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Cruise to Frugality Island

The Cruise Ship "Affluent Society" in Stormy Fiat Currency Waters on the Road to Frugality Island

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:

• Bird and Fortune
  • Bird and Fortune - Subprime Crisis
  • Part 1-2 Bird & fortune - Financial crisis - Silly Money, Nov 08
  • Part 2-2 Bird & fortune - Financial crisis - Silly Money, Nov 08
• Merle Hazard
  • Inflation or Deflation  - now, that is talent. Freaking' hilarious!
  • Mark to Market Dedicated to the "courageous" men and women of the Financial Accounting Standards Board, who watered down fair value accounting in 2009.
  • Bailout Great job with the cell phone.
  • H-E-D-G-E, by Merle Hazard
  • Green with Envy
• Every Breath You Take

Old News ;-)

Delayed Reverberations of Financial Blogs Forums ;-)

There are no markets anymore, just interventions

[Nov 7, 2009] CDS report Standing on the shoulders of the Fed

"Invisible helicopters" still at work and asset market still rising. But if something cannot go forever it will eventually stop. 

FT Alphaville

The knowledge that the Fed is standing behind the economy helped support the markets today in a difficult session. Of course, the glut of liquidity provided by the Fed and other central banks is helping financial markets rally across the board. It will need a significant negative catalyst to divert investors from their chase for yield.

[Nov 7, 2009] GM Backs Out of Magna Deal It's Each Nation to Itself

Seeking Alpha

Davewmart:

I am not too sure that it is economic nationalism that is the chief threat to our wellbeing.
Internationalism has largely operated as a cover for the most powerful nations to grab as much as they can, and has provided the cover for the decimation of working people's livelihoods, the creation of an underclass in the West, and the eventual impoverishment of everyone, as most people in the current recession simply have not got the income or surety of income to drag us out of recession.

This seems to have been the practical result of outsourcing, one manifestation of internationalism.

The results in the Third World have been even worse, with the classic example of crazed ideologes from the IMF demanding that The Haitian people remain responsible for loans taken out by dictators, granted by greedy bankers and used largely to finance excessive consumption by the dictator and the military means needed to maintain the oppression.
The IMF demanded that support for agriculture be eliminated, in the interest of the 'free' market, which lsimply meant that peasant farmers were destroyed by hugely subsidised US and European food.

The result has been a population living on mud biscuits.

The same band of happy and righteous intenationalists and 'free' marketeers have now reduced America to a position where 50% of it's children will be on food stamps at some time.

Not that their free market principles have stopped them socialising the losses of the connected oligarchs.

So forgive me if I can't see internationalism and the free market as the shining city on a hill.

At least nationalists are assuming some responsibility to look after their own.

That responsibility is sacrificed by the internationalists in service to an abstaction.

Leftfield:

Davewmart: So true.

Whatever the posturing, as the article says, Magna may have likely been just as bad for the workers as GM. Now, lots of politicians can huff over their turf in a combination of offended ego and vying for support from their marks, I mean, supporters.

Germans have plenty of ammunition as one of their banks was stiffed about 1/2 $billion on an overnight loan as Lehman went under. That used to sound like real money, remember? How could Obama throw Merkel into such a humiliating situation?

More layers of politicians, such as the EU probably is even more idiotic and wasteful than the League of Nations that did so much to prevent WWII.

[Nov 7, 2009] David Michael Green Can You Hear Us Now

As most 401K investors is sheeple that will be fleeced anyway and can do very little about it (gold is probably the only way to vote "non-confidence" in the current government but it is unclear whether it the price was manipulated by speculator who understand the level of dissatisfaction and mistrust of the government (aka "inflationary expectations in Bernanke speak). Still it make sense to try to understand the mechanic of the fleecing.  Obama didn’t win elections because of a populist uprising, but because he was one of the boys. and this alwyas is the case. But after becoming president Obama seems to remain a marionette in hands of the same powerful interests which secured his election. In ant case the phase " What does surprise me, though, is just how bad he is at playing politics, especially where his own self-interest is overwhelmingly at stake" is pretty naive and should be taken with a grain of salt... It is not simply the Obama Administration that is captured, there is a general capture of the entire beltway and state assemblies.

I am not surprised that Barack Obama – like the last two Democratic presidents – has turned out to be a conservative, corporate creature whose interest in the public interest is scarce and superficial.  What does surprise me, though, is just how bad he is at playing politics, especially where his own self-interest is overwhelmingly at stake.  Can this really be the same person who ran such a remarkable campaign last year, stealing the presidency from two of the great figureheads of American politics?

Obama is one of the most articulate politicians in American history.  And yet, his communications strategy is the absolute worst I’ve seen since Carter.  In fact, what’s most stunning about it is that his team seems to have dismissed all the lessons learned over the last three decades – especially from masterful Republican administrations – about how to market presidents and policies from the White House.  This is no longer rocket science, if it ever was.  How can a guy this sharp be so clueless and, thus, adrift?

Obama is also one of the smartest people ever to sit in the Oval Office, but he has demonstrated astonishing levels of cluelessness about what the public wants, about the nature of his opposition, and about what makes a presidency successful.  He doesn’t understand that the public will follow you if you lead them, especially if you do so with passion.  He doesn’t get that the conservative movement is a lethal cancer seeking to commodify, monetize and profitize every aspect of America, and therefore is committed to the destruction of all else, including this administration, despite even that it is essentially staffed by Goldman Sachs.  He doesn’t understand that the most successful American presidents were the ones who brought a vision to the table, and fought for it.

Fundamentally, Obama is an anachronism.  He is essentially a nineteenth century president operating in a crisis era, as the early twenty-first grapples with cleaning up after the late twentieth.

Historians sometimes debate over whether history makes the man or the man makes history.  Leaving aside the sexist construction of the question, I think, manifestly, it has to be both.  Almost all the great presidents served during time of great crisis, usually war.  But that doesn’t guarantee their place in the historical pantheon.  You have to also meet those challenges of your time.  Lincoln is widely considered America’s greatest president.  His predecessor, James Buchanan, is generally thought to be the country’s worst.  Both faced the same crisis of Southern secession, but they responded to it very differently, earning their respective places in history.  On the other hand, had the civil war come twenty years earlier or later, we’d hardly even know their names, except as the answer to trivia questions.  “Who was the first president from Illinois?!”  “Who was our tallest president?”  And so on.

Obama could be Lincoln – or better still, FDR – if he wanted to be.  He has chosen instead to be Buchanan.  Faced with crisis scenario after crisis scenario, the candidate of ‘change’ repeatedly and instinctively homes in on the weakest, most centrist, most useless response possible.  His stimulus bill probably stopped the economy from continuing its free fall, but it leaves the country stuck in months or even years of unyielding recession at worst, and jobless recovery at best.  His healthcare bill helps in some important ways, but does nothing to hold down costs in a society that utterly wastes one dollar out of every three it spends in this area, and it does nothing to make healthcare more affordable for most Americans.  He seems to have some interest in a global warming bill and a banking regulation bill and maybe even doing something about civil rights for gays.  But in none of these areas is there any sense that he will do what is morally necessary.  Likewise, with Afghanistan, all the indicators seem to suggest that he will opt for some numbingly anodyne middle ground.

The guy is a leaky bucket at a time when the boat has been swamped.  He’s an pressureless fire hose when the house is in flames.  A tattered parachute when the ground is coming up fast.  A rusty musket as the Huns come over the ridge.  At a time when America needs a bold, powerful and wise leader in the White House – principally to undo the damage of the bold, powerful and sociopathic guy who was just in there – we have instead Mr. Rogers’ pet gerbil.  Complete with cardigan sweater and barbiturate-laced water supply.  Obama seems to want nothing more than to be liked.  In the neighborhood called Earth.

The great irony, of course, is that he is accomplishing just the opposite.  Gallup recorded his job approval ratings right after his inauguration at 69 percent.  Today they are down to 50.  That’s not 35 percent, like his predecessor, to be sure.  But since when did being better than George W. Bush become the standard?  A backed-up toilet was more popular than Bush a year ago today.  Hell, even gonorrhea was more beloved.  But the point is that dropping fifteen to twenty percent in job approval in what is likely to be the best year of his presidency, at a time when the public is likely to be most generous, is a spectacular failure of the first order.  Even according to Obama’s own pathetic standards.  If all he wants is to be liked, he’s still blowing it.  This is the equivalent of having every fourth friend or family member drop you on Facebook.  Not a good sign, especially if you live for popularity.

