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Financial Skeptic Bulletin, January 2011

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[Jan 1, 2011]  In 2009 I Learned That…

Dec 30, 2011 | The Reformed Broker

Rest

[Jan 31, 2011] The Coming Collapse of Commercial Real Estate is Already Here, Says Davidowitz

The U.S. consumer may be on the mend as we head further into 2011, but the same story of resurgence does not apply to many of the U.S. big-box retailers.

From Wal-Mart to Sears to Target to Best Buy, if you look at what is happening in the retail space, "it looks pretty scary," says retail expert Howard Davidowitz.

Wal-Mart -- the world’s largest retailer – has seen six consecutive quarters of negative same-store sales and is now looking to put the majority of its investment capital towards emerging markets.

In the case of Target and Best Buy, they both recently missed major key earnings expectations. Making matters worse, Best Buy “tanked” even without the competition from the now defunct Circuit City, Davidowitz points out.

Tale of Two Stores

There is a sea change happening in retail, Davidowitz tells Aaron in the accompanying clip. Consumers are spending more now than during anytime in the last three years, but they are choosing to spend more and more online than in brick-and-mortar stores.

Companies like Apple, Amazon, Netflix are doing gangbuster business while the aforementioned struggle to keep pace. Why go to the store – be it record store, book store or movie rental store – when you can buy all you need right from the comfort of your own home and have it delivered to your front door or digital media device?

The Walls Are Collapsing

A coming collapse in commercial real estate has been looming for the last couple years, but Davidowitz thinks it has already begun. “I think there has [already] been a partial collapse in the commercial real estate business,” he says pointing to the rising number of community bank failures. “I think retail real estate developers better start rethinking the use of their space.”

There are always exceptions to the rule, but his resounding advice is to stick to commodities and stay away from the retail space, at least for now

[Jan 31, 2011] Howard Davidowitz Blames the Financial Crisis on the Accountants and Ratings Agencies

Tech Ticker

There were many avoidable causes of the 2008-09 financial meltdown, according to last week's Financial Crisis Inquiry Commission findings. The report points the finger at several entities both public and private. It places heavy blame on the Federal Reserve for failing to properly regulate the overheated housing market and failing to identify risks in the system; it faults Wall Street for using too much leverage that ignored prudent risk management; and it places responsibility on a regulatory framework system weakened by decades of deregulation.

Noticeably absent of blame: the accountants.  "The heart of the issue continues to be the same, the accounting firms," investment banker Howard Davidowitz tells Tech Ticker. "If you don't have the numbers right, how can you evaluate anything?"

Not only did accounting firms fail to value assets correctly, they also were willing participants in questionable, if not illegal, schemes such as "Repo 105" -- accounting window dressing used by Lehman Brothers to misrepresent their risk exposure at the end of the quarter.

The incentive structure for accountants and rating agencies is a central flaw in the system, Davidowitz argues. It's hard to give objective analysis and advice if the company you're reviewing is also cutting the check. Until the conflict of interests inherent in the current system are dealt with, the system remains at risk, says Davidowitz. "It'll never work," he tells Aaron in the accompanying clip. "If you want to deal with systemic problems, so it won't happen again, you've got to get to the heart of our checks and balances. We didn't deal with that."

[Jan 31, 2011] The FCIC Report Sound and fury, signifying nothing by Steve Keen

January 30, 2011 | Debtwatch

I’ve just wasted a perfectly good day reading the report of the Financial Crisis Inquiry Commission–the body appointed by Congress allegedly to inquire into what caused the Financial Crisis.

What it has delivered reads more like an unedited thesis by a journalism student (who is about to receive a “C” grade). There are plenty of quotes, lots of detail, some nice section headings and a few pretty graphs, but absolutely no analysis worthy of the name.

And I thought the WEF report on credit was bad… At least that report actually considered the level of credit and the role of credit in a market economy. It had simplistic assumptions and reached simplistic conclusions, but at least it engaged with the topic, and its attempt to devise metrics for measuring the degree of credit stress deserved some praise.

But this FCIC report was simply a waste of time. All I got out of the entire tome was one good analogy about why the ratings agencies (Moody’s and the like) got the probabilities of defaults by mortgagors so badly wrong:

In rating both synthetic and cash CDOs, Moody’s faced two key challenges: first, estimating the probability of default for the mortgage-backed securities purchased by the CDO (or its synthetic equivalent) and, second, gauging the correlation between those defaults—that is, the likelihood that the securities would default at the same time.

Imagine flipping a coin to see how many times it comes up heads. Each flip is unrelated to the others; that is, the flips are uncorrelated. Now, imagine a loaf of sliced bread. When there is one moldy slice, there are likely other moldy slices. The freshness of each slice is highly correlated with that of the other slices. As investors now understand, the mortgage-backed securities in CDOs were less like coins than like slices of bread. (p. 145)

But that’s about it: otherwise there’s lots of detail, and almost no insights worth even commenting upon. To my surprise, I found myself siding with the dissenting members of the Commission–not because their analysis was much better, but because they had the honesty to describe the majority report as simply useless. As one of the several dissenting reports put it:

The majority’s almost 550-page report is more an account of bad events than a focused explanation of what happened and why. When everything is important, nothing is. (p. 414)

The same dissenting report makes some sensible statements about what the Commission should have considered, and then concludes:

These facts tell us

That’s about all that is worthwhile in this entire report. All it amounts to is a journalistic overview of the events from early 2005 till late 2010. It’s reasonable as such–I’m sure some resourceful if unimaginative Hollywood hack writer could mine the document for a movie or two  about the crisis. But as such it’s hardly new (Hank Paulson’s insider account of the crisis in “On the Brink” was far more timely and certainly more exciting) and certainly not worth the public dollars that would have been expended on it.

If this is the best the US Congress can do, then the USA can look forward to many more years of this crisis–and many more crises in future.

If you do have to read the report, then please don’t waste any money buying it–just download the PDF instead (I’m sure the hardback will be in a remainder bin at a nearby bookshop in the very near future).

Now I’ll get back to a worthwhile use of my time–finishing the second edition of Debunking Economics. In closing, to make up for your time wasted reading this, here’s the verse in which that wonderful phrase “Sound and fury signifying nothing” entered the English lexicon: Act 5, Scene 5 of Shakespeare’s Macbeth, when Macbeth is told that Lady Macbeth is dead:

She should have died hereafter;
There would have been a time for such a word.
To-morrow, and to-morrow, and to-morrow,
Creeps in this petty pace from day to day
To the last syllable of recorded time,
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life’s but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.

[Jan 31, 2011] New York Times’ Joe Nocera Blames Crisis on “Mania”, Meaning Victims

January 29, 2011 | naked capitalism

pastafaria:

A bubble looks to me like a ponzi scheme. The ones first in make a killing, the one last in loose a lot if not all of their money.

Perhaps they are created on purpose by people who know how to manipulate and influence markets, and at some point they grow under their own strength of deluded investors appearing to get an initial high return on investment.

[Jan 31, 2011]   FCIC Report Misses Central Issue Why Was There Demand for Bad Mortgage Loans « naked capitalism

What happened is that the benefits for originating bad loans exceeded the cost of these negative consequences – someone was paying enough more for bad loans to overwhelm the normal economic incentives to resist such bad underwriting.

The best example of this is John Paulson, who earned nearly $20 billion for his fund shorting subprime. This amount of money was not ever possible or conceivable in the mortgage business prior to that point. The only way it could occur was through the creation of a tremendous number of bad loans, followed by a bet against them. Betting on good loans could never generate this much gain.

Given the massive amount of money earned by betting on bad loans, the logical next step is to ask, how did such incentives affect and distort the market?

... ... ...

The introduction of a standardized contract on credit default swaps in the mortgage related market (which took place in June 2005….notice the timing relative to when the really bad mortgage issuance took off?) allowed interested parties to bet against the mortgage market in a remarkably efficient manner – through the use of CDOs. CDOs allowed investors to bet on the weakest mortgage bonds, the BBB tranches, which were a teeny but critical portion of the original deal (note it was cheaper to place these bets via CDOs than the ABX index, although some of the short sellers did that also). If the dealers couldn’t place these dodgy pieces, the entire mortgage bond factory would have ground to a halt. The last thing the dealers would want to be stuck with is the least desirable portion of a bond offering.

But conversely, this normally hard to place portion, precisely because it was the worst rated piece, suddenly became prized. Speculators could put a very small amount of money down and, if right, reap previously unheard of returns. For just a small investment in a CDO or CDS, an investor could create huge incentives for mortgage lenders to seek out unqualified borrowers and lend them far too much money (for reasons explained at greater length in ECONNED as well as in older posts on this blog, heavily synthetic CDOs pioneered by the hedge fund Magnetar were a particularly destructive way to execute this strategy. Those deals stoked the mortgage market directly, by using some actual BBB bonds, and indirectly, though their impact on spreads and the fact that pipeline players and other longs used some of the CDS not taken down by the shorts to lay off their risk, which encouraged them to stay in the game longer).

The report notes that many people saw the weakened standards and thought it was insanity and a serious problem. In fact, contrary to popular perceptions, many people in the securitization market thought the same thing. Some believed the problem would eventually cure itself, others thought there needed to be tighter controls. Virtually no one understood why the loans continued to be created, even after alarms were sounded. Almost no one recognized that there was a tremendous financial incentive for bad, rather than good, loans and that the alarms just made such bad loans more valuable. In fact, the alarms created a frenzy of more CDO creation as more hedge funds became aware of the opportunity to short the deals, which created demand for more bad loans.

The normal expectation was that warnings and threats about bad lending would have some impact on curtailing the bad loans, but it had the opposite effect: it led to more CDOs and demand for more “product” to short.

[Jan 30, 2011] step-aside-bernank-here-comes-timothy-jeethner-bears-explain-banker-bailouts-and-screwing-am

Do you work for a bank? No. Did you get any of the bailouts? No. Do you pay taxes? Yes. Then the joke is on you.
Jan 29, 2011

Mark McGoldrick:

Do you work for a bank? No. Did you get any of the bailouts? No. Do you pay taxes? Yes. Then the joke is on you.

Yes, indeed, the joke is on the American people. Consider fiscal year 2008 for Goldman Sachs:

In 2008, like all the Wallagio banks, Goldman Sachs was on a rapid path towards insolvency. No matter how much Goldman denies it, they were. Otherwise, they would not have made an over-night decision to become a bank holding company (giving it access to the government's mammary glands), along with accepting loan shark terms for capital from Warren Buffet - all in the same weekend. All the dominos were falling, and Goldman had its rightful place in line.

I'm not quite sure how many dozen different bailouts, back-door bailouts, subsidies and government programs Goldman Sachs benefited from in 08/09/10, but the list would be an impressive one - from the AIG bailout to ZIRP, and everything in between, Goldman had their lips firmly clamped around Bernanke's areolae. Make no mistake about it, the American taxpayer kept Goldman alive.

While the stock market crashed in 2008, driving the pensions and retirement accounts of millions of American's into the ditch, Goldman saw "record commissions" from equities in 2008, which were even higher than the bubble-top commissions of 2007. Similarly, their asset management division saw "record management fees". Securities services achieved record net revenues, 27% above the prior record set in 2007. In short, all the volatility and panic of 2008 that turned America into an economic wasteland was very profitable for Goldman, and I haven't even bothered to mention the "Big Short" conspiracies which deserve merit.

(All of these quotes and numbers can be found on page 1 of the link provided below.)

With this as a backdrop, Goldman not only stayed solvent, they posted net earnings of over $2 billion.

How much taxes did they pay?

1% (page 5)

So while you calculate your taxes in the next few months, and you think about how hard you're working and how you're barely surviving, keep in mind that Goldman only paid a 1% tax rate in 2008. If you're paying more than 1% in taxes, you're paying more than Goldman did in 2008 with $2B in profits. To add further insult, Goldman just announced that they would be hiring in 2011 - most of it overseas. All of this, from a company that only exists because of the American taxpayer.

http://www2.goldmansachs.com/our-firm/press/press-releases/archived/2008/pdfs/2008-q4-earnings.pdf

agrotera:

United States patriot and historian G. Edward Griffin wrote a book over 20 years ago called The Creature from Jekyll Island -- A Second Look at the Federal Reserve. I hope the book will have to go into infinite editions to keep up with demand so that all of the United States might also find their patriotic spirit again, and demand a fair, and US Constitutional way to manage our currency...remember--the word currency means integrity as well as the literal thing we call money, but without integrity, no country's money means anything, especially if it is fiat money.

Andrew Jackson was demonized in history books to take back our country away from the private central bankers who had taken control. When 1913 came along, this group fenagled a way of flying under the public's notice by calling their private organization (bank cartel) The Federal Reserve. The Chapter Two of Griffin's book is titled, "The Name of the Game is Bailout".

We all suffer from cognitive dissonance and it is hard to believe that our beloved country, could be run by bankers, but it is...and the ramifications of this are too heavy to fathom, but let me at least say--our heartland is being gutted. The largest banks borrow for 0.0-0.25 but all the rest of the banks get charged 4-5% so voila, no lending---their is no such thing as an "exit strategy" for the Fed because money hasn't gone into the system, it has only gone into it's largest arms, the toobigtofail institutions, so that they can get paid 0.25% on any excess reserves, plus 6% on 1% of required reserved, and wtih these reserves, they buy treasuries, get paid the coupon, then use this money as collateral to buy derivatives, and send capital markets in any direction they wish...who pays the interest?--tax money.

OH yes, and these sacred, toobigandimportant tofail entities are buying up tax notes across the country through their veiled hedgefund affiliates, so that the every day citizen with a $300 tax problem, now has a $300 tax due, plus a bill for $10,000 in legal fees from a Bank affiliate....and these are the entities that our elected officials insisted we needed to save? They all need to get elected OUT OF OFFICE and we need new officials that are not bought by corporate interest (the bank cartel owns more than half of the DOW so there is no way to finger point which institutions are the one supporting the candidate--ultimately, this group supports candidates from every direction like a stealth bomber, under most of our radar.)

PS I am not a fan of Huffington but, this piece is a truthtelling nightmare exposee that i am grateful they shared with all of us:

http://huffpostfund.org/stories/2010/10/new-tax-man-big-banks-and-hedge-funds

Temporalist

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

The Creature From Jekyll Island (by G. Edward Griffin)

http://www.youtube.com/watch?v=lu_VqX6J93k&feature=related

Second Look at the Federal Reserve by Edward Griffin 1 of 7

http://www.youtube.com/watch?v=F3TAh1gy6rc

America:Freedom to Fascism(Full)

http://www.youtube.com/watch?v=8NpTVXitOQk&feature=related

MountainHawk:

Financial illiteracy of the masses will allow bankers and politicians get away with murder, the sheeple have no clue, never will...

Madhouse:

It was Paulsen that got Goldman its $12 billion back from AIG. Then they turned around and gave that to their vermin in bonuses in less than a month, like a pack of weasels thinking it would be rescinded. Goldman fucked up on the counterparty risk and still got paid 100% on the dollar. Paulsen knelt down in front of Pelosi to beg her to get the support to bail AIG. He had so little respect for this country and its people that he did not even consider perhaps making, oh, say, 80 cents on the dollar. No, it was a pure fuck. And then what a paultry penalty imposed when they should have been criminally indicted and taken down for the structured product scam.

The Bush bailout and then the Obama bailouts should never have occurred. The severe plunge would have cleaned out the rathole. What do we have ? Squid worse than ever (exporting great PR for the US brand as we speak), GM still has not sold an electric car, B of A and Citi are walking zombies, somehow no one is questioning the fact (except it seems on this website) that the budget is severely in the red forever which is in itself insane, we still are professing an increasingly bizarre Kabuki dance of a foreign policy doctrine that is a miserable $1 trillion a year failure, another dingbat President with zero balls and blah blah (it goes on forever).... But tonight, fuck you again Paulsen. For the good of your country, you should have denied the bailouts, effectively calling in a Broken Arrow...

 Aristophanes:

I agree: Hank Paulsen has gotten far too little credit for the enormous swindle he pulled off.

Even here on ZH is he rarely singled out. This guy was one of the primary looters, then gets into a government position where he fixes the remaining bets of his cronies and declaires immunity for himself and them.

All this is done under the guise of helping to save the economy. He is then seen by the masses as some sort of savior.

The guy is guilty of TREASON. Let's start using that word more. TPTB that lie, cheat, steal and destroy our country are guilty of TREASON.

guidoamm:

But... but... but...

Everyone including the bears, keep forgetting one of the biggest and the most sneaky bailouts of all and it is a doozie.

The official bailouts allow banks to maintain investment grade ratings.

This allows banks to attract institutional money.

Institutional money is, amongst other things, pension and insurance money.

People that today still have a job and contribute to pension and insurance funds, are having their contributions handed to the banks that, in turn, are handing this money straight out in bonuses.... because bonuses are paid out of total turnover... and never in the history of the world have such large bonuses been paid...

http://ca.news.yahoo.com/goldman-sachs-triples-salaries-ceo-4-other-exec... 

Zina:

An "astonishing" increase of 600 billion dollars (0.6 trillion)

Incredible: 4.5 trillion dollars in new debt just to get a increase of 0.6 trillion in the nominal GDP.

[Jan 29, 2011] SP 500 and NDX March Futures Daily Chart - The Sleeper Awakens

The US equity market is very thin and held in weak hands. When genuine selling appears, and in this case for a part the withdrawal of artificial support, prices drop sharply as the risk trade comes off. Gold, silver and the dollar all rallied. But what about the bonds? Cliche-wise, this will probably end badly as Ben stretches the dollar and the bond to fill the pockets of the monied interests. 

And as for the next incident to stir the muddy waters of this gaseous recovery, head to higher ground if they start showing live pictures of demonstrations from the Americans' worst nightmare, Ar Riyadh. Then this will not be so easily dismissed as the rants of an 'uneducated people incapable of democracy'' as they said today on American TV, don'cha know. 

[Jan 29, 2011] Advance Report Real Annualized GDP Grew at 3.2% in Q4 Hoocoodanode

"The GDP deflator was very light at only 0.3%. If it had come in as estimated (1.6% according to Bloomberg), and all other inputs remained constant, real GDP growth would have been cut in half." This so-called growth is just liable to be a pipe dream - with gas prices going up, up, and up, we can look for prices on groceries, clothing, medicines, lumber and building materials and almost everything else going up, too. Products need to be transported - and the cost of that transportation will be passed on to the consumers.

Mike in Long Island:

Looks like another tech bubble in the making. Yeehaw - I missed the boat last time around it'll be different this time.

Edit to add

But semi-seriously

Looking at the last graph of equipment and software - look at 1996 to 2000 and then compare to today. It's almost as if the gap between it and residential and non-residential coupled with the turndown it's exhibitiing are indicative of another recession.

Hmmn. .

Mr Slippery:

What would real GDP growth look like if the federal government were not running a deficit of 9% of GDP?

Is this remarkable recovery sustainable?

steelhead:

Rob Dawg wrote:

Honestly, where's the recovery from a credit/debt recession when PCE growth consistently exceeds GDP growth?

You hit the nail on the head...

poic:

"See my link from yesterday about the similarities of socialism and crony capitalism..."

there are very few. Crony capitalism ends up with bailing out the banks, covering the bonds @100%, keeping the perpetrators at the top in place.

Socialism tends to take over the financial institutions, do a haircut on the bonds and remove officials from the banks.

That is a fundamental difference between socialism and crony capitalism that is glossed over by those who assume they are the same.

And I'll ask again, do people who've lived in Socialist as well as Crony Capitalist systems believe they're the same? Cause I sure don't.

Rickkk:

Bernanke: All But One Major Firm Was At Risk In 2008

01/27/11

"Twelve of the 13 most important U.S. financial firms were at the brink of failure at the height of the credit crisis in 2008, according to previously undisclosed remarks made by Federal Reserve Chairman Ben Bernanke in November 2009 to an investigative panel.

The deeply divided Financial Crisis Inquiry Commission released the notes from its private interview with Bernanke and others on Thursday as part of a final report on the origins of the 2007-2009 crisis.

eric:

Consumer spending is set to fall. The upswing counter-tr­end represents consequenc­es of a few temporary factors. Inflation is rising. Cut, cut, cut coming. Optimism is reserved for forty per cent wealthy, well-off or secure; pessimism for sixty per cent facing falling standards of living, fixed salaries, unemployme­nt and poverty.

[Jan 29, 2011] really-nominal-gdp

Credit Writedowns

Released by the BEA this morning: the advance reading of real GDP came in at 3.2% for the 4Q of 2010 (actually, it was 3.17%, but who’s counting?) versus expectations of 3.5%. There was a lot of internal noise, with large positive contributions from personal consumption and net exports, offset by negative contributions from inventories and government spending. However, the line item that jumped off the page was the GDP deflator, the measure of inflation that turns nominal GDP into real GDP.

The GDP deflator was very light at only 0.3%. If it had come in as estimated (1.6% according to Bloomberg), and all other inputs remained constant, real GDP growth would have been cut in half. A smaller deflator pads real growth by subtracting a smaller number from nominal growth. We read one possible explanation for the light deflator: oil is an import, and imports subtract from GDP, therefore higher oil prices subtracted from the GDP price index. What we do know is that the core PCE price index (a preferred Fed measure of inflation) also declined, and the GDP deflator tends to track Core PCE over time despite the quirkiness of GDP accounting. The current level of Core PCE, 0.4%, is the lowest on record since 1959.

Read more: http://www.creditwritedowns.com/2011/01/really-nominal-gdp.html#ixzz1CTngyfay

[Jan 29, 2011] US Advance Q4 GDP 3.2 per cent

January 28 | FT Alphaville

Brick:

This says a lot for me.

purchases by U.S. residents of goods and services wherever produced -- decreased 0.3 percent in the fourth quarter, in contrast to an increase of 4.2 percent in the third.

And inflation

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.1 percent in the fourth quarter, compared with an increase of 0.7 percent in the third.

The good news is that exports were up and imports were down, but there is a feedback mechanism where by importing less will cause a downturn in exports as the rest of the world copes with the loss of demand from the US. Inventories were still up but less so, which means the inventory build post the crisis is coming to an end. It also looks like a few people ran up their credit cards in the last quarter.

Personal outlays increased $152.6 billion (5.8 percent) in the fourth quarter and Disposable personal income increased $99.6 billion (3.5 percent) in the fourth quarter.

It does however look as if durable goods may be recovering as things begin to wear out. Not so good if its all going on the credit card though.

Durable goods increased 21.6 percent.

In total it looks to me like there are a few people at the top of the heirachy which are slowly recovering prosperity while demand is falling across most of the US with mild stagflation. The US is now particularly vunerable to any slow down in the rest of the world.

[Jan 29, 2011] New York Times’ Joe Nocera Blames Crisis on “Mania”, Meaning Victims «

January 29, 2011  | naked capitalism

Richard Kline:

This was a sell-side (credit giving) bubble, not a buy-side (credit-taking) bubble. The blatantly false narrative, pushed by the perps and their fawning PR flacks, is that “‘They’ made us do it.” What bullshit. This bubble was forged by the excreta trifecta of pyramided bets, laughabley miniscule reserves against losses on those bets, and fraudulent representation of the those bets by the pyramiders to their marks. This was all done _inside the financial industry_. The critical enabler of this bubble wasn’t a great, financially illiterate, unwashed ‘Them’ but the degregulation of the perps by their cronies in government, so that they were able to roll those pyramided bets out the front door where previously that would have landed them in jail. Which is where they, the financial industry perps belong. To the extent to which there was a buy-side driver of all this—subprime mortgages dangling the promise of financial security to millions who never had had such a chance—it was created BY THE FINANCIAL INDUSTRY so as to have product to move up the chain in those securitized, pyramided bets to be onsold to the marks.

Was there a quality of mania-c fabulation afoot in the populace on the putative valuation spike of their mortgated or owned real property? Yes, but as Yves sketches with typical and commendable efficiency a not exceptional, not Depression-inducing bubble. And that fabulation wasn’t a _cause_ of the bubble but an effect. As in, once the financial industry perps induced a spike in paper valuations via their rigged enabler chain of evaulators-boilershop loaners-bundlers-secureres-sellers, the public holding mortagages were induced to refi and take cash out in _another_ industry-created straw-into-gold operation.

Everything in this financial crash leads back to the top of the financial industry. The food chain rotted from its head, not its tail. And that’s a tale the perps are busy hiring every shill with a byline to push as we head back down the double dip of the depression that never ‘recovered’ further than recession or the public at large, at best.

scraping_by:

It’s true there was a cottage industry in flipping properties, spurred on by the financial guru industry. Lots of infomercials sucking up cheap time on cable TV. Free seminars in a hotel ballroom where every participant got a free thumb drive just for attending. Expensive seminars and boot camps to explain attitudes. Articles in Readers Digest and stories from someone your cousin heard about. Hours of video. Books and books and books and books and books. Think Rich Dad, Poor Dad, probably the biggest single promoter.

But again, this was a cottage industry. While the flippers and their thing about OPM added to the pressure on prices, and still does in some areas, it wasn’t in the tens of billions thrown around in the derivative markets. It wasn’t an instrument based on an instrument based on an instrument. And it was, ultimately, big money poured into real estate by the mortgage companies with no questions beyond how to pour in more. Scale matters.

In any case, it was the financial derivatives that lost buyers and fell, not the housing. It was the big money banks and hedge funds who bribed the rating agencies. It was the big money that bought enough government to operate their dealing. There was a mania was confined to a small group of traders intent on the deal. There was a mania, but it was a cold-blooded one.

hermanas:

“Nocera may sound reasonable…”, so did Judy Miller.

Schofield

Richard Kline is correct the cause was sell-side (credit giving) bubbles but we need to remember that a bet on a bet is also the provision of credit as well as the money lending loan. It is the permitted existence of all these inflating activities with no sensible risk rules of thumb that create the boom-bust cycles within predator capitalist societies. We should fear that excessively authoritarian China has successfully taken up Chartalism together with tight regulation of speculative activities to control the boom-bust cycles. Nazi Germany did the same and in the short space of eight years rebuilt its economy so successfully that it took five years of war to defeat its military strength. China is marching down the same road. Predatory capitalism is not only destroying our livelihoods it is in the parallel process of ultimately destroying our right to protest against the imposition of authoritarian regimes.

DownSouth

Schofield said:

We should fear that excessively authoritarian China has successfully taken up Chartalism together with tight regulation of speculative activities to control the boom-bust cycles. Nazi Germany did the same and in the short space of eight years rebuilt its economy so successfully that it took five years of war to defeat its military strength.

I don’t believe the situation that existed in Nazi Germany is as you describe it. Correct me if I’m wrong, but what you are saying is that 1) there was a strong state in Nazi Germany that stood as a counterweight to the corporations and 2) this strong state kept the most abusive practices of the corporations in check.

The other day Paul Tioxin provided a link to this essay
that paints an entirely different picture than you do of the relationship between corporations and state power in Nazi Germany:

To define “capitalism” as consisting of the “free competition” of a large number of independent entrepreneurs with freedom of contract and trade is, of course, to speak of the past. A more enduring trait, and therefore one better fitted to be seized upon in a definition, is the major institution of modern society: private property in the means of production. Now rapid technological change, requiring heavy investments, further augments the gobbling up of the little by the big and this monopolization eventuates in an extremely rigid economic structure. Powerful corporations demand guarantees and subsidies from the state. Thus, in the era of monopolization “the administrative act” and not “the contract” becomes “the auxiliary guarantee of property.” Intervention becomes central, and: “who is to interfere and on whose behalf becomes the most important question for modern society.” In Germany, as seen by Neumann, National Socialism has tied the economic organization into the web of “industrial combinations run by the industrial magnates.” By means of the newer implementation of property, the administrative command, the cartellization of German business has proceeded rapidly. The Nazis saved the cartel system, whose rigidities were sorely beset by the depression. Since then their policies have consistently resulted in a further monopolization into the orbit of the big corporations. The cartels and the political authority have been welded together in such a way that private hands perform such crucial politico-economic tasks as the allocation of raw materials.

But who runs the giant cartels? Behind cartellization there has occurred a centralizing trend which has left power decisions and profits in the lap of the industrial magnates, realized many an old dream not shared by the now regimented workers or the small business men now virtually eliminated. The dreams come true in Germany may well be those of the industrial condottiere everywhere. Among specific Nazi politics which have implemented this oligarchification of capitalism is Aryanization: Jewish property expropriated has not gone to the “State,” but to industrialists such as Otto Wolff and Mannesmann. (Apart from the Jewish case, there is a definite trend away from any thought of genuine nationalization.) The power of such industrial combines has also been augmented by the “Germanization” of business in conquered territories. The “Continental Oil Corporation” of Berlin is predominantly composed of the most important German banks and oil corporations. Heavy industry in Lorraine was equitably distributed—-among five German combines. More important than these processes has been the industrial revolution in chemistry, subsidized by the State, but deriving its dynamic from capitalism, and rendering power to giant combines in the same way that all property in the means of production confers power, but more brutally. The hard outlines of the cartel powers are further confimed by the near assimilation of finance capital by the monopolists of industrial capital.

Neumann has shown that profit motives hold the economic machinery of the Reich together. But given its present monopoly form, capitalism demands the stabilizing support of a total political power. Having full access to and grip upon such power is the distinctive advantage of German capitalism.

AR

I suggest asking Nocera if he has a clause in his contract either with his publisher, or the Times that stipulates that he avoid the “F word.” It might be worth asking. Or maybe he’s too much of a Poodle, and keeps his own claws filed short.

