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Financial Skeptic Bulletin, May 2012

 

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This one year old selection of news. It's really funny to read forecasts that are just one year old.

Note: Despite doom and gloom stock market went from 1260 to 1460 in one year. This new stock and bonds bubble was supported by Fed.

NEWS CONTENTS

Old News ;-)

May

[May 31, 2012] Not Exactly Good News

May 31, 2012 | Financial Armageddon

The Atlantic notes that 10-year Treasury bond yields have hit a 220-year low:

One of these days, the bond vigilantes will show up. Today was not that day though. Tomorrow's not looking good either.

The chart below from Bloomberg shows the nominal yield on 10-year Treasury bonds the past five years. Thursday's midday yield was the lowest it's been over that period. It was also the lowest it's been the past 50 years. Actually, 100 years. No, 220 years.

Yes, Thursday's brief sub-1.54 percent yield was the lowest ever.

...I suppose most Wall Street "strategists" would say this means stocks are very cheap, since the S&P 500 index has an earnings yield -- earnings divided by price, or the reciprocal of the P/E ratio -- that is more than four times higher and a dividend yield that is 33 percent greater.

Then again, maybe the soaring bond market is telling us something more along the lines of what one successful investor has to say about our future prospects, as Zero Hedge reports in "'The End Game: 2012 And 2013 Will Usher In The End" - The Scariest Presentation Ever?":

If Raoul Pal was some doomsday spouting windbag, writing in all caps, arbitrarily pasting together disparate charts to create 200 page slideshows, it would be easy to ignore him. He isn't. The founder of Global Macro Investor "previously co-managed the GLG Global Macro Fund in London for GLG Partners, one of the largest hedge fund groups in the world. Raoul came to GLG from Goldman Sachs where he co-managed the hedge fund sales business in Equities and Equity Derivatives in Europe... Raoul Pal retired from managing client money in 2004 at the age of 36 and now lives on the Valencian coast of Spain, from where he writes." It is his writing we are concerned about, and specifically his latest presentation, which is, for lack of a better word, the most disturbing and scary forecast of the future of the world we have ever seen....

And we see a lot of those.

Consider this:

It continues:

It only gets better. We use the term loosely:

And the punchline

Wow. That's pretty scary, even to me.

[May 29, 2012] The Politics of the Super-Rich

Economist's View

Larry Bartels:

More on the Politics of the Super-Rich, Monkey Cage: Andrew argues, based on “extrapolation from preferences of the top 5%, data on campaign contributions, and data on political attitudes of the top third of income,” that “there are lots more rich and powerful Republicans” than Democrats. While extrapolation from the top third, or even the top 5%, to the “super-rich” seems perilous, some new data on campaign contributions handsomely support his claim. ...

While these data seem compelling with regard to the partisan alignment of the super-rich, they do not speak to Andrew’s additional claim that “rich Democrats tend to be moderate on economic policy, whereas rich Republicans tend to be highly economically conservative.” ...

For what it’s worth, I suspect that Andrew is mostly right on this score as well—but also that there is a great deal of politically significant variation even within the domain of “economic policy.” For example, the finance industry super-rich in Bonica’s data look, on average, much like the rest of the super-rich. However, even those who contribute mostly or entirely to Democrats are probably not “moderate” on the issue of financial regulation—a fact that may be relevant to understanding why the regulatory response to the Wall Street meltdown was not more vigorous.

Goldilocksisableachblonde:

I have my doubts about the graphs depicting ideological distributions , like the one above , when the topic at hand is economics. I suspect they're reflecting voting patterns across the universe of issues , including foreign policy , social norms , military spending , etc.

If you define Dems as to the left of the ideology zero point on the horizontal scale , and define that ideology on economic issues to mean pro-labor , pro-regulation , pro-antitrust enforcement , anti-inequality via progressive taxes , etc. , then the graph above looks like it might be about right for around 1970 or 1980 , perhaps with different shapes of the curves.

But today , I think you'd have to adjust the zero point on the above graph well to the left to accurately depict ideology on economic issues. That is , we're decidedly more right of center overall.

Of course if you say that liberal economics is now neoliberal economics , then the graph may be accurate as it stands , but the point remains - the "liberals" of the past were not nearly as "neo" as they are today.

Paine: 

I think you are talking on different points here

The shift of the money elite toward an anti interventionist pro market position is
Obvious the move could be from social liberal to neo liberal
And it has impacted the trust fund liberals in particular
The shift has been from redistribution to cultural liberation

The GOP as the business mans party is well understood by the common voters

Charlie Baker:

Here's a report on misinformed voters:

Poll: 2010 Voters Misinformed on Key Issues
 

Summary:

http://newsdesk.umd.edu/global/release.cfm?ArticleID=2313
 

Full report:

http://www.worldpublicopinion.org/pipa/pdf/dec10/Misinformation_Dec10_rpt.pdf

While I grant that a lot of people know that the very richest people back the GOP, Red State working/middle class people often buy the "job creator" narrative, and the notion that "tax cuts + austerity = more jobs." The GOP has been very successful in painting Obama as an elite crony capitalist to its base, handing out big govt money to Solyndra and Planned Parenthood.

Conversely, the Democratic voters often have mystification about the nature of Democratic policies. Dem voters often skew "progressive" where the party policies skew "neoliberal." I was responding to this part of the post:

"... even those who contribute mostly or entirely to Democrats are probably not “moderate” on the issue of financial regulation—a fact that may be relevant to understanding why the regulatory response to the Wall Street meltdown was not more vigorous.... "

I apologize for the antagonism resulting from my brief comments, and hope this clears up my position somewhat.

RueTheDay said...

According to the latest stats I could find, the top 5% of households had an AGI > $154k/yr. When exactly did $154k/yr become "super-rich"? In a major metropolitan area, a household consisting of a high school teacher and a police officer could easily be in the lower end of that group.

I'm not a big fan of using income measures (as opposed to net worth measures) to define the "rich" in general, but if we're going to use them then we need to do a better job than this. I recognize that the data may not be available, but then we should either attempt to collect the data or simply say we don't know rather than "extrapolating". Lumping together the political preferences of households with $154k in annual income from wages/salaries with households that have annual incomes of 3-5+ times that amount from passive investments doesn't tell us anything anything at all as the demographics have little in common.

Marc Faber Sees 100% Probability Of Global Recession In 2013

ZeroHedge

Faber ramps up the rhetoric noting that while stock indices are not performing terribly, there are many economically sensitive (and luxury) stocks that are down very significantly - which suggests to him that the huge asset price run of the last decades in come to an end prompting the question of the day from CNBC's Cramer-stand-in "You're not looking for a recession in the US are you?" Faber, in his calm, thoughtful way responds, "I think we will have a global recession late this year, early next year", to which a stunned Wapner asks for odds (surely 30%, 50%?) of this recession - "100% certainty" comes the reply to leave Wapner throwing in the towel on any positive spin as Faber suggests the only 'investment' in this case is 'Cash USD' and investors must own some gold.

[May 29, 2012] War Pigs - The Fall Of A Global Empire

It seems both parties are war pigs
May 27, 2012 | ZeroHedge

We will bankrupt ourselves in the vain search for absolute security.” -Dwight D. Eisenhower

As Americans mindlessly celebrate another Memorial Day with cookouts, beer and burgers, the U.S. war machine keeps churning. As we brutally enforce our will on foreign countries, we create more people that hate us. They don’t hate us for our freedom. They hate us because we have invaded and occupied their countries. They hate us because we kill innocent people with predator drones. They hate us for our hypocrisy regarding democracy and freedom. Just when we had the opportunity to make a sensible decision by leaving Iraq and exiting the Middle East quagmire, Obama made the abysmal choice to casually sacrifice more troops in the Afghan shithole. We have thrown over $1.3 trillion down Middle East rat holes over the last 11 years with no discernible benefit to the citizens of the United States. George Bush and Barack Obama did this to prove they were true statesmen. The Soviet Union killed over 1 million Afghans, while driving another 5 million out of the country and retreated as a bankrupted and defeated shell after ten years. Young Americans continue to die, for whom and for what? Our foreign policy during the last eleven years can be summed up in one military term, SNAFU – Situation Normal All Fucked Up. These endless foreign interventions under the guise of a War on Terror are a smoke screen for what is really going on in this country. When a government has unsolvable domestic problems, they try to distract the willfully ignorant masses by proactively creating foreign conflicts based upon false pretenses. General Douglas MacArthur understood this danger to our liberty.

