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Financial Skeptic Bulletin, April 2009

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Reading those now ancient posts you can instantly understand how wrong the financial press is all the time.  At this time it was completely unclear how, with so much uncertainty, the 2008 mess might play out. Also it was unclear that banks were rescued. What was clear is that the fiscal and monetary stimulus had prevented collapse of stock market despite baby-boomers withdrawing from it due to poor returns and record volatility.

Boomers actually suffered huge losses in the process of this withdrawal; who was the buying  stocks during the next 12 month rally is still a mystery. It was definitely not individual investors.  Other then Paul Kasriel  very few analysts expected a huge stock rally which suddenly materialized in April: there were very few, if any, economic preconditions for such a rally.  Many suspect that Fed and Treasury hands are dirty in this :-). 

The interesting question arise: if market situation in April 2009 was so turbulent and unpredictable who was in the best shape to react quickly at least at right direction (forget about predicting magnitude) ?

The buffer against runaway wage inflation was probably the globalization of labor. Also one should not underestimate the fact that the Fed Politburo manages capitalism much more that it is commonly assumed and all this "free market" talks is just PR for peasants.  It simply does not exist on the level of multibillion companies. And smaller companies with some minor exceptions are actually  managed by banks.   Of course there are side effects to this the Fed intervention (David, April 04, 2009):

I have been involved with government economic regulation and policy for 25 years. No matter how convinced government interventionist policy-makers, and their apologists amongst academic economists, have been that they have now finally figured everything out and will of course avoid the mistakes of the past, they are always wrong. There are ALWAYS "unintended" (but eminently foreseeable) consequences. The world is always too complicated. Fed-administration of monetary policy is of course government intervention and prescribed pricing at the very heart of capitalism, i.e., the financial markets.

Another interesting factor was the determination of the centrists in Congress to block any rational response to the challenges of global resource constraints, and the absolute lunacy of the Repug Right. One exception was battery assisted (hybrid) small cars, which became more prominent and battery building promoted on the highest levels f Administration (the President himself toured some plants). Combined they pretty much ensured paralyzed ineffective governance of Obama administration, just kicking the can down the road.  Two was lost (or, resulted in stalemate, which is the same thing) does not help either.

Among prominent inflationistas:

One year later the same discussion can be continued with the same arguments. The only post that suggest that rally might continue is Paul Kasriel  post ([Apr 23, 2009]  Northern Trust's Kasriel Are we there yet):

But there is a good chance that the worst for the U.S. economy in terms of quarterly contractions in real GDP is behind us
Calculated Risk

From Paul Kasriel and Asha Bangalore at Northern Trust: Are We There Yet?

Is the economic recovery at hand? No, we still are mired in a recession that is going to be of the longest duration in the post-WWII era (the previous record was 16 months) and is likely to involve the largest annual average contraction in real GDP for a single year (the record to beat is a decline of 1.9%, which occurred in 1982). But there is a good chance that the worst for the U.S. economy in terms of quarterly contractions in real GDP is behind us, occurring in the fourth quarter of 2008. We currently are forecasting an annualized rate of contraction in real GDP of 3.8% in the first quarter of this year vs. the annualized rate of contraction of 6.3% in the fourth quarter of 2008. So, economic activity still is descending, but our forecast has the rate of descent moderating. We do not expect any growth in real GDP until the fourth quarter of this year.

 Enjoy !!

Best/Rest

Top Posts

[Apr 29, 2009] Ten Guidelines from Richard Bernstein on His Final Day at Merrill

April 15, 2009 | 1440 Wall Street
Tomorrow will be my last day at Merrill Lynch. I want to sincerely thank my colleagues and clients for the opportunity to work with them. It is because of them that my 20 years at the firm have been so rewarding.

As a last report, here are what I view as 10 of the most important investment guidelines I've learned in my time at the firm:

  1. Income is as important as are capital gains. Because most investors ignore income opportunities, income may be more important than are capital gains.
  2. Most stock market indicators have never actually been tested. Most don't work.
  3. Most investors' time horizons are much too short. Statistics indicate that day trading is largely based on luck.
  4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy
  5. Diversification doesn't depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.
  6. Balance sheets are generally more important than are income or cash flow statements.
  7. Investors should focus strongly on GAAP accounting, and should pay little attention to "pro forma" or "unaudited" financial statements.
  8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.
  9. Investors should research financial history as much as possible.
  10. Leverage gives the illusion of wealth. Saving is wealth.

[Apr 27, 2009] Luck and Taxes

"Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich - disparities that often stem from random events. ..."
Economist's View
Robert Frank:

Before Tea, Thank Your Lucky Stars, by Robert Frank, Commentary, NY Times: The link between success and luck is stronger than many people think. Analysis of this connection provides a useful framework for weighing ... recent "tea parties," where orators ... bemoaned their "crippling" tax burdens. ...

Contrary to what many parents tell their children, talent and hard work are neither necessary nor sufficient for economic success..., some people enjoy spectacular success despite having neither attribute. (Lip-synching members of boy bands?...)

Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich - disparities that often stem from random events. ...

Malcolm Gladwell reports that a disproportionate number of pro hockey players owe their success to the accident of having been born in January, which made them the oldest, most experienced players in every youth league growing up. For that reason alone, they were more likely to make all-star teams, receive special coaching and eventually become professionals.

Although people are often quick to ascribe their own success to skill and hard work, even those qualities entail heavy elements of luck. ... People born with good genes and raised in nurturing families can claim little moral credit for their talent and industriousness. They were just lucky. ...

Even in markets where luck plays no role, minuscule differences in performance often translate into enormous differences in salaries. ... In law, consulting, investment banking, corporate management and a host of other occupations, the ablest performers are often paid hundreds or even thousands of times as much as others who perform nearly as well.

Another important message of recent research is that a person's salary depends far more on where she is born than on her talent and effort.

For example, as a Peace Corps volunteer in Nepal long ago, I hired a cook who had no formal education but was spectacularly intelligent and resourceful. ... Yet his total lifetime earnings were less than even a very lazy, untalented American might earn in a single year. Well-paid Americans owe an enormous, if rarely acknowledged, debt to the social investments that supported their success.

The president's proposal is modest: raising the top marginal tax rate from 35 percent to 39.5 percent, its level when Bill Clinton left office and well below the corresponding level in most other industrial countries. There has never been a shortage of talented people willing to work hard for success... And the president's proposal would not cause such a shortage...

It would, however, promote more efficient provision of public services... For example,... when government levies higher tax rates on the wealthy, we can provide public services that the wealthy and others greatly value but that would otherwise be beyond reach. Under such a tax system, the heavier tax bill becomes payable only if we're lucky enough to end up among life's biggest winners.

Financially successful tax protesters seem blissfully unaware of how incredibly fortunate they are. To borrow from the late Ann Richards and her description of the first President Bush, they were born on third base and thought they'd hit a triple.

See also Hal Varian's Luck, Skill, and Progressive Taxes..

[Apr 25, 2009] Why Pay Tuition?

with 14 comments

One of our goals here at The Baseline Scenario is to explain basic economics, finance, and business concepts and how they apply to the things you read about in the newspaper. I think I'm pretty good at this. But if you prefer video and diagrams, I may have found something much better (thanks to a reader suggestion).

Salman Khan has created dozens of YouTube videos covering the basics of banking, finance, and the credit crisis. (There is also a series on the Geithner Plan that doesn't seem to be on the main index page yet.) I've only watched a few, but they are very clear and from what I can see everything looks accurate.

But what's really exciting is that he also has many, many more videos on math - from pre-algebra through linear algebra and differential equations - and physics. My wife and I watched the one on the chain rule and implicit differentiation and she gave it two thumbs up. (My wife is an economics and statistics professor.) So the next time you - or your child - needs to derive the quadratic formula, just head on over to his web site. Hours and hours of fun.

[Apr 28, 2009] The capital well is running dry and some economies will wither

This was an important contrarian post. Actually rally were already under way and lasted more then a year. "some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long. "
Telegraph

Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long.

Commerzbank said every European bond auction is turning into an "event risk". Britain too finds itself some way down the AAA pecking order as it tries to sell £220bn of Gilts this year to irascible investors, astonished by 5pc deficits into the middle of the next decade.

US hedge fund Hayman Advisers is betting on the biggest wave of state bankruptcies and restructurings since 1934. The worst profiles are almost all in Europe – the epicentre of leverage, and denial. As the IMF said last week, Europe's banks have written down 17pc of their losses – American banks have swallowed half.

"We have spent a good part of six months combing through the world's sovereign balance sheets to understand how much leverage we are dealing with. The results are shocking," said Hayman's Kyle Bass.

[Apr 1, 2009] Speech 'Rebuilding the Economy by Rebuilding America' By Felix Rohatyn

I am a capitalist but I do worry that capitalists may, through short-sightedness, greed, and/or vanity, bring our system into jeopardy. We need to move past the simplistic notion that we all will prosper if government would only "get out of the way."
April 1, 2009 | FT.com

Felix Rohatyn, president of FGR Associates and former US ambassador to France, to the Economic Club of Chicago on March 24, 2009.

It is good to be back at the Economic Club of Chicago and to see so many friends. It is always a privilege to speak here and I am grateful to be your guest.

We meet today at a time of grave concern about the global economy and our position in it. As Roosevelt did almost eighty years ago, we are searching for a strategy for reviving America and allowing us to lead. I believe that a central component of that strategy must be significant new investment in our public infrastructure.

I have argued for greater attention to infrastructure for many years. President Obama's stimulus program now includes infrastructure, and his budget for next year proposes a federal infrastructure bank to fund projects of regional and national significance – an idea that holds great promise for smarter, more effective federal spending.

I hope that these early initiatives, as important as they are in themselves, will lead to the massive level of infrastructure investment that we need in order to secure our future quality of life, increase economic productivity and create millions of jobs.

As of now, we must end the sterile debate over "big" or "small" government that has stopped us from making the investments we need to prosper. For almost three decades, we have been seized by a caricature of government as fundamentally inept and wrong-headed. But as we have seen in recent events, this makes for a better speech than a rule for governing. Governor Mario Cuomo once said to me: "We should have all the government that we need but only the government that we need." He was right.

I am a capitalist but I do worry that capitalists may, through short-sightedness, greed, and/or vanity, bring our system into jeopardy. We need to move past the simplistic notion that we all will prosper if government would only "get out of the way."

My experience in both government and business has taught me that sometimes, particularly in times such as these, government clears the way. Throughout American history, government investment has served as a platform for economic growth and a more affluent and inclusive society. From the Louisiana Purchase and the Erie Canal, through the creation of the Land Grant colleges, to the Interstate Highways and the G. I. Bill, government investment was pivotal.

These important episodes offer us important lessons. One is that none of them was born of consensus. In retrospect, we regard the Louisiana Purchase and the Erie Canal as "no-brainers." But in their day, many people thought those projects were wasteful budget-busters –they could not see how valuable these investments would be. And I worry that today our budget rules don't distinguish adequately between investment and consumption, leaving us with too little of the former, and too much of the latter.

Moreover, the opposition to these investments was often self-interested and privileged. The elite private universities saw no need for the Land Grant Colleges. Private utilities were appalled by the idea of TVA. And there were simply political elites who feared that the sweeping change investments bring would undermine their own power.

A third lesson of these episodes is that few of them ever work out perfectly. The railroad barons rode the Transcontinental Railroad to great and undeserved wealth. Speculators found room to maneuver within the Homestead Act. There were often great abuses of good programs. But the fact that these programs weren't perfect doesn't mean they weren't worthwhile. The prospect of problems should focus us, but not immobilise us.

I mention these events because I hope that President Obama's recent stimulus will be the beginning of a rebalancing of investment and consumption in our economy, and a long-term reappraisal of what our government does and why.

In fact, infrastructure is only one of a number of pressing, national investment needs.

Too many children go to school in dilapidated facilities. Too many suffer from illnesses because we underinvest in public health. We must make the transition to a domestically-based, carbon-free economy. We need to complete a broadband, Internet network. These are the investments that will define our future, as surely as the Land Grant Colleges or the Panama Canal did in their day.

The stimulus package passed by the Congress was not perfect. But I am dismayed when I hear it derided as wasteful public spending, or that infrastructure spending is unwarranted because some of it would take a year to get underway.

There is clearly a need for stimulus – we need to create employment. But we need to balance the short- and long-terms more artfully. We may need another stimulus in very short order.

This is another lesson reinforced by the current crisis – the recognition that we need to invest federal dollars consistently and rationally.

Again it's not just infrastructure. We may soon invest in salvaging the auto industry; I think we should. But that investment will be wasted if we do not implement an energy tax program that will make the investments in new automobile technology worthwhile.

Our global competitors are investing in their own futures. If China's investments in education match its massive investments in infrastructure, China will become even more competitive. The Chinese already have plans to construct 300,000 km of rural roads and nearly 100 new airports. In fact, a recent article in the New York Times noted that China is using the need for domestic fiscal stimulus as a platform for making new, public investments that will make them a better competitor.

For many years, I have looked for a different approach to the way we finance infrastructure. Our current programs are good at spending money, but not at getting something in return. They subsidise construction but spend too little on maintenance. They skirt the issue of what users are obliged to pay. And they do not make different types of investments compete for scarce taxpayer dollars.

Americans are willing to pay for infrastructure if they get value for their money. Recent polling results show that 94 perceive purposes – such as the construction of new facilities, as opposed to the refinancing of old ones.

When we add it all up, these new realities require a new system for appraising, selecting, and funding our public works.

Two years ago, a bipartisan Commission chaired by Senator Warren Rudman and myself unanimously recommended creating a National Infrastructure Bank. All the infrastructure funding programs would be folded into the Bank, and any major federal investment in an individual project would have to be approved by the Bank's evaluators.