It didn’t have to be this way.  He could have been both a great president, a popular president, and a heroic president.  All he had to do was be willing to treat the people who already hate his guts as political enemies.  All he had to do was be willing to treat the people who live to fleece the country as treasonous thieves.  All he had to do was to speak clearly, act boldly, and lead a broken country down the bright shining path toward repair that is obvious to anyone who is willing to look.  But since that group excludes most Americans right now, this notion of bold leadership is especially essential.

In fairness to Obama, the public doesn’t really know what it wants these days, and best of luck to the two new Republican governors trying to cut taxes without deficit spending.  If they can do it, they will only do it by slashing government services.  Idiotic voters love tax cuts in the abstract.  They will most likely feel a bit less enamored of closed schools, pothole proliferation, massive prisoner releases and state parks that cost as much to get in to as professional sports stadiums now do.  For the last several decades, these selfish citizens have been all to willing to be trained by one of the sickest regressive mantras of them all – that government is just some bloated pig wasting tax dollars, and therefore that they could have their tax cuts without any cost to service, or without deficit spending.  Apart from occasional lip service to Jesus, there is nothing closer to the core of the regressive/Republican canon than this tax-cutting chant.

It’s a complete lie, of course, and it took about five minutes into the Reagan administration to show that.  Reagan slashed taxes so much that he tripled the national debt in eight years time.  That problem wasn’t helped by the fact that Republicans actually blow through cash faster when they control the government than do supposed “tax-and-spend Democrats”.

But now the day of reckoning has arrived, especially for the states, which generally do not have the federal government’s capacity to tell gigantic lies through borrowing.  People in New Jersey and Virginia have been stupid, and all they had to do to see how stupid they were being is to look at what that “economic girly-man” Arnold Schwarzenegger has been doing to Caleefornya.  The state government is essentially conducting a going-out-of-business fire sale, and its creditworthiness is now about as good as Bernie Madoff’s.  Government services are being tossed overboard as if they were lead cannonballs in a leaky rowboat.

[Nov 7, 2009] Gasparino on "The Sellout"

RealClearMarkets has an interesting interview with Charlie Gasparino regarding his new book "The Sellout." There seems to be a consensus forming that something has gone seriously wrong with the US republic, and that the Obama administration is failing to address it, failing badly.

One has to wonder what it will take to give Washington a wakeup call. It seems that, when confronted by white collar crime, people lose all the perspective which they have when it comes to fighting crime and injustice. "It won't work, it can't be done, they will just come back and do it again."

Well, duh. If you make it worth their while, administer wristslap justice at worst, and let all the top dogs openly flout the law, of course they will be back. What the US needs is the reincarnation of Melvin Purvis with a minor in finance. I would put Eliot Spitzer in charge of the SEC with the right resources and let him rip through Wall Street like the wrath of God, and make the bankers howl.

But that probably won't happen, because there is too much dirt, too many scandals on both sides of the aisle for this crew to administer its oath to uphold the Constitution.

Here is an excerppide, it has to happen again--the "it" being another financial crash. Of course, it won't happen tomorrow or next week, or maybe not even two years from now. But when the memory of 2008 wears off, and mark my words it will wear off, excessive risk taking will be back in a form that evades all these alleged regulatory controls that have been established. Regulation can never cure the disease of excessive risk.

The only thing that can cure it is tough love--allowing firms to fail. That doesn't mean I wanted the Fed and the Treasury to walk away last year. That would have meant Armageddon. But they should have walked away before that, when the systemic risk was smaller and the damage would have been limited. 1998 would have been a great place to start. Let Long Term Capital Management fail; let Lehman, and as I show in my book, possibly Merrill to fail, because the trades were the most vulnerable to LTCM's bad bond market bets.

Instead, by arranging a bailout, and by using free money to juice up the markets, policy makers emboldened Wall Street to take even more risk. That's what they did then, and that's what I fear is happening all over again...

Now I'm not in the Goldman is the center of all evil camp. But I know a lot of really smart people who believe that Goldman's bankers and traders virtually control the federal government in order to advance their own notorious agenda.

In fact, as I show in The Sellout, there were far worse players whose risk taking led to last year's meltdown, starting with Merrill Lynch and Citigroup. They were equally powerful from a policy making standpoint.

Remember, after Robert Rubin fought to end Glass-Steagall's separation of investment and commercial banking, he didn't go back to his old firm, Goldman Sachs, he went to work for the firm that benefited the most from the law's demise, Citigroup.

But Goldman in many ways crystallizes all that is wrong with the financial bailout, started by the Bush Administration, but carried on and expanded by Obama's. Goldman has been declared a bank, not much different than the old Bailey Building and Loan, and yet they don't take deposits or offer checking accounts. So what do they do? They trade, and they are trading as a federally protected bank, meaning they get to borrow at cheaper rates and they are Too Big To Fail."

Read the full interview here.

German Wise Men fear 'credit crunch' in 2010 by Ambrose Evans-Pritchard,

Oct 15, 2009 | Telegraph'

There is still a significant risk of further shocks to the international financial system,' said a joint report by the five 'Wise Men', a panel that advises the government.

Emergency action by the European Central Bank and authorities worldwide "averted a looming collapse" of Germany's banks over the Winter but lenders are still too frail to renew normal lending.

"Credit to non-financial firms has clearly been declining. Financial conditions are likely to worsen further. Banks are facing large write-offs on toxic debt and a rising toll of company insolvencies," it said.

The report said it was a serious error to pressure banks to raise capital ratios in the middle of a downturn, causing them to tighten lending standards. "There is a major danger that already tight financing conditions could lead to a credit crunch next year," it said.

The first round of the financial crisis hit the big banks and state Landesbanken, which had portfolios on US sub-prime debt and other traded assets,. The next wave of victims may be the country's savings banks faced with the 'slow-burn' losses of loan defaults.

Large companies can raise money on the bond markets but smaller Mittelstand family firms are facing serious problems rolling over debt. Germany's industrial lobby VDMA this week called for a change in policy to prevent savings banks from choking off credit to its members, the backbone of the export machine.

The Wise Men said Germany's economy would contract by 5pc this year. They have upgraded their growth forecast for 2010 from minus 0.5pc to plus 1.2pc, but cautioned that unemployment will rise by another 300,000 as firms pull back from costly work-support schemes, known as Kurzarbeit. The pace of the current rebound - driven by restocking and short-term stimulus - is "not likely to be sustainable".

David Goldsby

Paul. Gibraltar on October 16, 2009 at 06:37 AM

• Gloom and doom, and equities hit another year high. One of you must be wrong.

No real contradiction. The stock market rally is a factor of four things.

1. A brilliant worldwide government PR campaign allied to an endless supply of cheap money for the big banks and 'in the know' hedge funds to put in place the biggest bear squeeze the world has ever seen. Big momentum.
2. A relief rally in the markets and in the economy that governments had at last got their act together enough to stop world economic meltdown. The amount of business cancelled last Autumn only to re-emerge this Spring and Summer was awesome.
3. The inventory cycle turned positive.
4. The major stock market indices are made up of companies with such dominant monopolistic or oligopolistic market positions, and served by labour markets so cowed, that they were able maintain margins in the face of horrendous volume downturns, and it is these companies that get the headlines and drive the markets.

So we have momentum feeding confidence feeding momentum.

But, as AEP continues to point out, the underlying realities remain precarious in the extreme, and if governments take away fiscal or monetary stimulus; nay, if they even just maintain it; nay, if they don't increase it; they can still send the world economy crashing.

Meanwhile, commodity prices continue to rise on the momentum and before we know it countries with the weakest currencies (temporarily) will find CPI inflation heading towards and past the 2% target. As long as that target remains in place world employment will never recover. Hence you now hear some people talking about much lower growth rates being the new norm - 1% I heard touted. So with population growing at say 1% and productivity growth potential in the internet driven age at perhaps as high as even 4%, that leaves unemployment soaring by 4% per annum. Something's got to give, and they don't want it to be the inflation target.

On the other hand, maybe the cogniscenti know something I don't, and 'price stability' has already been redefined upwards. The gold bulls obviously think so.

