much money.

Trillions misallocated into condos, jet skis and collateralized debt obligations. The money looking for a safe place to spend the night doesn’t belong to people with debt to retire.

Maybe this money would be better off being collected in taxes in Greece and the U.S. of A. so that Standard and Poor’s wouldn’t downgrade them. They could use it to pay for universal healthcare, wars in Iraq and Afghanistan, maybe even repair a little crumbling infrastructure.

Have a swell weekend and remember the words of the wise CEO, “It’s only money and it ain’t mine.”


Nice calls last year and this year BR.

2009 S&P had a nice run up in price (especially with the fed/gov’t handouts), but the actual dividends paid
drop to 2005 levels.
Earnings have dropped each year since the 2006 peak. 2009 seams to have been a gift for some, but the next few years may not be so easy to make gains (especially buy and hold/emh types), unless your a wise trader.


Market down for 2010.

1) Barry is correct about the 25% correction looming. All you really need to know on this is that everyone and their grandma is on “is this the ‘big one’ we are waiting for” lookout mode while also pushing more and more money in anticipating the rally to continue “until they raise rates.” Ride the wave until it’s time to bail then everyone clicks “sell” before the others, right? Which leads to …

2) Are there enough things likely to happen in 2010 that will cause #1? Yes, and moreso than usual and more every day.



It’s lazy and lack of sophistication on the part of the media. While adjusting for inflation it is also beneficial to factor in dividends.

Technical glitches aside, Blodget had a good point that the markets were ready to sell off regardless of what happened. The Dow was off by ~300 before the technical issues and closed down ~385.

I have not done any valuation work or looked and industry charts, but what I have been reading suggests that these markets are not cheap (but they are not expensive either.) I’m inclined to look at James Altucher suggestion of picking up some cheap shares of the non-bank Greek stocks (if you have access to the Athens stock exchange all the better.) That being said, there other deals out there in the world that are more compelling than the U.S. (or the just mentioned Greek play.)

However, since markets don’t go straight up or down, it seems wise to take a wait and see approach (particularly if you have no edge on any specific name and are looking to trade the indices.)

[May 07, 2010] On the Fat Fingered Trade and Market Freakout

naked capitalism

But another side effect of today’s equity market gyrations is further distrust in the markets, particularly by retail buyers. I am told that various retail trading platforms were simply not operating during the acute downdraft and rebound. I couldn’t access hoi polloi Bloomberg news or data pages then either. The idea that the pros could trade (even if a lot of those trades are cancelled) while the little guy was shut out reinforces the perception that the markets are treacherous and the odds are stacked in favor of the big players (even though we all understand that, it isn’t supposed to be this blatant).

But the bigger issue, despite the stomach-knot-inducing drop in equities, is the wild gyrations across pretty much all markets. The credit markets were is disarray BEFORE equities took their cliff dive. Japan has pumped $21 billion of emergency liquidity into the market overnight, its biggest operation since 2008.

The Reserve Bank of Australia warned of the possibility of a sharp economic contraction…..and they are right. This is classic Keynes liquidity preferences. Keynes, a successful speculator, identified a crucial link between financial markets and real economic activity. When investors en masse retreat to the sidelines and prefer to hold cash or similar highly liquid instruments, the loss of risk capital and restrictions on lending are a blow to the productive economy. Accordingly, the G-7 has a conference call set, presumably which will lead to at least coordinated statements, perhaps some concrete action, to calm markets


“Keynes, a successful speculator,”

Um, not everyone has a father-in-law to make good your debts when you go bankrupt.

There would be lots of people who would be successful speculators if, every time they went belly up, someone made could their losses so they could try again.

“Reader Hubert, who is no fan of the Anglo-Saxon “kick the can down the road” credit system, nevertheless believes that the least bad way of the current mess is for the ECB to deploy its balance sheet…”

I love it! In a thread on a US market crash the solution is…for the Europeans to deploy the ECB’s balance sheet. Let the f*cking markets crash. We’re in a depression no matter what. Deploying balance sheets and deficit spending ensures that it’s the lower classes who will bear the greatest burden, while asset holders, i.e. the rich, get off.


I agree with a: what is it we are trying to rescue here? And whether Keynes was a genius of the stock markets or a spoilt rich kid is neither here nor there in the final analysis. What matters is addressing the question of what is damaged, how is it damaged, and if it can be fixed.

This is in my opinion yet another manifestation of systemic breakdown. The markets are not ‘free’ (they never were), greed is not the deep-motivator of all human behaviour, there is uncertainty and information asysmetry, humans are irrational, and so on. We have a creaking, centuries old infrastructure, both physical and cultural, built atop a heap of fallacious assumptions and outright ignorance. The system that has grown up as a consequence of this is failing fast, and will continue to fail (catastrophe looms I fear) until the core issues are addressed, in as unbiased a manner as humanity can manage.

