Softpanorama
(slightly skeptical)
Open Source Software Educational Society
May the source be with you, but remember the KISS principle ;-)
Softpanorama Search
|
Softpanorama |
May the source be with you, but remember the KISS principle ;-)
Softpanorama Search
|
About this page see: About "On the Road to Frugality Island". Like modern financial alchemists this blog tries to exploit the second derivative (comments on the blog posts) of infospace ;-)
I think many IT professionals including myself are still living in a fool's paradise and have yet to understand the gravity of the economic crisis.
There is only one measure of the health of an economy: how many fulfilling, living-wage jobs are created or destroyed (most other factors can be distilled to this.) In this area we should expect frugal future. For many educated professionals (including IT specialists) markets are shrinking, not expanding. Unemployed or underemployed, they need to learn to live on lower cash flows... Many, especially those over 40 might not be able to find full time jobs. And I know from personal experience that it's very hard to adjust your lifestyle down.
The word "Recovery" is seldom defined. If it means a return to the recent past, it will never happen. Structural changes including structurally high unemployment are inevitable. Companies will be keeping fewer employees for any particular level of sales revenue. Potyomkin village façade of recovery that the administration presents is a fake. It looks like they have nether courage, nor real intention to make any structural changes. As David Einhorn observed in his October, 2009 speech:
Presently, Ben Bernanke and Tim Geithner have become the quintessential short-term decision makers. They explicitly “do whatever it takes” to “solve one problem at a time” and deal with the unintended consequences later. It is too soon for history to evaluate their work, because there hasn’t been time for the unintended consequences of the “do whatever it takes” decision-making to materialize.
During difficult times like current a lighter look on the whole situation is very important. See Financial Skeptic Humor. Among them:
|
|||||||
| Note:
If you got to this page without visiting
Naked Capitalism
(and clicking on some advertisement in appreciation of the intellect
of Yves Smith), please do it right now... Yves Smith' s blog
really was a crown jewel of economic blogosphere (Note: Feb-Oct
2009 it was temporary filled with "helpers" posts as she was writing
a book) !!! If you are an Amazon customer, please, please buy your Amazon items using links from Yves Smith' s blog... |
| 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 |
There are no markets anymore, just interventions
November 18, 2009 | FT.com Money Supply
A report published by MIT suggests the world faces a uranium shortage from 2013. So, a few excel spreadsheets later, we have a rough-and-ready Vulnerability Index for you. Most vulnerable, by our reckoning, are France, Japan and South Korea. Most secure are Australia, Kazakhstan and Uzbekistan. More here.
" I think Paulson was a disaster where Geithner is just a mediocrity..."
The economy needs more help from the government, but it's unlikely to get it:
The Big Squander, by Paul Krugman, Commentary, NYTimes: Earlier this week, the inspector general for the Troubled Asset Relief Program ... released his report on the 2008 rescue of the American International Group... The gist of the report is that government officials made no serious attempt to extract concessions from bankers, even though these bankers received huge benefits from the rescue. And more than money was lost. ...Throughout the financial crisis key officials — most notably Timothy Geithner... — have shied away from doing anything that might rattle Wall Street. And ... this play-it-safe approach has ended up undermining prospects for economic recovery. For the job of fixing the broken economy is far from done — yet finishing the job has become nearly impossible now that the public has lost faith in the government’s efforts, viewing them as little more than handouts to the people who got us into this mess.About the A.I.G. affair:... why protect bankers from the consequences of their errors? Well, by the time A.I.G.’s hollowness became apparent, the world financial system was on the edge of collapse and officials judged — probably correctly — that letting A.I.G. go bankrupt would push the financial system over that edge. So A.I.G. was effectively nationalized; its promises became taxpayer liabilities.But was there any way to limit those liabilities? After all, banks would have suffered huge losses if A.I.G. had been allowed to fail. So it seemed only fair for them to bear part of the cost of the bailout... Indeed, the government asked them to do just that. But they said no — and that was the end of the story. Taxpayers ... ended up honoring foolish promises made by other people ... at 100 cents on the dollar.Could things have been different? ... Major financial firms are a small club, with a shared interest in sustaining the system; ever since the days of J.P. Morgan, it has been common in times of crisis to call on the big players to forgo short-term profits for the industry’s common good. Back in 1998, it was a consortium of private bankers — not the government — that put up the funds to rescue the hedge fund Long Term Capital Management.Furthermore, big financial firms ... can pay a price if they act selfishly in times of crisis. Bear Stearns ... earned itself a lot of ill will by refusing to participate in that 1998 rescue, and it’s widely believed that this ill will played a major factor in the demise of Bear Stearns itself, 10 years later.
bakho:
Eric:I am not sure why PK mentions Geithner but not Paulson and Bush.
Paulson had an original plan that was even worse than TARP.
This is after all the BUSH BANK BAILOUT. Had it happened six months later, we could have had a very different response.
Now that BIgFinance has stabilized, it would be nice to have Obama bring in an honest to god labor economist. He doesn't have a labor economist in a top position. That may be why he is not getting the best advice on JOBS.Obama is so far to the right on fiscal policy that he has Centrist Republicans running his financial policy. The Republicans are even farther to the right, somewhere in the Gamma Quadrant.
Josh Stern:The single concerted effort to stop the bailouts was by the Republican members of the House, with some Democrats to be sure. McCain was publically excoriated because he showed some hesitation during the events of September 2008. You're right that Paulson was Secretary of the Treasury and Bush was President when this came down, but the Democratic party in Congress, definitely including then Senator Obama, was more lockstep in favor of bailing out Wall Street than the Republicans were.
in reply to bakho...
I've had more or less the same thoughts.
Geithner's argument for why he didn't push haircuts for AIG creditors is because Paulson had already announced the bailout AIG, which meant paying the creditors (some of whom were TARP recipients), and they told him they had been counting on getting paid in full.
It would be good politics for Obama to can Geithner for the reasons you give. Obama could remind people that when he was picking his cabinet the economy was in free fall, people were scared, and the imperative was to do whatever necessary to stabilize things. Now that most things have stabilized and Wall Street has had an unexpectedly quick asset and profit recovery, people second guess what was actually needed in the crisis. He could then say whether or not people want to give him any credit for achieving stability, it's time to turn the focus to improving conditions for U.S. workers and domestically hosted industries, so therefore he is announcing new appointments.
On merits, I think Paulson was a disaster where Geithner is just a mediocrity, but a change there could help both materially and politically.
kharris:
bakho,
While as a matter of history, TARP and the general notion of leaving banks notionally in private hands no matter how much public money pours into them is a Republican legacy, it is now up to Democrats to deal with our problems. The push-back from right-wing partisans on the way to an Obama administration was to claim that the people who had it right (as Krugman did have, regardless of whining to the contrary) were merely partisans and wouldn't equally take Democrats to task when the time came. Krugman is, forgive the cliche', speaking truth to power instead of keeping score. Partisan thugs are proven wrong, and there is virtue in that.
Now, keeping score is necessary if we are going to avoid picking leaders based solely on demagoguery, but it may be a good idea to keep our score-keeping apart from our current policy critique.Fred C. Dobbs:
Ok, so you were maybe expecting FDR, but instead we got Herbert Hoover. Go figure!
naked capitalism
...there are a lot writedowns in residential real estate still coming. This is one reason bank credit is not going up significantly despite zero interest rates. Remember when I wrote about “extend and pretend?” This is the kind of thing that is holding up bank balance sheets. The article I wrote in October on short sales in North County San Diego highlights the issues involved. But at some point banks will have to take the hit (unless house prices magically go up to near previous levels – what everyone except renters wants).
Ivy Zelman has the same sinking feeling I do here; we don’t think house prices are necessarily heading up permanently. She even throws in a mixed metaphor to get her point across. She says:
I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down.
Look, the fake recovery is now in full swing. But I expect the recovery to hit a brick wall by 2011, if not earlier. While the proximate cause of my concern is the likelihood of increased taxes and/or reduced spending by the Obama Administration, it is jobs that concern me. See Calculated Risk’s post showing the correlation between unemployment and mortgage delinquency and you see the connection. The fact is we have a record number of foreclosures and that is a direct result of rising unemployment. Unemployed people don’t have any money, so they don’t pay mortgages. It’s as simple as that.
The interesting bit about the New York Times article was this:
The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.
S:
it is refreshing to see you refer to it as a fake recovery. Perhaps we ought to stop debating the symptoms and start to challenge the orthodoxy of the ivory tower. Perhaps the best starting point is the low rate job nexus. it would be fascinating to know how a decade of below average rates and no job growth comports with the fallacy that low rates means job creation. It doesn’t and hasn’t and it won’t. Maybe just maybe the place to start is rethinking trade dogma for a new age.
One can only laugh at Geithner casting aspertion on the “previous” administration. Yet another reminder of how seriously bankrupt is the collective, economically and politically.
November 19 2009 | The Automatic Earth
More interestingly, perhaps, are two reports this week, in which financial giants Goldman Sachs and Société Générale, separate from each other, reveal that their view of the immediate future is not nearly as fine and benign as you may think. Société Générale singles out private and public debt as the possible instigator for economic collapse, and tells clients that sovereign bonds will get them good returns. Goldman simply bets heavily against financials and against gold!.
Where the two diverge is in their view of the dollar: Société Générale sees it plunge further, whereas Goldman Sachs sees the opposite. And as much as it may chagrin us to agree with Goldman on anything at all, we do when it comes to the US dollar. We think of it as sort of the wounded crippled last one standing when the first smoke will begin to clear and the bodies are carried out. We don't doubt that oil and gold have very good odds for a strong comeback down the line, but they are not the obvious choice in a situation such as the one we see coming short term.
What we see is not gold vs. the USD or oil vs. the USD. We see risk versus the US dollar. Investors have not been risk averse the past months. And they still are not (yet). And stocks are up, and gold is up, and so is oil. And the dollar is down.
Risk versus the US dollar. If one goes down, the other goes up.
We think that right there you can see what will happen when investors and speculators and everybody else except for a few bravehearts will want to get away from risk, lose their appetite. At that point, it'll be either risk or the dollar. If you think investors will want to take on additional risk, in the face of the numbers on housing and jobs and CRE, a bet against the dollar makes sense. If you don't, that bet, in our view, makes no sense.