“I am concerned for the security of our great Nation; not so much because of any threat from without, but because of the insidious forces working from within.”

Economic Opportunity Cost

“You can’t say civilization don’t advance… in every war they kill you in a new way.” – Will Rogers

Any doubt that the Military Industrial Complex is as strong as ever should be removed after examining Obama’s 2012 Budget which has $900 billion dedicated to our military machine. We spent $370 billion in 2001, $620 billion in 2006, and now this liberal anti-war Democrat from Illinois is spending 45% more than that war monger Bush who was burned in effigy by the anti-war Democrats during Iraq War protests. It seems both parties are war pigs.

[May 29, 2012] U.S.A. 2012: Is This What We've Become? by Charles Hugh Smith

05/27/2012 | ZeroHedge

The word "sacrifice" has been sacrificed on the altar of expediency. The politicians we elect (those who dare speak the truth of our impoverishment and complicity don't get elected--we abhor and fear the truth) have ground the word "sacrifice" into meaningless with overuse; it now means nothing but yet another clarion-call to swallow lies and artifice to protect our share of the loot. The government can't be the problem, because the government issues me a nice check every month. And so we cling to easy falsehoods... The problem is our consumerist, Central-State dominated society/economy that depends on ever-rising debt and and leverage is unsustainable, and placating ourselves with expedient simplicities that shift the accountability and responsibility from ourselves to someone or something else solves nothing. This reliance on excuses, denial and expediency is the hallmark of adolescence; in adulthood, these are the hallmarks of failure and pathology.
...
Is this what we've become, brittle, simulacra "grown-ups" who are incapable of acknowledging the truth of our situation? If we cannot dare acknowledging reality, then how can we solve our problems? If we cannot bear an awareness of our systemic rot and unsustainability, then how can we move past denial and expediency? If we have lost the ability to live within our means and to acknowledge difficult facts, then we have lost everything: our national integrity, our ability to problem-solve, our vigor and our future.

[May 25, 2012] Egos and Immorality by Paul Krugman

Economist's View

Ruin the economy, then get indignant and whiny if anyone points that out:

Egos and Immorality, by Paul Krugman, Commentary, NY Times

...You can see why Wall Street likes this story. But none of it — except the bit about the Gekkos and the Romneys making lots of money — is true..., and there are real questions about why, exactly, the wheeler-dealers have made so much money while generating such dubious results. ... And it has been especially sad to see some Democratic politicians with ties to Wall Street, like Newark’s mayor, Cory Booker, dutifully rise to the defense of their friends’ surprisingly fragile egos.

As I said at the beginning, in a way Wall Street’s self-centered, self-absorbed behavior has been kind of funny. But while this behavior may be funny, it is also deeply immoral.

Think about where we are right now, in the fifth year of a slump brought on by irresponsible bankers. The bankers themselves have been bailed out, but the rest of the nation continues to suffer terribly, with long-term unemployment still at levels not seen since the Great Depression...

And in the midst of this national nightmare, all too many members of the economic elite seem mainly concerned with the way the president apparently hurt their feelings. That isn’t funny. It’s shameful.

Neildsmith:

"Once upon a time, this fairy tale tells us, America was a land of lazy managers and slacker workers. Productivity languished, and American industry was fading away in the face of foreign competition."

It's not a fairy tale, it's a religion.

Efficiency: The altar upon which average people are sacrificed to the gods of finance.

Edward Lambert said in reply to Neildsmith...

Yet, they were not efficient... The most efficient economy has MSC=MSB (marginal social costs = marginal social benefits).

The buyout kings worked upon the principle of MPC=MPB (marginal private costs = marginal private benefits). They had absolutely no concern for social costs.

As a result, they left heaps of negative externalities for society to pay for... like low real wages.

Romney envisions providing public goods as private goods. Inept...

Charlie Baker said in reply to Edward Lambert...

Akerlof and Romer had the right word for it: LOOTING. Read it and weep:

Looting: The Economic Underworld of Bankruptcy for Profit
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=227162

ilsm:

Lies repeated often enough become reality.

Their attack ads: they (finaciers) ruined the economy so Obama is faulted for the rising debt, much of it coming to keep the republic together after they ruined the economy.

The answer is raise taxes and stopped the wars, not elect a wall st rodent.

In the same add the Heritage Foundation PPACA will cause millions of Americans to going into "pools".

While their tea party puppets wanted pools and vouchers to replace Medicare, to save the medical insurance complex as health costs skyrocket and fewer businesses can get their workers private insurance.

Occupy the media.

Almost Laughable

May 24, 2012

In "‘The Death of Equities’… Again?" FT Alphaville ponders whether sentiment has reached the kinds of extremes that have historically marked major -- secular -- turning points:

Thursday’s FT declares “the end of a six-decade passion for equities”. Quite a claim.

Institutional investors, from pension funds to mutual funds sold directly to the public, have slashed holdings in the past decade. Stocks have not been so far out of favour for half a century. Many declare the “cult of the equity” dead.

The story may evoke a feeling of déjà vu for some. Especially those who read the August 13, 1979 edition of BusinessWeek, which famously also announced ‘the death of equities’.

 

[May 23, 2012] The Inside Story Of What Happened On The Facebook IPO

Business Insider

And now for some more bombshell news about the Facebook IPO...
Earlier, we reported that the analysts at Facebook's IPO underwriters had cut their estimates for the company in the middle of the IPO roadshow, a highly unusual and negative event.
What we didn't know was why.
Now we know.
The analysts cut their estimates because a Facebook executive told them to, a source tells us.
The information about the estimate cut was then verbally conveyed to sophisticated institutional investors who were considering buying Facebook stock, but not to smaller investors. 

km4:

but not to smaller investors

SMALL FRIES. THE MINNOWS. THE LITTLE PEOPLE.

All f#cked.

EngineerJim:

Why is everyone so negative today? Don't tell me everyone on here is long FB?!?!?

I have 200 shares of FB. My wife egged me into buying it -- so I'll blame it on her. I told her -- well look at the bright side, we can only lose about $8K.

Outsider:

I told her -- well look at the bright side, we can only lose about $8K.

This is why I have an imaginary trading account.

Which reminds me, VXX, which was up 35% for the month, is now only up 25%.

Outsider :

 What if the SEC imposed larger fines?

That would send a message (a weak one, but one):

"Would you like fines with that?"

rosethorn:

Sheryl Sandberg - Wikipedia, the free encyclopedia

-Prior to Google, Sandberg served as chief of staff for the United States Department of the Treasury. -While at Harvard, Sandberg met then professor Larry Summers who became her mentor and thesis adviser. -in March 2008 Facebook announced hiring Sheryl Sandberg away from Google. After joining the company, Sandberg quickly began trying to figure out how to make Facebook profitable.

later...

[May 23, 2012] ATA Trucking index declined 1.1% in April

dryfly:

black dog wrote:

retail sucked for april

But will be revised down to 'blows chunks'...

[May 23, 2012] JPMorgan Hearing Market Regulators Warn They're Broke, Outgunned By Wall Street

See also:
Two of the most important financial regulators in the country have a message for Congress: We need more money.

At a hearing before the Senate Banking Committee Tuesday morning, Securities and Exchange Commission Chairman Mary Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler told lawmakers that the demands on their agencies to expand oversight are growing, but that their pocketbooks are not.

"We’re way underfunded at the CFTC," Gensler told lawmakers, after a question on the subject from Senator Chuck Schumer (D- N.Y.). "Imagine if, all of a sudden, there are eight times the number of teams on the [football] field, but only seven refs," Gensler said. "There would be would be mayhem on the field. The fans would lose confidence."

Similarly, Gensler said, investors are losing confidence when when mayhem breaks out in the financial markets as a result of lax oversight. "They feel that the market is unfair."

SEC chief Schapiro echoed the point: "We've been asked to take on very significant new responsibilities," she said. Though the SEC has made progress in hiring new staffers and improving its technological capabilities, Schapiro conceded that, in some areas, the efforts haven't gone far enough.