I read the transcript of an interview, and his FDL Book Salon blog, and try as they might, none of his questioners could get him to respond to the question of fraud. He did not respond to any of the blog questions that suggested fraud, and side-stepped away in the interview.

It’s not plausible at this end-stage of US Capitalism, that any employee of a major media outlet would dare tell more than the limited hangout version of this, or any other scandal.

http://www.econtalk.org/archives/2010/12/nocera_on_the_c.html?source=patrick.net#f1
http://fdlbooksalon.com/2011/01/08/fdl-book-salon-bethany-mclean-and-joe-nocera-all-the-devils/

Mike Ruppert, in Crossing the Rubicon wrote this:

The why and the how
It is my belief that sometime during the period between late 1998 and early 2000, as certain elites became aware of the pending calamity of Peak Oil, they looked at the first highly confidential exploration and drilling results from the Caspian Basin and shuddered. The economy had already been milked close to collapse, and the Caspian results could not be kept secret forever. The data woud surely come out, and what woud happen to the markets then” What if some of the major oil companies had been inflating Caspian numbers and hyping-up hopes of a bonanza in order to pump their stock value? What if all the inflated reserve estimates revealed themselves to be bogus all at once?

A major economic collapse was imminent in the fall of 2001….

It is likely that some of those early Caspian drilling reports came from companies like Exxon-Mobil, where Condoleezza Rice sat on the board. She was an expert on Kazakhstan. The elites began to grasp that the hoped-for Caspian reserves would not even offer a short reprieve from the onslaught of Peak Oil. Through declassified CIA reports we know that the CIA was aware that US oil production had peaked in 1970 and that the Agency was tracking Soviet oil production in the hopes of predicting a Russian peak in 1977. The CIA is Wall Street. Even if the oil had been there, it could not be monetized, because there was no safe route or pipeline to get it out. Alarms started going off.

It was time for the major players to cash out, and that’s what some 20 giant corporations from Enron to WorldCom, to Merck, to Halliburton did, as those in the know pumped and dumped their stocks, sucking the wealth out of pension funds, small investors, and mutual funds from 2000 to 2002. For the most part only the smaller investors and funds were hurt. The people on top cashed out and moved “their” money elsewhere.

p. 572-3 [Copied from scribd. Any errors/typos are mine.]
http://www.scribd.com/doc/8032220/Crossing-the-Rubicon-by-Michael-Ruppert

The planning for MERS, which can be considered to be a core cabal of the plotters of the housing con began in the early-mid 1990’s.

I think it’s safe to say that the plan to dispense with the US middle class and move the engine of Capitalism to Asia was hatched in the 1970’s. Since then it’s just been a matter of engineering pump-and-dumps to grab all assets.

Francois T

AR,

Nocera is like any “establishment journalist”; he is not there to uncover the facts and let the chips fall where they may. That would be the job of investigative journalists, like Jeremy Scahill for example.

By contrast, just examine what Glenn Greenwald write about “establishment journalists” and see if it fits Nocera’s behavior.
http://www.salon.com/news/opinion/glenn_greenwald/2010/12/28/cnnn

The piece I’m referring to is about Wikileaks, government officials and the behavior of journalists; just replace Wikileaks by Wall Street, adjust for financial instead of political context and the comparison becomes eerie.

Some examples:

what always strikes me is how indistinguishable — identical — are the political figures and the journalists. There’s just no difference in how they think, what their values and priorities are, how completely they’ve ingested and how eagerly they recite the same anti-WikiLeaks, “Assange = Saddam” script.

Now, replace “anti-WikiLeaks, “Assange = Saddam”" by “pro-financiers, “Wall Street = crisis yes! Crime no!”" meme and Voila!

It’s not news that establishment journalists identify with, are merged into, serve as spokespeople for, the political class: that’s what makes them establishment journalists.

Thus, as Glennzilla point out so aptly, it can’t be surprising that you cannot see

any daylight at all between the “journalists” and the political figures. They don’t even bother any longer with the pretense that they’re distinct or play different assigned roles. I’m not complaining here — but merely observing how inseparable are most American journalists from the political officials they “cover.”

Personally, I have yet to read from any US financial journalist that is a Name, an article that goes radically against the vapid pablum of Nodrama Obama and TurboTax Timmy.

DownSouth:

Yves said: “Third, he seeks to shift blame from ‘particular Dutchmen’ whose presumed counterparts today would be particular members of the financial services industry, and instead society as a whole. Since everyone is to blame, no one is to blame.”

It’s most intriguing that Nocera should chose that rhetorical strategy to exculpate the financiers, because it’s exactly the same defense Eichmann argued in his trial. But as Hannah Arendt responded in Eichmann in Jerusalem: A Report on the Banality of Evil:

[G]uilt and innocence before the law are of an objective nature, and even if eight million Germans had done as you did, this would not have been an excuse for you.

Of course, as the trial brought out, not all Germans did do as Eichmann had done. There were many who didn’t, as Arendt goes on to explain:

From the accumulated evidence one can only conclude that conscience as such had apparently got lost in Germany, and this to a point where people hardly remembered it and had ceased to realize that the surprising “new set of German values” was not shared by the outside world. This, to be sure, is not the entire truth. For there were individuals in Germany who from the very beginning of the regime and without ever wavering were opposed to Hitler; no one knows how many there were of them—-perhaps a hundred thousand, perhaps many more, perhaps many fewer—-for their voices were never heard. They could be found everywhere, in all strata of society, among the simple people as well as among the educated, in all parties, perhaps even in the ranks of the N.S.D.A.P. Very few of them were known publicly, as were the aforementioned Reck-Malleczewen or the philosopher Karl Jaspers. Some of them were truly and deeply pious, like an artisan of whom I know, who preferred having his independent existence destroyed and becoming a simple worker in a factory to taking upon himself the “little formality” of entering the Nazi Party. A few still took an oath seriously and preferred, for example, to renounce an academic career rather than swear by Hitler’s name. A more numerous group were the workers, especially in Berlin, and Socialist intellectuals who tried to aid the Jews they knew. There were finally, the two peasant boys whose story is related in Gunther Weisborn’s “Der lautlose Aufstand” (1953), who were drafted into the S.S. at the end of the war and refused to sign; they were sentenced to death, and on the day of their execution they wrote in their last letter to their families: “We two would rather die than burden our conscience with such terrible things. We know what the S.S. must carry out.” The position of these people, who, practically speaking, did nothing, was altogether different from that of the conspirators. Their ability to tell right from wrong had remained intact, and they never suffered a “crisis of conscience.”

DownSouth:

The failure to punish free riding and anti-social behavior destroys the very glue that holds a society together.

For more on this there’s this essay from Hillard Kaplan and Michael Gurven. The researchers conclude:

We propose that multi-individual negotiations result in the emergence of social norms that are collectively enforced. We base this proposal on a result obtained by Boyd and Richerson (1992), and treated more recently by Bowles and Gintis (2000), in which cooperation can be stable in large groups, if noncooperators are punished and if those who do not punish noncooperators are also punished.

Francois T

Down South:

If what you quote here is true:

We propose that multi-individual negotiations result in the emergence of social norms that are collectively enforced. We base this proposal on a result obtained by Boyd and Richerson (1992), and treated more recently by Bowles and Gintis (2000), in which cooperation can be stable in large groups, if noncooperators are punished and if those who do not punish noncooperators are also punished.

then the US is on a path of social disintegration. The noncooperators have not only escaped any punishment, they’ve come out of a crisis they provoked more powerful and wealthy than before, precisely because those who could’ve punished them refused (for purely self-interested motives like electoral money) to do so.

By the way, I’m not strictly alluding to the financial crisis here. Dick Cheney and his criminal syndicate of war profiteers have ALL escaped punishment for war crimes, systematic torture and law breaking on a scale totally unimaginable in this country just, say, 15-20 years ago. Yet again, we find the same group of enabling cowards (Obama and his inner circle) in position of punishing the noncooperators but refusing to do so.

I’m afraid History will be very harsh when judging the legacy of Barrack Obama as president. Unless, of course, he decided to finally show some kahunas during his 2nd mandate, when he would be unencumbered by the burden of winning an election.

Allow me to harbor a galactic-size dose of skepticism here.

rps:

The question is has USA social policies progressed since its’ inception? Absolutely. Each generation stands upon the shoulders of its’ predecessors. The past 115 years from 1896 to 2011 has been a revolution in societal evolution. The momentum is breathtaking when measured in this time-frame. We come up against the “power structure” in every generation and yet manage to move forward.

Here’s an excerpt from the Populist Party platform, issued at its convention in Omaha in 1892, which read in part:

“The conditions which surround us best justify our cooperation: we meet in the midst of a nation brought to the verge of moral, political, and material ruin. Corruption dominates the ballot-box, the legislatures, the Congress, and touches even the ermine of the bench. The people are demoralized; most of the States have been compelled to isolate the voters at the polling-places to prevent universal intimidation or bribery. The newspapers are largely subsidized or muzzled; public opinion silenced; business prostrated; our homes covered with mortgages; labor impoverished; and the land concentrating in the hands of the capitalists. The urban workmen are denied the right of organization for self-protection; imported pauperized labor beats down their wages; a hireling standing army, unrecognized by our laws, is established to shoot them down, and they are rapidly degenerating into European conditions. The fruits of the toil of millions are boldly stolen to build up colossal fortunes for a few, unprecedented in the history of mankind; and the possessors of these, in turn, despise the republic and endanger liberty. From the same prolific womb of governmental injustice we breed the two great classes—tramps and millionaires.”

Theodore Roosevelt’s major contribution to American history was his vigorous performance as a Progressive leader. When he became president, the U.S. was at the dawn of the Progressive Era

[Jan 29, 2011] How can the Architects of the Crisis Investigate it- by William Black

Crisis was caused by the change of economics of the USA, not only and no so much by individual evil banksters. To a certain extent they played the role because they were allowed to: loss of competitiveness lead to hypertrophied financial sector, not vise versa.
New Economic Perspectives

The Financial Crisis Inquiry Commission (FCIC) issued its report today on the causes of the crisis. The Commissioners were chosen along partisan lines and the Republicans, one-upping the Republicans’ dual responses to President Obama’s State of the Union address, have issued three rebuttals. The rebuttals follow a failed preemptive effort by the Republicans to censor the report – they insisted on banning the use of the terms “shadow banking system” (the virtually unregulated financial sector that conducts most financial transactions), “Wall Street,” and “deregulation.” The Republicans then issued their first rebuttal last month, their “primer.” The primer, following the lead of the censorship effort, ignored the contributions that the shadow banking system, Wall Street, and deregulation made to the crisis. The combination of the demand that the report be censored and the primer’s crude apologia critical role that the unmentionable Wall Street, particularly its back alleys (the unmentionable “shadow banking system”), and the unmentionable deregulators played in causing the crisis was derided by neutrals. The failure of their preemptive primer has now led the Republican commissioners to release two additional rebuttals to the Commission report. Again, they issued their rebuttals before the Commission issued its report in an attempt to discredit it.

The primary Republican rebuttal was issued by Bill Thomas, a former congressman from California and the vice chairman of the commission; Keith Hennessey, who was President George W. Bush’s senior economic advisor, and Douglas Holtz-Eakin, who was an economic advisor to President Bush on the regulation of Fannie and Freddie and principal policy advisor to the Republican nominee for the President, Senator McCain.

Republican Commissioner Peter Wallison felt his Republican colleagues’ dissent was insufficient, so he drafted a separate, far longer dissent. Wallison is an attorney who was one of the leaders of the Reagan administration’s efforts to deregulate financial institutions and later became the leader of the American Enterprise Institute’s (AEI) deregulation initiatives. His bio emphasizes his passion for financial deregulation.

From June 1981 to January 1985, he was general counsel of the United States Treasury Department, where he had a significant role in the development of the Reagan administration’s proposals for deregulation in the financial services industry….

[He] is co-director of American Enterprise Institute's ("AEI") program on financial market deregulation.

Each of the Republicans commissioners was a proponent of financial deregulation and was appointed to the Commission by the Republican Congressional leadership to champion that view. Three of the Republican commissioners were architects of financial deregulation. For example, the Republican congressional leadership appointed Wallison to the commission because they knew that he was the originator and leading proponent of the claim that Fannie and Freddie were the Great Satans that had caused the current crisis. The fourth member, Representative Thomas, voted for the key deregulatory legislation when he was in Congress and was a strong proponent of deregulation.

The Republican commissioners’ desire to ban the use of the word “deregulation” in the Commission’s report is understandable. There was no chance that they would support a report that explained the decisive role that deregulation and desupervison played in making the crisis possible. Wallison was a major architect of three successful anti-regulatory pogroms (primarily, but not exclusively, led by Republicans) that created the criminogenic environments that led to our three most recent fraud epidemics and financial crises (the S&L debacle, the Enron era frauds, and the current crisis). The Republican congressional leadership appointed Wallison to the Commission in order to place the nation’s leading apologist for deregulation in a position where he could defend it. President Bush appointed Harvey Pitt to be SEC Chairman because he was the leading opponent in America of the SEC Chairman Levitt’s efforts to make the SEC a more effective regulator. In each case, “mission accomplished.”

Each of the Republican commissioners was in the impossible position of having to investigate and judge their own culpability for the crisis. The Republican politicians who selected them for appointment to the Commission knew that they were placing them in an impossible position and ensuring that the Commission would either give deregulation a pass or split along partisan lines and lose some of its credibility. The proverbial bottom line is that the Commission would fail to identify the real causes of the crisis and the control frauds that drove it would continue to be able to loot with impunity.

In contrast, only one of the six Democratic commissioners was involved in financial institution regulation or deregulation. None of the Democrats was known as a strong proponent of any particular view about the causes of the crisis prior to their appointment. Brooksley Born was head of the Commodities Futures Trading Commission (CFTC) under President Clinton. She famously warned of the systemic risks that credit default swaps (CDS) posed. Her efforts to protect the nation were squashed by the Commodities Futures Modernization Act of 2000, which deliberately created regulatory “black holes” by removing the CFTC’s authority to regulate many trades in financial derivatives. Enron exploited one of these black holes to create the California energy crisis of 2001. The largest banks and AIG exploited the black hole to trade CDS. While the squashing of Brooksley Born was a bipartisan effort (Senator Gramm and Alan Greenspan were the most prominent Republicans in the effort), it was led by the Clinton administration – Messrs. Rubin and Summers at their arrogant, anti-regulatory worst.

By appointing Born to the Commission, the Democrats were admitting their error and ensuring that one of the Democratic Party’s great embarrassments – passage of the Commodities Futures Modernization Act – would be exposed. The Democrats were fostering rather than seeking to forbid discussion of their dirty laundry by appointing someone with a proven track record of taking on her own party.

In 1999, Born resigned as CFTC Chair. She retired from her law firm in 2002. She did not influence or seek to influence regulatory policy role during the crisis. She was not active in making comments about the causes of this crisis prior to her appointment to the Commission.

The next, nastier stage in the Republican apologia for Wall Street and the anti-regulators has already begun. Bloomberg reports that House Oversight Committee Chairman Issa claims to be:

“looking into allegations of partisanship, mismanagement and conflict of interest at the commission. The California Republican and two other lawmakers sent a letter yesterday renewing a demand for documents on the panel’s spending, its use of media consultants and its staff turnover.”
Issa is a deeply committed anti-regulator. He will not be investigating the allegations of partisanship and conflicts of interest by the Republican commissioners who have exemplified partisanship and who are in the impossible position of having to examine their own culpability for the crisis. He will seek to discredit any report and any expert who explains why financial deregulation and desupervision are criminogenic.

The most important question we must answer about our financial crises is actually a two-part question: why are we suffering recurrent, intensifying crises? To answer it we must find not only the causes of the crises, but also (and even more importantly) why we fail to learn the correct lessons from the crises and keep making even worse policy mistakes. The answer to the second question is dogma. The definition of dogma is that it cannot be examined or changed – except to become even purer. The ever purer anti-regulatory dogma creates the ever more intensely criminogenic environments that produce intensifying crises. The Commission’s report makes that clear. For example, Alan Greenspan claimed that markets automatically exclude fraud. He did so after the most notorious “accounting control fraud” of the S&L debacle (Charles Keating) used him to praise his fraudulent S&L, leading to the most expensive failure in the entire debacle. Greenspan learned nothing useful from the S&L debacle. He concluded that there was no reason for the Fed to use its unique authority under HOEPA to stop the pervasively fraudulent “liar’s” loans that were hyper-inflating the real estate bubble and leading us to a crisis. Greenspan ignored the FBI’s September 2004 warning that mortgage fraud was becoming “epidemic” and would cause an “economic crisis.” This anti-regulatory dogma that Greenspan exemplified spread through much of the Western world, and the resultant crises have done the same.

We are witnessing in the multiple Republican apologias for their anti-regulatory policies an example of why we fail to learn the correct lessons from the crises. The groups most in the thrall of the dogma appoint true believers in theoclassical economics to the body that is supposed to find the truth. These anti-regulatory architects of the crisis then purport to be impartial judges of the causes of the crisis that they helped create. The Republican House leadership now openly threatens to use aggressively its subpoena authority to bash anyone who dares to oppose the dogma and the Republican effort to censor the decisive role the anti-regulators play in causing our recurrent, intensifying crises.

The Commission is correct. Absent the crisis was avoidable. The scandal of the Republican commissioners’ apologia for their failed anti-regulatory policies was also avoidable. The Republican Congressional leadership should have ensured that it did not appoint individuals who would be in the impossible position of judging themselves. Even if the leadership failed to do so and proposed such appointments, the appointees to the Commission should have recognized the inherent conflict of interest and displayed the integrity to decline appointment. There were many Republicans available with expertise in, for example, investigating elite white-collar criminals regardless of party affiliation. That was the most relevant expertise needed on the Commission. Few commissioners had any investigative expertise and none appears to have had any experience in investigating elite white-collar crimes. These Republicans, former Assistant U.S. Attorneys (AUSAs) and FBI agents would have played no role in the financial regulation or deregulation policies in the lead up to the crisis. They would not have had to judge their own policies and they would have brought the most useful expertise and experience to the Commission – knowledge of financial fraud schemes and experience in leading complex investigative and analytical skills.

[Jan 29, 2011] Paying (both meanings) for War

The Big Picture

My friend (and Washington State money manager) Carl writes about our three trillion dollar war post:

The biggest reason the U.S. is marching towards receivership—-the U.S. refused to pay for the wars in Iraq and Afghanistan.

Instead of raising taxes like we did to pay for WW 1 —we lowered them. Instead of having a high marginal tax rate for the wealthy, President Bush and the congress lowered taxes.

The following is just about Iraq and does not include the cost of Afghanistan.

Read about steps taken to prepare for and pay for WW 1.

And tax rates during WW 2.

Fascinating stuff — thanks Carl!

MikeG:

The Bush Administration knew their reckless war in Iraq would lose most of its support if it was going to cost Mr. and Mrs. Patriotic Heartland Taxpayer more than the price of a yellow ribbon magnet for their SUV.

eightnineEmous:

It was always clear that the Tea Party’s claims that they stand for balanced budgets and fiscal responsibility was a fraud.

And yet for two years no one in the MSM called them out on it.

I doubt that it was stupidity or laziness; one has to assume that their self interest demanded they go along with the charade.

[Jan 29, 2011] No, Not Every Crisis Book Overlooked Citigroup By Barry Ritholtz

January 29, 2011

“The F.C.I.C. is the first to take a close look at the missteps at Citigroup, which virtually every book about the financial crisis has overlooked. It is a devastating portrait of negligence at the top — including the once sainted Robert Rubin.”

-Joe Nocera, NYT, Inquiry Is Missing Bottom Line

Say it ain’t so, Joe!

How did you miss this? Bailout Nation, Chapter 18 is titled “Too Big to Succeed.” It is about the history of Citigroup, its numerous missteps leading up to the crisis, the role of Robert Rubin and Larry Summers in the repeal of Glass-Steagall, and Citi’s role in the collapse. (Bank of America makes a guest appearance in the last third of the chapter).

It is, to say the least, rather critical.

The Glass-Steagall repeal may not have been the cause of the crisis, but it sure as hell made the damage far worse. It allowed banks to own businesses they otherwise could not, and to manufacture and buy junk paper in quantities far greater than would otherwise have been possible.

When Glass-Steagall was in effect, Wall Street collapses were kept on Wall Street and for the most part, away from Main Street.

Do you remember the devastating credit crisis and recession caused by the 1987 crash? No, because it never happened. As Bailout Nation makes clear, Glass-Steagall was a major factor why.

Anyway, Chapter 18 is posted in our Bookshelf. And in light of the FCIC report, the rest of the book should be next in your queue.

[Jan 29, 2011] holtz eakin on the financial crisis “if it’s everybody’s fault it’s nobody’s fault” Tech Ticker, Yahoo! Finance

Douglas Holtz-Eakin, who was an economic advisor to President Bush on the regulation of Fannie and Freddie and principal policy advisor to the Republican nominee for the President, Senator McCain. This guy is the hard core ideological extremist.  The real reason is the US showdown and loss of competitiveness shifted attention of compensation those with financial activity instead of financial. And I would agree with the statement "Wall Street exploited it customers and when faced difficulties bought Washington politicians.". 

The Commission's findings are "too facile," says former CBO director Douglas Holtz-Eakin, a FCIC commissioner and co-author of one of two separate dissents to the majority's findings. "They basically blame everybody. And if it's everybody's fault it's nobody's fault."

Rather than "Wall Street greed" or lobbying designed to make regulators look the other way, "a much more nuanced view is in order," says Holtz-Eakin, currently president of the American Action Forum. "This was a global phenomenon...and happened in very different monetary policy regimes and regulatory regimes."

While conceding AIG credit default swaps "featured prominently" in the crisis, Holtz-Eakin disputes the idea that derivatives were to blame, as some contend. He also disagrees that the primary cause was government housing policy and the related abuses by Fannie Mae and Freddie Mac, as a separate dissent by Peter J. Wallison claims.

In a WSJ op-ed, Holtz-Eakin, FCIC Vice Chair Bill Thomas and commissioner Keith Hennessey lay out the 10 Factors they argue really cased the financial crisis, including:

In other words, Holtz-Eakin in unsympathetic to the view that the crisis was caused by a "100-year flood" or a "run on the bank," as suggested by some Wall Street executives, including Lehman Brothers' Dick Fuld and Bear Stearns' Alan Schwartz.

"Concentrating mortgage risks in the midst of a housing bubble leaves you highly exposed and that happened to particular firms," he says. "The notion they had a run on themselves independent of their financial structure is just wrong. But in the panic we saw comparable runs on institutions that had no comparable exposure; it really was a panic."

elow down payment loans" and "teaser rate loans" had not existed, the rest of the causal chain would have been cut off.

"Likewise, the multitude of financial-firm failures, spanning varied organizational forms and differing regulatory regimes across the U.S. and Europe, makes it implausible that the crisis was the product of a small coterie of Wall Street bankers and their Washington bedfellows."
Monkey see, monkey do. Do you really think the big coterie of European bankers would let the small coterie of Wall Street bankers have all the fun?

Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4).
Accurate credit ratings would have made it impossible to sell securitized instruments once their high risk was known. And even greedy securitizers would not create what they could not sell.
If the credit raters object that they cannot afford more accurate ratings, and neither the securitizers nor their buyers are willing to pay for accurate ratings, the ratings might as well be outlawed, thus telling the world of the unknowability of the product risks.

mary

In our free market society, where the (unfettered) financial industry is a large part of the economic system, the risk of a financial panic increases as the "self serving" activities of money lenders increases.

To suggest that the panic can be counted among the largest contributing causes of the"financial crisis," is like saying that it was an iceberg that sank the Titanic.

The Titanic ran into the iceberg, the iceberg did not run itself into the Titanic. Likewise the financial industry and its massive pile of bad decisions caused the panic.

The financial industry (in it's various forms) are the biggest cause of our downfall.

The financial industry slice of our economy needs to shrink and industries that provide value, real value, must grow.

Andrew The great

Alan Greenspan--Zionist Jew was the biggest fan of deregulation.

Look at ALL the other Zionists in high places in Government/Finance.

It's not a conspiracy and not anti-semantism when the facts are readily available.

Glass/Steagall outlawed leverage ratios greater than 11:1.

Your government is made up of COWARDS.

[Jan 27, 2011] Financial crisis of 2008 avoidable, says US inquiry

BBC News

Ethical breaches

The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done”

End Quote Phil Agelides Financial Crisis Inquiry Commission

The damning report criticised the extent of the financial deregulation overseen by the former chairman of the Federal Reserve, Alan Greenspan.

It concluded that the crisis was caused by a number of factors:

It added that "collapsing mortgage-lending standards" and the packaging-up of mortgage-related debt into investment vehicles "lit and spread the flame of contagion".

These complex derivatives, which were traded in huge volumes by major investment banks, then "contributed significantly to the crisis" when the mortgages they were based on defaulted.

The report also highlighted the "abysmal" failures of the credit ratings agencies in recognising the risks involved in these and other products.

Blame game

Leading figures of the George W Bush and Obama administrations were not let off lightly:

However, the report did soften the blow, saying: "In making these observations, we deeply respect and appreciate the efforts made by Secretary Paulson, Chairman Bernanke, and Timothy Geithner... and so many others who labored to stabilise our financial system and our economy in the most chaotic and challp leadership.

But the president's failure to address the decoupling of American corporate profits from American jobs, and explain specifically what he'll do to get jobs back, not only risks making his grand plans for reviving the nation's "competitiveness" seem somewhat beside the point but also cedes to Republicans the dominant narrative.

The address he gave last night could have been given (indeed, was given) by Democrats in the 1980s when Japan seemed to threaten America's preeminence. Bill Clinton's 1992 campaign manifesto, "Putting People First," laid out the case. Only now the competitive threat comes from China.

A similar call for economic patriotism and public investment emerged in the 1950s and 1960s, when the competitive threat was the Soviet Union. John F. Kennedy challenged America to get to the moon ahead of the Soviets. Before him, Republican president Dwight Eisenhower committed the nation to building the interstate highways system -- forty-one thousand miles of four-lane (sometimes even six-lane) freeways to replace the old two-lane federal roads that meandered through cities and towns -- in order to speed troops, tanks, and munitions across the nation in the event of war. And a National Defense Education Act to educate a generation of mathematicians and scientists to catch up with the Soviets in space.

US Unemployment and Other Data Not Indicative of Recovery By Bill Bonner

01/26/11 Baltimore, Maryland – There are two legs to American household wealth – jobs and housing. Here’s the latest on housing from The New York Times:

The long-predicted double-dip in housing has begun, with cities across the country falling to their lowest point in many years, data released Tuesday showed.

Prices in 20 major metropolitan areas fell 1 percent in November from October, according to the Standard & Poor’s Case-Shiller Home Price Index. The index is only 3.3 percent above the low it reached in April 2009 and has fallen fell 1.6 percent from a year ago.

Prices in Atlanta and Chicago fell more than 7 percent, exceeding even the drops in the perennially troubled Detroit and Las Vegas.

Housing is still going down. If you don’t mind, we’ll repeat what we said yesterday:

“House prices expected to decline for a fifth successive year,” says The Financial Times.

Foreclosures are rising and will continue to rise until March of 2012, according to the projections in the FT, wiping out possibly trillions more in household wealth. Sales are at a 13-year low.

Houses are Americans’ most important asset. And the average house is down about 25% since 2006. But that’s in terms of dollars. In terms of gold, the loss is over 60%.

Okay… Well, it looks like households are hopping on one leg. Now, let’s look at the good leg, employment.

Whoa… What’s this?

WASHINGTON (AP) – The unemployment rate rose in 20 states last month as employers in most states shed jobs.

The Labor Department says the unemployment rate rose in 20 states and fell in 15. It was unchanged in another 15 states. That’s nearly the same as in November, when the rate rose in 21 states, fell in 15 and was the same in 14.

The report is evidence that the job market is barely improving even as the economy grows. Most economists expect hiring to pick up this year, although the unemployment rate will likely remain high.

Employers in most states didn’t add any net new jobs last month. The number of jobs on employer payrolls fell in 35 states in December, the department said. Only 15 states reported gains. Layoffs have slowed dramatically in the past year, but hiring has yet to pick up.

This is not good news. Two gimpy legs. Household wealth is going to fall down.

But what do you expect? This is a Great Correction, isn’t it?

If you listen to the financial media, the State of the Union, or the stock market you’ll get a very different impression. Or just re-read the article above. It says “…the job market is barely improving.” In fact, it’s not improving at all. It’s getting worse. The population is growing. If employers don’t add new jobs, it means more people out of work.

Housing? Same story. It’s not “barely improving.” Houses are still losing value.

We could ask sarcastically: “So, where’s the recovery?”

But why bother? You know as well as we do that there is no recovery. And there’s not going to be a recovery.

Instead, the economy has to move on…to something new. If the financial and political authorities suddenly came to their senses, we could imagine that a couple of rough years of bankruptcies and losses would be followed by a long period of new growth.

But we weren’t born yesterday. This is not a dream. It’s reality. And if our new theory is correct, the authorities are not going to come to their senses. Because they’re paid not to. Ben Bernanke has to believe his crackpot activism will pay off. Otherwise, he’d have to renounce the whole project…and admit that he’s been a fool. He’d also be out of a job – because neither the bankers nor the politicians would allow the chips to fall where they may. Hey – they own those chips!

But couldn’t the feds all get a Ron Paul makeover and come to see that their interventions were actually making thing worse – by adding even more debt and delaying the necessary adjustments?

Nope. Not gonna happen. Remember, a government is the result of natural selection, not rational thought. Its primary objective is to survive. And it does so by protecting its niche – at all cost.