The Bank would be able to negotiate with the individual state or local sponsors of a project. Alternatively, it could help groups of states come together for projects with national implications, such as the upgrading of the national rail freight nexus in Chicago or high-speed inter-city rail that saves energy and frees up airspace while addressing security concerns, or many others.

It would also create an avenue for private investors to put risk capital into new projects and protect their involvement through the Bank's own participation. In short, it would treat Infrastructure like an investment, and not just a jobs program.

The Bank would be capitalised by giving it the amounts that now go into the existing programs, about $60-70bn per annum. But the Bank would be free to support projects in any number of ways, as would a private sector bank in a competitive environment.

The American Society of Civil Engineers estimates it will take $2,200bn dollars to bring our infrastructure to an acceptable level within five years. This is a staggering sum, and it speaks to the negligence of which we have been guilty. The $120bn allocated in the stimulus is only a small part of a solution. However, the Bank could make significant strides towards filling these needs by issuing its own long term bonds and, with conservative leverage, could raise several hundred billion dollars initially, and become self-financing over time. Thus, the Bank could become a strong partner with domestic and foreign sources of capital to finance our infrastructure investments. The goal of $500bn of new investment over the next five years would be readily achievable if we refocused federal programs and added outside sources.

This would require a sweeping reorganisation of the way we invest in our country, and at this time may seem like a far-fetched proposal. But the problems we face are so important and our tools so outdated that only a full reorganisation will do.

I know that consideration of infrastructure financing must be weighed in the context and climate of the economic issues we face, here at home and all over the world: energy security; the prospect of global climate change; the need to reform our health care system; security against terror and the proliferation of weapons of mass destruction, to name but a few.

It is a disconcerting list, and fixing these problems will not be easy. But we are now talking about these problems realistically. I do not know if President Obama will succeed in his arduous agenda. But at least we now have an agenda, and that is the first step.

Within this framework, one of the most important issues is the necessity for the western democracies to forge even stronger ties aimed at global growth and stability. The difficulties in the organisation of the recent G20 Summit have not been encouraging on that score.

The last years of the 20th Century were years of astounding wealth creation. The markets demanded cheap money and the Fed gave it to them. Reckless speculation and excessive leverage were aided and abetted by regulators blind to what was happening. With the repeal of the Glass-Steagall Act in 1999, our leading financial firms were given the license to become too big to fail and they, in turn, became too big to be managed. New financial creations, hedge funds and private equity, invented by bankers and traders all over the world, were searching for higher and higher returns. The markets then turned into casinos and the Bernie Madoffs and Allen Stanfords became heroes to those they would destroy. Close behind came the global financial crisis. And then the music stopped.

It is futile to search for one responsible party; everyone who matters was guilty. The question now before us is how we might meet the challenge of this remarkable moment and rebuild our country.

We have so far not found a secure formula to reverse these developments. The United States has taken the lead in urging strong stimulus by the developed countries, which is beginning to create a split between the positions of the US and the UK on the one hand, and the rest of the world on the other.

I believe the Europeans are wrong about stimulus, but they have ample reason to distrust American views. During the last two years an increasing level of controversy has surrounded our capital markets and, in particular, executive compensation, which gives rise to a general critique of American capitalism in today's world.

During my four years as United States Ambassador to France, I spent considerable time and effort singing the praises of American market capitalism. It was met generally by European skepticism of its dangers and of its harshness. America's capitalism over the decades has had enormous successes, but we must now show that our system is fair and that we are prepared to manage it pragmatically if we are to continue being the leaders of the world.

When the Prime Minister of China, our biggest creditor, publicly raises questions as to the security of Chinese assets in the US, it is time to give some serious thought to this issue. The recent controversies involving some of our biggest investment firms, banks and insurance companies require that the United States react with high standards – that we stand for the creation of wealth within a framework of fairness.

I know from my own experience that crises can lead to the kinds of reforms that build confidence and stability. My own involvement with a major financial crisis was the crisis of New York City in 1975. That crisis had been brought about by excessive lending by our banks and reckless spending by the City.

We succeeded in rescuing the City in the face of opposition created by President Ford's Administration. It was not until President Giscard d'Estaing of France and Chancellor Helmut Schmidt of Germany warned President Ford of the danger of a bankruptcy of New York, that we were able to negotiate a modest federal loan to the City. But this averted the catastrophe of a bankruptcy that would have seriously wounded both the City as well as the State of New York. It was an early symptom of global financial integration.

We succeeded in rescuing the City and used our momentum to put New York's fiscal house in order, thanks in large part to my friend and leader, Governor Hugh Carey. But the crisis New York City faced was less dangerous than today's global crisis. In 1975, the banks were the rescuers – today they are the rescued. Many have been as short-sighted as New York itself was more than 30 years ago.

We're now learning the cost of inadequate regulation and oversight . We will inherit partial ownership of a number of financial institutions and, if we do not stabilise the economy, we may have to nationalise several big banks temporarily – a circumstance fraught with danger. This was recently predicted by former Fed Chairman Alan Greenspan, a fervent supporter of deregulation. It may be that our government will turn out to be the only credible and large enough entity to provide financial shelter to some of our large financial institutions.

Market capitalism is a sophisticated system that requires adherence to sophisticated rules; we are now witnessing what happens when these rules are ignored. The financial system must be regulated with an eye to system risk. Institutions must maintain adequate capital and submit to greater transparency and strict boundaries on the kinds of businesses they enter.

We cannot count on the conservativism or common sense of the system or its managers for its long-term stability. America must be a trustworthy partner in economic policy, and must keep its own house in order. These are the rules. After we come out of this crisis, we must remember how it happened, and make sure they are never broken again. This may be easier said than done, but the world depends on our doing it.

NEWS CONTENTS

Old News

[Apr 29, 2009] Clusterfuck Nation by Jim Kunstler

Even if the Mexican swine flu turns out to be something of a false alarm, it will require billions of dollars in unexpected new outlays for prevention operations here in the USA -- reinforcing the false idea that the nation has bottomless resources (the same idea that has been driving the bail-out fiesta). My guess is that the fear emanating from the story will be a potent generator of paranoia in the meantime, leading to widespread closures of things, canceling of events, restrictions on travel (official or otherwise), and a sell off in the financial markets. And that's if the flu turns out not to amount to anything.

If the flu is the real deal, it will surely drive a stake through the faintly-beating heart of that invalid global economy, and possibly even continental-scaled economies like the US, the Euro-zone, and China -- any place where things and people have to move long distances to keep life going. The US, obviously, suffers in this instance from its proximity to Mexico, and the fact that so much of our food comes from places that employ casual Mexican labor. A serious flu outbreak would be a short path to food shortages in the US, with our three-day supermarket inventories and just-in-time shipping methods. It would not be such a bad idea now to lay in supplies of beans, brown rice, cooking oil, onions, and toilet paper.

The big story at the end of last week was New York Attorney General Andrew Cuomo's pursuit of former Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke in the matter of Bank of America's gobbling of Merrill Lynch last fall. It is alleged that the dynamic duo importuned BOA chief Ken Lewis to avoid disclosing some important particulars to the BOA shareholders, as required by law. The outstanding stage-whisper coming from all this was the word "indictable" in reference to messers Paulson and Bernanke. It goes to show how swiftly events can move beyond "unthinkable" in extraordinary times. Now, former Merrill Lynch chief John Thain -- of thousand-dollar trash-basket infamy -- has come back out of the woodwork to backbite BOA's Ken Lewis over who-said-what in regard to a treasure chest of bonuses divvied up during the blur of TARP payouts last fall. Thain complains of being unemployed since then -- though one wonders why he doesn't just shut the fuck up, buy half of Nantucket with his untold millions of booty, and learn to play the oboe or something. This giant CEO cat fight was just getting interesting when the Mexican flu pulled the news-plug on it.

Of high interest to those confused and perplexed over President Obama's actions so far in the banking fiasco, I commend a great piece by fellow blogger-on-the-margins Charles Hugh Smith: Obama's Secret Plan. This analysis is low on the paranoia and high on the Machiavellian maneuvering insight. The basic idea is that Mr. Obama has gone along with all the TARPing and PPIPing because it was tactically the only way that he could give the Wall Street plutocrats enough rope to hang themselves -- and that this was the only reality-based strategy that could get public opinion in the mood for real change. It explains a lot, if it's true. Alternately, it would be very sad to learn that Mr. Obama really believes he can rev back up a securitized-debt-and-consumption fiesta by turning the Federal Reserve into an ATM.

In any case, the banking-and-investments sector has been on auto-pilot for a few weeks. Lesser banks are crashing around the country (Idaho, Florida, California last week), but the remaining Big Boyz are still lurching through the landscape like so many Frankenbanks, jazzed up on electric surges of digital cash. There are ever more hints of a peasant uprising against the castle of privilege, but no sign just yet of the flaming brands and shaking fists from the village below. This flu thing will put the schnitz on their distempers for a while.

[Apr 29, 2009] Sell-in-May-and-Go-Away by Todd Harrison

"I believe the current rally will prove a massive stock tease": he can't be more wrong at this time...
April 29, 2009 | Yahoo! Finance

I believe the current rally will prove a massive stock tease. We monitored the cumulative imbalances as they built through the years and it would be myopic to assume we've swallowed the bitter pill in its entirety. While there are two sides to every trade, we must remember that social mood and risk appetites shape financial markets.

I don't know how conditions are where you live, but through my lens, times are tough and tension is elevated. While news is always worst at the bottom and best at the top, our finance-based global economy is dependent on employment, leverage and the velocity of money.

One way or another, the bar bill of our collective excess must be paid by this generation or the next.

[Apr 29, 2009] U.S. Economy in 2nd Straight Quarter of Steep Decline By JACK HEALY

April 29, 2009 | NYT

The gross domestic product shrank at an annual rate of 6.1 percent from January through March, the Bureau of Economic Analysis reported. It was the third straight quarter of declines and capped the worst six months of economic activity since the late 1950's.

Economists had predicted a drop of 4.7 percent, and the steep dip could dampen hopes that the pace of economic declines had begun to ebb. The decline was almost as sharp as in the previous quarter, when the economy shrank at a pace of 6.3 percent, its worst drop in a generation.

A plunge in business investment contributed to much of the overall decline in the nation's economic output.

Companies slashed their capital investment at an annual rate of 38 percent, and cut their inventories at a pace of $103.7 billion as they rushed to reduce their costs. Business investment in software and equipment declined by an annualized 33.8 percent, and investment in new structures was down 44.2 percent.

If there was one bright spot in the numbers, it was that consumer spending edged up by 2.2 percent after two quarters of declines. The sharper-than-expected drop in economic output came in sharp contrast to recent signs of stabilization in the economy.

... ... ...

...The current unemployment rate of 8.5 percent is expected to rise to as high as 10 percent as businesses slash their costs and institute hiring freezes, buckling down for more bad times.

.... ... ...

"'I don't think anyone's going to be thrilled," said Michael Moran, chief economist at Daiwa Securities. "The unemployment rate is going to continue rising, and I think this soft labor market is going to continue to give a disappointing tone to the economy."

[Apr 29, 2009] Willem Buiter's Maverecon Green shoots grounds for cautious pessimism

FT.com

The only reasonably convincing evidence of 'green shoots' comes from China. That, however, is unlikely to be sustainable, as it is very much the result of a 'same-as-it-ever-was' package of fiscal, monetary and credit policy measures by the Chinese authorities. The export- and heavy-industry led expansion they have successfully engineered is the way of the past. It will go nowhere, unless China transforms the composition of both production and demand in the directions that are unavoidable (and also desirable) for a country at its level of economic development. Apart from China, the only green shoots I have seen were in the salad bar of the hotel I am staying at.

[Apr 29, 2009] How libertarian dogma led the Fed astray By Henry Kaufman

I have doubts about the hypothesis that Greenspan was a libertarian. more plausible explanation would be that Greenspan was just a compulsive ladder climber without any own beliefs. Ann Rand nonsense was just a smoke screen that greatly helped his career. In no way he was a libertarian: he was a corrupt promoter of corporate welfare (junior member of financial Politburo where Wall Street heavyweight like Sandy Weill played the first violin) : private profit/public losses (or Greenspan put). "Corporate welfare" system needs to be dismantled ASAP. "Welfare queens from Wall Street need to held accountable by Pecora-style commission and criminal prosecution if they cross the line. Moreover, The Treasury and Federal Reserve can no longer be considered honest brokers. They too have been corrupted . . .
April 27 2009 | FT.com

The Federal Reserve has been hobbled by at least two major shortcomings that were primarily responsible for the current and several previous credit crises. Its failure to spot the importance of changing financial markets and its commitment to laisser faire economics were big mistakes and justify a fundamental overhaul of the Fed.

The first of these shortcomings was its failure to recognize the significance for monetary policy of structural changes in the markets, changes that surfaced early in the postwar era. The Fed failed to grasp early on the significance of financial innovations that eased the creation of new credit. Perhaps the most far-reaching of these was the securitisation of hard-to-trade assets. This created the illusion that credit risk could be reduced if instruments became marketable.

Moreover, elaborate new techniques employed in securitisation (such as credit guarantees and insurance) blurred credit risks and raised – from my perspective, many years ago – the vexing question, "Who is the real guardian of credit?" Instead of addressing these issues, the Fed was highly supportive of securitisation.

One of the Fed's biggest blind spots has been its failure to recognise the problems that huge financial conglomerates would pose for financial stability – including their key role in the current debt overload. The Fed allowed the Glass-Steagall Act to succumb without appreciating the negative consequences of allowing investment and commercial banks to be put together. Within two decades or so, financial conglomerates have come to utterly dominate financial markets and financial behaviour. But monetary policymakers failed to recognise that these behemoths were honeycombed with conflicts of interest that interfered with effective credit allocation.