"We’re still way outgunned by the firms we regulate in terms of technology," she said.

The inadequacy of the SEC budget is an issue that Schapiro has raised in the past, and one that sits at the heart of criticism that the regulator is not able to fully monitor and regulate financial markets. Last month, a number of former SEC enforcement lawyers told The Huffington Post that the SEC is playing catch-up in some of its oversight. "The SEC just doesn't have the resources to be everywhere -- to regulate and to be the cop on the beat," Paul Berger, a former associate director of the SEC's enforcement division who left in 2006 for the law firm Debevoise & Plimpton told The Huffington Post at the time.

Outsider :

JPMorgan Hearing: Market Regulators Warn They're Broke, Outgunned By Wall Street

SEC chief Schapiro echoed the point: "We've been asked to take on very significant new responsibilities," she said. Though the SEC has made progress in hiring new staffers and improving its technological capabilities, Schapiro conceded that, in some areas, the efforts haven

't gone far enough.

"We’re still way outgunned by the firms we regulate in terms of technology," she said.

I can't believe she has the nerve to say that.

Tell me everyone is not thinking the same exact thing when they hear that.

Pellice:

some investor guy wrote:

""We’re still way outgunned by the firms we regulate in terms of technology"

Isn't the problem at base that the markets have outgrown the nation-state, even the United States? They may wish us well, but the market economy will not hesitate to screw the nation-state if profit is at stake. We already have one-world government - by financial interests. Time for regulators to catch up.

josap:

Pellice wrote:

We already have one-world government - by financial interests. Time for regulators to catch up.

It's too late. The regulations will simply be changed to fit the financial interests.

[May 22, 2012] The EU Political Game of Growth Vs Austerity is Akin to Polishing the Brass on the Titanic

ZeroHedge

Both growth and austerity are political hot buttons that fail to address the core issues plaguing the Euro-zone. Those core issues are:

  1. Age demographics, which courtesy of a welfare state translates into…
  2. Massive unfunded liabilities and debt overhang that stifles growth…
  3. And an unwillingness to innovate or pursue democratic capitalism

When political leaders talk about austerity today, they’re not even actually addressing real austerity. France, for instance, is balking at the prospect of submitting to more “austerity measures” when it actually increased its spending by $62 billion from 2009-2011.

Indeed, the whole exercise becomes a total joke when you realize that as far back as 2004 France had unfunded liabilities (social programs, pensions, etc) equal to over 500% of its GDP. As Jagadeesh Gokhale of the Cato Institute notes, in order to meet these needs without increasing taxes, France would need to set aside nearly 10% of its GDP every year indefinitely.

Put another way… in order for France to meet its unfunded liabilities, it would have to start saving NOT spending beyond its means

Speaking of which, spending beyond one’s means is precisely what EU leaders are referring to when they talk about “growth.” For the EU, economic growth is synonymous with spending money (especially if it’s someone else’s money), NOT economic innovation or organic growth from small business.

[May 22, 2012] Did Morgan Stanley Botch the Facebook IPO by SUZANNE MCGEE

May 22, 2012 | The Fiscal Times

Meanwhile, there was plenty of information out there to make an investor become more wary about Facebook at the kind of valuation underwriters were seeking. Even before General Motors (GM) announced its decision to yank all its spending on Facebook because its ads there weren’t attracting new customers, the financials made it clear that the company’s growth rate was slowing. There simply aren’t that many people left for most of us to “friend,” and it seems that we don’t like being pitched vacation villa rentals or liposuction treatments when we’re trying to chat with those we have “friended.

Reuters Breakingviews published a detailed analysis of the company, its financial position and its strategy that was available for at least two weeks before the IPO as an e-book. In it, the authors concluded that the company likely had a fair value closer to $65 billion than the $104 billion price tag it commanded on the IPO date. Everyone vying for stock in the company last week could have paused to read and think that through instead of being caught up in the hype.

Similarly, Facebook could have avoided being caught up in its own hype. The company, as the premier social-networking company out there and subject of an Oscar-nominated feature film, was always going to be an iconic IPO. It didn’t need to be valued at quadruple the level that Google was when the latter made its debut on the public markets in 2004. The company has plenty of savvy backers and employees who were in a position to say, “Waaaait just a second. Let’s be sure this is handled properly, so that the stock not only fetches the maximum possible price.” Sure, those insiders who sold as part of the deal wanted to maximize their return too. But most of them own more stock in the company that they likely will find themselves trying to sell at lower and lower prices, as lockups are removed in three to six months’ time. They could have said “no” when Morgan Stanley and other underwriters suggested raising the size and price, if that is what happened. Or they could have refrained from asking underwriters to make those changes, if that’s the way the scenario played out.

[May 12, 2012] JPMorgan $2 billion loss hits shares, credit, image

May 12, 2012 | Reuters

JPMorgan Chase & Co lost $15 billion in market value and a notch in its credit ratings on Friday while a chorus of regulators and politicians reacted to its surprise $2 billion trading loss by demanding stiffer oversight for the banking industry.

The loss by one of Wall Street's most respected banks embarrassed chief executive Jamie Dimon, a leader lauded for steering his bank through the fallout from the 2008 financial crisis without reporting a loss.

"We know we were sloppy. We know we were stupid. We know there was bad judgment," Dimon said in an interview with NBC television to be broadcast on "Meet the Press" on Sunday.

He said it wasn't clear whether the bank had broken any laws or violated any rules. "We've had audit, legal, risk, compliance, some of our best people looking at all of that."

The loss also invited regulatory scrutiny for a man who had all but led the charge to limit it, criticizing the so-called Volcker rule to ban proprietary trading by big banks.

The New York Times reported that the Securities and Exchange Commission has opened a preliminary investigation into JPMorgan's accounting practices and public disclosures about the trading loss.

On Friday, Securities and Exchange Commission Chairman Mary Schapiro told reporters: "It's safe to say that all the regulators are focused on this."

The debacle sparked new fears about big banks and prompted Dallas Federal Reserve Bank President Richard Fisher, who has called for the breakup of the top five U.S. banks, to say he is worried the biggest banks do not have adequate risk management.

The fallout extended across much of the banking sector, with shares of some of Wall Street's top names declining on Friday. Among others, Citigroup dropped 4.2 percent, Goldman Sachs fell 3.9 percent and Bank of America slipped 1.9 percent.

JPMorgan was far away the worst performer, however, falling 9.3 percent on a day when some 212 million of its shares traded, the most volume in its history.

Fitch Ratings cut JPMorgan's debt ratings a notch and put all of the ratings of the bank and its subsidiaries on negative ratings watch.

WFTAsaid:

For the past 30 years I’ve managed to eke out a living selling fertilizer (not the organic variety that Jamie Dimon was peddling yesterday,) so I’ve never needed to be a financial genius, but a “hedge” by definition cannot lose money. It is a defensive measure used to protect a gain, or to insure in an outcome. It may limit upside if the event you were defending against doesn’t happen, but it never, ever loses money.

When the financial press allows the CEO to use the word “hedge” to explain a $2 billion loss other than in a sentence like, “Our failure to hedge resulted in a $2billion loss,” our financial press does us a disservice.

JP Morgan Loss Bomb Confirms That It’s Time to Kill VaR

naked capitalism

jake chase:

First of all, Keynes identified the problem in 1923 in his Treatise on Probability. There is a big difference between uncertainty and risk. Trading involves uncertainty. You have positions which inevitably are correlated in ways nobody can predict. That is why banks should not be gambling, particularly when they are using deposits as capital and the Fed as an insurance company. Why do they do it? Because in the short run they can capture profits which are then extracted as bonuses. It is unbelievable that toadying academics still do not understand this, particularly Bernanke who is the poster child for this species.

LeonovaBalletRusse
jc, “the difference between uncertainty and risk” — and why this distinction is crucial — is demonstrated by Dr. Gerd Gigerenzer:

Dr. Gerd Gigerenzer, Director, Max Planck Institute for Human Development, makes the distinction clearly and succinctly in his presentation at the INET Plenary Conference in Berlin: “Paradigm Lost: Economics + Politics” on Thursday, 12 April 2012 (day one), during the session entitled: “What Can Economists Know? Rethinking the Foundations of Economic Understanding.”