Get Bernard Lietaer, the MMT people, plus others otherwise predisposed in a room together to hammer something out. We badly need a new direction and a system reset. One way or another change is coming. I’d like the smoothest version possible, not the roughest. And the roughest is what our inflexible adherance to the zombie system dooms us to.

[May 07, 2010]  Timothy F. Geithner as a head of the plunge protection team

Should secretary of Treasury be so concerned with the stock market ?  Should legalized gambling with American retirement saving be stopped ???

The Treasury secretary, Timothy F. Geithner, was returning to the Treasury about 2 p.m. from the Capitol when he saw on his BlackBerry that the market was down 3 percent. He called the Treasury’s market room, which constantly monitors financial exchanges; officials there theorized that the cause was Greece’s and Europe’s financial woes.

Minutes later in the Treasury hallway, Mr. Geithner looked again at his BlackBerry and saw that the market was down nearly 9 percent. He told colleagues it had to be a mistake.

Mr. Geithner immediately called the market room and then the Federal Reserve. He held a conference call with Fed officials and Mary L. Schapiro, the chairwoman of the Securities and Exchange Commission. About 3:15, Mr. Geithner walked to the Oval Office to brief President Obama.

Next Mr. Geithner spoke with European central bankers. After the markets closed, at 4:15 and again at 5:45, he joined conference calls with the heads of the Fed, the New York Fed, the S.E.C. and the Commodity Futures Trading Commission; the calls were expected to continue into the evening.

The Group of 7 industrial nations’ ministers and governors, including Mr. Geithner, plan a conference call at 7:30 a.m. Friday Eastern time.

As of about 6 p.m., all the officials knew was that there had been what one called “a huge, anomalous, unexplained surge in selling, it looks like in Chicago, at about 2:45.” The source remained unknown, but it had apparently set off algorithmic trading strategies, which in turn rippled across everything, pushing trading out of whack and feeding on itself — until it started to reverse.

Federal officials fielded rumors that the culprit was a single stock, a single institution or execution system, a $16 billion trade that should have been $16 million. But they did not know the truth.

What happens to the day’s market losers will depend on the nature of the cause and whether it can be identified. That is a question for the S.E.C. The Nasdaq market said in the evening that it would cancel all trades in hundreds of stocks whose prices had swung wildly between 2:40 p.m. and 3 p.m.


this is all very fishy. If the drop was due to computerized selling- then what explains the bounce back up.

Someone stepped in to keep the market from collapsing.

Our tax dollars at work?

Denver bound passenger


Price inflation is advancing on the cost side while economic deflation is killing us on the asset side. By calling the manipulated near 1% price inflation a good sign; they completely ignore the forces pulling the national economy apart. (Have they not been paying their bills lately?)

Economists have completely missed the true picture composed of two important parts engendering very different forces. The Bureau of Labor Statistics reported that 162,000 non-farm payroll jobs were created in March. But they fudged since more than half of them (81,000) were imagined, make-believe, new jobs created by phantom new businesses that the Labor Department pretended started up in March. That reduced that actual counted new jobs figure down to 81,000. Of that 81,000, 40,000 were temporary jobs, reducing the figure to 41,000. And the Government created 51,000 Census Worker jobs that will be eliminated within a few months, which means the real economy actually lost jobs again in March. With 150,000 new entrants into the job market in March due to normal population growth, this means the economy fell short by at least 157,000 jobs and their fuzzy math allowed unemployment to remain at 9.7%. A major problem is that Government has grown in size so much that it and has overtaken the financials as being the largest sector of the economy and continues to grow with reckless abandon.

Frederic Schultz, Esq.

To put this nation and world on strong economic footing, we must end prohibition (legalize drugs) and end the wars in Iraq and Afghanistan. We are hemorrhaging billions daily that could be spent on firemen, teachers, and infrastructure. This is all very sad. We must change course now before things snowball out of control.


It's not Greece that is spooking the market. It's the proposed legislation that will permit the Federal Reserve to be audited. If it passes, all the naked sleaze bags on Wall Street and in our government will be exposed on the beach when the tide rolls out. Too much sunlight is a killer.


The fake house of cards, the rising stock market just burst its bubble. For over a year, it was buy, buy, buy to fake an end of the recession. Even though all the factors were there that the recovery was really not one at all. Employers are still laying off people, homes are still being foreclosed upon, companies are going out of business and banks are not lending. The stock market went up because no was trading; they were picking up bargains, and with it what looked like a remarkable recovery.