Andrew

According to the other article "Ex-FSA chief Sir Howard Davies sees 'dramatic� risks for Britain" people aren't willing to change. This is perhaps the most fascinating aspect of the entire event: that as much as people blame the politicians and the bankers, they're as much to blame.

The Germans alluded to above won't be in nearly as many difficulties because home ownership is much lower than in Anglo nations. Unemployment won't lead to massive mortgage defaults. Once the second crunch hits, nations of renters, like France and Germany, will be much better off.

Unfortunately, the Anglo nations want better lifestyles than their continental counterparts, and to own their own home and to export very little. So, do we change our money into gold, move to France or Germany, or both?

[Nov 4, 2009] Guest Post Wall Street Journal Admits Economists Were Wrong, But Fails to Discuss their INCENTIVE for Being Wrong

naked capitalism

Barry Ritholtz has an excellent criticism of the article, pointing out:

There are many areas I would have liked to see the [journal's] article explore: The lack of Scientific Method, the mostly awful performance of economists, its misunderstanding of the value of modeling, the bias inherent in Wall Street variant of economics, and lastly, the corruption of economics by politics...

Let’s start with the basics. Hard “science” — Physics, Biology, Chemistry, and all variants thereto — begins humbly. They try to describe the universe around us by creating theories, and then testing them. These theorems are always preliminary. Even when testing validates them, Science is always prepared — even eager — to replace them with newer theories that are proven to be even more valid.

The humility of science begins with an admission: We know nothing. We seek to learn through experiment and logic, and constantly evolve more and more accurate explanations. Scientific belief evolves gradually over time. Nothing is assumed, presumed, or hypothesized as true. Indeed, research is a presumption that current theories are inadequate or incomplete. The practice of science is a an ongoing search for better explanations, more proof, further verification — for Truth.

Science is the ultimate “show me” state.

Economics has a somewhat, shall we call it, less rigorous approach. Indeed, the arrogance of economics is that it is the polar opposite of Science. It begins with a few basic assumptions, many of which are obviously untrue; some are demonstrably false.

No, Mankind is not a rational, profit maximizing actor. No, markets are not perfectly, or even nearly, efficient. No, prices do not reflect the sum total of all that is known about a given market, sector or stock. Those of you who pretend otherwise are fools who deserve to have your 401ks cut in half. That is called just desserts. The problem is that your foolishness helped cut nearly everyone else’s 401ks in half. That is called criminal incompetence.

Where was I? Ahhh, our sad tale of the practitioners of the dismal arts.

Starting from a false premise that fails to understand the most basic behaviors of the Human animal, economics proceeds to build an edifice of cards on a foundation of sand. (How could that possibly go astray?) Like a moonshot off by a few inches at launch, by the time the we reach further into time and space, the trajectory is off by millions of miles . . .

Economics … creates an illusion of precision where none exists. The belief in their models led to all manner of mischief, from subprime to derivatives to risk management…

The Behaviorists have been fighting the mainstream for decades now, trying to correct the errors of the basic building blocks of the dismal science.

But I would go further in my criticism of the economic profession by arguing that the decisions to use faulty models was an economic and political choice, because it benefited the economists and those who hired them.

For example, the elites get wealthy during booms and they get wealthy during busts. Therefore, the boom-and-bust cycle benefits them enormously, as they can trade both ways.

Specifically, as Simon Johnson, William K. Black and others point out, the big boys make bucketloads of money during the booms using fraudulent schemes and knowing that many borrowers will default. Then, during the bust, they know the government will bail them out, and they will be able to buy up competitors for cheap and consolidate power. They may also bet against the same products they are selling during the boom (more here), knowing that they’ll make a killing when it busts.

But economists have pretended there is no such thing as a bubble. Indeed, BIS slammed the Fed and other central banks for blowing bubbles and then using “gimmicks and palliatives” afterwards.

It is not like economists weren’t warning about booms and busts. Nobel prize winner Hayek and others were, but were ignored because it was “inconvenient” to discuss this “impolite” issue.

Likewise, the entire Federal Reserve model is faulty, benefiting the banks themselves but not the public.

Selected Comments

bobh:

The shameful state of academic economics is guaranteed by the process that selects and advances academic economists. This article mentions the mechanisms that keeps ambitious economists from criticizing the Fed, but the larger, overall biases favoring corporations, financial elites, and “free markets” are enforced at every step of a potential economist’s path to the happy comfort of a teaching job at a major university.

Graduate students or tenure candidates are screened and weeded out by their betters if they don’t embrace the ideas that are pleasing to the corporate and private donors who endow chairs and build new, named business schools.

The result is a privileged class of mandarins who are happy to keep their eyes carefully lowered and focused on their desks, studying equations and models, while economic crimes are going on outside the gates of academe.
 

[Nov 4, 2009] Trouble Ahead Can the Right Seize the Banking Reform Issue in 2010

November 3, 2009 | naked capitalism

Trouble Ahead: Can the Right Seize the Banking Reform Issue in 2010? Eliot Spitzer explains how the White House defense of the status quo will give Republicans powerful ammunition in the 2010 elections.

Few things are as potent in politics as calling for change at a moment of fundamental dissatisfaction with the status quo. Nobody should know this better than the current White House. Gauzy words describing the possibilities for change are always more comforting than defending the current dire straits. That is why — in addition to all the substantive arguments — the current White House plan for banking reform is so troubling.

Let us fast forward a couple of months. Momentary GDP pops notwithstanding, the economy next year is likely to be in pretty sad shape. Consumer spending is sagging; foreclosures are still climbing (and may surge as ARMs re-set); unemployment is likely to be hovering in the 9.5-10.0 range; federal deficits and state deficits will be soaring; and Goldman profits will still be setting new records.

Added to this toxic political brew will be a new, and perhaps counter-intuitive, but highly successful political attack from the RIGHT: break up the banks. Imagine this: by next spring, an intellectual consensus will have emerged that the concentration in the banking sector that developed from the 1980s until the crash of ‘08 was misguided. Voices as disparate as Former Fed Chair Paul Volcker, Bank of England Governor Mervyn King, meta- investor George Soros, and the Wall Street Journal editorial page will be in agreement on this point.

A few brave souls on the Right — recognizing that the Republican Party has been bereft of ideas in its attacks on President Obama — will then try to re-define a populist, conservative attack by asserting that the White House has been captured by Wall Street. Real populism and change, they will argue, will come from the Republican, not the Democratic, party.

The power of such an attack from the Right should not be underestimated. There will be a huge first mover advantage that goes to the candidates who grab the real banner of attacking the structure of Wall Street as having been the root of the crash of ‘08. We Democrats are spending way too much time wringing our hands over the new, “reformed” structure of regulation, and not nearly enough focusing on restructuring the banks. Congress continues to mediate the intramural battle among regulators who are defending turf in the next regulatory flow chart. Yet the real debate should be how to take the big banks and make them smaller: how to peel off proprietary trading and other high-risk endeavors that are now being funded and guaranteed by taxpayers.

squanto:

You say conservatives have the momentum in terms of getting spending under control. If that’s true, it’s only because they’re now in the opposition and they reflexively oppose everything Obama does. During the Bush Administration the national debt nearly doubled (from $5.7trn to $11.2trn) and you never heard a peep from the right about fiscal responsibility. Today’s Republicans are all for cutting taxes but they no are longer hawks re: spending. It’s like they want to drive the gov’t into bankruptcy.
 

kwark:

Froggy,

It appears to me that “Tea Party Republicans” are paid from the same deep pockets that own the movers and shakers in both parties. It’s clear that our so called “two party” system is so thoroughly corrupt that “change” – originating from either party – will prove to be nothing but smoke and mirrors. As with Bush 2 and Obama, we’ll see just one more swap of corporate dweebs for another set of corporate dweebs. Paranoia alert: I doubt that a third party candidate CAN be elected President, or for that matter, any sizable number of Senators and Congressmen – the Repub and Dem powers that be simply won’t allow it to happen. “They” don’t even have to resort to fraud or ballot-stuffing (although “they” are certainly not above those tactics). All “they” need to do is flood the airwaves with lies – fear will keep those voters voting for the anointed Republicrat or Demopublican.

timbo:

I know this much. Partisan squabbling about who was murder one, and who was the accomplice in this vicious murder scene to me is immaterial.