Jesse's Café Américain
“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank
examiner for the Office of the Comptroller of the Currency. “At the height of
the economic boom, to take an aggressive supervisory approach and tell people to
stop lending is hard to do.” Post Mortems Reveal Obvious Risks at Banks, NY TimesWell, the boom is over, so what about now?
>The current notional value of derivatives on US commercial banks’ balance sheets is $203 trillion. 97% of these ($196 trillion) sit on FIVE banks’ balance sheets, according to a recent report from that very same Office of the Comptroller of the Currency.
>It is obvious from this report that Goldman Sachs is by no means a bank, and deserves no consideration as such. It is a hedge fund. In general, Wall Street is out of control.
>
Today's testimony by Timmy Geithner in front of the US Congress is interesting to watch. It serves to reinforce my opinion that the Administration is incompetent, caught in old solutions and the status quo, and that the Republican alternative is morally and intellectually bankrupt, given to demagoguery, and owned by a similar but slightly different set of special interests.
Most of the congress are indifferent to the interests of the American people as a whole, whether through self interest or mere cravenness, despite their occasional histrionics for the cameras. It is remarkable how they can act as outraged bystanders, when they have long been at the heart of the corruption and decline. It is their job to manage the government. They have classic American CEO amnesia and 'incredible denial.'
The key to a general reform has long been campaign finance reform and a reduction of lobbying payments and campaign contributions as soft bribes to Congress. As the banks cannot regulate and reform themselves, at least according to John Mack's recent advice to the American people, so the Congress and the federal government seem incapable of reforming and managing themselves. If one does it, they all want to do it, and in some ways they must to be competitive, if the administration of justice creates selective exceptions.
And too many in the States are yearning for a strong leader, someone who will tell them what to do. A great man, who will exercise authority with a directness and little or no discussion. Someone who will 'put things right.' The primary question seems to be less policy than fashion, whether to wear brown shirts or black, and whether torchlight is too 'retro.'
On a brighter note, the Noveau beaujolais for 2009 is rather nice, dry almost to a fault, but not too tannic. A little more 'fruitiness' would have been a highlight.
Equities are floating on thin volumes and thick liquidity.
It may float further, and await any event to end this rolling top and spark selling.
Here is Steve Meyers view.
Ted K
IF (I say IF) the rumors about Geithner asking for Sheila Bair’s firing are true, it’s obvious the guy not only is working for big banks’ interests, but he is out to destroy those who care about Main Street people. This story reported recently by Mary Williams Walsh of NYT is also reason to question what Geithner’s REAL AGENDA is. http://www.nytimes.com/2009/11/17/business/17aig.html?_r=1&dbk
Whose side is Geithner on??
Bayard
Simon, this is exactly the thing that Congress needs to hear. The problem is that they need hearing aids to do so. Thusfar they have turned their deaf ears (both of them, all of the time) to such congent testamony in favor of supporting the oligarchy/plutocracy in which they willingly, nay, gleefully participate. The way things are going, by the time (a couple of years) passes until the next dam burst, they are likely going to be out of office, and so why try to do the right thing now and cost them valuable private sector careers after they leave Congress.
The oligarchs will continue to support (oops, bribe I meant) their way to further prosperous differentials until then, and carefully send their ill-gotten gains to parts of the world less likely to fall as we will.
I would love to see some strong leaders in the administration and Congress act on even a little of the good advice that you and many others (Stiglitz, Ferguson, Volker, et al) have offered up, but thus far the public hasn’t spoken loudly enough to conquer the Congressional deafness, and, even if that happens, I believe that many of them know, or believe that their days of glory on Capital Hill are numbered.
I don’t ever speak of violence as a solution, but I guaranty you that if the high rate of unemployment continues, their will be many within out borders who will be thinking of violent solutions, as many already are.
November 19th, 2009
As long as I am here in Europe, I might as well give you some flavor of what has become known as Recession Porn: The most dire forecasts expecting the most egregious outcomes.
Today’s “Crisis Porn” comes to us via Société Générale by way of the UK’s Telegraph, and its Pretty grim:
“In a report entitled “Worst-case debt scenario”, the bank’s asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems.
Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of “deleveraging”, for years.
“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.
Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.
Note that the report is a “worst case scenario.” That’s your recession porn for the day . . .
call me abab:“In an economy full of losers, everyone is fixated on hating the winner.”
wow- what a douchbag- would Goldman “suck off the government” Sachs- be in business right now w/o taxpayer assistance and inside “sweet” info to guarantee almost 100% trading success-
those ass holes could burst in flames and i would not do one thing to put the fire out
Through the Looking Glass Says:
I just finished listening to the 1994 tape version of The Creature from Jekyll Island. Its amazing how prophetic it is . It explains everything going on today in the financial system to a T. I encourage everyone to listen to this or buy the book . Its basically the bible for the plutocracy, you know, its god’s work outline.
When you have an hour to sit in a quiet place put it on and listen will full attention. I wish I had remembered it last summer . I would have seen that I forgot the blueprint but they didnt, all a part of their cyclical plan.
http://video.google.com/videoplay?docid=6507136891691870450#docid=-8484911570371055528
Pass It on.
HarryWanger :
Nothing stokes the fire like some GS talk. They are the winners – they are, after all, doing God’s work. Like money missionaries. We don’t hate them for that. How could we? If all those lazy unemployed folk would get off their asses, get accepted to Harvard, graduate, preferably with a law degree, and get a job with God’s chosen company, they too can be winners. See it’s that simple.
Me, I’ll just sit out here with all the losers, watch the chosen stock price and maybe see if it bounces once it hits that 100 support area. About us simpletons can do when you don’t have a direct line to the Fed and Treasury Secretary to phone up when money gets a bit tight.
NYTimes.com
Nearly one in 10 homeowners with mortgages were at least one payment behind in the third quarter, the Mortgage Bankers Association said Thursday.
“Clearly the results are being driven by changes in employment,” Jay Brinkmann, the association’s chief economist, said on a conference call with reporters. Five million more unemployed people over the last year has turned into about two million more overdue loans, he added.
The association’s delinquency numbers do not include those who are actually in foreclosure, a figure that also rose sharply, to 4.47 percent of all loans. A year ago, it was 2.97 percent.
The combined percentage of those in foreclosure as well as delinquent is 14.41 percent, or about one in seven mortgage holders. About 52 million homeowners have mortgages.
In previous recessions, homeowners who lost their jobs could sell the house and move somewhere there were better prospects, or at least a cheaper lifestyle. This time around, many of the unemployed are finding that the value of their property is less than they owe. They are stuck.
naked capitalism
mmckinl:
Obama is exactly half right …
Debt is the problem … but not government debt. The problem is the bad debt that isn’t being reconciled by banks, specifically Wall Street Banks.
Naked Capitalism has covered this topic continuously for well over a year, calling for de-leveraging of bad debt in the private sector.
It is this unreconciled bad debt that will pull the economy down by sucking good capital into the black holes their accounting tricks call balance sheets.
Obama has truly been captured by the banksters thinking and it will spell Japan style economic misery-stagnation for a decade or more, ballooning the US, state and local deficits because of the drop in tax revenue and business activity.
I see no way out unless we get radical change in the way we do business and government … But the big money is pressing Congress and the White House to do what is in the best interest of the very criminals that got us here.
Ed:
Sigmaseek:Someone here or on another blog pointed out that a factor usually missing in these articles is that the US ran large deficits and had a large amount of government debt BEFORE the recession or depression. This is quite different from the scenario during the 1930s when Keynes was writing, and changes things significantly.
People look to the history of US policy during the Great Depression, but the US was the world’s creditor at the time. The country that is in a similar situation to the 1930s US is now China. The current US situation approximates that of 1930s Britain. But then 1930s Britain didn’t try to outspend the other countries in the world combined on defense.
The difference between private and public credit is that typically private credit has to be secured by something tangible and public credit is secured by claims on private assets and the future productivity of taxpayers. Adding public domestic credit on top of private domestic credit just runs up the credit on what are already leveraged private domestic assets. There is a limit on interest paying capacity of assets as we are now seeing.
The government has been capitalizing interest since Bush took office and it has only gotten worse with Obama.
If the government were private it would have had its credit cut off long ago, but since tax levies are senior to any bank credit it gets the ok to crowd out private credit. As your equation goes, Foreign sources of capital is the only source of credit as the private assets and thus the private credit is getting market to market. The foreign claims on public/private assets are therefore declining in value. Public debt repudiation or default are the only answer to any sustainable recovery despite the financial engineering the Fed is undertaking.
So it’s clear to me that you obviously have no idea how our credit system works. Someone’s gotta pay until they can’t or there’s nothing backing the credit.
pebird:
“If the government were private it would have had its credit cut off long ago …”
by whom, that other government (the banks)?
Public debt is used for interest rate and exchange rate maintenance and political reasons – that’s it. There is NO future claim on taxpayers or the unborn. The only constraint is the real capacity of the economy to produce goods in demand.
If foreigners don’t have the dollars, they can’t buy the debt – it’s just a way to sop up excess dollars – it is NOT a financing mechanism at all.
With what do you think China buys US debt? Yuan? No, they have excess dollars and they want to maintain a currency peg. They could spend the dollars (which would be great for the US but would blow their peg), or they can buy Treasuries and use them as collateral and get some leverage when they borrow to purchase raw materials and goods, and still maintain the peg.
What happens when the Treasuries mature? – we rip up the bond and give them back their dollars with some interest. Big deal, they will probably roll over to new Treasuries anyway.
So the world population has increased by almost a billion people in the last 10 years. World GDP has increased from 30.5 trillion 1999 to 60.5 trillion USD in 2008. And everyone is upset that the world’s reserve currency government debt has gone up from 5.7 trillion in 1999 to 12 trillion USD today during a financial crisis. Why? Are we going to run out of numbers? Ooooooh, scary.
So there is going to be a run in the dollar? To what? The Euro? The RMB? Yen? Gold? Are countries going to start trading in physical gold instead of electronic account balances?
The TOTAL money (government and banking) in the system has been drastically reduced over the last year. Everyone looks at the “big” government spending but doesn’t complain about the bigger private banking non-spending.
This debt hysteria is out of control – it’s a political attempt to keep the Administration hamstrung and to NOT engineer a recovery – the banks would rather foreclose on real property than be paid back – remember the loans they made were garbage – and they were fully aware they were toxic. To be paid back with real property (real estate, commercial buildings, businesses) at “pennies” on the toxic debt dollar is the steal of the century.
lark:
Obama at times seems like the “mainstream media” in giving equal time to right and left approaches, even though we tacked right for decades and we are exactly here, right now, with Obama as president, because the right wing ideas have failed.