It’s “pay dirt” at http://www.ineteconomics.org

enouf
It’s all intentional; for-profit cognitive dissonance
chitown2020:
Chris Whalen spoke about the lack of banking regulators to want to deal with breaking up the BIG BANKS. Chris said the FDIC is willing to do it and it will have to be done. This needs to be done before they clean everyone out. http://maxkeiser.com/ 

LeonovaBalletRusse:

They’re ADDICTED to “hot, fast money” that goes with the “primo tail” risk, the cocaine, with Crystal on the side.

Dr. Gabor Mate will tell you why they canNOT be cured. The pols are addicted also, hence they are enabling co-conspirators, forcing the People to be enablers against our will. Think: crack cocaine system on the street, for How It Works: from plantation owners to manufacturers to brokers to pushers to hustlers dealing, doing, and dying in the gutter. “Uncle Sam” embezzles whatever “money” is required from the People’s accounts, and provides the Praetorian Guard to keep the system locked down. Full-circle payout to the 1% comes from every level of the Private Plantation Prison rackets.

London has cut its deal with China, so “The Opium Wars” are meant to run their course in the Homeland. London says: “It’s your night in the barrel.”

decora:

The problem with ‘oops, lets fix the math’ solutions is that they don't address the problem, which is that a large part of the system is basically a con. i.e. nobody cares if the models are accurate – the point is not to be accurate, the point is to get other people to think its accurate long enough to milk them for a few billion dollars, and then run off and say ‘oops sorry, but I didn't break any laws’.

think about the guys running bear stearns, specifically Alan Greenberg, who loved to tell everyone about his reputation for memos regarding the saving of paperclips.

he works on the street for decades, him and jimmy cayne riding to work together every day for years and years. then comes the rise of the computers, and the derivatives. do you think he understands all this stuff? CDS, MBS, CDO, CDPC, etc etc? obviously he doesn't understand it. but he doesn't need to.

he understands the con. he understands the game. he understands that he can make huge amounts of money off the backs of other people. Bear Stearns was the investment bank where the boiler rooms went when they needed a pipe to the market. They have been playing this type of game for decades. you don't need to understand the fundamentals in order to run the con – because the con is not about fundamentals or math or calculus or Gaussian curves. The con is about people and their beliefs and expectations. The con is about the well spoken guy in the Armani suit.

the con existed before computers and formulas and risk models, and it will exist long after these companies that will cease to exist when their own cons blow up. the game itself is never ending. only from time to time, does a society try to organize itself so that the leaders are not the same people who are the con artists. the US used to be such a place, but it is slipping.

[May 10, 2012] Max Keiser Interviews Chris Whalen on the Banks, And Accounting at Wells Fargo

Jesse's Café Américain

Max Keiser Interviews Chris Whalen on the Banks, And Accounting at Wells Fargo

This is an interesting discussion. I have enormous respect for Chris Whalen, bearing in mind that he is very much a member of the banking community and this must by its very nature affect his priorities if but a little.

And of course, Max is always Max, and always interesting. When he shifts his schtick into low gear (pun intended) he is an excellent interviewer. I wonder if Comedy Central could handle his style. He burned out the BBC fairly quickly when he called for bankers to be sent to the guillotine. Hunter Thompson drives the Shark to Wall Street. Or perhaps more like Lenny Bruce, for those who remember him, the older crowd like me.

Although I think most of what he says is quite to the point, I don't necessarily agree with Chris when he complains that on one hand that the Fed has not done enough to reform the banks, but on the other hand he suggests the Fed raise rates so that the unreformed banks can make more money on their interest rate carry trades, even if it harms the real economy.

I think a strong enough reform of the banks, the real banks, would help reduce their need for outsized returns, and take them off the Fed feedbag. And Chris alludes to that glancingly later on when he talks about JPM. Max hits that point hard, but Chris just doesn't seem to get it quite yet. And Chris defers somewhat to Jamie D. but unleashes on Jon Corzine. Corzine won't be buying any rating services anytime soon.

The Fed interest rate policy is a blunt instrument, and it does definitely penalize savers. But there are other ways to deal with that than by simply raising rates overall to help subsidize the banks, given the extraordinarily weak recovery in the real economy, which at the end of the day is what public policy should be all about. And of course Chris makes no reference to the intense bank lobbying that helped to weaken Dodd-Frank and the Volcker Rule and make them more complex and less effective. I seem to recall Yves Smith taking him to task on that, and she was right.

But overall it is good. His opinions on Wells Fargo are rather blunt and could be an eye opener to some. The American banking system is still a snakepit, and it makes we grind my teeth a bit when the triumphalists on Bloomberg television compare the US 'success' in financial recovery to other nations.

Here is the original source for this excerpt titled provocatively ""I Steal Therefore I Am."

Again I apologize for having to direct viewers to Russia Today to obtain this information about the US financial system, but there is a decided lack of frank discussion like this in the American media, except perhaps on Comedy Central and a few isolated outposts on PBS.

Keiser Report I Steal, Therefore I Am (E286) interview starts at 13:48

[May 10, 2012] From Financial Crisis to Stagnation

Economist's View

jeffrey678 said... 

"Shock Doctrine" by Naomi Klein

Klein believes that neo-liberalism belongs among "the closed, fundamentalist doctrines that cannot co-exist with other belief-systems ... The world as it is must be erased to make way for their purist invention. As Klein sees it, the social breakdowns that have accompanied neo-liberal economic policies are not the result of incompetence or mismanagement. They are integral to the free-market project, which can only advance against a background of disasters.

Klein seems to suggest that these disasters are manufactured as part of a deliberate policy framed by corporations with hidden influence in government. Her more considered view, which is also more plausible, is that disaster is part of the normal functioning of the type of capitalism we have today:

 "An economic system that requires constant growth, while bucking almost all serious attempts at environmental regulation, generates a steady stream of disasters all on its own, whether military, ecological or financial.

The appetite for easy, short-term profits offered by purely speculative investment has turned the stock, currency and real estate markets into crisis-creation machines, as the Asian financial crisis, the Mexican peso crisis and the dotcom collapse all demonstrate.

http://www.guardian.co.uk/books/2007/sep/15/politics?INTCMP=SRCH
 

Mike said in reply to jeffrey678...

How is neoliberalism = free markets? It is corporatism. It is amazing that people butcher the English language and suggest that laissez-faire economics is not analogous to corporatism.

Mark A. Sadowski said in reply to Mike...

Neoliberalism supports the privatization of nationalized industries, deregulation, and enhancing the role of the private sector in modern society without regard for the market failures that might have made nationalization, regulation and an enhanced role for the public sector preferable in the first place. Laissez-faire policies pursued naively inevitably lead to corporatism.

river said...

Palley doesn't actually come out and say it, but I suspect that he falls into the "progressive" camp in his beliefs. Just based on simple intuition (which I realize can be misleading, but is very hard to ignore)of a simple minded engineer, this explanation seems to be the best to me (and one I have argued for a while on this board, but didn't have an advocate with any credentials that thought the same thing (Steve Keen, Yves Smith, Barry Ritholtz and now Thomas Palley the main exceptions).

The only reason for a person like me to make an argument about this issue:

"The critical insight is that each perspective carries its own policy prescriptions. Consequently, the explanation which prevails will strongly impact the course of economic policy. That places economics at the center of the political struggle as it influences which explanation prevails."

"As of now, the economics profession is split between the hardcore and softcore neoliberal positions. However, that can change under the pressure of an ugly reality that produces mass political demand for change, as happened in the Great Depression of the 1930s which provided an opening for Keynesian economics. The only certainty is change will be politically opposed as powerful elites and orthodox economists have an interest in preserving the dominance of the existing paradigm by ensuring their explanation of events prevails."

Goldilocksisableachblonde said in reply to Mark A. Sadowski...

I would characterize most of the NGDP-targeting advocates as well to the right of the type of shared-prosperity progressives that Palley describes. Whether conservative , libertarian , whatever , they're members of one of the two economic porn groups who've collaborated over the last several decades to systematically dismantle what had been a perfectly good economic system.