Nor did the Fed recognise the crucial role that the large financial conglomerates have played in changing the public's perception of liquidity. Traditionally, liquidity was an asset-based concept. But this shifted to the liability side, as liquidity came to be virtually synonymous with easy borrowing. That would not have happened without the marketing efforts of large institutions.

My second major concern about the conduct of monetary policy is the Fed's prevailing economic libertarianism. At the heart of this economic dogma is the belief that markets know best and that those who compete well will prosper, while those who do not will fail.

How did this affect the Fed's actions and behaviour? First, it explains to a large extent why the Fed did not strongly oppose the removal of Glass-Steagall restrictions.

Second, it also helps explain why the Fed failed to recognise that abandoning Glass-Steagall created more institutions that were "too big to fail".

Third, it diminished the supervisory role of the Fed, especially its direct responsibility to regulate bank holding companies. To be sure, the Fed's supervisory responsibilities have never been very visible in the monetary policy decision-making process. But its tilt toward an economic libertarian approach pushed supervision a notch down just at a time when financial market complexity was on the rise. Fourth, as hands-on supervision slackened, quantitative risk modelling became increasingly acceptable. This approach, especially quantitative modelling to assess the safety of a financial institution, was far from adequate. But it worked hand in glove with a philosophy that markets knew best.

Fifth, adherence to economic libertarianism inhibited the Fed from using the bully pulpit or moral suasion to constrain market excesses. It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective. Such public pronouncements about financial excesses are hard to ignore, reaching the broad public as well as market participants.

Sixth, the Fed's increasingly libertarian philosophy underpinned its view that it could not know how to recognise a credit bubble but knew what to do once a bubble burst. This is a philosophy plagued with fallacies. Credit bubbles can be detected in a number of ways, such as rapid growth of credit, very high price/earnings ratios and very narrow yield spreads between high- and low-quality debt.

By guiding monetary policy in a libertarian direction, the Fed played a central role in creating a financial environment defined by excessive credit growth and unrestrained profit seeking. Major participants came to fear that if they failed to embrace the new world of securitised debt, proxy debt instruments, and quantitative risk analysis, they stood a very good chance of seeing their market shares shrink, top staff defect, and profits dwindle.

Ironically, the problem was made worse by the fact that the Fed was inconsistently libertarian. The central bank stuck to its hands-off approach during monetary expansion but abandoned it when constraint was necessary. And that, in turn, projected an unpredictable and inconsistent set of rules of the game.

We should, therefore, fundamentally re-examine the role of the Fed and the supervision of our financial institutions. Are the current arrangements within the Fed structure adequate – from its regional representation to its compensation for chairman and governors to its terms of office for governors? How can the Fed's decision-making process be improved? If we were to create a new central bank from the ground up, how would it differ? At a minimum, the Fed's sensitivity to financial excesses must be improved.

[Apr 29, 2009] Obama Summarizes Economic Policies, Misses Several Key Points

April 19, 2009 | Seeking Alpha

On March 4, 1932 (one year to the day before FDR took office), a majority-Republican Senate Banking, Housing, and Urban Affairs Committee established it to investigate the causes of the 1929 crash. It was little more than a fig leaf until Democrats took over, appointed Ferdinand Pecora as special counsel, and made a real effort for banking and regulatory reform.

Straightaway, Pecora looked into Wall Street's seamy underside by placing powerful bankers in the dock, holding them accountable for their actions, and doing through hearings what would have been impossible in open court given their ability to "buy" justice.
He confronted Wall Street's biggest names. Years later in his book, Wall Street Under Fire, Pecora wrote:
"Undoubtedly, this small group of highly placed financiers, controlling the very springs of economic activity, holds more real power than any similar group in the United States." Morgan called it performing a "service" and exercising no more control than through "argument and persuasion."

Roosevelt encouraged him in his March 4, 1933 inaugural address saying:

"there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency....the rulers of the exchange of mankind's goods have failed through their own stubbornness and their own incompetence, have admitted their failure and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men...."

"They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish. The money changers have fled their high seats in the temple of our civilization. We must now restore that temple to the ancient truths. (Doing it requires) apply(ing) social values more noble than mere monetary profit."

[Apr 29, 2009] US backing for world currency stuns markets - By Ambrose Evans-Pritchard

Mar 27, 2009 | Telegraph

US Treasury Secretary Tim Geithner shocked global markets by revealing that Washington is "quite open" to Chinese proposals for the gradual development of a global reserve currency run by the International Monetary Fund.

[Apr 29, 2009] Ten Guidelines from Richard Bernstein on His Final Day at Merrill

April 15, 2009 | 1440 Wall Street
Tomorrow will be my last day at Merrill Lynch. I want to sincerely thank my colleagues and clients for the opportunity to work with them. It is because of them that my 20 years at the firm have been so rewarding.

As a last report, here are what I view as 10 of the most important investment guidelines I've learned in my time at the firm:

1. Income is as important as are capital gains. Because most investors ignore income opportunities, income may be more important than are capital gains.

2. Most stock market indicators have never actually been tested. Most don't work.

3. Most investors' time horizons are much too short. Statistics indicate that day trading is largely based on luck.

4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy

5. Diversification doesn't depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.

6. Balance sheets are generally more important than are income or cash flow statements.

7. Investors should focus strongly on GAAP accounting, and should pay little attention to "pro forma" or "unaudited" financial statements.

8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.

9. Investors should research financial history as much as possible.

10. Leverage gives the illusion of wealth. Saving is wealth.

[Apr 29, 2009] Standard & Poor's Puts Additional Losses on U.S. RMBS at $260-$375B

April 27, 2009 | Seeking Alpha

Total additional losses from legacy US Residential Mortgage-backed Securities are expected to reach $260 billion: $165 billion from subprime, $90 billion from Alt-A, and $5 billion from prime RMBS, according to Standard & Poor's Market, Credit, and Risk Strategies group (MCRS).

In a worst-case economic scenario, total losses could reach $375 billion: $235 billion from subprime, $132 billion from Alt-A, and $10 billion from prime.

MCRS, an independent group within S&P, reviewed the total amount of private-label (not issued by Fannie Mae (FNM) or Freddie Mac (FRE)) residential mortgage-backed securities (RMBS) outstanding, as well as their current performance record. Their findings:

[Apr 28, 2009] The capital well is running dry and some economies will wither

"some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long. "
Telegraph

Traders already whisper that some governments are buying their own debt through proxies at bond auctions to keep up illusions – not to be confused with transparent buying by central banks under quantitative easing. This cannot continue for long.

Commerzbank said every European bond auction is turning into an "event risk". Britain too finds itself some way down the AAA pecking order as it tries to sell £220bn of Gilts this year to irascible investors, astonished by 5pc deficits into the middle of the next decade.

US hedge fund Hayman Advisers is betting on the biggest wave of state bankruptcies and restructurings since 1934. The worst profiles are almost all in Europe – the epicentre of leverage, and denial. As the IMF said last week, Europe's banks have written down 17pc of their losses – American banks have swallowed half.

"We have spent a good part of six months combing through the world's sovereign balance sheets to understand how much leverage we are dealing with. The results are shocking," said Hayman's Kyle Bass.

[Apr 28, 2009] Slashdot Future of Financial Mathematics

April 25, 2009 | Slashdot
by jstott (212041) on Sunday April 26, @12:21AM (#27718567)
No. His "system" is indeed based on the assumption that such events are unpredictable.

His system is basically arbitrage. We have an algorithm for pricing options (Black-Scholes) that makes an invalid assumption (it uses Gaussian statistics where it shouldn't). This fault was recognized almost as soon as it was published, but people continue to use it anyway, which means they're mis-pricing their options. Black Swan makes money in the long haul because they know big price swings occur more often than the options are priced for, and they buy based on this knowledge. Exploiting market mis-pricings like this one is the essence of arbitrage.

Like classic arbitrage, this only works because a) there is a mismatch between price and real cost [risk] and b) there aren't a lot of players making the same purchase. Change either A or B and Black Swan's strategy will become a money-loser, or at least a break-even.

-JS

--
Vanity of vanities, all is vanity...

[Apr 27, 2009] Luck and Taxes

"Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich - disparities that often stem from random events. ..."
Economist's View
Robert Frank:

Before Tea, Thank Your Lucky Stars, by Robert Frank, Commentary, NY Times: The link between success and luck is stronger than many people think. Analysis of this connection provides a useful framework for weighing ... recent "tea parties," where orators ... bemoaned their "crippling" tax burdens. ...

Contrary to what many parents tell their children, talent and hard work are neither necessary nor sufficient for economic success..., some people enjoy spectacular success despite having neither attribute. (Lip-synching members of boy bands?...)

Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich - disparities that often stem from random events. ...

Malcolm Gladwell reports that a disproportionate number of pro hockey players owe their success to the accident of having been born in January, which made them the oldest, most experienced players in every youth league growing up. For that reason alone, they were more likely to make all-star teams, receive special coaching and eventually become professionals.

Although people are often quick to ascribe their own success to skill and hard work, even those qualities entail heavy elements of luck. ... People born with good genes and raised in nurturing families can claim little moral credit for their talent and industriousness. They were just lucky. ...

Even in markets where luck plays no role, minuscule differences in performance often translate into enormous differences in salaries. ... In law, consulting, investment banking, corporate management and a host of other occupations, the ablest performers are often paid hundreds or even thousands of times as much as others who perform nearly as well.

Another important message of recent research is that a person's salary depends far more on where she is born than on her talent and effort.

For example, as a Peace Corps volunteer in Nepal long ago, I hired a cook who had no formal education but was spectacularly intelligent and resourceful. ... Yet his total lifetime earnings were less than even a very lazy, untalented American might earn in a single year. Well-paid Americans owe an enormous, if rarely acknowledged, debt to the social investments that supported their success.

The president's proposal is modest: raising the top marginal tax rate from 35 percent to 39.5 percent, its level when Bill Clinton left office and well below the corresponding level in most other industrial countries. There has never been a shortage of talented people willing to work hard for success... And the president's proposal would not cause such a shortage...

It would, however, promote more efficient provision of public services... For example,... when government levies higher tax rates on the wealthy, we can provide public services that the wealthy and others greatly value but that would otherwise be beyond reach. Under such a tax system, the heavier tax bill becomes payable only if we're lucky enough to end up among life's biggest winners.

Financially successful tax protesters seem blissfully unaware of how incredibly fortunate they are. To borrow from the late Ann Richards and her description of the first President Bush, they were born on third base and thought they'd hit a triple.

See also Hal Varian's Luck, Skill, and Progressive Taxes...

[Apr 26, 2009] Beware Insider Selling

It's really funny that people view insiders as economic gurus in the present economic situation. How about Fuld switching career to a stock commentator on CNBC ? ...
The Big Picture
  1. dead hobo Says:
    April 26th, 2009 at 9:44 am

    ... ... ...

    The economy is filled with dour and miserable people who rate 110% on the buzzkill meter. The stock market is filled with happy people who are making lots of money and lots of professionals who want to be my friend (except for short sellers, who just hate everybody). The stock market has happy news business reporters who tell me it's OK to make money with stocks. The economy looks depressed enough to hang itself, but not until it talks you into going first.

    Therefore, all you need to do to profit beyond avarice is to buy companies where a) insiders aren't selling and b) companies where insiders are selling. You can't lose. The stock market will protect you from the economy.

  2. franklin411 Says:
    April 26th, 2009 at 9:52 am

    So wait…I'm to believe that the economy is crashing because corporate managers were too stupid to see the dangerous bubble they had created, and I'm also to believe that corporate managers are so brilliant that they're anticipating problems ahead and dumping stock like crazy?

    I love it…everyone who agrees with me right now is a genius. The same guy, if he disagrees with me tomorrow, is a moron.

  3. dead hobo Says:
    April 26th, 2009 at 10:00 am

    franklin411 Says:
    April 26th, 2009 at 9:52 am

    So wait…I'm to believe that the economy is crashing because corporate managers were too stupid to see the dangerous bubble they had created, and I'm also to believe that corporate managers are so brilliant that they're anticipating problems ahead and dumping stock like crazy

    reply:
    -----
    Point [well] taken. Since these people are confirmed stupid, this is absolute proof of a market that has nowhere to go but up. The economy may be noxious, but the stock market is soaring. It's become the official Happy People Club. Happy people attract happy people. This is the real secret to success.

[Apr 26, 2009] Economist- A Glimmer of Hope

Another classic contrarian statement: "The worst thing for the world economy would be to assume the worst is over". It might be true in a long run, but for the next 12 months it was a nice joke.
April 26, 2009 | CalculatedRisk

The Economist cover story is titled A glimmer of hope? and cautions: "The worst thing for the world economy would be to assume the worst is over"

Tupuli:

I used to really like The Economist, but sometime in the last year I realized that their correspondants' adherence to economic liberalism was one-sided. For example, they advocate tough-love capitalism for automakers and more generally, those on the losing side of globalization. I tend to agree with those arguments. On the other hand, they completely abandon such principles when their readership (e.g. bankers) is threatened. All of a sudden they offer nuanced arguments about 'why finance is different'. I've also come to believe many of the criticisms offered below as well:
http://en.wikipedia.org/wiki/The_Economist#Criticism

Anyone else come to a similar conclusion?

Anyway, I'm still likely to buy one before a long flight and generally do find their analysis insightful.

anotherajh:

tupuli writes: I used to really like The Economist, but sometime in the last year I realized that their correspondants' adherence to economic liberalism was one-sided. For example, they advocate tough-love capitalism for automakers and more generally, those on the losing side of globalization. I tend to agree with those arguments. On the other hand, they completely abandon such principles when their readership (e.g. bankers) is threatened. All of a sudden they offer nuanced arguments about 'why finance is different'.