Thus we get tax cuts as stimulus. “Strong dollar” rhetoric. No aggressive pro-jobs policy. Bailouts for Wall Street insiders. No action on making it easier to unionize. Weak action to help homeowners facing foreclosure.
Now, in the midst of a collapse in demand and soaring unemployment, he tells us he’s worried about the deficit. Thanks, buddy.
It’s always time for takeaways for the working folk and giveaways to the rich in this country. I am sick of it.
This weak gruel is Reagan lite. Not what I voted for.
Seeking Alpha
I'm not saying the stock market will crash, only that if it had any relation to the real U.S. economy that it should crash, and soon.
The current politics of experience is so warped by misleading statistics and orchestrated propaganda that it feels strange to state the obvious and find it is "that which cannot be spoken" -- the credit-dependent, consumer-dependent U.S. economy is going down, and going down hard, and the trillions of dollars borrowed and spent by the U.S. government and Federal Reserve to crank up a recovery have failed completely, utterly and totally.
The basic idea of Keynesian policy is simple: when the wheels fall off the private, quasi-free enterprise economy the government borrows and spreads mountains of money around like fertilizer which will stimulate "green shoots" of recovery.
The forgotten key to successful Keynesian policy is a government should not have been borrowing and spending trillions of dollars during an era of so-called "prosperity." When a government like that of the U.S. has been propping up "prosperity" with trillions in borrowed money for a decade, then doubling or tripling the "stimulus" in the hopes that the green shoots will be enduring is truly farcical.
If the economy needed several trillion dollars in deficit spending to eke out the meager jobless growth of 2001-2007, then why does anyone think that doubling or tripling that deficit spending will create an enduring boom?
The truth is the U.S. economy has been dependent on Federal stimulus for years, both the indirect stimulus of artificially low interest rates and unlimited liquidity, and the direct spending of hundreds of billions of borrowed dollars.
Even before the financial crisis, the Federal government was borrowing and spending $400 billion a year to prop up "prosperity." All that spending simply papered over the rot at the core of the economy:
1. The primary support of the U.S. economy is consumer spending which is ultimately based on household income and assets.
Earned income has been flat to down for most Americans for years. The median income has been skewed upward by the top 10% whose earnings have risen significantly. According to the Bureau of Economic Analysis, real disposable personal income-- income adjusted for inflation and taxes--declined 3.4% in the third quarter after increasing 3.8% in the second quarter.
In an economy dependent on consumer spending for 70% of GDP, how can GDP rise by 3.5% while personal income plummeted by 3.4%? Assuming that boost in GDP is real and not just statistical legerdemain, then where did it come from? From borrowed money, of course-- the Federal government borrowed and spent over $1.4 trillion in fiscal 2009.
In the good old days of 2002-2007, households would have borrowed and spent hundreds of billions as well. But the consumer, beset by declining assets ($13 trillion lost in the past two years), declining income (see above), falling housing values and worrisome employment trends (17% unemployment/underemployment, broadly measured), is actually cutting back on borrowing. (Revolving Consumer Credit Drops 13.1% in August.)
Consumer credit decreased at an annual rate of 5-3/4% in August 2009. Revolving credit (credit cards) decreased at an annual rate of 13%, and nonrevolving credit decreased at an annual rate of 1-1/2% --the longest decline in consumer debt since 1991.
So while households are still burdened with almost $2.5 trillion in credit card and nonrevolving debt (auto loans, etc.), they are paying debt down, not adding more.
And let's not forget that homeowners pulled out about $5 trillion in home equity in 2001-2007, and the home equity ATM is closed for good. That brings us to:
2. The primary asset in most U.S. households is a home, and home values are still dropping, foreclosures are still rising and the only force keeping the market from falling faster is the Federal government's de facto nationalization of the entire U.S. mortgage market.
Of the $1.5 trillion mortgage securities issued in 2009, a mere 1% ($15 billion) have been issued by banks; 99% are backed by the government. The government owns over half the nation's $10 trillion in mortgages via its de facto ownership of Fannie Mae (FNM) and Freddie Mac (FRE), and it has guaranteed virtually all the mortgages originated in the past year via FHA or VA.
The residential mortgage market is now effectively owned lock, stock and barrel by the Federal government and its private "central bank," the Federal Reserve.
Should the Fed and Treasury reduce their subsidies (that wonderful $8,000 giveaway tax credit to new home buyers or anyone claiming to be one), guarantees and outright purchases of mortgages ($1.2 trillion this year alone), then the mortgage market would instantly freeze up or start pricing in the very real risk that housing is not "recovering" and that anyone holding a mortgage could suffer huge losses if real estate continues declining in value.
Here are a few charts to ponder:
3. So how have companies "surprised" with higher profits? By slashing payrolls, R&D and various accounting tricks. Actual revenue growth is missing in action. So how do you keep "surprising to the upside" after you've slashed headcount, burned R&D and turned every accounting trick in the book?
You don't. A stock market rising on the hopes of an actual, real, tangible recovery in household income, home equity and creditworthiness is seeing mirages and hallucinating that the lake just ahead is deep and wonderful and stretches to the horizon.
Only we never reach the "lake," do we? "Stabilization" is a chimera; the reality is the government is propping up the economy via unprecedented borrowing and spending, and there is absolutely no evidence that private capital, credit or spending are rising from the "stabilization."
We are walking through the desert, kept alive by the sugar-water drip of Federal stimulus, guarantees and subsidies. The "so near, yet so far" mirage of "recovery" has been propping up the stock market for nine months, and when a slight breeze blows away the thermal illusion, then the market will crash back to the March lows, or perhaps even lower. That crash will simply reflect the state of the real economy.
MarketWatch
It's coming in 2012: Another, bigger meltdown of Wall Street's "too-greedy-to-fail" banks. No, this is not another fanatical warning about that Dec. 21, 2012 end-of-days prediction based on the Mayan calendar, though you may well ask "Who will survive?"
Here is what's happening: History is repeating itself. Wall Street's soul-sickness is setting up a new meltdown. Dead ahead. Be prepared.
Since 2000, my columns have covered many warnings of major debt accumulation, market meltdowns, and the psychological failings of Wall Street's greedy, myopic brains. Last June we summarized 20 predictions made between 2000 and 2007 warning of a subprime meltdown coming. Oddly, no one seemed to be listening to all the warnings from leading minds like Buffett, Grantham, Gross, Faber, Shilling, Roubini, Fed governors, and many more. Was that a repeat of 2000 with no one listening?
Suddenly it hit me: It's just the opposite: Everyone is listening and everybody knew a crash was coming -- but we were in a trance, including Washington's bosses. Bernanke, Bush, Paulson, Greenspan all heard it. So did Wall Street, and Main Street.
Unfortunately America's collective brain was addicted to the adrenaline rush of gambling in a risky bull. The euphoria is intoxicating. We were caught up in a game of musical chairs, squeezing out every last dollar of return, blind to the catastrophe ahead until caught by surprise. Unfortunately, Wall Street lacked a moral compass and stole trillions from American taxpayers. Today, the only lesson Wall Street has learned is "greed is good." Now the beginning of the end has become a moral tragedy that is setting the stage for an implosion of Wall Street, capitalism and our economy circa 2012.
Everyone's still listening, still in a trance
Yes, another meltdown is coming; it's inevitable. This time, I've decided to do more periodic updates -- a watch list of alerts, warnings and predictions. Just like the updates done for over a decade, except this time we're more aware that few in power will listen, not Wall Street, not Washington, not Corporate America. But you must.
Recently a bright idea came to me: a new way to present these predictions. My wife was working all day at a hospital in Templeton, Calif., so I parked myself in the Café Vio in nearby Paso Robles, with two huge briefcases of research files on bubbles, debt, derivatives, behavioral economics and lots more. While trying to make sense of the materials, the headlines themselves started telling a fascinating story. Here's an edited montage of their staccato warnings. Read fast and "feel" the message:
Financial Times: "Second Great Depression [is] still possible."
The economy's "spiral is captured in a Titanic metaphor ... unsinkable."
BusinessWeek: "Next bubble could come sooner than you think."
From Reinhart and Rogoff: "This time is different." But it never is.
Bloomberg: "Citi's 'near death' hoard signals lower profits."
Citi hoarding $244 billion in cash "as if another crisis were on way."
Wall Street Journal: "Three decades of subsidized risk."
Gasparino's "The Sellout:" Greed, mismanagement killed financial system.
SeekingAlpha: "Crisis lessons forgotten in new speculation."
We prop up trash stocks Fannie Mae, Freddie Mac, AIG; learned nothing.
USA Today: "Wall Street bailouts ... business as usual"
Warning: "Too big to fail" protections guarantee another crash down the road.
Boston.com: "Why capitalism fails ... why it will happen again."
Economist says American capitalism "contains seeds of own destruction."
MarketWatch: "Einhorn bets on major currency 'death spiral.'"
Hedger bet against Lehman. Now against dollar. Says "break up too-big-to-fail" banks.
Forbes: "Be prepared for worst ... repeating Great Depression."
Expect "GD2" says Congressman Ron Paul, author, "The Revolution," "End the Fed."
New Republic: "Next financial crisis coming; we made it worse."
Former IMF economist: "Bernanke soft landing, sowing seeds of next crisis."
Wall Street Journal: "The economy is still at the brink."
Moral hazard: No CEOs of failed banks indicted ... even paid millions.
BusinessWeek: "What happens if the dollar crashes?"
Trade wars break out, banks collapse. Cheap dollars are killing us.
Pimco Investment Outlook: "On the course to a new normal."
Gross's "new normal:" spending, stocks down, savings up, banks riskier.
Economix, New York Times: "Finance gone wild."
Simon Johnson: Wall Street's "pathological" power over Washington.
Vanity Fair: "Wall Street lays another egg."
Ferguson: "Math models ignored history, human nature," failed, repeating.
Clusterstock: "10 bubbles in the making."
Fed's toxic debt, gold, emerging markets, ETFs, China, securitization, more!
Rolling Stone: "The great American bubble machine."
Taibbi: Goldman's a giant vampire stealing trillions with "gangster economics."
Temasek Hedge: Roubini predicts bubble, hates equities.