Monetary stimulus was a useful tool for Roosevelt in a way that it isn't today , because he had implemented and would continue to implement policies that ensured that its beneficial effects were widely-shared and thus effective , i.e. , the transmission mechanism actually had a transmission.

I think Bernanke realizes this , as revealed by his repeated hints that fiscal policy would be a more direct method to attack unemployment. Why would he want to carry the legacy of the Fed chair who was the best ever at pissing up a rope ?

I share the view expressed in this piece by Dan Alpert re : Krugman vs Bernanke :

http://www.economonitor.com/danalperts2cents/2012/04/25/earth-to-paul-krugman/

Mark A. Sadowski said in reply to Goldilocksisableachblonde...

"Monetary stimulus was a useful tool for Roosevelt in a way that it isn't today , because he had implemented and would continue to implement policies that ensured that its beneficial effects were widely-shared and thus effective , i.e. , the transmission mechanism actually had a transmission."

Monetary stimulus doesn't need fiscal stimulus as a transmission to work. (FDR actually did relatively little fiscal stimulus). And the idea of shared prosperity is hardly contradictory with monetary stimulus (By strengthening unions, instituting a minimum age and making taxes more progressive FDR did both).

"I think Bernanke realizes this , as revealed by his repeated hints that fiscal policy would be a more direct method to attack unemployment."

Bernanke is merely trying to shift the responsibility to someone else (as is Draghi). He is a born consensus seeker (look at his history as department chair at Princeton). As long as Hawks dominate the BOG he will go along with them. You're just reading you own motives into someone elses. Remember, Bernanke is a Republican.

"I share the view expressed in this piece by Dan Alpert re : Krugman vs Bernanke :"

Alpert's views are self contradictory to the point of being totally incoherent. He argues that cheap labor is leading to increased AS (which should lower inflation) and then argues that monetary stimulus is increasing commodity price inflation (which would be symptomatic of decreased AS). Which is it?

Both arguments are thin as rice paper. How could a positive AS shock in the developing world affect our ability to attain full employment? We always have the ability to depreciate our currency through monetary stimulus to keep our trade deficits in check. How can the monetary policies of the advanced world inflate global commodity prices? They can't. It's all about the fact that supply for these commodities is relatively inelastic and demand in the developing world is soaring. China now consumes over 40% of the earth's steel, cotton and copper and is the world's third largest consumer of oil, which is subject to peak oil. Twenty years ago China wasn't even a blip on the world's commodity radar screen. Now it is the elephant in the world's commodity markets.

Cameron Hoppe said...

I don't think any of the three should be ignored. However, the real explanation to lies in the pursuit of status and power. WWII was a shared goal, and it was fought mainly by working class and poor men. This is not a dig against middle class and rich guys: it was a low-tech total war requiring full mobilization. The majority of men were working class or poor.

It had the effect of putting working class and poor men in a position of status. It put them in a position to be admired. They were universal heroes for life.

That all changed in Vietnam. The heroism demanded of those who fought was just as great, but they were regarded coolly by wealthy chicken-hearts and sometimes berated by some who opposed the war. Even WWII veterans were known to show disdain for those who went to Vietnam, regarding it as something other than a "real war".

This is not the whole story, but it is integral to the present dynamic, IMHO. Capitalism is inherently unstable in that today's debt is always to be paid for via tomorrow's growth. However, it doesn't matter too much what sectors see growth and which workers or rentiers see their income and wealth increase. So long as there is growth, capitalism survives.

For me, the dynamics of increasing inequality, periodic financial crises coupled with public bailouts of corporate executives, and the rise of apathetic trade can only be understood in the light of primate status dynamics. A person making $1 million+ per year may consciously think he or she wants more money. What the earner really desires is more power, more status, more reproductive opportunities for one's self or offspring.

It's easy to justify a drive for money and wealth. Most people can understand it because they don't have enough to meet the real needs of their present and future. It's impossible to justify a constant grab for eternal power for oneself and progeny. But it is exactly what we are witnessing. Economists and everyone else should call it what it is.

PaulS:

There has been much discussion about the Depression/World War II analogies. Many such as Krugman argue that it was the extremely high deficit spending during World War II which lifted the US out of the Great Depression. However, there were two parts to the US economic mobilization, and the spending was only one of the two. The other part is the War Production Board. The War Production Board was a huge act of central planning to marshal the nations' resources towards war. It completely reallocated resources to this end. And arguably this reallocation had as much to do with creating the prosperous postwar economy as did the spending.

This is why it is not a contradiction to say that the 30s unemployment was structural, and at the same time say that the government was able to improve the unemployment picture. To the extent that 30s unemployment was structural, it was the central planning which upended the structure and created a better fit between workers and the economy.

While these two parts of the economic intervention during the War, the planning and the spending, certainly both contributed to the economic recovery, it is only the spending which has really been talked about in public, according to the orthodoxies. The central planning of the WPB certainly is not. As mentioned in the post, polite economists don't talk about central planning at all.

Mark A. Sadowski:

The main problem with your thesis is that unemployment had already fallen to 6.0% (counting FERWs as employed) by 1941 and real GDP was already back to trend although war spending was minimal and the War Planning Board had not even been created yet since we were not at war.

WW II didn't end the Great Depression because the New Deal already had.

Edward Ericson Jr.:

The post WWII role of what Andre Gunder Frank called "military Keynesianism" arguably played a role both in the pre-1980s "virtuous cycle" and its less virtuous aftermath.

It's hard to put 4-8 percent of your imputed GDP into an utterly unproductive endeavor and not produce first order economic distortions.

Jes sayin'.

ezra abrams:

Quote:

"... 1945 - 1975 the U.S. economy was characterized by a “virtuous circle” Keynesian model built on full employment and wage growth tied to productivity growth"

I guess being the world's super power, no competition for industrial stuff from japan and china, low oil etc had nothing to do with it. If all you have is a hammer... I'm always amazed at how little effort economist put into getting something other then a hammer (tools from phd time) to study problems. Of course, if things like military might creating low oil [prices] were responsible for some of the growth, then people might question the high status afforded to the math driven economist

[May 10, 2012] 'We Are Not Doing Very Well'

In "NBER's Martin Feldstein Bashes The Deplorable US Economy, Says Bernanke Has Engineered Another Stock Bubble," Zero Hedge highlights some less-than-upbeat commentary from a Bloomberg TV interview with economist Martin Feldstein:

Feldstein on the U.S. economy:

"We are not doing very well. The economy is just coming along at a snail's pace. The first quarter numbers that we just got last week were not very good at all. The GDP number was 2.2%. That was a disappointment, but you know, it was all automobiles. 1.6 out of the 2.2 was motor vehicle production. So, people were catching up after not being able to buy them the year before. So, this is a very weak economy. The payroll employment numbers, we are going to get some new ones in April. Let's hope they are better than March where it fell by half. The stock market is, I think, responding to the Fed. I think the real danger is that this is a bubble in the stock market created by low long-term interest rates that the Fed has engineered."

On the danger of a bubble in the stock market:

"The danger is, like all bubbles, they burst at some point. Remember, Ben Bernanke told us in the summer of 2010 that he was going to do QE2 and then ultimately they did Operation Twist. The purpose of that was to make long-term bonds less attractive so that investors would buy into the stock market. That would raise wealth and higher wealth would lead to more consumption. It helped in the fourth quarter of 2010 and maybe that is what is helping to drive consumption during the first quarter of this year. But the danger is you get a market that is not with the reality of what is happening in the economy, which is, as I said a moment ago, is really not very good at all."

I'll be danged -- another economist (see: "No Punches Pulled") who is not afraid to speak the truth.

 

[May 08, 2012] The economic impact of stabilizing house prices

CalculatedRisk

dryfly:

Rob Dawg wrote:

You have to be more specific. Do you want a healthy economy or a wealthy banking system?

I was at a bar in Houston last week in a rather 'interesting neighborhood' - on Telephone Rd for those who know the region - eating bbq and listening to karaoke in Spanish [you got shouted down if you sang in English - really hilarious - everyone quite drunk including yours truly].

