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Financial Skeptic Bulletin, October 2010

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[Oct 27, 2010] State Borrowing To Fund Unemployment Set For December Default Markets

Minyanville.com

...many US states are now in a vicious cycle that will be exploding in December. As businesses lay off workers, fewer payroll tax dollars go into each state’s unemployment insurance trust fund. Simultaneously, as businesses lay off workers, more dollars are coming out of those states’ trust funds to pay unemployment benefits.

Since March of 2009, 31 states have borrowed billions from the federal government to continue paying out unemployment benefits while keeping their UI trust funds from insolvency.

The federal stimulus provided for a moratorium on interest payments until December, 2010. And, as you likely know, that’s a month from now.

Take a look at California.

The Golden State is on the hook for $11 billion in unemployment benefits this year but only taking in $4.6 billion. According to the Pew Center for the States, California would have to at least double its business tax to make up for the lost $6 billion.

[Oct 27, 2010] US has Japan disease could drag global economy into a quagmire Roach says

Yahoo! Finance

“There’s a lot of lasting damage that is going to be around for years to come,” Roach says, suggesting emerging markets will not be immune to further weakness in the developed world.  “The U.S. - the biggest economy in the world - drives a lot of other economies, especially out of developing Asia," he says, describing decoupling as a “crock."

Meanwhile, “China’s got very daunting challenge ahead of them" in trying to transform its economy to one based more on domestic consumption and less on global exports, Roach says. If it fails, he believes the next crisis could again cripple its economy.

But in what seems like a bit of contradiction, Roach tells Aaron he is still “very bullish” on China. 

[Oct 27, 2010] Gross, Grantham blast Fed's asset buying

Yahoo! Finance(Reuters)

Two top asset managers, Bill Gross, co-founder of Pacific Investment Management Co., and Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., lambasted the Federal Reserve's loose monetary policy and said renewed asset purchases are in danger of becoming ineffective.

The U.S. central bank's bond asset purchasing program "is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme," Gross wrote in his monthly investment outlook posted on Pimco's website on Wednesday.

"It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up," said Gross, who manages the world's largest bond fund.

The Fed is expected to announce another round of large-scale asset purchases when it holds its next policy meeting on November 2-3, after already deploying $1.7 trillion to pull the economy out of the financial crisis.

Gross said the United States is in "'a liquidity trap,' where interest rates or trillions in asset purchases may not stimulate borrowing or lending because consumer demand is just not there."

Gross's views came a day after Grantham, who helps oversee over $100 billion at Grantham Mayo Van Otterloo & Co., said Fed policy has resulted in "extraordinary destructiveness" and "ruinous cost."

"I would force (the Fed) to swear off manipulating asset prices through artificially low rates and asymmetric promises of help in tough times -- the Greenspan/Bernanke put," Grantham wrote to clients on Tuesday. He referred to Fed Chairman Ben Bernanke and his predecessor, Alan Greenspan.

"It would be a better, simpler and less dangerous world, although one much less exciting for us students of bubbles," Grantham wrote in a report titled "Night of the Living Fed," in a play on the traditional scary Halloween season.

Gross, who helps oversee more than $1.1 trillion in assets at Pimco and runs the $252 billion Total Return Fund (NASDAQ:PTTRX - News), said the resumption of asset purchases by the Federal Reserve would squelch the bond market.

"The Fed's announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment," he said.

Gross said Treasury rates may be "rock bottom," but there are "safe spread" securities that are attractive.

He and Grantham both see value in emerging markets, with Gross exposed to emerging market debt and Grantham moderately overweight in emerging market equities.

Grantham said he still sees compelling value in U.S. quality companies. "For good short-term momentum players, it may be heaven once again" as they are "so cheap," he said.

Gross said he also is exposed to high-quality global corporate bonds and U.S. agency mortgages, which are yielding 200 basis points "more than those 1 percent Treasuries."

Gross did include a caveat: "While our 'safe spread' terminology offers no guarantees, it is designed to let you sleep at night with less interest rate volatility."

(Reporting by Jennifer Ablan, Editing by Leslie Adler)

[Oct 27, 2010] Grantham On The Ruinous Cost Of The Fed's Manipulation Of Asset Prices

zero hedge

Jeremy Grantham launches into his most aggressive and succinct anti-Fed diatribe yet. He is a man who gets it. 'If I were a benevolent dictator, I would strip the Fed of its obligation to worry about the economy and ask it to limit its meddling to attempting to manage inflation. Better yet, I would limit its activities to making sure that the economy had a suitable amount of liquidity to function normally. Further, I would force it to swear off manipulating asset prices through artificially low rates and asymmetric promises of help in tough times – the Greenspan/Bernanke put. It would be a better, simpler, and less dangerous world, although one much less exciting for us students of bubbles. Only by hammering away at its giant past mistakes as well as its dangerous current policy can we hope to generate enough awareness by 2014: Bernanke’s next scheduled reappointment hearing." Pretty much all familiar topics to Zero Hedge readers.

And for those pressed for time, and unable to read the full 16 page must read letter (attached), here is a bulletized form of all Grantham's key issues of contention with our zombifying chairman.

  1. Long-term data suggests that higher debt levels are not correlated with higher GDP growth rates.
  2. Therefore, lowering rates to encourage more debt is useless at the second derivative level.
  3. Lower rates, however, certainly do encourage speculation in markets and produce higher-priced and therefore less rewarding investments, which tilt markets toward the speculative end. Sustained higher prices mislead consumers and budgets alike.
  4. Our new Presidential Cycle data also shows no measurable economic benefits in Year 3, yet point to a striking market and speculative stock effect. This effect goes back to FDR, and is felt all around the world.
  5. It seems certain that the Fed is aware that low rates and moral hazard encourage higher asset prices and increased speculation, and that higher asset prices have a beneficial short-term impact on the economy, mainly through the wealth effect. It is also probable that the Fed knows that the other direct effects of monetary policy on the economy are negligible.
  6. It seems certain that the Fed uses this type of stimulus to help the recovery from even mild recessions, which might be healthier in the long-term for the economy to accept.
  7. The Fed, both now and under Greenspan, expressed no concern with the later stages of investment bubbles. This sets up a much-increased probability of bubbles forming and breaking, always dangerous events. Even as much of the rest of the world expresses concern with asset bubbles, Bernanke expresses none. (Yellen to the rescue?)
  8. The economic stimulus of higher asset prices, mild in the case of stocks and intense in the case of houses, is in any case all given back with interest as bubbles break and even overcorrect, causing intense financial and economic pain.
  9. Persistently over-stimulated asset prices seduce states, municipalities, endowments, and pension funds into assuming unrealistic return assumptions, which can and have caused financial crises as asset prices revert back to replacement cost or below.
  10. Artificially high asset prices also encourage misallocation of resources, as epitomized in the dotcom and fiber optic cable booms of 1999, and the overbuilding of houses from 2005 through 2007.
  11. Housing is much more dangerous to mess with than stocks, as houses are more broadly owned, more easily borrowed against, and seen as a more stable asset. Consequently, the wealth effect is greater.
  12. More importantly, house prices, unlike equities, have a direct effect on the economy by stimulating overbuilding. By 2007, overbuilding employed about 1 million additional, mostly lightly skilled, people, not counting the associated stimulus from housing related purchases.
  13. This increment of employment probably masked a structural increase in unemployment between 2002 and 2007, which was likely caused by global trade developments. With the housing bust, construction fell below normal and revealed this large increment in structural unemployment. Since these particular jobs may not come back, even in 10 years, this problem may call for retraining or special incentives.
  14. Housing busts also help to partly freeze the movement of labor; people are reluctant to move if they have negative house equity. The lesson here is: Do not mess with housing!
  15. Lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the financial industry. This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefits are reduced. It is likely that there is no net benefit to artificially low rates.
  16. Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy. Importantly, by increasing inflation fears, this easing has sent the dollar down and commodity prices up.
  17. Weakening the dollar and being seen as certain to do that increases the chances of currency friction, which could spiral out of control.
  18. In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.

Read the below letter (pdf link) in conjunction with the just released letter from Sprott on how to counteract the Fed's pervasive destruction.

DavidPierre
A week away ... Fed's announcement of how badly they intend to debauch the Dollar.

Talk ... "it's already in the market" ... may or may not be true.

Markets moved and realigned ahead of this announcement in expectations of Fed "help" but have they moved too far or not enough?

Whatever they announce, it better be "good"!

How perverse is this announcement really? 

A "bad" announcement in the market is one where the Fed only trashes the Dollar a little. 

A "good" one is where they completely capitulate with a $1 Trillion+ shovel job... "the bigger the better" a thought process where people are HOPING that the Dollar gets debased. Good for over indebted idiots ( the federal government) short term ... it will "lessen the bite" of debts but now people understand what they are wishing for. This especially applies to bond buyers, do they really want the Fed to let the inflation genie out of the bottle?

How good are their 3.5% 30 year bonds going to look when inflation cranks up past 10%?

TIPS auction actually goes "negative". This means that these "inflation protected" bonds were returning LESS money than invested!  Why would anyone accept negative rates on one of these bonds, or ANY bonds for that matter? Why not just buy a lump of "golden crap"? ... doesn't pay any interest but who cares, nothing else does either.

It really doesn't make sense, everyone knows that governments are in a currency war where the winner is whoever devalues the most the fastest, so why are buyers lining up hundreds deep to lock in low interest rates with the promise of being paid back in depreciated currency? Maybe it's something in the water, who knows but this phenomenon is surely not logical.

No matter the amount of freshly printed currency (debt) is announced markets can't hold together for more than a week or two. If you were packed to the gills with Dollar denominated Treasuries wouldn't you use the Fed's "bid" to unload these? Especially if you were a foreigner (China comes to mind here) that had more Dollars than desired?

Foreigners have lost roughly 15% on their Dollar holdings over the last couple of months so why would they want to hold on longer to take a further beating? Especially while the Fed is advertising that they intend to increase the downward pressure? ... something in the water?

"The madness of crowds" ... everyone participating and  NOBODY calling this spade. This is pure fear and desperation of the Fed, the ensuing panic will be global and unlike anything ever seen. In retrospect, all we needed (other than a Gold standard) was to let the economy and markets recede back in 1996 and the 2000-2002 time frame. But NO, damn the torpedoes and full steam ahead!

Blow the bubbles, spin the reality, fake the numbers, bankrupt the Treasury and screw the people because no one will be the wiser until the next administration!

This IS the next administration and the shit has already hit the fan. The policy response? ...turn up the fan speed and start shoveling more, ...yeah, that ought to do it!

{p.s.  CFTC commissioner Bart Chilton spoke today regarding the ongoing Silver price manipulation. He appears to be a man of honor.  God bless him. May his guardian angel diligently watch his back.  The Gold and Silver mafia scam has some very powerful and dangerous entities running the show. CFTC didn't run his background cheque well enough before appointing him! Bravo Mr. Chilton! }

{p.s.s.  Sprott Asset Management Chief Investment Strategist John Embry tells Eric King of King World News that the long-awaited commercial signal failure in the gold and silver markets may be imminent. Excerpts from the interview can be found at King World News here:

http://kingworldnews.com
/kingworldnews/KWN_DailyWeb/Entries/2010/10/25_J...

Via LeMetropoleCafe

CitizenPete
YEP...!!!!

http://aucanary.blogspot.com/2010/10/statement-at-cftc-public-meeting-on.html

CFTC puts spotlight on silver trades

By Gregory Meyer in New York and Jack Farchy in London

Published: October 26 2010 18:41 | Last updated: October 26 2010 18:41

A senior US commodities regulator has alleged fraud in silver trading more than two years after investigators began a probe into the market.

Bart Chilton, commissioner at the Commodity Futures Trading Commission, said “members of the public” and “publicly available documents” convinced him the silver markets are tainted by violations of federal commodities law.

http://www.ft.com/cms/s/0/3f5faf38-e125-11df-90b7-00144feabdc0.html

B9K9

Gold promoters attempt to persuade (potential) investors that Ben can act unilaterally without concern for other countervailing forces.

This in incorrect - dangerously so. In point of fact, there are significant global geo-political realities that give pause to continued advance of preferred monetary policies.

Simply ask yourself this question: does a strong dollar or weak dollar policy help the USA achieve its mission objectives with regard to control of ME oil?

If you think the (so called) WoT will benefit from a highly depreciated dollar, then gold and other risk-on investment strategies might be suitable. If not, then not so much.

Think it through fellow ZH space-monkeys.

Gordon Freeman

While I like gold as much as anyone, it is this kind of lazy, made-up, bullshit "analysis" that gives the naysayers their ammo. WTF is this "production cost" happy horseshit?? Let's see, let's plug in $500, and a $300 fudge factor, and presto! instaprofits! When gold was at $600, they would plug in $250, etc. It's all complete bullshit, in a very crooked industry, run by criminals.

The only reason needed to buy gold and the miners is that fiat currency is doomed, and miners stocks will be dragged along for the ride (although they will do their damnest to try to fuck it all up)

Snidley Whipsnae:

The estimated shortage of physical gold in unassigned accounts at bullion banks is ~20,000 tons. The shortage may be more or it may be less but that there is a large shortage of physical gold is beyond question, proven by CFTC testimony and some more recent revelations.

If a mere 10% of those with unallocated accounts at bullion banks were to suddenly demand physical delivery the LBMA and CFTC would collapse and the price of physical would go ballistic.

Has anyone other than me noticed that the SCO (Shanghai Cooperative Organization) is almost never mentioned in any press releases, and seldom mentioned on the internet? Back when the SCO was formed the US asked to be invited as a 'non participating' observer and was denied.

Perhaps this is why;

"As well as these problems there is growing evidence of disruptive intent behind the gold policy of the ex-communist nations. I recently covered this in an article that tied in the relationships of the Shanghai Cooperation Council. In that article I pointed out that the substantial majority of today’s gold-buying nations are members of, or are associated with this organisation. As if to confirm these fears, in the last few days Iran, which is an associate member of the SCO, announced it is now buying gold. Furthermore, China is restricting the export of rare earth metals, which with the energy policies emanating out of the SCO membership, has the appearance of a coordinated attack on the Western economic system. If such a conspiracy exists, gold is central to it."

http://www.financeandeconomics.org/Articles%20archive/2010.10.22%20Gold%20unallocated.htm

DosZap:

Snidely,

"If a mere 10% of those with unallocated accounts at bullion banks were to suddenly demand physical delivery the LBMA and CFTC would collapse and the price of physical would go ballistic."

Unless I am incorrect an Unallocated account has no standing in recieving PHYSICAl.

You can cash out, but not demand physical. Have to be allocated for that.

Snidley Whipsnae:

Right, my bad. I meant to say allocated accounts, and some with allocated accounts have been moving their physical gold recently.

OTOH, how much unallocated gold has been 'leased out' at low interest, sold by bullion banks, and is now gone missing? How would the bullion banks come up with, oh, 20,000 tons of gold in today's markets to replace the unallocated gold that they have 'leased' or sold?

Login or register to post comments by lawrence1 on Tue, 10/26/2010 - 18:16 #679053

You might want to read fofoa´s latest post about oil and gold in which he describes in detail how the House of Saud have been replacing their oil with gold for decades and now the bullion and central banks have leased their gold probably many times over. Maybe more than just the LMBA and Comex are in deep shit. And dont they deserve it.

DosZap:

Might wanna read what the HEAD Sheik said about PEAK OIL also.

He said no way Jose'.

One well, largest in world has had 70 Billion Bbls taken out, he stated it had another 80 Billion plus left.

ONE well.

So, he said, forget peak oil, as we have way more than needed.

http://www.businessinsider.com/saudi-arabia-cheap-oil-era-2010-10?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+clusterstock+(ClusterStock)

Snidley Whipsnae:

Thanks, I have been following FOFA for some years and am aware of 'Another's' comments regarding oil and gold never flowing in the same direction.

The Saudis suddenly 'discovered' a few months ago that they had more than twice as much gold in their possesion than they previously announced. Surley a simple oversight. :)

I would not be at all surprised to hear that the Saudis have more gold than all the central banks in the world combined.

I do believe that the arrangement worked out between the Saudis and the US consisted of some US military protection, some Saudi acceptance of fiat dollars for oil, and some gold for oil. I believe that is pretty close to FOFA'S conclusion and I find it credible.

working class dog on Tue, 10/26/2010 - 20:25 #679326

The long only ETF's , GLD, SGG, USO all are examples of investment institutions who are speculators not BONAFIDE HEDGERS, are forcing the purchase of the underlying commodities, and thereby forcing the price up.

Self fullfilling prophecy, how do you say tulip bubble in Gold.

By the way the Fed has REDUCED ITS BALANCE SHEET, in case anybody is interested. Too much talk of Printing money, only tells me the crowd is wrong in the short term and we are due for a reaction exactly opposite to what the money printing crowd is saying.

Just an observation.

Snidley Whipsnae on Tue, 10/26/2010 - 20:45 #679367

Do you think the Fed is going to try to strengthen the dollar against other fiat currencies?

Do you think that the Fed is going to stop purchasing treasury issues, increase overnight interest rates, and let interest on treasuries rise in general?

BTW, the Fed reducing it's balance sheet when the velocity of money is very low has little effect on the economy. The Keynesians have found that out in spades. Excess reserves have found their way into other economies, causing inflation abroad.

If the Fed raises interest rates what do you predict for the housing industry?

This Hussman article might be of interest to you:

"In either case, the hallmark of a liquidity trap is that holdings of money become "infinitely elastic." As the monetary base is increased, banks, corporations and individuals simply choose to hold onto those additional money balances, with no effect on the real economy. The typical Econ 101 chart of this is drawn in terms of "liquidity preference," that is, desired cash holdings, plotted against interest rates. When interest rates are high, people choose to hold less cash because cash doesn't earn interest. As interest rates decline toward zero (and especially if the Fed chooses to pay banks interest on cash reserves, which is presently the case), there is no effective difference between holding riskless debt securities (say, Treasury bills) and riskless cash balances, so additional cash balances are simply kept idle."