I completely agree, Tupuli. I have been a long time subscriber to the Economist, and sometime around 2000 they lost their way. Indeed I recall an earlier incarnation of "Buttonwood" describing the US debt/financial policies as those of a "banana republic". But while they used to write prescient and insightful articles,they suddenly seemed to be falling over themselves to excuse obvious folly as sensible "innovation". This was especially evident in their writing about CDOs, but they also treated the stupidity of the Bush administration with kid gloves until very late in the debacle. This is why I started searching the blogs for something better, and am so happy to have found the likes of "Calculated Risk", "Follow the Money", "Naked Capitailism, and "Baseline Scenerio", not to mention the insights of energyecon, dryfly, evilhenrypaulson, mp, and others. But I was pleased by this latest issue of The Economist, and I hope they've got their mojo back.

Doc Holiday:

Between 1929 and 1932, the Dow Jones Industrial Average soared by more than 20% four times, only to fall back below its previous lows. Today's crisis has seen five separate rallies in which share prices rose more than 10% only to subside again....

JUSA :
When some of you talk about the "banksters and elitists" who exactly are you referring to? I mean these are not just some abstract people. They have First and Last names and exist in the real world. Do you fret about George Bush and Barack Obama, or their real masters.

Lets see who you may have in mind but be afraid to say:

Rothschilds
Kuhns
Loebs
Kahns

Greenspan
Zoellick
Bernanke
Dassault (Bloch)
Barney Frank (US Senator)
Axelrod (Obama's election advisor/puppeteer's agent)
Summers
Geitner
Goldman Sachs's CEO Blankfein
AIG Former CEO Greenberg that created the mess but safely retreated in shadows right before the crisis
Same can be said about the CITI's CEO Weil
Madoff the money launderer

and the list goes on and on. You get the picture. Now we can see who the banksters and elitists are.

Are you so afraid to name them by name? These are publicly known, yet there are many of them who are not known yet they are present in the halls of power in almost every major government and country.

[Apr 26, 2009] IMF Emerging Markets Veteran on the U.S.

One of the central themes of our Atlantic article was that the current crisis in the U.S. is very similar to the crises typically seen in emerging markets, and that resolving the crisis will require (some of) the measures often prescribed for emerging markets. This, Simon said, would be the assessment of IMF veterans who had worked on emerging markets crises.

At the exact same time that we were writing that article, Desmond Lachman - who worked at the IMF for 24 years, and then worked on emerging markets for Salomon Smith Barney for another seven years - was writing an article for the Washington Post saying many of the same things.*

Selected comments
  1. Lois F

    I find myself mystified as to what the Obama Administration is thinking, it seems so obvious that they are letting the bank oligarchs take the system down. It must be American exceptionalism blinding them or something.

  2. Badtux

    The problem is, Lois, it is not so obvious that the Obama administration is letting the bank oligarchs take the system down. The system appears to be stabilized at the moment. It is still sick, but there is time now for the surgeons to consult and figure out what procedures will work best to cure the patient. Obama the Candidate did not win by taking hasty actions - he was a calm, steady methodical campaigner who won by staying on message and running an incredibly tight campaign - and those who expect him to take hasty actions today when there is time for similar calm, steady, methodical actions simply were not paying attention when he was running for office.

    As I've pointed out in another thread, if you are looking for expertise that knows something about where the skeletons are buried in the financial system, you don't get academics or IMF bailout specialists. All they have is theoretical knowledge, which is nice, but it is, well, theoretical.

    You look for, well, the best people you can find inside the financial system - the people who were reading the tea leaves correctly before things came to the current impasse. This presents obvious conflict of interest problems, but you don't hire a plumber to decide your medical care when what you need is a heart surgeon, you just have to set it up so that the heart surgeon has somebody looking over his shoulder to make sure he's not recommending unnecessary surgeries just to make extra bucks. And the person looking over your heart surgeon's shoulder is going to be an expert on heart care too, and probably a member of the same medical society and such, but that just means you have to carefully examine their advice and check with even more sources before taking action, not that you should ignore their advice or go hire a plumber to decide your medical care.

    In short, it is not surprising that the Obama administration has hired a lot of people from within the system to work on repairing the system. Without additional supporting evidence, I am not currently willing to accept conspiracy theories about the Obama administration being the bagmen for oligarchs. We are currently in much better shape than we were at a similar point in 1931 when much less money had been vaporized out of the economy by the initial shock (the stock market collapse of 1929) than has disappeared due to the housing collapse, and while it's fashionable to demean Hank Paulson and Tim Geithner as "tools", evidence to support this thus far is of the same quality as proof of the existence of the Yeti. From where I'm sitting neither man is the sharpest tool in the tool shed, but Paulson did a reasonable job of stabilizing the patient for a lame-duck President while waiting for the new administration to take office, and the new administration has barely been in office for four months and it's still unclear what they're going to do about the core solvency issues once they have everybody onboard and the political consensus needed to take action (remember, nothing happens in a vacuum - there are always political constraints because we live in a democracy, not a dictatorship).

    To conclude: It may very well be that the Obama administration's actions are as evil as you say. But at present, we simply don't have enough evidence to make that statement with any degree of certainty. Until then, the best course of action is to urge the administration towards meaningful action in directions that we believe necessary.

[Apr 26, 2009] Madoffing the U.S. Financial System

April 25, 2009 | charles hugh smith-Weblog and Essays

I reprint Zeus Y.'s important essay today because it makes a critical point few emphasize--that the lies we're being told are being swallowed whole because many of us don't seem to want to know the reality looming behind the smoke and mirrors.

I received the following incisive comments from Zeus in an email:

It continues to amaze me how much people try to divert the obvious. I'm tired of people using words like "unthinkable" and "unknowable" to describe the value of CDS (credit default swaps) and now they might as well be screaming, "We don't want to know. Tell us lies, tell us whatever, just don't cause me anxiety." Am I in the minority? My anxiety disappears when I know. It's this surreal Emperor-with-no-clothes train wreck that everyone is trying to paint as a mere blip that makes no sense to me.

"C'mon," I want to say. "They've already proven that they've consistently and thoroughly enriched themselves at your expense." It is central to their operation. The whole system runs on it. Do you want to continue to be taken after the con has already been exposed? How can that lessen anxiety? "Oh, I've been ripped off. They're doing the same things without any transparency or accountability. Now, I feel so much better!" It's flat-out loony.

We're seeing as much a social psychological watershed moment here (as well as financial, and frankly environmental watershed). We've got to understand the benefit and joy of reality and stop with the damaging fantasies we've bought into. They don't work even when they "work". If everyone could actually be a king (instead of a sucker), the environment would collapse and we would die in a much shorter time. Consider this collapse a grace period to get our crap together and create another system.

This one has proven it does not work, and thankfully, proven it before it takes out the entire globe.

Thank you, Zeus. Here is his insightful essay, in case you missed it. If you reprint it or link to it, please credit it to Zeus Y.

Madoffing the U.S. Financial System

We are seeing unfold before us nothing short than the Madoffing of the U.S. financial system. The recent reports of profitability for the major financial companies-Bank of America, Goldman Sachs, Citigroup, etc. are exactly Bernie Madoff on a large scale.

Here is the recipe:

  1. Cannibalize incoming capital and investment to keep the bonus, fee, and salary gravy train going for broker and firm,
  2. Sustain the illusion of solvency by paying dividends and claiming a profit, and
  3. Ensure through accounting tricks that liabilities are never counted.

It's very easy. Hand out phony returns, based on laundered incoming bailout and investment money. Skim your take. Hide liabilities. Delude people into thinking you are profitable.

Investment banks have all they need to keep the fraudulent charade going:

  1. Highly fungible bailout money, much or most of which has no strings, no requirement even to notify lending authorities where the money is going.
  2. The power to price assets, including so-called "toxic assets" (sic), in any way that suits them [freed from "mark to market" accounting],
  3. An immense amount of greed, entitlement, opportunism, and nihilistic amorality among the leaders and managers of financial institutions, and
  4. political enablement which accedes to "too big to fail" blackmail, conducts inconsequential and invisible "stress tests," and assures institutions that no matter how badly or corruptly they perform they will not be taken over.

Forget that manic or addicted behavior has never been solved by enablement. Enablement, in fact, only makes the problem worse by delaying the inevitable and necessary coming to terms.

The Financial Accounting Standards Board's (FASB) recent ruling that banks can establish prices for their assets any way they choose leaves us with a huge valuation-of-assets problem: "I think it's a mistake. If it's too cold in the room, you don't fix the problem by holding a candle under the thermometer," William Poole, former Federal Reserve Bank of St. Louis president, told Reuters at a conference in New Orleans. "It may increase reported bank earnings by 20 percent, but it has nothing to do with the reality of bank earnings. It's very important to maintain that distinction," Poole said.
( http://www.bnet.com/2407-13071_23-284495.html )

This might alternatively by called the "90 trillion dollar blender" problem ( www.calculatedriskblog.com). South Park did an unfortunately "truth is stranger than fiction" satire on the finance industry in which the industry leaders claimed a Margaritaville blender was worth 90 trillion dollars. FASB's ruling allows them to do just that. If you live by the market (including wildly inflated values), then you should die by the market. Even if you feel your assets are undervalued, you should at least give an accounting as to what they are, why you think they are undervalued, and submit your reasoning to public scrutiny and debate.

As far as I know there is no such requirement presently, and therefore no transparency or accountability. Banks can simply assign whatever worth is convenient for their purposes. This gets back to the counterfeiting charge I leveled against credit default swaps. This is simply phony money. If I can say my pen is worth 3 million dollars and then borrow against that to try to make a quick buck in some investment scheme, I am committing fraud. Banks do it, and they are acting legally? If past performance is any indication of future behavior, investment banks are probably right now continuing to make highly risky, highly leveraged investments to stoke their personal largesse, while hoping for a Hail Mary patch for their company's books. These addicts won't be kept from their crack.

I know President Obama is trying with his conventional approaches to buy time, space out damage from financial mismanagement, and avoid a panic. There is probably some wisdom to that. However, trusting these companies to right their own ship after the atrocities they have consistently committed is suicidal. Why don't we just pick off these institutions one at a time. I am almost certain that even generous stress tests have shown the major players to be insolvent.

Instead of indulging in corporate welfare to bail out these crooks, force the worst in order, one by one, into receivership (with adequate time in between to absorb and reallocate assets), wipe out the stockholders and bondholders, and sell off the healthy parts. If fraud has been committed, seek criminal conviction and set up a special civil court to allow stockholders and bondholders to seek damages. This will help avoid the "Oh, crap" factor and attendant market panic.

However, it will also mean we as a society will need to take the heat and full responsibility. Gray Davis, according to the documentary "Enron: The Smartest Guys in the Room," had the power to do this with Enron (go in and take them over), but he demurred, as Obama has, to the mistaken notion that private market players are always the better arbiter of the mistakes created by those same players.

This protracted travesty is the logical outcome of an economy increasingly dependent upon financialization -- the notion that, "Your money can work for you; you don't have to work." Increasingly endless and abstract mechanisms must be developed to create a notion of "growth" that has lost its foundation in real productivity. Our whole economy is being kept afloat by international demand directed, at first, at our derivatives and other phony high-yield financial vehicles, and now (in a reactive spasm) conveniently directed at our "secure" bonds (which is as you noted, Charles, another emerging bubble).

As long as we insist upon enabling this money-for-nothing illusion in ourselves and our financial institutions, our problems will get worse and our character will take a beating.

[Apr 26, 2009] 1981-1983 Social Security Commission: Myths and Realities by Bruce Webb

Greenspan was very eager to please Reagan at this time and his zeal paid off handsomely...
Angry Bear

Currently there is a lot of discussion about forming a new Bi-Partison Entitlements Commission modeled in part on the 'Greenspan Commission' of 1981-82 and partly on the Base ReAlignment Commission (BRAC). The idea is that you get people to agree on 'Crisis', then get a 'bi-partisan' group together to present an up or down 'compromise' proposal to Congress. I put 'bi-partisan' and 'compromise' in quotes because this idea is being pushed by a combination of Conservative Republicans and Blue Dog Democrats who have predetermined the outcome. A group I belong to is preparing some major push-back, and when the lead authors get the material together it certainly will be plugged here. But in the meantime I invite those interested in this to actually revisit the results of the previous Commission.

REPORT OF THE NATIONAL COMMISSION ON
SOCIAL SECURITY REFORM JANUARY 1983.

The guts of the Report are found here:
Chapter 2: FINDINGS AND RECOMMENDATIONS

While the meat is found here: Appendix K- List of Tables This is extracted from the broader Actuarial Cost Estimates for OASDI and HI and for Various Possible Changes in OASDI and Historical Data for OASDI and HI

Some selected tables and commentary below the fold.

The first Table is from Chapter 2 and shows the mix of recommendations. Note that .58% of payroll is punted to Congress, the rest of this was what they could get from a consensus vote. Even then the final vote on the Report was 12-3.


Now the result translated into numbers:
I am only showing the results for Alternative II-A which is the more optimistic of the two Intermediate Cost projections, for II-B you will have to click through. Table 7-A: Cost rates

Now the same data expressed in Trust Fund Ratios by Alternative

A close look shows that the Commission didn't really think they had fixed OAS even in the short run. And while their numbers show OAS (that is the actual retirement component) running surpluses in the medium term they still foresaw it running to Depletion in 2027.