Was talking to a laborer on the stool next to me and we were discussing the economy [he actually got it better than many I've talked to at white collar bars]. I told him they had to make the choice - save the banks or save the economy, they couldn't save both. They decided and the rest of us were screwed. The guy said that explains it better than anything I've heard anywhere so far. Ten minutes later the bar wench brought me a full pitcher pro bono. True story.
 

scone:

 Duke wrote:

I would say that the primary impact of stabilizing prices is that they will set a ceiling on interest rates.

Yep. And if the Bernank tries to raise interest rates, it raises the cost of gummit borrowing at just the wrong time. However, the Bernank might raise interest rates just a bit, over several years, to scare the pants off the potential buyers: "buy now before interest rates go up!" That would cause little feeding frenzies to keep the real stakeholders (big builders, stock market, NAR) happier, even as prices dribble slowly down in real terms. So I'd think there's a chance of 1/4% increases starting somewhere around 2014, not before. The cover story on that will be "the economy is recovering," of course.
 

cdresearch:

Until someone can rationally explain to me how the long-term jobs situation (declining employment/population ratio, more temp/low-paying jobs, reduced benefits, global wage arbitrage, aging demographics, technology displacement, etc.), understated inflation, and an average home price to median household income of nearly 4 to 1, in an artificially tanked mortgage rate environment (unsustainable), could possibly add up to a "bottom" in, or "stabilizing" house prices, I'll just stick with the view that we still have further to slide.

Doc Holiday:

 Re: " I think we should start asking what the economic impact of stabilizing house prices will be."

==> No possible way is there a recovery within sight. No one is looking at the increasing shadow inventories and including the population over 65 ... there is a massive hangover and there will be a flood of inventory that will slow any predicted bullshit recovery ... mark your grave with this!

==> Nonetheless, the NAR cheerleading and the upbeat economist will continue to have happy fantasies, and connect those thoughts to the total bullshit that the recession was over in 2008

Comrade Troyski:

Housing is 90% consumption and rising prices on existing inventory serves to impoverish people -- the new buyers -- in a totally zero-sum manner.

While housing is certainly wealth -- that which provides utility for us -- more money flowing into and out of housing is not capital-accreting, since housing is only partially a capital good (again, that zero-sum thing, for housing to appreciate, somebody down the road is going to have to pay more for the same or less amount of hard wealth).

As mp stated last week, there's an entire macro situation looming mostly behind the scenes now. People don't really understand that all taxes, in the end, come out of rents (and housing), even though they do kinda figure out that home prices are set by disposable incomes.

What's the tax situation going to look like this decade and next? If we actually start pensioning off the baby boomers there's going to be 80 million of them by 2030 -- and 80 million x $30,000 is $2.4T/yr in pension burdens. This is going to be an immense wealth transition to a senior-based economy, with major winners and losers.

Even aside from that, we're going to need to somehow reverse the Bush tax cuts -- just Obama's preferred policy won't reduce the deficit more than $100B/yr or so, and we've got a $1.4T/yr deficit as of now. That money reducing disposable incomes would be immensely deflationary to housing.

I don't expect interest rates to rise from here, given the general dire prospect workers still face. And even if interest rates rise somehow, I fully expect the Fed to step in and preserve the low-rate environment, since anything else would cause our $10T mortgage debt bubble to completely pop.

Debt Outstanding Domestic Nonfinancial Sectors - Household, Home Mortgage Sector (HHMSDODNS) - FRED - St. Louis Fed

azurite

Comrade Troyski wrote:

What's the tax situation going to look like this decade and next? If we actually start pensioning off the baby boomers there's going to be 80 million of them by 2030 -- and 80 million x $30,000 is $2.4T/yr in pension burdens. This is going to be an immense wealth transition to a senior-based economy, with major winners and losers.

There is also a growing need for replacement of essential infrastructure like water & sewer plants & transfer/distribution systems. Assuming rates start to increase now/ within the next few years (as is planned in the town I live in)--sewer & water rates & fees, that is--that is in part a transfer from the older generation who may be paying the bulk of those increased rates (although anyone who pays rent or owns will pay a portion) but may not live long enough to get their money back, so to speak, via use of the replaced systems.

sum luk
"Until someone can rationally explain to me how the long-term jobs situation (declining employment/population ratio, more temp/low-paying jobs, reduced benefits, global wage arbitrage, aging demographics, technology displacement, etc.), understated inflation, and an average home price to median household income of nearly 4 to 1, in an artificially tanked mortgage rate environment (unsustainable), could possibly add up to a "bottom" in, or "stabilizing" house prices, "

.... I'd like to offer the theory that it can't get a lot worse, but I'm concerned the upcoming election and the failure to even address the impending fiscal cliff - will prove me wrong.

josap:

cdresearch wrote:

an average home price to median household income of nearly 4 to 1, in an artificially tanked mortgage rate environment (unsustainable), could possibly add up to a "bottom" in, or "stabilizing" house prices,

In my area house prices are 2 to 1, for a good family home. Less for a condo or townhouse. Ratio of 3 to 1 if you want upscale burbs. 

sum luk

poic wrote:

Are you interested in my loss-diversification newsletter?

from: http://blogs.telegraph.co.uk/finance/philipaldrick/100016977/greece-is-at-the-epicentre-of-a-new-euro-crisis-and-its-chaos-will-spread/

Contagion risks are back with a vengeance. With Greece edging towards the euro exit gates, pressure is building in familiar territories. Yields on Portuguese sovereign debt have spiked even more rapidly than those on Greek debt. Spanish and Italian borrowing costs are creeping up. The markets are pointing to another imminent euro crisis. And, once again, Greece is at the epicentre.

Doc Holiday

How many years (more likely decades) will it take to paper-over the Multi-Mega-Lotto Trillion Dollar Black Hole from the Housing Collapse?

Not going to happen in our lifetime, mark your gravestones by it!

Former Idealist:

Sovereign strategic defaults. Only a sucker would pay their debts.

Doc Holiday 

poic wrote:

Until someone can rationally explain

Several things have to line up, e.g., shitloads of really stupid people and a tsunami of cheap and easy money from Asia, which will probably happen when Romney steals the election, and then we see an instant replay of the Bush Ownership Society with no strings attached, except for having China totally take over every asset in America and all our allies... blah, blah ... actually, even if Obama gets re-elected, refer to Plan A, where China takes over America...

Realistically, there will be shitloads of really stupid people that believe a recovery is under way Laughing out loud

cdresearch 

Sebastian wrote:

Given only the negatives, it's impossible to explain.

I didn't preclude anyone from using "positives" to rationally explain a sustainable housing bottom, and yet, to be rational and comprehensive, one must successfully address the key issues that I raised. I zeroed in on the most critical variables that must be solved if we are to create a true bottom, and a genuine and sustainable housing recovery. But so far, I have not heard of any reasonable solutions to these variables.

sum luk  

 josap wrote:

And next week it will be Spain or maybe France now.
They just keep taking turns on center stage.

.... I dunno. They're doin a good job of makin it sound serious this time. You might wanna read this: http://blogs.telegraph.co.uk/finance/philipaldrick/100016977/greece-is-at-the-epicentre-of-a-new-euro-crisis-and-its-chaos-will-spread/

cdresearch

1 currency now -yogi wrote:

For the record, price are only worth tracking relative to other prices.

I agree. 

glimmerman  

 If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. But if potential sellers think prices are stabilizing, and may even increase, they are more willing to wait for a better market or to sell when it is most convenient.

You do realize there was a seminal study about the 90s housing bust that contradicts your assertion?

http://www.andreisimonov.com/Microstr_PhD/GenesoveMayer.pdf

Housing markets exhibit a number of puzzling features, including
a strong positive correlation between prices and sales
volume
and a negative correlation between prices and time on the
market. Sales volume can fall 50 percent or more from peak to
trough in a real estate cycle. Although the most dramatic examples
along these lines are in local markets,1 a strong positive
correlation between aggregate prices and trading volumes has
also been documented at the national level in the United States,
Great Britain, and France [Ortalo-Magne and Rady 1998; Stein
1995]
.

azurite 

ac wrote:

BTW for context I made that comment because she was talking about Romney who has these grandiose plans for beefing up military spending because somehow that doesn't count as government spending.