In addition:

"Velocity

A related way to think about a liquidity trap is in terms of monetary velocity: nominal GDP divided by the monetary base. (The identity, which is true by definition, is M * V = P * Y. The monetary base times velocity is equal to the price level times real output).

Velocity is just the dollar value of GDP that the economy produces per dollar of monetary base. You can also think of velocity as the number of times that one dollar "turns over" each year to purchase goods and services in the economy. Rising velocity implies that money is "turning over" more rapidly, so that nominal GDP is increasing faster than the stock of money. If velocity rises, holding the quantity of money constant, you'll observe either growth in real output or inflation. Falling velocity implies that a given stock of money is being hoarded, so that nominal GDP is growing slower than the stock of money. If velocity falls, holding the quantity of money constant, you'll observe either a decline in real GDP or deflation.

The belief that an increase in the money supply will result in an increase in GDP relies on the assumption that velocity will not decline in proportion to the increase in money. Unfortunately for the proponents of "quantitative easing," this assumption fails spectacularly in the data - both in the U.S. and internationally - particularly at zero interest rates.

http://www.hussman.net/wmc/wmc101025.htm

working class dog on Tue, 10/26/2010 - 20:38 #679355

Another thought from an amateur economist and private investor (myself)

The fiat currency system is here to stay, there may be adjustments to it here or there, but it is here to stay. The gold standard doesn't work, it causes wars, and reduces incentives to develop economies. Granted if allowed to run out of control or be co-opted by wealthy special interests, the majority of the people get hurt with a fiat system. People get hurt in the gold system as well. The USA expanded it's economy due to expansion of real value credit. We increased our standard of living to the highest in any recorded history due to real value credit expansion. We don't need a Black George Bush in the white house. We don't need media hyped idiots like Sarah Palin, what we need is a man like Davey Crockett or Ella Grasso (past Governor of Ct.), or a women like Eleanor Roosevelt as president. To get there we need $10.00 per gallon gas, and no jobs. Than we will pull the real leaders from the depths of our 250 million. This is what it will take. Look around the world the ecomonies are coming back. It takes time, and I think zero hedge should investigate the Fed Balance Sheet is shrinking not rising , because the Fed is also selling other assets and allowing certain liquidity programs to expire.

 

[Oct 27, 2010] Gonzalo Lira On The Identity Of The False Religion Behind The Mask Of Economic Science

The point with most economics, and with neoliberal economics worst of all, is that it assumes that egotistical behavior will lead to optimum outcomes.
zero hedge

mikla:

I think he was using irony, because he was referring to ClimateGate, the climate 'scientists' who were fudging data in order to provide the results they were looking for.

Ok. My response is still that at least the people pretending to do "climate studies" actually have the good sense to fabricate plausible results, even if they have to hide their falsified data. Economists are too stupid to do even that.

The real question is whether the oligarchy is dumb, or whether they benefit from the boom-crash economy.

They are mere snake oil salesmen. The provide nothing, through deceit and fraud, in exchange for a paycheck. They are comprised of (1) true idiots, and (2) mercenaries willing to rationalize any concept to curry favour from the central planners.

Citxmech:

According to Popper, science seeks the [small-t] pragmatic "truth" by posing questions in a falsifiable manner and disseminating the results for public scrutiny - thus a well-formulated hypothesis that yields the predicted results will be accepted by the scientific community... until it doesn't. Inconsistent hypotheses will be reconciled by continued attempts at falsification of the incompatible hypotheses until consistency is achieved. A hypothesis that consistently yields good results will be elevated to "theory" status. Re-evaluation of theories are scientific revolutions. The big-T truth is, of course, never attained - but we get further from ignorance as the process continues.

Under Popper's paradigm, macro probably fits into the "pseudo-science" category with things like psychology, where complex inter-related dynamic systems are attempted to be understood by unfalsifiable gross oversimplifications.

Sean7k:

If you read my other posts, you will see exactly what my "logical" conclusions are and how to implement them. All guided by Austrian theory. I want to see the system destroyed- you want to live within it- good luck with that. I have a fall back position that mitigates the worst parts of monetarism- do you?

Any idea what your avatar really means? I just see a lot of Yin.

jm:

You and I both have to live within it. There's no alternative. There is no grand revolution coming to the rescue that puts all the bad guys on the bottom (or jail) and ushers in a golden age of freedom and non-bullshit. You should work for evolution.

Real revolutions leave everyone worse off, poorer, and most likely mourning the loss of loved ones. And then a new set of skimmers takes over on top.

Russian peasants were all-in on killing the kulaks with a sickle. A couple of years later Stalin was killing them with a hammer.

zaknick:

I think you're wrong. There is no way these scumbags can get away with this murderous madness they call our reality. They've hollowed out the American economy (the true basis of their own power) handing out so-called free trade agreements which were just bribes in exchange for bankster interests in unfathomable wealth overseas (not in China's case where they finally obtained what they always wanted: slave laborers).

I also fail to see how most folks come out poorer after a revolution with the inequality rates of today. Do you not understand that the wealth production capability of this nation was stolen? Financial garbage was the biggest export by far in the US. A revolution that squeezes the oligarch's interests opens up economic opportunity for entrepreneurs which is

  1. A job and wealth creator,
  2. The way nature meant it to be until these bankster supported bandits took over the economy as if it was their own little plantation and we their slaves.

It is untrue that after major changes a new prosperous for all economy cannot emerge from the ashes of the curse of the present system, especially with the talent on tap in America and the gutting of decrepit monopolies and policies that stink of fascism.

jm:

Sure, I could be wrong. But venom and anger about how things are doesn't make a brighter future.

You talk about "murderous madness"... injustice, sure. It has happened everyday since humans lived. But to talk of murderous madness is so rhetorically out of proportion that it is an injustice to people that have actually been killed and tortured and murdered. There is real murderous madness in this world, but not here. Let's both hope murderous madness never really happens here.

You and I have every right to be angry about how awful things are, but it can't absolve everyone of responsibility. I'm not going to try and assign blame, because everyone had a part in making this shit sandwich... everyone take a bite. Shared sacrifice and time.

I'm all for innovation and entreprenuership. But I'll let return on capital decide how nature decides on things.

Bankster bandits taking over. People with money bribe politicians. This is how it has always been and always will be. Revolutions just make a new set of people that bribe a new set of politicians. After the herd gets thinned out, of course.

No doubt that prosperity is possible here. But when you talk about "emerging from ashes", that's an obstacle to it. You unleash that and there's nothing but pain and trouble. It is easy to trivialize this. At everyone's peril.

Peace.

zaknick:

There are literally millions of innocent people and children around the world and right here in the goood ole US of A who would disagree with you negation of murderous insanity.

As to everything else you said, I would rather be free than a slave to other men and their games. Dylan said something like, "you play with my world like it's your own little toy". That to me is un-freaking-acceptable. Capisce? Most of the misery in this world is man-made. I'll worry about the next bunch of fascists when the time comes, for now I'll concentrate of opposing them any way I can which is why I spout off so much around here.

Franklin, Jefferson, Lincoln, Garfield, JFK all knew and warned us of the dangers we face today. I have known peace and prosperity and I know it can exist no matter what you say.

Peace

Walter_Sobchak:

jm you are a defeatist. zaknick you are an idealist. Civilization is fascism.

B9K9:

My father, the long time MIC intelligence operative, taught me the most important rule:

He who complains has already lost.

Some may notice that my posts never promote any ideals, nor complain about how things actually are, or deplore that the pace of change is too slow, etc.

Nope, they're usually just straight observations about how things actually work, with a little bit of monetary mechanics thrown in to support certain conclusions.

Life is really quite simple: we are born, grow & develop, decline & die. During our peak growth & development stage(s), we must compete for scarce resources in order to support the offspring that typically result from successful mating strategies. Evolutionary pressures have resulted in the manifestation of certain behaviors centered around organizational power.

Societies & cultures are simply amalgamations of individuals, so they tend to mirror and replicate individual behavior. The quest for power consolidation is a key foundational element of government. Since most people are ill equipped to survive this type of environment, the strong always rise to the top.

However, and this is a huge however, as noted above, these self-same societies, cultures & governments are also subject to the immutable laws of nature: they are born, grow & develop, then enter a period of decline and die.

What does this mean to us? Simple - don't bother complaining. Just let nature takes its course. If a society/culture/government is presently in a growth & development stage (ie at its peak power), it is a waste of time/energy to complain or attempt to effect meaningful change. OTOH, if it is entering the decay/death cycle, one need not do anything other than perhaps give a gentle 'push'.

The USA, as it is presently constructed, is in terminal decline. The Fed cannot fight the math - they needed some incredible new growth component to bury the last decade of fraud. Sadly, at least for them, it is not forthcoming. The MIC is not going to take-one-for-the-team by accepting blame for two more lost wars. Anyone with the slightest heightened sense of awareness can tell that the marriage of convenience between the Fed & MIC (that is, $USD backed by military control of ME oil AND military control of ME oil backed by the $USD) is not going to end well.

Rather than endlessly engage in parlor room debates regarding various economic theories, it might profit one to think about the larger scale cycle(s) that are playing out in real time. From the ashes a new form of organization will arise - will you make it through the bottleneck and/or benefit from the new paradigm?

I suggest this is what people should be contemplating and planning.

philgramm

B9K9,

This is one of the more profound posts I have read here on ZH. There are very smart readers on this site but I often sense the immense frustration that the readers (myself included) feel with the current paradigm. It seems the smart thing to do is try to prepare for the inevitable collapse in this boom/bust cycle and to try to live as true to oneself as possible without being a pawn. Oh.......and try to have a laugh or two along the way (I can always count on ZH readers to provide my daily dose of yucks)

Cognitive Dissonance:

It matters not whether your followers have benefited from your preaching. It matters only that your disciples do as they are taught and continue to weave their wool and deceive their sheep.

As long as the economic shock and awe troops aka economists, money managers and financial product salesmen continue to support the masters of the universe, the followers will continue to get coal in their statements and be told it's divine diamonds in the rough.

Login or register to post comments by zaknick on Tue, 10/26/2010 - 17:31 #678941

Exactly. Like psychiatrists and psychologists (maybe not all) are just drug peddlers making up quackery as they go along with big pharma's part of the fascist plan. It really is criminal to push pills on somebody who's unwell emotionally for 30 years doing God knows what to them (the FDA sold out long ago) and never "fixing" the issue.

I could go on and on about so much corruption in the society but why bother... if you don't know by now, you're one of the sheep headed for slaughter.

Sabremesh:

You are missing the point. It doesn't matter if he has mischaracterised Austrian economics - it is still a dogma. Economics is the charlatanry of our age, and future generations will look back at us with the same contempt for believing in it that we currently hold for earlier civilizations who swore by astrology and divination by entrails.

Cognitive Dissonance:

You are missing the point. It doesn't matter if he has mischaracterised Austrian economics - it is still a dogma.

Ummmm,

Did you by some chance hit the wrong "reply" button? Because I said nothing about Austrian economics and was commenting directly to the author about the main theme of his article, a False Religion Behind The Mask Of Economic Science.

Escapeclaws:

"Economics is the charlatanry of our age"

What about psychology and psychiatry (psychology with drugs)? Those guys do all their research on captive populations in mental hospitals. Pray you never end up in one. Remember lobotomy and shock therapy? That's their version of physicists using supercolliders to study elementary particles. Of course we all know that physics can't hold a candle to psychiatry or economics when it comes to rigorous analysis.

Now they forcefeed patients risperidon like french farmers force feeding geese to make fois gras. The patients develop so many secondary symptoms that the psychiatrists tell the families that the twisted bodies and projected tongues are the result of their debilitating mental disease which the industrial strength drugs are designed to combat.

Sounds like what Bernanke is doing to the economy by force feeding ZIRP and QE. And like psychiatrists, the Fed is accountable to none.

AnAnonymous:

Is total baloney.

If he is going to bash Austrian economics, he should at least take the time to bother learning what it says.

Funny, funny. Most of the comments section confirms economics as a religion.

Lets focuse a bit on religions.

One common tactics is to tell that people have first to study their religion before being critical of it. Of course.

A disbeliever/misbeliever/unbeliever/other believer start to learn the religion. In the end, it turns itself into a toddler as his knowledge will be validated by the new authority.

Guy learns the religion for 20 years. He comes back but his knowledge is deemed not accurate enough. More over, you need a certain life experience to understand.

So what? Let your kids learn the religion. But later, it appears that your kids are not born in the religion. You need to be born in the religion etc...

In the end, the guy family is found to be converted.

It is more an abrahamic religion thing to be fair on other religions.

This said, economics worshippers use the same tactics. Hidden conversion.

Austrian schools of economics is not less a religion than any other school of economics. Their praexology is the deus ex machina per excellence.

This said, religions do not prevail one over the other by terms of facts but matter of opportunity.

The roman empire wealth was accumulated under other auspices than Christianity. Christianity was established in Europe by a state decision, no matter what the Christians like to claim on separation between religion and government.

It is a matter of opportunity. And the Austrian school of economics might the next trendy economics religion.

Not because it is truer. But because the opportunity is right there.

zloty owadow:

Easily observable fact: Economics is not a science simply because each branch of genuine science takes great pains to accurately measure anything which is studied. Many scientists have spent their lives creating better and more accurate rulers, so that other scientists can measure more accurately. This is a key part of science.

Economic "scientists" on the other hand insist on making their rulers (viz. currencies) more and more rubbery and inaccurate. Their research reports then create more problems in measurement process by adjusting hedonic oscillators, extrapolating extispicetic functions, and encouraging coprophagic denial factors until the printing of such nonsense is simply a bad joke.

Imagine asking a physicist: "How fast is speed of light?" and his reply is:

"What year? In 1920, it was 300,000 kilometers per second, but in 2010 it is 3,295,500 kilometers per second!"

You would immediately think "He is bogus, he is a joker!" All the time we are talking about, from 1920 to 2010, the speed has not changed, but the ruler has stretched...quite a lot. This is the picture of an economist. The bad joke is, we all take them seriously and allow them to talk as if they are also learned people who have something to say which may help us and our civilization. In fact the situation is much worse than this humourous reductio ad absurdum because it is done on purpose. Economics is not a branch of science, it is a branch of thievery which makes necrophilia look like a wholesome career.

aarskever :

A bit hit and miss in your sketch of the field and its problems.

First of all, yes, religion is just one type of behavior that is based on an ideological set of beliefs.

Yes, orthodox (and most other types of) economics is like religion, but for a different reason than you mention here. The point with most economics, and with neoliberal economics worst of all, is that it assumes that egotistical behavior will lead to optimum outcomes. That is, the 'invisible hand' of the market is actually a providential god that will magically make us behave in an altruistic fashion by behaving egotistically. How idiotic is that? As anyone who has heard of game theory knows, optimal outcomes - especially in prisoner's dilemmas - are reached through mutual cooperation, and not through mutual treachery. Yet neoliberals have been teaching business majors for 30 years now that people should never behave altruistically, as this would 'upset the market'.

And this is why economics today is religion: it assumes that the best outcomes are generated by unchecked self-interest. But even though everybody knows that life just isn't that easy, for some reason everyone has come to believe it. Certainly markets are hard to predict, and trying to control them is dangerous (See the Fed's current actions); but it hardly follows from these two statements that therefore we must not try to influence anything, because then and only then the 'best outcome' will make its grand entrance. That's not just an idiotic belief in the rationality or fairness of the market, it's grotesque. You don't help people by trying your hardest to screw them, in order to maximize your own pathetic profits, you hurt them. Yet hurting - in the newspeak of Neoliberals - is helping.

calltoaccount:

"They anaylze data for christ sakes"

just like Mishkin analyzed Iceland for 120k? a huge proportion in US on Fed payroll, or beneficiaries of corporate thinktank cash; they are coverup lipstick and makeup; hacks for hire.

like truth-trashing mortgage pushers, credit raters, CDO CDS market manipulators and bribe-fueled fraud enablers of all stripes- they do it for the dough-- and because everybody else is doing it.

THE DORK OF CORK:

Excellent article - the prince / priest dynamic is at the core of politico - economic developments since the dawn of civilization.

The Priest control peoples minds while opportunistic princes who detect weakness in the control framework appeal to the masses for direct power.

The pond has been stagnant for some time, with the priestly algae blocking the light from reaching the ecosystem.

The system will die unless the pond is oxygenated.

The Austrian solution is absurd as very limited government would merely create a power vacuum that would be filled by Tamerlane like figures who will fill the chaos with violence and extreme malice.

A powerful government with limited powers is what is needed, not the weak government with unlimited powers of the present or a Austrian fantasyland of exponential contractual interconnections only and completely ignoring the responsibility of government to balance the power balance between various players before they gain a critical mass of unlimited consolidation of power.

Variance Doc:

I normally like reading Mr. Lira's articles, but this one does not have the quality of the previous posts.

First, there needs more fact checking. For example, he claims "...Myron Scholes, Robert Merton and Fischer Black...invented options pricing..." This is simply not true. Options and pricing have very long history BEFORE these guys came along; it just wasn't a unified approach. What these guys did was bring in models from mathematical physics - stochastic processes, and apply them to the options pricing problem. It is a beautiful application of math; their work does deserve the Nobel memorial prize! What this did was to establish a coherent way to CALCULATE a fair price, assuming some (unrealistic) market conditions, for European options.

Second, it claims people never can be predictable (modeled). This is not true either. Economics assumes equilibrium exist and thus economists are able to use some basic mathematical models, masturbate with the math, sit back and marvel how smart they are. This is the state of the art in econ today. Not very impressive. Take away the assumptions behind the math, and the cookie crumbles - forecasts/predictions are way off, dogs and cats living together, printing money is the answer, etc. What is needed is far more advanced math to model non-equilibrium settings and this is where the economist's brain fails. It is possible (I believe) to model people, we (non-economists) just have not invented the math yet.