As I have said before this would be a pretty sad and ineffective kind of 'Prefunding Boomer Retirement'. Why is combined TF Depletion now set for 2041? Because the economy actually came in somewhat better than II-A and closer to I (which is now called Low Cost). But that wasn't part of the master plan

Some additional perspective from the Commission's Executive Director can be found in this Oral History of Robert Myers. Oral History of Robert Myers

Read More on "1981-1983 Social Security Commission: Myths and Realities"

[Apr 26, 2009] Restoring The Old Order That Failed

"the old order that's been running the American establishment for the last generation has demonstrably and miserably failed"
Newsroom Magazine

Failed Establishment

The problem isn't that Blankfein or anyone else did something wrong in the decade before the collapse began, although they well may have done so. The problem is that the nation's banks and credit extenders failed to do what was safe, conservative of others' interests, and above board. The result has been cataclysmic– leading former Washington Post finance writer and author William Greider to surmise - the old order that's been running the American establishment for the last generation has demonstrably and miserably failed.

But so did we all - and, it now seems, so is our new president who is knowingly and one might presume intentionally trying to restore the old order establishment. There are many good reasons for doing so. Among them are stability, predictability and risk avoidance to an economy still in peril. Those who favor installing an new order are becoming more vocal in their assertions that perpetuating the systems and institutions that failed only treats the symptoms of what is clearly a potentially fatal disease.

What Matters Most Goes Unknown, Thus Unheeded

In a generation seemingly absent responsible adults, we knowingly and cheerfully chose to have a grand party at the expense of our children and grandchildren. In the doing, we effectively destroyed our great institutions of finance, journalism, education, banking, manufacturing, insurance, transportation and athletics.

As a nation our errors were of commission and omission. Our errors of commission were largely based on tilting the economic playing field to favor the wealthy and powerful among us by lessening governmental regulation and control. Deregulation became a game in which immense wealth was transferred from the nation's middle class to the mighty, rich and powerful. Absent responsible adults to remind us that American capitalism rests on a foundation of checks and balances, we systematically deregulated ourselves into disaster.

And now reality has set in, what matters most has become clear and painful. Over reliance on laissez-faire thinking, and the invisible hand first postulated by Adam Smith has failed. Neither we, nor the world around us is happy with the result. We know someone did us wrong and we rightly demand retribution. Until we accept the reality that as a nation we got exactly what we asked for, substantive change remains unlikely.

Angry And Confused

But we're mad as hell - and rightfully so. Our sense of betrayal is universal at home and abroad. Bankers we once held in high esteem we now flagellate as thieves and criminals. We overlook, for the moment, our own contributions to the problem. For as we collectively invested billions in market holdings based on short term earnings performance, our personal flight from reality sent our own jobs overseas, destroyed effective corporate governance and freed our bankers to do other, more risky things with our savings.

Our banks turned into failed enterprises by way of corrupt behavior and failed oversight because we, you, me all of us, sought to live better, become wealthier, or profit from failed governance. As long as deregulation favored our interests, our jobs, and our investments, we went along. We did so by permitting ourselves to be made ignorant of what matters most, to be herded to political extremes, and corrupted by single-issue thinking that concealed what was being done in our name. We allowed ourselves to be seduced by those who pandered to our desires and our need to be needlessly entertained. It it we who disdained things that really mattered - things we knew little about and cared less to know.

It was our making that produced a one party system comprised of two warring extremes. It was our demand that someone else do the work, take the risk, give of their lives so that we might prosper that made us a debtor nation. It was we who demanded that our once mighty financial empires be turned into wild-eyed speculators cunningly running criminal enterprises. Our government was permitted to run-amuck by failed political institutions, failed oversight, failed governance and the disembowelment of long respected journalistic institutions by people and organizations that surely knew better.

[Apr 25, 2009] The One Trillion Commercial Real Estate Time Bomb

"In this light, anything that the government can try to do, absent continuing to print massive amounts of dollars, is irrelevant."
April 25, 2009 | Zero Hedge

Combining all sources of CRE asset holdings demonstrates the true magnitude of this problem. The period of 2010-2013 will be one of unprecedented stress in the CRE market, and a time in which banks will continue taking massive losses not only on residential mortgage portfolios but also on construction loan portfolios, the last one being a possible powder keg: Foresight Analytics estimates C&L loan losses at a staggering 11.4% in Q4 2008.

And the bad news continues: there is a risk that commercial mortgages will under-perform CMBS loans, and delinquency rates for bank commercial mortgages will be magnitudes higher than those for comparable CMBS (commercial mortgage-backed securities -- NNB). The figure below demonstrates the underperformance of bank commercial mortgages: as of Q4 2008 the delinquency rate for CMBS was less than half of bank CRE exposure.

Reflecting on this data should demonstrate why the administration is in such full-throttle mode to not only reincarnate credit markets at all costs (equity market aberrations be damned) but to boost credit to prior peak levels, explaining the facility in providing taxpayer leverage to private investors who would buy these loans ahead of, and at maturity. Absent an onslaught of new capital, there is simply nowhere that new financing for commercial real estate would come from and the entire banking system would crash once the potential $1 trillion + hole over the next 4 years become apparent, as there is less and less capital left to fill the ever increasing CRE cash black hole.

An attempt to estimate the number of loans that would not conform for refinancing, based on two key criteria of cash flow and collateral presents the conclusion that roughly 68% of the loans maturing in 2009 and thereafter would not qualify. The amount of refinanceable loans is important because borrowers will either be unwilling or unable to put additional equity into these properties. Instead borrowers will be faced with either negotiating maturity extensions from lenders or simply walking away from properties. And despite the banks' and the administration's promise to the contrary, loan extensions will not provide the way out (see below), meaning losses taken against CRE is only a matter of time.

... ... ...

In this light, anything that the government can try to do, absent continuing to print massive amounts of dollars, is irrelevant. The equity market can easily go up indefinitely, short squeezes can be generated at will, TALF can see 10 new, increasingly more meaningless permutations, the administration can prepare worthless stress tests that are neither stressing nor testing, and talk up a storm on cable TV to convince regular investors that all is well, yet none of these will do one thing to provide the banks and CMBS borrowers with the massive capital they will need to plug the value gap either during a CRE loan's term or at maturity. The multi-trillion problem is simply too massive to be manipulated and is also too large to be simply swept under the carpet for the next administration and generation. It is inevitable that the monster hiding in the closet will have to be addressed head on, and the sooner it happens, the less the eventual destruction of individual and societal net worth (however, it still would be massive). Delaying the inevitable at this point is not a viable option: Zero Hedge hopes the administration realizes this, ironically, before it is too late.

Selected Comments

[Apr 25, 2009] Why Pay Tuition?

with 14 comments

One of our goals here at The Baseline Scenario is to explain basic economics, finance, and business concepts and how they apply to the things you read about in the newspaper. I think I'm pretty good at this. But if you prefer video and diagrams, I may have found something much better (thanks to a reader suggestion).

Salman Khan has created dozens of YouTube videos covering the basics of banking, finance, and the credit crisis. (There is also a series on the Geithner Plan that doesn't seem to be on the main index page yet.) I've only watched a few, but they are very clear and from what I can see everything looks accurate.

But what's really exciting is that he also has many, many more videos on math - from pre-algebra through linear algebra and differential equations - and physics. My wife and I watched the one on the chain rule and implicit differentiation and she gave it two thumbs up. (My wife is an economics and statistics professor.) So the next time you - or your child - needs to derive the quadratic formula, just head on over to his web site. Hours and hours of fun.

[Apr 25, 2009] Samuel Brittan Worries About Secular Stagnation

"What if stagnation is caused by having consumed all the easy oil, and having cultivated all the reasonably productive land?"
He writes:

A long cool look at budget deficits: it would have been much better if the UK could have entered the [current] recession with much lower initial deficit and borrowing ratios – if only because the financial markets do not understand the very good arguments for fiscal deficits in depressed times....

What fundamentally is wrong with a budget deficit? The basic argument is that if borrowing is too high the government can get into a debt trap, having to borrow more and more simply to pay the interest on past borrowings....

Keynes in his General Theory maintained, however, that the propensity to save was much greater than the private propensity to invest, not just at the bottom of a recession but more or less permanently – a state known as secular stagnation....

We could easily have a good few years in which secular stagnation might seem to prevail again, if only because of the near destruction of the world financial system. If we are in such a state then an attempt to adhere rigidly to a fiscal rule could lead to a permanent and unnecessary loss of output outweighing any welfare loss from the debt trap risk itself.

I have sympathy with those economists who favour a mainly monetary approach to sustaining demand. But I fear that the present dangers are great enough to require a belt and braces – monetary and fiscal – approach.

I go back to an early suggestion of Milton Friedman... tax rates should be set to balance government spending at a hypothetical level of national income corresponding to "reasonably full employment at a pre-determined price level"... the beauty of the suggestion is that, should the economy go back to a recognisable trend growth rate, then the budget would automatically achieve the target balance.

Yet should there really be secular stagnation then deficits would run on as long as necessary...

[Apr 25, 2009] Off the Charts - A Recession That Is Already Setting Records

NYTimes.com

THE current recession has become the second-worst in the last half-century and is close to surpassing the severe 1973-75 downturn, according to the Index of Coincident Indicators, based on government data and compiled each month by the Conference Board, a private organization.

Unlike the more widely followed Index of Leading Indicators, which is supposed to help forecast changes in the economy, the coincident index is aimed at simply recording how the economy is doing now.

... ... ...

As measured by the National Bureau, there were actually two recessions during the period we now remember as the Great Depression - 1929 to 1933 and 1937 to 1938 - separated by a recovery that did not come close to restoring the economy to its pre-Depression size. That first downturn lasted 43 months, nearly three times as long as this recession has lasted until now.

[Apr 25, 2009] Ford -- "Turning the tide in North America"

Are Ford bonds out of danger ?
swamp otis (profile) wrote on Fri, 4/24/2009 - 7:13 am

another smoking gun from last night.

posted by jmf (homepage) wrote on Thu, 4/23/2009 - 10:36 pm

"""""moin from Germany,

speaking of a Banana Republic.....

Goldman Sachs Principal Transactions Update: 1 Billion Shares!

This is getting surreal. Goldman principal program trading is now well over 5x compared to its customer and agency trades and a 150 million share pick up compared to last week. For yet another week, Goldman's principal trading represents more than half of all NYSE member firm principal transactions.
http://zerohedge.blogspot.com/2009/04/goldman-sachs-principal-transactio...

Now take a look at the almost non existant volume of yesterdays late market pop.......

http://zerohedge.blogspot.com/2009/04/equity-market-recap.html

I assume the next move down will be not very pleasant........""""""

[Apr 25, 2009] The GOP divorced from reality By Bill Maher

Chances for any economic recovery are undermined by powerful legacy of Reagan brainwashing which lasted 25 years and created an army of "good fortive base is absolutely apoplectic because, because ... well, nobody knows. " Does this mean that the country is doomed ?
April 24, 2009 | Los Angeles Times

(699 Comments)

The Republican base is behaving like a guy who just got dumped by his wife.

If conservatives don't want to be seen as bitter people who cling to their guns and religion and anti-immigrant sentiments, they should stop being bitter and clinging to their guns, religion and anti-immigrant sentiments.

It's been a week now, and I still don't know what those "tea bag" protests were about. I saw signs protesting abortion, illegal immigrants, the bank bailout and that gay guy who's going to win "American Idol." But it wasn't tax day that made them crazy; it was election day. Because that's when Republicans became what they fear most: a minority.

The conservative base is absolutely apoplectic because, because ... well, nobody knows. They're mad as hell, and they're not going to take it anymore. Even though they're not quite sure what "it" is. But they know they're fed up with "it," and that "it" has got to stop.

Here are the big issues for normal people: the war, the economy, the environment, mending fences with our enemies and allies, and the rule of law.

And here's the list of Republican obsessions since President Obama took office: that his birth certificate is supposedly fake, he uses a teleprompter too much, he bowed to a Saudi guy, Europeans like him, he gives inappropriate gifts, his wife shamelessly flaunts her upper arms, and he shook hands with Hugo Chavez and slipped him the nuclear launch codes.

Do these sound like the concerns of a healthy, vibrant political party?

It's sad what's happened to the Republicans. They used to be the party of the big tent; now they're the party of the sideshow attraction, a socially awkward group of mostly white people who speak a language only they understand. Like Trekkies, but paranoid.

The GOP base is convinced that Obama is going to raise their taxes, which he just lowered. But, you say, "Bill, that's just the fringe of the Republican Party." No, it's not. The governor of Texas, Rick Perry, is not afraid to say publicly that thinking out loud about Texas seceding from the Union is appropriate considering that ... Obama wants to raise taxes 3% on 5% of the people? I'm not sure exactly what Perry's independent nation would look like, but I'm pretty sure it would be free of taxes and Planned Parenthood. And I would have to totally rethink my position on a border fence.

I know. It's not about what Obama's done. It's what he's planning. But you can't be sick and tired of something someone might do.

Republican Rep. Michele Bachmann of Minnesota recently said she fears that Obama will build "reeducation" camps to indoctrinate young people. But Obama hasn't made any moves toward taking anyone's guns, and with money as tight as it is, the last thing the president wants to do is run a camp where he has to shelter and feed a bunch of fat, angry white people.

Look, I get it, "real America." After an eight-year run of controlling the White House, Congress and the Supreme Court, this latest election has you feeling like a rejected husband. You've come home to find your things out on the front lawn -- or at least more things than you usually keep out on the front lawn. You're not ready to let go, but the country you love is moving on. And now you want to call it a whore and key its car.

That's what you are, the bitter divorced guy whose country has left him -- obsessing over it, haranguing it, blubbering one minute about how much you love it and vowing the next that if you cannot have it, nobody will.