The sad thing is there are a lot of independents out there who support Romney because they see him as the "deficit cutting" candidate.

That was the reason for my "framing the discussion" reply. DoD budget is sacred cow--its unaudited spending/budget is almost always placed outside of any discussion of budget cuts and is now, by Ryan, et al, being explicitly removed from the discussion of gov't functions whose budget can be cut.

Hard for me to understand why people can see replacement of crumbling/collapsing infrastructure they use everyday as less important than yet another sure to run over budget, take twice as long to develop as originally estimated, weapon that isn't particularly useful or even necessarily wanted by the military, as more important then safe water or safe bridges.

But so it seems.

 cdresearch

sum luk wrote:

I'm concerned the upcoming election and the failure to even address the impending fiscal cliff - will prove me wrong.

Certainly by now we must have learned that politicians will do their best to avoid tackling serious problems. It's not a good election strategy.

[May 08, 2012] Consumers Are Borrowing Again, Is it Here to Stay? by Asha Bangalore

May 7, 2012 | Northern Trust

Consumer borrowing increased $21.3 billion in March to $2.54 trillion. This is the largest monthly increase since November 2001. Revolving credit (credit cards) and non-revolving credit advanced in March, with the latter posting the larger gain.

The level of outstanding consumer credit is only 1.6% short of the peak ($2.58 trillion) registered in 2008. Consumer borrowing is back in full swing, but will it continue to advance?

The latest Senior Loan Officer Survey shows an increased willingness to lend to consumers (Chart 3). The improvement in the attitude of bankers and the sharp increase in the demand for consumer loans (see Chart 4) are factors supportive of further growth in consumer borrowing.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

[May 08, 2012] The Case for Industrial Policy

May 07, 2012 | Economist's View

Chris Blattman makes the case for more research on industrial policy:

The case for industrial policy (a paper and a rant), by Chris Blattman: A new paper, where some very good economists look at data from Chinese medium and large firms:

…sectoral policy aimed at targeting production activities to one particular sector, can enhance growth and efficiency if it made competition-friendly.

…if subsidies are allocated to competitive sectors… and allocated in such a way as to preserve or increase competition, then the net impacts of subsidies, tax holidays, and tariffs on total factor productivity levels or growth become positive and significant.

“You can’t pick winners” is the knee-jerk retort to the mention of anything that even rhymes with industrial policy. I would call it the triumph of ideology over evidence, except that even “ideology” feels like a generous term. Lazy thinking might be a more accurate description. Some have given the question a great deal of thought, but most have not.

I’m not suggesting that ... governments can pick winners (probably they can’t). Nor am I forgetting that industrial policy is easily politicized and distorted (as surely it is). So what am I talking about?

I’ll make two claims. The first: industrialization is the most important and essential process of development. ... The problem? We have little to no idea how to do that. And many of the tools in the current policy tool box are deeply flawed.

Some take this as evidence economists and researchers should focus on other things. This brings us to the second part of my argument, where I make the opposite claim: there is no more important or promising frontier of knowledge. The fact that we know so little, and the tools are so poor, suggests (to me) that the marginal gains from more research are huge. there is no more important place for scholars to spend their time. ...

When my students run rushing in the direction of micro-poverty programs, or randomized trials, I steer them away. Yesterday’s research and policy frontier is tomorrow’s old news. What is the next frontier? I would put money on industrial development and, with it, a new breed of industrial policy.

Some of the most interesting development research is coming from people swimming ahead of this wave: Eric Verhoogen, Nick Bloom, David Atkin, David McKenzie, Dani Rodrik, Ricardo Hausman, the authors of this post’s paper, and a slew of others. I haven’t seen the same swell in political science, but surely it will come.

Alex Smith:

Don't forget that the US government had industrial policy back in the 19th century - railroads, 20th century - highways. 21st century - green energy?

cm:

What about "defense"? Looks like a winner to me ...

Tao Jonesing:

The government has had an industrial policy for almost three decades now that has made the FIRE sector the clear winner at the expense of the manufacturing sector.

While we don't have an explicit industrial policy, we do have one that is de facto.

[May 08, 2012] Jesse's Café Américain Bill Black Austerity During a Serious Recession Is Economically Insane - A Warning From History

"The German’s and the ECB are not demanding any sacrifices from European elites. They explicitly target the working class and government workers’ wages and oppose any increased taxation of the wealthy. The Berlin Consensus is a road map to ever greater inequality."

Bill Black

"Thank God the US opted for bailouts and not handouts...People in economic distress should suck it up and cope."

Charlie Munger

I will not mince words with this. I see a world on the brink of war, for all the same old reasons. It will take many forms political and financial, at first civil and then regional. If this does not resolve the situation then the conflict will expand and continue by other means.

The elites' price for peace will be a world without borders, or at most three or four spheres of influence, under their direct control and planning.

Appeasement will only serve to inflame their lust for power and dreams of domination. They see themselves as moving from victory to victory. The tide of reform is being turned aside by special interests, compromise is viewed as ideological impurity, and legitimate protests are met by not by recognition and justice but by indifference and repression. This will not stand.

"The technetronic era involves the gradual appearance of a more controlled society. Such a society would be dominated by an elite, unrestrained by traditional values. Soon it will be possible to assert almost continuous surveillance over every citizen and maintain up-to-date complete files containing even the most personal information about the citizen. These files will be subject to instantaneous retrieval by the authorities...

In the technotronic society the trend would seem to be towards the aggregation of the individual support of millions of uncoordinated citizens, easily within the reach of magnetic and attractive personalities effectively exploiting the latest communications techniques to manipulate emotions and control reason."

Zbigniew Brzezinski, Between Two Ages: America's Role in the Technotronic Era, 1970


In fairness to Brzezinski, the above quotes in context seem more a forecast, and a threat to be feared rather than a prescription to be followed.

[May 08, 2012] In Nothing We Trust - Slashdot

April 23

Hugh Pickens writes "Ron Fournier and Sophie Quinton write in the National Journal that seven in 10 Americans believe that the country is on the wrong track; eight in 10 are dissatisfied with the way the nation is being governed, only 23 percent have confidence in banks, and just 19 percent have confidence in big business. Less than half the population expresses "a great deal" of confidence in the public-school system or organized religion. 'We have lost our gods,' says Laura Hansen. 'We've lost it—that basic sense of trust and confidence—in everything.' Humans are coded to create communities, and communities beget institutions. What if, in the future, they don't? People could disconnect, refocus inward, and turn away from their social contract. Already, many are losing trust. If society can't promise benefits for joining it, its members may no longer feel bound to follow its rules. But history reminds us that America's leaders can draw the nation together to solve problems. At a moment of gaping income inequality, when the country was turbulently transitioning from a farm economy to a factory one, President Theodore Roosevelt reminded Americans, 'To us, as a people, it has been granted to lay the foundations of our national life.' At the height of the Great Depression, President Franklin Roosevelt chastised the business and political leaders who had led the country into ruin. 'These dark days will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men,' said FDR. 'Restoration calls, however, not for changes in ethics alone. This Nation asks for action, and action now.'"

daem0n1x: Re:Thanks, media

Don't forget the indoctrination being performed for decades on the minds of people:

  1. Society owes you nothing;
  2. if you fail, it's your own fault;
  3. Don't blame others for being treacherous, just be smarter than them;
  4. Your coworker is not your friend, he's after your job;
  5. Anything has value only if it has commercial value;
  6. Merciless competition is the natural way, live with it;
  7. If you're not rich, you're useless scum;
  8. . . .

This is not the way our brains were programmed to work. Without a sense of community, we drown in misery. Without trust, there's no community. The USA is a few steps ahead of Europe in this stupid individualistic mentality. Don't expect your country to go anywhere with this.