Economist sees "bigger bubble than before" as Fed wastes taxpayer trillions.
CNN/HuffPost: "Wall Street made mess, big bucks on clean-up."
Michael Lewis says "they're too powerful ... we're in for day of reckoning."
Vanity Fair: "Wall Street's toxic message: capitalism failed."
Stiglitz: Wall Street writes self-serving rules, puts global economy at risk.
MarketWatch: "Wasting our chance to fix the banking system."
America's got a "banking system that's just a ticking time bomb."
Mother Jones: "Could cap'n'trade cause new meltdown?"
Yes, and Goldman sees huge profits if this $1 trillion market is created.
Fortune: "We owe what? The next crisis, America's debt."
Yes, "chronic deficits are putting America on the path to fiscal collapse."
Time: "America and its deficits: Are we broke yet?"
Justin Fox, author, "Myth of the Rational Market:" "We'll soon find out."
HuffPost.com: "Main Street jobs? First kill Wall Street jobs."
"Looting of America" author: Wall Street got rich destroying Main Street.
The Nation: "Creative destruction on Wall Street."
Greiner: They treats problem as "psychological," solved by "happy talk."
Kiplinger: New black swan triggers next financial crisis.
Money manager Bob Rodriquez: "Next bubble already growing."
The Atlantic: "Why Wall Street always blows it."
Blodget learned a lesson, but Street chief executives still clueless, no lessons learned.
Questions for today: Do you believe a new crash is coming in 2012, give or take a year? Will it trigger the "Second Great Depression?" And how big a factor is Wall Street's greed and lack of morals?
Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC.
"I haven't been this bearish in a year," she said in a live interview. "I look at the board and every single stock from Tiffany [TIF 43.01 0.77 (+1.82%) ] to Bank of America [BAC 15.87 -0.11 (-0.69%) ] to Caterpillar [CAT 60.40 1.62 (+2.76%) ] is up. But there is no fundamental rooting as to why these names are up — particularly in the consumer space."
In a wide-ranging interview, Whitney, CEO of the Meredith Whitney Advisory Group, also said:
She was disappointed that Fed Chairman Ben Bernanke didn't spell out how the Federal Reserve planned to exit "the biggest Fed program to date, which is the mortgage-backed purchase program." In a speech earlier Thursday, Bernanke said the central bank was watching the dollar's decline but is likely to keep interest rates low.
The US consumer was going through the biggest credit contraction ever—even bigger than that during the Great Depression. "That credit contraction is accelerating," she said. "There's nowhere to hide at this point."
The banking sector is not adequately capitalized and will need to raise more capital in the coming year.
The residential real estate market is likely to worsen and remains a much bigger threat than the commercial property market. The government's mortgage modification program won't result in any major improvement in homeowners' ability to stay above water, she added.
"I don't know what's going on in the market right now because it makes no sense to me," she said.
"The scariest thing about the Fed's program is that the money on the sidelines isn't going to support that asset class," she added. "So the trillion dollars of Fannie (Mae), Freddie (Mac) and mortgage-backed securities that the Fed is holding—there's no substitute buyer there."
No surprise here: The Federal Reserve Bank of New York, in a desperate headlong rush to rescue American International Group, screwed the pooch. Despite holding all of the cards, cash and power, they still managed to manuver themselves into a corner with “little negotiating room.”So says the most recent audit from the Office of the Special Inspector General (SIG) for the TARP program (full embed here) :
“SIGTARP concludes that: (1) the original terms of federal assistance to AIG, including the high interest rate it adopted from the private bank’s initial term sheet, inadequately addressed AIG’s long term liquidity concerns, thus requiring further Government support; (2) FRBNY’s negotiating strategy to pursue concessions from counterparties offered little opportunity for success, even in light of the willingness of one counterparty to agree to concessions; (3) the structure and effect of FRBNY’s assistance to AIG, both initially through loans to AIG, and through asset purchases in connection with Maiden Lane III effectively transferred tens of billions of dollars of cash from the Government to AIG’s counterparties, even though senior policy makers contend that assistance to AIG’s counterparties was not a relevant consideration in fashioning the assistance to AIG; and (4) while FRBNY may eventually be made whole on its loan to Maiden Lane III, it is difficult to assess the true costs of the Federal
Reserve’s actions until there is more clarity as to AIG’s ability to repay all of its assistance from the Government. SIGTARP also draws lessons that should be learned regarding the importance of transparency andratings agencies had on the AIG bailout.”In other words, the deal that was cut in November 2008 with AIGs counter-party banks resulted in those banks being paid off in full for high risk credit-market bets.
Had AIG gone bankrupt, these firms would have recieved pennies on the dollar. The banks that benefited the most included Goldman Sachs Group Inc., Merrill Lynch and large French banks Société Générale and Calyon. (See table below)
The New York Fed said its goal was to “prevent a system-wide collapse” and not obtain the best deal possible. So they got played for patsies.
Selected comments
bsneath:
There is going to be a revolt in this country as more of this information comes out and as more people lose their jobs, homes, way of life, self esteem, chance to send their children to college, you name it.
It is common for people to want to find someone else to blame for their misfortune. In this instance they will have legitimate reasons, persons and organizations to blame.
I suspect this will get very ugly before it is over, because it will take fear before the greed-entrenched elitist class agrees to make the changes that are needed to save our economy and society.
They can bemoan all they want – with their derogatory indignation -about the rise of “populism” – of a class of individuals who are less than their equals. Before this is over, the populists will prevail. There is simply too much information, too widely available, with too many watchdogs for the elitists to conduct business as usual, behind closed doors, through obfuscated legislation and governmental rules.
The times they are a changing.
bsneath:
So, $40 billion went to foreign banks, $14 billion to Goldman Sachs and $8 billion to other American banks?
Am I reading the chart correctly?
Was it ever made public that nearly 2/3rds of the $62 billion bailout went to foreign banks?
Was it ever made public that Goldman Sachs was the recipient of nearly 2/3rds of the remaining 1/3rd amount that went to domestic banks?
TakBak04:
I remember reading that we had to bailout the foreign banks because they had bought our crap on “good faith” from our ratings agencies.
Paulson and the rest were carrying on that the “Global Economy” would implode. That was the basis for the bailout. At least that’s what I remember reading from articles at the time, and watching CNBC an the House Vote which vetoed the bailout on first round…but Senate sent it back after CNBC caterwalled loudly that the fate of the world was on Pelosi’s shoulders. After it was voted through with Senate pressure, I remember CNBC for a few days was trashing Congress. They shut up and went along with it all once they saw that Goldman got bailed out.
It was a boondoggle. But, one can’t blame the foreign banks for not pressuring us when we sold them crap. Are they culpable in not doing due diligence? Sure…but it was such a mess and web of tangled financial instruments how could they sort it out when to this day, we don’t even know if our banks, the Fed and the SEC have been able to track it all down.
So, it’s good to see the numbers on this, but what good does it do at this point? Until there’s a real investigation (a cold day in hell before that happens) and someone is held accountable what does it matter? Goldman Wins. They have “friends in high places.”
bsneath:
http://www.cnbc.com/id/33972133
Meredith Whitney is calling for a second recession. Credit contraction is accelerating and the contraction will be greater than during the Great Depression, banks will need to raise more capital. Fun Fun Fun
Yahoo! Finance
Excluding autos, October retail sales were up 0.2%, half the expected rise, while September's drop was revised down sharply to 2.3% from 1.5% originally.
These disappointing sales data fit squarely with Gary Shilling's grim economic outlook.
"The whole gist of what's going on [with recovery] is in the hands of the U.S. consumer," Shilling says, and that's a problem for the bulls for three major reasons:
- Borrow & Spend No More: After a 25-year "borrowing and spending binge," the ability of U.S. consumers to borrow (especially against their house) is severely constrained, Shilling notes. After years in which U.S. workers borrowed in order to make up for punk wage growth, we have reached a "watershed" moment on this front, he says.
- Golden Years: The U.S. consumer is in a savings mode and that's especially true of aging Baby Boomers, who are going to be less willing to spend as they approach retirement - especially after the shellacking 401(k) accounts took in 2008.
- Got to Have a J-O-B: Unemployment is an important indicator (lagging or not) more this time around vs. in prior recoveries, according to Shilling.
Add it all up and Shilling says the "V-shaped recovery" is largely a function of "special factors," most notably the government stimulus package and the cash-for-clunkers program. "What do you do for an encore?," he wonders.
In sum, Shilling predicts the holiday shopping season will disappoint investors, prompting them to rethink the idea of a sustainable V-shaped recovery, "precipitating a substantial selloff."
Editor's note:The accompanying video was taped prior to the release of Monday's retail sales data.
November 15, 2009
There’s a book out called “The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis” and before you derisively sneer at what at first sounds like hysterical hyperbole in the subtitle, consider this bit of logic from Josh Kosman writing in today’s New York Post:
“You better sit down,” the secretary says. “I’ve got bad news…”
The Treasury Secretary is talking about private equity. It’s not the private equity firms themselves but the companies they own that are defaulting. During the boom years of 2001-07, private investors bought thousands of US companies. They did it by having the acquired companies take on enormous loans using the same cheap credit that fueled the housing boom. That debt is now starting to come due.
“Considering what we have already been through, how bad can it be?” Obama asks.
Now here’s where things get interesting. In the hypothetical scenario, the writer does not for a minute think that the private equity firms themselves are in trouble (or perhaps he is simply dismissing the importance of them in the equation). Rather, the crisis he is about to allude to concerns the underlying companies owned by these funds, and there are thousands of them:
“Well,” says the Treasury Secretary, “PE firms own companies that employ 7.5 million Americans. Half of those companies, with 3.75 million workers, will collapse, between 2012 and 2015. Assuming that those businesses file for bankruptcy and fire only 50 percent of their workers, that leaves 1.875 million out of jobs.
“To put that in perspective, Mr. President, NAFTA caused the displacement of fewer than 1 million workers, and only a slightly higher 2.6 million people lost jobs in 2008 when the recession took hold.
“A spike in unemployment will mean more people will lose their homes in foreclosure, and the resulting nosedive in consumer spending will threaten other businesses. The bankruptcies will also hit the banks that have financed LBOs and the hedge funds, pensions and insurers who have bought many of those loans from them.”
“Is this bigger than the sub-prime crisis?”
“It is similar in size to the sub-prime meltdown. In 2007, there were $1.3 trillion of outstanding sub-prime mortgages. As a result of leveraged buyouts, US companies owe about $1 trillion.