The state of the art in econ today is very primitive, and that is why there are all these debates about deflation/inflation, Neo-classical vs. Neo-Keynesians vs. Austrians, etc, and no concrete answers.

ebworthen:

Go apply mathematics to your significant other and see how far it gets you...

tomdub_1024 on Tue, 10/26/2010 - 21:58 #679574

Been tossing this idea/theory/whatever around in my head a while...a steady state economy...

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

Not saying that I joined the "church" or anything like that, but from a middle class perspective, kinda makes some sense at a local/family/personal level the past 20-30 years.

I never did really buy the "continuous growth" "continuous improvement" mantras of the 80's-00's...I mean, in Biology class, and observations in wilderness, demonstrated to me rather tersely the concept of "the edge of the petri dish", and what happens to what lives within the petri dish at that point the edge is reached.

And we must always throw in reversion to mean, and that history is non-linear, cyclical instead.

Just musings at this time, seems every orthodoxy is reaching frayed limits these days, so why not entertain heretical ideas, if only in mental exercise?

I know that many sci-fi writers (Heinlein and Asimov especially), toyed with this idea.

Winisk
Conservation and equilibrium are not allowed in economic discussions :) Populations will grow until they are constrained by a greater force.  That is the natural way.  Our economy will grow until it can't.  It always struck me as odd that the pro-reproduction and immigration policy is considered healthy and promoted while any discussion of voluntary birth control is hushed.  Perhaps a primer on the science of populations should be on the reading list.  Nevermind, I forgot that we humans are bestowed with supernatural qualities.

ddtuttle

The reason economics isn't a science has nothing to do with economics per se and everything to with politics & power: by controlling economics you control the economy. This obvious fact has been a key strategy for the power elite for centuries if not millennia.

What people think governs how they behave, and when you control how they behave with money, you can make sure it flows into your pocket. But how exactly does this happen in our modern society, where academic work is subjected to peer review and stringent standards of intellectual excellence? Easy.

The saying "money doesn't grow on trees" does not really hold for banks. They create it out of thin air, so why fuck around with trees? They hire most of the economists, and the front man must deflect scrutiny from how the system really works. "Pay no attention to the man behind the curtain." The fractional reserve banking system, which is the holy of holies at the core of modern economics, has several properties.

So economics is coerced into becoming propaganda that states the banking system is the cornerstone of the complex financial world of today. Banks perform a valuable socially beneficial service. Because banks can also get caught out by this bi-polar cycle of manias and recessions, they thought up a really neat idea: let's create a new bank whose sole purpose is to manufacture new money and give it to us when we get ourselves into trouble. This way we make money when things are hopping, and we don't loose money when it turns out we fucked everything up again. This fine institution was actually created and is called the Creature from Jekyl Island, aka the Federal Reserve. It's whole purpose is to create money out of thin air and give it to troubled banks. It's liabilities are guaranteed by the US government and the US taxpayer.

Matt Tiabbi's wonderful contribution to the english language "a vampire squid wrapped around the face of humanity, sticking its blood funnel into anything that smells like money", was aimed at GS, but is really a better description of the Fed. This power structure is the force corrupting economics. Of course, economics will never be precise like physics, but it is possible to make it more precise than the mess we have now. Yes, at its core are the actions of people and their money, which we all know can be emotionally charged. But, money comes in mathematically precise denominations, and the vast majority of people can at least add and subtract numbers, so eventually people gravitate towards a solution of self interest, which in its broadest strokes is predictable. Its a little like phase changes in physics. A super saturated solution can exist indefinitely, but eventually it precipitates out; its hard or impossible to say when, but we know what its going to do.

Turbulence is another unpredictable quantity in physics, but it operates within fairly strict confines and within known time frames. Precise short term predictions are impossible, but long term approximate ones are fairly accurate.

For an even better example of how precise economics can be check out Steve Keen's web site. Because he's in Australia, the Fed can't blacklist him. Awesome stuff.

[Oct 24, 2010] U.S. Financial Markets The Well Has Been Poisoned (Anger of the Honest Part II) by Charles Hugh Smith

"Institutional investors responsibly avoiding fraud-tainted markets? Oops, I must have stumbled into the born yesterday support group meeting. "
zero hedge

If you are so confident in the "transparency" and trustworthiness of the mortgage securities market, please tell us how many private institutional investors are buying mortgage securities which aren't 100% guaranteed by the Central State.

The same distrust has poisoned U.S. stock markets. The high keening cry to "get into the market while stocks are cheap" which has been spewed daily for months on end on network TV and other channels of raw propaganda has been ignored by the "retail investor," a.k.a. the top 20% of Americans who have financial wealth to preserve and invest.

For 24 straight weeks, retail investors have been pulling tens of billions of dollars out of U.S. mutual funds and plowing hundreds of billions into low-yield Treasury bonds.

Why? Because they sense the stock market is hopelessly, deeply corrupt and by comparison Treasuries are trustworthy. You won't make a lot of yield in Treasuries, thanks to the Fed's zero-interest rate policy (ZIRP) which is designed to drive money into risky assets, but then you won't lose 40% like you did in 2008-09 or 2000-2002 in the stock market.

We can also see how insiders are responding to the knowledge that the well has been poisoned: they're selling 500 shares for every share they buy. This unprecedented cascade of insider selling has been noted elsewhere many times, as has the declining expectations for the "recovery" of U.S. CEOs.

Those who know the most are selling their shares as fast as they legally can, and are publicly expressing their lack of faith in the tricked-up "recovery."

The U.S. financial markets have been poisoned, with long-term negative consequences. Only crooks, fraudsters and "marks" (those who still believe the propaganda about the "recovery" and "stocks are cheap" poison) will be left in a stock market propped up by the same socialization of risk which keeps the flimsy facade of a mortgage market from crumbling. High-frequency trading machines create the illusion of a market, and State intervention via proxies and other corrupt games provides the liquidity needed to fund the facsimile of a "rising market" and a "recovery" in the U.S. economy. But the public isn't buying the fraud any longer; they finally "get it": The well has been poisoned and only a fool drinks from a poisoned well.

This is why we can safely anticipate a hollowed-out stock market which trades at a steep discount to its present propped-up levels in the years ahead--until the crooked players are indicted and the financial markets thoroughly cleaned. That will take political will which is completely lacking in the Demopublican-Republicrat status quo. For more on this, please read:

bankonzhongguo:

It's important that everyone look at the arc of their own experiences in this mess. I grew on John Wayne and GI Joe. Scouts, county, church, the flag, family - the whole apple pie. When things got bad in 2008 and in each bubble before, it chalked it all up to the market and my fault for not reading the tea leaves. Its my responsibility. Now after the last two years, especially after everyday seems punctuated by another unpunished act or omission, those in the know seem to run away with billions uncaring for this country or its Citizens. During the 2008 crisis and before, I was one of those interested "smart guys" that had CNBC on in the background all day in addition to all the other information that crosses an active investor's desk. I have not watched any main stream media in months, except for the occasional "perfect reverse barometer" reading - meaning whatever they are saying - the "truth" must be the opposite. All these institutions, media, government, police, the market have cried wolf too much and now I am not filled with hate, but apathy in this express elevator to Hell. I have tuned and dropped out because my family's needs are not being represented, nor is the "government" upholding its end of the mythical social contract. Both political parties are nothing more than corporate bag men and this Obama character and his wrecking crew crossed the Rubicon.

I really don't care what these characters do or say. They are looting the Republic. There is no law - only what you can get away with.

A Man without Q...

The Chicago Booth/Kellogg School Financial Trust Index showed that only 14% of those surveyed in September 2010 trusted the stock market. The mythical money at the sidelines is not waiting for the economy to improve, they simply see the system is corrupt and they won't come back until that changes. Same thing with the RMBS crisis - the Fed thinks the greatest danger is one or more of the big banks collapsing, but the real danger is if they protect criminal behavior and don't punish the bank.

http://www.financialtrustindex.org/resultswave8.htm

sweet ebony diamond :

"once a market has been poisoned by fraud which goes unpunished, then institutional players will avoid that market as untrustworthy"

Give me a colossal fucking break. If you read Zero Hedge you would know that the biggest circle jerk known to man is occurring right now.

Barry, Nancy, Ben, Lloyd, Jamie, and whoever leads the major Pension Funds, etc. etc. are trying to sweep everything under the carpet.

TPTB are fucking hideous scumbags.  The wrath is hard to control.

tom:

Institutional investors responsibly avoiding fraud-tainted markets? Oops, I must have stumbled into the born yesterday support group meeting.

[Oct 18, 2010] Morgan Stanley Any Sell-Off In Corporates To Be Short-Lived

Barrons.com

Morgan Stanley Smith Barney strategists putting together model ETF portfolios for clients said Monday they’re overweighting corporate bonds and have added 5% to to both CDs and non-U.S. sovereign bond funds.

The report, created for advisers and institutions, said that while MSSB ETF analysts remain concerned about a possible sell-off in corporate bonds by year-end, “the team believes a number of factors will keep any sell-off both shallow and short-lived.”

The MSSB team’s model fixed-income portfolio for investors with moderate risk appetites now has:

Also, MSSB’s ETF analysts are recommending 5% each in preferreds, mortgage-backed securities, Treasury Inflation-Protected Securities and high-yield bonds.

Their biggest suggested holding by far is the iShares iBoxx Investment Grade Corporate (LQD).

Other model portfolio ETFs include:

[Oct 18, 2010] Sign of a Top

Financial Armageddon

Sign of a Top? This is not an investment opinion. But as a long-time market-watcher and died-in-the-wool contrarian, I can't help but think that a newsletter targeted to investors in one popular and high-flying technology company, marketed in a post-cum-advertisement at the Business Insider (a blog I happen to visit on a regular basis), can be seen as anything other than a sign of a top -- for the stock, the technology sector, or even the market as a whole.

Sign Up Now To Get The Apple Investor Newsletter

Calling all AAPL enthusiasts... Sign up now to receive the Apple Investor newsletter.

What is it? The Apple Investor offers a compilation of important news and trends affecting Apple, along with our own analysis and commentary. You'll receive this newsletter straight to your inbox every Monday, Wednesday and Friday.

Signing up is quick and easy. Use the form below to enter your information then click the "Sign Up" button.

My guess is that we'll soon find out if my cynicism is warranted.

[Oct 18, 2010] Industrial Production, Capacity Utilization decreased in September

CalculatedRisk

From the Fed: Industrial production and Capacity Utilization

Industrial production decreased 0.2 percent in September after having increased 0.2 percent in August. ... The capacity utilization rate for total industry edged down to 74.7 percent, a rate 4.2 percentage points above the rate from a year earlier but 5.9 percentage points below its average from 1972 to 2009.
 

[Oct 18, 2010] Jim Quinn Consumer Deleveraging = Commercial Real Estate Collapse

Note: All graphic material was removed. Nice quote: "All of the happy talk from the Wall Street Journal, CNBC and the other mainstream media about commercial real estate bottoming out is a load of bull. It seems these highly paid “financial journalists” are incapable of doing anything but parroting each other and looking in the rearview mirror."
naked capitalism

All of the happy talk from the Wall Street Journal, CNBC and the other mainstream media about commercial real estate bottoming out is a load of bull. It seems these highly paid “financial journalists” are incapable of doing anything but parroting each other and looking in the rearview mirror. Sound analysis requires you to look at the facts, make reasonable assumptions about the future and report the likely outcome. Based on this criteria, there is absolutely no chance that commercial real estate has bottomed. There are years of pain, writeoffs and bankruptcies to go.

... Shockingly, the Wall Street banks, run by MBA geniuses, loaned developers a half trillion dollars at the very peak in the market. Sounds familiar. Thank God the taxpayer has bailed these Einsteins out so they could live to make more bad loans and collect big fat bonuses.

...Commercial real estate prices have dropped 42% in just over a year. This means that the $6 trillion value of all the commercial real estate in the country has dropped to $3.5 trillion. The debt remained in place. The billions in debt issued in 2003 – 2005 is coming due between 2010 and 2012. The underlying assets are worth billions less than the debt that must be refinanced. Commercial loan payments by owners can only be made from cash flow generated by rental income. A key requirement in generating rental income is tenants.

...Office vacancies will remain at record levels for the next five years.

Based upon the current rising delinquency rates of 15.7% for commercial real estate loans and 9.05% for CMBS, there is no bottom in sight. Only raging mindless optimists like Larry Kudlow could ignore the facts and conclude that all is well in commercial real estate world. Banks pretending that the loans on their books aren’t worth 40% to 50% less, while also pretending that borrowers with negative cash flow can make loan payments, is not a solution. It is a Federal Reserve encouraged fraud. Allowing loans to be rolled over with no hope of ever being repaid will only prolong the pain and delay the inevitable.

The facts are that hundreds of billions in commercial loans are coming due, with a peak not being reached until 2013. If banks were to properly account for the true value of these loans, hundreds of regional banks would be forced to fail. This is unacceptable to government authorities. They will insist that the fantasy continue. Banks and real estate developers will pretend to be solvent, hoping the economy will miraculously repair itself and eventually make them whole. I understand these bank CEOs and delusional developers also believe in Santa Claus, the Easter Bunny, and the Efficient Market theory. It seems our entire financial system is based upon debt, fantasy, fraud, and delusion.

Selected Comments

SteveB:

Quinn states that Target has plans to open 128 new stores. So I went to the transcript of Target’s August 18, 2010 conference call, which states “after closings and relocations we expect to add ten locations this year. We plan to steadily build from this very light program in the next few years, adding 20 or more new locations in 2011 and more than 30 in 2012.”

Then I checked on Commercial Real Estate Sales Transactions at the Real Capital Analytics web site. Their Market Stats box states that during the past 6 months, the annual rate of contracts within the US was $124 billion. As one would expect, it has increased from the $52 billion shown on Quinn’s graph for 2009.

There is undoubtedly excessive commercial real estate space in the US, but Quinn has a problem in his treatment of data.

Jim Quinn:

I don’t have a problem in my treatment of data. The 128 store openings was their plan. They may have come to their senses.

http://retailindustry.about.com/od/statisticsresearch/a/2010_us_retail_industry_store_openings.htm

What does the $124 billion in the last 6 months have to do with the $52 billion in 2009? Your recent data supports my contention that the CEOs of these companies are delusional idiots.

Thanks for supporting my article.

Jim Quinn:

The Fed with another great investment of YOUR tax dollars:

NY Fed takes $180m hit on Hilton debt restructuring By Francesco Guerrera in New York

Published: October 7 2010 00:04 | Last updated: October 7 2010 00:04

The Federal Reserve Bank of New York has suffered a loss of about $180m on a debt restructuring that staved off financial problems at Hilton, the hotel group owned by Blackstone, the buy-out fund.

The Fed’s decision to agree to a lossmaking sale of about $320m of its Hilton debt to Blackstone highlights the problems faced by US authorities as they manage billions of dollars in assets acquired during the financial crisis.

EDITOR’S CHOICE Fed plays risky game toying with bonds – Oct-01Plosser voices concern over further easing – Oct-04Future in doubt for New York Fed chief with a ‘scarlet letter’ – Jun-02The Fed and other lenders could, however, still recoup their losses because the deal left them with better terms on other portions of the debt, according to people close to the situation.

The central bank received $4bn of the $20bn in loans used to finance the leveraged buy-out of Hilton in 2007 when it took on $29bn in troubled assets from Bear Stearns, the stricken investment bank bought by JPMorgan Chase.

The Hilton takeover was emblematic of the credit boom that preceded the turmoil, and saddled the hotel operator with high levels of debt just as the economic downturn hit the hospitality industry.

In April, Blackstone renegotiated the Hilton debt to improve the company’s financial health, buying back $1.8bn of debt for $800m – a steep discount to its par value.

The deal led to a 56 per cent loss on the debt held by the Fed that was sold to Blackstone. More than 20 other lenders, including banks and hedge funds, accepted the same terms and actually sold more of their debt holdings than the Fed, said people familiar with the deal.

The Fed, Blackstone and BlackRock, which manages the Bear portfolio on behalf of the Fed, declined to comment.

From an accounting standpoint, the loss on the Fed debt sold to Blackstone was offset by a paper profit on the remainder of its Hilton debt. The mark-to-market gain reflected the fact the restructuring eased Hilton’s financial constraints and made its debt more liquid and more valuable, said people familiar with the situation. The paper profit will remain unrealised until the Fed sells more of its Hilton debt.

By contrast, the realised loss of about $180m will be included in the yearly accounts of Maiden Lane I, the Fed vehicle that holds Bear’s assets. The Fed also won an unusual promise of compensation from Blackstone if the banks involved in the restructuring underwrite a Hilton listing. Fed supporters say the moves increased the chances that taxpayers will be repaid.

But critics said the Fed should have not accepted Blackstone’s discounted offer. Courtney Alexander, of Unite Here, the hotel workers’ union, said: “There was no question the Fed was going to get paid at maturity, so why accept less than full value now?”

Jim in MN:

This is but a subpart of the Big Policy Call in DC/NY which is No Bond Haircuts. Naturally, the perps will smash and grab more since the get out of jail card is sitting right in their pockets.

No Bond Haircuts = Japanification/zombification/eternal bleeding of the real economy to bail out parasites

Which in turn = zero real return (at best) on stocks and bonds = need to save more = reduced consumer spending = continuing depressionary conditions for employment, politics (whatever your favorite issues is, forget about addressing it) and more

No one discusses the Big Policy Call any more. It has killed the Obama Dawn. It will kill our country.

All the rest of it is, ahem, collateral damage.

Thanks for the noble effort at truth-telling.

Hillary:

 Another part of the equation is who was buying and selling in 2005-7. In 2005 I briefly worked for a major CRE company that owns and manages buildings. It’s an established company that’s experienced boom-bust before. Most of the buildings they owned in our market were sold to REITs while the company retained management.

Who was buying? Calpers.