Both were at the scene of the murder with blood spatters on their clothes and murder weapons in hand, with plenty of motive.

When its all said and done, both parties oversaw massive credit bubbles, rampant spending increases, wars, corporatism and all its vices, a total disregard for the constitution, and total disdain for American ideals – whatever your definition.

So when the finger pointing begins in earnest, it’ll turn me off even more.

Kind of feel bad for the Dems, Obama didn’t even give his hopey-changey platform lip service.

If a real leader can ever take office, its gonna take a serious populist surge. Not the Oprah Winfrey style shit we saw in ‘08, more like Tiananmen square.

Hopin for the best

Michael Fiorillo:

I think there is a lot of insight in what Spitzer has to say, but I would only disagree on two things: the time frame and who exactly will seize the terms of debate.

My worry is not so much about any current Republican candidates, who all seem pretty hopeless.

My fear is that Obama’s captivity – willing or unwilling, it doesn’t matter – and cravenness, combined with the structural readjustment-by-another-name that is being forced down people’s throats, will fuel a backlash against representative democracy in general and a hunger for a strong leader.

What a burn that would be, having to take to the streets to defend these bastards from even worse bastards!

Bob Goodwin:

I am a libertarian and republican. This blog is (mostly) read by dems, so I will try to make my comments cogent, and not partisan.

I was mad as hell at Paulson and Bush. Not enough to become a democrat, but plenty happy to give all republicans a few terms in the wilderness. My Libertarian principles were in tatters, because the Wall street psychopaths clearly used our excess liberties to the detriment of the populace. Obama has not been an improvement.

Republicans have had a fund raising advantage until the last two cycles. Wall street suddenly had the funds to buy both parties. It is unclear how this will play out in the future.

The tea-parties are a running joke to the left, and rightly so due to their lack of sophistication. But one should be wary of waking activism. I have found they are largely full of people like me, who kinda liked free markets and were appalled by Tarp. And who were kinda republican too.

How out of touch are rupublican legislators who have taken Wall Street largess for years? A lot. But their base has flipped. I don’t think it will take them very long to flip too.

The democrats will howl with legitimate rage. And it won’t be fair. In a great historical irony, the mess that Paulson built will be blamed on Obama. Johnson’s great society was built on the ashes of southern bigotry. This is a smaller irony than that was.
 

Kevin de Bruxelles:

Spitzer posits an open, utopian political environment where politicians are free to calculate policies solely based on what is best suited to win elections. Of course the hermetically sealed two-party US political system is very much a closed system, and where only “two” choices are given. Elections are won by, on the one hand, blindly attacking the other choice, and on the other, making vague positive-sounding promises for the future. There is absolutely no need for the Republicans to threaten one of the most massive wealth/power nodes in the US to get a few dumb schmucks to vote for them. Why go after powerful Citi when they can so easily get the same results by pounding pathetic Acorn instead?

Spitzer plays the concern troll convincingly while simultaneously laying the ground work to head off any reform by stating the dangers of one tax proposal that was never going anywhere anyway. It seems the rumbling of discontent by the masses at the current state of the US is finally being felt at the top. The response is self-referential analysis; to try to convince the peasants that there is meaning in the fluctuations within the closed US political system; not mentioning that as any bird needs to keep its two wings moving to fly, the US system needs constant motion for both its wings to convince the citizens that our democracy is still soaring.

And why should Spitzer make any reference to an alternative? The closed US political system finds itself in a position of commanding authority. Not only is there no other international political system to challenge it; there is only miniscule domestic opposition to their monopoly on power; and it is divided on two extreme flanks; the Dennis Kucinich left and the Ron Paul right. As things stand, due to the animosity between these two positions, they can only serve as self-cancelling focal points of discontent and the closed US political system can destroy each in detail. Only if these two factions were to start actively working together could the closed US political system find itself facing a raging two-front political war for legitimacy. Sadly I’m not betting on this happening since both sides are fatally imbued with partisan booby traps that will make future broad growth and consolidation difficult.

With the Obama presidency giving the word underachieving new meaning, combined with the still fresh memories of the mal-achieving Bush Administration, the other lurking danger to the closed US political system is from cynicism from the broad center about the two-party system. Signs of such a movement have been appearing, among other places, on certain economic blogs. Not everyone looking for change will in fact be satisfied with monthly First Family portraits featuring a cute melanin-enhanced family unit while the President actually spends four years running a four corners offense to kill the clock on any substantive change. Nor will others be satisfied with pummelling the straw men of socialism and Acorn for the next three years as the country crumbles. And for these people the only solution the closed US political system has to offer is the distraction of tighter and tighter swings of the pendulum combined with massive amounts of inside-baseball analysis of where exactly the pendulum is heading. These discussions serve the purpose of focusing the public’s attention on the hypnotic effects of the swinging pendulum while denying even the possibility of activity outside the closed system.

Opponents of the system must create an alternative — yes a third party — that can act as a focal point of discontent, that can serve as a magnet for the many who are on the verge of abandoning the closed US political system. Just as it is hard to convince passengers to leap from a sinking ship directly into the rough waters in the middle of the ocean; it is difficult to convince people to abandon the current political system without at least the semblance of a sturdy lifeboat to carry them. And while discussions on Too Big To Fail are important; the even more fundamental problem that the closed US political system refuses to address is the on-going evisceration of US manufacturing capability. Two hundred years ago Alexander Hamilton found the intellectual arguments to protect infant industries, today we urgently need to save “geriatric industries”, while staying mindful of the dangers of outright mercantilism.

[Nov 4, 2009] Buffett, Tavakoli Flag Scheme Bigger Than Madoff’s (Update1) - Bloomberg.com

Read Chapter 10 In Chapter 10 of Dear Mr. Buffett author Tavokoli explains some of the events that led to the credit crash of 2008, and recounts how Buffett and other financial sages warned of the impending crisis [PDF].

March 5 | Bloomberg

Bernard Madoff could face 20 years in jail if convicted of what prosecutors are calling the biggest Ponzi scheme in history. But his $50 billion ploy pales next to the one created by Wall Street during the past decade: the securitization machine.

In “Dear Mr. Buffett: What an Investor Learns 1,269 Miles From Wall Street,” Janet Tavakoli explains that securitization process, and how regulators, politicians and the government ignored all kinds of warnings from people who saw it for what it was.

Tavakoli uses her 2005 lunch with billionaire investor Warren Buffett and their ensuing correspondence as the backbone of her analysis of the current financial crisis. Buffett, who read a draft of the book as early as last July, told Tavakoli he would feature it “prominently” at Berkshire Hathaway Inc.’s annual meeting in May.

“I think you’re in for a lot of fun,” Buffett wrote the author in a December e-mail.

Tavakoli, 55, spent 22 years working in the structured- finance departments of Wall Street firms, securitizing mortgages and other loans. She has been the head of her own small advisory firm, Tavakoli Structured Finance Inc., since 2003 and has written books about the mechanics of securitization including collateralized debt obligations, the most infamous of all.

Securitization consists of bundling loans and slicing them into packages with different risk profiles to be sold separately. Collateralized debt obligations take already securitized loans and further bundle them into packages. CDO- squared do the same process all over again.

How We Got Here

Rating agencies, which were being paid by the investment banks doing the securitization, would smack their best credit grade of AAA on the top tranches of these bundles. Many of those ratings have been cut to junk in the past two years as defaults surged.

Tavakoli doesn’t think the concept of securitization is flawed; she says it was abused by greedy financiers and turned into the monster that led to the collapse of the financial system.

In a telephone interview, the seasoned financial engineer talked about how we got here, and the future of securitization.

Tavakoli: It was a massive Ponzi scheme with many players involved. At times you’d have the CDO manager, an investment bank and a hedge fund involved, all of them knowing they were doing the wrong thing. These people all wanted to get in on the fees, so they all went along with this stuff. Some of the CDO- squared that came out in 2007 were nothing more than a way of avoiding acknowledging losses. It’s a scandal.

‘It Was Massive’

When you raise money from new investors to pay off old investors -- if you’re an investment bank and you have these rotting loans, and you package them up and feed them to new investors so you can pay your bonuses and dividends -- that’s a Ponzi scheme. By every definition, this is as bad as what Madoff was doing. It was massive, bigger in size.

Onaran: Why didn’t the regulators realize this?