You’re probably not laughing now. I personally did not have a handle on just how big the world of private equity had gotten but now I’ve got about trillion reasons to look into this stuff.
Do yourself a favor and head over to the Post to read the rest:
Massive Defense Spending Leads to Job Loss
The Center For Economic And Policy Research says Massive Defense Spending Leads to Job Loss.
Defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs."We just marched in we can just march home"Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.
The scenario we asked Global Insight to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low.
The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.
For some reason, no one has chosen to highlight the job loss associated with higher defense spending. In fact, the job loss attributable to defense spending has probably never been mentioned in a single news story in the New York Times, Washington Post, National Public Radio, or any other major media outlet. It is difficult to find a good explanation for this omission.
Please consider Ron Paul on Forbes: Be Prepared For The Worst; On Larry King Discussing Michael Moore"We just marched in we can just march home. Besides, I will win this argument. We are bankrupt and cannot afford it."Ron Paul has it correct."Let's quit this militarism around the world. We are in 130 countries and 700 bases around the world and we cannot sustain these. It's pumped out by the left and the right. There is conservative Keynesianism and liberal Keynesianism which always fails and gives us the financial crisis we are in."
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
A new study from the non-partisan Pew -- "Beyond California: States in Fiscal Peril" -- looks at nine states that the organization asserts aren’t far behind the Golden State in suffering havoc from the Great Recession. The nine, alphabetically: Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin.
Economist's View
...stories of highly profitable banks paying huge bonuses to their executives have also inspired people to think that things are not so bad in the business world. Anger at these profits and bonuses only tends to increase the contagion of the story.
But any such speculative boom is inherently unstable... It was, in fact, an excessive speculative boom in the stock market and the housing market that got us into this financial mess in the first place.
To be sure, governments and multilateral institutions made some reasonable attempts to restore confidence. But they did not “engineer” a recovery. They got lucky, and the G-20, as well as the governments that instituted stimulus packages, are currently in a honeymoon period of apparent success.
Where our still-ailing world economy goes from here is as uncertain as the speculative markets that played such an important role in both the financial crisis and the recovery. We can only wish that formulating economic policy were as clear-cut as, say, mechanical engineering. It is not: a host of poorly understood natural cyclical factors play a role, and so do the vagaries of human psychology.
Josh Stern:The title of the essay have me wondering whether for Shiller, does the primitive "ghost" element map ontobakhoa) the "animal spirits" of behavioral economics or
b) our heavy reliance on the securities markets for setting the direction of the global macro economy?
There are 2 recoveries that are needed. One is the economic recovery. If an economy plummets enough, eventually it will reach a bottom where it can grow again???? This is not a useful insight for our current situation.We have had MASSIVE job loss and the ROSIEST projections are that HIGH UNEMPLOYMENT will continue for YEARS. The task find productive endeavors for available labor until the economy creates enough new jobs. FAILURE to address idle labor is ignoring the HUGE negative effects of unemployment and accepts a massive opportunity cost.
Wealthy elites think it is entirely acceptable to have millions of young people out on the streets with no educational, job training or employment opportunities. The wealthy elites need to think again.
Bruce Wilder:
in reply to paine...
I agree: Mark Thoma is misreading Shiller, who is advocating mildly for modesty, if not exactly prudence (for or against? he doesn't say).
We are looking at the consequences for knowledge and collective action, of failing to exclude, or marginalize, fools and crackpots. Neither Thoma nor Shiller is a crackpot, and neither is inclined to any more than garden variety foolishness. But, economics honors, indeed features, fools and crackpots galore, while our mainstream political discourse is dominated by professional fools, posing as "serious people".
So, even though they don't contribute any text above, John Cochrane and Edward Prescott and Greg Mankiw, David Broder and Robert J. Samuelson and Larry Kudlow, provide contextual fog, that make any sensible conversation extremely difficult.
Thoma has to defend the very concept of an interventionist policy, because it is under constant aerial bombardment.
Personally, I'd like to see Shiller in an extended conversation with, say, Elizabeth Warren.
http://www.pbs.org/now/shows/546/index.htmlThe dubious wisdom of "restoring confidence" by a policy re-inflating asset prices could become the turning point of an enlightening dialectic, if the Hoover Institution and Cato types could be safely ignored.
Shiller's point, that the "success" of such a policy depends on processes with a life of their own, might find useful grounding against Warren's critique, which takes note of declining wages and welfare.
Nov 13, 2009 | naked capitalism
Notice the complete lack of any investigation into fraud in the financial crisis? And notice the flurry of activity to bust insider traders? Yes, insider trading is a serious abuse and should be prosecuted, but that is mere side show compared to the abuses in the credit markets. No one wants to let anyone look under that hood.
Roberspiere:
Yves: “No one wants to let anyone look under that hood.”
The reason is that the past fraud and the present fraud most likely touches high government officials and bankers. The first thing I noticed was how little it was done to investigate fraud. Compare this with the S&L and notice the difference.
This administration (and the previous one) have come to realize that the best way to protect themselves and their crony friends is by not even investigating for wrong doing. I also noticed that this administration was as bad or worst after Obama took office and his first words were: “lets not act in anger” when referring to the bankers. We the people are pretty much screwed…
Hugh:
We used to have these discussions during the Bush years: Was it incompetence or criminality? After a while it became a distinction without a difference. It is all about looting and cronyism. Administrations would rather shoot the messenger and accept the abuses than lose the good PR.
It just goes to how corrupt the system is.
WSJ
I looked as hard as I could at how states could declare bankruptcy," said Michael Genest, director of the California Department of Finance who is stepping down at the end of the year. "I literally looked at the federal constitution to see if there was a way for states to return to territory status."
Nov 14, 2009 | The Big Picture
He expects a further decline in CRE property values next year (office, retail and industrial), but envisions an upturn in 2011.
That’s the good news; The bad news is a “massive repricing of all commercial real estate;” Zisler warns of a “crisis of unprecedented proportions”approaching:
“Of the $3 trillion of outstanding mortgage debt, Randy points out, $1.4 trillion is slated to mature in four years, and he estimates another $500 million to $750 million of defaults. Maturing debt will have a tough time finding lenders. Debt that has been or will be marked to market, he predicts, will render many banks, especially of the regional and community kind, insolvent, since much of the debt is worth half or even less of par value.”
Zisler’s Slide Show was included in the California State Controller’s Office report on the state’s finances; You can download it at their site; more of Zisler research can be found at their own website.
Neil C Denver:
Isn’t $750 million divided by $1.4 trillion only 1/2 of 1%? That doesn’t sound like a crisis. Perhaps he meant $750 billion.
Mark E Hoffer:
“…Lastly, consider the plight of the commercial property arena in Southern California. Distress among the legion of white collar firms has resulted in a hemorrhage of office property thrust upon the market. The region is bleeding enormous office space. Almost 51 million square feet of office space in Los Angeles County, Orange County, and the Inland Empire is now empty. That is more than 17% of the total. The exodus from office buildings that began in late 2007 has actually accelerated during 3Q2009. No recovery there. The anemic business climate continues to take its toll on the commercial real estate rental industry. Vacancies stand as a direct reflection of unemployment. Companies cut back on workers, end leases, and struggle to survive. Some shut down and liquidate.
The volume of idle office space in four counties is staggering. The vacant office space is a mind-bending 1200 to 1300 square miles of vacancy in just four counties of Southern California. The problems in commercial real estate are so huge, that they are hard even to grasp.
Worse, bank losses have yet to hit the balance sheets on such commercial loans. Does an interest rate hike come amidst vast acreage of vacant office space, led by Southern California? Never confuse Wall Street liquidity revival with economic revival.
Copyright © 2009 Jim Willie, CB
Editorial Archive
http://www.financialsense.com/fsu/editorials/willie/2009/1106.htmlSteve Barry:
I will add that bubbles pop at their weakest spots…so while the Federal gov’t thinks they have saved us from the brink with their money printing, I do see on spost that has been left uncovered…state governments…I posted this week an article that 10 states are in deep doo doo, accounting for 30% of the US population…and that list did not even count NY, where the governor stated this week that “We’re going to run out of cash in four and a half weeks. We are going to run out of money. Unless we do something about it, (it will) threaten generations…”
b_thunder555@yahoo.com:
November 14th, 2009 at 11:11 am
Zisler wrote:
“Debt that has been or will be marked to market, he predicts, will render many banks, especially of the regional and community kind, insolvent, since much of the debt is worth half or even less of par value.””
Yes, but only IF Chairman Ben and Secretary Tim don’t get their way and don’t devalue the dollar as much as they hope to. They only have to drop the value of the USD by 2011 to below 50% of what it was worth in 2006/2007, and the debt that’s now worth 50% below par will magically be @par again(in NEW dollars of course.)
And guess what? Ben and Tim will be praised for averting the CRE crash, Cramer will scream about the new bull market (with securities priced in worthless dollars,) and bankers will up their bonuses by 100% in order to “keep up” with bank earnings…. 295million of “other americans” – those who draw most of their income from somewhat fixed salary, pension, social security, unemployment benefits, etc (but not from investments banks, CRE, oil futures trading, or insider tips on penny stocks) will grumble, but will go on.
The new American Sheep… A hurd led by The O-team of Ben, Tim and Larry… praying that Lloyd & Co. continues to do G*d’s work here on Earth…. booyah indeed.
They got the Dollar General IPO out the door and a few more deals were done so its "Mission Accomplished" for Wall Street. The SP 500 looks to be completing a hand off to the retail crowd of overpriced paper in this cycle of the price pump. Time to dump the bids and let it drop, with maybe one more push higher at most to suck in a little more money from the productive economy, or at least what is left of it.
Be aware. This rally is a ponzi scheme thinly disguised even by US Wall Street standards. But do not try and get in front of it, to short it prematurely.
The Obama administration is as asleep at the switch and coopted by its masters in New York as was the prior administration's regulators under Chris Cox, and that is a real accomplishment in a failure to reform.
People forget what the markets were like in the late 1970's when the pits were dead and the average person wanted nothing to do with the US equity markets. The creation of 401k's and more gambling tables like the options exchanges helped to perk things up. This latest generation of jokers will not stop until they have trashed the markets once again.
Expect more token reforms like position limits out of this crew in key commodities, with loopholes big enough for a vampire squid to slip through without inconvenience like the other 'reforms' being crafted by Barney, Tim, Larry, and Chris.