Peter Orzag, writing in The Financial Times:

Most fundamentally it is difficult to see how the medium-term federal deficit can be reduced to sustainable levels without additional tax revenues from those earning less than $250,000 a year. And yet it is equally difficult to see the political system embracing that reality without being forced to do so by the bond market.

The feds cannot suddenly stop rigging the system for the benefit of their favored groups and supporters. A flesh-eating dinosaur can’t suddenly become a vegetarian.

The elite, the privileged, the parasites and the zombies are the feds’ base of power. Lose them and the government is out of business.

Regards,

Bill Bonner
for The Daily Reckoning

[Jan 25, 2011] QE2 A Success: 56% Of Wall Street Gets Biggest Bonus Than Last Year

66Sexy:

whoever said "crime doesn't pay" was probably a ranting daytrader

doc:

Mission Accomplished.

williambanzai7 :

Look at the bright side. McDonalds is planning to raise prices.

This would not be possible without banker domestic help willing to pay more for burgers.

[Jan 24, 2011] Low Volume Meltup Resumes

After last week we actually saw some volume participation for the first time in 2011, today the no-volume meltup has resumed. The chart below shows the relative to average volume in the ES. Which ironically shows the Catch 22 the banks find themselves in: the higher they run up the market, the less participation there is, the less trading volume, the lower commissions, and the lower the profits from the traditionally biggest contributors to bank P&L over the past 2 years: flow and prop trading (as confirmed recently by Goldman, Morgan Stanley, JPM, Jefferies and everyone else).

Which simply means that banks will have to increasingly rely on the Treasury curve trade (and of course, fudged accounting) to make their bottom line. This would work if consumers had actually stopped deleveraging. Which they haven't. Meaning simply that banks will need to make all their trading profits on market distributions and other crashes that see volume spike. But that as we now know, is contrary to the Fed's third mandate. A curious bind indeed.

[Jan 23, 2011] Does Borderless Economy Equal, Jobless Prosperity

Nancy Folbre:

Borderless Economy, Jobless Prosperity, by Nancy Folbre, Economix

Why has the economic recovery left workers behind? ... Many journalists argue that globalization is partly to blame... Few economists like this argument, but even some mainstream savants like Alan Blinder ... express concern about the effects of offshoring. ...

A recent Time magazine article by Zachary Karabell referred to the new joblessness as a part of a megatrend toward globalization that we just have to live with. So much depends on who “we” are. During the 25 years after World War II, the interests of American investors and workers were closely, though not perfectly, aligned. Productivity increases were passed on in the form of higher wages that, in turn, fueled increasing demand for domestically produced goods and services. Businesses willingly paid taxes to support public programs designed to improve the education, health and security of the labor force on which they relied. ...

Large corporations are no less patriotic now than they were then. But their economic incentives have changed. Facing intensified international competition, they have little reason to care about the nationality of their workers, consumers or investors. Fans of globalization point to many economic benefits: lower-priced consumer goods, rewards for technological innovation and higher living standards for many workers in developing countries. But however significant these benefits, the other side of the ledger reveals significant costs arising from political realignment and efforts to escape regulation and taxes. Jobless growth is only one symptom of increased social conflict, intensified economic inequality and weakened democracy. The prosperity in jobless prosperity exists only for the rich.

bakho:

In the 10 years after WWII, the GI Bill invested more money in education grants, business loans and home loans than all of the New Deal programs combined for their first 10 years. We have reduced our government investment in our workforce and infrastructure.

Wealthy investors take their investment dollars to countries that out compete us by adding Government investments court the private investment.

Low Tax-Low Service-Low Jobs

Jesse:

A borderless economy implies a loss of fiscal and public policy, in which the participants fall to the least common denominators of governments.

Once you cede your sovereignty, either by engaging in 'free trade' or 'shared currency' one loses a great deal of latitude in public policy, and how the many are treated and will fare.

This is basic economics for those who look at things like money.

Let me control the money supply and I care not who makes the laws. duh.

me:

"Large corporations are no less patriotic now than they were then"

Wrong. I suppose that kis why IBM says we should not be held to any national labor laws, we should be allowed to do what we want.

"Fans of globalization point to many economic benefits: lower-priced consumer goods"

If we have no jobs we don't buy cheaper goods.

Social unrest is coming to your town sooner than you think. It has started in Greece, Ireland, England, France and will be here. Young people with no job and nothing but time on their hands will soon figure this out.

yuan:

 "A borderless economy implies a loss of fiscal and public policy, in which the participants fall to the least common denominators of governments."

In this kind of an economic system "governments" also have an incentive to compete for multi-national corporate largess by reducing regulations, wages, and taxes.

btg :

said... "Large corporations are no less patriotic now than they were then. But their economic incentives have changed."

true only if you believed that corporations were never patriotic at all, except that during the cold war their interests were more closely aligned with those of US and other western governments.

hence the famous line that "what is good for the US is good for GM, and vice versa"

Of course, now foreign based corporations play a bigger role than they used to - Toyota, Sony and others.

If companies were patriotic, then they would care about all the people, not just the selfish interests of shareholders and management - that "we are all in this together" not "screw the poor"

[Jan 23, 2011] Who Holds the Trump Cards in the China vs. US Poker Game?

01/22/2011

tjfxh:

The question is, who is driving this game, China or the US. It is clearly the US multimationals that are providing the invesment and expertise that runs the Chinese export economy.

The reality is that the US is winning in real terms of trade. The US is getting stuff, and the China is getting paper (actually numbers on a spreadsheet). The US is importing deflation and exporting jobs, the Chinese are importing jobs and also importing inflation.

Who are the real winners? The US multinationals that are opening new markets abroad and securing a low wage, low benefit workforce in an unregulated environment favorable to business, as well as acquiring real assets in the form of investment in factories and other capital goods abroad, beyond the reach of the US tax man.

Who are the losers? Chinese and US workers, and the US middle class in general. Who are the winners? The captains of industry and finance. So what else is new?

sethstorm:

I'm not entirely sure that they're fully out of reach of the tax man - the products generally do have to make it to shore.

That, and those multinationals are only as powerful as they are allowed to be.

More Critical:

2) US Treasuries ownership (a decision by the #1 holder to dump would start a global rush from the US Dollar)

LOL.

So many words in this article, and so little basic clue shown about how the world really works.

Firstly, chinese ownership of US Treasuries amounts to holding a water pistol to the US's head. All the cards are on the US side: the debt is denominated in dollars and the US very much desires a weaker dollar, to improve its ailing economy. (a weaker currency makes the US more competitive)

Secondly, in China they are still routinely executing high officials accused of treason and corruption. Guess what would happen to the Bank of China officials who came up with the "lets keep 1000 billion dollars in US Treasuries" idea, if those bonds were suddenly worth 10% or 20% less due to China playing 'hardball'? Guess what would happen to them if chinese unemployment increased and chinese production dropped because they weakened the dollar and made the US more competitive?

Guess why chinese officials were so scared about European periphery bonds dropping, and started backstopping Europe's debt last week? That should have given you guys a clue that your theory about chinese intentions is dead wrong ...

Thirdly, China making the dollar weaker, while maintaining the yuan's cap to the dollar would be a suicidal macro policy: it would push chinese inflation even higher. If they decoupled the yuan they'd not only face domestically and internationally, but they'd also reverse the direction of the outsourcing of about 3 million US jobs to China which happened in the past two decades.

So it aint gonna happen - and if it happens, it's good for the US and bad for China.

The "China can black-mail the US via its UST holdings" is one of those stupid right-wing zombie lies. It's not even remotely true.

Guys, you should really not accept the GOP talking points at face value - show some backbone and practice some critical thinking for heaven's sake ... that brain you got born with has a purpose! :-)

topcallingtroll:

Yeah i dont understand why he thinks higher yuan rates will hurt us and the derivative structure unless the author is talking about forcing.us rates higher and even that wouldnt hurt us as much as the chinese bevause the fed controls short term rates and the steepener.trade would just recapitalize the banks faster

Eternal Student:

+1. Agreed. Other commentators below have debunked the other points. Let me just add that the trump cards are trade and resources. China needs the US more than vice-versa for trade. We saw the failure of being the low cost production leader with Central America in the 90's. People are starting to look elsewhere than China for production now.

China's dependance on foreign resources is a huge Achilles heal. From Africa to Canada, those routes all go through foreign navies. With these two weaknesses, and over a billion people to feed and control, this is not a position of strength.

Al89:

'Both countries' debt-to-gdp ratios are ridiculous, nobody wins.'

Exactly. People seem to think the fall of the US is a certainty, that China will grow to the sky. China has major problems too, I don't view the Chinese government's control as being total, it is a fragile state like all others.

The U.S has control over the Western world (does the reaction to Assange and Wikileaks cause anyone to doubt this?), easier access to rare materials than China, and (yes this still counts), a military which is far superior to the Chinese army.

China hasn't even gained dominance over the U.S in it's backyard, Asia, and people think they rule the World! U.S carriers are docking in Vietnam, neighbouring states like the Philippines, Taiwan, India not mention Japan and South Korea still look at China with suspicion and view the U.S as allies and a balancing force.

KickIce:

The more jobs we lose the less influence we have with China as demand for cheap junk falls. As soon as we use our usefullness they will dump our currency as their end goal is to become the #1 economic power.

The winner is the country with the most commodities. China understands this, Timmy and Ben - not so much.

[Jan 22, 2011] WHAT WILL TURN ME MORE BULLISH ON THE U.S.A.

January 22, 2011 | The Big Picture

El Viejo

1. You can’t break the laws of physics. There is not enough uranium or solar efficiency or wind (except on the blogs) to replace cheap oil.
2. The paradox of thrift says if everyone saves, your economy collapses. Japan will default in 2 yrs and they don’t save as much as they used to.
3. True.
4. The damage is done. Inventories are coming down.
5. They tried it in the 30s to minimal advantage. (why not outlawing overtime?)
6. I told my doctor that I almost immigrated to NZ in the 70s. He said he did too, but then decided he could make more money here.
7. That’s being done now. They expect Sallie Mae to go bankrupt due to (attempted)defaults on student loans. (don’t try it the govt comes after you cause it’s federal money) The IRS will get you!
8. The regulations they just instituted are having a negative effect. GS profits down 53% Yawn.
9. Carrot incentives and Tax sticks to make them use that corporate money to retool or rehire!
10. That’s why I said in a previous post (somewhere?) that the Mexicans may save us. We aborted a whole generation that we needed to pay for our boomer retirement. And you are right about Japan. I lived there for two years.

DeDude:

The one thing that would get me really optimistic for the future would be a strong reversal of the current trends in income distribution. Consumers are 70% of our GDP and anything we do except for strengthening the income of the consumer class will just be like rearranging the chairs on the deck of the Titanic. Our country is currently sinking into an Argentina like structure and the economy will follow the structure. The fake GDP created by financial “innovation” will not carry much in the long run.

A:

I think the key word in David’s summary, is courage. All political behaviour is driven by the first two of the four points of politics:

POINT ONE: the first priority of any politician/political party is to get into power. POINT TWO: the 2nd priority for any politician/political party, is to STAY in power

As you can see, the issues that David is concerned about are secondary to the above. Perhaps tertiary. Hence, you’re not going to see much in the way of courage. History does in fact rhyme.

Niskyboy:

Rosenberg is so persistently bearish he’s lost credibility with me. Yes, someday the world will end, but between now and then you can live your life. Anyone who’s acted on Rosenberg’s macro economic advice hasn’t exactly made any money over the past year or two, have they? Sure there are tough problems — and we all know them. We all can list more of them.

What we don’t know, yet, are the creative solutions that clever, incentivized people will apply to solve or to ameliorate at least some of those problems. People always sound so smart when they preach gloom and doom, but it’s because they can’t predict the unexpected. Well, that’s because it’s unexpected. Club of Rome, anyone?

Yes, we’re on an unsustainable course. Manage your personal and business affairs with that in mind, work hard and hope for a bit of luck. But really, things aren’t coming to an end tomorrow, next week, next month, next year.

Man, I’m getting tired of this. (There’s no sense in going to Zero Edge anymore, either, it’s just more of the same, and juvenile, too.) Maybe there’s a reason Rosie no longer works at Merrill Lynch. Maybe the reason is that clients who follow his advice would lose money.

[Jan 20, 2011] What Am I Reading?

Jesse's Café Américain

Why people care about these sorts of things puzzles me but here goes.

I read non-fiction off and on all day long during trading/working hours from a wide variety of internet sources and things sent in by readers, so in my off hours I tend to shy away from financial and economic material.  I did my basic economic reading from 1992 through 2004, reading almost nothing else but that sort of thing. Quite a bit of that was done on international flights and in hotels while traveling for business.

I have at least a thousand books in my library. I 'collect' things. My oldest book is a 1630 edition of Thomas More's biography by his great grandson Cresacre More. I have an enormous collection of early edition books and pamphlets by and about John Henry Newman and the other figures in the Oxford Movement.

Before the internet took over I spent many happy hours browsing in the stacks of the booksellers along Charing Cross Road and in lower NY. From what I can tell the old bookmen are a dying breed.

I recenly finished The Passage by Justin Cronin. This is an excellent work of apocalyptic science fiction that is amazingly detailed and well written.   It was part of a sci-fi binge that included the entire Dresden Files series of novels by Jim Butcher.  Great reading material for hospital and doctors waiting rooms.  Before that the Odd Thomas series by Dean Koontz. And everything by Douglas Preston and Lincoln Child. I am a Sherlock Holmes devotee as well, and always manage to find something.

I just started The Bed of Procrustes by Nassim Taleb. This is more of a philosophical book as it is financial, and eminently readable on an a continually interrupted basis since it a collection of aphorisms.

I do keep a select set of books next to my chair for reading in the late and quiet hours of the evening after all the family is put to bed, the doors locked, and the windows closed.

From this I am re-reading sections of Econned by Yves Smith which is an awesome work about the financial crisis and its roots. If you do nothing else read the introduction thoroughly and you will know more about the financial crisis than most. I rarely read the same book twice unless it has real substance.

I am also re-reading sections of Arrogant Capital by Kevin Phillips.  It is driving me to despair of any serious reform effort in the US.

I am eagerly waiting to buy a DVD copy of Inside Job.

And there it is.

[Jan 20, 2011] U.S. Stocks Near ‘Significant’ Top, Tom DeMark Says - Businessweek

That's pretty naive, if you think about what brought the market to this level..  No that a drop can't happen, it's just that tech indicators are dangerous thing to believe without having a larger concept of dominant trends.
Jan. 18 | Bloomberg

U.S. stocks are within a week of “a significant market top” that is likely to precede a drop of at least 11 percent in the Standard & Poor’s 500 Index, said Tom DeMark, creator of a set of market-timing indicators.

DeMark’s Sequential and Combo indicators, designed to identify market tops and bottoms, are giving a sell signal on the main U.S. stock benchmark for the first time since mid-2007, he said in a telephone interview. The S&P 500 began its 57 percent plunge from a record in October 2007.

“I’m pretty confident that in one to two weeks, the market will be in a descent,” said DeMark, founder and chief executive officer of Market Studies LLC. “It could be pretty sharp.”

DeMark’s forecast follows projections from Wall Street strategists that the S&P 500 will climb to 1,384, an annual gain of 10 percent, through the end of the year, according to the average of 12 estimates in a Bloomberg survey. Short selling of companies in the index has fallen to the lowest level in a year, according to Data Explorers, a New York-based research firm.

... ... ...

On a weekly basis, the two indicators signaled on Jan. 14 that a reversal is imminent as the S&P 500 closed at its highest level since August 2008. DeMark expects a decline of at least 11 percent because his work shows that markets move in increments of 5.56 percent, he said. Assuming a drop twice that size is “a conservative estimate,” he said.

The indicators are based on comparisons of the current closing level of the index with closing and intraday levels over previous periods. The reading Jan. 14 was the first signal of a reversal in the S&P 500 since March 2009, when the indicators showed a rebound was imminent, he said. That month the S&P 500 fell to a 12-year low from which it has rebounded more than 90 percent.

The index has risen for seven straight weeks, the longest stretch since May 2007.

[Jan 19, 2011] 2011 The Year For Cautious Optimism

January 19, 2011 | naked capitalism

Maju:

 “I would love to hear your views”.

I think you are being optimistic. This is a structural crisis like we have not seen in centuries probably.

You cannot pretend that we are out of the crisis when the ecological disaster in the Gulf of Mexico has not been addressed for instance but just buried under the sand (yet it overflows). You will say: what does have to do? All because the costs we transfer to the ecosystem remain being costs we have to pay for somehow, we just pretend they are not (because that’s how capitalist faulty logic works). I see no advance in reducing the environmental and social costs, the overproduction and the instigation to consumerism: the general reasons behind the crisis remain unaddressed, so the crisis is going to persist – it’s difficult to heal if you remain stuck with the bad habits.

But even if we would dare to ignore all that, there are other structural problems, namely the massive concentration of fraudster Capital in very few hands. Why the TBTF are such thing? For no other reason but because they foot the bill of all people in power in all key positions. Nothing at all would happen if they would fall, as long as the states were active in intervening and not just letting “market” (the maimed “invisible hand”, you really need faith for that, I’d rather believe in Santa!) to “rule” the economy. “Market” is just an euphemism for oligarchs. “Money markets” means big banks specially.

So, well, focusing, as long as all Capital is concentrated in so few hands and the state apparatus, in Washington or Ouagadougou, is subservient to these mafias, there is no exit to the crisis because it’s this concentration what is causing it. Bernanke and antecessors said that they did not mind big companies, nor big banks, but what they meant is that they are faithful servants of their lords, nothing else. These big companies, this concentration of Capital in monopolistic form has just destroyed markets making the Western economy not better nor more efficient than the Soviet one was in the late 1980s.

But in the Soviet case the state could intervene (it was neutralized in the end though). In the Western case however, the state has been neutralized and can do nothing unless there is a radical revolution first.

So we are bound to languish in this decadent monopolistic self-destructive lack of economy. And I see no reason to expect 2011 specially being better. Rather, I expect it to be a quite turbulent year, as so many crisis are open and have to explode…

Mike M:

How about demographics? As of 01/01/11, 10,000 Boomers a day will turn 65 in America, until 2020. 3.65 million a year, going into the end game with very little savings and stuck with an asset, the home, that is sinking underwater by the day?

Think of the medical costs, too, if you can. Sort of an anchor to any sort of acceleration, wouldn’t you think?

Jim the Skeptic :

 I wish you were correct but I think you are being too optimistic.

This is not the typical post WWII recession where manufacturers with excess inventory lay off employees until the inventory is reduced.

This is a repeat of the Great Depression but with Roosevelt’s programs in place, the immediate damage has been reduced.

Imagine our situation without any unemployment insurance, or Social Security benefits. Consumers would have had less money to spend. And without deposit insurance the 156 failed banks would have caused their depositors to lose all their money. Businesses would have lost their operating capital and consumers would have lost their life savings. That would have led to banks runs and additional bank failures. I am sure that I am missing other programs.

Unemployment insurance has helped but now the unemployed are reaching the 99 week limit and are losing that check. Expect consumer spending to fall.

The stimulus is just about a thing of the past. The federal politicians are talking up austerity. Stimulus money to the states is probably over. The weak economy will have to stand on it’s own.

State and local governments will have to continue to reduce the number of employees and spending on programs will have to be reduced.

Jobs and the resulting increased consumer spending will be the eventual cure. Who will soon be needing a very large number of new employees? Nobody.

I would not bet on this situation getting much worse, but I don’t see any way it can get better.

DumpTheBankInfoJulian:

Jim, I’m with you. I don’t see anything to be optimistic over. I believe this is the year that the shit starts hitting the fan. I believe the big banks will be hit with a deluge of lawsuits…some of which will be one big bank suing another.

I don’t think it will be pretty.

bear_in_mind:

 @JimTheSkeptic: Very astute points!

I think it’s clear the stock market is virtually disconnected from the broader economy, so I expect it will do what it does until enough retail investors are sucked in to provide yet another windfall for the Fat Cats… then lookout below.

Until the U.S. reclaims a sovereign manufacturing base, be it ‘green tech’ (i.e. solar, wind, nuke) or wholesale infrastructure upgrades, the mid-to-long term looks bleak indeed. Without it, look for structural unemployment to remain stubbornly high.

And over the next decade, changes in American demographics (read: Baby Boomers retiring) are about to serve a massive body blow to the economy: 1) institutional ‘brain drain’; 2) unfunded liabilities in medical care and pensions; 3) inadequate savings and home equity to maintain lifestyle.

I see nothing to keep this house of cards from crashing down. The one upside is that with enough Boomers retiring, it might bring UE down some – but if Boomers can’t make ends meet without employment, they might delay retirement and exacerbate the UE dilemma.

If America wakes up in the next few years, we might turn things around by the middle of the decade, but if policy makers stick to their “muddle through” approach, our next best hope may be the 2020’s. So, if you weren’t a ’saver’ before, you doggone sure better start now!

Greg :

Well said Jim

The forces are definitely turning in the wrong direction now. All the revisionist efforts at discrediting the New Deal reforms have blinded average people to how much support basic programs like UE, FDIC and SS provide. Its in the trillions.

Our phucking Tea Party geniuses are on a full frontal assault of all that the New Deal brought and they will collect a few hides. They will not get their wet dream wish of a fully privatized, no social insurance system but they will succeed in getting things reduced by 25-33% I believe. In addition I think they might succeed in getting rid of minimum wage laws. The average worker will be paying much more for much less.

This time next year will be very ugly. I wont be back in the stock market any time soon.

Cynthia:

The only reason why many of us are feeling somewhat optimistic about the US economy is because the stock market has surged back to pre-Lehman crash levels. I say this as I’m looking through the rear-view mirror with the road ahead not looking so bright and rosy. Seeing that broad-based gains have occurred in the stock market over the past year and a half or so, it’s only natural to think that there are plenty of more gains to occur down the road.

But as I’ve said before, there seems to be something very phony about these gains on Wall street. With the combination of bailing out the banks, dropping interest rates to near zero, and pumping even more money into the banks under the guise of quantitative easing, not once but twice, the market is bound to rebound. But I see this as giving the economy several bags of intravenous fluids to correct critically low blood pressure. If the problem with the economy was merely dehydration, then we should be well on the road to recovery. But I sense that there is an underlying problem that has yet to be diagnosed and treated — something as debilitating as heart failure or bacterial sepsis or internal bleeding. I could be wrong, but I doubt it.

Alex Sebastian:

Mr. Harrison,

Interesting that you stated that “the recovery is likely to be of poor quality due to significant malinvestment.” I am interested if you could spell out your reasoning here.

I only ask because one thing I have been considering is the massive issuance of high yield debt of late. I have neither the time nor the capacity to run the numbers, but I suspect that investment-grade issuers don’t see a lot of good investment opportunities (and therefore are reducing debt issuance because they have as much cash as they will need). On the other hand you have non-IG companies with unprecedented market access who are in all likelihood putting every dime they get (from pension funds starved for yield) to work. This is probably what’s driving the large rises in business investment we are seeing.

While I must admit, there is a fair amount of speculation here, somebody should run some numbers, because if my suspicions are confirmed, these inherently cyclical companeis (along with the broader economy) will take a drubbing the next time things get nasty.

Edward Harrison says: January 19, 2011 at 6:49 pm Thanks for the comments, Jim. I remember meeting Shumer at the US Open when he was running for Senate the first time. I think it was 98. He was out glad-handing, trying to shake everyone’s hand and I was wondering who this guy was.

Let me repeat something from another recent post which puts my comments here in a broader context. This is based on something Randy Wray wrote about New Keynesian solutions:

In any event, the US is in a cyclical upswing, predicated on fiscal and monetary stimulus. I think this upturn demonstrates that stimulus works. But, to what effect? Are we experiencing a sugar high that will lead to more malinvestment and a worse hangover when the high wears off? I would suggest that this is a strong possibility – and I assume Randy and Marshall agree. I am not at all convinced policy is geared to those things that will make this upturn sustainable: increased employment and personal income, increased household savings, reduced financial sector leverage, and capital formation. Is the US just trying to get through the next election cycle by any means necessary? Or despite historic partisanship, is there a discernible and coherent economic policy guiding the US?

http://www.creditwritedowns.com/2011/01/more-on-fall-of-new-monetary-consensus.html

This is a golden opportunity to get things sorted. Personally, I think Obama IS just trying to get through the next election cycle and his economists are just figuring out how to help him do that. There doesn’t seem to be any longer-term framework in mind (except export more). And if you follow MMT, you would argue that exports are a cost and imports a benefit (hard to explain here, but that’s the problem with mercantilist export-orientation).

Let’s see what the President has to say in the SOTU. I expect to hear more pro-export, pro-free trade, pro-incumbent, pro-big business platitudes and how America is in the midst of a sustainable recovery. Needless to say, this is exactly the kind of mindset I am saying is going to make the next downturn very difficult.

[Jan 20, 2011] Words You Seldom - If Ever - See In the Financial Media

"These flow numbers are volatile, and spikes of this size have almost always been short-lived in the past few years. It will take several more weeks of such inflows before any sort of trend can be declared."

Be still my heart/mind! A caveat! From the WSJ! Progress!?

I cannot tell you how many articles I read each and every day that effectively extrapolate trends from single (or painfully limited) data points without any such caveat. Well over a dozen if not some multiple of that.

So-doing is an example of several particularly dangerous types of cognitive bias including but not limited to anchoring (the common human tendency to rely too heavily, or "anchor," on one trait or piece of information when making decisions), contrast effect (the enhancement or diminishing of a weight or other measurement when compared with a recently observed contrasting object), focusing effect (the tendency to place too much importance on one aspect of an event; causes error in accurately predicting the utility of a future outcome) and others.

Trends are important - as are identifying and acting upon them - but every single day I see traders, journalists, pundits, etc calling out trends too-early based upon obviously limited data.

The trend may be your friend, as they say, but if the trend you've identified isn't actually a trend, then your friend it shall not be.

I learned this lesson the hard way when I watched my college $ go *poof* when the tech bubble burst. I used it to my advantage when I shorted some retail/apparel in 2008 and finished the year with double-digit gains in my personal account while the S&P 500 nosedived ~50%. Unfortunately, I wussed-out on the huge upward-trend since March, 2009 as my macro outlook - based on the data I follow - was and still is a bit less rosy than valuations across a variety of sectors/firms have and continue to imply. Whoops!?

The point is simple: Don't jump to conclusions based on headlines. Drill-down and dig a little deeper into the details. That's what John Paulson and other fund managers did before the housing bubble burst, and last I checked, that approach worked out pretty, pretty well for them...

[Jan 19, 2011] Guest Post Most Economists Fall Back Into Neoclassical Stupor …

January 18, 2011 | naked capitalism

Susan:

When are these econo-pontificator jobs going to get outsourced to Mexico, India and China? When? When?

Justicia :

You don’t expect the “theoclassical” economists to recant, do you? Why, you might as well wait for the Pope and the College of Cardinals to become atheists.

scraping_by:

Joining the upper class by serving the upper class. Economists as a tribe of rhetorical footmen.

While reality-based economics would be jobs in a sustainable system, it’s faith-based explanations that tell us the best in the best of all possible worlds.That’s what brings in the money.

Status and wealth, a heck of a combination.

Tom Stone:

They know which side their bread is buttered on. That is all they need to know.

Hugh:

I echo lambert’s and scraping by’s sentiments. The economics profession is not about an analysis of our economy that can make reasonable predictions about it. Economics and economists are enablers of the con and validators of kleptocracy. They say the many must make do with less and do not say that the result of this policy will be the few will have more.

These are not innocent, unworldy types tied to outdated and obsolete ideas. They are abettors and apologists for the greatest economic crimes in human history. We should call and treat them for what they are: criminals. Kleptocracy is not a some time thing. It is not a label you apply occasionally. Kleptocracy is a system. The looters can’t function without corrupt politicians, a complacent propagandizing media, or complicit enabling academics. With kleptocracy, there is no middle ground. You either stand with the looters or their victims. I think this is the critical choice we all must make.

Bev:

Since this is a group of co-conspirators, these banksters, economists, media, politicians, academicians, any way to RICO them into ratting each other out to turn this around?

In case that won’t happen, I like the people who have workable effective ideas to improve our outcomes.

I like the effort toward public/state banks to put into circulation ample debt free money to get people jobs and turn things around on a dime.

Ellen Brown’s site: http://webofdebt.wordpress.com/

Bill Still’s site: http://www.secretofoz.com/

 

[Jan 19, 2011] Breakfast_with_Dave_011811It is truly difficult to understand why it is that everyone is so whipped up about U.S. growth prospects

Bottom line: Growth projections of 3-4% for 2011 look quite spurious to us even if the markets seem to have recently been buying into this supercharged consensus view.

It is truly difficult to understand why it is that everyone is so whipped up about U.S. growth prospects. Even the latest set of data points has been less than exciting. Retail sales, payrolls, and consumer confidence have all been below expected and all of a sudden we see that jobless claims are moving back up. The deceleration in core capex orders is quite telling and housing remains firmly in the doldrums. To be sure, we have a slate of "diffusion" surveys telling us that businesses are feeling better — the ISMs, the IBD/TIPP survey, the NFIB and the array of regional manufacturing surveys too, but over 70% of the U.S. GDP is the consumer and we did seem to close out 2010 with real spending and wages roughly flat. Is that good? Or perhaps there is now this widespread belief that the government will stop at nothing to achieve the holy grail of sustainable economic growth and revived animal spirits among the investing class. The Fed has made it quite clear that the road to prosperity lies through the equity market, and that the primary objective of quantitative easing was to generate a positive equity wealth effect on consumer and business spending. So far, the stock market is biting because the rally has been non-stop in nature for months now and whatever givebacks we see are brief affairs and widely treated as buying opportunities. Hope springs eternal, so much so, that even soft economic data like we saw last Friday are treated with little more than a shrug of the shoulder.