[Oct 15, 2010] Gold Market on U.S. Elections: So What

See also Goyette: Finding Shelter in a Currency Crisis
Mish's Global Economic Trend Analysis

from my friend Charles Goyette, author of the The Dollar Meltdown

Some real money could be saved rolling back the American empire. Congressman Ron Paul and others calculate total war and foreign spending at about $1 trillion a year. In this context, a return of the Republicans reminds us of Talleyrand’s comment on the Bourbon dynasty that returned to the throne of France after the abdication of Napoleon: They “had learned nothing and forgotten nothing."

Republicans seemed to have learned nothing and forgotten everything. Betraying a hubris not seen since Bush set off to “rid the world of evil,” the pledge from November’s likely winners includes “bringing certainty to an uncertain world.”

Republicans do take their military Keynesianism seriously. Just months ago Republican congressmen came together to support President Obama’s surge in Afghanistan with a $59 billion emergency spending bill. Now they are campaigning about a “robust defense,” one category of spending that even the new members from the tea parties aren’t inclined to resist.

Bay of Pigs:

Correct, gold has nothing to do with the election and everything to do with the USD. Mish, if you expect Rep's to suddenly get religion and fix all this, you are sadly mistaken. The Fed and the crooks on Wall St are running the show now. If Congress audits the Fed and Ft Knox, and reigns in the Banksters, I'll start listening to something they say. Until then, we are screwed.

fedwatcher:

Bay of Pigs,

Correct! The major party leaders (both Republicans and Democrats) have done nothing. Who has pressed for auditing the Fed? Well there is Ron Paul who is a Libertarian who calls himself a Republican but is clearly not part of the leadership and there is Alan Grayson, a Democrat who again is not part of his party's leadership, and there is Bernie Sanders who is an Independent (but does not mind being called a Socialist). What links these three? They all are marching to a different drummer. They should join together and form a real Tea Party along with Paul Ryan, a Republican from WI, who has published a plan.

 

wawawa:

After 1st term of Bush I became political atheist . I learned that big-money controls/write legislations in this country. People in the street do not have any chance for their voice to be heard.
 

[Oct 15, 2010] Paul Krugman- The Mortgage Morass

"Bank Bail Out II coming to theaters near you."

The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.

enrique:

I guess Prof. K is smart enough to understand that the mortgage morass he is dealing with in that article, like any major economic phenomenon is not "exogenous" but responds to the needs and interests of the bigger system. It´s impossible to accept that a serie of phenomena that almost collapsed the whole economic system can be isolated and treated like a plastic surgery.
On my humble opinion the question PK and other do not ask ( or don´t dare ...) though SHOULD address is what were the social and economic preconditions ,what were the wider and profound interests in that specific historical moment that permitted the formation of so many anomalies , imbalances or whatever.

I have my own answer, but that is not the point of this comment. As long as the biggest questions are not addressed with intellectual honesty, we will remain with the same problems, only taking care of the symptoms ( but we´ll remain with stuff for angry articles and comments...)

Goldilocksisableachblonde:

"American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model."

What was the value of that intangible asset - a corporate and financial system that was viewed as being based on transparency and the rule of law - and how much of that value has been lost ? Worse , could we have moved from having a large , positive 'brand equity' , to actually having a negative brand equity , so that economic agents will actively avoid doing business with us when there are alternatives available ?

This is what we needed , and it's still not too late , to help reclaim our 'brand' :

"Another View: Lessons From Pecora Were Ignored" Michael Perino

http://dealbook.blogs.nytimes.com/2010/10/14/another-view-lessons-from-pecora-were-ignored/ 

"Pecora realized, much more so than the commission’s members, that dissecting one shady transaction and showing how specific bankers ripped off specific clients was far more effective than endless testimony about theoretical conflicts of interest. That was how he created the clamor for reform. His genius was his ability to convert complex economic problems into simple morality plays.

Pecora wrote in his memoirs: “Legal chicanery and beneficent darkness were the banker’s stoutest allies.” His investigation succeeded because he was willing to shine the “fierce light of publicity and criticism” on the wrongful practices he unearthed. To emulate his success, the Financial Crisis Inquiry Commission needed both heat and light. Unfortunately, they gave us neither."

rjs:

this is about more than property rights; the entire RMBS market, the worlds largest asset class, could be in jeopardy, as the actual notes may have never been rightly conveyed to the RMBS trusts, thus invalidating those instruments...

this could make lehman look like a walk in the park

[Oct 15, 2010] Drumbeat October 14, 2010

October 14, 2010 | The Oil Drum

Seraph

Societies evolve slowly, just like biological species

It has been a contentious issue for some time among historians, anthropologists, and archaeologists whether societies and cultures arise slowly or in sudden bursts and if they collapse in the same way. Now researchers using the tools of evolutionary biology instead of anthropology have created an evolutionary tree of political forms in the Pacific Islands and concluded that cultures evolve towards higher complexity by a slow process of incremental steps, but may take larger steps towards lower complexity.

tejanojim:

Well, I'm not an evolutionary biologist or an anthropologist, but this makes sense to me. Increasing societal complexity involves a shift from occupations like farmer and merchant to occupations like pet groomer and social media liaison. Convincing people that they can support themselves with such abstract, hands off modes of work would pretty much have to be a slow, gradual process. By contrast, if all the banks fail and the grocery stores are empty, jobs like gang member, scavenger and whore are the kind of things people will take up to try to survive.

hightrekker:

The author of the paper gives a presentation on Nature Podcast this week, if you want to pursue this further. Jarred Diamond follows up with his view (positive).

http://www.nature.com/nature/podcast/

[Oct 14, 2010] Time for Criminal Charges To Be Filed . . .

The Big Picture

rktbrkr:

By changing the mark-to-market rules the banks obscured the facts but couldn’t change them, now that the details are coming to light I’d say the facts are worse than we imagined a couple years back when Hank P was throwing life rings. Now that the TBTF have returned the life rings in order to collect their bonuses we can see the tsunami approaching. We have always underestimated the depths to which our TBTF bankers have sunk.\

IMO it will be politically impossible for Turbo Timmy to throw another life ring party for his buds.

donna:

Well, I dealt with an idiot in charge of handling estates at JPM for five years who was completely incompetent. I would question the competence of any of their employees.

Just get your money out of any of the big banks and tell your friends and companies to do the same. Legal action is not sufficient — just destroy their reputations so completely that no one will bank with them ever again.

 

[Oct 14, 2010] The enormous mortgage-bond scandal Analysis & Opinion by Felix Salmon

Oct 13, 2010 | Reuters

You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.

But that’s not even the biggest potential problem facing the investment banks who put these deals together. It also turns out that there’s a pretty strong case that they lied to the investors in many if not most of these deals.

I mentioned this back in September, and I’ve been doing a bit more digging since then. And I’m increasingly convinced that the risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits from the SEC or other prosecutors, as well as suits from individual mortgage investors.

The key firm here is Clayton Holdings, a company which was hired by various investment banks — Goldman Sachs, Bear Stearns, Citigroup, Merrill Lynch, Lehman Brothers, Morgan Stanley, Deutsche Bank, everyone — to taste-test the mortgage pools they were buying from originators.

Here’s how it would work:

First, the bank would put in a winning bid for the pool of mortgages, with the intention of slicing it up into mortgage bonds and selling those bonds off to investors at a profit.

After submitting the winning bid, the bank would commission Clayton to take a closer look at a representative sample of loans in the pool. Clayton controlled as much as 70% of the market for this service, which is known as third-party due diligence. But Clayton’s not at fault here, and the problem is likely to apply no matter who performed this service.

The size of the representative sample would vary according to the size of the loan pool; it could be anywhere between 5% and 35% of the loans in the pool. Essentially, Clayton would go back to the loans, one by one, and re-underwrite them after the fact, checking that the originator’s underwriting standards were in fact being upheld.

Clayton would either accept or reject the loans it was looking at, according to whether or not they met underwriting standards. Here’s the results of what it found for one bank, Citigroup; the chart comes from this document filed with the Financial Crisis Inquiry Commission. I’m just using Citi as an example, here; all banks behaved in basically exactly the same way.

Look at the first line. Clayton reviewed 1,280 loans on behalf of Citigroup in the first quarter of 2006. Of those, it accepted 554 outright: they lived up to the originator’s underwriting standards. It also waived another 144, on the grounds that there were mitigating factors (a large downpayment, say). And it rejected 582 for a rejection rate of 45%.

This kind of information was valuable to Citigroup: it showed them that the quality of the loan pool was much lower than you’d think just by looking at the ostensible underwriting standards.

Armed with this information, Citigroup would do two things. First of all, it would take those 582 rejects and put most of them back to the underwriter. Essentially, they said, the loans weren’t as advertised, and they didn’t want them. But Citi would still keep some of them in the pool.

But remember that Clayton had tested only a small portion of the loans in the pool. So Citi knew that if there were a bunch of bad loans among the loans that Clayton tested, there were bound to be even more bad loans among the loans that Clayton had not tested. And those loans it couldn’t put back to the originator, because Citi didn’t know exactly which loans they were.

If there had been any common sense in the investment banks, that would have been the end of the deal. But there wasn’t. Rather than simply telling the originator that its loan pool wasn’t good enough, the investment banks would instead renegotiate the amount of money they were paying for the pool.

This is where things get positively evil. The investment banks didn’t mind buying up loans they knew were bad, because they considered themselves to be in the moving business rather than the storage business. They weren’t going to hold on to the loans: they were just going to package them up and sell them on to some buy-side sucker.

In fact, the banks had an incentive to buy loans they knew were bad. Because when the loans proved to be bad, the banks could go back to the originator and get a discount on the amount of money they were paying for the pool. And the less money they paid for the pool, the more profit they could make when they turned it into mortgage bonds and sold it off to investors.

Now here’s the scandal: the investors were never informed of the results of Clayton’s test. The investment banks were perfectly happy to ask for a discount on the loans when they found out how badly-underwritten the loan pool was. But they didn’t pass that discount on to investors, who were kept in the dark about that fact.

I talked to one underwriting bank — not Citi — which claimed that investors were told that the due diligence had been done: on page 48 of the prospectus, there’s language about how the underwriter had done an “underwriting guideline review”, although there’s nothing specifically about hiring a company to re-underwrite a large chunk of the loans in the pool, and report back on whether they met the originator’s standards.

In any case, it’s clear that the banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool. That’s a lie of omission, and if I was one of the investors in one of these pools, I’d be inclined to sue for my money back. Prosecutors, too, are reportedly looking at these deals, and I can’t imagine they’ll like what they find.

The bank I talked to didn’t even attempt to excuse its behavior. It just said that Clayton’s taste-testing was being done by the bank — the buyer of the loan portfolio — rather than being done on behalf of bond investors. Well, yes. That’s the whole problem. The bank was essentially trading on inside information about the loan pool: buying it low (negotiating for a discount from the originator) and then selling it high to people who didn’t have that crucial information.

This whole scandal has nothing to do with the foreclosure mess, but it certainly complicates matters. It’s going to be a very long time, I think, before the banking system is going to be free and clear of the nightmare it created during the boom.

Update: KidDynamite asks a good question in the comments: were the bond investors able to do their own due diligence on the loan pool? The answer is no, they weren’t — the prospectus did not include the kind of loan-level information which would enable them to do that. « Previous PostNext Post »Comments38 comments so far | Comments RSSOct 13, 2010 11:47 am EDTTo say *that* diligence was done, without disclosing the poor results of that diligence, suggests that the diligence produced favorable results regarding the quality of the loans. So it may be worse than a lie of omission – it sounds actively misleading regarding the quality of the pool.

Posted by MickWeinstein | Report as abusive Oct 13, 2010 11:53 am EDTThis brings up memories of the SEC vs GS case again.

Felix – isn’t there a big difference between “due diligence” and “inside information?” it sounds to me like the bank did its due diligence and, as usual, the investors didn’t.

as you noted, Clayton’s testing was being done by the bank! the bond investors had every opportunity to do their own due diligence too, right?

Posted by KidDynamite | Report as abusive Oct 13, 2010 12:19 pm EDTAs I understand it- former banker with no ax to grind- loans were tested against orignial guidelines and banks own standards (for purchases) not just guidelines- so numbers are skewed negative vs. guidlines. I’m no statiscian but given variance in sample sizes you cite- can’t draw valid statistical conclusions on pools. Looked at the report you cite that was on HP. It looked like only a small percentage of rejected loans were waived, many were rejected according to that report. Think plenty of lawyers and regulators have been looking at this stuff for a long time- much written about it. Clearly there were process breakdowns all over but this is not an open and shut matter in any case. Details on loans would seem to matter here like they do in put backs.

Posted by factsman | Report as abusive Oct 13, 2010 12:22 pm EDTPart of the real issue I see is the MSM focusing on “no free ride for the banks=deadbeat mortgage holders get a free ride”. Nowhere have I seen a piece dealing with the investor loss. During this whole crisis the bankers have been painted as victims. The real victims are the investors. They should be getting the foreclosed properties or the opportunity to negotiate with the residents in the properties to get payment. If the bankers get their way they will take the properties, get the government to pay the old loans, and screw the bond holders. We used to call it fraud.

Posted by CIDNSAPres | Report as abusive Oct 13, 2010 12:28 pm EDTExcellent article, a shining light at last! This clearly shows why securitisation of mortgages is a bad thing, without which there would most likely not have been the size of problem we have ended up with.

As for having nothing to do with the foreclosure mess, that’s impossible to say without knowing more about the quality of borrowers and the type of underwriting going on. If Clayton’s re-underwriting did not reject borrowers on welfare benefits or on low fixed incomes who were taking temporarily discounted rates they could only just afford at the discounted rates, and if that underwriting did not look at what would happen when the discounted period ended, then although the due-diligence was correctly done it was asking the wrong questions.

I suspect there’s an element of naivety operating here though, as if everyone always expected it to be possible to switch to yet another discounted mortgage at the end of the current one. Since nobody in the banking community expected to be left holding the debt parcel when the music stopped, nobody cared what was in the package.

Posted by FifthDecade | Report as abusive Oct 13, 2010 12:52 pm EDTI have memories of SEC vs GS too. Mine are that I am still throughly convinced that Paulson had more info about the why he was shorting and what was placed in the CDOs the the investors.

And kid, if the bank said it had been vetted by the third party, and the bonds were rated way higher then they should have been, what kind of a transaction offer is that other then misleading and fraudulent.

Knowingly buying it low and selling it high is rather a nifty thing if the one going short is involved in the deal and knows this, wouldn’t you say? If you are failing to meet the quality benchmark that your portfolio prospectusis states to investors it has acquired, wouldn’t you say that was fraudulent?

Oh and I know you are going to answer…

Posted by hsvkitty | Report as abusive Oct 13, 2010 12:55 pm EDT“And the less money they paid for the pool, the more profit they could make when they turned it into mortgage bonds and sold it off to investors.”

This also means that banks had not only a financial incentive to take on the pools in general, but to specifically buy (to resell) pools with the highest amount of drek.

Posted by greyeconomics | Report as abusive Oct 13, 2010 1:01 pm EDTMost notes were not transferred to the custodian of the SPV (special purpose vehicle) that was created as the issuer of the securitized pool of mortgages. The reason is very simple: to expedite business. What is also very important to understand is that the legal language of the SPV which issues the MBS or any complicated securitized pool of mortgages, in most cases was not adequate. The inadequacy was in that the “transfer” of the pool of mortgages (notes essentially) from the loan originator to the SPV did not constitute a TRUE SALE!! As a result we have and will have more lawsuits (to the SPVs and the loan originators) etc…

Posted by efipm | Report as abusive Oct 13, 2010 1:22 pm EDTFascinating,

What was being written against these wonderful bonds?

If you guessed CDS’ you win.

The same banks that were selling these bond were also buying CDS converage for those same bonds (that they knew were drek).

We paid GS $10,000,000,000 through AIG for CDS insurance on bonds that they knew were losers (their due diligence should have proved that out). So they had their cake and at it too.

Posted by akah0mer | Report as abusive Oct 13, 2010 1:28 pm EDTWhen will we see some banksters doing the perp walk?

Posted by PhilPerspective | Report as abusive Oct 13, 2010 1:36 pm EDTkitty – doing due diligence is not a crime. When you do due diligence, you’re not bound to share that with your counterparty!

You’re absolutely right that in the Paulson case, Paulson did better research than his counterparties. That’s not a crime. In fact, the main goal of capital markets is probably to try to do better “work” than the guy on the other side of the trade – to do a better job evaluating the information that’s available.

Kirk Kerkorian sold 25-odd million shares of MGM stock today. Do you think that the buyers of that stock on the secondary offering have as much information about MGM as KK does? Hell no. Sold to you, sucka!

Posted by KidDynamite | Report as abusive Oct 13, 2010 1:39 pm EDTFelix – I now see your update. “The answer is no, they weren’t — the prospectus did not include the kind of loan-level information which would enable them to do that.”

Huh? you’re being an apologist for investors who bought stuff they couldn’t value? Sounds like we’re going to get back to the ratings agencies again with this discussion… but hey – look – if you as an investor cannot value something – YOU SHOULD NOT BUY IT. I don’t know how else to say it.

if the prospectus didn’t allow investors to evaluate the product, and they bought it anyway, well, what did they expect? another segment chasing easy money without doing their homework – we know how that works out (hint: it doesn’t)

Posted by KidDynamite | Report as abusive Oct 13, 2010 2:02 pm EDTFelix – doesn’t this make MBIA and AGO a screaming buy?

Posted by Commentary_101 | Report as abusive Oct 13, 2010 2:08 pm EDTThe prospectuses for these deals have never included loan-level detail, as far as I know. The loan level detail went primarily to the rating agencies. I’ve been out of the business for a while, but the earlier rated securitizations were bought by institutional investors based on aggregate statistical reporting on the performance of the pools, as well as on the information in the prospectus. Investors relied on the servicer [primarily] and the trustee to do their jobs.

While it’s easy to blame the bankers for pushing these deals, let’s not forget the investors who relied on the statistics and the ratings, without doing their homework on the underlying collateral. The investors, particularly those who bought the higher-rated tranches, did not demand the information on the pools, nor did they [collectively] demand even a sampling audit/review of the collateral [this might have required a majority of the holders to request, depending on the terms of the deal].