Tavakoli: They were all sleeping -- the Securities and Exchange Commission, the Federal Reserve, the Congress, the Senate banking committee and a number of other people. I wrote the SEC in February 2007, complaining about rating agencies.

In August of 2005, the SEC was investigating Bear Stearns Cos. for mortgage securitization. Then they dropped the matter. The New York attorney general had an investigation and he dropped it too.

‘People Got Greedy’

Onaran: Why did you choose to use your correspondence with Warren Buffett as the peg for your analysis of the crisis -- besides the marketing power of his name, of course?

Tavakoli: I wanted to show that you can prosper in the financial world without ripping off other people. If I just told the story, it would be so darn depressing. But if you do it by comparing it to somebody like Buffett, you see that there’s a sane way to do finance.

The reason we’re in such a mess is that people got greedy. They were using leverage and structured products to hide problems, to make it look as if they were making huge profits when they really weren’t. These banks were paying high bonuses and high dividends on phantom profits.

Warren has always warned about leverage. His shareholder letters are a chronological history of his warnings. I thought maybe they won’t listen if I just talk about these things, but how could you not listen to Warren Buffett?

Onaran: How is the new government handling the problem?

Rewrite Mortgages

Tavakoli: One proposal I do agree with, although you might be surprised, is President Obama’s proposal to rewrite the mortgages. If you had a subprime option-ARM (adjustable rate mortgage), just turn it into a fixed-rate loan. We should redo these mortgages but not help out speculators and the people who bought a bigger house than they could afford.

Onaran: What’s the future of securitization? Will it ever make a comeback?

Tavakoli: What should happen with securitization, if we want to go back to using it as a tool of finance, we might have to bust up some existing securitizations. It might be unprecedented but we’ve already done a lot of unprecedented things.

We have to unwind, just completely rip apart, the CDO- squareds, the CDOs and go right back to the residential mortgage-backed securities but then vet all the loans in the portfolio. You have to do a rigorous statistical sampling of each lot. I would say bust up all the bad securitizations that have been done, then you can really value it, when you go back to the basic loans.

“Dear Mr. Buffett” is published by Wiley (282 pages, $24.95).

[Nov 4, 2009] Janet Tavakoli on Financial Meth Labs \

Amazing woman, amazing interview...  A lot bit too long (one hour). Still a couple of points she made are unique and the whole interview is very well done. 

Nov 3, 2009 | Mish's Global Economic Trend Analysis

Here is a lengthy but well worth listening to 59 minute interview of Janet Tavakoli on C-Span. The interview is from April 20, 2009 but given that Tavakoli's name is just now on everyone's radar, most will have missed it.

Selected quotes:

• We have taxation without representation.
• When you have some bad apples in, they draw more bad apples in.
• Collateralized Debt Obligations (CDOs) were overrated and overpriced the minute they came to market. If that wasn’t enough, investment banks were creating these things in their financial meth labs , knowingly selling things they knew or should have known were overrated and overpriced.
• In 2007 when it was clear that this activity should be shut down, because we had mortgage lenders failing throughout the country, instead of shutting down the financial meth labs, the investment banks sped up, they accelerated the bad deals they were bringing to market. Many of them were just phony securitizations with no other purpose than to hide losses.
• I was hopeful that when someone like Obama came in, there would be meaningful change. If anything, the situation has gotten worse. But this is bipartisan. You’ll notice that President Bush when he was in office, he elevated Roland Arnold who was the head of Ameriquest, that had been involved in alleged mortgage fraud, massive, sued by almost every state in the union, and he was elevated to the position of Ambassador to the Netherlands. The Netherlands did not even like it.
• This was not a model issue. This was a management issue. We had people who knew or should have known they were selling things that were value destroying securitizations, and their sale provided money to lenders were originating fraudulent loans, overrated by complicit rating agencies.
• That was the biggest Ponzi scheme in history...

Janet Tavakoli is a straight shooter and an equal party basher. You have to like that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Selected comments:

CauseAnd Effect:

“Interesting comments by Janet about the reselling of mortgages through securitization. But I know for a fact that some of the most egregious loans like Alt-A option Arms, etc...were kept by lenders as portfolio loans. I took out of few of these loans because I could use them to flip houses, but I would never dream of keeping this loan. No one could meet the payments of these things. When my mortgage broker told me that these were the most popular loans on the CA market in 2005, I knew the market was gonna blow-up.

Leo Chen:

“The folks who voted for "Change We Can All Believe In" might want to send that Janet Tavakoli video to the African-American gentleman residing in the WH who acts like a white man deep in cahoots with the Wall Street Banksters.

We would do well to send a copy of that Janet Tavakoli video to EVERY Senator and Representative. Mish, how might that be effected? You can get ten years in the slammer for stealing a couple of hundred bucks, but you will be given a million dollar bonus [with taxpayer money] after you've trashed the American economy.

Erica Benjamin:

That was fantastic. This is the kind of information that needs to be in every American's face all day long. She used very accessible language for a lot of complicated concepts. 

[Nov 4, 2009] Wood warns of correction, says “key variable in the West is government policy”  By Edward Harrison

November 3, 2009 | naked capitalism

Christopher Wood, the well-noted market strategist at CLSA and writer of the classic Japan crash warning book “The Bubble Economy,” is now warning of a market correction in the West.  According to CNBC India, Wood believes that the markets’ extreme upward move is increasing the chances of a major correction.

Wood is still cautious. He says there is some initial indication of a technical breakdown in the US. “The US market will be vulnerable early next year the US market. If it becomes clear, after this inventory cycle, that consumption, employment is not really recovering, then the market will go down. You will then get renewed stimulus in the US and measures trying to generate growth. The key variable in the West is government policy.” CLSA’s best case scenario is 1,200 on the S&P 500 by year-end, he added.

I agree with Wood that underlying economic demand may indeed be weak and all we may be seeing is an inventory and stimulus induced cyclical upturn (see my July post “ISM: Is this the mother of all inventory corrections?”). Of course, the worry is about the employment cycle not turning up before these measures’ positive effect wears off.  This is the question for 2010. If this happens, we get  a double dip and a huge market-sell off. Even if the employment situation starts to improve slowly while stimulus and the inventory cycle recede, this will lead to a muddle-through scenario, again inducing a correction. This is the heart of Van Hoisington and Lacy Hunt’s call about partial recoveries and stock market weakness.

Brick:

I don’t think inventory is well understood and it means different things to different participants in the market. What I see going on at the moment is a reduction in raw material inventories on the back of a dollar decline. Once hedging effects begin to lapse then this will feed through to margins or prices. Manufacturing and wholesaling inventories have declined, which is the result of improved efficiencies and is permanent, so don’t expect a big turn around in the ISM inventories data. Retailers are currently building inventories for the Christmas period and taking a bit of a gamble that the consumer will turn up. Despite manufacturers view point that retailers are holding too little stock I have a suspicion that it is the other way round.

As for the employment improvement then I think once you take seasonal and cash for clunkers effects out there is very little improvement. As for seeing more stimulus then I have some doubts, why else would the treasury have ducked round trying to extend the debt ceiling, unless they know their will be a political backlash. Anyone looking for good news should have been looking at exports from the ISM data which does suggest a bit of a pick up. The problem is that the economic pick up is likely to feed into corporate profits with any upturn in US consumer disposable income likely to be a long way down the line.

Edward Harrison:

Good points on inventories and stimulus. Steve Keen made some similar points yesterday:

http://www.debtdeflation.com/blogs/2009/11/02/debtwatch-no-40-november-2009-have-we-dodged-the-iceberg/

He said if you strip out government expenditure growth and cash for clunkers, you get -0.5% for what was supposed to be a robust Q3. Clearly, underlying demand is weak.

As for inventories, both wholesale and retail inventories were still declining in October according to the ISM data released yesterday. So inventories are still subtracting from GDP at this point. I see wholesale inventories turning up in a month or two.

winterwarlock

The nexus mechanism, the marriage between agency, public and private, and inside stockholders, which promulgated demographic Ponzi scheme economies, served the purpose of populating the entire face of the planet. Because we have reached relative planetary saturation, that mechanism has become cancerous; it’s consuming itself to death.

[Nov 3, 2009] Be Prepared for the Worst by Ron Paul  

Forbes.com

What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years.