But it's been almost 100 days, and your country is not coming back to you. She's found somebody new. And it's a black guy.

The healthy thing to do is to just get past it and learn to cherish the memories. You'll always have New Orleans and Abu Ghraib.

And if today's conservatives are insulted by this, because they feel they're better than the people who have the microphone in their party, then I say to them what I would say to moderate Muslims: Denounce your radicals. To paraphrase George W. Bush, either you're with them or you're embarrassed by them.

The thing that you people out of power have to remember is that the people in power are not secretly plotting against you. They don't need to. They already beat you in public.

Bill Maher is the host of HBO's "Real Time with Bill Maher."

[Apr 25, 2009] The Recovery to Come

Jamie Galbraith explains why he believes the recovery will be slow, and what we might do to speed it up:

The Recovery to Come, Remarks to the 18th Annual Conference Honoring Hyman Minsky, by James K. Galbraith: ...The question before us is:... Will what went down, come back up? ... It seems to me that there are four essential points to make about the expansion to come.

The British used to call this scenario "stop-and-go." A future of short and incomplete expansions may be the most likely case, with no prospect for a return to full employment. For the working population of the country, this is no recovery at all. And it will be made all the worse rising financial markets and premature declarations of victory, the gloating of the bailed-out. ...

Selected Comments

bakho says...

Many of the banksters think that the consumer credit economy is going to return. NaGonnaHappen. BigAuto in part sealed its fate by only making profits on expensive models. In order to sell them, Auto loans have gone from 3 years to 5-7 with the result that people that might like to buy a new car are underwater on their trade in.

In addition, people are waiting for the more fuel efficient cars to come on line before they buy. With GM idling plants for months, the ripple will take down many parts suppliers and affect demand for steel. Since expenditures on transportation are the even larger than expenditures on housing, turn around in Auto/transportation will be critical to recovery. The credit card defaults are starting to hit and housing has still not deflated the entire bubble.

A new energy economy that would invest in a modern electric grid and pay people to invest and sell to the grid could be part of the new economy that is less dependent on oil imports. The overbuilt housing is a 50 year headache, because many of the houses are in locations that require long commutes and are fuel inefficient. The FSU created the same type of problem by building cities in Siberia that are a drag on the rest of the country.

bakho says...

How much car can you afford?

The best rule-of-thumb we've seen is that monthly payments shouldn't exceed 8% of your gross monthly income. If that's $3,000, for example, then the payments should be no more than $240 a month.

Nor should you stretch your loan out over more than 48 months, or four years, to lower payments enough to fit that rule.

New cars and trucks start depreciating as soon as they're driven off the showroom floor. Stretching payments out for 60 months or more virtually guarantees buyers will be "upside-down" for much of the loan. That means they'll owe more than the vehicle is worth, making it difficult to sell or trade.

Yet extending payments over five, six or even seven years is how dealers persuade customers to spend -- and borrow -- record amounts for new cars and trucks.

According to the Federal Reserve the average length of an auto loan was 61.1 months in May and the average amount financed reached an all-time high of $27,163. At 7.8% annual interest, the average rate for such loans, the monthly payment would be a hefty $540 a month.

Beezer says...

"The actual and potential availability of IMF resources on this scale has encouraged Mexico, Poland and Colombia to apply for almost $80bn in precautionary financial assistance from the IMF's new Flexible Credit Line facility. This will boost confidence within these countries and is also an insurance policy against further global weakness." Tim Geithner in yesterday's FT.

So the IMF, a internazionalized policy bank, is getting more money and is receiving loan requests from clients who otherwise would not have asked for or received assistance. Fine. Makes common sense.

So if this idea is a good one, why haven't we applied the same practical tool nationally? A national bank would behave as the IMF will behave, lending to further specific goals of our nation, not relying on private banks as conduits.

We're asking private banks to do something they manifestly would not normally do: Lend into a deepening recession. Private capital can get reckless in good times, but in bad times they are not going to willingly solicit more losses. They're going to preserve capital.

The only outfit which will be counter-cyclical in times of dire need is a national bank. It's an effective tool. Without one we're left with one size fits all, ham handed efforts by Treasury and the Fed, neither of which has the personnel to be very effective.

Take over City and the government instantly has 100,000 bank employees able to actually implement national policy goals.

If it's good for the IMF in helping the world, a national bank would be equally as good helping its own country recover.

http://auto-loan.interest.com/content/trends/

ken melvin says...

I don't think that there is much demand for loans; other speculative venture stuff, hasn't been for sometime. robertdfeinman says...

Interesting that the focus was on labor, but the comments are about banking (again).

I claim that much of the employment that has replaced manufacturing has been in unproductive (in the traditional sense) endeavors. We are now seeing that we can get along without armies of stock analysts, lawyers and other middlemen. The bubble that supported them in M&A, selling financial "products" to savers and the like has popped. Explain to me why we needed mortgage "brokers"? What's wrong with just going to a bank for a loan?

I could cite dozens of other creative employment categories that have been created in the past decades. Galbraith is right, these jobs aren't coming back, unless and until, there is a new bubble.

Here's my latest take on the whole issue:

Too Many People, Too Little Work

There are still areas which haven't gotten the memo, health care is one. This week a "pharmacy benefits manager" firm is being bought for $3 billion. What does such a firm do? Denies coverage for drugs to insurance claimants. If and when health care is rationalized, we can expect to another category of pointless work to be eliminated as well.

hapa says...

RDF,

manufacturing is coming back. high labor intensity in manufacturing is not. dean baker has been dancing around this lately, tiptoeing around the difference between "share of employment" and "share of GDP." they're not the same. what isn't paid directly is subject to vacuuming away to the caymans.

personally i've never argued that manufacturing was the big redistributor of the green transition because, even with transport prices rising, we know right now that it's only getting easier (and cheaper and more necessary) to design complex stuff for automated manufacture and quick assembly. actually this emphasis on design has a green benefit: designing ultimate disassembly, for repair/reuse/recycling, is easy to add to such a process.

the real labor intensity gain is in retrofits and installation. this creates a separate problem because there will be pressure to install bad equipment on unimportant resources in marginal locations -- an incredibly bad complement to a congress unwilling to disrupt the status-quo-yucky. there will be green jobs right now. and they will not bring the affected buildings up to a real 2030 standard of cost-effective self-sufficiency. "weatherization" might not even succeed at bringing buildings to a 2015 standard, to soften periodic fossil-scarcity shocks. "but we already did that once!" is a bad situation.

this is where the national infrastructure plan comes in, and state and regional building codes, and so on, as i see it.

mrrunangun says...

RDF is right on with his remarks. Employment recovery in the USA looms as a big problem. The globalizing policy of incurring easy money foreign debts to buy imported manufactured goods and allowing our own manufacturing industry to weaken was good for the educated population and middlemen. It gradually eliminated new employment opportunities for uneducated men outside of the construction of speculative housing and commercial buildings and transporting the newly abundant foreign goods. Since another building spree is unlikely given the need to work down the current overhang and the reduction in transport for imports that is implied by the need to rebuild household and business sector balance sheets, where is the employment going to be for the poorly educated men on the scale necessary for full employment? Without startup subsidies and other protections to strengthen domestic manufacturing, I cannot see where economically productive jobs will come from. Even such a policy as that will be slow to raise employment.

mmckinl says...

The only possible remedy for unemployment is a shorter workweek and longer vacations ... and to make employment cheaper for employers by the government taking over health care, pension and other benefits ...

The vast majority of jobs lost now are never coming back. The great retirement boom that would have opened millions of jobs is bust as boomers are broke.

Lafayette says...

The whole shebang

Article: To reverse this in six months would require a swing to job creation of the same amount, or a net swing of 1.2 million jobs a month for half a year. This is not going to happen - not even close. ...

Yes, but -- we all know that. So what is required?

Two attributes:

As a result of the administration's determination to save the big banks, we will emerge from this slump with an unreformed financial sector in the hands of the same people who produced the disaster in the first place. ...

Yes, but -- the "system" will not be anywhere near what it was before the Mess. And, with further regulation, both internally and externally (ala Basle II) it can be further contained. The G20 started us all on that road, we are not alone.

For as long as we take, finally, regulation of wheeler-dealer HiFi as an absolute priority -- from the mortgage writing to its securitization to offloading it onward to global debt-investors. The whole shebang must be brought under control.

And preferably, under new management. Meaning Federal controls assuring regulation that remains independent of some quirk Administration's free-for-all, though-shalt-not-impinge-upon-free-markets blindness.

There is little reason to hope that the recovery will be allowed to march us all the way back to full employment unless we overcome our vulnerability to volatile oil prices, and nothing in the plans so far suggests we have...

Yes, but – it is not energy commodities that will affect the recovery as much as the "transition thing". We are, as a nation, transitioning from the Industrial Age to the Information Age at a time when globalization and geopolitics have altered fundamentally the contextual hypotheses.

The coming down of the Iron Curtain (hurrah!) has unleashed upon the world a doubling of the Supply of labor. And China as well as parts of Eastern Europe have been smart enough to wake-up and take advantage of that opening. These are the key reasons that our industrial/commercial composition must develop and change. Quickly.

It is difficult to see the long-term benefit of this evolution, but there IS a pot of gold at the end of the rainbow. The treasure is a higher-standard of living for not only the world, but ourselves, since we are so well placed to exploit it.

If we will only pull the finger out …

A turnaround could bring the deficit hawks back out of the woodwork, arguing vociferously that "now is the time" for tax increases and entitlement cuts.

Yes, but – the changes necessary to evolve economically will require a sea-change of mentality in the public mind. Business is NOT as usual.

The restructuring will require fundamental shifts in industrial make-up AND consumer/worker mentalities. These can be assisted by addressing the major concerns of all of us. What are they?

To answer that question, we must go back more than sixty years to the early 1940s when an American psychologist devised the Maslow Hierarchy of Needs .

Everything changes and nothing changes. We live in a very different world today from the last century, but our needs and concerns are still the same. Abraham Maslow expressed them concisely and correctly in his triangular hierarchy of needs.

The three most important come to mind:

[Apr 25, 2009] Markets Cheer Stress Test Double Speak

"When your marriage is on the rocks, you don't ask the same jamoke who introduced you to your spouse for marital advice." Barry Ritholtz

The latest sign of something out of whack is via Jesse, who tells us that insider sales are at high levels. When did that last happen? October 2007. Admittedly, not long ago, but nevertheless not a sign of confidence.

[Apr 25, 2009] A retest of March 9 lows is likely By Mark Hulbert

April 24, 2009 | MarketWatch

New bull market, or bear market rally?

That's the big debate currently, of course -- with a lot apparently riding on the right answer. But what if it doesn't make that much of a difference?

I ask because new bull markets often retest the lows of the bear markets that preceded them. That means that, even if a new bull market is now underway, it is not necessarily essential that you immediately increase your equity exposure.

Consider what happened after the 2000-2002 bear market came to an end on Oct. 9, 2002, at the 7,286 level on the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,425, +102.32, +0.99%) . Over the next 49 calendar days, the Dow turned in a 23% rally. That's remarkably similar to the current rally, which as of Thursday night is 45 days old and in which the Dow has risen 22%.

But, following that 49-day rally in 2002, the Dow declined for a few months, in the process setting up a retest of its Oct. 9 low. By the subsequent March 11, for example, the Dow stood at 7,524, just 3.3% above the bear market low.

If the 2002-2003 script were to be followed today, the Dow would fall back in coming weeks to the 6,763 level.

Too much should not be made of the experience following the October 2002 low, of course, since it constitutes just one data point. But it is consistent with what's happened at the early stages of many other bull markets as well.

To document this, I analyzed past bull markets, using the definition employed by Ned Davis Research, the institutional research firm. According to that definition, a bull market occurs whenever there is a 30% rise in the stock market over a 50-calendar-day period or a 13% rise after 155 calendar days. Using this definition, the firm calculates that there have been 33 bull markets in the U.S. since 1900.

I first determined where the stock market stood 45 days into each of these bull markets. I then calculated the extent of the market's drop from that level to its lowest point over the subsequent six months. In more than half the cases (19 of 33, to be exact) the percentage difference between that retest low and the previous bear-market low was in the single digits.

[Apr 23, 2009] Gulf Times – Qatar's top-selling English daily newspaper - Opinion

"This diplomatic and economic realism is more than a reversal of the neo-conservative muscle-flexing of the George W Bush years. It is an attempt by a declining power to use its restrained capabilities in a more economical way."

This diplomatic and economic realism is more than a reversal of the neo-conservative muscle-flexing of the George W Bush years. It is an attempt by a declining power to use its restrained capabilities in a more economical way.

For example, in times of crisis it is no shame for a government to be mercantilist, but by behaving in this way, the US has lost the moral high ground as a champion of free trade.

America's new pragmatism is also the consequence of a process of "reverse socialisation". Over the past two decades, the US and its European allies believed that they could inculcate the rest of the world with their economic and political principles. Countries like China became enmeshed in a web of multilateral organisations and subjugated to conditional engagement strategies. Nowadays, the West does not have the leverage to enforce these conditions.

Moreover, the majority of developing countries now actively embrace multilateral bodies as part of their development strategies.

As we move from a unipolar international order to one with multiple regional powers, realism should allow them to vie for influence while keeping the costs as low as possible. The result will be a new concert of powers, tied together by their fixation with national economic growth and the objective of discouraging others from causing instability that risks intervention.

Instead of entrusting America with the arduous task of safeguarding international stability on its own, the BRICs (Brazil, Russia, India, and China) will assume a more prominent role in policing their own backyards. Russia can have its Caucasus, and if the generals in Myanmar should go mad, it would become China's and India's problem to sort out.