The S&P 500 may still be some 17% away from its prior peak, but the Wilshire 5000 just closed at a new high after last week’s 1.8% advance, and in the short span of just 22 months, has managed to double (+100%). In other words, from the March 2009 lows, $8.3 trillion of paper wealth has been created. Thanks Ben! The S&P 400 midcap index is at a new high too, as is the Wilshire small-cap index, piercing its old high set back on July 13, 2007.

The Dow has now gained ground in each of the past seven weeks. The last time it did that was back in the week ending April 23, 2010. Ahem. A month later, it was down 1,200 points. You see, nothing lasts forever, not even a speculative bounce. The Shiller cyclically-adjusted P/E ratio has expanded for six months in a row and at 23.3x in January is now at its highest level in nearly three years. Sentiment is wildly bullish. The market is seriously overbought, and it is expensive on a "normalized" earnings basis.

In any event, as we look to the months and quarters ahead, what do we see? We see that the Federal government just announced a bonanza of $858 billion of stimulus measures towards the end of last year. Of course, almost all of that just ensures that Washington will not be a source of contraction this year, but the psychological impact has been huge so far. The Fed has allowed its balance sheet to explode even further to obscene levels of $2.43 trillion or triple what it was before the financial crisis took hold. In the past three years, the Fed’s balance sheet has expanded by $1.5 trillion and nominal GDP has only managed to rise over $500 billion. Fascinating. And we had the U.S. public debt explode by $5 trillion over that same time frame — the country is 244 years old and over one-third of the national debt has been created in just the past three years. Incredible. The U.S. government now spends $1.60 in goods and services for every dollar it is taking in with respect to revenues which is unheard of — this ratio never got much above $1.20, not even during the previous severe economic setbacks in the early 1980s and early 1990s.

So we have federal fiscal support, which at the margin is subsiding. And we have massive monetary support, and on this score the Fed is going to be facing much more intense congressional scrutiny going forward.

At the same time, it should be remembered that about half of last year’s GDP growth was inventory accumulation. That is about to come to an end.

Net exports in 2010 received support from accelerating global growth and the tailwind of a roughly 5% decline in the U.S. dollar from a year earlier. Now we have half of U.S. exports being negatively affected by policy-induced decelerations in Europe and non-Japan Asia.

The slowing trend in capital goods orders suggests that business spending growth will end up being half the 15% increase we enjoyed in 2010.

Illinois just raised taxes that will drain $6.5 billion from the regional economy and California is planning $12.5 billion in spending cuts. All told, we could easily see $65 billion of fiscal restraint from the lower levels of government this year, which is akin to a 0.5% drag from baseline GDP growth.

If the GOP in Congress gets its way, in order to get the debt ceiling passed, we will see $50 billion of federal spending restraint this year too.

If home prices go down another 10-20%, as even some Fed district banks think is possible, that could end up curtailing consumer spending by a full percent via negative wealth effects on the personal savings rate. The question here is whether an overvalued stock market can serve as an antidote.

Vacancy rates are still far too high to believe that construction spending, residential or commercial, will be contributing to overall economic growth this year.

Interest rates are no longer declining and in 2010 this offered $100 billion of debt service support to the household sector.

Finally, the food and energy bill combined can be expected to drain $100 billion out of household cash flow this year too. As we saw in December, real spending looked flat and real wages are now down in three of the past four months. And the salutary effects of the payroll tax cut will only be felt incrementally this quarter. Look for air pockets thereafter.

It should be remembered that about half of last year’s GDP growth was inventory accumulation — that is about to come to an end

Vacancy rates are still far too high to believe that construction spending will be contributing to overall U.S. economic growth this year

[Jan 18, 2011] Breakfast_with_Dave_011711 Beneath the veneer of all the enthusiasm is the reality that real organic incomes are under pressure

US consumer does not matter much as consumption is the game played by the top 30% of population only. Other 70% can watch Superball...

At this rate, the energy bill is going to create a drag U.S. household spending power by $60 billion this year. The surge in grain and meat prices is going to lift the grocery bill by $40 billion. The end to the debt-service relief (relief that was supposed to be nurtured by QE2) is another $100 billion

So there we have $200 billion of headwinds that is going to offset 70% of the federal fiscal stimulus that was unveiled last month.

U.S. CONSUMER HITTING AN AIR POCKET?

Well, that January consumer sentiment number was nothing to write home about. The University of Michigan Consumer Sentiment index sagged to 72.7 from 74.5 in December and is a good 20 points shy of the level that in the past typified an overall economic expansion. Sadly for those expecting a job market bounce in January, not only are initial jobless claims now back on the rise but the University of Michigan index of ‘facts-on-the-ground’ current conditions sank from 85.3 to 79.8 in January, a three-month low and the steepest decline since last July when double-dip was the flavour du jour. Buying conditions for large household goods slumped to 129 from 140 ― auto buying plans fell to a three-month low.

Beneath the veneer of all the enthusiasm is the reality that real organic incomes are under pressure. So with that energy-induced 0.5% MoM hike in the December U.S. CPI, real wages contracted 0.4% and are down now in three of the past four months. The pace over the past six months is now running just 15 basis points north of zero ― well below the 3.6% trend in mid-2010. The three-month trend, which was more than 5% at an annual rate back in mid-2010, has since swung to a -0.5% annualized pace.

Felix Zulauf: "You also have a tremendous social division. In the U.S., the top 20% of the population owns 93% of the financial assets. That tells you the average guy is in bad shape. He spends what he makes, and at the end of the month he’s even."

Fred Hickey added to that sentiment: "Last August, things weren’t looking so well. Then Ben Bernanke gave a speech in Jackson Hole that implied the Fed would engage in quantitative easing, and from that point forward, the Dow added 1,400 points. Gasoline prices went from $2.65 a gallon to well over $3.00 ― a $50 billion hit to consumers. Food prices rose to record levels. It caused a major imbalance in the economy. If you own financial assets, you’re doing quite well. If you don’t, you’re getting hit by higher food prices, higher insurance costs, higher everything, and you’re not getting any interest on your savings ... The economy has structural problems and we aren’t dealing with them. Money-printing won’t work, yet that’s the prescription we continue to give the patient. If the Fed keeps printing after June we’ll have higher gasoline and food prices and more imbalances until this ends. And at some point, it will end, because the dollar will fall apart. What we are doing now makes everything appear rosy. But it is devastatingly terrible policy for the long-term."

Geez, where have you heard that before. Hope Fred isn’t getting any hate mail.

Marc Faber: "If you measure the stock market not in dollars but gold, it is down 80% since 1999. I no longer regard the U.S. dollar as a valid unit of account. People shouldn’t value their wealth in dollars because one day, in dollars, everyone will be a billionaire."

That zinger is too good.

Bill Gross one-upped that one: "We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential. And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default. Ultimately, creditors and investors are at the behest of a central bank and policymakers that will rob them of their money."

As for the market action for 2011, we have two giants in our camp.

There is a clear buyers’ strike in the market for state and local government debt that is largely based on fear and misperception. The mass selling of muni’s, which represent the bedrock of the U.S. economy, is incredible ― nine consecutive weeks of net redemptions totalling $16.5 billion ($1.5 billion in the January 15 week). Talk about fertile ground for a huge long-term buying opportunity.

Even in California, only teachers come in front of bond holders. In other states, the debt holders are the first to get paid.

First, even if you buy into the default talk, look at the yield protection you get now. There are some long-term muni’s trading north of eight percent ― even higher than junk bonds (a premium of over 100bps!). Long-term AAA-rated muni’s are now trading well north of five percent or 116% vis-a-vis Treasury bonds (typically, muni bond yields are equivalent to 82% of Treasury yields given their tax advantage). California off-the-run 30-year 6% bonds are now being quoted at a yield premium to dollar-denominated debts offered by the likes of Mexico and Columbia.

Give me a giant break.

Even in California, only teachers come in front of bond holders. In other states, the debt holders are the first to get paid. It’s amazing how few people know that.

The spurious reasons beyond default concerns is that the lower levels of government are saddled with a huge supply calendar (partly because of the expiration of the federal Buy America Bonds subsidy). But in truth, new issuance this year at an estimated $350 billion is lower than the $439 billion in 2010.

If we are talking about looking for what is S.I.R.P.-like (safety and income at a reasonable price), investors should screen for:

Regions with a manageable refinancing calendar, A or better credit rating, low levels of foreclosure rates and excess housing inventory, low unfunded pension obligations, and growing population bases. And best to concentrate on bonds backed by a non-cyclical revenue stream like water and power.

And have a read of Older Workers Are Keeping a Tighter Grip on Jobs on page B3 of the Saturday NYT. As we have long argued, the prime reason for this phenomena is that the boomers increasingly need income as an antidote to this last decade of lost wealth. And right now, in the muni space, we may well have the most compelling opportunity to add income to portfolios since the rapid meltup in corporate bond yields in late 2008.

STILL VALUE IN BONDS

First, all the bad news is already out there ― that is almost always the case when the WSJ runs with a headline like Pimco’s Bond Fund Pares U.S. Holdings as it did on page B7 of the weekend WSJ. Treasuries are down to a 22% share of the Total Return Fund, close to a two-year low and down from 30% in November. So Bill Gross has probably done all the selling he’s probably going to do.

Second, Ben Bernanke is another key buying source, at least through June.

Third, consensus economic growth upgrades have probably gone too far or at the least have likely peaked.

Fourth, sentiment towards bonds in general is extremely negative.

Fifth, the University of Michigan survey showed that long-term inflation expectations have not budged despite the surge in food and energy prices ― they remained stable at 2.8% in January.

Sixth, core inflation remains very close to zero ― prices were up by less than 0.1% MoM in December and the three-month trend is just 70 basis points away from outright deflation.

The equity wealth effect is clearly kicking into high gear ― jewellery pricing was up over 2% for the second month in a row

After nearly a decade of stagnant to lower global production growth, mined output is up now for two years running

 

[Jan 16, 2011] NPR’s “Must Read”, As in Orthodoxy-Promoting, Economics Books

naked capitalism

Reader Gary specifically asked for a recommendation on modern monetary theory. The classic there is Randall Wray’s Understanding Modern Money. His query led me to ponder what books belong on a list of economics “must reads”.

I’ve deliberately excluded crisis books from my quick and dirty list (except for one sleeper that discusses general crisis dynamics) and have focused on good heterodox books as well as instructive historical accounts:

Needless to say, reader input encouraged.

[Jan 15, 2011] Guest Post “The Fed No Longer Even Denies that the Purpose of Its Latest Blast of Bond Purchases … Is To Drive Up Wall Street

January 15, 2011 | naked capitalism

XRayD:

The financial industry, with its incestuous relationships with government agencies, runs a close second to the energy
industry. In the last 10 years or so, their machine, led by the famously failed economic consultant Alan Greenspan
– one of the few businessmen ever to be laughed out of business – seemed perhaps the most effective. It lacks,
though, the multi-decadal attitude-changing propaganda of the oil industry. Still, in fi nance they had the “regulators,” deregulating up a storm, to the enormous profi t of their industry. Even with the biggest-ever fi nancial fi asco, entirely brought on by the collective incompetence they produced (“they” being the fi nancial regulators and the financial industry leaders working together in some strange, would-be symbiotic relationship), reform is still diffi cult. Even with everyone hating them, the fi nancial industry comes out smelling like a rose with less competition, profits higher than ever, and not just too big to fail, but bigger still.

The rest of this piece by Jeremey Grantham is must read too:

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IICpAi5iWziVPw3uptdcvg6dozLwvzF55NDLAyMt5kMpgbOzvopWZHc7IfNuYFv3ddkDJ5oeQ5

Karen Bernier:

Regarding Bernanke’s so-called wealth effect, the following comments by John Hussman and Jeremy Grantham have been noted before on NC, but bear repeating:

Hussman said that “Bernanke’s case for creating wealth effects via the stock market….are undoubtedly among the most ignorant remarks ever made by a central banker”

And according to Hussman’s math, which I won’t bother repeating here: “In effect, Ben Bernanke is arguing that investors should value a one-time payout of $904 million dollars at $1.47 trillion….”

And Jeremy Grantham from Oct 2010 (which might be included in the article by XRayD above, but I haven’t read it yet):

“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.”

But producing a healthy, stable economy is not Bernanke’s goal. This is the Big Lie, and the attempter has it right when he says above that the “conscious goal is to serve as the banksters’ thug”.

[Jan 15, 2011] Dylan Ratigan on State-Local Public Pension Reforms «

January 15, 2011 | naked capitalism

Paul Tioxon:

I have seen this on cable today. Of course, the temporary downtown in the economy is a crisis put to good use by the republicans to instill fear and resentment of the public against the government workers. The problem, other than the obvious lack of revenues as a result of economic depression is that business, large and small, pay little and in many cases no taxes. The tax burdens are relative to the states with no taxes, like the corporate haven of Delaware, which was getting some Congressional scrutiny as the on shore off shore tax haven for rich. But more importantly, if even in the best of times, we can not find evidence of corporate America taking its full share of responsibility for the nation state which secures its existence, its maintenance and its political cover in bad times, how can we expect the state to fund its other equally valid obligations to pensions? Without the state bureaucracy staffed by well paid, reasonable people, who can make a career out of public service, and plan on retirement, the private sector will suffer as well, breeding a government of short term bribe takers, instead of long term technocrats and bureaucrats. Take for example this study by the GAO.

http://www.gao.gov/new.items/d08957.pdf

Foreign Corporations and US based Corporations are compared.

In the 8 years from 1998 through 2005, large FCDCs in a panel data set that we analyzed consisting of tax returns that were present in the SOI corporate files in every year were more likely to report no tax liability over multiple years than large USCCs in the same panel data set. As figure 2 shows, about 72 percent of FCDCs and 55 percent of USCCs reported no tax liability for at least 1 year during the 8 years. About 57 percent of FCDCs and 42 percent of USCCs reported no tax liability in multiple years—2 or more years—and about 34 percent of FCDCs and 24 percent of USCCs reported no tax liability for at least half the study period—4 or more years. A correspondingly higher percentage of USCCs reported a tax liability in all 8 years, 45 percent for USCCs and 28 percent for FCDCs.
A Greater Percentage of Large FCDCs Reported No Tax Liability over Multiple Years between 1998 and 2005

Large FCDCs and USCCs reporting no tax liability in 2005 arrived at that result in similar ways on their tax returns, as shown in figure 3. At a high level, corporate tax returns are organized to (1) calculate gross profit as gross receipts or sales minus the cost of goods sold; (2) calculate total income as gross profit plus other types of income; (3) report various
Large FCDCs and USCCs Were Similar in Where on Their Tax Returns They Established Zero Tax Liability
Page 8

BUT THAT IS NOT ALL. EVEN WHEN TAXED, TAXES ARE NOT TURNED OVER TO THE GOVERNMENT, SEE WITH HOLDING TAXES KEPT BY CORPS.

http://www.gao.gov/new.items/d081034t.pdf

Testimony Before the Permanent Subcommittee on Investigations, Committee on Homeland Security and Government Affairs, U.S. Senate
TAX COMPLIANCE
Businesses Owe Billions in Federal Payroll Taxes
Statement of Steven J. Sebastian, Director Financial Management and Assurance

Our analysis of IRS’s records showed that, as of September 30, 2007, over 1.6 million businesses owed over $58 billion in unpaid payroll taxes, including interest and penalties. As such, payroll taxes comprise over 20 percent of IRS’s $282 billion inventory of outstanding taxes, penalties, and interest owed by businesses and individuals at September 30, 2007, and over 50 percent of the total amount owed by businesses in IRS’s inventory. Our analysis showed that 70 percent of all unpaid payroll taxes are owed by businesses with more than a year (4 tax quarters) of unpaid federal payroll taxes. In addition, over a quarter of payroll taxes are owed by businesses that have tax debt for more than 3 years (12 quarters). Because unpaid payroll taxes include amounts owed for Social Security and Hospital Insurance (Medicare Part A) taxes,6 the federal government may have to transfer higher amounts from the General Fund to the Social Security and Hospital Insurance trust funds to make up for the amounts businesses fail to remit. IRS estimated that for the tax debt it had in its inventory of unpaid assessments as of November 1, 2007, the General Fund had transferred $44 billion to the trust funds over what IRS collected because employers failing to remit withheld taxes on employee wages.
Summary
IRS has a number of powerful tools at its disposal to prevent the accumulation of unpaid taxes and to collect the taxes that are owed. However, IRS acknowledges that its traditional collection methods do not always bring taxpayers into compliance and that there is a major compliance problem with the large number of businesses that repeatedly
6 These amounts are collected pursuant to the Federal Insurance Contributions Act. 26 U.S.C. ch. 21.
Page 3

The problem, in addition to assaults on Social Security as being ticking time bombs, the conflation of greedy, overpaid and under worked, inefficient and corrupt government employees, who won’t even shovel snow for OT with politicians who are crooks that hire more crooks, is that the corporations, on a regular basis, even when the economy is booming, refuse to pay taxes. Businesses have become little more than plundering schemes, taking profits out the nation and reinvesting everywhere around the world and paying mininmum or no taxes. Is it any wonder that state governments and city governments go begging?

TC:

How public sector pensions “got into this position” is no different than how the entire national economy arrived: by the allure of a Ponzi scheme.

I have no doubt that, public pension underfunding represents a strategic flank by which the stranglehold of borderless, unaccountable, concentrated financial power can be broken. It starts with political will to cut in on those most dependable revenue streams whose increasing utility over recent decades, indeed, has been in support of the Ponzi scheme whose continued unraveling is further revealed with this public pension underfunding issue moving front and center. States could be well-served monopolizing certain aspects of the insurance industry particularly fitting that very cause for which government, indeed, is necessary: that all citizens may benefit.

Again, this is just for starters. How states safely leverage these new, dependable revenue streams is a dialog on how to make tax receipts rise, tax rates fall, the size of government shrink, and every living pensioner sublime with certainty they will be well-provided.

DownSouth:

“…an honest politician…”

Oh really?

It sounds to me as if he’s pretty much aping right-wing talking points.

Take this from his interview, for instance:

People are prosecuted for fraud if they’re in the private sector. If you happen to be a big state pension system you’re simply told you made a mistake.

So “people are prosecuted for fraud if they’re in the private sector”? What planet does this guy live on? This comment fits the simplistic black and white myth that right-wingers have propagandized so successfully: Public sector (government) = bad, private sector = good.

And of course defined-benefit plans are more expensive than defined-contribution plans, that is 401(k) plans. Why does he think the private sector went to them? As Jacob S. Hacker points out in The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream:

[T]he one singular virtue of 401(k) plans became all the more irresistible: 401(k)s are dirt cheap. In the late 1970s, employers devoted more than 4 percent of workers’ payrolls to pensions. By the late 1980s, they were contributing around 2.5 percent. Most 401(k) contributions, after all, are made by workers, not employers.

There seems to be a built-in assumption on the part of our good mayor that defined-benefit plans are bad and defined-contribution plans are good. But good for who and bad for who? There are winners and losers here, difficult choices that need to be made. Of course one would never know that from what Mayor Sanders says.

The eradication of defined-benefit plans from the private sector is almost complete. As Hacker goes on to point out: “As recently as twenty-five years ago, more than 80 percent of large and medium-sized firms offered a defined-benefit plan, today, less than a third do, and the share continues to fall.”

Once private sector workers got murdered, it was almost a foregone conclusion that public sector workers would be next to face the firing squad. The double standard that exists in public pensions and private pensions is difficult to defend. But this evades the underlying question, and that is: Was the move from defined-benefit to defined-contribution plans in the private sector a “good” thing? Would it not be fair to say that it was good for capital but bad for labor? Would it not be fair to say that the shift from defined-benefit to defined-contribution plans is a factor in the growing inequality in America?

And then there’s the whole issue about the past and the future. Ratigan wanted to talk about the past—-pension liabilities, promises (and contractual agreements?) that had already been made. Mayor Sanders deftly switched the discussion so as to talk about the future. Undoubtedly, if all public sector pensions were to immediately be switched from defined-benefit to defined-contribution plans, the future savings would be immense. But that leaves the $3.2 trillion question unanswered. So it seems Sanders dodged another difficult question.

If Sanders were “an honest politician” then he would lay out the facts and let the people decide. This would involve presenting an honest assessment of the pros and cons of defined-benefit plans vs. defined-contribution plans. He wouldn’t dodge the extremely difficult question about what to do about all the promises to public sector workers that have already been made. And surely, wouldn’t he admit that the private financial sector bears at least some responsibility for the poor investment performance of the pension funds?

Grinder :

 DownSouth,

I have a phrase I use all the time, It is what it is. I don’t view things as to lay blame, I’d rather just coldly understand the situation to understand the implications.

The custodians of capital have all the options. They can choose whichever climate best rewards capital. Global businesses can pit countries against each other to secure the best deal. Highly mobile workers can pit state governments against each other.

Don’t like NJ taxes and your mobile and educated then move to TX. NJ loses enough 100K plus workers they’ll rethink their policies. The US for years is transitioning away from capital intensive businesses domestically and its impacts are really being felt in the last few.

As such business and the people working for those businesses aren’t tied to the land anymore. Twenty years ago, the state of CT could tax its major employers at will because it was too expensive to relocate it’s physical plant out of state. Since then these companies have been steadily shifting production to China probably to the point where they are now self-sufficent overseas.

CT has a 3.5 billion budget shortfall but I guarantee they will not raise taxes one penny against its major employers for fear of the consequences to employment. From my perspective, that check is a good thing. Spending in my state got totally out of hand and now the state has to deal with the consequences of its fiscal mismanagement in an environment where its businesses and people just “don’t have to take it”.

Lowell Weicker, who introduced the CT income tax a number of years ago over fierce opposition, is quoted as saying CT residents just need to take their castor oil. No more. Illinois will learn this lesson in the coming years.

DownSouth:

 Grinder said: “I have a phrase I use all the time, It is what it is. I don’t view things as to lay blame, I’d rather just coldly understand the situation to understand the implications.”

Now you’re starting to sound just like Barak Obama.

Seriously though, it’s necessary to properly assess blame so as to know who to punish. Societies that don’t punish are pathological societies.

I don’t know what your cup of tea is, but if you like science there’s this essay from Hillard Kaplan and Michael Gurven:

We propose that multi-individual negotiations result in the emergence of social norms that are collectively enforced. We base this proposal on a result obtained by Boyd and Richerson (1992), and treated more recently by Bowles and Gintis (2000), in which cooperation is modeled with punishment. They found that cooperation can be stable in large groups, if non-cooperators are punished and if those who do not punish non-cooperators are also punished.

As Hannah Arendt points out in The Human Condition, however, it is imperative that we distinguish between “punishment” and “vengeance” (or “revenge”):

[F]orgiveness is the exact opposite of vengeance, which acts in the form of re-acting against an original trespassing, whereby far from putting an end to the consequences of the first misdeed, everybody remains bound to the process, permitting the chain reaction contained in every action to take its unhindered course…

The alternative to forgiveness, but by no means its opposite, is punishment, and both have in common that they attempt to put an end to something that without interference could go on endlessly. It is therefore quite significant, a structural element in the realm of human affairs, that men are unable to punish what has turned out to be unforgivable. This is the true hallmark of those offenses which, since Kant, we call “radical evil” and about whose nature so little is known…

But in addition to assessing blame, it is also necessary to assess intent. As Arendt explains:

The reason for the insistence on a duty to forgive is clearly “for they know not what they do” and it does not apply to the extremity of crime and willed evil…

• Grinder said: “The custodians of capital have all the options. They can choose whichever climate best rewards capital. Global businesses can pit countries against each other to secure the best deal.”

Only if we allow them to.

Externality provided this link the other day that gives the history of how we arrived at this dismal state of affairs. We got here because bad political decisions were made. There’s nothing inevitable or immutable about it.

[Jan 15, 2011] Should We Believe Jamie Dimon’s Crocodile Tears Over How Much Mortgages Have Cost Banks

This is one of those myths the banking industry likes to perpetuate when it suits them. They piously pretend that they are taking their medicine and doing the hard and expensive work of fixing foreclosures. In reality, the costs are passed along and the risks of them doing a bad job are borne by someone else.

In addition, JP Morgan’s impressive-looking fourth quarter earnings were burnished more than a tad by under-reserving and the failure to take warranted writedowns (of course, if your regulators endorse extend and pretend, as they do, the banks get off scot free). JP Morgan has the second biggest book of junior mortgages, meaning second mortgages and home equity loans. The biggest four banks, which are also major servicers, have all taken to using seconds to extort borrowers who are delinquent on their first mortgages. If they were to foreclose, the seconds would be wiped out. But in cases where a borrower is trying to negotiate a mod or a short sale, the banks refuse to budge to preserve the fictive marks on their seconds. As law professor Katie Porter noted:

A persistent problem, pointedly described in these letters (July 10, 2009 and March 4, 2010) from Rep. Barney Frank to the large banks, is that the banks that hold second mortgages are not modifying those loans. (Yep, these are the same banks that took TARP money). The reluctance of the second lienholders to agree to a modification gums up the process for trying to get a modification on first, and usually much larger, mortgages. The investors in the first loan somewhat sensibly resist modifications, particularly those with principal write-downs, pointing out that it doesn’t seem right that they should take a haircut, while junior lienholders refuse to modify their loans.

In other words, some of last quarter’s $4.8 billion in earnings should have instead been applied to writing down JPM’s over $100 billion book of junior mortgages, particularly since $2 billion of those “earnings” came from reversing reserves taken for credit card losses.

In addition, other elements of the quarterly information looked to be weighing too light on residential mortgage risk. The bank originated $50.8 billion of new mortgage loans (loan origination fees were $749 million in the fourth quarter), yet made no reserves against them. Given that the GSEs are now vigilant about putbacks, wouldn’t realistic accounting require an ongoing reserve for originations, since the possibility of future representation breaches exists (especially given recent history) and the amount is unknown?

Banks like Chase face little in the way of competition, enjoy the benefits of super low interest rates, which is a transfer from savers to the financial system, and even worse, will be able to dump risk onto taxpayers if it screws up again in a serious way. Yet the executives and producer classes in big banks continue to earn lavish pay when the banks should instead be building stronger capital bases. It clearly benefits Dimon sound contrite rather than gloat too much about how much easy money he is making.

kievite:

All this anger about bonuses and regulatory capture is misplaced.

The banking system is an extension of the state. They are important foot soldiers in fiat currencies wars. And they are paid as such. As one Roman Emperor instructed his sons: “Mind the soldiers and ignore everyone else”. So this is not a question of bankruptcy/restructuring, but the question of the timing and size of the next bailout.

We need to understand that in no way Washington will agree to restructure the largest banks due to truths restructuring will reveal. That means that the policy of the Fed and Treasury with respect to the large banks is and will be state socialism, without any pretenses of a public good.

As for JP Morgan I think problems that Chris Whalen pointed out in December for Bank of America are applicable:

[Jan 15, 2011] Guest Post “The Fed No Longer Even Denies that the Purpose of Its Latest Blast of Bond Purchases … Is To Drive Up Wall Street  by George Washington

"The internet bubble at least produced some productive assets. The housing bubble did not. Now we have a Fed balance sheet and Govt debt bubble which are driving the economy."
naked capitalism

David Rosenberg writes today:

So the Fed Chairman seems non-plussed that Treasury yields have shot up and that the mortgage rates and car loan rates have done likewise, even though he said this back in early November in his op-ed piece in the Washington Post, regarding the need for lower long-term yields:

“For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment.”

But the Fed Chairman is at least getting what he wants in the equity market. Recall what he said back then — “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

So now the Fed has added a third mandate to its charter:

1. Full employment
2. Low and stable inflation
3. Higher equity valuation

The real question we should be asking is why Ben didn’t add this third policy objective back in 2007 and save us from a whole lot of pain over the next 18 months?

And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.

Indeed, leading economic consulting firm Trim Tabs (25% of the top 50 hedge funds in the world use TrimTabs’ research for market timing) wrote on Wednesday:

The Federal Reserve’s quantitative easing programs have helped stock market participants, financial institutions, and large companies but have done little to address the structural problems of the economy, according to TrimTabs Investment Research.

“Quantitative easing is supposed to produce stronger economic growth and lower unemployment,” said Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “While QE1 and QE2 have worked wonders on the stock market, their impact on GDP and jobs has been anemic at best.”

Similarly, Ambrose Evans-Pritchard wrote today:

The Fed no longer even denies that the purpose of its latest blast of bond purchases, or QE2, is to drive up Wall Street, perhaps because it has so signally failed to achieve its other purpose of driving down borrowing costs.

Unfortunately, a rising stock market doesn’t help the average American as much as you might assume.

For example, Robert Shiller noted in 2001:

We have examined the wealth effect with a cross-sectional time-series data sets that are more comprehensive than any applied to the wealth effect before and with a number of different econometric specifications. The statistical results are variable depending on econometric specification, and so any conclusion must be tentative. Nevertheless, the evidence of a stock market wealth effect is weak; the common presumption that there is strong evidence for the wealth effect is not supported in our results. However, we do find strong evidence that variations in housing market wealth have important effects upon consumption. This evidence arises consistently using panels of U.S. states and individual countries and is robust to differences in model specification. The housing market appears to be more important than the stock market in influencing consumption in developed countries.