America, what are you becoming?
"How are the mighty fallen, and their devices of empire perished..."
Author of Hoodwinked John Perkins explains why Wall Street CEOs have been engaging in "predatory capitalism", the exploitation of the entire system to benefit a small number of the very rich.
Former economic hit man John Perkins has experienced today’s economic collapse before. The banking industry and sub-prime mortgage fiascos, the rising tide of unemployment, and the shuttering of businesses are all too familiar in the Third World countries where he worked. He was both an observer and a perpetrator of events that have now sent the US – in fact the entire planet – spiraling toward disaster.
The real cause of our global financial meltdown is what Perkins calls predatory capitalism – the mutant form of an economic system that encourages widespread exploitation of the few to benefit a small number of already very wealthy people. A new geo-politics has emerged; today the CEOs of big corporations, rather than governments, control human and natural resources around the globe, as well as politicians and the media. Their arrogance, gluttony, and mismanagement have brought us to the perilous edge. The solutions will not be “return to normal ones”.
The second problem is that losses of 401K investors using stocks (even without self-defeating moves like selling low and buying high) for the last 15 years are substantially higher then the author assumes. My calculations had shown that for 401K investors who started in Jan 1996 and used cost averaging investing 100% in S&P500 underperformed Vanguard stable value fund approximately 30% (assuming today's S&P500 value 1100). For PIMCO Total Return it's even more. That tells us something about Siegel.
If we assume that stable value returns match average inflation, 401K investors who use S&P500 can lose close to half purchasing value of their savings before retirement. So assumption of positive returns (after inflation) in 401K in my view is pseudo-science and assumption of positive returns in S&P500 in case of cost averaging is even worse (Lysenkoism ?).
The article below first appeared in our Washington Post column yesterday. I’m reproducing it in full here because there is an important correction, thanks to a response by Andrew Biggs. I’ve fixed the mistake and added notes in brackets to show what was fixed. Also, I want to append some additional notes about the data and some issues that didn’t fit into the column.Recent volatility in the stock market (the S&P 500 Index losing almost 50% of its value between September and March) has led some to question the wisdom of relying on 401(k) and other defined-contribution plans, invested largely in the stock market, for our nation’s retirement security. For example, Time recently ran a cover story by Stephen Gandel entitled “Why It’s Time to Retire the 401(k).”
However, the shortcomings of our current retirement “system” predate the recent fall in the markets, will not be solved by another stock market boom. The problems are more basic: we don’t save enough, and we don’t invest very well.
We ran several scenarios of what a typical two-adult household that entered the job market last year at age 22 might expect to receive on retirement at age 65 in 2051. For each scenario, we assumed that our household would earn the median amount for its age group every year. We began with data from the U.S. Census Bureau on 2008 earnings by age group, and assumed that real incomes would grow by 0.7% per year (the average growth rate for the 1967-2008 period). According to analysis by Andrew Biggs, medium earners typically accumulate Social Security benefits equivalent to 52% of their pre-retirement income, which comes to $40,265 per year. (All figures are in 2008 dollars.) For our scenarios, we used different estimates of the household’s savings rate and of the rate of return it would earn on its savings. [Correction: I initially used the online Social Security Social Security benefits calculator, which says it provides estimates in "today's dollars," but actually uses wage-indexed dollars. See Biggs's explanation of the difference.]
For the first scenario, we assumed the average economy-wide savings rate of 2.4% over the last ten years (1999-2008) and a real rate of return of 6.3% — the long-term average real return for the stock market. (In his book Stocks for the Long Run, Jeremy Siegel calculates the annual real rate of return from 1871 to 2006 as 6.7%; updating that figure through 2008, we get 6.3%.) At retirement, this yields accumulated savings of $298,064. Today, a 65-year old couple could convert $298,064 into a joint life annuity of $18,467 (we did an online search for annuity rates), meaning that they would receive that amount each year (not indexed for inflation, however) as long as either person were still alive. (Anything other than buying an annuity is gambling that you won’t outlive your money.) $18,467 is only 24% of the household’s income at age 64. Combined with Social Security, the couple would receive $58,732 per year, or a respectable 76% of its pre-retirement income of $77,432. [Correction: Originally this was 59%; all later figures were also 17 percentage points too low.]
Savings were unusually low over the past decade. The current savings rate (first three quarters of 2009) is 3.6%. Plugging this into our spreadsheet, we get an annuity of $28,092 and retirement income of $68,357, or 88% of pre-retirement income.
But this overlooks the fact that people do not earn the rate of return of the stock market. Even assuming that people are investing in stocks, most do so via stock mutual funds which, on average, do worse than the stock market as a whole. For example, in the 1990s the average diversified stock fund had an annual return 2.4 percentage points lower than the Wilshire 5000 Index (which reflects the performance of the overall market). The main reason for this underperformance is that mutual funds have to pay fees to their managers — who, on average, do not earn those fees through superior stock-picking (to put it mildly).
If we use a 3.9% annual return instead of a 6.3% annual return, now our annuity is only worth $15,347 per year, and combined with Social Security our household is only earning 72% of its pre-retirement income. But wait — it gets worse.
The average investor in mutual funds does not even do as well as the average mutual fund. The reason is that investors tend to chase returns. They take money out of funds that have recently done badly and move it into funds that have recently done well. Because of mean reversion (the tendency for trends away from the average to return back to the average), this means they take money out of funds that are about to go up and put it into funds that are about to go down. Among large blend stock funds (the category that includes S&P 500 index funds), research from Morningstar shows that the gap between mutual fund performance and investor performance ranges from 0.9 to 2.2 percentage points, depending on fund volatility. (It can be much higher — over 10 percentage points — for other types of funds.)
Taking an average gap of 1.6 percentage points, our expected annual returns are now just 2.3%. Now our cumulative savings are only $172,853 and our annuity is only $10,709; combined with Social Security our household is only earning 66% of its pre-retirement income.
Now, you can get close to that 6.3% expected return through a simple strategy: buy a stock index fund and don’t touch it. But this has another problem — you are 100% invested in stocks, the riskiest of the major asset classes. Whatever your expected cumulative savings, there is a 50% chance that your actual savings will be lower, and they could be a lot lower.
Since we’re talking about survival in old age, ideally our household would not take any risk at all. The closest you can get to this is to invest in inflation-protected Treasury bonds. 20-year TIPS (Treasury Inflation-Protected Securities) currently yield 1.96% on top of inflation. [Note: In the Post column I used 2.4%, the yield at the latest auction; however, that was back in July, and long-term bond yields have come down since then, so this is the current yield according to Bloomberg.] This provides a final annuity of $9,925; combined with Social Security, that’s 65% of pre-retirement income. That’s not very much. And the only way to get higher returns is by taking on risk.
Bear in mind that we’re assuming that Social Security will be around in its current form, as will Medicare (or else seniors will have sharply higher health care costs than they do today). Also, we’ve made a number of optimistic assumptions along the way: that life expectancies do not increase by 2051 (this would reduce the annuity you can get with the same savings); that median-income households save money at the average rate for all households, which is untrue (richer households save at a higher rate, making the average savings rate higher than the median savings rate); and that the savings rate is constant over age (since older people in fact save at a higher rate, the money has less time to build up). In addition, we haven’t started talking about below-median households, who save at a lower rate. [Note: I assumed you can get an annuity yielding 6.2%, from this online site; Biggs, who probably knows better than I, uses 5.4%, which yields lower annuities for the same amount of savings.]
The problems, in short, are that we don’t save enough and we don’t invest very well. One could argue that these are a matter of choice. People could save more, and they could make smarter investing decisions. But given that they don’t, we could very well see tens of millions of seniors without enough money to live decently in retirement. Given that prospect, perhaps we should question leaving retirement security to individual choices and free markets.
***
Andrew Biggs argues that the numbers show that the retirement system is doing OK. After all, if you assume just a 2.4% savings rate and a 6.3% real return, you get 76% of your pre-retirement income. The system is doing better than I thought it was before Biggs pointed out my error, but that’s almost entirely due to Social Security. Social Security is replacing 52% of pre-retirement income (not 35% as I initially calculated) and private savings are replacing anywhere from 13% to 24%, depending on the scenario. I think the 13% scenario is the most accurate, since is the lowest-risk option; anything else is not retirement saving, it’s retirement gambling.
Biggs also thinks (email to me) that my savings rates are too low, especially with auto-enrollment into 401(k)s on the rise. This is a plausible point; we don’t really know where the savings rate will end up after this recession. If the median worker is auto-enrolled in a 401(k) — and, even better, if he gets an employer match — he may be OK. Then we may be talking about a problem that affects a significant number of lower-income households (who are less covered by 401(k)s and employer matches than higher-income households), though not the median household.
This is the spreadsheet with the scenarios. WordPress.com won’t let me upload an Excel file, so I embedded it in a Word file and uploaded that.
There’s a legitimate question about 2008 vs. 2051 living standards. For example, in our most pessimistic scenario, we still end up with an annuity of $50,190 in 2008 dollars. That might not seem so bad. After all, median income in 2008 was only $53,303, and this is all in real terms, right? However, I don’t think that’s the right approach to take. Living standards will improve on average between now and 2051, and therefore an income of $50,190 2008 dollars will feel very different in 2051 than it felt in 2008. This is why I think the right comparison is to pre-retirement income; that tells you the drop in living standards that people will suffer at retirement. (In practice, most people probably won’t buy annuities, and won’t adjust their living standards down immediately — but that just means they have a higher chance of outliving their money.)
Another possible objection is that we’re leaving out capital gains from housing. Even if the average return that investors get from stock mutual funds is only 2.3%, the fact is that many people invest in their houses and seem to get higher returns. However, I think that we can’t count on these higher returns. First, these returns are largely a product of leverage and subsidized interest rates; real housing prices underperform the stock market. Second, a given house doesn’t really change in real value (the utility it provides to people), even if its price changes; in general, its value goes down, unless you put money into it for maintenance and improvements. If the price of equivalent houses goes up in real terms, that just means that (on average) one generation of home owners is taking money from the next generation of home buyers in the form of higher prices. In other words, it’s a multi-generational Ponzi scheme that can’t go on forever. Third, of course, not everyone owns a house.