Everybody was relying on somebody else. This works fine when the loans are performing and there is plenty of cash for distribution to the holders. The problems only arise when delinquency and defaults rise dramatically, then we all see who’s been swimming naked as this tide has gone out.

Posted by Laocoon | Report as abusive Oct 13, 2010 2:52 pm EDT“were the bond investors able to do their own due diligence on the loan pool? The answer is no, they weren’t — the prospectus did not include the kind of loan-level information which would enable them to do that.”

most remic pools are either guaranteed (fannie/freddie) or insured/wrapped by a third party so somebody besides the bank had access to the loan pool and was paid (by investors) to do due diligence, (something that you conveniently ignore in your piece).

Posted by alea | Report as abusive Oct 13, 2010 3:27 pm EDTGreat job, Felix. Excellent journalistic work.

Posted by yr2009 | Report as abusive Oct 13, 2010 3:46 pm EDTThis is fraud.

Posted by daddylove | Report as abusive Oct 13, 2010 4:17 pm EDTKidDynimite nailed it 100% correct. Investment banks did not have any duty to their counterparty when building and selling these loan pools.

You can fault Bill Gross for having a trillion dollar sized ego… You can fault Pimco for foolishly high fees for the fixed income arena… but if you look at the index crushing returns they have generated and the mind numbing size of their portfolio it’s easy to see why the fund is so popular dispite the steep management fee.

When Bill Gross tells his underlings to buy something he knows what he’s buying… way way way too many bond fund managers, insurance companies, pension managers are babes in the woods in the seemingly “safe” world of fixed income.

Posted by y2kurtus | Report as abusive Oct 13, 2010 5:28 pm EDTThese were underwritten securities, so by definition these were not “trades” and there were no counterparties. If these were sold by prospectus, the issuer and underwriter both had an affirmative obligation to disclose all relevant and material facts. The people buying these securitized vehicles were undoubtedly lazy in not performing more dilgence or in thinking more clearly, but caveat emptor is not a defense that an issuer can use in omitting material information from a prospectus. This sounds like a straight forward 10(b)5-1 violation, and if so, should lead to a whole lot of legal fun, including criminal complaints.

Posted by markslater | Report as abusive Oct 13, 2010 6:10 pm EDTUmmm Kid I was speaking about the fraudulent offering…

“At Goldman Sachs, 19 percent of loans failed to make the grade in the final quarter of 2006 and the first half of 2007, but 34 percent of those loans were still sold by the firm. Throughout this period, Goldman Sachs was also betting against the mortgage market for its own account, according to documents provided to government investigators. “…

“To be sure, the prospectuses detailing the types of loans in these pools contained brief warnings that some of the mortgages might not meet stated underwriting standards. But few investors probably realized that huge portions of the pools had failed to meet the benchmarks.

The Clayton figures took into account only small samples of the loan pools that were sold to investors. The 911,000 loans Clayton analyzed over the 18-month period were roughly 10 percent of the total number of mortgages in the securities it was contracted to review.

As a result, it is very likely that many of the loans that were not sampled also failed to meet underwriting standards but were packaged into the securities anyway.”

And for those of you saying it’s ok to sell shite as long as you put perfume on it and called it “eau de CDO”, because the other person should have known it was shite because “everyone was doing it” (sucker!!) well, I am so glad I live in Canada where people can be charged for fraudulent endorsement of an instrument and banks are regulated.

Posted by hsvkitty | Report as abusive Oct 13, 2010 6:14 pm EDTTake down Goldman Sachs – with extreme prejudice.

Posted by LosGatosCA | Report as abusive Oct 13, 2010 6:34 pm EDTIf, while performing due diligence for a client, you uncover a giant risk, and don’t tell your client about that risk, does that mean you still performed the due diligence? That’s what this sounds like, that banks uncovered problems with the mortgages, but didn’t care about it. Isn’t that something that should be disclosed? If not, why is every possible reason why a stock could go down disclosed on every company’s SEC filings?

As for whether or not individual loan information was available, the bank may not have been forthcoming with that information, but some people were able to uncover it. Michael Burry, who was profiled in Michael Lewis’s “The Big Short”, did just that; he examined all of the loans in many bonds, and bought swaps on the bonds that were the worst. Maybe not every bond packager provided that information, but some did, and it sounds like the ones who didn’t provide that information, and withheld the findings of their due diligence have exposure to a negligence or fraud lawsuit. And deservedly so.

Posted by OnTheTimes | Report as abusive Oct 13, 2010 6:34 pm EDTcome on Kitty – I’m not going to go through this again. There is nothing in any of the documents in any of these products that guarantees their performance. If there were, you’d be correct.

What the documents for many of these products DO guarantee, however, is delivery of the mortgage note, which is actually missing in a lot of cases, and is a main problem of Foreclosure-gate. I think that MBS buyers protected by this clause requiring the note (many/most of them, perhaps!) should be allowed to “put” the MBS back to the banks. Ie, the banks should be forced to buy back the fraudulent products.

But the fraud comes from specific contractual obligations that weren’t fulfilled – not from non-performing assets.

in your comment above, you used the quote; “But few investors probably realized” – stop right there – it’s the investor’s JOB to REALIZE. If they don’t realize something, that’s THEIR problem.

Posted by KidDynamite | Report as abusive Oct 13, 2010 7:14 pm EDTAs I’ve read in articles on this the samples varied quite a bit and may have been adverse which helps lead one to conclude that there is no satistical significance to be drawn from these reports (they are no doubt incendiary). If I read this right, this report was also backward looking and first released in mid 07. Think Fifthdecade is right -there is a difference between original underwiritng and reunderwiritng which is what this company apparently did. In reunderwiritng they review original UW plus other data that can trigger excpetions a loan buyer wants to see (higher appraisal or credit??), but still conform with original guidelines. Not at all saying there were angels acting here, just that the data matters especially when you’re looking to bring complex cases outside the court of public opinion. Look at the Cioffi case in the E.D. for example.

Posted by getitman | Report as abusive Oct 13, 2010 9:49 pm EDTThank you for an *excellent* article, Mr. Felix.

Once more, I wish I could simply ‘recommend’, but refuse to join Facebook or Twitter, etc.

Posted by Warburton | Report as abusive Oct 13, 2010 10:31 pm EDT@Kid…

“I’m not going to go through this again”

Sure you are… and I think that is the 3rd time now.

BUt let me just reiterate … While you may think what goes on is OK because regulations impede access to the financial crack, but choosing those 2 words to throw back at me (when I didn’t even say them, so much amused) are cherry picking.

He was, in fact, referring to the investors being duped, and misleading and misrepresentation is fraud… in case you are not aware. (and it seems not just you, the SEC and the Government are forgetting contract law so I see the investors will be lining up to remind them with impending civil suits)

Posted by hsvkitty | Report as abusive Oct 13, 2010 11:23 pm EDTThere are legal issues in this discussion that have not been answered. How much information must a seller disclose when selling MBS to buyers? For many transactions…..home sales…..corporate stock disclosure….used car sales….loans, state and federal laws offer buyers some basic protection by requiring at least a small amount of transparency so the buyer has an idea exactly what he he buying. Are there no laws in this area? Can an MBS seller sell a buyer securities that he knows will end up not returning a profit?

Posted by pablo222 | Report as abusive Oct 13, 2010 11:42 pm EDTAs a retail investor (with most in index funds Felix, but some “play” money), I’d like to follow up on Commentary_101. What to buy and what to short? This seems like a pretty important factor that is being ignored by the market. I have no idea who is/was doing things right or wrong, but this seems like something that could have material effects on earnings regardless of J Dimon’s quarterly comments. If we were smart enough to have shorted BA, ML, C or whatever and get out timely, we’d be rich. How do we it now?

Posted by mwbugg | Report as abusive Oct 14, 2010 8:13 am EDT@KD

“there were no counterparties. If these were sold by prospectus, the issuer and underwriter both had an affirmative obligation to disclose all relevant and material facts… caveat emptor is not a defense that an issuer can use in omitting material information from a prospectus. This sounds like a straight forward 10(b)5-1 violation, and if so, should lead to a whole lot of legal fun, including criminal complaints.” (posted above by markslater)

This sounds right to me; why do you insist on making excuses for banks’ con-man behavior?

Posted by dbsmith1 | Report as abusive Oct 14, 2010 8:37 am EDTThe Clayton gig was always going to get expensive for somebody. Cannot help observing the delicious irony in all this:not only crooked, but incompetent. A metaphor for banking firms everywhere.

Posted by nbywardslog | Report as abusive Oct 14, 2010 9:11 am EDTKid Dynamite, the facts as I understand them:

* The banks had access to the details of the underlying loans, reviewed those details, and knew that a substantial fraction (a third?) were complete dreck.

* The banks assured investors that “due diligence” had been performed but did not disclose the results of said “due diligence”.

* The investors did not have access to the loan details and thus could not perform “due diligence” on their own.

* The investors bought the loans anyways, foolishly trusting the banks.

Am I mistaken in any of the above?

Now it is obviously true that the investors were idiots. They bought a pig in a poke, at prices that assumed it was prime ham. Yet part of their willingness to do so was the trust that they placed in the banks (who assured them that “due diligence” had been performed). They apparently viewed the banks as a “broker” for the deal rather than as a “counterparty”. Shouldn’t a higher fiduciary standard apply to that relationship? (For example, some states have laws requiring real estate brokers to disclose any adverse conditions of which they are aware, even if they are serving as a “seller’s agent”.)

I don’t know whether the actions were legal or illegal. Let the courts determine that. But I *do* know that the investment banks have proven themselves to be uniformly unworthy of trust. You can’t believe anything they say (or seem to say) and thus should avoid participating in any deal where they are a significant intermediary.

Wouldn’t that spell the end to their business?

Posted by TFF | Report as abusive Oct 14, 2010 9:21 am EDT“KidDynimite nailed it 100% correct. Investment banks did not have any duty to their counterparty when building and selling these loan pools.”

But therein lies the problem we seem to be overlooking.

Banks may be able to convince a court that buyers of MBS willingly took on the risk. but they, like all of us, should be careful what they wish for, because they may get it.

The problem we are overlooking here is the complete extinction of business ethics in big companies throughout the English-speaking world. Thirty years ago, most business transactions were “win-win”. One party had something of value they wanted to sell, another had more use for it than the seller. Both benefited from the transaction. Over the past three decades, especially in Finance, the decline in ethics has gone hand in hand with the rise of the “trader mentality” and the “lawyer mentality”. A trader doesn’t have “customers” he has “counterparties”. Every trade is zero-sum. For a trader to win, his counterparty must lose. The trade is a game. You lose, I win, fair and square. The “lawyer mentality” also operates in a zero-sum world. If I can craft a contract in which you seem to agree to give me what you didn’t intend, and I can get you to sign it, I win, you lose, fair and square.

Thirty years ago, banks had customers, not counterparties. Like all investors, the MBS buyer must “beware”. But the buyer can’t do “due diligence”, since the only information available is that which the MBS creator has chosen to make available to the investors. In the final analysis, the buyer of a complex security created by a financial institution has to trust that institution to have provided information that is true and correct. Without that trust, the transaction, and the market for it, can’t exist.

Take a look at the volume in the stock markets. Even when prices are rising, volume is declining. Right now, investors don’t trust Wall Street even to sell them shares of publicly traded companies, much less “asset-backed securities” or “structured finance products”.

So careful, kids. You may be able to keep your winnings this time, especially if you write the rules of the game. But if the game depends on trust, and trust is destroyed, the game is over.

Posted by Mike_SD_CA | Report as abusive Oct 14, 2010 9:42 am EDT“Moral Hazard” is a term that’s been applied by the banks as among their reasons for refusing to recast or reduce loan amounts for their defaulting borrowers. The hypocrisy is maddening.

The bond holders will file their court complaints on at least two grounds, the pricing vs. disclosure issue that Felix raises here will be one; the other is failure to maintain custodianship of the underlying security interest. This is coming to light now in the many AG investigations showing fraud, forgery and perjury in the registration of the notes/mortgages at the local level and the foreclosure mess.

Posted by Heartmuscle | Report as abusive Oct 14, 2010 9:45 am EDTif I had a nickel…an institutional buy-side analyst or trader did have access to sufficient information, including deep dive research, to proceed toward a better informed investment portfolio. However, even armed with the latest / greatest of research materials (think L. Goodman, then-UBS, among several others) and the knowledge that perhaps Ameriquest or New Century were originating seriously questionable loan products: you are still going to get bit in the end (literally, and figuratively).

Any regimented pursuit of thorough research would never arm you for the real truth: that sell-side firms were gonna skull-hump you / others just like you given the opportunity. The tippy-top of the capital structure just isn’t going high enough.

Yes, the investors should know better. and in most cases, it will lead to investment firms, hedge funds and other “high grade / safe” bond investors either shutting down, trimming headcount or regrouped for a new day.

Posted by McGriffen | Report as abusive Oct 14, 2010 10:15 am EDTI spent the night thinking about this from a legal perspective, basically, my father in law was a trust and estates attorney who had to figure out many times how to clean up a title when ownership was extremely unclear. It’s a big undertaking, to say the least, and in this case there are probably two possibilities: A series of agreements that would be like a “quit claim” whereby the originating party and the intermediary parties affirm that they received value for the transfer of the note as provided in original purchase agreements, and that they have no further interest in the note, thereby “curing” the defect in ownership.

Assuming that many of the originating and intermediary parties have fallen down a rabbit hole and might not even exist any more (I wonder how many were created just for the purpose of doing this, and then wound up when the need for them expired), it seems like the only alternative is a documentary record of the original transaction showing that value was provided to the intermediary parties, which could suffice to establish that the trust has an equitable interest in the note, and to receive payments under the note.

I don’t see any other way out. Note that the equitable mortgage ain’t the same kind of beast in bankruptcy that it originally would have been.

I don’t know how feasible this is from a practical perspective, but is this, finally, the backdoor way for debtors to start the cramdown process and leverage modified loan terms?

Note that it is NOT the debtor’s interest in the property that is in doubt here — it is the creditor’s interest.

I am also very depressed that anyone could defend what happened here, no matter what political persuasion you normally profess. Being able to prove that you own something is the non-negotiable essential to enforcing any kind of property right. Banks and anyone else who tried to short circuit the usual ways of establishing ownership are f’ing with everyone’s property rights. It’s just obscene.

Posted by rb6 | Report as abusive Oct 14, 2010 10:45 am EDTThis problem doesn’t exist in the CMBS market, because the buyers of the junior, junk-grade certificates, get kickout rights on every loan. Also, every loan gets listed in the prospectus in advance of the deal.

That’s one reason why I never bought subordinated certificates on whole loan residential MBS, and mezz only once. The data quality was poor relative to other securitized investments.

Posted by DavidMerkel | Report as abusive Oct 14, 2010 12:01 pm EDTSo where do the ratings agencies fit into this?

My understanding is that the senior tranches were rated by the agencies, many times to be AAA. The ratings were the key reason why many of these were sold since they could be held by pension funds and banks etc. as specific types of capital and reserves.

Was the “due diligence” information provided to the ratings agencies or was it withheld? If it was withheld, does that constitute a material legal problem?

Posted by ErnieD | Report as abusive Oct 14, 2010 12:14 pm EDTInvestors have rights to review the portfolio – (a) On or before the Mortgage File Delivery Date, each Mortgage Loan Seller will have made the related Mortgage Files available to the Purchaser or its agent for examination which may be at the offices of the Trustee or such Mortgage Loan Seller and/or such Mortgage Loan Seller’s custodian. The fact that the Purchaser or its agent has conducted or has failed to conduct any partial or complete examination of the related Mortgage Files shall not affect the Purchaser’s rights to demand cure, repurchase, substitution or other relief as provided in this Agreement. In furtherance of the foregoing, each Mortgage Loan Seller shall make the related Mortgage Files available to the Purchaser or its agent from time to time so as to permit the Purchaser to confirm such Mortgage Loan Seller’s compliance with the delivery and recordation requirements of this Agreement and the Pooling and Servicing Agreement. In addition, upon request of the Purchaser, each Mortgage Loan Seller agrees to provide to the Purchaser, Entity and to any investors or prospective investors in the Certificates information regarding the Mortgage Loans and their servicing, to make the related Mortgage Files available to the Purchaser, Entity and to such investors or prospective investors (which may be at the offices of the related Mortgage Loan Seller and/or such Mortgage Loan Seller’s custodian) and to make available personnel knowledgeable about the related Mortgage Loans for discussions with the Purchaser, Entity and such investors or prospective investors, upon reasonable request during regular business hours, sufficient to permit the Purchaser, Entity and such investors or potential investors to conduct such due diligence as any such party reasonably believes is appropriate.

 

[Oct 13, 2010] JPMorgan Chase earns $4.4 billion in 3Q, mortgage revenue shrinks

HousingWire

JPMorgan Chase originated $40.9 billion in mortgage loans, up 10% from a year ago and a 27% increase from the previous quarter. Its third-party mortgage servicing portfolio reached $1 trillion, declining 8% from a year ago and 4% from the previous quarter.

The bank earned $207 million from its mortgage banking sector, a 50% decrease from the third quarter of 2009.

Jaime Dimon, CEO of JPMorgan Chase, said losses from its mortgage division will not see much improvement in the months ahead and could even worsen.