I pointed out in March:

Even Alan Greenspan recently called the recovery “extremely unbalanced,” driven largely by high earners benefiting from recovering stock markets and large corporations.

***

As economics professor and former Secretary of Labor Robert Reich writes today in an outstanding piece:

Some cheerleaders say rising stock prices make consumers feel wealthier and therefore readier to spend. But to the extent most Americans have any assets at all their net worth is mostly in their homes, and those homes are still worth less than they were in 2007. The “wealth effect” is relevant mainly to the richest 10 percent of Americans, most of whose net worth is in stocks and bonds.

I noted in May:

As of 2007, the bottom 50% of the U.S. population owned only one-half of one percent of all stocks, bonds and mutual funds in the U.S. On the other hand, the top 1% owned owned 50.9%.

***

(Of course, the divergence between the wealthiest and the rest has only increased since 2007.)

And last month Professor G. William Domhoff updated his “Who Rules America” study, showing that the richest 10% own 98.5% of all financial securities, and that:

The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.

The bottom line is that quantitative easing is not really helping the average American very much … and is certainly not worth trillions of dollars.

Fed's Rosengren- Two Key Questions about the Economic Recovery

ghostfaceinvestah

smp wrote:

This country desperately needs productive assets. Housing is not a productive asset.

As much as I think Rosie is blind to the powers of the printing press vis-a-vis markets, he does have a good handle on economics, and had a good commentary recently (maybe it was today?): the internet bubble at least produced some productive assets. The housing bubble did not. Now we have a Fed balance sheet and Govt debt bubble which are driving the economy. From Rosie:

"The bubble of 2000 reflected the dramatic expansion of technology companies. A complete saturation even if many of these companies did indeed play a pivotal role in enhancing the nation’s capital stock. But corporate balance sheets expanded dramatically to a point where the gap between tech-heavy capital spending budgets and internally generated funds surged to unprecedented levels. The bears of 1998 and 1999 weren’t exactly wrong as much as being early.

The bubble of 2007 reflected the rapid expansion of the housing stock (not a productive asset) and the speculative leverage that ignited the boom. This was about a radical expansion in two balance sheets at the same time : household balance sheets and banking sector balance sheets. The extent of the excess leverage made the previous debt-induced dot-com bubble look like a mild affair in comparison.

This bull phase, yet again, is being fuelled principally by the radical expansion of the Fed balance sheet (+170%) and the Federal government balance sheet (the debt/GDP ratio has ballooned from 65% in 2007 to approximately 95% today). Washington is now spending 1.60 for every dollar it is taking in from the revenue base. This is really pushing the envelope."
.

Mr Slippery

This looks like more than 1% inflation to me. It just isn't being passed on to the consumer, yet. There has been some stealth repackaging of food for smaller portions, but a lot of finished goods aren't reflecting the rise in input costs. Either profits come down or prices go up.

Graph- Producer Price Index- All Commodities (PPIACO) - FRED - St. Louis Fed

picosec:

1 currency now -yogi wrote:

How about, 'In the past, when we were blowing the housing bubble, we could count on housing to make GDP appear to be growing.

There wasn't much of a housing bubble as part of the 1982 recovery. Labor was absorbed elsewhere. No longer.

http://cr4re.com/charts/charts.html?Home-Prices#category=Home-rices&chart=CoreLogicHPINov2010.jpg  .

black dog:

I see Rosengren didn't touch the subject of where home prices are headed.

His playing down of inflation is just his way of saying "ain't no one messing with our QE"

Does he even read the fed surveys? In particular the diffusion index for prices paid versus prices recieved? Has he ever heard of margin squeeze layoffs stemming from them? .

black dog:

With regard to the first concern, our research suggests that the lasting effect of energy prices on overall inflation has been surprisingly small in recent years. For evidence, consider the enormous surges in oil prices in mid-2008, which were followed by significant declines in core inflation, as I mentioned earlier."

this quote is AMAZING. No context at all. If energy prices get out of hand we can count on another TEOTWAWKI meltdown to get them back in line?? .

ResistanceIsFeudal:

Basel Too wrote:

why build stuff when i can make 30% YoY speculating in commodities?

Exactly. And building stuff exposes you to tons of regulations and legal hassles, plus income tax. Putting OPM on the ponies, not so much and taxed as cap gains. No customers/clients to keep happy either. .

1 currency now -yogi :

mp wrote:

Sure, historically speaking, housing is the best leading indicator of recovery, but history can no longer be a guide.

Correlation without causation; circularity.

If housing is counted as part of recovery, of course it will tend to indicate recovery. When all the banks collapse at once or the currency collapses, the economy usually suffers. That doesn't suggest a policy of saving the banks at all costs-- unless you shill for the Fed. .

[Jan 14, 2011] What the Real Experts Say

Sometimes I read something and it feels like the author took the words right out of my mouth. That includes this excerpt from a post at Prudens Speculari (an old friend of Financial Armageddon), entitled "Thinking":

I have been doing a lot of thinking over the last few days to start the new year. As much as it makes my head hurt I still try to do it.

Things that I have been thinking about....

and finally

All the signs of the housing crisis was a debacle in the making were there for anyone that cared to look. I realize when you are slicing the cake (Wall St.) and need the crumbs to live on you do not care to look any further than the continued slicing the cake.

Click hear, hear! to read the rest.

[Jan 14, 2011] The Bill Daley Problem

What's left in the discussion below is that a new technological breakthrough can still save the day...
The Baseline Scenario

Let’s be honest.  With the appointment of Bill Daley, the big banks have won completely this round of boom-bust-bailout.  The risk inherent to our financial system is now higher than it was in the early/mid-2000s.  We are set up for another illusory financial expansion and another debilitating crisis.

Bill Daley will get it done.

CBS from the West

Exactly. And there are common elements here: the vested interests and business model of a large and powerful industry are affected–they rev up their PR and lobbying machines to inundate the discourse with disinformation. There is no limit to the disinformation: blatant lies and fabrications are definitely included in the tactics. They dominate the discourse because they have effectively unlimited resources at their disposal to spread their lies. They supplement this with direct purchase of our venal lawmakers and, voila, they always win.

Michael Allan Hunt:

Thanks Simon, Once again you and your colleagues at naked capitalism, calculated risk, etal. point out the falseness of the left vs. right paradigm as it pertains to the oligarchical control of the country by these financial elites.

But what to do about it?? Gentle readers, everyday, resolve to rhetorically ask a friend/ relative (1) why the innermost circles of the executive office needs to be infiltrated by former bank executives (like Mr.Daley), (2) why our dear Treasury Secretary felt compelled to visit Goldman Sachs HQ innumerable times prior to passage of the recently passed, so-called, financial reform legislation,and foremost (3) why it is necessary to recapitalize imprudent financial institutions, at no cost to the bondholders/ stockholders, when grandma gets paid 0.03% APR on her deposits.

The answers of these questions have nothing to do with whether or not you are a republican or a democrat!

Jackrabbit

The TBTF Banks are GSEs. They can’t exist without government support.

Maybe we should start with that simple fact. If that is recognized, then it follows that:

a) Government/GSE executive compensation limits should apply, and

b) GSE lobbying/influence limits should also apply.

Framing the issue as “excessive financial risk,” is a gift to the bankers. The problem undue political influence. Back-door bailouts are subsidizing the political influence of bankers.

Jackrabbit

 It seems that Simon agrees that TBTF Banks are the new GSEs. From the HuffPost:

“I’m concerned about the excessive power of the largest global banks,” he said. “Who are the government-sponsored enterprises now? It’s the six biggest bank holding companies.”

Trixi:

... The name of the game is organised crime. Whether we are talking about drug cartels in Mexico, or the banking cartels. Organised crime owns governments and the legal right to murder (police powers/war powers). We are getting the stick, and no carrot.

Charley

Thank you Simon for articulating what few others are. It was particularly gratifying to see your statement regarding Daley’s appointment as being “beyond ludicrous”. What’s maddening is so few others recognize this. As a measure of how completely the banks have won, the media is reporting that Obama is in disfavor with the banks and the business community in general, and so has appointed Daley to mend the gulf. Absurdly, Obama is painted as being a foe of these interests, when he actually has been bought off by them and has done most of their bidding–beyond ludicrous indeed. Obama’s shocking actions of the last 2 years have laid bare the bogus right/left argument as a red herring. At the bedrock of it all, the money and power people own everyone (to the despair of us who held out hope that someone, probably a Democrat, would do the right thing). Until we have publicly funded elections, what more can we expect? We can only hope people like Simon continue to speak the truth and continue to explain what is happening and how to follow the money trail. I’m convinced there is a huge part of the public who knows the country is getting screwed and is desperately seeking a national voice to right these terribly wrongs (a desire, in a bizarre double-irony, that spawned the big money-backed, hair-brained Tea Party).

Steve:

Simon, I believe you are right. Our increasingly giant financial institutions are highly likely to create another meltdown? And who’s going to pay to clean up that mess?

One area where I disagree with you. I don’t think Obama and his crowd lack an understanding of the dangers baked in to our currently unstable financial system. I think they understand them very well.

My sense, Obama, the Democratic leadership and the GOP leadership understand the potential for another financial train wreck. Just like they understand the longer term implications of spiraling government and public debt, our chronic trade deficit and our economy’s inability to create the sort of jobs that will restore our middle class and turn around our chronic trade imbalance.

These guys understand all this. What we don’t understand or chose to deny is that they understand full well. The reality is, they just don’t care.

Seems to me the politicos are perfectly happy letting the cowboy capitalists and the globalization at any cost crowd have their way. The politicos know they are letting these parasite strip mine what’s left of our economy and raid the public coffers for all they can. These guys, including Obama, would rosin Nero’s bow at Rome goes up in flames as long as they keep their perks.

IMO, its time to face up to reality and stop hoping the politicos will someday “understand”. It should be obvious they don’t care what happens as long as they can spin their way out of it. Americans need to recognize we need to cooperate in an anti-partisan effort to get money out of politics, primary the worst of the lot, vote out heinous incumbents of both parties and push for Constitutional amendments to reform both our political and economic systems.

I believe its time to restore democracy to our political and economic system. Get money out of politics, get rid of corporate personhood, stop the offshoring of our jobs and invest public money to re-capitalize our manufacturing base, protected by tariffs from the predatory corporations sucking up our livelihoods by offering cheap socks and tvs at WalMart.

David L. Kendall:

No way to get money out of politics. The notion that rich people will not also be powerful people is unusually naive.

You are right about the incumbent party. The labels Democrat and Republican are utterly meaningless. But money is not meaningless. Following the money leads invariably to what’s really going on.

Just as Prof. Simon Johnson says, the banks are at the hear of the problem, just as they have been throughout time out of mind.

Paul

If the elite were in any remote danger of losing power in the United States, blogs and the internet would be no more. Dissidents would be rounded up, like in other police states. There is no way any of us will see democracy in our time. But the masses definitely will see depression, famine and riots.

jeff simpson

Obama means well, but he is emulating the wrong role model. He has embraced Lincoln’s attempt at keeping the system intact (for Lincoln the task was preserving the Union), and so he attempts to steer down the middle of the road in a country he thinks will reward him for this. He will be villified on the right for being a totalitarian nanny-state-luvin’ socialist, and on the left for steering the middle right course because the country, en masse, still believes that small-govt-is-beautiful deregulation kool-aid touted by Reagan and his ilk.

A better role model would be FDR. For a surprisingly relevent speech touching on the major themes we again face today, see his 10/31/1936 speech made famous with the ‘I welcome their hatred’ line.

In this speech, FDR rails against business interests that threaten to close factories unless their candidate wins. It sounded the same as how the big banks threatened to take down the whole economy unless they were bailed out.

There are other passages that resonate with modernity in an eerily striking manner.

http://docs.fdrlibrary.marist.edu/od2ndst.html

Steve

Jeff, consider this. Obama embraces a totally corrupted system. IMO, his sleaziness was promising real change and hope and then abandoning his campaign theme to play the Beltway game.

Suggest you watch the documentary from Frontline called “Obama’s Deal”. Its about the Obama team’s tactics to get health care reform.

I would rather have no health care reform. Instead I wish Obama would have called on his supporters to call their Senators and Congressfolks to demand a public option. He could have created a tidal wave of popular support for this right after the 2008 election. And he could have taken down the Too Big To Fail financial outfits as well, not wrecking them, but firing their top dogs and restructuring them so they provide necessary financial services rather than promulgate a casino of junk derivatives.

Uncle Billy Cunctator

They don’t censor because all press is good press. I’ve been haunting 20 blogs since 2005 and none of the blathering does any good whatsoever. They provide the illusion of opennness, and that’s it. They don’t need to censor because it doesn’t matter. They both know where I stand, and could care less. If I managed to damage their credibility in any significant way, it would be a major problem, but that is clearly difficult — they have a major machine behind them, and what do we have but bloviation on a very narrow slice of the internet. They are two pipes in the Mighty Wurlitzer, and we’re mice squeaking at each other deep inside the machine. Has Simon ever engaged on the blog? I can’t remember a single instance. If he did it would be giving us a toehold. He and his superiors are not interested in a dialogue; they are simply here to manage the message and provide the illusion that they are providing an open forum. You know your Peterson. He’s just one. There are many, and there is a pecking order.

Bayard Waterbury

Simon, you say, regarding the banks (not really banks, but, certainly in name): “These banks have captured the hearts and minds of top regulators and most of the political class (across the spectrum),…” From reading this article, it’s only too obvious that you get it, but, at the same time, don’t.

First I have to say that these “bankers,” in the words of Clark Gable “quite frankly…don’t give a damn” about being socially useful entities, regardless of their spurious arguments, which even they don’t believe. They don’t care about you, or me, or any of their fellow Americans, period!! The only thing they care about is money, to the exclusion of everything else, period!! They only maintain a position in the discourse to provide thin cover to their handmaidens in Washington, who also don’t care a whit about their fellow Americans, the very ones who elected them to serve us.

Sadly, looking back through history (check with Niall Ferguson), this is human foibles, pure and simple, repeated in various ways throughout human history, from ancient Egypt and Rome, through 12th and 18th century France, early 20th century America, and many other times, whether bankers did it, or others. The correlation in the modern world between power and money is perfect, and is not subject to rational discussion as a curative.

I love this blog. It is sane and sensible. It is informative. I read and participate because I believe in rational discussion about economic issues. Having said that, real change will not occur in today’s world which arises from rational discussion of economic issues. The banksters are globalist. The appointment of the new staff to Obama’s White House, including Bill Daley, is simply a symptom of what we are going to see from our leadership, as such, for the foreseeable future, that is, at least, until the world economy collapses. Hard to say whether this collapse will precede massive chaos, or whether it will be coincidental therewith. As Caesar once famously said, “the die is cast.” It is. Dialectically our course is set, and won’t be reversed in time to avoid massive global tragedy. It makes me sad, but I just don’t see any way out.

Bruce E. Woych:

I know you addressed your comments to Simon, but I thought your entry was very thought provoking and (I think) common ground for many of us. I mostly agree with your sentiment and have to confess that when left to myself in my rocker…I feel the same way.

However, there are certain determinants in play here and I believe this is pushing us to a turning point or a breaking point. I am tempted to indicate that while we kick the can down the road, the bankers are kicking the bubble up the highway. A set of ultimatums are pending this doom and bust scenario. We are either transitioning into the despot regime that we so recklessly supported in the world (for our own interests…) and becoming homogenized into a global colony, or we need to look seriously at the facts and begin to intervene. I don’t think the die is cast for our future, but I do think it is already on the table for our present. The symptoms of our leadership is the symptoms of our society in consolidated form that has turned into a contradiction with the very society that spawned them. To turn William Black on his head, it is not a “systems capacity” failure. There is, I believe, a working system but it has been usurped and captured by a class orieted politic that has actually divided the elite class itself into survivalist modes. The real core of the problem is corruption. It is much like a prison system of gangs and the top dogs are ruthless at dominating the rules and even the prison logic. But the system still prevails. I hesitate to say with unqualified stealth, but all wealth and success out there is also in the same boat… and sooner or later they will be faced with the spiraling determinants of the actual system. Consider this scenario presented in regard to the Penal System becoming something of a reactionary force and how it interacts with the system at large: I will label this “The Neoliberal agenda and the turning point of critical mass economy…” Take a look:

The Penal State in an Age of Crisis Hannah Holleman, Robert W. Mc C h e s n e y, J ohn B e l l a m y F o s t e r , a n d R . J a m i l Jonna

Excerpts from the Penal State: The Penal State in an Age of Crisis - Monthly Review

Neoliberalism…, a political regime where the interests of capital are elevated and the interests of the working class are demonized and demolished. It was the main political-economic response of the system to the slowdown of economic growth in the early 1970s, which has persisted and indeed worsened since. It was also meant to counter the 1960s and early 1970s era of social protest.

… neoliberalism is devoted to turning any public sector undertaking that can be profitable over to capitalists. Here we see the seamy underside of the system: beneath all the highfalutin lectures on hard work, efficiency, free markets, competition, and accountable government, is the deeper reality of routinized corruption, of public monies diverted into rich people’s pockets.

We may be approaching a moment where it will be possible to open up a debate on the obscenity and absurdity of the present order and its punitive social control mechanisms. The current economic crisis is putting states and municipalities in a very difficult position. They have sharply declining revenues but the social needs of their struggling populations are escalating. If today’s state and local governments follow business-as-usual, and use their shrinking revenues to cut back on necessary social programs to bankroll their bloated prison systems, support for public safety spending amongst the overall population may falter. More and more people may conclude that the United States cannot afford its prison-industrial complex any more than its military-industrial complex, given pressing social needs. ( [END OF EXCERPTS] NOTE THAT THE EXCERPTS ARE SELECTED FROM THE TOTAL TEXT AND YOU MIGHT SEE THE ARTICLE VIA THE LINK TO EVALUATE THE ENTIRE CONTEXTUAL ARGUMENT PRESENTED BY THESE AUTHORS)

[Jan 14, 2011] Gasoline’s prepping for a return to $4 a gallon Commodities Corner -

Each one cent increase if gas prices means one billion out of the pocket of consumers. One dollar increase (for example, from $2 to $3 per gallon)  means 100 billion "dis-stumulus. "
MarketWatch

As of Wednesday, the national average for regular gas stood at $3.09. That’s up nearly 4% from a month ago and more than 12% above the year-ago average, data showed.

Diesel fuel has seen similar gains, with diesel prices at $3.34 per gallon as of Wednesday, up nearly 15% from a year ago at levels not seen since October 2008.

And prices for both fuels are likely to continue rising.

In a monthly outlook report, the U.S. Energy Information Administration, the reporting arm of the Energy Department, said it expects regular gasoline to average $3.17 at the pump this year, 39 cents higher than last year

[Jan 13, 2011] The Rise of the New Global Elite - Magazine - The Atlantic

This widening gap between the rich and non-rich has been evident for years. In a 2005 report to investors, for instance, three analysts at Citigroup advised that “the World is dividing into two blocs—the Plutonomy and the rest”:
In a plutonomy there is no such animal as “the U.S. consumer” or “the UK consumer”, or indeed the “Russian consumer”. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the “non-rich”, the multitudinous many, but only accounting for surprisingly small bites of the national pie.

Some of what I’ve learned is entirely predictable: the rich are, as F. Scott Fitzgerald famously noted, different from you and me.

What is more relevant to our times, though, is that the rich of today are also different from the rich of yesterday. Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth.

The rise of the new plutocracy is inextricably connected to two phenomena: the revolution in information technology and the liberalization of global trade. Individual nations have offered their own contributions to income inequality—financial deregulation and upper-bracket tax cuts in the United States; insider privatization in Russia; rent-seeking in regulated industries in India and Mexico.

... ... ....

Meanwhile, the vast majority of U.S. workers, however devoted and skilled at their jobs, have missed out on the windfalls of this winner-take-most economy—or worse, found their savings, employers, or professions ravaged by the same forces that have enriched the plutocratic elite. The result of these divergent trends is a jaw-dropping surge in U.S. income inequality.

The clincher, Peterson says, came from the wife: “She turns to me and she goes, ‘You know, the thing about 20’”—by this, she meant $20 million a year—“‘is 20 is only 10 after taxes.’ And everyone at the table is nodding.”

As with the aristocracies of bygone days, such vast wealth has created a gulf between the plutocrats and other people, one reinforced by their withdrawal into gated estates, exclusive academies, and private planes.

To grasp the difference between today’s plutocrats and the hereditary elite, who (to use John Stuart Mill’s memorable phrase) “grow rich in their sleep,” one need merely glance at the events that now fill high-end social calendars. The debutante balls and hunts and regattas of yesteryear may not be quite obsolete, but they are headed in that direction. The real community life of the 21st-century plutocracy occurs on the international conference circuit.

Critiques of the super-elite are becoming more common even at gatherings of the super-elite. At a Wall Street Journal conference in December 2009, Paul Volcker, the legendary former head of the Federal Reserve, argued that Wall Street’s claims of wealth creation were without any real basis. “I wish someone,” he said, “would give me one shred of neutral evidence that financial innovation has led to economic growth—one shred of evidence.”

At Google’s May Zeitgeist gathering, Desmond Tutu, the opening speaker, took direct aim at executive compensation. “I do have a very real concern about capitalism,” he lectured the gathered executives. “The Goldman Sachs thing. I read that one of the directors general—whatever they are called, CEO—took away one year as his salary $64 million. Sixty-four million dollars.” He sputtered to a stop, momentarily stunned by this sum (though, by the standards of Wall Street and Silicon Valley compensation, it’s not actually that much money). In an op-ed in TheWall Street Journal last year, even the economist Klaus Schwab—founder of the World Economic Forum and its iconic Davos meeting—warned that “the entrepreneurial system is being perverted,” and businesses that “fall back into old habits and excesses” could “undermin[e] social peace.”

drewfromct:

"No one here is interested in a return to feudalism.

Not the prospective serfs, anyway."

On the contrary, there are all too many poor deluded souls among us who cheer the New Feudalism because they naively believe that they will be among the royals. They are no more than a mass of clucking chickens cheering on the rise of the next Col. Sanders.

[Jan 13, 2011] Outsized Pay on Wall Street Persists

naked capitalism

But a much uglier element is how this trend continues to suck “talent” into socially destructive activities (if you think that’s an overstatement, read this post from yesterday). And it is becoming institutionalized, not just due to the pay gap between jobs in TBTF financial firms, but also due to the seemingly unending rise in the costs of higher education, well outpacing inflation for more than 20 years. As Jamie Galbraith pointed out in his book The Predator State, there’s a fallacy in thinking that having more people get more advanced education leads them to higher levels of lifetime earnings. While that can be true for individuals, if large numbers of people adopt the same strategy, more credentialing simply becomes a new normal (look at how many college and even advanced degree graduates take jobs that don’t require their level of educational attainment).

So the result is increasingly costly higher education, due to more and more people going to college and grad schools, and students being less price constrained due to student loans. So students who don’t have affluent parents are forced to be mercenary in their career choices or risk having huge problems in contending with their school loans (which can’t be discharged in bankruptcy). A widely discussed article in the New York Times pointed out how law school is now a bad investment, and also described “Enron-type accounting” on behalf of the law schools themselves in misrepresenting the value of their degrees.

So the normal avenues to upward mobility or even normal middle class prosperity are eroding, and demanding and socially valuable careers that were once highly respected are now falling in relative standing in increasingly Plutocratic America. This is not a blueprint for economic success or rising social well being.

Another reflection of this sorry trend was an article in the Atlantic, “The Rise of the New Global Elite,” which was admirably shredded by reader paper mac:

The cherry-picked anecdotes of blue-collar, self made executives used to suggest that entry into the ranks of the ultra-rich is somehow “meritocratic”, despite extensive evidence showing that the relationship between heriditary wealth, education, and socioeconomic status is strengthening; the suggestion that these elites somehow “produce wealth”, despite the clear evidence than in fact most of them do little but extract it; the absolutely laughable assertion that attending elite wank-fests like TED talks or Davos conferences somehow constitutes engagement with serious ideas; the absurdity of claiming that the handful of billionaires with significant philanthropic contributions to their pet causes shows us that the ultra-rich are legitimately attempting to better the condition of their inferiors- I’m amazed this trash got past any editor, anywhere.

Freeland is clearly far too close to her subjects. She spends most of her 7 pages fellating a handful of executives she had access to (include a puke-worthy passage suggesting that Lloyd Blankfein is, after all, just a regular, salt-of-the-earth boy)….

It’s nonetheless worth pointing out a few bits that provide some insight into the psychopathology of the subjects and the author. One that struck me was this:

“The clincher, Peterson says, came from the wife: “She turns to me and she goes, ‘You know, the thing about 20’”—by this, she meant $20 million a year—“‘is 20 is only 10 after taxes.’ And everyone at the table is nodding.””

In what way is this person not mentally ill? In what world is this not simple addiction to money? Who in God’s name needs 20, or even 10 million dollars a year? If we lived in a sane society, this person would be the object of pity and ridicule- someone so completely given over to their wealth addiction that they will literally never have enough. It is people like this who will kill us.

mainman

Most people in the US could easily drive less distances and drive more efficient cars they just don't. Pretty much wherever I go I see people circling for ages to get the best parking spot rather than walking 20 feet or leaving cars idling for half and hour. I have zero pity for lardass's in SUV's complaining about the cost of gas. They should have bought a car they can afford to run.

IMHO it would be a good thing if gas goes up as it will encourage people to buy more practical vehicles and act more wisely.

As for hurting the economy give me a break. Other countries pay way more for gas and have much lower un-employment rates.

Laptops_R_evil:

I had a BIG discussion in a Doubletree bar last night with a car auctioneer (repos) which everyone seemed to join in: I get 43 highway with my old 1990 Honda Civic 4 door. FORTY THREE! I paid $1000 for it, summer of '08.

This "higher mileage" govt. mandate is an outright LIE! Because the younger generations weren't around 20 years ago to have a 1990 Honda Civic! It seems to be a govt/corp rouse just to get 18k outta you for a hybrid. 4 cylinder engines in small framed autos can get the mileage, NO problem!

WE ARE BEING JERKED OFF! And it doesn't even feel good, which sucks!

reality fan:

I don't know what planet this author is on, but $4 a gallon gass will keep me close to home this summer and I won't be using my boat much either. As for the talk about the smaller cars, thats crap...just look up and down the rows in parking lots....Vans, PU trucks and SUV's outnumber the cars. To a point, a American public hasn't gotten it, about the large vehicles, but $4 gas will hurt no matter what.

DelJ:

This "ivory tower" author is completely disconnected from a place I like to call "planet earth". He totally ignores the HUGE effect oil price per barrel increases have on increasing DIESEL fuel, and the corresponding increase in EVERYTHING consumers buy from stores that receive shipments via diesel powered truck. Diesel fuel cost is a secondary element of a consumer's budget (if they do not have a diesel powered vehicle), yet it can be more of a cost than their actual fuel costs. The author using the word "lazy" to describe consumers in regards to gas milage is not helpful nor accurate; people want the best gas milage they can get, but since theu live in the REAL world and not some ivory tower, their family situation may be that they cannot all FIT into a subcompact that gets 40 mpg. Higher gas efficiency cars and hybrids are many times not worth the investment, since the gas cost you actually save does not justify the additional cost of purchase.

A Yahoo! User

$4, $5, no end in sight right? They will just pay it? Oil analysts think that because demand wont fall much, its no big deal. However, the extra gasoline drain on the wallet has a 4X effect on the rest of retail. Oil demand fell 5% while the rest of retail fell 20%. The RV industry fell -70% and all the jobs that go with it. We are an oil based economy and the foundation for all goods and services. High oil and dead wages wont fly.

A Yahoo! User

That guy is an idiot! $4 gas will hurt this economy unless the trucking industry is going to run on solar power or batteries. Greed is destroying this nation. The market is manipulating it higher with JPM and GS buying oil contracts when they will NEVER attain delivery of the futures. Sickening. I suppose, as long as the RIGHT people are getting paid, screw the country. Right?

[Jan 12, 2011] The Globe's Limitations: How Peak Oil Threatens Economic Growth

Everyone just stay calm and follow the instructions that you're given ;-)

In the second video in the series “Peak Oil and a Changing Climate” from The Nation and On The Earth productions, Richard Heinberg, senior fellow with the Post Carbon Institute, discusses how depleting oil supplies threaten the future of global economic growth. According to Heinberg, historically there has been a close correlation between increased energy consumption and economic growth. If the economy starts to recover after the financial crisis and there is an increased demand for oil but not enough supply to keep up with that demand, we may hit a ceiling on what the economy can do.

“What politician is going to be able to standup in front of the American people and tell them the truth?” Heinberg asks. “Every politician is going to want to promise more economic growth and blame the lack of growth on the other political party…. The whole political system starts to get more and more polarized and more and more radical until it just comes apart at the seams.”

[Jan 12, 2011] How The Fed Spent $2 Trillion And In Exchange We Got 650,000 Temp, Leisure And Retail Jobs zero hedge

"In a democracy, you get the government you deserve..."

B9K9:

I agree. Tyler keeps posting up irrelevant information that attempts to provide some kind of linkage between policy decisions and economic fundamentals. Bzzt! Wrong.

ZH is an incredible platform, but for it to remain relevant, it really needs to climb the perspective ladder. From a higher vantage point, one can clearly see that the entire name of the game is preservation of the current regime - one that is an admixture of state protected oligarchies representing many different fields. And the underlining mechanism behind this entire process is the magic of credit generated ponzi "money".