In doing the research for this column I came across a paper by Andrea Frazzini and Owen Lamont called “Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns.” They find that, at least when looking at historical data, you can make money by doing the opposite of what investors do with their mutual funds. That is, money flowing into mutual funds is a valid predictor that the stocks in those funds will, on average, go down relative to the market. The real beneficiaries are corporate issuers of stock, who are able to issue stock at high prices when demand for it is high. I also like the way they put their findings into context: “These facts pose a challenge to rational theories of fund flows. Of course, rational theories of mutual fund investor behavior already face many formidable challenges, such as explaining why investors consistently invest in active managers when lower cost, better performing index funds are available.”
Finally, I hate making mistakes. So I wholeheartedly endorse Biggs’s call for the Social Security Administration to fix its misleading calculator.
By James Kwak
spencer
By using current real data you are ignoring inflation that would make the situation worse than you describe.
You are assuming a savings rate of 2.4%.
If you ignore inflation that yields a constant saving stream in real terms.
But in an inflationary environment of for example 2% to 3% annually, and go back and apply a 2.4% savings rate to nominal earnings some 20 years the dollar savings you get are only about half of current earnings in real terms. To achieve the 2.4% average real savings in an inflationary environment in savings rate in earlier years has to be higher to offset the impact of inflation on averages wages.
jake chase
When you assume the financial future will be roughly like the past, you disregard the sea change in financial markets caused by swaps and OTC derivatives: over leveraged risk is a guerrila army bearing nuclear grenades moving in quantum jumps through the investment landscape. They can blow up anywhere, any time. Exposure is entirely hidden. No published financial statement of any bank or public corporation is anything but a trap for the gullible, a convenient fiction, an outright fantasy. Any investment decision is nothing but a bet, and we might as well all be monkeys throwing darts at the financial pages.
In the past ten years, a stock index fund returned nothing. To the extent corporations achieved growth in profits, the dough was siphoned off in executive stock options. Today, you get nothing in government bonds, unless you want to take thirty year risk. If you want a good investment, buy a laundromat (and a gun).
Tom S
I think the biggest mistake in your estimate is that you assume people will begin saving at age 22. From what I have seen of the typical college graduate, they will often spend maybe six months unemployed and often spend the first couple of years paying off debt and getting on their feet. Alternatively, there are many young people (like myself) getting graduate degrees which means more years of no saving. If I did such a calculation I would assume no saving begins until at least age 25, maybe 28. This will really crunch your already low values.
October 21, 2009 | PrudentBear
I used to think that "civilized society" was defined as people collaborating and in the process of doing so, providing each other with goods and services, mostly for reward but at times – either through taxation or volunteerism – for free to those less fortunate. In the process of this collaborative exchange, man was supposed to become more enlightened, thus ensuring optimum outcomes could be secured with fewer natural resources and less labor, abetted by invention, cooperation and innovation. Each generation was to leave behind a legacy of capital formation (roads, bridges, schools, etc.) as well as an intellectual legacy in the arts and technology.
Over time, a compounding of these positive developments would endow each successive generation with a higher standard of living, without the good earth being gutted and polluted beyond recognition.
But something, unfortunately, has gone wrong, and it may possibly become far worse than we can imagine. What has been the source of this failure to compound progress?
The answer is theft. Earthquakes, tsunamis and other such natural phenomena, as well as diseases, are of miniscule consequence compared to theft. Theft throughout history has manifested itself in the same forms again and again and each time it has resulted in resources either being destroyed or re-distributed in the process.
It is my thesis, in this brief essay, that theft is supplanting value in both the medium of exchange as well as in the exchange itself. Theft has become the manifestation of greed and moves in when the conscience moves out. As a result, we are faced with the phenomenon of cascading theft – that is, theft that leads to more theft. In the end, the concept of "value added" is transformed increasingly into "value lost."
War
War, which has often been described as organized theft, most probably occupies equal top spot in the rankings. History has repeatedly cast conquerors as liberators who bring some form of democracy/freedom to the downtrodden, when in fact a closer examination shows that the conqueror either carts off the spoils and/or leaves behind a corrupt and compliant democracy or dictator that allocates favorable concessions to the bankers and capitalists of the conqueror.War not only vanquishes the loser, but also has the effect of weakening the ally. A study of how a financially cash-strapped Great Britain was made redundant as an Empire is fascinating as it is telling about who your friends are. According to a recent article by economist and historian Zachary Karabell, Great Britain in 1946 asked for a loan of $5 billion at zero percent interest for 50 years. What she got was a $3.7 billion loan and a set of conditions which effectively installed the United States and the U.S. dollar as the linchpins of power and finance. As someone once cleverly quipped, "I want to thank the U.S.A. for coming to our assistance in 1941 when we really needed them in 1939."
To maintain its Empire, the U.S.A. has installed bases all over the world. According to Hugh Gusterson, professor of Anthropology at George Mason University, the United States has over 1,000 bases worldwide which constitute 95% of all foreign bases in the world. So we have the U.S. citizenry largely footing the bill for human and material resources so that major corporations can extract "profit" which is often not even taxed in the U.S.A. Can anyone estimate what those resources would have yielded the American people had they been deployed in the U.S.A? Moreover, has there ever been an instance in history where a nation has spent so much to make so many enemies? Perhaps it was only a coincidence that the United States invaded Iraq a few months after it announced that it would refuse U.S. dollars for the sale of its oil. It is clear here that business must be protected against "unreasonable" foreigners.
Unfortunately, the matter does not stop there and as part of the cascading effect, additional theft is warranted through the implementation of the Department of Homeland Security and other such measures.
The Banking System
The banking system, which is war's grotesque Siamese twin, is the greenhouse, factory and laboratory of every paper alchemy known and unknown to man. Is there any wonder that this is the case? A recent Wall Street Journal report stated that Wall Street firms would be paying out $140 billion in bonuses this year as opposed to $130 billion a year before the meltdown. Amounts of this size are neither payment nor reward; they are bribes to buy the intellect of America's best without the inhibition of conscience. At least New York might be saved by the infusion of these bonuses.The credit creation system, which is the heart of banking, is by all accounts nothing more than a debt pyramid that, in combination with opportunistic mortgage brokers, accommodating government-sponsored enterprises (GSEs), clever bankers and gullible investors, gave rise to an unprecedented orgy of buying, speculation and manipulation. Manufactured income details and low upfront interest rates gave the perpetrators of this theft the means to initially create dreams for the clueless home buyers – and to subsequently substitute those dreams with nightmares.
The cascading effect of this theft has led not only to loss of homes, but also bankruptcy, loss of jobs, breakdown of families and the gutting of so many industries that sprung up in the wake of a building boom struggling to keep up with demand. The game was good while it lasted, but the day arrived when even the banks were brought to the brink as a result of losses being generated by the subprime fiasco. This was no doubt greatly complicated by derivatives, which still remain more deadly than the unaccounted for nuclear-bomb briefcases of the USSR.
It is no secret that the Federal Reserve has more or less provided astronomical amounts at a virtually zero rate of interest to a raft of top banks in an attempt to counter horrendous losses, and to therefore save them from annihilation. Has the Fed's largesse flowed to the struggling home owner? According to a recent Bloomberg News report, a total of 937,840 homes received a default or auction notice or were repossessed by banks, which represented a 23% increase from a year earlier. So there is your answer.
Fear not, as not all is lost. Goldman Sachs reported a $3 billion profit in three months just days ago. Is this a sign of recovery or massaging the truth? I am afraid to say the latter after reading various commentators and in particular the piece by Dylan Ratigan in the Huffington Post. Some $64 billion received through the Trouble Asset Relief Program (TRAP), AIG, the Fed and the FDIC was exponentially leveraged to buy distressed assets, which has led to their reflation.
The taxpayers, of course, have received precious little in return but the politicians did better. According to the Center for Responsive Politics, major banks and financial institutions in receipt of $295 billion in TARP money reciprocated with $114 million to Washington for lobbying and campaign contributions. As Andrew Cockburn puts it, "at 258,449 percent, it has been called the single best investment in history."
The mutually parasitic relationship goes further, in that the major banks are also keen buyers of U.S. Treasurys sold at auction. And what they cannot lend out, they deposit with the Fed at interest. Generations of future economists, analysts and commentators will scratch their heads in disbelief at this fiasco which is so brazen that it defies any modicum of common sense.
Whether the assistance afforded by the Fed to banks can outrun the pace of foreclosures and rising unemployment remains to be seen, although the signs are not encouraging. Either the unfolding internal collapse or the external refusal to continue funding the United States while its dollar slides will inevitably bring on a resolution unlikely to be palatable to anyone. In the meantime, depositors are subjected to laughable rates of interest on their savings as well as the ignominy and insult of potentially having their bank closed by the FDIC on a Friday afternoon.
Government
If war and banking are the terrible Siamese twins then surely government is the mother of these two creatures. Whilst I do not consider myself to be a member of some lunatic fringe advocating the dismantling of government, I nevertheless consider most of its activities to be wasteful and many without purpose and therefore a form of theft. (Here the astute reader will correctly point out that war is their doing also).Do I need to remind readers that Social Security contributions disappear into the unified budget and replaced with increasingly worthless IOU's in the forms of government securities? Through inflation, their value diminishes until retirement resembles imprisonment. Government will either tax or borrow in increasingly larger vicious circles to both placate the masses but also to cement its position and authority. As the vicious circle grows, so does the amount "skimmed" by corporate America which provides the bulk of the services. Where otherwise would the Halliburtons of this world be without Uncle Sam's generosity?
Consumption
The final member in the quadriga of theft belongs to consumption. No doubt the Renaissance and the Industrial Revolution transformed the world of consumption, but it has been in the last couple of decades that consumption took on a hideous conspicuousness that has in its own right threatened the viability and stability of the system. Whereas only the rich in previous generations could flaunt their "toys," in the world of today, anyone armed with a credit card could create a veneer of affluence. As Warren Buffet once exclaimed, "price is what you pay, value is what you get." It is clear that whilst price and value are rarely identical, nevertheless the hiatus between the two has never been so disturbingly wide.Housing values up to the time of the bust were the major but not the only example of this rift. No doubt the siren call of easy credit and the interest-ree loans of retailers also proved extremely powerful and effective. The reality is that the real wages of Americans had not increased since the 1970s, and in an effort to keep the lid on their wage demands and propensity to strike, credit became a common currency. The ability to borrow not only gave the masses the ability to buy, but also blurred the distinction between needs and wants. Consumption was fast-tracked well beyond the normal trajectory of the economy to the point that it now constitutes some 70% of U.S. Gross Domestic Product (GDP).