60 Minutes Brings HFT To The Mainstream, As CFTC Refutes HFT Liquidity-Provisioning Argument

zero hedge

Last night on 60 Minutes, Steve Kroft, finally brought mainstream America's attention to the topic that has been the primary scourge of efficient markets over the past 5 years: High Frequency Trading (not to be confused with Signing, aka RoboSigning). In Wall Street: The Speed Traders, Kroft spoke to such advocates of a robot parasite-free as Themis Trading's Joe Saluzzi and (now ex) Senator Ted Kaufman, as well as some other individuals who stand to benefit by computerized feedback loops making a mockery of price discovery, and which have now caused something like ten mini flash crashes in as many days, not counting the Flash Crash itself. Of course, the only defense the HFT lobby continues to use is that it provides liquidity. Which is why, once again falling back to scientific literature, this time a study by Andrei Kirilenko of the CFTC et al (which is also obviously biased as the CFTC, just as the SEC, stand to lose what last credibility they have if it is indeed discovered that it was precisely SEC and CFTC endorsed HFT, and not Waddell and Reed, that was the cause of the Flash Crash, something we refuted flatly last week), which demonstrates just how fallacious any claims that HFTs provide liquidity are. In a word: "HFTs traded over 1,455,000 contracts, accounting for almost a third of total trading volume on that day. Yet, net holdings of HFTs fluctuated around zero so rapidly that they rarely held more than 3,000 contracts long or short on that day." Said otherwise, Liquidity-to-Volume ratio: 0.00206%.

Full 60 Minutes:

And key section from Kirilenko et al say on the topic of HFT liquidity provisioning:

We find that on May 6, the 16 trading accounts that we classify as HFTs traded over 1,455,000 contracts, accounting for almost a third of total trading volume on that day. Yet, net holdings of HFTs fluctuated around zero so rapidly that they rarely held more than 3,000 contracts long or short on that day. Because net holdings of the HFTs were so small relative to the selling pressure from the Fundamental Sellers on May 6, the HFTs could not have prevented the fall in prices without dramatically altering their trading strategies.

We also find that HFTs did not change their trading behavior during the Flash Crash. On the three days prior to May 6, on May 6, as well as specifically during the period when the prices are rapidly going down, the HFTs seem to exhibit the same trading behavior. Namely, HFTs aggressively take liquidity from the market when prices were about to change and actively keep inventories near a target inventory level.

During the Flash Crash, the trading behavior of HFTs, appears to have exacerbated the downward move in prices. High Frequency Traders who initially bought contracts from Fundamental Sellers, proceeded to sell contracts and compete for liquidity with Fundamental Sellers. In addition, HFTs appeared to rapidly buy and contracts from one another many times, generating a “hot potato” effect before Opportunistic or Fundamental Buyers were attracted by the rapidly falling prices to step in and take these contracts off the market.

Can we finally move beyond the cheap, overused, and flat out flawed justification that HFT provides liquidity? he correct It does nothing of the sort, and since the operative word here is "churn" all HFTs do is merely concentrate (lack of) liquidity risk to a point where should HFTs decide to step away from the market suddenly and without regulatory recourse, as they did on May 6, the next step is a complete market collapse.

chopper:

NASDAQ and the NYSE have failed to protect their franchise. More surprisingly, CME Group has also failed to protect their franchise. No market is well-functioning that drives out participants in such mass numbers. as on May 6th, liquidity will disappear when it is needed most because 'liquidity providers' have been driven out of business by HFT cannibals. most likely, HFTs will cannabilize each other while the rest of us wait patiently on the sidelines to capitalize on 1 or 2 major 'flash crashes' per year. as for now, continue to 'live to trade another day' until this reaches its ugly conclusion.

[Oct 09, 2010] The Austerity Zone Life in the New Europe

NYTimes.com

Selected Comments

Zoe

I am a U.S. citizen on a three-month work relocation at our UK office. I have visited many coworkers' homes in the UK, Poland and Amsterdam recently, and have had many chance conversations when people hear my accent.

I understand that the EU is not a utopia and that it, too, has felt the effects of a global recession. But, based on the observable evidence available to me, I just don't feel like things are as bad here as they are in the U.S. right now, for a couple of reasons, but two in particular that stand out. To a person, and independently, I have heard the following:

  1. "Well, it's not as if you'll lose everything. Unemployment is a concern, but if something happens, you've still got health care, your kids can still go to a good school, you might suffer a loss in income, but you almost assuredly (and this is what got me) won't lose everything you've worked for in the course of one or two bad years." (Fellow Americans, can you IMAGINE feeling that way?)
  2. "Yes, I have some concerns. I am mostly worried about immigration, because it's just been too much too soon. (And I can feel that; some of my days in London have felt like New York circa 1928.) But I know we'll figure it out, I know our leaders will eventually deal with it and get it right; they usually have in the past." (Again, faith that leaders will LEAD and SOLVE problems - I'm agog.)

The funny thing is, when they mention taxes, and I list all of my actual taxes and their percentages (state and federal income tax, property tax, sales tax, and all the rest), they realize that they pay about 2% more than I do - and get a LOT more for their money.

AlbertoAstoria:

To Zoe:

I agree for the most part with your comments. However, the reason Europeans get a lot more than us for their taxes is quite simple. They basically don't have to maintain a global empire and as a result, spend 50%(give it or take) of their national budgets in weapons to attain such task.

On the other hand, and rephrasing and agreeing with a another reader's comment, at least they don't have to worried about their health insurance. Gosh! I miss Madrid so bad! (the good stuff that is)

illampu

Some days ago I just came back from Europe, visited Spain, Italy, England, France and Germany. Most of the time I spend in Germany, because it is a lovely country with beautiful cities and a breathtaking countryside. Apart from Germany, I encountered mostly people worried about their future and prospects. Only the Germans were very upbeat and confident. Germans seem to be a very rare breed, they hardly use credit cards, save money and never would buy things, they don`t think they can afford. Their economy booms and you can see that everywhere, because they know that they produce top quality goods, the rest of the world want. The taxes are very high, but they see what it gets them. Free health care and eduacation.An infrastructure next to non, fantastic highways and transportation systems by train and busses even into the smallest places at almost any time. Parents get paid for children by the goverment, about 360,00$US per child until they finish their education.

They have a social net for jobless people, which have a right of an apartment, heating, complete health care and about 550,00$US monthly for food. There is a great discussion in Germany at the moment, why this money is also spend on immigrants, like the huge Turkish community, which have no interest to integrate, only living on welfare. There is no poverty anywhere in Germany, compared to the USA or Bolivia.

In Bolivia we have a socialist/communist goverment, in the US you have a goverment run by an olygarchy. The results are almost the same, the lower and middle class suffer. Furthermore seem the Germans get tired of bailing out EU-countries, which are corrupted and of their politicians, which run their countries recklessly into the ground.

One more thing about the recent German boom I didn`t mention are their worker unions. Elected members of the unions have seats in every companies or cooparations decicions making table. The most amazing thing is their invention of Zeitarbeit, very contrary to a hire and fire society. In crisis, like the last two years, workers and employees are not laid off, but through unions agree with their companies to work half time, at half salery and receiving another 25% of their former salery from the goverment. They call it, I think a social contract, no lay offs because the companies don`t like to loose top quality workers or employees, when hard times hit.The moment the economy booms again, it`s all back to normal. This year, because of the boom with a payraise of 5 %. All this in a country by conservative parties.

Max

The West is about to have its lunch eaten by Asia. The oppressed are about to become the oppressors. We've earned it. Europeans, as well as Americans, are going have to become much more serious about education and work smarter and harder and even then probably even then have to learn to make do with less.

The demise of low-skill high-pay factory work in west will result in a large, unemployable underclass. Keeping those folks economically and socially comfortable will take as much resources as any shooting war.

[Oct 09, 2010] Open thread October 8, 2010

Angry Bear

I marked my calendar, a red letter day, something on the WSJ editorial page I agree with!!!

Wall Street Journal, October 8, 2010, Pg. 18

"Less Government Means Less Defense Spending, Too"

"Arthur Brooks, Edwin Feulner and William Kristol claim that military spending is not the prime driver of our current fiscal crisis, but the Pentagon accounts for 23% of the federal budget ("Peace Doesn't Keep Itself," op-ed, Oct. 4). It is inconceivable that this spending should be exempt from scrutiny in a time of soaring deficits."

"Rather than Congress constantly writing a blank check, the process of military budgeting should begin with a discussion about security necessities and their costs. That isn't a discussion that Messrs. Brooks, Feulner and Kristol seem anxious to engage in—unsurprisingly, since all three support the disastrous military interventions in Iraq and Afghanistan."

"Of course, cutting spending without a corresponding reduction in commitments is a recipe for overburdening service members taxed by too frequent deployments to far-flung places. But it is already obvious that most of what America spends on its military—often erroneously labeled "national defense"—really defends others who can and should defend themselves."

"It's time for advocates of free markets and limited government to recognize that a vast military presence around the world is utterly inconsistent with those ideals. If we agree that government intervention domestically often has unintended, harmful consequences, we should recognize that the same principle holds true internationally, in spades. If we believe that the Constitution created a government whose most important duty is to "provide for the common defence" and "secure the Blessings of Liberty to ourselves and our posterity," we should not be so willing to deploy the sharp end of that government's power in support of those who are not parties to our unique social contract."

"The Brooks-Feulner-Kristol approach to military spending amounts to another form of foreign aid, a massive wealth transfer from Americans to non-Americans, helping them finance generous social welfare systems. It is time to get our allies off the dole."

"Ed Crane and Christopher Preble, The Cato Institute, Washington"

What is interesting is Cato tilting with: American Enterprise Inst, Heritage Foundation and Foreign Policy Inst on the WSJ editorial pages.

MG

Those who read the original WSJ op-ed, Peace Doesn't Keep Itself, as well as the CATO letter response, Less Government Means Less Defense Spending, Too, might consider additional readings to round out the issues. The exchange and difference in opinions didn't begin or end there. Here are some of the related articles and reports.

Heritage:
- Morning Bell: Peace Doesn’t Keep Itself, October 5th, 2010
- Defining the Obama Doctrine, Its Pitfalls, and How to Avoid Them, September 1, 2010
- The State of the U.S. Military, January 2010
- People and Platforms: An Agenda for Balanced Defense Forces, April 22, 2009

CATO:
- Actually We Aren’t Running the World, October 6, 2010
- Budgetary Savings from Military Restraint, September 21, 2010

All are worthy reads.

[Oct 09, 2010] Ezra Klein - 'This is the biggest fraud in the history of the capital markets'

Janet Tavakoli is the founder and president of Tavakoli Structured Finance Inc.

EK: And how much danger are the banks themselves in?

JT: When we had the financial crisis, the first thing the banks did was run to Congress and ask for accounting relief. They asked to be able to avoid pricing this stuff at the price where people would buy them. So no one can tell you the size of the hole in these balance sheets. We’ve thrown a lot of money at it. TARP was just the tip of the iceberg. We’ve given them guarantees on debts, low-cost funding from the Fed. But a lot of these mortgages just cannot be saved. Had we acknowledged this problem in 2005, we could’ve cleaned it up for a few hundred billion dollars. But we didn’t. Banks were lying and committing fraud, and our regulators were covering them and so a bad problem has become a hellacious one.

EK: My understanding is that this now pits the banks against the investors they sold these products too. The investors are going to court to argue that the products were flawed and the banks need to take them back.

JT: Many investors now are waking up to the fact that they were defrauded. Even sophisticated investors. If you did your due diligence but material information was withheld, you can recover. It’ll be a case-by-by-case basis.

EK: Given that our financial system is still fragile, isn’t that a disaster for the economy? Will credit freeze again?

JT: I disagree. In order to make the financial system healthy, we need to recognize the extent of our losses and begin facing the fraud. Then the market will be trustworthy again and people will start to participate.
 

EK: It sounds almost like you’re saying we still need to go through the end of our financial crisis.

JT: Yes, but I wouldn’t say crisis. This can be done with a resolution trust corporation, the way we cleaned up the S&Ls. The system got back on its feet faster because we grappled with the problems. The shareholders would be wiped out and the debt holders would have to take a discount on their debt and they’d get a debt-for-equity swap. Instead we poured TARP money into a pit and meanwhile the banks are paying huge bonuses to some people who should be made accountable for fraud. The financial crisis was a product of our irrational reaction, which protected crony capitalism rather than capitalism. In capitalism, the shareholders who took the risk would be wiped out and the debt holders would take a discount but banking would go on.

[Oct 09, 2010] Mish's Global Economic Trend Analysis Hussman calls for 10-Year S&P 500 Total Return in the Low 5% Area; Thoughts on Risk Management

Hussman calls for 10-Year S&P 500 Total Return in the Low 5% Area; Thoughts on Risk Management

John Hussman is bearish on the economy and stocks. He backs up his beliefs with good commentary and a series of charts in Economic Measures Continue to Slow .

Please see the article for some excellent economic charts. Here are a few snips regarding equity returns.

With the S&P 500 at a Shiller P/E over 21, and our own measures indicating an estimated 10-year total return for the S&P 500 in the low 5% area, it is clear that investors have priced in a much more robust recovery than we are likely to observe. Our long-term total return estimates are consistent the historical norms based on Shiller P/Es - since 1940, Shiller P/E values above 21 have been associated with annual total returns for the S&P 500 averaging 5.3% over the following 7 years and 4.9% annually over the following decade.

Dividend payout ratios and operating earnings growth

A note on valuation. A number of observers have suggested that the low level of dividend payouts as a fraction of operating earnings is indicative of strong prospects for reinvestment, which is then extrapolated into assumptions for high rates of future earnings growth. Unfortunately, this argument is problematic on two counts.

First, forward operating earnings are not realized cash flows. As I've noted frequently over the years, forward operating earnings represent analyst estimates of the next year's earnings excluding a whole range of chargeoffs and "extraordinary expenses" as if they do not exist. While operating earnings provide a smoother measure of business performance, they don't provide a good measure of the cash flows that are actually deliverable to shareholders.

Losses that are booked as "extraordinary" are still losses, and represent the results of bad investments and a consumption of amounts that were previously reported as earnings. Similarly, the portion of earnings used for share buybacks is often expended simply to offset dilution from grants of stock to employees and corporate insiders, and again do not reflect cash that is deliverable to shareholders. In recent years, based on the widening gap between reported operating earnings on one hand, and the sum of dividends and increments to book value on the other, a great deal of what is reported as earnings ends up evaporating as extraordinary losses and share compensation.

The second problem with the low level of dividend payouts, relative to forward operating earnings, is that there is no historical evidence whatsoever that low payouts are accompanied by higher growth in future operating earnings. To the contrary, when dividends are low relative to forward operating earnings, it is a signal that operating earnings are temporarily elevated - typically because of transitory profit margins. As a result, subsequent growth in forward earnings is actually slower than normal over the following decade.

On the latitude for a constructive investment stance

Based on the data that we've observed in recent months, my view remains that a fresh downturn in the economy remains a not only a possibility but a likelihood. Little of the economic improvement we've observed since 2009 appears intrinsic, but instead appears driven by enormous government interventions that are now trailing off. Still, while I believe that there is a second shoe that has not dropped, I recognize that the full force of government policy is to obscure, stimulate, intervene and borrow in every effort to kick that can down the road. I believe that the unaddressed and unresolved problems relating to debt service, employment conditions and housing are too large for this to be successful, but as we move through the remainder of this year - as I've said throughout 2010 - we are gradually assigning greater probability to the "post-1940" dataset. Accordingly, there are developments that could potentially move us to a more constructive position. We don't observe those at present, but an improvement in economic evidence and a clearing of overbought conditions, leaving market internals intact, would be one configuration that might warrant less defensiveness.

To some extent, I view current market conditions as something of a "Ponzi game" in that valuations appear neither sustainable nor likely to produce acceptably high long-term returns, and speculators increasingly rely on finding a greater fool. As the mathematician John Allen Paulos has observed, "people generally worry only about what happens one or two steps ahead and anticipate being able to get out before a collapse... In countless situations people prepare exclusively for near-term outcomes and don't look very far ahead. They myopically discount the future at an absurdly steep rate." Undoubtedly, we have periodically missed returns due to our aversion to risks that rely on the ability to find a "greater fool" in order to get out safely. But it is important to recognize that speculative risks are not a source of durable long-term returns. At a Shiller P/E of 21 and a historical peak-to-peak S&P 500 earnings growth rate of 6%, a simple reversion to the historical (non-bubble) Shiller norm of 14 would require seven years of earnings growth and yet zero growth in prices. Stocks are not cheap here.

Stocks Not Cheap

I wholeheartedly endorse Hussman's analysis that suggests stocks are not cheap. I have said the same thing repeatedly all year long, most recently in Analysts Cut S&P 500 Profits Forecast; Earnings Estimates Still Overly Optimistic; Stocks Not Cheap
 

Earnings Estimates A Mirage

It's important to understand why earnings have gone up: Trillions of dollars of stimulus worldwide that is not sustainable. Bank earnings estimates have been inflated by massive extend-and-pretend games encouraged by the Fed with a blind eye from the FASB.

Moreover, the FASB has delayed mark-to-market accounting rules and has still not forced banks to bring SIVs and off-balance-sheet assets back on the books. Those assets are held at inflated values.

Equities only look cheap if you use absurd forward earnings estimates, and ignore future writeoffs and other "one-time" items that seem to have a way of recurring with remarkable regularity.
No Sure Things

Although most are plowing hand-over-fist into the "QE-Trade", it is a mistake to assume that quantitative easing is a guaranteed play for equities. It's not. Please see Sure Thing?! for a discussion.

Moreover, QE is not a guaranteed play for the economy either, as noted in Bernanke says Lawmakers Should Consider Rules on Fiscal Limits; Expect Hissy Fit from Krugman; Bernanke Pisses in the Wind

Yet everyday I get emails calling me a "chicken little" or other unprintable names for not recommending everyone plow into equities. I heard the exact same thing in 2006-2007.

However, I have recommended gold continuously since it was $300. I have also recommended treasuries with many attempting to short the things and getting their heads blown off.

Superior Returns Come From Reducing Risk

I see no reason to like equities here, but that does not mean they won't go up. Indeed they did. However, investors need to understand why equities are rising, the likelihood it continues, and what the risks are, even if short-term traders don't.

When this rally ends, it is as likely as not to be a steep descent with dip buyers fully conditioned to "buy the dip" all the way down.

Day traders and swing traders seem to think that everyone ought to be hopping in and out of stocks every hour or every week. However, not everyone wants to, or can - for many reasons, trade that way. Money managers in particular are unlikely to trade that way.