So, when you see a headline like "the Fed spent $2T", one must not be confused about its publicized intent, but rather, focus on its true purpose. In this case, the true purpose is to maintain the fascist state in all its present glory.

Now, once one understands the overriding mechanisms & motivations, it's easier than sh!t to arbitrage the system just like the insiders. For, after all, nothing is really opaque anymore, now is it? Nope, in reality, this game is utterly transparent.

Right now, we have bubbles in 4 major areas, incidentally all effects of focused gov't action: education, commodities, equities & debt. Whereas the latter three are a result of printing (QE), student loan growth is the one area where credit is still increasing.

How long can this continue? Who knows. But in the interim, there's a 1:1 correlation that would be wise to game in terms of preparation.

DocLogo:

Please continue. which commodities do you feel are bubbles?

B9K9:

Everything denominated in the $USD is in a bubble.

Try this thought experiment: what if the debt ceiling was not increased, QE ended, and massive budget cuts were undertaken. What would happen? Answer: the dollar would soar and all commodities (including gold) priced in FRNs would crash.

But what is the likelihood of this occurring? Nil to never gonna happen. So what's the corollary? The $USD will continue to fall while all items priced in $USD will continue their upward trajectory.

The key is to not think about price, but policy. And no, don't worry about policy in terms of public impact, follow policy in terms of regime preservation. As long as the fascist empire still stands, the $USD will be used as a bludgeon to achieve its strategic imperative(s).

That's why, while Robot is correct, he appears to lack any intrinsic understanding of why this is so. So, to recap, stay long in the areas that are effected by dollar depreciation. Don't get out of your long positions until you can literally see the white of Ben's eyes get really big.

Then you will know the party is ending.

uno:

for a timeline, I do not see anything dramatic happening with O in the House. The media LOVES him and will attack anyone challenging him. This is probably why he is in right now, especially now having Daley as the Chief of Staff to pacify TPTB.

The current solution is to give out benefits (food stamps, SSI disability, medicaid etc) while the looting continues. Soon anyone not working will get free lottery tickets while Wall Street continues with record bonuses.

The USD will drop dramatically over the next few years, outsourcing of most jobs requiring a college degree will increase.

The signs I would look for is huge protests outside the White House, just cannot see that happening with O in.

Jaw Knee Cash:

I was shooting in the desert last weekend and came across a dead stag beetle. I picked it up and it was very light. I realized that its insides were completely eaten out; just the outer shell remained. Just like the economy of this country. It's dead and has been hollowed out by parasites.

EscapeKey:

I read somewhere that 40% of all American jobs are minimum wage jobs.

anony:

The U/E rate and U/E population not working will NEVER reverse their upward trends. We have reached Peak employment some 5-10 years ago depending on which crock of poo you choose to disbelieve.

Now we will have many more millions of people who will not be able to find work each and every year. And our open borders may soon be abandoned by border guards and fences torn down when Mexicans can no longer find jobs here to send pesos back there.

The government continues to lie about inflation to avoid the addition to expenses that Cost of Living raises command. Social security payments haven't seen an increase in two years and the part deductible for medicare has increased both for Part D and the part of the Soc Sec payment.

New ways of getting to the people what they need to survive will become increasingly necessary as the extension of Unemployment Comp has been extended to 4 years, eventually it will become permanent like the dole in the U.K.

[Jan 11, 2011] The Outer Limits- Can Corporate Profit Margins Stay in the Stratosphere by Aaron Task

Yahoo! Finance

As $22.05 per share, S&P 500 companies are expected to set a record for fourth-quarter profits. In addition, analysts are expecting full-year 2011 profits of $96 per share, which would be a record.

It's tempting to think that profits can't live up to those great expectations, but corporate earnings have exceeded expectations for six-straight quarters, the longest streak since at least 1993, according to Bloomberg.

By slashing payrolls and asking more of the employees they keep, as well as buying back shares, corporations have generated strong bottom-line earnings growth despite generally weak top-line revenue growth.

As a result, corporate profit margins have hit record levels, a key reason why the stock market has fared so well the past two years despite an unemployment rate hovering near 10% and only falling to 9.4% last month because 260,000 people abandoned the labor market. (See: Dec. Jobs Better Than They Were, Not Where They Need to Be)

Optimists believe 2011 will be the year of expanding revenues as the economy improves, hiring resumes and consumers begin to spend again more uniformly and aggressively. In this "goldilocks" scenario, profit margins will remain at record levels, justifying higher P/E ratios and further upside for stocks. With corporations sitting on nearly $2.5 trillion in cash and wiling to use it on mergers, as evident again this morning, you can see why optimistic sentiment is on the rise, Monday's early setback notwithstanding.

But there are several factors suggesting profit margins will decline in coming quarters, or just revert to historic levels, as Henry Blodget writes:

-- • Increasing commodity prices, which companies might not be able to pass through to end users
-- • Higher taxes, as federal and local governments try to balance their budgets
-- • Higher labor costs, as weak-dollar policies raise the cost of foreign manufacturing
-- • Deflation, as companies are forced to compete by cutting prices because consumer demand remains weak
-- • Recession. No one's talking about a double-dip now, but that doesn't mean we won't eventually get one.

Whether the bulls or bears are proven right remains, of course, to be seen. But it's safe to predict the status quo of record profit margins and high unemployment can't last much longer because productivity is already at the outer limits.

[Jan 11, 2011] Barkley Rosser's Home Page

An interesting set of papers by Barkley Rosser's

[Jan 11, 2011] Former Bush Speechwriter "Advises" Obama To Cut Social Security Benefits

EconoSpeak

Over a week ago on Angry Bear the estimable Bruce Webb argued that the 2% cut in payroll taxes was picked by insider Dems as part of an old plan to be offered to be put into private accounts, long the goal of the Wall Street gang. I fear he may be right on this, see http://www.angrybearblog.com/2010/12/2-non-solution-part-two.html . Bah, humbug!

[Jan 11, 2011] Oil Climbs to 1-Week High as U.S. Panel Calls for Drilling Industry Reform - Bloomberg

The U.S. Energy Department increased its crude oil price forecast for 2011 to an average $93.42 a barrel from $86.08, according to its monthly Short-Term Energy Outlook, released today. Prices may climb amid projections that accelerating economic growth will bolster fuel demand. Futures averaged $79.41 a barrel in 2010, the department said in the report.

A Deutsche Bank AG note earlier today estimated prices in New York will average $96 a barrel this year as global demand increases by almost 1.7 million barrels a day.

“Oil supply, demand and inventory fundamentals are pointing towards a gradual tightening in the oil market,” Washington-based Adam Sieminski, chief energy economist at Deutsche Bank, said in the report.

[Jan 11, 2011]   Two Toxic Bubbles in One  by Martin Hutchinson

Who are those suckers the GS managed royally fleece ?

Goldman Sachs’ $2 billion deal for Facebook, valuing the social networking site at $50 billion, combines the worst elements of the 1997-2000 and 2004-07 bubbles. It sets a grossly excessive valuation on an Internet company with modest revenues and prospects. It also involves an investment bank structuring a complex deal to maximize its own fees, while driving a truck through two major elements of financial services regulation. Add a third element, that it places a company controlling personal information on 500 million users in close business partnership with a Russian billionaire with a criminal record and you can see the deal is truly groundbreaking. It should also raise important red flags about current market conditions.
 
General market opinion is that the U.S. stock market is not currently overvalued, because it has not broken through its 2007 highs. I would argue that U.S. fiscal and monetary policies are unsustainable, making the foundations of the economy far more fragile than in 2007. In any case, the Facebook deal in terms of valuation is reminiscent not merely of 2007 but of 1999. However good a company’s prospects a valuation of 30 times revenues is excessive. After all, there is not much more for Facebook to go for in terms of recruiting new members; with 500 million it already has 7% of the world’s population and well over half the global population of young affluents that advertisers drool over.
 
If with this customer base and a fashion-level second to none Facebook can’t gross more than measly $2 billion, with net income not much above break-even, its business model is not worth anything like $50 billion.  At this level it is at best JDS Uniphase, destined for painful post-bubble deflation. More likely it is Pets.com, destined to disappear in a puff of smoke when the market turns down, leaving only a sock puppet behind.
 
However the Facebook deal has overtones of the excesses of 2006-07 as well as those of 1999-2000. One of the solidest rules in the SEC book, dating back to 1960 in its present form and to the 1934 Securities and Exchange Act in its principle, is that a company cannot continue to shelter behind the non-disclosure of a private company once it has acquired a broad base of 500 shareholders. Facebook and Goldman Sachs are evading this rule, by having buyers invest in a special purpose vehicle, which then buys the Facebook shares. This is exactly equivalent to shareholders investing through a nominee account, whatever fancy dress Goldman Sachs’ high-priced lawyers put around it. It is a direct attempt to evade the 500-shareholder rule and if the SEC doesn’t take strong action forthwith it will prove beyond doubt that the U.S. investor protection system has been eviscerated by regulatory capture.

... ... ...

Like all bubbles, this one will end. What’s more, it will end fairly quickly because there is a limited remaining supply of rocket fuel to give it impetus. Commodity prices have now risen to levels mostly above the peak of the 2008 boom, and in doing so have fueled inflationary and contractionary forces that will destabilize the U.S. economy within a matter of months. No doubt Wall Street, the Fed and the politicians will use every artifice to prolong the mania, but it may not be prolongable. Nobody wanted the housing bubble to burst in 2007, or Lehman Brothers to fail in 2008, but market forces eventually proved too powerful for the optimists. Similarly in this case, the market will prove too strong for those attempting to keep the bubble inflated. By the end of this year, the bubble’s contradictions will already be fully apparent, although judging by past experience it may be late 2012 before catastrophe finally hits.
 
One can only hope that, unlike in 2008, the response of the political class will not be to try and re-re-inflate the bubble by any means possible. It is long past time for sound monetary policy, for sound fiscal management and for investment driven by solid value rather than by speculative excess. Leverage must become eye-wateringly expensive, as it was in the early 1980s, and the foolish wealth of Wall Street’s acolytes must be replaced by solid Main Street accumulation. Only when risk-free bonds (which may well not be those of the U.S. government) earn solidly positive real after-tax returns can we be sure that savings will begin once more to accumulate rather than dissipate and the U.S. economy return to investing in the productive rather than the meretricious.
 
The Facebook deal is important mostly as an indicator that the current economic recovery is unsound and that the bubble of higher commodity prices and stock valuations is approaching its maximum inflation. We should heed its message.
 

[Jan 11, 2011] Market Outlook 2011 - Thoughts of a Professional Investor Deric O. Cadora

Safehaven.com

The current macroeconomic outlook is easily the gloomiest of my career. We have a central bank that will stop at nothing to produce the illusion of economic expansion, and a Congress with no reservations about expanding an obscenely large public debt. These misdirected policies will continue to distract capital from its most efficient uses, increase prices of raw materials, and encourage speculation over production.

The Fed's policy is flawed precisely because its directors believe easy money to be the driver of economic growth. This misconception is seductive in its simpleness and convincing because of the deceptive cause-and-effect relationship such policies carried over the last quarter century. I say "deceptive" because easy monetary policies were not the true driver of the economic expansions that followed. The 1980s and 90s were a period rich in innovation derived from the advent of the personal computer and later, the internet.

The economy reacted favorably to easy money during this period because entrepreneurs were teeming with ideas and ambition. In other words, there was a ready market to put cash to work toward a productive purpose. The economy would have recovered with or without central interference. The unfortunate consequence of the cause-effect illusion was that the Federal Reserve reacted with ever-larger doses of freshly printed money each time the economy slowed because policy-makers believed lower interest rates would create wealth.

The reality is that lower interest rates misdirected capital, enabling inefficient businesses to survive. Eventually this exuberance resulted in mass speculation and a much larger downturn... in the form of the bursting of the tech bubble... than would have otherwise occurred because capital was steered away from efficient producers into the hands of anyone with an idea, good or bad.

Not realizing that misdirected monetary policy was the direct cause of massive misallocation of capital and by extension, the culprit for an abnormally large downturn, our central bank responded by printing more new money than ever before, and another bubble was created in real estate. In this case, the resulting misallocation of capital is tangible in the millions of empty homes and vacant commercial centers scattered around our country.

Still operating with no clue, the Federal Reserve along with Congress are complicit in counterfeiting more money over the last three years than in several decades combined. Unfortunately, there is no innovative industry ready to absorb this money. Instead, banks are lending the new cash in the only arena for which there is a ready market and in which they can earn a high enough spread to warrant the risk: as margin for speculators. The result is a soaring stock market, disconnected from any economic valuation, and soaring raw material prices. The last time I checked, higher input prices were not favorable for economic expansion.

The first irony here... and a sad one it is... is that allowing interest rates to rise as they naturally would without central interference would actually serve to move financial capital away from speculative use and toward production. With higher interest rates in hand, banks would be more willing to accept certain levels of economic risk. Furthermore, higher interest rates would serve to control raw material prices, making industry more feasible. There would, of course, have to be a period of painful contraction in between the interest rate rise and economic expansion as misallocated resources found higher and better uses.

The second irony is that the stock market boom, a stated aim of the Fed, will be a large factor in the next, unavoidable bust. Profit driven by speculation is not a sustainable business model for the banking system. Real wealth is built only by production. Eventually, higher interest rates will be forced upon the economy, stock prices will be driven lower, margin will forcibly contract, and the flaws in central bank policy will become painfully apparent to even those who refuse to see it now. By the time the Fed is forced to withdraw liquidity in order to control inflation, the bonds they purchased during the monetary expansion effort will be priced much lower. There will be no way for the Fed to withdraw enough liquidity.

The first warning shot to this unraveling will come in the form of a dollar crisis, which I believe is just in front of us. Without further ado, let's get to the specifics of my market outlook...

[Jan 10, 2011]   Markets Could Freeze and Crack In January

Forbes

As January progresses, the major markets, whose pipelines have been pumped full of liquidity induced speculation, could very well freeze and potentially crack.

With investor sentiment inordinately bullish, mutual funds fully invested as of year end, and every minor pullback considered an opportunity to get in on the momentum train, the chill of partisan backstabbing over the future of Fannie Mae, Freddie Mac, and posturing over raising the debt ceiling could freeze markets and crack speculative pipe dreams.

We started the New Year like we did most of the months in 2010. Markets rallied early in the month. As noted in Barron’s over the weekend, of the S&P 500’s 142.5 point rise last year 133.5 points were added on the first trading days of positive months. The rest of those months saw churning and sideways movement, if not some giveback. January may have spent its rally already.

[Jan 10, 2011]   Overheating East to falter before the bankrupt West recovers

Telegraph

Can bond yields rise on "sovereign risk" even as core prices grind lower towards deflation? Yes, they can, and this baleful possibility is not in the textbooks.

Ben Bernanke made a fatal error by launching QE2 too early, with an incoherent justification, by dribs and drabs for fine-tuning purposes. The QE card cannot easily be played a third time. If he now tries to print money on a nuclear scale to crush all resistance and hold down Treasury yields, he risks exhausting Chinese patience and invites the wrath the Tea Party Congress.

Alas, my neck-sticking predictions for 2011 must be as grim as ever. This does not exclude further bear rallies over the Spring on Wall Street and Euro-bourses as institutional mammoths seek to extract themselves from bonds. Europe's insurers have as little as 5pc of assets in stocks, against 15pc or more in the 1990s. Yet it is a double-edged sword if big funds switch en masse into shares. Bond dumping has economic consequences.

Japan will slip back into technical recession. It cannot keep raiding its foreign reserve fund to pay bills. Public debt will spiral up to 235pc of GDP. Interest payments will approach 30pc of tax revenues. Fresh debt issuance will outstrip fresh private savings this year. Dagong, Fitch, and S&P will have to act. Downgrades will come thick and fast. This time they will hurt.

Yes, I thought Japanese bonds would buckle in 2010. The obsolete paradigm survived another year. The longer it takes, the worse it will be.

China and India are over-heating, faced with a 1970s choice between choking credit or the onset of stagflation. If they choose the latter to buy time, the politics of food will turn on them with a vengeance.

Vietnam will have to rescue its banking system, kicking off the Asian hard-landing of 2011-2012. The Aussie dollar will come back to earth.

Dylan Grice's rule of thumb at SocGen is that regions coming off a "good crisis" -- Japan in 1987, the US during East Asia’s 1998 blow-up, Chindia this time -- typically pop about two and half years later. The reason they have a good crisis when others bleed is because momentum from credit follies and/or hubris overpowers the external shock, but that contains the seeds of its own destruction.

Speaking of rules, the Atlanta Fed’s law is that every year of debt-based boom is roughly offset by equal years of debt-purge bust, which means a Lost Decade for the old world. I doubt the West will recover soon enough to pick up the growth baton before the East hits tires. We may then have a "sub-optimal equilbrium", that modern euphemism for a trade depression.

Europe is hobbled by its Delors Error. The region makes things that world wants to buy. Its external accounts are in balance. Fiscal policy is more responsible than in Japan, America, or Britain, yet the whole is less than the parts. A dysfunctional currency union engenders chronic crisis at a lower threshold of aggregate debt.

Frazzled investors will seize on China’s foray into Iberian debt markets to thin their own holdings, denying the Portugal and Spain much interest relief.

Lisbon may last unit on until March before being forced by yields above 7pc to accept its debt servitude package. At that point the EU will order its €440bn rescue fund to buy Spanish debt pre-emptively, hoping to draw a final line in the shifting sand, with half-hearted solidarity from the European Central Bank.

As usual, Frankfurt will fall between two stools, failing either to satisfy Germany by immolating EMU on an altar of Bundesbank purity, or to satisfy everybody else by blitzing QE to save the system.

Bond yields will not fall enough to stop to the vice from tightening in every EMU state south of Flanders. It will become clear that Europe’s scorched-earth rescues cannot work because they offer no means by which victims can clear debt and claw their way back to health.

Ireland's Fine Gael-Labour coalition will take its revenge on Europe for imposing such ruinous terms under Berlin's Diktat. It will restructure senior bank debt, setting an irresistible precedent for the PASOK backbenchers in Greece, the Left wing of the Partido Socialista Obrero Espanol, and America’s insolvent cities. From bank debt to parastatal debt is a hop, and from there to quasi-sovereign debt is a skip. Nobody will utter the word default. They never do. Bondholders `volunteer'.

Pudding bowl haircuts will set off the next wave of distress for Europe’s banks as they try to refinance $1 trillion by 2012, in competition with hungry sovereigns. Gold may slip at first as casino funds cut leverage to meet margin calls, before punching higher to €1300 an ounce as investors seek gold bars in a precautionary move. Talk of capital controls will grow louder.

Year III of the Long Slump is when we confront the Primat der Politik in tooth and claw, the phase when states become erratic, victims fight back, and dissident intellectuals start to inflict damage on failed orthodoxies. The dog that hasn't barked yet is the jobless army in Spain, the 43pc of youths without work. Bark it will when the €420 dole extension expires in February.

The cruelty of Europe’s `internal devaluations’ will become clearer. Wage cuts are tectonic events. They set off the protests that forced Britain and then France off the Gold Standard in the 1930s, and smashed Argentina’s dollar peg a decade ago. What we need is an iTraxx European Wage Index to navigate EMU's treacherous waters from now on. Spain’s Jose Luis Zapatero has barely begun to cut, yet he has already had to impose the first state of emergency since Franco to keep airports open.

Certainly, this is the year when Europe's unions will remember their own warnings twenty years ago that EMU was a "bankers’ ramp", a scheme for the convenience of elites. They will ask louder why crucifixion on a Deutschmark cross is in their interests.

Those few and reviled Iberian economists who dare to suggest that monetary union itself is the reason why Spain and Portugal cannot take action to fight the slump, will find a voice in the press at last. Once debate is engaged, it will be impossible to contain.

It would be a mercy if the German constitutional court brought this unhappiness to a swift close by ruling in February that Europe’s rescue machinery is a breach of EU treaty law, and therefore of the Grundgesetz. But it cannot happen, can it? A court order forcing Berlin to suspend payments would drive a stake through the heart of German foreign policy, and for that reason the eight judges must recoil, and the law be damned. One presumes.

Alas, there may be no neat solution, no division into two currency blocs with the South keeping the euro and the North launching the euro-plus, no brave decision by Germany to get out, revalue, and let others recover. Instead, there will be month after month of catfights, and flashes of hatred.

The EU will do just enough to prop up the edifice, but too little to restore lasting confidence. The German bloc will not confront the elemental point that either they agree to pay subsidies – not loans – on a scale equal to Versailles reparations, for year after year, or the South with stay trapped in slump until electorates blow a fuse.

Norway will sail on serenely.

Happy New Year.

[Jan 09, 2011] Deepening crisis traps America's have-nots

Telegraph

Raghuram Rajan, the IMF’s former chief economist, argues that the subprime debt build-up was an attempt – “whether carefully planned or the path of least resistance” – to disguise stagnating incomes and to buy off the poor.

“The inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly,” he said.

Bank failures in the Depression were in part caused by expansion of credit to struggling farmers in response to the US Populist movement.

Extreme inequalities are toxic for societies, but there is also a body of scholarship suggesting that they cause depressions as well by upsetting the economic balance. They create a bias towards asset bubbles and overinvestment, while holding down consumption, until the system becomes top-heavy and tips over, as happened in the 1930s.

The switch from brawn to brain in the internet age has obviously pushed up the Gini count, but so has globalization. Multinationals are exploiting “labour arbitrage” by moving plant to low-wage countries, playing off workers in China and the West against each other. The profit share of corporations is at record highs across in America and Europe.

More subtly, Asia’s mercantilist powers have flooded the world with excess capacity, holding down their currencies to lock in trade surpluses. The effect is to create a black hole in the global system.

Yes, we can still hope that this is a passing phase until rising wages in Asia restore balance to East and West, but what it if it proves to be permanent, a structural incompatibility of the Confucian model with our own Ricardian trade doctrine?

There is no easy solution to creeping depression in America and swathes of the Old World. A Keynesian `New Deal’ of borrowing on the bond markets to build roads, bridges, solar farms, or nuclear power stations to soak up the army of unemployed is not a credible option in our new age of sovereign debt jitters. The fiscal card is played out.

So we limp on, with very large numbers of people in the West trapped on the wrong side of globalization, and nobody doing much about it. Would Franklin Roosevelt have tolerated such a lamentable state of affairs, or would he have ripped up and reshaped the global system until it answered the needs of his citizens?

[Jan 09, 2011] Is Mark Zuckerberg the Next Steve Case

Plausible: Slashdot and other discussion sites are in deep decline...
Slashdot
"With all signs for Facebook pointing up, author Douglas Rushkoff goes contra, arguing that Facebook hype will fade. 'Appearances can be deceiving,' says Rushkoff. 'In fact, as I read the situation, we are witnessing the beginning of the end of Facebook. These aren't the symptoms of a company that is winning, but one that is cashing out.' Rushkoff, who made a similar argument about AOL eleven years ago in a quashed NY Times op-ed, reminds us that AOL was also once considered ubiquitous and invincible, and former AOL CEO Steve Case was deemed no less a genius than Mark Zuckerberg. 'So it's not that MySpace lost and Facebook won,' concludes Rushkoff. 'It's that MySpace won first, and Facebook won next. They'll go down in the same order.'"

headhot (137860)  Dead on.

In my network, posts are getting sparser and sparser. Just like the end of Freindser, or Orkut, or any other social network system. People get bored and stop. It the infusion of new users that drives their survival, and Facebook my be nearing the end of people willing to sign up.

Seumas (6865)

At some point, I think all social networking bullshit will inevitably be reduced to about 10% of what it currently is.

People will finally grasp what the rest of us grasped ages ago. That is, I have nothing worth saying that hundreds or thousands of people need to know about and none of them have anything worth saying that I give a damn about. We're all just a bunch of circle-jerking morons so wrapped up in ourselves and the trivial reciprocation (to ensure that those in our circle will continue to care about us, too). Eventually people will pull their heads out of their own asses and move on.

They'll return to the way things should be done. If you have something important to say and there are people in your life that are important enough to tell it to, you email them or call them. You have a direct dialogue with them, rather than this self-absorbed mass-broadcasting of everything, where those who are on the other end are merely absorbers of your greatness. And they'll contact you directly when they have something to talk about, too. Everything else doesn't need to be shared and you can have actual individual relationships and discussions with people.

It's the same way we went through the whole web thing. The first time you discovered the web, you probably spent endless hours doing random things, just because it was new and amazing. Fifteen years later, you recognize that the web is a vast wasteland of shit and you only utilize it and things on it when you have a specific objective. Random surfing is largely a thing of the past.

It also reminds me of the AOL days (during the time, I was an engineer at Netscape) in that "everyone" was amazed by it as a consumer or an investor, but everyone I knew saw it as an obsolete toy for people that hadn't yet grown out of it. And people eventually did. Just like there are countless rational people who step back and shake their heads at Facebook and the never-ending self-important social-networking habits of people . . . which we recognize as doomed to become obsolete.

muuh-gnu:

Why did those users need a web based so called "social network" to communicate in the first place? Before FB, they had email, forums, IRC, IMs, why did they need a web based communicaiton tool? Once they were all over those web based networks, why did every 2-3 years one network win over the users of a former network-de-jour? Because every one was purely technically "better" than all the former ones? Dream on.

I think this "ease of use" premise with regard to social networks way always false, I think what always drove people to new means of communication was the quest for other new people. Communities of any kind, be it RL cliques, IRC channels or social networks, tend to dry up with regard to interesting new content once there is no influx of new blood. Then users one by one, beginning with the influentiel trend setters, like queen bees, tend to wander around in search for a more interesting, cool new beehive. If, no, _when_ they find one, all the lower status worker bees will naturally follow, since the value of the old place drops significantly without the social leaders. People, especially the more easily bored social leaders, are somehow in an eternal quest for change. They tend to easily be bored in a low flox environment. The only thing FB _can_ do is prolong the time the queen bees will be interested enough to stay before their search goes on. They may hold them for 5 years but even that does not sound realistic. They will never be able to simply stop the migration, since this would mean rewiring hardwired behavioral patterns, which one tiny website, no matter how much users it by chance may have at a certain point of time, will simply not be able to do.

shadowrat:  Re-You're a target

Nobody forces you to put your wife's maiden name on facebook. Facebook even prevents unauthorized access to any info you post. I assume you also wouldn't send an email containing a picture of grandpa jones because that can be easily intercepted. Even if you encrypt it, one careless recipient could forward it without encryption.

Your best protection against identity theft is knowing what you can and can't post. You seem to have that knowledge so I don't know what you would have to lose by posting some casual fb updates.

boxwood: Re-Dead on.

New users spend a lot more time on the site, post more content, send more messages, etc.

I've been on facebook for years. I rarely update my status or post photos now. All of my friends who have been on there for a while are the same. Sometimes I meet someone who just got on facebook and they post more messages so I load up facebook more often to see what messages they've posted to me. But after a while they get bored too, post less often, and so I have less need to go to facebook.

Facebook became the most popular website due to the network effect, but they will become less popular due to the boredom effect. As more people become bored with facebook they stop posting and just go to read what everyone else is up to. But as more people transition from adding content to just viewing content, there is less content and less reason to go there to view content. And now that more people are becoming aware of privacy issues with facebook it becomes even less likely they will post stuff there.

So it has a big userbase, but a lot of that userbase is bored. When the next cool thing comes out that "everyone" is using, they will just use that and not bother with facebook anymore.

jellomizer:

There are 3 stages. Early adopters: It is the new hip thing to do. Also this is where the zealots and the big fans come in. This was the area when face book was considered a social network for college kids.

Middle adopters: This is where the product gets it's name recognition. And big envesters come in. This is where it really grows. you don't need to be hip to use it it is mostly expected.

Late adopters: Ok it isn't a fad. That is when grandma gets an account. It is big and the early adopters start leaving to the next big thing.

So even when you go from stage 2-3 you are still growing. But you are approaching the end.

cptdondo:

I'd really like to see the demographic of the msot active accounts. Just from my own anecdotal evidence. the vast majority of facebook users seem to be teen girls. Most adults I know use Facebook as a specific tool; to get name recognition for an election, to spread word of an art show, etc.

The teen girls seem to use it for social networking the most.

Teen girls grow up, get boyfriends, move on. Adults, with few exceptions, don't really use facebook in a way markedly different from a blog or even an email newsletter.

So a demographic would really be instructive.

betterunixthanunix:

When you get down to it, Facebook doesn't actually do something people need -- it is fun, people like it, but people had friends and social networks before Facebook, MySpace, BBSes, etc. People talk about how Facebook puts them in touch with lost friends; my experience has been that people are "in touch" only to the extent of clicking adding the person to their friends list, and then never speaking to them again. Farmville is not really a killer app, it is just an amusement. Facebook could vanish suddenly tomorrow, and I doubt that society would be seriously affected by its absence.

betterunixthanunix:

Well, I was replying to a post that said it was unfathomable for Facebook to die, because of how many users it has. My point is that, in fact, it is not unfathomable, because Facebook everything that Facebook does is either redundant or useless, in terms of what people need. All of the industries you named have prominent examples of companies and styles that have go under because people just stopped being interested or because their product or style was not fashionable anymore.

TheRaven64

Maybe Facebook sers will migrate to The Real Internet too? Facebook chat and picture hosting seem to be the two killer features that people (at least, people I talk to) seem to want. Facebook chat is just a non-federated Jabber server with a web interface. Google and others provide a federated Jabber server with a web interface for free.