America's policy shift will inevitably erode the Western liberal axis. America has the flexibility, capacity, and leadership to adapt to the new rules for pursuing diplomacy, but Europe simply does not. Its strategic relevance, even in the transatlantic partnership, is destined to weaken further.

Realism will give the US more manoeuvreability in the short term, but it will have to sacrifice some of its soft power to achieve this.

Whether America is able to strengthen its global influence in the future will depend not so much on its moral esteem, but on the extent to which it succeeds in revamping its economy and forging new alliances. The same will apply for other powers.

But this rising Beijing Consensus offers no guarantee of stability. A concert of powers is only as strong as its weakest pillar, and requires a great deal of self-discipline and restraint. It remains to be seen how the American public will respond to its national U-turn.

If one main player slides back into economic turmoil, nationalism will reduce the scope for pragmatic bargaining. Overlapping spheres of influence and frozen conflicts could again cause major conflict. And, if China comes out of the crisis as the big winner and continues to boost its power, zero-sum thinking will soon replace win-win co-operation.

Project Syndicate

**** Jonathan Holslag is Head of Research of the Brussels Institute of Contemporary China Studies

[Apr 23, 2009] Using Anti-Trust Law to Break Up Banks that are Too Big to Fail

So more and more I'm starting to thing there may be a single explanation after all, that the regulators of these markets were captured by powerful forces that wanted the game to continue. The power of regulators, and the will to enforce the regulations, must match - in fact exceed - the will and power of those being regulated to resist having constraints placed on their behavior. I've talked about why ideology may have eroded the will of regulators, but their will is partly a function of their power. So long as we allow huge, clearly over-sized financial institutions to exist, this problem will potentially be present.

Therefore, if the current anti-trust legislation is adequate to the task, then yes, let's give regulators the power to enforce it, and ensure we have people in place with the will to do so. But as I said above, I think current law may have glaring legal holes that need to be closed before we can use this section of the law effectively.

If so, then it's time to get started crafting new legislation that is up to the task, and I hope Simon Johnson is successful in getting movement in this direction. He has my support.

[Apr 23, 2009] Northern Trust's Kasriel Are we there yet

"But there is a good chance that the worst for the U.S. economy in terms of quarterly contractions in real GDP is behind us"
Calculated Risk

From Paul Kasriel and Asha Bangalore at Northern Trust: Are We There Yet?

Is the economic recovery at hand? No, we still are mired in a recession that is going to be of the longest duration in the post-WWII era (the previous record was 16 months) and is likely to involve the largest annual average contraction in real GDP for a single year (the record to beat is a decline of 1.9%, which occurred in 1982). But there is a good chance that the worst for the U.S. economy in terms of quarterly contractions in real GDP is behind us, occurring in the fourth quarter of 2008. We currently are forecasting an annualized rate of contraction in real GDP of 3.8% in the first quarter of this year vs. the annualized rate of contraction of 6.3% in the fourth quarter of 2008. So, economic activity still is descending, but our forecast has the rate of descent moderating. We do not expect any growth in real GDP until the fourth quarter of this year.

[Apr 23, 2009] Investors, leave hope for dead - MSN Money

In their influential letter to clients, economists at ISI Group in New York listed 13 reasons to be optimistic this week, including a surge in mortgage refinancing, rapid money growth, a surge in tax refunds, fiscal stimuli, lower mortgage rates, a positive yield curve, a boost in Social Security payments and a global tsunami of central bank initiatives.

But you can't put their letter aside halfway, because they follow up with a cascade of catastrophe, including continuing constrictions in credit, a crushing of consumer net worth, an acceleration of home price declines, a rise in the savings rate toward 8%, private-sector deleveraging that's likely to persist for years and a negative-feedback loop entwining a decline in profits with declines in capital expenditures, employment, retail sales, state and local budgets, ad spending and export-oriented foreign economies. The economists finish with a conclusion that the Obama administration's efforts to raise taxes, rewrite contracts and add carbon taxes will discourage investment for years.

Are these pros and cons really balanced? Well, Rod McKnew, a banking analyst at boutique broker-dealer Newedge, who's been right on the crisis for the past two years, wrote this week in a note to clients that, according to his data, 16 key economic indicators are showing weakness. "Some balance," he concludes, adding, "The north wind keeps coming in about midnight and cutting down the green shoots."

Some of McKnew's weaker numbers: consumer confidence, the unemployment rate, average hourly earnings, the Producer Price Index, industrial production, capacity utilization, housing starts and building permits.

If you get right down to it, it's not hope versus some ethereal despair but hope versus what's really happening. Larry Jeddeloh, the chief analyst at TIS Group in Minneapolis, observed that virtually the exact same language of shoots and glimmers appeared in 1931 just before the second wave of the Great Depression. And it was the second wave that was the killer then, not the first (the first merely took down the stock market).

The first wave of our current recession was actually far worse, and faster, than the one of the 1930s, Jeddeloh says, considering that the CPB Netherlands Bureau for Economic Policy Analysis estimates that world trade fell 41% from November to January and that over the past year industrial production has fallen 31% in Japan, 19% in Germany, 17% in Brazil, 13% in Russia and 11% in the United States -- staggering blows from which economies don't just get up and walk away.

[Apr 22, 2009] Geithner defends 'high risk' financial bailout

Times Online

Geithner defends 'high risk' financial bailoutChristine Seib in New York Timothy Geithner, the US Treasury Secretary, defended America's $700 billion banks bailout after an independent inspector slammed the scheme as too risky for taxpayers.

In testimony to the Congressional Oversight Panel, set up to monitor the Troubled Asset Relief Program (Tarp), Mr Geithner said that it was vital to remove toxic assets from banks' balance sheets so the companies could step up their lending to consumers.

The Treasury is working on a plan in which Treasury, US Federal Reserve and private investors' money will be pooled in investment funds to buy unwanted securities from the banks.

Neil Barofsky, an independent inspector, said in a report to Congress today that this public-private partnership was too beneficial for private investors and left taxpayers holding too much risk.

"If the Government alone purchased these legacy assets from the banks, it would assume the entire share of the losses and risk overpaying," he told the panel.

"Alternatively, if we simply hoped that banks would work off these assets over time, we would be prolonging the economic crisis, which in turn would cost more to the taxpayer over time."

The difficulty Mr Geithner faces in convincing taxpayers that the Tarp is the right way to rescue the financial system was underlined by testimony today to another Congressional committee.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, told Congress' Joint Economic Committee that the $700 billion scheme had slowed the country's economic recovery by creating uncertainty. Instead, insolvent banks should simply have been allowed to go bust, he said.

Mr Hoenig repeated the suspicion held by many Americans that the big banks were bailed out because they were too close to the Government.

"These 'too big to fail' institutions were not only too big, they are too complex and too politically influential to supervise without a clear set of rules constraining their actions," he said.

The Government is expected to release early next month the results of stress tests on the country's biggest banks.

The tests looked at whether the banks would be able to withstand economic deterioration without further bailouts.

Bank of New York Mellon said today that it would cut its dividend so it could use the money to repay its Tarp loan. Goldman Sachs and JPMorgan Chase have also said that they planned to pay back their bailout debt.

But the Government is concerned that if some banks are permitted to repay their bailout debt, the banks that are unable to do so will be singled out as weak.

Speaking ahead of his panel appearance, Mr Geithner said that individual banks' financial strength would not be his sole criterion when deciding whether to permit the repayments.

[Apr 22, 2009] Pelosi Wall Street Probe Follows Pecora After Crash

April 21 | Bloomberg

Wall Street may be heading for the deepest investigation of its practices since a congressional panel's probe of abuses following the 1929 stock market crash.

House Speaker Nancy Pelosi plans to push for a comprehensive inquiry, saying that three-quarters of Americans want to know what led to the bankruptcy of Lehman Brothers Holdings Inc. and the collapse of Bear Stearns Cos. and Merrill Lynch & Co. She favors one patterned after Senate Banking Committee hearings led by Ferdinand Pecora starting in 1933, according to her spokesman, Nadeam Elshami.

The Pecora review "was probably the single most important congressional investigation in the history of our country, except perhaps the Watergate hearings," Donald Ritchie, associate historian for the U.S. Senate, said in an interview.

Congress is reacting to an economic collapse that has generated $1.3 trillion in financial industry losses, $700 billion in U.S. taxpayer cash infusions and loans, and $37 trillion in destroyed world stock market value since 2007. The Pecora Commission generated public support for creating the Securities and Exchange Commission and laws that governed financial services for seven decades.

Pelosi, a California Democrat, will speak about hearings this week to lawmakers, including Representative Barney Frank, chairman of the panel that writes banking law, Elshami said.

"I think it's useful to have it, but that should not be a reason to hold off on legislating," Frank, a Massachusetts Democrat, said of Pelosi's proposal after a speech in Washington yesterday.

Rewriting Rules

President Barack Obama, Frank and other congressional leaders have made rewriting the rules governing Wall Street a top priority.

Several lawmakers have proposed a commission or select committee to investigate the causes of the meltdown. Pelosi's backing, expressed during an appearance in San Francisco last week, was the first show of support from the congressional leadership.

"We truly want to find out what happened to this country and level with the American people," said Representative John Larson of Connecticut, the No. 4 House Democratic leader, who has proposed a nonpartisan independent commission. "We need to provide a narrative."

Job Losses

Wall Street firms have cut more than 180,000 jobs during the worst credit crisis since the Great Depression. The retrenchment helped boost New York City's unemployment rate to 8.1 percent in February from 6.9 percent in January, a record month-to-month increase, according to the state Labor Department.

City Comptroller William Thompson predicted in March that 250,000 jobs would be lost in New York before the recession ends.

People need "to have a clearer understanding of as to how we got here and what the exposure is to the taxpayer to all of this," Pelosi said April 15, according to a tape of an appearance at the Commonwealth Club of California. She said she told Treasury Timothy Geithner about her plan.

Senate Majority Leader Harry Reid, a Nevada Democrat, hasn't indicated a preference for a new inquiry.

"There are a variety of proposals in the Senate," said Regan Lachapelle, Reid's deputy communications director, in an e-mail. "Senator Reid is exploring these different approaches and plans to discuss them with the speaker at the appropriate time."

Premature Reforms

Some lawmakers say passing reforms without a complete study of the credit crisis would be premature. Senator Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee, made that point at a hearing on modernizing financial rules in February. He cited the Pecora hearings as the "best precedent."

Senator Christopher Dodd, the Connecticut Democrat and committee chairman, responded: "Certainly we want to examine what happened, but also we need to move forward."

Members of Congress may be reluctant to tackle the recommendations of such an inquiry because of financial industry donations to political campaigns, said Wall Street historian Charles Geisst.

Financial services has been the biggest contributor in every U.S. election cycle in the last 20 years, according to the Center for Responsive Politics, a Washington research group that tracks campaign money. Its individual and political action committee donations in 2007 and 2008 totaled $463.5 million, compared with $163.8 million from the health-care industry and $75.6 million from energy companies.

Goldman and Citigroup

Individual and PAC donations from Goldman Sachs Group Inc. which totaled $30.9 million, and Citigroup Inc., at $25.8 million, were higher than those from any other company except AT&T Inc.'s $40.9 million over the last 20 years, the center's compilation of Federal Election Commission data shows.

"How can you seriously propose a law when you've been taking money from 'The American Poodles for Wall Street' or whatever fund for the past 10 years," said Geisst, a professor of finance and economics at Manhattan College in New York and author of "Wall Street: A History" (Oxford University Press, 488 pages, $24.99).

Senators John McCain, an Arizona Republican, and Byron Dorgan, a North Dakota Democrat, say they're concerned congressional turf disputes might hamper the effort.

"The magnitude of a serious investigation and the conflicts likely to arise from fragmented committee jurisdictions suggest that a bipartisan select committee is necessary," they wrote March 8 in the Washington Post.

'Different Take'

Larson said he has sought Dodd's support for his bill.

"He has a different take on it," Larson said. "Given his position, he'd like to have more of his input on this, but he definitely embraces the concept." Dodd's office didn't respond to requests for comment.

Pelosi, who wasn't available yesterday, would prefer the hearings be handled by a newly created subcommittee of an existing congressional panel, which is more tailored to the Pecora Commission's approach, according to spokesman Elshami.

"I would hope that the individuals who take part in this will have at least a modicum of past experience of the players and the instruments that are involved," said Representative Scott Garrett, a New Jersey Republican and member of Frank's Financial Services Committee.

"That's so you don't have a huge learning curve going in, which would be a waste of time," he said.

Insider Prices

In citing the Pecora model, advocates of a full-scale probe are harkening back to an investigation that captivated the nation in the 1930s. It centered on an intense examination of bankers and brokers and how their actions helped contribute to the stock market's implosion.

Pecora exposed practices that benefited the wealthy at the expense of ordinary investors, such as giving favored clients insider prices on stock offerings, Ritchie said.

"Stock exchanges were operated as private clubs up to that point," he said, adding that the investigation "brought back to Earth once-Olympian bankers."

The Pecora hearings were steeped in drama -- and comedy. In one incident, the publicity-shy financier J.P. Morgan sat alone at the witness table during a break and was surprised when a circus promoter, seeking a chance to use the hearings to get publicity for his show, placed a dwarf in Morgan's lap, Ritchie said. Photos of the son of the banker who staved off the Panic of 1907 in an awkward moment appeared on front pages across the nation and became a symbol of the humbling of the nation's top financiers.

[Apr 22, 2009] Chrysler Pier Loans

In their five-page counteroffer, the lenders said they are prepared to cut Chrysler's first-lien debt by $2.4 billion, or down to about $4.5 billion, in exchange for a minority equity stake, likely to be 35% to 40% ...