It is important to honor your timeframe and trading style, not someone else's.

Most of those fully invested here were also fully invested in 2008, with disastrous consequences.

In the long haul, superior returns are made by reducing risk, patiently waiting for favorable opportunities to invest. In the meantime, (and although this opinion can change at any time without warning) I am comfortable owning gold and treasuries, and being hedged in equities.

It is far easier to make up for lost opportunities than it is to make up for losses, especially losses that happen while chasing the latest sure thing.

[Oct 08, 2010] And You Thought Last Time Was Bad...

tradeking13 said:  He did an interview over at King World News recently discussing many of the same points.

If there is one thing that mainstream analysts seem to agree on, it is that the worst of the economic storm has passed. But as was the case during the early days of the crisis, many mistakenly assume that because things seem fairly calm on the surface, there is not a great deal to worry about. In the end, of course, the stresses and strains back then triggered an eruption that had many thinking that the world was coming to an end. Are we near that point again? Based on what what one smart analyst has to say (in a post at Pragmatic Capitalism entitled "Chris Whalen Describes Why 2011 Could Make 2008 Look Like a Cakewalk"), the answer may well be "yes":

Christopher Whalen makes a remarkably convincing case for why we’ve simply kicked the can down the road and why the banks could be in for a repeat of their 2008 nightmares in 2011.  If Mr. Whalen is right the banking sector is in for a whole new round of government intervention, takeovers, likely nationalizations and general disaster:

The U.S. banking industry is entering a new period of crisis where operating costs are rising dramatically due to foreclosures and defaults. We are less than ¼ of the way through the foreclosure process. Laurie Goodman of Amherst Securities predicts that 1 in 5 mortgages could go into foreclosure without radical action.

Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue. BAC, JPM, GMAC foreclosure moratoriums only the start of the crisis that threatens the financial foundations of the entire U.S. political economy.

The largest U.S. banks remain insolvent and must continue to shrink. Failure by the Obama Administration to restructure the largest banks during 2007-2009 period only means that this process is going to occur over next three to five years –- whether we like it or not. The issue is recognizing existing losses not if a loss occurred.

Impending operational collapse of some of the largest U.S. banks will serve as the catalyst for recreation of RFC type liquidation vehicle(s) to handle the operational task of finally deflating the subprime bubble. End of the liquidation cycle of the deflating bubble will arrive in another four to five years.

[Oct 06, 2010] Who is holding hot potato

In the meantime, and contrary to what CNBC was misrepresenting on national TV, the 22 weeks of consecutive outflows now amount to $76 billion in capital taken out by retail investors from domestic stock funds, and $75 billion YTD. And here is the scariest statistic for the administration, the Fed, and bankers around the world: in September $20 billion was pulled out from domestic stocks. This occured despite the nearly 9% surge in stocks. Which means that the bankers, the HFTs, the Fed, and whoever else may be accumulating stocks in expectation of retail jumping in for the latest round of passing the hot potato, is out of luck.

[Oct 06, 2010] Kyle Bass On Hyperinflation, And Other Less Relevant Things

Hyperinflation is caused by a political collapse, for example disintegration of the country. That still not very probably for the USA.

[Oct 06, 2010] IMF Reduces US Growth Forecast

10/06/2010

The IMF's latest growth forecast, which will be continuously revised until it finally gets it right and sees a decline in world growth (sorry, boys, and Jim O'Neill, decoupling does. not. work) has the US growing at 2.6% and 2.7% in 2010 and 2011, revised down by -0.7% and -0.6% respectively, from the prior overly bullish estimates, which we ridiculed at the time as well.

[Oct 06, 2010] Breakfast_with_Dave_100510

All sorts of efforts are either being announced or contemplated to resist currency appreciation from India to Korea to Taiwan and now Brazil as well (the latter just doubled its tax on foreign bond holders, to 4%). Hence the allure of gold and silver as currency surrogates with a more inelastic supply curve (we could probably even include platinum in there).

Tin is hardly precious, but global supply disruptions have helped it to a 51% price surge this year. Again, more attention is being placed on the fact that the S&P 500 is up 2% so far this year than on where the real money is being made — commodities in general, metals in particular.

Are currency wars any different from trade wars? We may indeed look back at that comment (“currency war”) by Brazil’s finance minister (Mantega) back on September 27 as a critical inflection point. The fact that nobody talks about this, preferring instead to justify their positions on a bond yield/earnings yield gap, is even more reason for caution. And of course, overnight Bernanke voiced his support for additional expansion of the Fed balance sheet, which means more expansion of the money supply. Whether or not velocity turns up ahead of a new credit cycle remains to be seen, but again, the implications from all this global stimulus is clear: nobody wants a strong exchange rate, and the only certain investment theme that comes out of this, in this era of intense uncertainty and beggar-thy-neighbour currency policies, is precious metals.

Indeed, gold just hit a new record high of $1,328/oz this morning (in the aftermath of the BoJ move) for another 1% gain and is now up 21% for the year, and as far as we can tell, the only asset class to have generated a positive return now for 10 years running (longest winning streak since at least 1920, according to Bloomberg). The legendary Jimmy Rogers reportedly told CNBC today that the yellow metal may well hit $2,000 in the next decade (and that may end up being conservative — then again, 4%-plus average returns are not that bad at all in a deflationary backdrop).

Silver, without much fanfare, is performing even better, with burgeoning global demand for solar panels and batteries providing some extra torque from the already solid investment-related buying activity. Even if we are due for a technical pullback, the precious metals complex is in a full-fledged bull market, and not until the world’s central banks have the gusto to start tightening monetary policy, then rest assured that ultra-low gold leasing rates will keep the trend in prices on an upward trajectory.

... ... ...

Alas, the pundits are spending more time worrying about an upturn in bond yields than trying to interpret what the market message is conveying — as we asserted above. Another classic example of this is contained on page B1 of the USA Today — When Interest Rates Rise, Bonds Will Suffer. Page C10 of the WSJ goes with Goldman Says Peak in Treasurys is Past ("equity offers much better return opportunity than bonds going forward" ... wasn’t that also said by the masses at the end of 2009?). Amazing.

The question is why so many people think bonds are in a bubble when they are the most detested asset class out there? After all, as we saw in the tech mania of the late 1990s and the housing mania of 2003-06, bubbles usually involve a mix of adulation, admiration and adoration with the asset class in question, which is obviously missing in the current case as it pertains to Treasury securities because you can’t lift up a newspaper or watch a business program on TV and not see pundit after pundit talking about the dangers of being invested in bonds. Something here is amiss.

[Oct 05, 2010] Now Warren Buffett Is Warning Of A Bond Bubble

Is he talking his book ?  Compare with Dave Rosenberg above

Now Warren Buffett Is Warning Of A Bond Bubble Joe Weisenthal | Oct. 5, 2010, 4:13 PM | 1,783 | 19 A A A x Email ArticleFrom To Email Sent!You have successfully emailed the post.

Buffett, speaking Tuesday at Fortune's Most Powerful Women Summit in Washington, said it's "quite clear stocks are cheaper than bonds" now. He added that he "can't imagine" the rationale for adding bonds to your portfolio at current prices.

The Berkshire Hathaway (BRKA) chief made the remarks in an interview with Fortune's Carol Loomis at the 12th annual summit. He said in response to a question by Abby Joseph Cohen of Goldman Sachs that investors will eventually regain confidence in the stock market – but he can't say when.

Buffett is pretty old fashioned in his thinking. Welll, actually that's obvious -- he's proudly old-fashioned -- but he definitely has a conventional attitude on the relationship between the enormous debt we have now, the likelihood that we'll monetize the debt, the impact that will have on inflation (it will go up) and the effect that will have on bonds (they'll go down).

Today certainly felt "reflationary," but more and more the market is betting against the notion that the Fed will successfully create inflation, even if it does monetize the debt.

[Oct 05, 2010] Fed, ECB Throwing World Into Chaos

zero hedge

Walter Brandimarte of Reuters reports, Fed, ECB throwing world into chaos: Stiglitz:

Ultra-loose monetary policies by the Federal Reserve and the European Central Bank are throwing the world into "chaos" rather than helping the global economic recovery, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday.

A "flood of liquidity" from the Fed and the ECB is bringing instability to foreign-exchange markets, forcing countries such as Japan and Brazil to defend its exporters, Stiglitz told reporters in a conference at Columbia University.

"The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy," Stiglitz said. "It's doing nothing for the American economy, but it's causing chaos over the rest of the world. It's a very strange policy that they are pursuing."

The U.S. dollar has weakened about 6.5 percent against a basket of major currencies since the beginning of September as prospects for further monetary easing by the Fed have led investors to seek higher returns elsewhere.

That flow of dollars caused currencies to appreciate in many emerging market countries such as Brazil, which offers strong growth prospects. The Japanese yen has also hit record highs against the dollar on expectation of additional greenback weakness.

Recent actions by those countries to curb the strength of their currency were "necessary," Stiglitz added.

"It's natural in that context for them to say -- we can't just let our exchange rates appreciate and destroy our exports," he said.

On Monday, Brazil doubled a tax on foreign investment into local government bonds, while Japan lowered the target for its benchmark interest rate to a range between zero and 0.1 percent.

The Bank of Japan also pledged to buy 5 trillion yen ($60 billion) worth of assets, in a strategy similar to the one adopted by the Fed to pump funds into the economy.

But additional monetary stimulus will "clearly" not solve the problems caused by lack of global aggregate demand, Stiglitz said.

"Lowering the interest rates may help a little bit, but that's much too weak to address the problems facing the United States and Europe," Stiglitz said. "We need fiscal stimulus."

traderjoe:

There can be NO appreciable rise in interest rates. Debt service payments would balloon, house prices would decline (all other things being equal), and all those newly printed bonds would decline in value. ZIRP is a trap. The Fed is painted in a corner.

They have executed their thievery with brilliance and cunning - all in broad daylight. The greatest scam of the century - all with the complicity of the government and the tacit approval of the citizens. Well done, well done, Ben, Al, bankers, et all...

[Oct 05, 2010] Let the equity bear market resume  by Neil Hume

Oct 04 | FT Alphaville

If you are wondering what this was all about…

… don’t worry, Société Générale strategist Albert Edwards has the answer. And it’s really rather simple.

The rally that started in July and continued into September was just “the market working off an extreme oversold position as it carves out a long-term top before entering the third lef of a multi-decade valuation bear market”. More…

If you are wondering what this was all about…

… don’t worry, Société Générale strategist Albert Edwards has the answer. And it’s really rather simple.

The rally that started in July and continued into September was just “the market working off an extreme oversold position as it carves out a long-term top before entering the third lef of a multi-decade valuation bear market”.

Got that?

Good.

Here’s some more from SocGen’s perma bear:

As is often the case, the market writes the news. Economic data is interpreted in such a way as to fit in with the market movements. In a technical rally a spotlight is often held to stronger economic data that was ignored just a few weeks before.

So we regard the recent surge in investor optimism as a red light (see chart below), especially at a time when leading indicators are still pointing to economic weakness ahead. We note, for example, that while the headline ISM for the US slipped to 54.4 in September, the backlog of orders crashed well below the critical 50 level to 46.5. The last time this occurred was October 2007, just one month before ‘The Great Recession’ officially began!

The situation in Japan is even worse. Manufacturing output has now fallen for three months in a row. In September, both the headline PMI and the new orders component dropped below the critical 50 level. As well as Japan being the template for Ice Age events over recent years, we have long said that Japan is also a highly sensitive straw in the cyclical wind. And just as Japanese tech clearly led the Nasdaq bust in Q1 2000, the Japanese PMI typically leads the US ISM down into global recession.

Now, where did I put that tin hat?

Related links:
The descent into global C-H-A-O-S – FT Alphaville
IMF admits that the West is stuck in near depression – Ambrose Evans-Pritchard

[Oct 05, 2010] IMF admits that the West is stuck in near depression By Ambrose Evans-Pritchard

 Oct 03, 2010 | Telegraph

 IMF admits that the West is stuck in near depression If you strip away the political correctness, Chapter Three of the IMF's World Economic Outlook more or less condemns Southern Europe to death by slow suffocation and leaves little doubt that fiscal tightening will trap North Europe, Britain and America in slump for a long time.

Spain, trapped in EMU at overvalued exchange rates, had a general strike last week The IMF report – "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation" – implicitly argues that austerity will do more damage than so far admitted.

Normally, tightening of 1pc of GDP in one country leads to a 0.5pc loss of growth after two years. It is another story when half the globe is in trouble and tightening in lockstep. Lost growth would be double if interest rates are already zero, and if everybody cuts spending at once.

Related Articles Capital controls eyed as global currency wars escalate Gold is the final refuge against universal currency debasement Ireland faces double dip, hints at debt restructuring Credit crisis: Swept away by a tide of debt Japan renews QE as recovery falters The IMF itself has become the problem as Europe's woes return "Not all countries can reduce the value of their currency and increase net exports at the same time," it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a "death spiral".

The Fund said damage also doubles for states that cannot cut rates or devalue – think Spain, Portugal, Ireland, Greece, and Italy, all trapped in EMU at overvalued exchange rates.

"A fall in the value of the currency plays a key role in softening the impact. The result is consistent with standard Mundell-Fleming theory that fiscal multipliers are larger in economies with fixed exchange rate regimes." Exactly.

Let us avoid the crude claim that spending cuts in a slump are wicked or self-defeating. Britain did exactly that after leaving the Gold Standard in 1931, and the ERM in 1992, both times with success. A liberated Bank of England was able to cut interest rates. Sterling fell. The key point is whether you can offset the budget cuts.

But by the same token, it is fallacious to cite the austerity cures of Canada, and Scandinavia in the 1990s – as the European Central Bank does – as evidence that budget cuts pave the way for recovery. These countries were able export to a booming world. They could lower interest rates, and were small enough to carry out `beggar-thy-neighbour' devaluations without attracting much notice. We were not then in our New World Order of "currency wars".

Be that as it may, it is clear that Southern Europe will not recover for a long time. Portuguese premier Jose Socrates has just unveiled his latest austerity package. He has capitulated on wage cuts. There will be a rise in VAT from 21pc to 23pc, and a freeze in pensions and projects. The trade unions have called a general strike for next month.

Mr Socrates has already lost his socialist majority, leaking part of his base to the hard-Left Bloco. He must rely on conservative acquiescence – not yet forthcoming. Citigroup said the fiscal squeeze will be 3pc of GDP next year. So under the IMF's schema, this implies a 3pc loss in growth. Since there wasn't any growth to speak off, this means contraction.

roaringchicken92:
Still wonder how much of the world's productivity, wealth, and ingenuity is wrapped up in the illegal drug and narcotic trade. Billions? Hundreds of billions? Trillions? All that cash wasted, shuffled around under the table, self-propagating. That's depressing enough right there.
sovereignmoney:
  Funny how the IMF, the group most responsible for financial terrorism around the world, now declares the US is near a depression. Sorry dunderheads, we are already in a depression, a depression caused by the IMF's policies. If the world ever decides to return to sanity, it will follow the example of the Bank of England Act and return the power of money creation back where it belongs, in the hands of the people.
Tarik Toulan:
 Dolmance 4 hours ago It's all worth it if the Americans are ruined. At least we won't have to deal with that rule of imbeciles anymore. And their culture of greed and neglect will have been so discredited that we'll never have to think about them again. =====================================

Not all the Americans, only the Neocon and Zionist underworld who have depleted the US and world's economy, while piling up their billions.

No_One_Important:

And lets not forget, after Sarkozy and Obama muscled Merkel into a bailout for Greece, her party was hammered the following weekend in elections.

It seems the german voters aren't any happier about bailing out other nations and their stupidity than Americans are about bailing out big multinational uber wealthy people.

Sounds a lot like the "world" is realizing "global" equity isn't equitable at all. Trying to prop up some idiots just results in everyone being dragged into the mud.

I was cheering Germany when Obama was at the G20 meeting trying to tell them "keep spending! More! More!" and the group of national leaders, led by Germany, told our idiot Obama "that's nice, now go sit down and be quiet and let the adults handle this."

Good for Germany! Excellent! The American voters are about to clean out Washington of the big spending idiots, and severely cut down the size of our government. Because unlike Europe, we have no use for massive monstrous garbage government supported jobs. Our unions have become parasites on our economy. We have municipalities looking at Chapter 9 bankruptcies which honor only bond holders, and eject all union obligations. There's more than one way to get rid of parasites in our society.

The US citizens understand, there is no faster way to get an economy moving than to let us, the people do it. Let us keep our OWN MONEY THAT WE EARNED. We have "big goverment" garbage politicians trying to ram stuff down our throat, and take more away from us.

That ain't gonna happen for much longer. Keep your eye on us. . . .the days of the "ruling class" are numbered in America.

If you want to stay face down in the dirt tied to some backwater garbage economy like Greece who won't pick themselves up or get themselves under control - that's your call. You guys made that Faustian bargain. . . .and look at what is happening now. . . . .

Eventually, you need to cut the parasites loose. Let them sink or swim,. . . . decide if you want someone else's garbage to pull you into the mud and drown you. American's don't tolerate "royalty". . .nor mentalities of entitlement.

Square yourselves up and take a cold hard look at other nations and decide if you really want your wagons hitched to nations using failed government economic policies. It's your call. Your freedom, or forever carrying parasites on your backs. . . .

No_One_Important:

 Oh an you guys were so smart tying your sovereign currency to other nations where you have no say so over their elections, how they spend, huh? Wowwwwwwww, now there's a really winning strategy, huh? How's that working out for you guys, huh?

Seems everything you were warned about consolidating your currencies is coming true, isn't it? Every bad thing you guys were ever warned about is happening, some nations dragging other nations into the mud. . . .great move, huh?

Funny, Germany is at pre crash employment now. Hmmmm, funny how that works huh. They've made attempts to harness their debt and they're adding jobs. . .just not the kind of "big government" garbage jobs that so many europeans like.