As the housing market fails to return to any sense of normalcy, commercial real estate begins to collapse and manufacturers produce goods that cannot be purchased by debt-strapped consumers, the economy will falter. That will go on until we come to our senses and end this wasteful government spending.

Government intervention cannot lead to economic growth. Where does the money come from for Tarp (Treasury's program to buy bad bank paper), the stimulus handouts and the cash for clunkers? It can come only from taxpayers, from sales of Treasury debt or through the printing of new money.

Paying for these programs out of tax revenues is pure redistribution; it takes money out of one person's pocket and gives it to someone else without creating any new wealth.

Besides, tax revenues have fallen drastically as unemployment has risen, yet government spending continues to increase. As for Treasury debt, the Chinese and other foreign investors are more and more reluctant to buy it, denominated as it is in depreciating dollars.

[Nov 3, 2009] Bullish data, recoveries, crashes and the psychology of forecasting redux

The key fact on the ground is that unemployment is still increasing and high unemployment becomes structural as there is no industristries which can absorb this work force... Huge deficits state and local governments have to face for next year and the handling of the commercial real estate debts should also be taken into consideration.

November 2, 2009 | naked capitalism

What I believe is happening has much to do with Nouriel Roubini’s comments. U.S. economic policy is geared toward reproducing the status quo ante via reflation of asset prices (something Bill Gross thinks is the right policy and even Dilbert has made fun of). The policy has been wildly successful so far, with asset prices bubbling over globally. I have called this the fake recovery, but as recently as September I was on the fence about how much uptick we were to get. I never dreamed the recovery process could be so robust given the headwinds we faced.

Selected Comments

hbl:

There’s a lot to agree with here (including the inventory factor as said before), but I still disagree that this is not yet a balance sheet recession. See the latest Total Loans and Leases of Commercial Banks for one more data point.

I think the fall in the savings rate in recent months despite the broader debt reduction trend apparent in the credit data has to do with:

a) Wealthier people (with little or no debt) regaining some confidence and increasing their spending after the free fall in asset prices stopped. A new crash in asset prices would reverse this.

b) Temporary government-induced spending such as cash for clunkers.

The evidence as I see it still suggests that those with balance sheets in need of repair are doing so, despite volatile government stimulus and “wealth” effects. Japan’s economy showed positive growth and inflation for years after asset bubbles popped, but the underlying balance sheet recession dynamics were in play under the surface essentially the whole time.

Dan Duncan

... Why is the Institute of Supply Managers any different from other fact distorting trade groups (ie, the National Association of Realtors ? ...

mikkel:

Ed, thanks again for describing the dynamics of the GDP and possible surprises. I certainly was one that thought you were slightly crazy in your “imminent recovery.” Although I also have to say that that part of it could be an emotional response to the word “recovery.”

If you had written that there was an imminent increase in GDP coming I would have been rather sympathetic if skeptical (your post on the mother of all inventory corrections is a great example of changing my thoughts). However to me recovery means stability and increase in activity on the ground level. I am aware you are talking about it in a technical sense but still.

I am finding the state coincident indexes that the Philly Fed puts out to be fascinating. It really demonstrates how little a technical “recovery” means in the context of on the ground activity. The points in this post again demonstrate why we could get a blow out GDP number but change almost nothing on the ground. To me this is a completely insane way of trying to measure the economy…although I guess it’s about as insane as the actual theoretical underpinnings of the economy.

You definitely get credit as the only person I’ve read that has suggested stronger than anticipated growth AND a depression.

mannfm11:

You might note that these numbers are up from very low numbers. If inventories are still being drawn down, it means that capacity utilization is coming off very low levels. That is kind of like getting a heart beat after an electric shock. Capacity utilization includes stuff like electricity generation and oil refining, so the rest of the economy was down to very low levels.

My problem with recovery is how it is defined, which means I don’t believe we have one. To grow from 65% capacity utilization says very little. To get down to 530K unemployment claims after nearly a year of panic stimulus by the government and the Fed says the patient won’t be out of the hospital and might never be normal again. The fact that the world is in debt, not just the US, to the point that more debt is likely to be bad debt drives on the idea that not only is a recovery not likely for long, but may in fact be ill advised.

kievite:

I would like to support Dan Duncan rhetoric question  “Why is the Institute of Supply Managers any different from other fact distorting trade groups (ie, the National Association of Realtors)?”

But I will go further and suggest that economic statistic is now so politicized that it can easily make editors of Pravda proud for their objectivity. We should not believe any of them without deep analysis of the error bounds ( and I think for GDP they are at least +-30% ), hidden agenda and dependencies on other equally flawed metrics of economic performance.

I think most 401K investors are still living in a fool’s paradise and have yet to understand the gravity of the economic crisis we experience. This partial refund that Mr. Market (aka Uncle Sam) gave suckers in 2009 can be easily withdrawn on short notice.

Structurally high unemployment is in the cards for the USA and I do not see anything other then a new technological revolution that can change that. The bottom half of US consumers is already cooked and in this sense there can be no recovery, only gradual multi-year slide to the bottom. Structurally high unemployment in a service-oriented economy will have disproportionate overall sedative effect on economic activity due to hidden interdependencies (airlines-hotels-restaurants)

The fact that asset markets are so detached from reality only increases the gravity of the situation and chances for double dip.

As for GDP it is such a flawed measure that in the current circumstances anybody who pushes it as a valid indicator of the economy can be counted as a charlatan. GDP deflator can and always will be manipulated for political reasons in the same way as CPI.

Microsoft CEO IT spending won't fully recover - Yahoo! Finance

"While we will see growth, we will not see recovery..."

Microsoft CEO Steve Ballmer said Monday corporate spending on information technology will not recover to levels seen in recent years before the global economic slowdown.

"The economy went through a set of changes on a global basis over the course of the last year which are, I think is fair to say, once in a lifetime," Ballmer told a meeting of South Korean executives in Seoul.

Spending on information technology, which accounted for about half of capital expenditures in developed countries before the crisis, was unlikely to rebound fully because capital was more scarce these days, he said.

"While we will see growth, we will not see recovery," Ballmer said.

Ballmer was in Seoul to meet corporate and government officials and tout the Redmond, Washington-based company's new Windows 7 operating system. The latest edition of Windows, the software that runs personal computers, was released last month.

He said company purchases of PCs and servers were down about 15 percent globally.

[Nov 3, 2009] A ticking time-bomb or the mother of all carry trades

Nov 2 | FT Alphaville

kim:

Am I the only one who finds it hard to believe that QE, carry trades, blah blah account for this rally ? Are the proceeds from QE being recycled into equities ? Are people borrowing USD (and GBK) to buy "overseas" equities ? In sufficient amounts to account for this rally ?

Or do the market makers just believe that they are (or claim that they are) and mark things higher as they trade with each other, shuffling the deck but with an upward bias ?

Where is the data on funds flow ? The change in asset allocations, at least amongst those end-investors who are required to report such things.

I find the whole thing totally bewildering, it almost resembles a game of spoof. And so far the retail investor seems to be staying away from risk (and I'm one of them). So I get zero on cash. That looks like a good deal to me, and I can't be the only one.

Or maybe not. But whatever is happening looks very very odd to me.

[Nov 3, 2009] Top 20 Signs How Bad the Economy Is By Doug Kass

TheStreet.com's RealMoney

This blog post originally appeared on RealMoney Silver on Nov. 2 at 7:38 a.m. EDT. "We are rapidly approaching a pivot point," says Doug Kass, a general partner of Seabreeze Partners, "when all the stimulus factors -- such as abnormally low interest rates and government bailouts -- will be withdrawn, and investors will begin to discount that." Kass, who has grown more bearish recently, thinks that a continued weak consumer, an end to the cost-cutting that's fueled corporate-profit growth, and higher taxes, among other things, will mean self-sustaining earnings growth is "far less certain" than the market expects. -- Barron's (Nov. 2, 2009) Over the weekend, I was interviewed in Barron's Streetwise column by Vito Racanelli. As mentioned in Barron's and last Monday night on CNBC's "Fast Money," we are now approaching the point of maximum fiscal and monetary stimulus. That means that, statistically, we are moving ever...

[Nov 3, 2009] The S&P is heading for 800 by Neil Hume

There is a whole camp of analysts who predict that S&P500 will drop to 800  in 2010. While correction in S&P500 is expected it is unclear whether it will drop further. Any such predictions should be taken with a grain of salt...