[May 07, 2012] Fall Out, and Secure For Sea

May 1, 2012 | The Kremlin Stooge

Alexander Mercouris:

Here is an interesting article by Edward Luce of the Financial Times written for the British magazine the New Statesman in which senior members of the US military including the retiring Chief of the Joint Chiefs of Staff tell him that the greatest danger to the US is its debt burden.

http://www.newstatesman.com/international-politics/2012/04/%E2%80%9C-number-one-threat-facing-america-its-debt-burden%E2%80%9D

What is most remarkable about this article is that the analysis of the US’s problems comes from serving members of the US military. Their essential points are

1. That the US has at most until 2021 before it entirely loses what room it still has to manoeuvre or to shape events in its own interests;

2. That the US defence burden is unsustainable and the diversion of resources it involves is undermining the US economy beyond the point of recovery;

3. That the US needs to cut its defence spending radically, withdraw from most of its foreign bases, end its various wars and seek a rapprochement with its major potential adversaries (China but also Russia and Iran), which would logically involve recognising their regional interests and abandoning the effort to meddle in their domestic affairs;

4. That the US should use the funds saved from the cuts in the defence budget to reinvest heavily in its economy and in its science and education base.

It goes without saying that I agree entirely with this analysis. It also goes without saying that I think that there is absolutely no chance what it proposes will be carried out.

marknesop:
“It also goes without saying that I think that there is absolutely no chance what it proposes will be carried out.”

I think the decision will be forced upon the country’s planners, for lack of viable alternatives. The quite understandable pride Americans feel for their huge military will allow it to go on for a while even in the face of decay in other institutions in order to maintain it, but it can’t last. As Kirill has pointed out before, sites that feature “shadowing” of government economic data suggest parameters like unemployment and household income gains are actually much worse than they are portrayed. More and more acknowledgement is coming out that the recovery is really not recovering and the U.S. economy is pretty close to stagnation.

Rather than encouraging moderation, the situation merely reminds the warhawks how little time they have, and increases their belligerence in their haste to get the job done while their will can still be imposed. It’s a strange concept to think that Russia and China might save the west from making a terrible mistake that might leave its legacy irretrievably tarnished. Maybe. And I don’t suppose they will want to do it for nothing, either.

[May 01, 2012] ISM Manufacturing index indicates faster expansion in April

Former Idealist :

march construction spending ... +0.1% ... briefing.com consensus expected +0.5% ... february revised to -1.4% from -1.1%.

Numbers so miniscule don't have any meaning to anyone other than those talking their book.

Former Idealist:

So banksters are slow to kick out homeowner slugs and fast to put them in a new car. Sebastian gives the all clear signal.

Bought a new O-ring for the pool. Same O-ring I buy every spring, $9.99 every year the past 10. This year, $16.99. Ben has blown it again and the collapse will be massive.

These are the good old days.

Sebastian: (in reply to adornosghost ...)

I agree, the ponzi game has more players.

Exactly. Any ponzi scheme is doomed to ultimate failure right from the very start, yet they can go on for long lengths of time. IMO, we should keep that in mind when attempting to forecast when it's all going to go pear-shaped.

Sebastian

Finance_Fan:

KarmaPolice wrote:

Auto workers no longer have that old-time safety net | Marketplace from American Public Media

Quotable:
"Retiree health care benefits are out. So are generous pension plans. And he says wages are half what they once were, down to around $17 an hour. The one bright spot? You can buy a decent house in Detroit for $40,000."

This seems reasonable. Don't you think?

coming to most counties & states soon imho

km4:

Guest Post- Where's The Collateral- | ZeroHedge

Put these two factors together and you get a global economy dependent on debt borrowed against phantom collateral and an American economy in which only the top 10% have credible collateral and income to leverage into more debt. In a sane system, when the collateral vanishes, so too does the debt (writedowns, write-offs, bankruptcy, take your pick). In an insane system, then phantom collateral supports ever greater mountains of debt.

How long do you reckon the insane system we have now will last? The collateral is phantom, but the interest payments are very, very real.

sum luk:

km4 wrote:

There is no reason to panic over our debt now

A TALE OF TWO DIVERGENCES | PRAGMATIC CAPITALISM

ResistanceIsFeudal:

shill wrote:

Operation Twist: New York Fed purchases $4.733 billion in Treasury coupons.

not merely a twist, it's also a squeeze!

[May 01, 2012] Excerpt From 'Debt Generation' - We Are All Kettled Now

For anyone who has never been ‘kettled’ it is when the police at a protest suddenly close ranks and refuse to let anyone leave. You suddenly find you are held against your wishes. The police will not explain why, and they won’t allow any exceptions. You suddenly have no control over what is happening, and no discussion is permitted. A decision made by someone you have never seen now exerts complete and total control over your life. We are all in that position now.
We Are All Kettled Now

30 Mar 09

For anyone who has never been ‘kettled’ it is when the police at a protest suddenly close ranks and refuse to let anyone leave. You suddenly find you are held against your wishes. The police will not explain why, and they won’t allow any exceptions. You suddenly have no control over what is happening, and no discussion is permitted. A decision made by someone you have never seen now exerts complete and total control over your life.

We are all in that position now.

So vast is the debt our government has burdened us with that this one fact will now determine most of the politics of the next decade. Other hopes and desires – the wish for better schools, a better health service, better care for the elderly - will wither in the shadow of the debt repayments. If we are forced to pay back from taxes all the vast sums that have been sucked out of public spending and given to the banks, the country will not recover for a generation.

The economic ‘plans’, forced on us without debate, are all based on the banks returning large parts of the money they have taken from us. This means, whether we like it or not, we all have to hope that the banks make profits as quickly as possible. We have all been ‘kettled’ into having to hope and work for the largest possible growth in world trade and finance. We have to hope that the rich get richer, and quickly. The lords of finance and their servants in politics decided this for us.

There never was any discussion or debate of possible alternatives when the financial crisis began. It was declared, and universally agreed (always a bad sign) that the problem was liquidity, not solvency. That meant the only answer ever proposed was to provide liquidity at all costs. Liquidity being our money to cover the massive losses they had incurred. This, we were told, wasn’t really a cost at all, but ‘an investment’. An investment which would pay back all the loaned, borrowed and printed money long before the debts came due through reinflated levels of growth and asset value.

That was, and is, their only plan. And so absolute is the certainty in the minds of all concerned that none of them can even conceive of looking beyond the closed circle of that logic. No counter-argument is allowed or taken seriously. No warning signs are read as such.

Their so-called ‘free market’ has seized control and locked us in to a course of action in which democratic choice has been foreclosed. The growing realisation that this is what is happening will bring about increased anger. The smug reaction to anger is to label it ‘mindless’. The mindless anger of the ignorant who don't understand the necessary steps being taken by those who know better. That is the boiled down assumption of all our leaders, all the economic experts and most economic journalists.

The truth is quite different. People like me are angry because exactly the same people who, in 2008, assumed they knew how to run the global economy still assume they, and only they, know what must be done now. And their prescription is as simple as it is arrogant: put it back they way it was.

We are told that the debts accrued by those in charge must be paid by us rather than honoured by them. No debate.

We are told we must get lending back to the old levels. No debate.

We are told we must get the consumer consuming again rather than saving. No debate.

We are told that we must agree and complete the Doha round of global free trade liberalization. No debate.

To be robbed is one thing: to be condescended to by the people who robbed you is another altogether.

That is why many people like me are angry. We are angry because the financial elite are shoving their ideology down our throats. We are angry because we might have wanted to have a say. We are angry because we had different ideas that were never even considered.

Here we are at the point in history when many of us are looking at the imminent threats of climate change and oil scarcity, clearly seeing the dangers of unbridled growth, and yet at this point democratic choice has been kettled. No debate.

And that is why this crisis is no longer just about lack of confidence in the markets: it is now about the legitimacy of our governments. The entire political class has been captured by the same ideology. They all, to one extent or another, believe ‘the market’ is going to save us. No other solutions have even been allowed into the debate.

We shouldn’t waste our time arguing over which party is most to blame. All the parties and the economists and the City boys all agreed, and they still do. In their minds the banks had to be bailed out and their losses made ours. We were taken to war without discussion and on false pretences; the same has happened with this financial crisis. So enough of who is to blame: they all were and are.

They all believe in a system that says we must create demand and then feed it with debt. This necessarily involves increasing demand by the creation of yet more debt. It always crashes and always will. That is how their system works. If we allow it to be the solution, it will create another crash and another. Each time the rich will reap profits on the way up and rape the public purse on the way down. It's win, win for them and lose, lose for us.

Plus ça change!

Debt Generation - By David Malone

 



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