To repeat an earlier point in a different manner, the price of a need more closely tracks value than what the price of a want does. When wants are satisfied in increasing measures, another cascading sequence of "thefts" occurs. A simple example would be the consumption of high-sugar carbonated drinks and fatty foods, which are simply wants. The effects are well documented and the results highly visible when one looks at the youth of America as it claims close to top spot (if not top spot) on the obesity charts. The effects of such over consumption on their health and by extension on the health system cannot be overestimated. Nor can the effect on their education, employment, income earning capacity, relationships and mental well being be discounted.Possible Solutions
Between wars, the banking system, government and consumption, one can safely say that the four have combined to bring a great nation to its knee. Should the United States go down on both knees, the ramifications for world prosperity and peace will be greatly jeopardized. The United States has but little time and very few options to counter the present descent in its economy. Creative destruction has largely been thwarted by the interference of government in banking and the car industry, as well as by providing stimulus checks. It may well be that the White House has a chaotic solution in mind should it be faced with doomsday economic scenarios. The reasoning may be that if you cannot get back on top of your affairs, then at least cause as much chaos to your rivals as is possible, to even out the net result. No doubt the U.S. dollar could become a refuge by default.In my view, the United States can reclaim the high ground in five ways. Whilst its capitalist system has been abused beyond comprehension, it is nevertheless a far better foundation than any communist or socialist system that relies on squeezing and restricting its citizens. In brief the five approaches are as follows:
- The components of GDP must be given differential weighting. Buying take-out food cannot be accorded the same value as buying fresh fruit. Visiting the doctor cannot be the same as visiting a gym, and buying a solar panel cannot equate to buying an electric hot water heater. Building a house with full bricks must surely rate more highly than a house built of a simple timber frame with some form of cheap cladding. Unless GDP becomes a qualitative measure instead of just a quantitative measure, then the ability of the United States to remodel itself will be hampered.
- The adoption of such changes to GDP calculation may also provide the impetus for a tax system that is more skewed to taxing consumption rather than investment. Hamburgers and soft drinks can incur a value-added tax (VAT) of 20%, whereas the VAT on a solar panel can be zero. I acknowledge that such a proposal is not without difficulties and has a number of objective and subjective limitations. It should be noted, however, that some nations are already studying the proposal of taxing "unhealthy" foods favored by children.
- The introduction, or rather the reintroduction, of honest money is an imperative. Gold, if nothing else, has retained value far better than almost anything else. The dollar's value since 1913 is now not much more than a noon shadow, whilst the Dow Jones Industrial Average is nothing more than a name when one considers that most of the companies in the original index are now history. Unless money regains its "store of value" characteristic, the retirement plan of every American will be become nothing more than a poor quality stamp collection.
- Needless to say, the Social Security contributions of Americans must be extricated from the general budget and accounted for separately. No longer can Social Security contributions be taken in exchange for Treasury bonds, unless they are used in building income producing infrastructure. The printing of dollars by the United States over the last half century has enabled the United States to lay claim to a disproportionate amount of the world's resources. Unfortunately, this misappropriation (another theft) has very little to show as it has been wasted on foreign adventures and very little investment at home.
- Additionally, the U.S. government must put a limit on the cost of health care for each person depending on age and the condition. This will prove to be a veritable minefield as there will always be cases that defy the criteria and which will give rise to many a cause celebre. This is the most unsustainable aspect of the U.S. budget going forward into the future owing to demographic developments, but failure to deal with this will render any other budgetary initiatives almost useless. Shrinkage in government in general is imperative.
- Finally, the gap between rich and poor, as well as the increasing concentration of wealth among the top few percent of the population, is a dangerous development that will destabilize democracy and its workings. The recent figures indicating that gambling is most prevalent among lower socioeconomic groups, is not only a measure of poor education but also an indication of the level of exasperation and helplessness among low-income groups. Perhaps the "rich" can be required to set up or provide certain services through private foundations for the less well-off in the community. This will have the two-fold effect of not enlarging government as well as ensuring best management practices, as it will be in the interests of the "rich" as well as a matter of pride to ensure effective use of their "tax" dollars. Such a proposal is not without precedent as it was common practice in Ancient Athens.
In conclusion, it should be noted that entrenched structures, force of habit, vested interests and a population that has led the high life on debt for too long, make any changes highly difficult. All hope, however, must be kept alive through strategies that can be followed step by step and brick by brick. Failure is not an option, because if compounding misery gets the upper hand, the nation will break apart. Value must be reinstated in transactions if value added is to return to the system. Progress is predicated on value added rather than value lost, and no amount of alchemy, printing, legislation or oratory will ever be able to reverse or supplant that truth.
Peter Souleles, an economics and law graduate, ran a private accounting practice in Sydney, Australia, until retiring in 2000.
There is a 70% historical inverse correlation between the direction of government deficits-to-GDP and the price-earnings multiple in the equity market. So we will make no bones about the government’s ability to create growth by either borrowing money or taxing the public in the future, but the major point is that government-led growth deserves a lower-than-average multiple, not an above-normal multiple. And yet, even on a Shiller normalized basis, we have a market that is still overvalued by roughly 20%. While momentum and speculation are keys to the current rally, these are never alluring or enduring features for a fundamental economist and strategist. There remains too much risk in equities for our liking, as impressed as we are with the Dow managing to just reach a 13-month high.
November 6, 2009 | The Golden Truth
A good friend on mine works for a real estate consulting firm in NYC. One of his deals is evaluating a client's investment in an insolvent commercial property. The deal has $110 million bank loan funded by Bank of America. My friend said the property is worth $30-40 million. What I found interesting, and which confirms that banks are not even close to marking their assets properly, is that my buddy said that B of A is carrying the loan on its books at the full $110 million.
I just did a "drive-by" on B of A's latest 10-Q. It has $2.1 trillion in assets, not including cash. It is reporting $257 billion of shareholder equity. Now, BAC is over-marking the above-referenced asset by 70%. Assume across all of its assets, BAC is being generous in its marks by only 10%. This exercise implies that a true mark-to-market of BAC's balance sheet would wipe out BAC's shareholder equity.
Is this unrealistic? I think, if anything, my analysis errs in the favor of BAC. Why? BAC has $159 billion of home equity loans on its books. We know that, in general, most home equity loans are probably worth nothing. Let's say BAC's are worth 50 cents on the dollar (this is generous). That adjustment alone would reduce BAC's book value by nearly $80 billion.
The bank has a loan loss reserve of 3.8% of its $914 billion in loans. But the charge-off ratios for residential mortgages and credit cards (not including commercial r/e) was 4.73% in the latest quarter for mortgages and 12.9% for credit cards. Clearly, BAC is unequivocally under-reserving for the purposes of managing earnings and maintaining its vital capital ratios. And we know that the banks are undeniably stretching out their declarations of delinquencies, defaults and charge-offs.
My point here is that between the home equity loans and the anorexic loan loss reserve, I can demonstrate that BAC's shareholder equity is overstated by at least 50%. I haven't bothered addressing the larger balance sheet items of residential mortgages (a large portion of which come from its acquisition of Countrywide, which we know was the goliath of toxic mortgage lending) and commercial loans. Imagine what a realistic assessment of those items would do to BAC's book value.
Then there's the off-balance-sheet toxic waste (like SIV's, CDO's, VIE's and derivatives). I said I did a "drive-by" on BAC's latest 10-Q, meaning I spent a couple hours digging through the footnotes looking for the obvious accounting exploitations the bank used to pervert its accounting presentation. I wanted to show that Bank of America is technically insolvent. If someone wanted to spend the time dissecting the derivatives disclosures and special purpose financing vehicles, I'm sure it could be shown that Bank of America would collapse tomorrow without the Federal Reserve and taxpayer support tossed its way (please note, most of the Fed support has taxpayer guarantees - you can thank Paulson, Geithner and Bernanke for that goody tossed at the banks).
This whole exercise was started after my "catch up time" phone call with one of my best friends from NYC. After I got off the phone I realized that I had just received an inside look at how distorted the book value of just one of BAC's non-menial commercial loan assets was. Based on this simple analysis, I truly believe that if we could do an accurate forensic accounting at all the big banks, especially Goldman, JPM and Citi, it could be shown that they are all fraudulently overvaluing their assets and thus catastrophically insolvent.
Reserve Bank of Philadelphia is now updating the Aruoba-Diebold-Scotti index (index of current business conditions) with each new data release and is reporting those updates on a useful webpage.
The Affluent Society Summary and Study Guide - John Kenneth Galbraith
Amazon.com- The Affluent Society- John Kenneth Galbraith- Books
Resources on John K. Galbraith
One of the problems faced by economists is that everyone knows about economics. Most people are ready to accept that a physicist, or a lawyer, or a historian knows something they don't. Economists encounter no similar deference. If you introduce yourself as an economist, you will probably be asked for a prediction about what is going to happen to interest rates, which the recipient will-rightly-not take very seriously.Politicians regularly express views on economic matters. Not jusimilar opinions about questions in hard sciences -- as with Stalin's adoption of Lysenkoism or Mbeke's opinions on Aids -- it is understood that they have overstepped the mark. Not so in economics.
Maybe economists do not deserve the professional respect accorded to physicists, lawyers or historians. Perhaps economics is tosh, like spiritualism or scientology; perhaps what students learn in-demanding and sought-after-undergraduate and postgraduate courses is mumbo-jumbo: perhaps the language of economics is useful only in talking to other economists. But if I were writing an...
Unfortunately, the use of "Lysenkoism" as an epithet has been degraded by overuse, especially in absurd situations. I propose to restrict "Lysenkoism" to circumstances where a clear case can be made for coercive enforcement of the belief system from outside the system (e.g., by state patronage). For example, if a concept spreads concurrently among the scientific communities of several countries
Copyright © 1996-2009 by Dr. Nikolai Bezroukov. www.softpanorama.org was created as a service to the UN Sustainable Development Networking Programme (SDNP) in the author free time. Submit comments This document is an industrial compilation designed and created exclusively for educational use and is placed under the copyright of the Open Content License(OPL). Site uses AdSense so you need to be aware of Google privacy policy. Original materials copyright belong to respective owners. Quotes are made for educational purposes only in compliance with the fair use doctrine.
Disclaimer:
Last modified: November 20, 2009