Nov 02 | FT Alphaville

That’s the message from Bob Janjuah, RBS’s Chief Markets Strategist in his latest missive titled “Happy Christmas, Cold Turkey Time”:

We said in late Aug that S&P would get to 1100/1120 by end Oct/early Nov. We said growth would peak in Aug and then weaken (see above) into and in Q1. This is all playing out. As this plays out, I expect S&P to be in the mid-900s by y/e, and mid/low 800s by Q1 2010. Credit spreads will weaken materially, IG will do better than HY, QUALITY (strong balance sheets) will be the winner. I look for 750 Crossover by late 2009/early 2010, and then further weakness as Q1 unfolds. Govvies shud rally - I prefer BUNDS to USTs or GILTS. The USD will probably rally, but I dislike any currency where PMs are simply printing. GOLD please. GET DEFENSIVE RE RISK.

That’s right, 800 by the first quarter of next year.

Thereafter, Bob says it is all about the policy makers (PM):

MORE policy in the UK/US may help risky assets very briefly (2/4mths), but because growth weakness in the PS [private sector] is/will be a sustained feature (IMHO) for many many quarters, MORE policy will very quickly be seen as THE risk. The USD and GBP would then be at huge risk as (PM) CREDIBILITY, SUSTAINABILITY and LACK OF SUCCESS are exposed badly. Bond yields will then rise dramatically I think - NOT because of bogus CPI inflation, but because debasement/monetisation will be seen as FAILED POLICY and which will then be PUNISHED, as opposed to the current outcome, where such policy has so far been given the benefit of the doubt and ‘rewarded’.

This will lead to a truly ugly 2010 with New Lows in stocks (500-handle S&P), New/Near New Wides in HY, IG spreads another 50% wider.

The EURO and the Bund are where to be in this world, as well as the HIGHEST quality balance sheets in credit and equity land (global big caps). Gold goes to $1500. THINK ABOUT IT - this is the world where USTs, GILTs, the USD, the GBP AND risky assets ALL SELL OFF…….

This will also be the time to consider going massively OW USD/GBP, as well as OW USTs/GILTS. Why? Because 2010 and beyond will then see us FORCIBLY abandon Reckless Policy (the driver of the sell off) which would then quickly be followed by a new era of DEFLATION and AUSTERITY.

Of course, it might not turn out that way:

IF the PM response to the initial weakness over the rest of 09 and early 2010 is NO MORE POLICY, then the initial knee jerk will be +VE for the USD, the GBP, USTs and GILTS. The knee jerk will also hurt equities (S&P in the low 700s) and credit spreads (again, HY/bad balance sheets do worse than IG /Good balance sheets). BUT within mths, we will ALL LEARN TO ADJUST AND REPAIR OUR BALANCE SHEETS. The NEW Normal. 3/5yrs of US/UK GDP around 1%+/- 50bps and mild deflation/low inflation. A long period of REPAIR, REFUELLING, etc. This is the LEAST WORST OUTCOME. I really really really hope this is what we get. I FEAR, and Kevin expects, the dreaded MORE POLICY route.

As for the longer term, here’s how Bob sees it:

Near term I think the battle will be between Central Bankers, who deep down, and I think privately at least, FEAR bubbles, FEAR failure and FEAR FORCED abandonment if current policies are persisted with too long and/or added to, vs Fiscal Authorities, who by definition want short-term fixes (there is after all an election cycle in the UK & in the US next yr). This is like a rumble in the jungle between the VOLCKER-ites and the GREENSPAN-ites, with GREENSPAN representing the Fiscal Authorities (he was after all surely the most politicized central banker ever). Are the Volcker-ites up to a fight? I think so. I hope so. Kevin feels and I FEAR however that they aren’t/they won’t. In which case MORE policy and then, very soon thereafter DISASTER, will follow. In this rumble the inevitable outcome is deflation and multi-yr austerity. China will be the Ref in the boxing ring. The PS and the FS [financial sector] will be the Judges (who have I fear have already made up their minds (PS) or are soon abt to (FS)

The rest of “Happy Christmas, Cold Turkey Time” can be found in the usual place (if you have the stomach for it).

[Nov 2, 2009] Guest Post- Galbraith Says Administration’s Sole Goal is to Restore System of 5 or 10 Years Ago, But Confidence Won’t be Restored Unless Fraud Which Caused the Crash is Investigated

"The real question we need to be asking is where we are heading in the absence of reform."

November 1, 2009

Galbraith also pointed out – as many other experts have – that confidence in the system cannot be restored unless the fraud which led to the crash is investigated:

JAMES GALBRAITH: That’s the point about the crisis, is that it could have been prevented. The people in authority two, three, five years ago, knew how to prevent it. They chose not to act, because they were getting a political and an economic benefit out of the speculative explosion that was occurring.

BILL MOYERS: You mean, the people who could have prevented the dam from breaking were too busy fishing above it, and reaping big rewards to want to fix the crack in it?

JAMES GALBRAITH: Sure. The Federal Reserve, in particular, knew that the dam was cracking. Alan Greenspan, I think, almost surely knew this, and chose to wait until it had washed away.

BILL MOYERS: Why?

JAMES GALBRAITH: They let all of this run, because they were getting a superficially stronger economy out of it. The ownership society, all that was a scam, basically, designed to lure people who could never afford these mortgages into accepting them. And yes, I think they, any rational person, certainly people in the industry, knew that this was not going to last. There was a little industry code, I’ve learned, IBGYBG. “I’ll be gone. You’ll be gone.”

BILL MOYERS: Really?

JAMES GALBRAITH: Yeah.

BILL MOYERS: The industry being the securities industry?

JAMES GALBRAITH: Well, and the mortgage originators and the bankers, generally.

BILL MOYERS: But that’s criminal fraud.

JAMES GALBRAITH: Oh sure. There was a huge amount of it. The Bush administration did not actively investigate the fraud that they knew, that the FBI knew was occurring, from 2004 onward. And there will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that’s a process which needs to get underway.

Without a thorough investigation like the Pecora Commission, and without prosecuting those who are guilty, confidence and hope in the future will not be restored, consumer confidence will remain depressed, and we will remain in an economic slump.

Selected Comments:

• Lavrenti Beria:

  The Galbraith interview was interesting but it told little most of us haven’t known or suspected for some time now. When asked the critical question about whether a system as corrupt as ours could be reformed, however, Galbraith’s analytical skills seemed to go decidedly limp, almost as though to say what needed to be said – that reform is out off the question and that demonstrations and strikes are our only meaningful recourse – might cost him his professorship, something which we simply cannot have, now can we? Here’s the question and the retort:

  BILL MOYERS: The perplexing question to me is whether or not you can reform a system that is so infiltrated by the money from the people who are benefiting from what’s going on, who have a vested interest, and use their money to promote that vested interest to make sure nothing changes.

  JAMES GALBRAITH: I think you can. I think the law is powerful. I think you cannot legalize financial fraud. You cannot fully conceal the tracks of financial fraud. You have to put the resources in to uncover it. You have to prosecute it. You have to give appropriate punishments, but we have a system, in this country, for doing that. It is a question of a decision to use the judicial resources that we have, to clean up the system.

  The law and the courts are the answer? I mean, really, what kind of legal cover do these vermin lack anyway? Why it’s precisely the protection of the legal system that these people have been able to count on!

  Galbraith’s academic chair at the University of Texas must exist in such rarified air that the fate of those defaulting on credit cards and mortgages seem as mere abstractions to him. How are the courts going to remedy the situation these folks face? I mean this country can’t even manage to try out-and-out torturers and war criminals, what are the courts going to do for those whose claims lack anything resembling the merit that these do? And this with nothing at all to say of how our justices get their appointments? Shame on you, James.

  •  Kevin de Bruxelles:

    One only needs to consult Hobbes to see where the answer lies.