Picture hosting is just a special-purpose web server; when Internet connections get slightly faster I can imagine this being a built-in feature in consumer routers. Don't upload your pictures to a remote server, just copy them to your own web server and send people links. A competent ISP could start offering this service now and run a transparent reverse proxy so anything people actually download is cached and doesn't use the last-mile upstream.

brentc:

I don't really see too much value in Facebook. Its nice to keep track of your relatives and friends but it becomes a pain to maintain. I laugh when I hear people at work who actually put effort into their Facebook page-especially since some of them got fired for for what they posted on it. I have my 15 year old daughter put some generic pictures of the family up there and occasionally I answer the friend request. I may be lazy or greedy but Facebook doesn't put money into my pocket so I don't put much effort into it.

In fact I see it as a potential liability that can be used against me on the job, or give the general public too much information as to what I am doing.

If I am going to post on a website it will be Slashdot or one of the hobby websites that I subscribe to. Now my 15 year old daughter lives for Facebook-this news might affect her. This may be a generational thing. If it is fading I don't see it with the younger set-yet. I wouldn't blame Zuckerberg for cashing out-isn't that what every computer geeks dream is?

rsmith-mac:

Comparing Zuckerberg to Case is an insult to Case. AOL wasn't the best internet service - what with being a kind of walled garden - but it was built on providing internet services to novice customers. Zuckerberg on the other hand built a service based on selling profiling data to advertisers. Zuckerberg would be lucky to be compared to John Sculley (or if you want scumbags, try Kenneth Lay), let alone Steve Case.

cshotton:

It's just as shallow to compare a desktop software application's success to the much more transient, ephemeral, and difficult to quantify success of Facebook. Better to look at the Internet as a whole and ask a couple of simple questions.

First, name one network-wide, user-oriented application level service that was present when the commercial Internet opened for business in 1991 that is still in operation and use today.

Discounting UseNet and Email as infrastructure, the answer is likely "nothing." It's instructive to consider why. Early community plays on the Internet (The Well, The Globe, AOL, WebTV, and even MySpace) fell in succession, not because there weren't plenty of users and not because they weren't good services. They fell because, by definition, something newer and better comes along. It's the same reason we don't drive horse-drawn wagons to work. Supporting the infrastructure and feature set of an existing system means, by definition, that you will never be able to change and adopt new technologies as fast as someone else starting with a clean slate.

Second, what is so special about Facebook that it will avoid being obsolesced by the next cool fad? Answer again, "nothing".

Facebook's only advantage is the depth of its social graph. And as many posters have noted, the average Facebook user has a pretty static social graph and no need to add to it in any significant way now. Once you are fully connected, it becomes trivial to notify your graph that you are moving elsewhere, and then Metcalfe's Law kicks in. Once the infrastructure becomes distributed and you are no longer locked into a single service, people will be free to move their social graph and associated applications wherever they'd like.

Extrapolating the past lifecycles of similar, successful social sites to Facebook, it seems logical to conclude (as the author did) that Facebook's days are numbered. Maybe in the thousands, but numbered nonetheless.
 

[Jan 09, 2011] Is Larry Summers' Potential Successor Really a Wall Street Ally

01/06/2011 | Mother Jones

 Ronald Pires

 The argument that the guy got money from this or that Wall Street company is just a distraction. The problem with Sperling is that he has no ideology of economics at a time when the du jour ideology has bankrupted itself. That means either that this bankrupt ideology will continue as our guide in spite of its failure, or economic policy will be rudderless. This is a miserable appointment not because Sperling is a bad person, but rather because his qualifications simply do not rise to the level of the problem at hand.

Adam Sharp :

David,

The fact that this Sperling, who appears to be a card-carrying member of the Bob Rubin Club, has "only" accepted $860k from Goldman (more than the average American will make in 25), doesn't mean he is a remotely acceptable candidate. Obama has lost ALL benefit of the doubt at this point, this seems like a desperate gift from a President doomed to single-termihood.

I could name a dozen candidates who are more qualified. Moral, hard-working, and motivated to enact actual change. William K. Black, Simon Johnson, and Christopher Whalen to name a few.

Sperling may be a great guy, or maybe he's just the best-smelling piece of crap in the room. Point is, he is guaranteed to go easy on his former colleagues. Most people would, I think. Who's gonna throw old work buddies under the bus?

This is why the revolving door needs to be halted. Enact legislation that bans lobbyists and banksters from taking corporate oversight gigs. It's not illegal, it'd be similar to a non-compete contract, but designed to stop the robbing of American taxpayers. ""he's the rare economic power-player in Washington who didn't fully cash in after leaving government service."

Meaningless. A decent, yet pragmatic individual won't do at this point

[Jan 08, 2011] Northern Trust's Paul Kasriel 2011 Economic Outlook

Seeking Alpha

Paul Kasriel, Chief Economist of Northern Trust, has just produced his annual economic forecast:. Here are some of the key takeaways:

Click here for the full PowerPoint presentation.

Source: Paul Kasriel, Northern Trust, January 2011.

EDHarkcom:

Recent positive December nonfarm payrolls predictions look great, and if there were more help-wanted ads in the local papers they would look a lot greater. With longer-term interest rates rising without FOMC blessing as QE2 exfoliates, any green shoot recovery may get cut off and end up in my bear soup.

The FOMC has apparently so surrendered control of monetary policy to the marketplace, a conservative notion many would approve of, except for the rigid control of the fed-funds and similar near-term rates.

Once it is decided things are doing well enough, those will be allowed to rise. Then the yield curve will invert and Henry Kaufman will thunder forth on CNBC to a shocked sweet young thing and the gaping audience.

JLarkin:

The credit crunch is over? We shall see if credit starts expanding after its multi-trillion dollar deflation.

It's hard to see how wages and disposable income are going to make much headway, or how consumers can handle any more debt.

Most of the deleveraging has been due to foreclosures not paying down credit balances.

[Jan 08, 2011] Economist's View Fed Watch More of the Same

rickstersherpa:

Reading this and other web sites, particularly "The Big Picture," you see a lot of comments by the inflation hawks about how rising commodity prices, particularly food and fuel, show that Fed is about to ignite inflation. Rarely does anyone push back with the fact most costs and prices in what is predominately a service economy are labor costs and that between rising productivity and flat nominal wages due to high unemployment (wage freezes, if not cuts, are the trend of the day), there is no significant insufficient supply that would cause an increase in the price of labor.

The Federal Reserve is causing inflation in the trade surplus countries with QE II, a kind of back door devaluation.

calmo:

So you are saying that there is ("no significant insufficient supply") lots (don't mind me making this easy on us dummies) of labor here (in the service vortex of the universe) and abroad too...

Ecocontrarian Kasriel suggests that China's economy is about to pause or worse. The American consumer needs help...is my picture. K expects US exports to continue to pull the economy along, but a close examination of these exports might show (I cannot be expected to do all the work, you know?) that these are materials/goods/services --infrastructure for final consumer goods...piling up in US garages...until recently.

(So how many cordless drills do you have? more than most of your Chinese counterparts, I bet.) Rising commodity prices...not faithfully represented in inflation stats via CPI, yes?

Michael Pettengill:

We won't see the employment rate go up until we have robust tax hikes.

To believe otherwise is to believe in the tooth fairy, voodoo, and Jesus being a current member of the Tea Party caucus.

Otherwise, look at the data that shows the employment rate going up when taxes are hiked.

But I do not call for any Democrat to call for tax hikes but instead to force Republicans to act to hike taxes.

If Republicans paid attention to their reading of the US Constitution, they know that it is their duty to levy taxes, and that their calls for a balanced budget amendment and an end to borrowing is contrary to the principles that the authors of the US Constitution places first in the authority and duty of the Congress:

Section 8: The Congress shall have power To lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defence and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;

To borrow money on the credit of the United States;

The failure of Republicans to hike taxes to pay the debts, pay for their wars, and to talk of defaulting on Federal debt is a violation of the US Constitution, and levying taxes to create jobs is certainly part of furthering the general welfare of the United States.

Greg:

Calculated Risk reports that hourly wages "ticked up three cents".

It would seem it's the low-paid jobs which are being cut.

If same-job wages are declining as rickstersherpa says above, then low-end job losses would have to be the more savage to produce the overall wage gain.

Conjecture: young adults are staying in school longer, in response to the dismal job market.

Conjecture: lots of people have just given up. They've fallen off the end of the 99-week unemployment chain, or never got into the labor force in the first place; they're the new proletariat. Not so good a thing.

Either way, Bernanke is probably right: the unemployment figure will be down a percent or two in a year or two. The fact that it's a percentage of a smaller labor force will be ignored.

[Jan 07, 2011] Oil Prices Update

2011-01-07 | CalculatedRisk

From Ronald White at the LA Times: Gasoline prices' rise evokes 2008
 

"It's just ridiculous. Every day it's another big bite out of my income. I've gone from $40 for a fill-up to $60 for a fill-up in just the past several weeks," said Eric Ott, a 47-year-old Valley Glen resident.
...
Oil closed Friday at $88.03 a barrel in New York futures trading.
...
"[W]e cannot expect brisk economic growth with oil at $120, $130, $140 a barrel and gasoline at $4 a gallon and higher ... Those kind of prices can spawn a tremendous amount of demand destruction." said Tom Kloza, chief oil analyst for the Oil Price Information Service
Back in early 2008 we saw clear signs of demand destruction. No obvious signs yet in 2011, but I had a similar reaction as Mr. Ott when I filled up my tank this week - ouch!

Jim Hamilton discussed this last month: Worrying about oil prices
 

nova:

Interesting site tracking food price changes

The Voice of Agriculture - American Farm Bureau

rosethorn:

Definitely demand destruction happening. Check the DOE chart on retail gasoline deliveries:

U.S. Total Gasoline Retail Deliveries by Refiners(Thousand Gallons per Day)

Lowest levels since they started keeping track. .

Barley:

CR - You disappoint me.

Reality is oil costs money. The emmisions cost money.

Truth be told I want oil to be + 150/bbl. and gas to be $7-9/gallon. Time to wake up and smell reality.

Yup this is not good for GDP growth. But it is good for much more.

rich:

Basel Too wrote:

Mr Ott should have hedged his gasoline use by purchasing ETFs...

Actually, gasoline is my best idea for 2011. UGA. Bought a little more on the dip today. .

 

[Jan 07, 2011] Peak Theories Believes A Short-Term Treasury Rally Is Imminent

zero hedge

Abigail Doolittle of Peaks Theories submits: "While I fully expect Treasurys to decline further this year, I think it will come in a volatile and range bound manner and at this moment there are some technical reasons to believe that we may see Treasurys rally in the coming weeks."

FredHayden:

She could be right as a short term trade. Treasuries rally when people get nervous. Right now sentiment is crazy high, nobody is scared.

On a 5% or 10% market correction treasuries could pop. SPY was down .20% today and TLT was up .53%

Long term it makes no sense to own treasuries.

CrashisOptimistic:

Treasuries are laden with cross currents.

1) Default is not going to happen. But in November Ireland default was on everyone's mind, and the cross current du jour that moment turned out to be that people would not flee to safety because of it. Rather, they began to think that if Ireland could then maybe . . . . . . THIS was the cause of the hit to Treasuries. It was not green shoots.

2) If you believe in slow or no or negative growth, then you are a Treasury bull. Period.

3) Ireland's election is in March and odds are AT LEAST 50/50 the new government will renege on the IMF/EU deal. This could put us right back in November for Treasury psychology.

4) The avowed purpose of QE2 was to lower Treasury rates. Period and in a concrete fashion, full stop. Economic growth and lower unemployment were to DERIVE from the lower rates. There was not supposed to be magical growth and lowered unemployment from QE2. Those parameters were supposed to DERIVE from lower rates. QE2 is a FAILURE. It has not lowered rates.

Rookie cynic:

Question for you all: If Congress votes to raise the debt ceiling (which it looks like they will), how can anyone think bond prices are going to rally? (Not to mention the profligate spending of the current Congress and the Feds reckless money printing.)

Orly:

It would certainly be a catalyst if they did not raise the debt ceiling but can anyone really believe that they will finally put their foot down and say enough is enough?

Didn't think so.

I can't think of another outside force besides the Euro going into the tank that would cause such a rally. That would only happen if there were very, very serious justification by way of sovereign debt that hasn't been priced in yet. In short, without another Black Swan event, I just can't see where the rally would come from. Yields may move back to three on the ten-year for technical reasons, briefly, but it would hardly be what one would call a rally in Treasuries.

Stocks are churning madly trying to stay afloat and the US economic numbers are certainly looking less bad. I guess we'll see.

Again, it is going to be another interesting couple of weeks ahead.

monopoly:

I think we know long term this cannot last but could you imagine if were all short for the past year or so. I guess we would also be on food stamps by now. I just wish we could move this along, blow up the system, fire the inmates, take the pain, and there will be pain, get the spoos to 666 and then start over, for real. This delay is just making the end game that much more painful. But it will go on and on for a long while.

Very little I see out there shows me that we have "real growth" without stimulus. This crap has to stop some day. Maybe after we hit the 20 trillion mark it will be over. I know, buy the dips, no shorts, eat a burrito, CMG or take a vacation, PCLN. Just beyond words all.

[Jan 06, 2011] http://www.declineoftheempire.com/2011/01/29-of-americans-say-its-difficult-to-afford-food.html

29% Of Americans Say It's Difficult To Afford Food- The Pew Research Center for the People & the Press released their year-end survey on December 15, 2010

let me repeat the information as a series of bullet points.

•Affording basic necessities remains a struggle.
•51% say it is difficult to afford health care.
•48% say the same about their home heating and electric bills.
•29% say it is difficult to afford food.

Why isn't this information Front Page News? Can you see the headline? I can see it, splashed across the top of the front page of the New York Times—

29% of Americans Say It's Difficult To Afford Food

Why haven't we seen this headline? Or this one?

48% of Americans Say It's Hard to Pay Their Heating And Electric Bills

[Jan 06, 2011] Samuel Brittan - The wrong kind of Third Way

When a book entitled Supercapitalism: the Battle for Democracy in an Age of Big Business (Icon Books) landed on my desk I took it for just another of the many anti-capitalist diatribes so beloved by publishers. Its author was Robert Reich, a former US secretary of labour who parted company from the Clinton administration on the grounds that it was not interventionist enough. But I was glad I persevered. For it turned out to be one of the most interesting books on political economy to appear for a long time.

During the postwar decades up to the early 1970s, the Bretton Woods system of semi-fixed exchange rates worked, after a fashion; and countries seemed able to combine full employment with low inflation and historically rapid growth and diminishing income differences. Reich calls them a “not quite golden age”. It was “not quite” because of the treatment of women and minorities and the prevailing conformist and authoritarian atmosphere.

It has been succeeded by what Reich calls supercapitalism, in which the cult of the bottom line has replaced the cosy oligopolies of postwar decades, once-dominant companies shrink or disappear, new ones spring up overnight and the financial sector is (or was until recently) in the driving seat. He rightly dismisses many of the popular scapegoats – or heroes – of the process. The changeover began well before Ronald Reagan or Margaret Thatcher could influence anything. Free-market economists have been preaching essentially the same message since the 18th century. It is extremely unlikely that there has been a radical change in the psychology or morality of business operators. His own candidate is the technologies that have empowered consumers and investors to get ever better deals.

Unfortunately, many of these same consumers have lost in their capacity as citizens. He cites the failure of the political process even to attempt to correct the increasing skewness of US income distribution. In later pronouncements he has attributed the subprime loan disaster in part to the failure of supercapitalism to raise the incomes of the mass of wage earners who have been impelled to resort to borrowing as a substitute. Moreover, Congress has performed abysmally in correcting market failures in environmental and other areas. He has a non-partisan explanation: the staggering increase in business lobbying expenditures affecting Democrats as well as Republicans, as a result of which the political process, far from correcting the distortions of unbridled capitalism, has made them worse.

But for me the novel point of the book is his utter dismissal of the prevailing idea of appealing to the “social responsibility” of business to improve matters. This is a notion that particularly appeals to soft centre politicians such as David Cameron’s Conservatives in Britain as a new kind of Third Way. Reich argues that it is the job of the democratic political process by laws, taxes and other interventions to harmonise the pursuit of money-making with the public good. “The job of the businessman is to make profits.” He is completely unabashed by the charge that he sounds like Milton Friedman and indeed quotes the late Chicago professor approvingly several times. He argues that the so-called stakeholders who insist on being consulted before legislation is drafted are increasingly companies whose interests might be affected. One result is the “corruption of knowledge”. We should beware of claims that a company is doing something for the public good. Corporate executives may donate some of their shareholders’ money to a genuinely good cause or forbear from polluting the atmosphere to forestall a greater legal or fiscal burden. But in that case such actions are likely to be limited and temporary, “extending only insofar as the conditions that made such voluntary action pay off continue”.

Similarly we should beware of a politician who blames a company for doing something that is legal. Such words are all too often a cover “for taking no action to change the rules of the game”. Above all, “corporations are not people. They are legal fictions, nothing more than bundles of contractual agreements ... A company cannot know right from wrong ... Only people know right from wrong and only people act.” One example of the “anthropomorphic fallacy” is when companies are held criminally liable for the misdeeds of their executives. Not only are the genuinely guilty let off too lightly but many innocent people get hurt. For instance, “the vast majority of Andersen employees had nothing to do with Enron but lost their jobs nonetheless”.

I have two reservations. One is that I cannot share Reich’s confidence that a revived and effective “democracy” would be a cure-all. You only have to see where democratic pressures are driving US energy policy. Second, there is a danger that the Friedman-Reich position could inadvertently give sustenance to the “I was only doing my job” defence for evil actions. You do not have to hold shares in a company selling arms to Saudi Arabia, or work for it. But do not deceive yourself that such individual gestures can be a substitute for a change in policy.

bee-or-not-be

01/05/2011

ebworthen:

George,

Good stuff, thank you.

The varoa mite has had a very large impact, had caused a great deal of problems 14 years ago when I did a research paper on them.

However, the other factors listed are valid.  The breeding and use of commercial bees is very similar to our crops.  Both are about higher production and lower price.  The long term unforseen consequences can only be guessed at.  The decline in the bee population is one of them, as well as the dangerous monocultures taking hold in crops such as corn and soybean in just the past decade.  Can you say "Irish Potato Famine".

Now, the scientific community will argue that we can "stay ahead" of the pests and diseases, however, that depends upon the continuation of our scientific and industrial capacity.  If we ever had an interruption to the research and it's implementation we would be S.O.L. on many fronts.

We are building a house of cards when it comes to our population and land usage based upon higher efficiencies of production per acre made possible by petrochemicals (fertilizers/pesticides) and machinery all dependent upon oil.

I know you write often about our involvement in the Middle East.  It does seem a tragedy that we spend so much money and more importantly lives of our soldiers in a distant land.  I have no doubt that the reason we are there long term is oil, meaning survival.

The modern societies of the world cannot be sustained by local organic farming; we have driven down a one-way road and it will not be pretty when the food and oil run short and the multitudes of the world go hungry.

Nautural crops (heritage seeds) and bee populations would be a step in the right direction; people just need to be able to afford to do so.  It becomes a philanthropic and humanitarian exercise as well as beneficial to the bees.

[Jan 05, 2011] Tax-Exempt Bonds for Beginners

The Baseline Scenario

Since the beginning of time (OK, the beginning of the income tax), interest on munis has been exempt from federal income tax; this is why munis are also known as tax-exempt bonds. In other words, this is a federal subsidy for state and local borrowing. There are various policy arguments for and against such a subsidy, but the basic fact is that we have a federal system in which power and responsibility are shared between the national, state, and local governments, and this is one way (not the only one) that the national government distributes money to state and local governments. The simplest alternative would be for the national government to simply hold onto its money and decide how to spend it, instead of funneling it to state and local governments to let them decide how to spend it. So the basic principle of the national government distributing money back to the states is one that Republicans should be favorable to.

But the problem is that, like most subsidies effected through the tax code, this one is inefficient. It works like this. Say that, absent the subsidy, a state would have to issue bonds with a yield of 5 percent. (That is, corporate bonds with otherwise equivalent terms issued by a company with an equivalent credit rating would yield 5 percent.) If the bond is tax exempt, however, a buyer in the 35 percent tax bracket would be willing to accept a yield of only 3.25 percent rather than 5 percent (because $5 before tax is equivalent to $3.25 after tax.) In that case, the federal government is giving up $1.75 (per year, assuming a $100 bond), and it’s all going to the state issuing the bond, which has lower interest costs; the buyer is indifferent between the two scenarios. That’s a subsidy.

In practice, however, it doesn’t work like that. The actual yield on tax-exempt bonds is higher than necessary for top-bracket bond buyers to break even. Historically, it’s been about 75 percent of the taxable yields (according to my tax casebook — Graetz and Schenk, 6th ed., p. 224). In the example above, that would be a tax-free yield of 3.75 percent. That means that the $1.75 subsidy is now being shared between the state and the bond buyer. The state gets $1.25 in lower interest costs, and the buyer gets $0.50 in interest she could not have gotten without the subsidy.

And who buys tax-exempt bonds? Rich people. So by funneling the subsidy through this tax exemption, part of it gets siphoned off by the rich. (The $1.25 in lower interest costs do benefit all state residents, who would otherwise have to pay higher state taxes; but they would still prefer $1.75 in lower interest costs.)

BAB were designed to solve this problem. Instead of making the bonds tax-exempt, they are taxable, so in the example above the state would issue them with a 5 percent yield and the buyer would get the same $3.25 after taxes as if she bought a corporate bond. This time, the federal government simply gives the state $1.75 in cash, and none of the subsidy gets siphoned off by rich people.

So it’s disingenous to analyze BAB without acknowledging the alternative; you have to compare them to traditional tax-exempt munis. And on a first-order analysis, the hit to the national fisc is the same ($1.75). The only difference is who gets that $1.75. With BAB, it’s the state as a whole; with tax-exempt munis, rich people get a cut.

Now, it is true that there are second-order effects. In particular, because the subsidy for BAB was set at 35 percent, that did low the effective cost of borrowing for states from $3.75 to $3.25 (in the above example). That means that states will borrow more than they would have otherwise. So while the federal subsidy is $1.75 on a $100 bond in either case, there will be more of those bonds in a world with BAB — so more borrowing, and more national debt. (This problem, if it is one, could have been solved by setting the percentage lower — say, at 25 percent — so that states’ effective borrowing costs would have remained the same.)

Also, because BAB exist, this reduced the supply of munis, increasing demand for munis (since there are still the same number of rich people who want tax-exempt bonds), which increases prices and reduces borrowing costs. So at the margin, BAB did increase state and local borrowing. That was actually the point — this was a stimulus bill, after all — but if you don’t like one government subsidizing another government’s borrowing, it was a bad thing.

But when people like Daniel Mitchell rail against BAB because they subsidize state and local borrowing, without mentioning tax-exempt bonds, what are we supposed to think? Do they not realize that this subsidy has always been part of the bedrock of the tax code? Or do they know it’s there, and are they attacking BAB because they want to preserve a tax exemption that disproportionately favors the rich? I’m not sure which is better.

(By the way, I think this example supports my interpretation of the tax code. BAB probably got slipped into the stimulus bill because tax policy wonks have for decades thought they would be more efficient than the existing subsidy mechanism. But the constituency for efficient tax policy is not as powerful as the constituency for investments that favor the rich.)

kanino:
From the book “AN AUTISTIC WORLD (1)”

As long as there are people willing to take advantage of situations by exploiting the limitations of other individuals, there will be all sorts of mercantilist theories that will excuse their actions. The common reference is the ability to profit from manipulating the loopholes in the law, or the modification of such, to accommodate the complete absence of justice, which enables certain governments or individuals to act in a selfish and amoral manner. The superfluous vision of a theoretical present based on those simplistic but effective actions, includes the creation of dream societies founded on the rotten supports of misleading imaginations, that happily pass the baton of inflation, corruption, stagnation, etc. to future generations.

Societies often want to be mesmerized more than enlightened by finding the truth. That predisposition is what misdirects them from their paths into hazardous conditions, because while they are watching the environment and wondering in awe “how” it is possible; someone else is benefiting with their denial by knowing “why” it is possible.

Russ Abbott:

You wrote, “Do they not realize that this subsidy has always been part of the bedrock of the tax code? Or do they know it’s there, and are they attacking BAB because they want to preserve a tax exemption that disproportionately favors the rich?”

I’m sure you know that none of that has anything to do with the Republican complaints. They complained against BABs because they wanted to criticize Obama.

Furthermore, as I’m also sure you know, Republicans don’t care if their criticisms make any sense. As Brad DeLong is fond of saying, Republicans lie, always. So it’s useless to try to figure out why they said something that seems nonsensical to most intelligent people. There is no reason — other than that they think the statements they make will have a significant political impact.

My Daughter Will Be Republican Majority Leader Someday

 When it comes to deficits and government spending, the strategy of Republicans in Congress is to assert things that are simply not true or that defy economic logic.

[Jan 05, 2011] Playing Chicken with Debt Limits: Obama as a Senator vs. Obama the Hypocrite President Today

President Obama is very concerned that Republicans might "Play Chicken" with the debt ceiling. The president is so concerned his aids are sending out dire warnings about dollar defaults and "catastrophic impacts" to the economy.

Please consider Don't 'play chicken' with debt ceiling
 

Some Republican lawmakers said Sunday they opposed raising the ceiling on the nation's debt without tackling government spending, and President Barack Obama's top economic adviser warned against "playing chicken" on the issue.

Austan Goolsbee, the chairman of the White House Council of Economic Advisers, said that refusing to raise the debt ceiling would essentially push the country into defaulting on its financial obligations for the first time in its history.

"The impact on the economy would be catastrophic," Goolsbee told "This Week" on ABC. "That would be a worse financial economic crisis than anything we saw in 2008."

Goolsbee added: "I don't see why anybody's talking about playing chicken with the debt ceiling."

Flashback March 20, 2006 - U.S. Senate Floor

Inquiring minds just may be wondering what the president's position was when he was a senator, just a few year's back.

Please consider Flashback: Previous Debt Limit Votes Have Not Been Good Ones

March 20, 2006: This was the last stand-alone debt limit vote on which then-Senator Obama voted. He was one of 48 members to vote against the increase, which passed with 52 votes.

He said: “The fact that we are here today to debate raising America's debt limit is a sign of leadership failure. It is a sign that the U.S. Government can't pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies. … Increasing America's debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.”

Truer Words Never Spoken

Yes Mr. President, America does deserve better. I suggest you do the best thing you can possibly do for your country today: Resign.

Since that is unlikely, I urge Republican to take the measures Obama recommended in 2006 when he crossed party lines and voted with Republicans in 2006 to not raise the debt limit.

[Jan 05, 2011] will-angela-merkel-make-or-break-euro

01/05/2011 | Canucklehead:

From a long term perspective, it makes sense that Germany would want to see it's banking entities having the dominant position in Europe.  How you achieve that depends on what vision one has of the European banking community going forward.

France et al's desire is to maintain the status quo.  That means Europe continues to be over-banked and each EU nation can sustain their sickly national banks.  There is no future in that vision.  The European banking fraternity needs to be culled (to a certain degree).  Where would Britain fit into all of this?

As you can see, we have a number of critical political questions that crop up.

First, Germany needs to sit on the fence for as long as possible, to draw in as much self-serving help as is possible.  China is willing to help in a self-serving way.  I suspect the US will also help in a self-serving way.  Once they are partially in, what role do they play in the various EU domestic markets and what role is left for the remaining European nation-states.

I assume you see the thin edge of the wedge, as the EU is primed to be broken up.  What is worth saving?  Who will save it?  What can be made of the new influence the saviours would have?

Germany should want to form a defensible EU-centric-domestic market with like-minded EU entities.  They can't save everyone.  They will have economic/marketing difficulty with any EU entity that has accepted Chinese, American, or British financial help.

It would be prudent to consider the options that cut your losses.  Leave many of the PIIGS to their fate.  China, Britain, and the US will have a future role in the governance of the PIIGS, irrespective of the significant amounts of money Germany would have spent.  Those failed states will blame Germany for the obvious decision of the PIIGS to accept new economic overlords.

Play for time and play off the forced decisions that result from Germany's non-commital to French entreaties.  The British do not need to be the only banking fraternity that can hold their cards close to their chests.

[Jan 05, 2011] End of Year Window Dressing In the SP 500: 2009-2010 and 2008-2009

I am keeping an open mind on this year's window dressing cycle as to the extent and the timing.

Wall Street desperately wishes to hand off this bubble to mom and pop and foreign hands, but so far the target victims are reluctant to buy in. The standard script is to keep running it higher while protecting your own risks with derivatives. If your derivatives counterparty fails then you obtain public funds to bail out of your losses. The objective is always the same: the public loses.

The Fed and Wall Street *could* conceivably keep this going as they did in the early cycle of housing bubble, or the tech bubble. Never underestimate the recklessness of desperate men caught up in a fraud of their own design. When the suckers start to question the game, double down and act even more resolutely and boldly. The average person will believe because they do not think people are capable of such obvious and blatant deception, since they are not so free of scruples and conscience. And of course greed is a marvellously effective prescription for silence, rationalization, and self-deception.

They may feign ignorance in Washington, New York and London, but they know, and it serves their purpose. This is a classic fraud, not even elegant or complex, but merely clumsy, an obvious abuse of trust and power.  It is as noble and productive as running a protection racket on the neighborhood candy store, and robbing little old ladies for their pension checks.

The only thing that is surprising about Wall Street and the US financial frauds is, as Eliot Spitzer famously observed, their scams and schemes are so simple and so obvious when one can pry back the veil of secrecy and see what is actually being done.   Old frauds never go way; they come back endlessly with minor variations and different shades of lipstick.