Well, Greece, and the EU, has brought Wall Street back to the land of reality. Even though Greece pass austerity measures; they will do little because Greece will not be able to sustain the requirements put upon it by the EU, the IMGF and the German bankers.

So, welcome to the beginning of the "double dip recession" and Great Depression II. The house of cards are crumbling with the ruins on the Acropolis. And this toxicity will spread through the EU as fast as the "black death". Returning right back her to the US or A.


i am not surprised. i don't think the dow has any reason to top 10k. our recession is not over. it's pure speculation that took the dow that high. housing is still down. unemployment is still in double digits. larger corporations are inventory heavy. the consumer is not shopping yet, they are buying necessities and items on markdown. confidence is still iffy, at best. we are still at war. obama's numbers are down was only a matter of time before someone else stumbled.

Nick Lento

Fear and greed....and lots of manipulation.

Ordinary innocent naive investors generally lose and the insiders generally win. A giant fixed casino....that's the global financial system we now have.

Before a market can be truly free it must be fair and honest. The scammers are in charge. The irony is that these manipulative tactics are 100% "legal".

Brian Sussman:

The decline shouldn't surprise anyone.

Ultimately the Great Recession will not hit bottom for several years. I suspect DOW will hit 7,000 or lower way before it reaches 12,000. It could take 5-15 more years before the USA economy stabilizes, and even that's dependent on major financial reform, serious regulation, and major 'trust-busting of our financial institutions.

Several weeks ago, as DOW was approaching 11,000, I warned a few friends that as soon as DOW hit 11,000 they should sell off and turn their assets liguid, because that was about as high as DOW could go before the EURO's problems caught up with the USA economy. I suspect my friends ignored my advice, and that now their IRAs have lost additional value, and that could have been avoided.

Meanwhile Wall Street is still playing its games of deception and fraud, while robbing most Americans of their wealth.

Between our crooked financial institutions, corrupt government, the still-lingering effects of Katrina, the Oil spill in the Gulf of Mexico, the likelihood of that Oil getting into the Gulf Stream, the Volcano in Iceland, the Euro, European and American economies, the financial bankruptcy of the the USA and its States and municipalities, the serious unemployment, the serious decline of most Baby Boomers retirement funds, etc., one would have to be lving in fantasy world of delusion and denial to actually expect our economy to strengthen or even stabilize for many years to come.


The lemmings follow each other over a cliff, and then the cliff itself collapses.

The masters of the universe in charge of trading desks really earned their bonuses today - NOT! Instead of making markets secure by holding off they exacerbate the decline by dumping stocks with their cute little computer sell off programs. Why doesn't the Fed or the stock exchange leadership step in and halt trading until the panic subsides? Free markets are a chaoitic free-for-all and an 'in free-fall' oxymoron. Keep your assets in cash and spend it - it has no value anyway.

Donion Foops:

We need a Financial Activity Tax on computerized and micro-trades. The treasury would be richer, and the tax would add a damping factor on the computer models.

One might think that the finance giants just wanted to jerk our chains and panic the public into fear response. After all, big money is made on market movement, not on market stability.


the markets here never got to fully correct themselves due to government interventions (cash for clunkers, tarp, stimulus/porkulus, mortgage rebates) - but government interventions and exhuberent proclamations of recovery only last so long and then the markets date with its destiny will play out. buckle your seat belts ladies and gentlemen, the second act is about to start and its bumpy.

[May 07, 2010] A Foreclosure Society

May 07, 2010 | Economist's View

It's hard to defend the home mortgage interest deduction, but if you're so inclined, feel free to try:

A tax break that is breaking us, by Edward L. Glaeser, Commentary, Boston Globe: The latest Case-Shiller housing data suggest that housing markets have now stabilized. ... This stability makes it possible to move beyond stop-gap measures and to envision fundamental reforms that will make the next housing crisis less damaging. Lowering the $1 million cap on the home mortgage interest deduction is a good place to start. ...
I’m not claiming that government policies, like the mortgage interest deduction, caused the bubble. The deduction is an old policy that has remained a constant in good times and bad. Moreover, the bubble can’t be explained by low interest rates or easy mortgage approvals or high loan-to-value ratios. The historical relationship between these variables and housing prices is just not large enough to explain either the boom or bust. America’s great housing convulsion is best seen as an enormous, almost inexplicable whirlwind that was created by ebullient, but incorrect, beliefs about never-ending home price appreciation.
But while government policies cannot be blamed for the bubble, they did exacerbate its damage. For decades, the home mortgage interest deduction and government-subsidized institutions like Fannie Mae and Freddie Mac have made mortgages artificially inexpensive. This subsidy encouraged homebuyers to borrow like mad and tie their fortunes to the housing market.
During the boom, these policies were thought to lead Americans to accumulate housing wealth and create an “ownership society.’’ We now know that encouraging people to borrow to buy homes can just as easily lead towards a "foreclosure society"...
The home mortgage interest deduction also subsidizes Americans to buy bigger homes... In an age of global warming, why should we subsidize the greater energy use inherent in larger homes? There is a powerful connection between structure type and ownership, which means that encouraging homeownership implicitly encourages sprawl..., which is bad for cities, bad for traffic congestion and bad for carbon emissions.
The mortgage interest deduction is also extremely regressive. ... Now that prices have stabilized, we can imagine slowly leading this political sacred cow towards a good stockyard. The interest deduction currently has an upper limit of $1 million. That limit could be reduced by $100,000 per year over the next seven years, which would lead to a less regressive $300,000 cap. After that point, we could consider replacing the interest deduction altogether with a flat homeowner’s tax credit that would encourage homeownership without encouraging borrowing or big houses. ...

Bruce Wilder:

"America’s great housing convulsion is best seen as an enormous, almost inexplicable whirlwind that was created by ebullient, but incorrect, beliefs about never-ending home price appreciation. "

No, it's not.

But, I guess somebody's got to pay for those lovely cufflinks.


I'm sure actually we discussed this issue before. But he is correct, the home interest deduction should go. Better to DIRECTLY subsidise housing by creating appropriate infrastructure or subsidising knocking down old buildings. This is one case where supply side measures make more sense. Any subsidy on housing (which is mostly land prices), just pushes up the price and helps no-one but the banks.


i suggest we figure out what the deduction is worth to the median home owning household and convert it into a refundable tax credit for every household renters included

ken melvin:

The deduction is a part of the the leveraging which is the bigger part of the problem. Get rid of it and tax the piss out of short term gains on housing.


With the banksters handing out "Home equity loans" like candy, the "Mortgage interest" deduction has morphed into a credit card interest deduction.

How do you unwind something like the mortgage deduction without further wiping out housing wealth of the middle class?

Who will pay for China’s bad loans

China Financial Markets

So as a consequence of the global crisis, China’s growth will rely more than ever on the growth of household consumption. The good way this can happen is by a surge in household consumption that will allow economic growth to remain high. The bad way is by lower growth in household consumption matched by a very sharp decline in economic growth. If the worriers are right, and non-performing loans surge, China can nonetheless easily avoid a banking collapse, but that does not mean the cost of cleaning up the banks will be negligible. On the contrary, it will put even more downward pressure on low-consuming Chinese households and will make the inevitable rebalancing of China’s economy much more difficult than many expect.

As I discussed in a posting last month, Japan showed how difficult. In the past two decades Japanese consumption growth has slowed from its headier pace of the 1980s. Consumption growth has limped along at 1-2% annually from 1990 to now as Japanese households were forced indirectly to clean up their own bad loans using almost identical mechanisms – repressed interest rates and an undervalued currency. Whereas in the 1980s, when Japanese economic growth exceeded its consumption growth thanks to its large and rising trade surplus, in the past two decades Japan’s economic growth – less than 0.5% annually – has been less than its consumption growth as Japan slowly and painfully rebalanced its economy towards consumption.

Likewise perhaps with China. Unless the rest of the world is willing to absorb rising trade deficits and supply it with rising trade surpluses, rebalancing for China means that instead of being the lower limit of economic growth, consumption growth will now be the upper limit. If future Chinese consumption growth also slows, as it did in Japan, because households are forced to foot the new bad-debt bill, we may see the real cost of the current explosion in bad loans – several years of sub-par growth.


More seriously, I think that your post is not only relevant for China, but for most of the industrial world too. The Financial Sector as a share of the economy has grown substantially in the last 20 years everywhere. If it was not due to loan margin increase, it was due to size increase (for a household, at current low rates, paying 150 bps interest margin on a loan 4 times its annual income is transfering the same money to the banking sector than paying 300 bps interest on a loan only twice its annual income).

We also witnessed a stagnation of the median real wage in the last decade that mirrored the depression of the Chinese middle class income. Indeed the last decade was simply a guilded age worldwide, only for the benefit of the upper decile of society. The problem is that there is a limit to what the middle class can absorb, and this limit is close.

If there is no growth worldwide, because the middle class cannot consume because of low income, and is not willing to borrow because of debt revulsion, “growing out” of the bad debt will not be an option. Deflation will set in.


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Last modified: September 12, 2017