Go ahead, bash the US some more. We'll recover, and move forward, some how, some way. We always manage to pull ourselves up by the bootstraps. We'll get rid of our garbage Obama/Pelosi type politicians and move forward again. Germany is recovering. . . .funny. . . . .how long will you stay face down in the dirt before you decide to pick yourselves up, hmmm? When the rest of the world is recovering an you're laying in your own filth whining and crying for big government to to clean you?

You'll become the next Zimbabwe. . . .so be it. It's not our problem. . .it's yours.

samanthavick:
 I wouldn't be in sucha rush to say that the European Central Bank has abandoned the PIGS Ambrose. I have read this on notayesmanseconomics today.

"As today has been QE day I can finish off by saying that we now have a concrete reason why the peripheral government bonds in the Euro zone have been rallying. The ECB has announced that it spent some 1.384 billion Euro’s on such purchases last week. This means that in total the Securities Markets Programme has spent some 63.5 billion Euros on such purchases since it was announced on May 10th."

I note also that he has an interesting view on further QE in the UK after analysing the minutes of the shadow Monetary Policy Committee.

http://notayesmanseconomics.wordpress.com

andrewjo:
Thanks for this I had forgotten to read today's article. The views on the new Japanese plan for QE and the suggestions for our own Monetary Polcy Committee are intriguing to say the least.

Errol Flynn:

 To those who criticize the IMF.

To understand the many deeper issues being fogged over by our economic predicament, you are urged to watch "The Money Masters" ... a highly educational, video presentation of how a cabal of International bankers took over the Western world ... lock, stock, and barrel ... thus acquiring the power to push us into recession, depression, and wars, whenever it suited them.

You can purchase an original DVD from Amazon: http://tinyurl.com/Amazon-DVD-TheMoneyMasters

Or download from Google in one large file: http://video.google.com/videoplay?docid=-515319560256183936#

Or download from YouTube in 22 segments: http://www.youtube.com/watch?v=lXb-LrVkuwM When downloading all segments, make sure you always follow the uploader named meroving911 as his frame-rates (video + sound quality) are higher.

Even though The Money Masters was produced circa 1994 it REMAINS ESSENTIAL VIEWING FOR ALL. Its educational message is still entirely prescient.

Behold, I am sending you out as sheep in the midst of wolves, so be wise as serpents and innocent as doves.

pumpernickel  
 After everything has been said over and over again and we all watch with fascination, as the Titanic hits the iceberg and sinks in slow motion, whilst the media orchestra is playing its merry tunes and the hedgefunds are dancing the dance of death some, no doubt, will say “in God we trust”. Others again will say “in Gold we trust”. I am with the former and with the latter, just to be on the safe side.

Adenauer used to say in his Cologne dialect "Et kütt wie et kütt en ätt es noch ämma joot jejange!" (What happens happens and it always turned out alright so far)

and times then were much harder in Europe. So cheer up your doom mongering lot. Relax. Time that Captain Mainwaring came on for some light relief:

German U-boat Captain: I am making notes, Captain, and your name will go on the list; and when we win the war you will be brought to account. Captain Mainwaring: You can write what you like, You're not going to win the war! U-boat Captain: Oh yes we are. Mainwaring: Oh no you're not. U-boat Captain: Oh yes we are! Pvt. Pike: [Singing] Whistle while you work, Hitler is a twerp, he's half-barmy, so's his army, whistle while you work! U-boat Captain: Your name will also go on the list! What is it? Mainwaring: Don't tell him Pike! U-boat Captain: Pike!

Dolmance  
It's all worth it if the Americans are ruined. At least we won't have to deal with that rule of imbeciles anymore. And their culture of greed and neglect will have been so discredited that we'll never have to think about them again.
Spencer  
 I did not hear anyone complain when the stock markets were soaring and they were making unreasonable profits on their portfolios but now that the market is making a long overdue correction the world is crying. The days of big government giving some many so much needs to end. If you look at the social welfare system in Europe it is a wonder that their society has lasted this long. The people in Europe protesting because they have to work until the grand old age of 62 are out of their minds, we live way too long now to be able to collect government funds till death. The money just is not there people, do the math. There are so many things done that just wastes money and the people don't care who pays or where it comes from.
DFW  
Give me hopey-changey over Bushy-Cheney-oily any time. After Clinton, the lawyer, our finances were in decent shape, and looking to stay that way. After Cheneybush (who're you gonna call? Budgetbusters!), they were a wreck, and the whacko right is trying to blame Obama for trying to fix it. They'd be at the barricades having no food or shelter if Cheneybush were still at the helm, but Fox tells them to ignore that, and so they do. If Fox told them to jump off an ocean liner half way across, they'd do that, too. (Edited by author 10 hours ago)
Spencer  
 If the dot.com revolution did not happen during the Clinton years the times would not have been so good for him. Stop wearing your rose colored glasses.
DFW  
  Watch Fox much? Simplistic explanations don't work in the real world. Cheney didn't move Halliburton to Dubai before the end of his administration because he likes sand.

Clinton simply had a better grasp on what to do, how to compromise, and how to make the best of things. The fact remains that with what he had to work with, he left the country in a far better shape than when he took office. Cheneybush did the opposite. Invading Iraq wasn't "bad luck" any more than Clinton's budget situation was good luck. Republicans don't like that, and so they come up with "momma liked you best" lines like yours about the dotcom revolution. Sorry, not buying that one.

kingcanute   PMYes, Clinton had a better grasp alright - ask former interns...

de_Tocqueville  

 DFW

I'm afraid Spencer is making a good point. Clinton had all those baby boomers earning big coin at the height of their careers. Therefore there was massive income tax revenue into the gov't coffers, thus the big surplus.

Now as this demographic group draw state pensions, become more reliant on health care and start paying much less tax, how are the next generation going to pay for all this. The factories and any wealth creating industries have vanished.

And Clinton was dealing with the devil (knowingly) when he signed for the repeal of the Glass-Steagell's Act.

No_One_Important

Yeeeeeeeeep. And no one likes to talk about the wave after wave of reduced defense spending from the Reagan era that was washing into the treasury. A monkey could have sat in that seat and looked good. Some contend a monkey did sit in the seat. The clinton's have been masters at bs marketing leading people to believe they actually had anything to do with that.

Funny, Summers was Clinton's Economic advisor. . .and he was just fired. Hmmmmmmmmmm. . . . .imagine thaaaaaaat. . . .the guy that likes to take credit for Clinton. . . .gee. . . .got fired because. . .well. . .his ideas don't work, huh?

Wow. . imagine that, huh? Because, Clinton nor Summers had anything to do with the economy under Clinton. He was just at the right place at the right time.

The bubble popped and he handed a downward spiraling economy to Bush in 2000.

Funny, all the "rickety rickety rah rah!" Clinton cheerleaders never want to talk about that. . . .and how Summers was just fired by Obama because. . . .well. . . . .Obama fell for the clinton marketing BS that they had anything to do with the economy under clinton.

Awwwwwwwww. . . poor stupid Obama. . . .poor stupid liberals in Washington. . . .not a clue how an economy really works. . .and they're making a mess of everything. No big suprise there, huh?

Well, we're going to fix it soon enough by getting rid of the Obama/Pelosi train wreck here in our nation. . .and put this train back on the rails and get it going again.

obbop:
 "There's class warfare, all right, Mr. (Warren) Buffett said, but it's my class, the rich class, that's making war, and we're winning."

[Oct 04, 2010] Technology stock picks & industry news

Yahoo! Finance

Economic conditions may force the federal government to bailout several U.S. states, banking analyst Meredith Whitney told Bloomberg earlier this week.

John Lekas, Leader Capital’s senior portfolio manager, agrees states and municipalities are in deep fiscal trouble. However, he thinks bailouts are a thing of the past.

“I don’t think politically they can,” go ahead with another round of bailouts, he tells Aaron and Henry in the accompanying clip. Nor should they. “The truth of the matter is, there’s a point at which you can’t just keep handing people money. You’re going to destroy the currency; you’re going to get hyper-inflation.”

In his latest letter to clients, Lekas quotes this dreary forecast about the financial prospects for states, from the Center on Budget and Policy Priorities:

“If states get no further federal assistance, the steps they will have to take to eliminate deficits will likely take a full percentage point of GDP. That in turn, cold cost the economy, 900,000 jobs next year.”

Not a pretty picture.

Without a bailout, Lekas predicts we’ll see a wave of municipal bankruptcies, as Harrisburg, Pa. is currently contemplating. “I think that is the only way out for them.”

In addition to more job losses, the bankruptcies will cause tremendous disruptions in the muni-bond market and the stock market. (Click here to see just how low he thinks stocks will go next year).

As a result, investors will flock to quality - short-term Treasuries are a likely winner. (A convenient call for the senior portfolio manager of the Leader Short-Term Bond Fund.)

It’s not all gloom and doom.

Bankruptcies will surely impact social services around the country. The silver lining: it will force local governments to get their fiscal houses in order.

“The good news on that is they can jettison their pension obligations, jettison their union contracts, which is the most expensive part for municipalities and begin to make real progress,” he says.

[Oct 04, 2010]   Frank Warnock on Two Myths about the Dollar

September 30, 2010 | Econbrowser

Ricardo

Do not miss the connection between the two "myths." The US with the dollar as the world reserve currency can force its inflation on the rest of the world. What this means is that while a country can inflate out of domestic debt it cannot inflate out of international debt because the world is essentially on a dollar standard. Countries still have to essentially pay other countries in dollars as long as the dollar is the reserve currency.

But this is a huge incentive for the US government and monetary authorities to inflate the dollar. The US through inflation can reduce both domestic debt and international debt. It is this aspect that causes China (and other heavy investors in US bonds) so much concern.

The link between these two "myths" is strong and US economic authorities, with their arrogance, greed, and hubris, could bring down the US monetary hegemony with a crash.

markg

Without spending there is no investment. Do capitalist invest in new production if there is no spending to buy the output? The only way to maintain spending (to promote investment) and save at the same time is for the govt to run a deficit. Govt deficits equal private sector savings - right Menzie? Of course, you could save by running a trade surplus, but not every country can do this at the same time. Other countries want to save in US dollars so they run a trade surplus with the US to accumulate dollars. The US does not borrow from them, they save in US currency.

Lord

An alternative to the dollar requires a large economy that is willing to borrow extensively. No such alternative exists. I am not certain any will ever exist. Euro borrowers have little input to Euro creation and as a result will always be precarious. Commodity speculation is about the only alternative but a risky one.

purple

There is no alternative to the dollar, but the US can't support it anymore. Private sector investment will continue to bleed overseas and unemployment will remain high, domestic demand weak. The remedy for that is fiscal policy which won't happen. The global financial architecture is shattered and we will limp along for years until it collapses entirely. In the meantime, enjoy life.

[Oct 03, 2010] Is China Getting Religion on Restructuring Its Economy

US trade policy towards China has been dictated by two powerful corporate oligarchs – the US multinationals and the banking cartel.
naked capitalism

Maju:

“It actually has been moving to a LOWER consumption share of GDP post crisis, the reverse of what you’d see if it were trying to rebalance the economy”.

Can you document this? If this were true, that would mean that their export share is still growing, because their GDP is also growing and still very fast. I doubt their exports are still growing in the context of the great crisis, simply because people everywhere is buying less and less in general, as their (our) purchasing power goes down with all these attempts to put the burden of the crisis on the shoulders of the working and middle classes.

I find difficult to understand this but I have not explored the data in any depth.

Also I do not wholly understand why China artificially supported trade surplus is untenable. More exactly: I understand the macroeconomic concepts but, unless the rest expels them from WTO and establish a boycott on Chinese products, they can get away with it until the former First World completely collapses. Then they would proceed with whatever restructuring is needed but by then they will have already won the trade wars.

The only problematic scenario would be that boycott, which possibly the US and its allies can get together to enforce, but the Chinese do not feel truly threatened at this stage for two reasons:

1. They hold such a huge share of US and other developed countries’ debt that they could throw it as an economic bomb. And they consciously use this as leverage by purchasing “toxic” debt from these countries, not just the USA.

2. The capitalist oligarchs who effectively rule NATOplus, from Seoul to Athens, have already invested heavily in China and like it the way it is. The “Chinese” enemy of the West is westerner and rules the West. That’s why some of what we see politicians and central banks doing looks so inconsistent: it’s what a drug addict does, regardless it is the path of doom.

Instead, it seems to me that the Chinese (who after all invented “virtual” paper money and have a long history of resisting becoming the market for the West’s products, since very early in Modern history) know rather well what they are doing: they are ’sucking the blood’ of the Western alliance, exploiting carefully the design errors of globalized Capitalism in their benefit.

Their goal is not so much to have a healthy market economy, that is a Western prejudice. Their goal, logically, is to become the first global superpower, replacing the USA, by careful controlled and slow, and profitable, demolition of their rivals and by co-opting their elites to some extent.

This is, I understand, a “legitimate” goal from the viewpoint of China, which would like to recover its past glory. The main risk they have its possibly to be drawn to a Cold War style military confrontation, where they cannot win (not yet at least) but that is why, partly, they emphasize “soft power” by trickling rather than openly confronting their rivals.

On the other side, we can already see how much of a failure is the militarist policy of the USA. The US invaded Iraq, spending huge amounts of money and credibility, China has largely reaped the benefits without raising a single gun. Similarly the intervention in Afghanistan and Central Asia is not really producing the results the USA would like from it (to be able to blackmail China and Russia from their weak spot). Instead they softly organize their pipelines and make trade agreements with whatever “US puppet” there is around. The USA reacts investing in a government change and China bribes them to their side.

And so on.

While I agree that the Chinese regime is not mid-term stable because the growing bourgeois class will eventually want to reform the system, they have so far managed to satisfied most of their demands and even co-opt them into the ex-Communist Party. For the Chinese bourgeoisie anyhow allowing the USA to set the rules is not desirable in any case, so they are so far happy with the deal, more or less. But unless the USA and allies are willing to assume the huge costs of “besieging” China (costs in economic readjustment, in greater military expenditure and costs in dissatisfaction from their ruling elite of global capitalists, who would lose much of their own profits as they’d get excluded from China too) this is not going to happen.

We can see the tension between these Western internal contradictions: the “nationalist” and the “globalist” poles but these tensions precisely cause only half-hearted reactions from the West, as it drifts without a clear plan in relation to China and its own future.

The West, specially the USA, is caught in its own globalist/imperialist trap, in its own capitalist system trap and China, whose leaders probably have read Marxist economists (often more realist than Liberal ones), know that and toy with it, like a cat with the mouse they have just captures.

I do not blame China, sincerely. I blame the Western ruling elite and I think that the only option in the mid-term is Socialism, including a good deal of Chinese-style protectionism (but also other things done much better too). However this will not happen yet, so the West is trapped in its own imperialist project that someone finally has managed to manipulate in their own favor.

kievite:

That’s a very good post.

I agree that Chinese regime is not stable in a long term, but the current crisis serve as huge stabiliser as it discredits the alternative model. Also the plunder of Russia is a reminder of the danger of dismantling the current political system while swimming with sharks.

I also agree that the West and the USA “is caught in its own globalist/imperialist trap”. The room for maneuvering is almost absent in the current political system with democrats being equally jingoistic as republicans. Regardless of whether Republicans or Democrats are in power, the US has demonstrated consistent pattern of over-reliance on military power probably since Truman if not since Wilson. Now this might be time to face consequences, especially the way Afghanistan war shapes and the amount of resources (and lifes) it consumes. President’s Eisenhower’s warning about the military industrial complex being a threat to the nation well-being is now coming true.

Bacevich addressed this issue really well in his recent book: Washington Rules: America’s Path to Permanent War.

I doubt that holding debt gives China the leverage that you assume. It actually more makes them a prisoner of the current economic arrangement. Also in case of really nasty confrontation this debt cannot play a role of the bomb — assets will simply be frozen.

I think the critical factor here is access to energy which is necessary for sustaining (or gradually declining) standard of living in both China and the USA. Rising energy prices in my view would unleash the de-globalization.

Energy prices also puts taps

fjf:

Those nasty, nasty, evil, mercantilist Chinese. Loo what they have done to GM:

Today, GM China sells five brands — Buick, Cadillac, Chevrolet, Opel, Saab and Wuling — more than 30 models with sales forecasted at nearly 864,000 vehicles this year. In China GM has eight vehicle assembly plants, three powertrain facilities, an engineering and design center, an automotive financing arm and some of its supplier operations, like AC Delco and Allison transmission. GM employs more than 20,000 people in China.

http://www.insideline.com/features/chinese-lessons-what-gm-has-learned-in-china.html

Wonder who moved US jobs to China? Wonder who profits from China’s growth?

fjf:

Another great American success story:

Of course, U.S. companies have been moving jobs offshore for decades, long before Wal-Mart was a retailing power. But there is no question that the chain is helping accelerate the loss of American jobs to low-wage countries such as China. Wal-Mart, which in the late 1980s and early 1990s trumpeted its claim to “Buy American,” has doubled its imports from China in the past five years alone, buying some $12 billion in merchandise in 2002. That’s nearly 10% of all Chinese exports to the United States.

http://www.fastcompany.com/magazine/77/walmart.html

Sure. You go clamp down on those evil Chinese mercantilists with their vastly overvalued currency resulting from the endless exports of US companies acting to destroy US jobs.

Americans are worse than children. They believe whatever they read in the MSM and they always find a bogeyman to blame for their faults.

AmericaninChina:

Bingo! US trade policy towards China has been dictated by two powerful corporate oligarchs – the US multinationals and the banking cartel. The multinationals made billions by moving US-based manufacturing jobs to cheap labor in China and “exporting” products back to the US. Now they’re poised to make lots more by selling their products to China’s booming middle class. The banking/financial industry unleashed a deluge of consumer credit/debt that was made possible by the Chinese recycling their giant trade surplus dough into US bonds; enabling many years of cheap credit in the US, and credit cards, equity loans, etc. replaced high-paying jobs. American are now dealing with the terrible consequences resulting when powerful corporate oligarchs pillage the economy, a practice that continues to this day.



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