How obvious and bold can they be? How about this obvious and bold?

[Jan 02, 2011] Allentown  by Bill Gross

Bill Gross is too simplistic here, but the point is relevant...
December 2010 | PIMCO

...the United States and its developed economy counterparts face an unfamiliar crisis of unrecognised dimensions and potentially endless proportions. Politicians and respective electorates focus on taxes or healthcare when the ultimate demon is a lack of global demand and the international competitiveness to thrive. The solution for more jobs is seen as a simple quick step of extending the Bush tax cuts or incenting small businesses to hire additional workers, or in the case of Euroland, shoring up government balance sheets with emergency funding. It is not. These policies only temporarily bolster consumption while failing to address the fundamental problem of developed economies: Job growth is moving inexorably to developing economies because they are more competitive. Free trade and open competition, like a stretched rubber band, have snapped the US and many of its Euroland counterparts in the face. By many estimates, Chinese labour works for 10% or less than its American counterparts. In addition, and importantly, it is able to innovate as quickly or replicate what we do. Jobs, in other words, can never come back to the level or the prosperity reminiscent of 1960s’ Allentown, Pennsylvania until the playing field is levelled.

This phrase of a “level playing field” opens up endless possibilities. If, in fact, the solution to how we can reclaim the vision of Ronald Reagan’s “shining hill” and the Allentown of decades past is to “level the playing field”, there are obviously a number of ways to do it. The constructive way is to stop making paper and start making things. Replace subprimes, and yes, Treasury bonds with American cars, steel, iPads, airplanes, corn – whatever the world wants that we can make better and/or cheaper. Learn how to compete again. Investments in infrastructure and 21st century education and research, as opposed to 20th century education are mandatory, as is a withdrawal from resource-draining foreign wars.

It will be a tough way back, but it can be done with sacrifice and appropriate public policies that encourage innovation, education and national reconstruction, as opposed to Wall Street finance and Main Street consumption.

[Jan 02, 2011] The Lull Before The Storm: What’s Coming in 2011 Gonzalo Lira

Oil price is all that matters now
December 28, 2010

Call it QE, call it “liquidity injections”, call it “interest rate stabilization”, call it “Fed balance sheet expansion”, call it “monetary accommodation”—whatever clever name you give it, it’s basically money printing, plain and simple: The Federal Reserve “implements” QE by simply creating money out of thin air, then going out and buying bonds with that new money. Actually, it’s even better than printing money—no bothers with printing presses and such.

... ... ...

Well—and this is just back-of-the-envelope numbers—the Federal government deficit is about $1.3 trillion. Meanwhile, between August 2010 to August 2011, QE-lite ($200 to $300 billion) and QE-2 ($800 billion) will add up to at least $1 trillion in Treasury bond purchases by the Federal Reserve.

So . . . a $1.3 trillion shortfall . . . and $1 trillion in money printing . . .

Now you get the picture—in 2010, the Federal Reserve successfully began monetizing over 75% of the U.S. Federal government’s yearly deficit.

Not only that, they did it with minimal market disruption—and in the case of the equities markets, Fed monetization actually improved those markets: Just like really expensive make-up applied to a dead guy, Bernanke’s monetization gave a false sense of corporate health and vigor to the stock market.

Bernanke’s successful monetization of the bulk of the U.S. Federal government deficit in 2010 was not a one-off: It will continue unabated for the foreseeable future...

American Insolvency, and The Morphine of QE: What To Pay Attention To In 2011

The upshot of the Fed’s successful monetization has meant that politicians on Capitol Hill and Pennsylvania Avenue have not had to make any real budget decisions: Because of Bernanke’s “success” with deficit monetization, he has created the conditions whereby the American political leadership can irresponsibly postpone the fiscal Day of Reckoning.

... ... ...

Therefore—as a direct byproduct of Bernanke’s “successful” monetization of the U.S. Federal deficit, and the resultant lack of need on the part of the political class to make true budgetary decisions—I am confident in predicting that in 2011, there will be another round of “stimulus”.
... ... ...

Now, the Fed’s monetization of the deficit should have some incidence on the Treasury bond market—shouldn’t it?

Here—I confess—I’m at a bit of a loss:

On the one hand, Treasury bond yields ought to rise, as the Federal government continues to spend like there’s no tomorrow, and slowly but inexorably positions itself to take over State and municipal liabilities, especially pension liabilities (which is what’s really killing the State balance sheets).

On the other hand, since the Federal Reserve is the buyer of 75% of the debt the Treasury Department issues, the Fed ought to be able to squeeze yields whichever way it wants to—which is exactly what it seems to have done: During 2010, the 10-year Treasury bond yield fluctuated between 2.41% (in October) and 4.01% (in April); today as I write it’s at 3.50% even. (Source is here.)

This would seem to prove that the Fed has the yield curve well in hand—therefore, if this really is the case, then the Treasury bond market is useless as a sign of anything. Just like the equities market, Treasuries are a rigged game that signify nothing.

What asset class is reacting more or less rationally to what has been going on in Europe and the United States? Commodities.

Reverse Engineer:

I don’t generally respond to Gonzalo Lira's Kindergarten Economic Analysis anymore because he doesn’t debate or really even answer comments. However, here are a few brief points to consider.

Gonzalo predicts Spain is likely to crash, but he doesn’t analyze how that will affect the system as a whole once TBTF German Banks have to recognize these losses, and CDS betting Spain will fail start to trip. Simply cutting the PIIGS loose to return to their own currencies doesn’t revive the viability of the Euro, because its underpinning of debt will have to be written off.

Gonzalo predicts a continued and ever upward flight to Commodities as a “safe haven” alternative to Treasuries, but he doesn’t explain how the wholesale purchasers of these commodities wil ever get paid back by end consumers who are already basicaly tapped out. Nor does he consider how China's efforts to curb inflation will disrupt the upward track of the commodities market. Read Ambrose Evans Pritchard for more on this.

Overall, Gonzalo has a confused populist viewpoint of hyperinflation resulting from debt monetization of the Dollar, but he doesn’t provide any analysis of how the consumer could afford to pay hyperinflationary prices to support such a spiral very long. So what occurs after a few months of prices rocketing to the moon here?

When Gonzalo will debate some of his ideas and predictions, he might be worth listening to. As it is, he just blows a lot of smoke.

RE

Anonymous:

Graham Summers:

"The US economy today is not about a recession or a housing bust… it's about an Empire in DECLINE."

"We've got all the tell-tale signs: we're engaged in endless foreign military excursions that bring nothing to the country, we're depreciating our currency at a rapid rate, we're trashing the national balance sheet and falling further and further into debt."

Pretty well sums up the situation -- in just a few words. johnny

Anonymous:

thanks for the digging and prognostications.

yes commodities should increase if you are printing like no tomorrow (irrespective of what you do with the money) and yes commodities should rise in a negative real yield environment if you are attempting to protect your purchasing power.

its no coincidence that the commodities that increased first were those that were most money like. these pose to effect to the bogus cpi measurements and indeed there is very little pass through from food inflation into core cpi. the kick in the crotch however will come from a higher oil price due to lack of short run substitution (you can switch to dog food but you still have to drive to work), an immediate discernible drop in disposable income (its an tax) and the fact that it has a high pass through and eventual impact on the core.

ergo what is going to stop this money printing madness will be oil and in a few months time you will have increased inflation prints everywhere in the world and a slowing US consumer. does bernanke start QE3 with 1.8% core, 3.5% headline, due to oil at 125$??? no. the effect of doing so would be to drive oil to 160$ and game over and bernanke isn't going to print momey to short the oil market.

so the fed may very well have blown up the world by trying to reflate too damn hard (BRICS inflation averaging 10% and them eventually having to slam breaks on really hard will also be benny's doing) ... and so we get stagflation in the 2nd half of 2011 with depression like unemployment going ... so much for the experiment.

and once QE is abandoned and the FED mocked then inflation expectations will start to fall as will all commodity prices taking the stock market with it. yes yields will drop once the FED stops buying treasuries. that's the way it works with debt deflation until we get the dreaded credit migration ... prob in 2012 which will accelerate the sinking of all markets.

as for Europe well some pretty big market concessions will be built to accommodate all that peripheral debt rollover/auctions ... but the self righteous eurocrats may try and prevent that by increasing the EFSF and directly buying the debt from spain etc ... and the EFSF issues debt to finance this so voila ... you now have the eurozone treasury equivalent ... shared losses and privatized gain.

but don't underestimate the impact that the next Irish elections will have on derailing the whole thing. small economy but very big financial sector debt and role in european bank finance and a very angry population.

the alternatives? well the ECB could try and print like the FED (unsterilized) and buy peripheral bonds but that goes 100% against their mandate, may very well be unconstitutional and would also have the impact of creating another commodity spike with ... oil at 160$, 4% inflation and a dying US consumer that would just be another great nail in the coffin.

as for you solution that spain etc would be forced to leave the EURO imagine what impact that would have on a german or french banks holldings of sovereign debt- haircut and a currency loss combines would mean they would get 10 cents on the dollar ... so no way. an EM like restructuring of debt (think brady bonds) seems far more likely ... so EU banking sector still in trouble.

one way or another, it will be a rocky ride in 2011 but one i hope the sheeple stop getting shafted and up their protests ... and that will come in Europe just as the increase in the prospects of war will come from Asia.

 Anonymous said... oil price is all that matters now

Anonymous:

Thank you for another interesting read. What you have presented is, I believe, substantially correct.

1. John Hussman (www.hussmanfunds.com) had a great commentary earlier this year explaining that QE will, without a doubt, cause commodity prices to rise.

2. I read that Belgium is very highly exposed to Irish debt (but I haven't confirmed this). If Ireland defaults, it will take down Belgium in a flash.

3. A bailout for Portugal is inevitable in the next 3 months. The driving factor that triggers a bailout is the bond vigilantes shorting. [A curiosity: I read that Portugal has the highest gold reserves in Europe, relative to GDP, but I haven't confirmed this.]

-Dave

David:

Hey Godzalo, you are verbose yet prosaic!

Here are my Nine 2011 Predictions in its essence:

  1. The U.S. will implement QE3/4 when the $600 billion of QE2 is not enough. QE3/4 will be in the trillions of U.S. dollars (USD) of quantitative easing.
  2. The major export nations will engage in and increase their non USD-denominated trading among themselves. This will put increasing devaluation pressures on the USD. So, look forward to the US Dollar Index to drop further from the low 80s now to the low 70s or even lower in 2011.
  3. Retail food prices in the U.S. will increase in the low to medium DOUBLE digit ranges (10% to 40%) for everything from the junk/GMO "foods" to healthy/organic foods. This will take place noticeably in the first half of 2011.
  4. The real estate market in Canada will finally begin its collapse suddenly after the new year celebrations are over.
  5. The Chinese real estate market, the last investment vehicle in China for those Chinese with money, will also begin its collapse suddenly, hitting hard cities like Shanghai, Beijing, Fuzhou, etc.
  6. Inflation will run rampant in China as it is already doing so with retail food prices.
  7. The EU will continue its financial collapse, as nations like Spain, Portugal, and Italy will join Greece and Ireland in facing the stark choice between (Option 1) bailing out THEIR banksters or (Option 2) having THEIR nation go bankrupt.
  8. Silver and gold will continue to climb in 2011. Silver will increase much more than gold in 2011. Silver will breach $50 per ounce in 2011.
  9. A major war will break out somewhere in the world in 2011 (if not in 2011 then definitely in 2012) involving the U.S. and/or one of its proxy allies.

For the full article: http://rense.com/general92/stdr.htm 

Bruce Krasting:

 GL Great recap. I was struck by this sentence:

"Insofar as the United States’ fiscal situation is concerned, that point has been reached, at least for me: I can no longer feel sorry for the American people."

This is an important point I think. The world has been given the US a pass for at least a decade now. We bring the rest of the world, bubbles and monetary policy that has a vision of the future that goes out only six months. We kick the can down the road at every problem we face. Now the US is adding to global food price inflation. How many will that hurt? Billions.

GL should be fed up. What kind of example are we setting? Our policies are "beggar my neighbor".

Why is this important? Because the likes of GL HAVE to buy our bonds. If he doesn't we are dead, dead dead. But GL is fed up and is not buying.

If those outside our border start to think like GL and the confidence necessary to fund our massive debt come into question then we have a new ball game and a new crisis staring us in the face.

Good luck to all in 2011. Bruce Krasting

Akhil Khanna:

The real reason for the rise in commodity prices is speculation by the banks and financial institutions. They have emerged to be more powerful than earlier anticipated and exert greater influence on the political class and central bankers who are responsible to curb their activities. Not a single top shot banker has been charged with bringing the world financial system on the brink of collapse in 2009. They continue to enjoy record bonuses while the unemployment continues to increase and families loose their homes to foreclosure.

They have successfully stalled all efforts to curb their speculative activities are now in total control of the movements in all the stock, commodities, bonds and currency markets thanks to the unlimited funds provided to them by the central bankers.

http://www.marketoracle.co.uk/Article24581.html

Anonymous:

Another set of BS predictions and economic ignorance from GL. Hey, all those of the commenters above who wrote "great post" - did you notice that the Irish passed their budget? That the Euro hasn't collapsed because of what is happening in Ireland, as Gonzalo was prophecizing?

Gonzalo, you haven't got a clue how modern government works and what they can do. Let me come up with a few predictions on my own.

1) Even if there is a sovereign debt crisis in Spain in 2011, it will be bailed out - just like Ireland was. The ECB will simply print the money! And since this is done electronically nowadays, they can print an infinite amount of it, if necessary, so there is no such thing as "too big to be bailed out".

Do you really think that the USA has a monopoly on the printing press? Everybody is doing it! It's the least painful (in the short term) and the most efficient way to kick the can down the road - so that today's problems become problems for tomorrow's government.

Sure, the Germans will grumble a bit. But they they will realize that (a) if Spain fails a lot of German banks will fail too and (b) money printing by the ECB means weaker euro, which is beneficial for Germany, it being the world's second largest exporter.

And even if the simpletons in the streets there grumble a lot and set a few cars on fire - who cares? Who do you think put Angela Merkel in power? Hans Schmidt, who was stupid enough to vote for her? He wouldn't have, if he wasn't befuddled by the election campaign paid for the Big Money - who are her real masters, like they are the masters of the politicians everywhere in the world. So, Angela Merkel will do whatever Big Money orders her to do - which will be what is beneficial for Big Money and screw the EU, the economy and the people.

2) Nobody will be expelled from the EU in 2011. Just the opposite - more countries might join. We need more fools to buy our useless crap.

Anonymous:

Oh, yes, a few other points.

1) If you truly believe that the EU is in trouble because its members can't print their own money to oblivion and that their problems will be solved by them exiting from the EU and devaluing their currencies, you're as stupid as those idiots on CNBC. The problems arise not because somebody can't print money - but because EVERYBODY does; because all the money is phony and is not backed by anything. The only way to solve this mess is to scrap the used toilet paper and start using real money. But it will be horribly painful and will be delayed for as long as possible - which is to say for a lot more than 2011.

2) So, you believe the Fed can control the bond market? Do you have the foggiest idea how freaking large the bond market is? (In case you don't get it, that was a rhetorical question - for it is blindingly obvious that you don't have such an ideal.) Tell us, Gonzalo, if the Fed was capable of controlling the bond market - what does prevent them from controlling the (much smaller) commodities market?? Like, you know, print a trillion or two, lend it to their buddies at JP Morgan and Goldman Sachs at 0% interest under the condition that, say, 80% of it is used to short commodities futures? Do you know what this will do to the commodity prices? Or maybe tell the exchanges to hike the margin requirements by 100%?

The truth is, commodities are raising because everybody believes that "China growth will save the world" story. Let me tell you a secret - the "China growth" story is phony. All those who believe in it have fallen victims to the propaganda campaign of the Chinese communist government. They are even better at lying and fudging statistics than the Americans are. China is full of malinvestments. China is an economic accident waiting to happen. And I won't be surprised if it does happen in 2011, as the Fed keeps devaluing the dollar and exporting US inflation to China via their yuan peg.

Oh, and one more thing. The US economy survived $150/barrel oil. It will survive higher commodity prices for a lot longer than you seem to think possible.

To cut it short - there will be no collapse. Neither in the EU, nor in the USA. There will be just several years of high inflation (but no hyperinflation). Yes, the savers and the retirees will suffer the most. Who cares? Serves them well for believing the BS that their government was feeding them with.

Stefan G.:

Hi Gonzalo,

One of your Anonymous replies was "oil price is all that matters now" I tend to agree with that. Pay checks are not going up for those who still have a job and we saw the result of $140+ oil. The economy tanked and commodities fell hard.

Why should this commodities run up be any different? Regardless of the money printing going on throughout the world, prices will not rise due to "Monetary Inflation" unless the money hits the general economy. I think a lot of this commodities run up is due to speculation including precious metals.

My 2 Cents Predictions

Anonymous :

I would like to comment on the Bush tax cuts. There seems to be a general consensus among many commentators that these cuts need to end. After all, if Americans want their cheese, they're going to have to pony up.

The only problem with that is raising taxes in this environment would be completely counter productive. Raising taxes now would result in less revenue to the government not more.

People will not work or run businesses to hand everything over to the government. When taxation reaches a tipping point beyond what people are willing to pay, they will change their behavior to avoid paying the tax.

It's been suggested that the tax rates that would result in the maximum revenue to the government are much lower than the rates currently paid in the U.S. This makes complete sense. Government is completely non-productive. When fewer resources go to that which is non-productive, more is available for productive uses, which ultimately will increase the tax base.

This leads me to ask what is the real reason for the onerous tax rates we have to pay now? It seems to be more than just revenue generation. That's a question for another day however.

GS

[Jan 02, 2011] Full Steam Ahead on Economic Collapse by crabbydogtrix

forty4spikes

The evidence is clear for anyone with the eyes to see. We are literally at war with the financial and political pirates that are in the process of looting us of so much that has made this country great and unique in world history. What is also clear is that these genius criminals have engineered a financial system that has the slaves literally invested physically and mentally in the system that enslaves them. To wake up is to realize that we have been financing the very bars of our prison

[Jan 02, 2011] Biflation - Wikipedia, the free encyclopedia

Biflation (sometimes mixflation) is a state of the economy where the processes of inflation and deflation occur simultaneously.[1] The term was first introduced by Dr. F. Osborne Brown, a Senior Financial Analyst for the Phoenix Investment Group.[2] During Biflation, there's a rise in the price of commodity/earnings-based assets (inflation) and a simultaneous fall in the price of debt-based assets (deflation).[3]

The price of all assets are based on the demand for them versus the volume of money in circulation to buy them.

With biflation on the one hand, the economy is fueled by an over-abundance of money injected into the economy by central banks. Since most essential commodity-based assets (food, energy, clothing) remain in high demand, the price for them rises due to the increased volume of money chasing them. The increasing costs to purchase these essential assets is the price-inflationary arm of Biflation.[4]

With biflation on the other hand, the economy is tempered by increasing unemployment and decreasing purchasing power. As a result, a greater amount of money is directed toward buying essential items and directed away from buying non-essential items. Debt-based assets (mega-houses, high-end automobiles and stocks) become less essential and increasingly fall into lower demand. As a result, the prices for them fall due to the decreased volume of money chasing them. The decreasing costs to purchase these non-essential assets is the price-deflationary arm of biflation.

[Jan 02, 2011] goldmans-key-charts-kick-2011

Jan 01, 2011

Caviar Emptor

Interesting: Goldman predicts plunging core CPI through 2012, and also soaring oil, copper, gold, equities, imports, consumer spending and a plunging US $. That pattern can only happen under my Biflation scenario. Has Goldman been converted to the Biflation camp?? Note they also predict almost no change in unemployment for 2011. That follows our predicted path. Unmentioned is housing, but we can assume they see a floundering market. That's the only way that core CPI can stay near zero, since 40% of it is housing. It cancels out inflation. Keep in mind, under usual conditions, if all input costs are predicted to rise and S&P earnings are predicted to rise too, then business costs would have to be passed on to the consumer and core CPI would also rise, contrary to what they're predicting. Deflationary forces would have to be at work to cancel this effect.

So nothing changes: What you earn and own will deflate, while what you need inflates. And that scenario, over time, is not the path to a healthy economy. It's the road to perdition.

dcb:

100 percent correct. In fact it will cause another recession as oil prices and staples go up, discretionary spending down, incomes for majority flat or down. the question will what will be the tipping point in the price of oil. I'd say you can safely short consumer discretionary as oil goes up and strapped people has less free income. High end will do well as rich get richer, also stocks in the low end of the spectrum. dollar general, wholesale places. You'd think wall mart, but they are already so big in the space I don't think there is room for growth, and they haven't been doing well.

Also in theory stocks should have a pe they can't go above, commodities no. I have been advocating DBC for a long time, and dba. both have long term futires so no roll over costs where the other funds eat you alive. I also firmly believe in global warming and regular crop disruptions dies to heavy storms, or lack or rain will also have effects long term.

as oil goes up, nat gas should see some play and it is the cheap alternative. I am not sure of the time frame, but I see this as the easy energy sounce for the future. it's just a matter of when oil gets too high.

Mr T :

Hello,

If you are being serious, words that do not exist in the english lanquage should not be used to describe an abstract concept unless you explain very concisely what you mean by "biflation".

If you mean some prices will go up and some will go down, there is no need to make up a word.

Stagflation:

http://dictionary.reference.com/browse/stagflation

No disrespect intended.

Caviar Emptor:

Sorry. This is not '70s style 'Stagfation'. And yes, I am proposing a new economic term, hitherto not described, not conceived of or predicted. It's blowing their minds since it's not in their musty books and they have nothing to fight it in their arsenal. Exactly how and why the term 'Stagflation' was originally conceived: because nothing in the old definitions could adequately describe what was happening in the economy. And it was considered a conundrum at that time.

Stagflation in the '70s was accompanied by 3.5-5.5% annualized GDP growth, something we'd be fortunate to have today and is not predicted by Goldman, the Fed or anyone. Demographics indicated a strongly expanding economy. And unemployment was nowhere near what we have today by any measure.

A new and totally different scenario requires a different name and approach. A fresh perspective, just as Stagflation was 'revolutionary' in the '70s

Dismal Scientist :

I see you have been a member for some 39 weeks. Surely this is not the first time you have seen the term 'biflation' on this site ? Caviar is correct, what we face today is a new economic environment for which there is no easy historical parallel. Particularly since wages are not going up, the rising price of commodities is crushing consumer disposable income for the average person. This is clearly different from the 70's. An accompanying mountain of debt of unprecedented levels to go with this, creates a situation that demands a new term.

Biflation is the term. Stagflation is so, well, 70's.

TonyV:

Caviar Emptor,

Based on what you just said, Ben Bernake must love Biflation. By pumping money into the system, he can punish China or other countries where food and gas counts for a much bigger part of a family budget, while keeping inflation somewhat in check here in the US. Sounds like a dangerous game but it has worked for him so far.

Neo-zero:

A very dangerous game. How long will these other nations allow themselves to be taken advantage of by Bernake and company! How long would you let your family starve before you did something about it.

I read somewhere that the Chinese (the peasants at least) at nothing but rice for 6 months to pay back their debts after WWII. With willpower like that not exactly the kinda people you wanna stiff. Once Bernake is done destroying the dollar and ruining our reputation across the world the one card we will have left to play is that the world still needs our food production capacity.

Caviar Emptor:

Yes. There's a geopolitical aspect, but it can cut both ways: China and US are tangled in 'mutually assured financial destruction'. Fed is hoping there's an easy solution and that China can 'pull the US out of recession'. Unfortunately, there are too many asymmetries for that simplistic solution.

[Jan 02, 2011] "No Amount Of QE Will Be Able To Keep The Current Stock Market Bubble From Bursting"

"If the money to boost stock prices by almost $9 trillion from the March 2009 lows did not come from the traditional players, it had to have come from somewhere else.  We believe that place is the Fed.
TrimTabs

It was the night before Christmas Eve, and CNBC trucked out TrimTabs' Charles Biderman to a de minimis audience, knowing full well that a man with his understanding of money flows would very likely repeat his statement from last year, that there is no real, valid explanation for the inexorable move in stocks higher, as equity money flows in 2010 were decidedly negative, and any explanation of the upward melt up would need to account for Fed intervention (and no-volume HFT offer-lifting feedback loops but that is a story for another day). A year after the first scandalous report was published, TrimTabs is sticking with its story: "If the money to boost stock prices by almost $9 trillion from the March 2009 lows did not come from the traditional players, it had to have come from somewhere else.  We believe that place is the Fed.  By funneling trillions of dollars in cash to the primary dealers in exchange for debt, the Fed has given Wall Street lots of firepower to ramp up the prices of risk assets, including equities." And, wisely, Biderman, just like Zero Hedge, asks what happens when the buying one day, some day, ends: "...stock prices will be higher by the time QE2 ends, but economic growth will not be sustainable without massive government support.  Then even more QE will be needed, and stock prices could keep rising for a while.  In our opinion, however, no amount of QE will be able to keep the current stock market bubble from bursting eventually." Ergo our call earlier that Bernanke has at best +/- 150 days to assuage the market's fear that QE2 is ending (not to mention that we have a huge economic recovery, right Jan Hatzius? We don't need no stinking QE...).

Therefore the best Bernanke can hope for is to buy some additional time. At the end of the day, the biggest problem is that the massive slack in the economy means that LSAP will have to continue for a long, long time, before the virtuous circle of self-sustaining growth can even hope to take over. By then bond yields may very well be high enough that Ron Paul will demands someone finally bring Paul Volcker out of the fridge.

[Jan 02, 2011] Must See Howard Davidowitz Destroys The Recovery Illusion, Debunks The Consumer Renaissance

Wal Mart stock went nowhere. Same for Sears and other big chains. Luxury chains done well. 30% of America did much better and those who are drive shopping binge. That's why it started smaller store and expand oversees.  Commercial read estate still in the tank and hundreds community banks will go down because of that.

[Jan 01, 2011] Symbols and Substance

The Baseline Scenario

From comments:

...If you look at Obama’s entire erratic policy grid of doublespeak compromises, it is not erratic at all... The Wrecking Crew preached and brutally enforced Nihilism while holding THEIR rent-seeking “contracts” sacred…

...Why would a rational person prefer tyranny by the ignorant over tyranny by the well-informed and maybe benevolent?...

...the Insiders almost always win: that IS the state of the world.

...“But there was one “sliver lining” according to the article: “The Army would have an influx of qualified recruits as the result of an unemployment rate between 25 percent and 30 percent.’”

Here’s a silver lining on that silver lining; most Americans between the ages of 17 and 24 are either:

Bruce E. Woych:

http://www.democracynow.org/2010/12/20/chris_hedges_obama_is_a_poster 

SYMBOLS:

From DEMOCRACY NOW: “In his new book, Death of the Liberal Class, Pulitzer Prize-winning journalist and author Chris Hedges argues that the failure of President Obama to represent the interests of his supporters is just another example of a quickly dying liberal class. In the book, Hedges explains how the five pillars of the liberal class—the press, universities, unions, liberal churches and the Democratic Party—have become corrupt. [includes rush transcript]”

http://www.democracynow.org/2010/12/20/chris_hedges_obama_is_a_poster 

SUBSTANCE! (1) http://www.salon.com/news/opinion/glenn_greenwald/index.html 

(2) http://www.salon.com/news/opinion/glenn_greenwald/2010/12/14/manning 

(3) http://projects.washingtonpost.com/top-secret-america/articles/monitoring-america/1/

http://open.salon.com/blog/kevin_gosztola/2009/05/14/obama_employs_bush_administration_tactic_blocks_photos

Bayard Waterbury

This, James, is perhaps my favorite of any post you’ve ever made. Why? It is because the arguments for “insider”/”outsider” are so apt and correct. What it does to me, without even launching into a major rant, is just how much a democratic country relies upon each citizen to be educated AND informed. The price of ignorance and apathy in a democracy is backbreaking, obviously. Don’t get me wrong, I think that a meaningful percentage of adult citizens of voting age try to be informed. Although, the obvious problem here is that the press intentionally misinforms people regarding issues, solutions, and political reality. I used to be so naive that I actually believed that by watching C-Span, I would get the unvarnished political truth. And, I was interested, and not even young at the time. How sadly wrong I was.

The Liz Warren example is a classic. I have become sophisticated enough to know that she is just a human political football. The administration knows that she’s smart and progressive, incredibly well informed, and hugely popular. A no-brainer as an appointee to her current post. Of course, Wall Street will claim that her CFPB will destroy their profits, but anyone who knows anything knows that that won’t happen. But, even I know that she’s only one small cog in a vastly dysfunctional governmental apparatus. Her presence will have a positive effect in some small ways, but the forces aligned against her are so vast and rich that she is heavily discounted already.

If I could wish for anything for Christmas it would be for our adult population to devote at least an hour a day to reading and investigation, and not spend any of that hour reading anything in the major media or watching any network television. That would be wasting the entire hour, or worse.

jake chase

No, James, you are obviously not naive. First McKinsey and then Yale Law School? Chances are you will find an excellent place to rest while our idiotic system crumbles. A person would have to spend 24/7 on rants, marches, demonstrations, hunger strikes, etc., and he would still be pis*ing in the ocean. Ignorance remains our national way of life. A vast majority absorbs propaganda and accepts it as news. Nothing has really changed in my adult lifetime, which began in 1960. If you think there is any aspect of government not controlled by the rich and their stooges, you simply don’t understand how it works.



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