    In Leviathan, Hobbes contrasts two states for human society. The first being a state of nature which is described as perpetual war between individuals. The moral logic of the state of nature is that there is no right or wrong: “To this war of every man against every man, this is also consequent, that nothing can be unjust. The notion of right or wrong, justice and injustice have no place. Where there is no common power, there is no law: where there is no law, no injustices. Force and fraud, are in war the two cardinal virtues.” (13.13) And then Hobbes goes on to describe the moral logic of the state of nature: “And because the condition of man is a condition of war of every one against every one; in which case every one is governed by his own reason; and there is nothing he can make use of, that may not be a help unto him, in preserving his life against his enemies, it followeth, that in such a condition, every man has a right to every thing, even to another’s body. (14.4)

    In order to transcend the state of nature, men accede to a social contract with each other to submit to a sovereign and in the process establish a civil society. To Hobbes (later diminished by Locke) the sovereign is almost all powerful. His job is to keep the peace, to install laws and justice, and to coerce the population to live within the limits he sets. But the one of the few limiting factors on his subject’s duty to submit to the sovereign is “The obligation of subjects to the sovereign, is understood to last as long, and no longer, that the power lasteth, by which he is able to protect them. For the right men have by nature to protect themselves, when none else can protect them, can by no covenant be relinquished.” (21.21)

    What is clear is that in the United States, where the sovereign is the elected government, an elite segment of society, namely bankers and other extremely wealthy individuals, are playing by the old rules, the rules of the state of nature, and they are grabbing as much of the pie as they can. All this while the sovereign has at best lost the ability to resist this crime, or at worst, is actively complicit. But the vast majority of citizens are sitting by idly still thinking they live in a commonwealth with laws and justice.

    There are two ways out of this mess. Either the sovereign must start playing his role and start enforcing the law and justice for all, or alternatively the citizens must stop submitting to this sovereign, overthrow this system government, and start all over again to find a sovereign since living in a state of nature is not an option.

    Something along these lines should have been Galbraith’s answer but he didn’t have the courage to face the bleak reality we find ourselves in.

     
    •  George Washington:

      I liked what you wrote so much, I posted it: http://georgewashington2.blogspot.com/2009/11/government-has-broken-social-contract.html

       
    •  Doug Terpstras:

      Hobbes ’state of nature’ echoes the dystopian nightmares of Ayn Rand (We the Living [Dead], Atlas Shrugged, and The Fountainhead)—Libertarian Darwinism on steroids. Tellingly, her submissive disciple, Alan Greenspan, nearly brought that hell to Earth, and Randianism is now enjoying a resurgence in the wake of the crisis. GQ has a good panning review of Rand and the Randroid cult at the following link:

      http://www.gq.com/entertainment/books/200911/ayn-rand-dick-books-fountainhead?currentPage=1

      Indeed it seems we are on the threshold of revolution, hopefully peaceful, but post-Obama hope is waning. Government has clearly been captured, the bankster kleptocracy is in firm control, and we now have “taxation without representation”—legitimate grounds for patriotic revolt. Thus far, the propaganda mills have succeeded in their divide and conquer strategy to maintain power, but we are fast approaching a critical mass of recognition that the US government has lost its legitimacy. GW’s commentary and threads like this instill faith that all is not lost and a positive tipping point is near.

       
      •  Lavrenti Beria:

        “Thus far, the propaganda mills have succeeded in their divide and conquer strategy to maintain power, but we are fast approaching a critical mass of recognition that the US government has lost its legitimacy.”

        Indeed. The fact that supposedly unbiased news programs such as PBS’s News Hour feature constructs such as the sterile Shields and Brooks reparte is itself symptomatic of the underlying pathology. Here, two views, supposedly alternative, are presented. One is clearly to consider these the entire range of opinion on any issue with questioning led by the mouse, Jim Lehrer.

        The entire thrust here is to showcase meaningless partisan advocacy while at the same time ignoring the more fundamentally presupposed comity that joins these two cretins at the hip. The effect is to strangle any truth that, in fact, the two are a unity and that anger respecting economic and political developments needs to be directed at them both simultaneously.

        The assertion of a Republican vs. Democrat division in such instances serves only to divert attention from the real culprit here which is this Republican/Democrat unity.

        And its most toxic success in recent times is to be seen in its ability to channel right side anti-system anger into “tea party” irrelevancies aimed solely at Obama. One day, the people will add 2 and 2 and its Katie bar the door.

• squanto:

  Given our political system, those in power will always choose a quick fix over the hard, time-consuming work of a real solution. Hence Obama’s desperate attempt to reflate the status quo ante. In terms of willingness to resort to short-term expediency, Obama is not one iota different from Bush.
   

• Hugh:

  I agree with Lavrenti. We know what many of the important reforms are. We aren’t seeing any of them. What ones we do see are weak, miss the point, and are gutted in Congress before they are enacted anyway. At the same time, we see trillions going to reflate bubbles. It’s been clear for a year now reform wasn’t going to happen under a Republican or Democratic Administration. Remember candidate Obama was a big supporter of the TARP. The real question we need to be asking is where we are heading in the absence of reform.

[Nov 1, 2009] Nine More Banks Fail with CIT a Packaged Bankruptcy While Gold Shines in a Jobless Recovery

Jesse's Café Américain

It was the housing bubble and an explosion in unproductive financial activity crafted by the Fed and the Wall Street banks that provided the appearance of economic vitality. It was no genuine recovery despite the nominal GDP growth. It indicates a need to deflate the growth numbers more intelligently, if not more honestly, and future economists are likely to 'discover' this. The tech bubble was perhaps an unfortunate response to the Asian currency crisis and fears of Y2K. What was done to promote recovery from the tech collapse and create the housing and derivatives credit bubble was pre-meditated and criminal.

The current state of economics is most remarkable for its arrogant complacency in the face of two failed bubbles, a near systemic failure, a pseudo-scientific perversion of mathematics exposed, and an incredible capacity for spin and self-delusion. The people wish to believe, and Wall Street and the government economists are all too willing to tell them whatever they wish to hear, for a variety of motives. And there is an army of salesmen and lobbyists and econo-whores touting this fraud around the clock.

The Failure of Financial Engineering

The next bubble should provide the coup de grâce when it fails, although the fraudsters might try and spin ten years of a stagflationary economy as 'the new normal.'

There are good reasons for this failure of American "monetary capitalism," and it has to do with an oversized financial sector and a surplus of white collar crime that both distort and drain the productive economy. The current approach is to pump money into a failed system without attempting to reform it, to fix its fundamental flaws, to make an honest accounting of the results. The result are serial bubbles and the foundation for long duration zombie economy with a grinding stagflation that may morph into a currency crisis and the fall and reissuance of the dollar, as we saw with the Russian rouble. It will stretch the political fabric of the US to the breaking point. This is how oligarchies and their empires fall.

Continued

Recommended Links

Indexes

• 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.

• index of industrial production

• Bloomberg.com Government Bonds

John Kenneth Galbraith

• John Kenneth Galbraith - Wikipedia

• John Kenneth Galbraith

• The Affluent Society

  • The Affluent Society - Wikipedia, the free encyclopedia

  • The Affluent Society Summary and Study Guide - John Kenneth Galbraith

  • Amazon.com- The Affluent Society- John Kenneth Galbraith- Books

  Resources on John K. Galbraith

  • Interview with Galbraith at Berkeley.
  • Speech at Helsinki by Galbraith.
  • Galbraith Page in Canada.
  • J.K. Galbraith Page at Laura Forgette
  • Creative Quotations of JKG
  • Review of Good Society
  • The Legacy Continues - James K. Galbraith

Institutional economics

• AMERICAN INSTITUTIONAL SCHOOL

• Institutional economics - Wikipedia, the free encyclopedia

Corporatism

• Corporatism - Wikipedia, the free encyclopedia

• Capitalism

• Corporate Statism

• Crony capitalism

• Economic fascism

• Neoconservatism

• Plutocracy

• Regulatory capture

• Fascist socialization

• Producerism

Central banks and international institutions

• Bank For International Settlements
• IMF
• World Bank
• Federal Reserve
• OECD
• ECB
• Bank of England
• Bank of Japan

Blogs See Financial Blogs

Recommended Papers

Reviews 'Economic with the truth' by John Kay Prospect Magazine October 2000 issue 56

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...

FSO Editorials Tainted Research Lysenkoism - American Style by Antal E. Fekete 06-10-2003 by Antal E. Fekete

Professor Emeritus, Memorial University of Newfoundland. [June 10, 2003]

Hobson's Choice

From this point of view Lysenkoism has a strong footing in economics as government pressure is quite noticeable. Moreover Wall Street pressure can be substituted for government pressure as money are financing activities of only particular types of economics. In this case muti-state propogation of competely unscietific theories is not only possible but natural...

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