The lenders have told Treasury ... they could recover at least 65% of their loans to the company if it is liquidated in bankruptcy.

lifeguard1999 (member) wrote on Tue, 4/21/2009 - 1:26 pm

"The largest Chrysler bank-debt holders are J.P. Morgan, Citigroup, Goldman Sachs Group Inc. and Morgan Stanley. Those four hold about $4.3 billion of the debt, according to people familiar with the matter."

Hehehehehe... The administration will cave in.

ac wrote on Tue, 4/21/2009 - 1:27 pm

More and more I'm starting to wonder if there's a lot of effort going on behind the scenes to hide a looming pension/retirement plan catastrophe caused by bond defaults.

I would understand perhaps the desire to stop an out of control downward spiral, but if the intent is to get re-elected by hiding real losses behind paper manipulation then the real disaster is yet come...

montas ankle (member) wrote on Tue, 4/21/2009 - 1:29 pm

this is precisely the problem with our new, never ending culture of bailouts

it is absolutely impossible to correctly price a bond because it is impossible to figure out what risks are real and what risks are not

the lenders to Chrysler have no reason to take the offered hit - after all, they made the loans thinking that in bankruptcy, the assets of the firm might pay at least some of the liabilities

now, of course, these lenders have a very complicated calculus - tick the government off (and this same gov't is their backstop, of course) and reject all 'unfair' offers, or take their medicine then ask for more money due to the subsequent loss they will take

if failure is not option, neither is success

Mannwich wrote on Tue, 4/21/2009 - 1:29 pm

Market will probably go parabolic on Capital One and Yahoo news. It just doesn't matter right now. Funny money is king in la-la land.

What I don't understand is why Obama doesn't just force these terms on the banks by threatening to pull way all future bank bailotus. That should do the trick, no? I can't believe people aren't generally more upset that this country is basically being run by a criminal cabal of bankers. Mind boggling.

squidward (member) wrote on Tue, 4/21/2009 - 1:29 pm

Broward - thank you for responding.
re: marginal utility of information
The same as marginal utility in economics. Each successive unit of information (however you care to define it) is worth less.

Umm, perhaps it could be better phrased:
"the marginal utility of information decreases with quantity" or just plain "increasing information has diminishing returns" instead of "information has marginal utility"

Because "marginal utility" can actually increase with quantity. (numerous examples come to mind)

CathyG wrote on Tue, 4/21/2009 - 1:33 pm

Another sterling example of banksters doing the right thing for the society in which they operate. They may get more from Chrysler in bankruptcy - they may not. What is the value of a car factory in the US today? But how much of a loss will they incur from the employees who are paying taxes into TARP, taxes into PIPP, interest on home mortgages, student loans, car loans and credit cards. The banks are in no position to say "NO" to the administration. They need to be taken over and broken into pieces small enough to drown.

Rajesh (member) wrote on Tue, 4/21/2009 - 1:35 pm

Canadian Auto Workers (CAW) indicate they won't accept the 20% wage cuts proposed by Chrysler. Fiat Chairman says no deal without CAW accepting pay cuts. The first lien debt holders may be academic. No Fiat deal = bankruptcy (it you believe the government) I wonder if the stress tests included a Chrysler liquidation.

rb wrote on Tue, 4/21/2009 - 1:35 pm

I can't believe people aren't generally more upset that this country is basically being run by a criminal cabal of bankers. Mind boggling.

People are very upset. They're just not reacting as you might expect.

Yalt (member) wrote on Tue, 4/21/2009 - 2:14 pm

ac wrote on Tue, 04/21/2009 - 3:27pm.

More and more I'm starting to wonder if there's a lot of effort going on behind the scenes to hide a looming pension/retirement plan catastrophe caused by bond defaults.

I would understand perhaps the desire to stop an out of control downward spiral, but if the intent is to get re-elected by hiding real losses behind paper manipulation then the real disaster is yet come...

Yes, that's the game. I recall many months ago, perhaps in the earliest days of TARP, Bernanke was making opening statements before testimony to Congress and slipped away from his written version to say that we need to give the American people confidence in their retirement savings.

jo6pac (member) wrote (in reply to...) on Tue, 4/21/2009 - 2:30 pm

NO worry, before GW left they took the Pension Trust Fund and gave it to WS were I'm sure it's lost all value. The race to the bottom continues.

jo6pac
Comrade-Dope jg (member) wrote on Tue, 4/21/2009 - 4:29 pm

My prediction: Obama folds on this like a cheap tent.

[Apr 22, 2009] Capital One- Expect Charge-Off Rates Greater than 10%

4/21/2009 | CalculatedRisk

Conference call notes (ht Brian):

... ... ...

Economic Outlook

I'll update our economic outlook. Unemployment and home prices have been and continue to be the economic variables with the greatest impact on our credit results. We now expect unemployment rate to increase to around 9.6% by the ends of 2009. Our prior assumption for home prices was for the Case Shiller 20 city index to fall by around 37% peak to trough. We now expect a modestly worse peak to trough decline of around 39%. ...

Selected Comments

Rob Dawg (member) wrote on Tue, 04/21/2009 - 4:06pm.

Complete BS. If Cap1 is "expecting" 10% charge-offs they should not be in the business of lending for unsecured credit.

Anonymously wrote on Tue, 04/21/2009 - 4:17pm.
"They're making 30% on the remaining 90%."

And even more on a select subset of the 90%, if you count the abusive fees as well as the interest charges...

Usury can be profitable even at high default rates.

(Presumably this is also why the "high yield" (junk) bond market hasn't imploded any further.)

Rob Dawg (member) wrote on Tue, 04/21/2009 - 4:18pm.
Broward Horne wrote on Tue, 04/21/2009 - 4:10pm.
"f Cap1 is "expecting" 10% charge-offs they should not be in the business of lending"
---------
Why? They're making 30% on the remaining 90%. For now.

But are they? I suspect that all their cash cows are moving to greener pastures where they get milked half as much. That leaves only the Casey Serin cows who just stop giving milk long before they stop eating your grass.

Comrade-Dope jg (member) wrote on Tue, 04/21/2009 - 4:26pm.
10% is the magic threshhold: for GDP, unemployment, charge-offs, etc.

10% means 'Depression'!

Coming soon.

splat wrote on Tue, 04/21/2009 - 4:35pm.
Gotta love that line "greater than 10% charge-off rate", I'd say they're expecting way WAY higher ( 20% anyone ?), coupled with a decline in their cash cow of near-loan-shark interest rate customers who're struggling to pay balances down.

They'll have to go back to a business model of making the 2.5% transaction fees and milking a smaller number of permanent-balance customers.

- splat

[Apr 22, 2009] Taxing grandma to pay Goldman Sachs By Peter Morici

Asia Times

It takes much less business acumen to borrow at 2% and lend at 5% and make a profit - and that is exactly what has happened. The extra fees are just gravy.

Increasing the spread for banks is like subsidizing parts purchases for car companies. The folks at GM would look like wizards if the Fed had been similarly generous with them.

This all comes at a cost to someone - America's elderly.

Many retirees depend on interest from certificates of deposit (CDs). Those rates are down dramatically, and as CDs expire retirees are compelled to reinvest their savings at lower rates and live on less. They can take comfort that their sacrifices are helping to pay off Wall Street's losses from the lavish bonuses paid bankers - for example, the US$70.3 million Goldman doled to chief executive Lloyd Blankfein in 2007.

... ... ...

...the Fed's lines of credit to banks, insurance companies and the like exceed $800 billion, and its monetary policy transfers income from retirees to the likes of Blankfein.

[Apr 21, 2009] Capitalism's Greatest Vulnerability (the link to the original article is broken)

PrudentBear

The great Hyman Minsky postulated that Capitalism was "flawed." Over the years I've taken exception with this particular view, countering that Capitalism is more appropriately described as "vulnerable." As part of this line of analysis, I have used the analogy of the human eye. We would not think of its delicate nature and susceptibility to injury as some "flaw" in our eye's design. Instead, this inherent vulnerability is fundamental to the nature of this important organ's functionality. We worry much less about our elbows, but they're not going to do an adequate job detecting light and transmitting visual signals to our brains.

I have argued over the years that an extraordinary backdrop has beckoned for the necessary keen focus to protect our Capitalistic system from its inherent vulnerabilities - just as one would don sun glasses on a sunny beach or ski slope or insist upon tight-fitting safety goggles before entering a metal-working shop. One must first recognize inherent vulnerabilities and then take more aggressive preventative measures as necessary in response to riskier environments.

We, as a society, failed to take preventive action. Now, Capitalism as we have known it is under fierce attack from many directions and on various levels. At the same time, there is regrettably scant indication that we now possess any clearer understanding of the nature of Capitalism or its inherent vulnerabilities. We're still entwined in Mistakes Beget Mistakes.

But there's lots of blame being bandied about. Many pinpoint "Wall Street greed." The securities firms, reckless traders, hedge funds, rank speculation and egregious leverage are viewed today as the major culprits. Executive pay and Wall Street bonuses are pilloried for fomenting dangerous excess. Others trumpet the failure of regulation and corporate governance. Some even attribute the mess to the Asian propensity to save. There's a more sensible case that flawed banking and Wall Street risk models played an integral role in the fateful Bubble. Many that participated in the bountiful upside of the speculative Bubble these days posit that the rating agencies were at fault for garnishing "AAA" ratings on Trillions of risky securities and debt instruments. And a very strong argument can be made that hundreds of Trillions of derivatives played a fundamental role in the near financial implosion. But how could it be that so many things went so wrong all at the same time?

I have over the years expressed disdain with the "free market ideologues" for their steadfast refusal to even contemplate the possibility that "Capitalism" could possess vulnerabilities of need of recognition and corrective action. Yet, economic history is replete with boom and bust cycles, along with a bevy of post-Bubble writings providing us fertile ground for cogent analysis of system vulnerabilities. Contemporaneous analysis during the Great Depression focused clearly on the acutely susceptible U.S. Credit system that emerged from "Roaring Twenties" lending and speculative excesses. During the forties, fifties and even into the early-sixties there was some adroit analysis of the Credit system's role in the boom and subsequent depression. This entire fruitful line of analysis was, however, stopped dead in its tracks with the emergence of a revisionist view of the twenties as the "Golden Age of Capitalism" needlessly terminated by post-crash policy blunders.

The Great Depression and today's turmoil expose Capitalism's vulnerabilities. And as easy (and accurate) as it would be for me to write that the problem lies first and foremost in the "Credit system," I have come to believe that it is vital to dig deeper to get to the root of the problem: Capitalism's Greatest Vulnerability lies with Risk Intermediation.

The essence of Capitalism is one of a predominantly private system of allocating resources based on market price signals. A private-sector Credit mechanism is fundamental to financing the economic system in a manner that effectively allocates both financial and real resources. And we can stop right here and recognize potential pitfalls. First, Credit flows may be inadequate to finance sound investments or to sustain economic activity. Second, there may be too much Credit. I have for some time argued that Credit excess ("Credit inflation") is the Bane of Capitalism. Credit excesses distort the various costs of finance throughout the system, while inflating asset prices and fostering distorted spending and investing patterns (among other effects). And, importantly, Credit inflation inherently fosters self-reinforcing Credit inflation through asset price, economic, and speculative Bubble dynamics. In short, "Credit excess begets Credit excess," with its subtle but corrosive effect upon pricing mechanisms.

But how on earth does the always-existing nature of "Credit Begetting Credit" somehow morph into the history's greatest Credit Bubble? One way: Unfettered Risk Intermediation.

I often referred to "Wall Street Alchemy" - the process of various methods of intermediation (Wall Street securitization structures, myriad Credit insurance and financial guarantees, liquidity arrangements, dynamic hedging, explicit and implicit government backing, etc.) transforming risky loans into coveted instruments perceived by the marketplace as safe and liquid ("money-like"). I have also theorized that a boom predominantly financed by, say, junk bonds would never run too far before the market lost its appetite for the inflating quantity of (conspicuously) risky debt. In contrast, our recent Credit Bubble was financed by endless Trillions of "AAA" debt instruments (GSE debt, MBS, ABS, CDOs, CP, "repos", auction-rate securities, top-rated guaranteed muni debt, Treasuries, bank deposits and such) ran to unmatched excess.

Importantly, there was a direct relationship between our contemporary system's capacity to intermediate Credit risk and the expanding scope of the Bubble. Over years, risk was in varying degrees distorted, camouflaged, or deceptively concealed to the point that it was no longer even possible to monitor, analyze or regulate it. Worse yet, the risk intermediation process was self-reinforcing instead of self-adjusting and correcting. Wall Street "alchemy" was the true source of this period's "easy money."

Our Credit system's capacity to intermediate Trillions of mortgage and consumer debt into "money-like" instruments was instrumental in fueling real estate and asset Bubbles throughout. It was the capacity of Credit system intermediation to create Trillions of instruments (chiefly Treasuries, agency debt, MBS, and "Repos") perceived as safe and liquid by our foreign trading partners that accommodated our massive current account deficits (and attendant domestic and international imbalances). It was contemporary risk intermediation at the heart of a historic mispricing of finance for, in particular, mortgages and U.S. international borrowings. And it was the potent interplay of contemporary risk intermediation and contemporary monetary management/central banking (i.e. "pegged" interest rates, liquidity assurances, and asymmetrical policy responses) that cultivated unprecedented financial sector and speculator leveraging.

Most historical analyses of busts (going back about 300 years to John Law!) focus on banking ineptness, negligence, excesses and nuances. Banks, creating "money-like" (i.e. deposit) liabilities in the process of intermediating loans, have historically been at the center of boom/bust cycles. Contemporary finance – with its focus on marketable debt instruments - took intermediation risk to a completely new danger level. For one, traditional bank capital and reserve requirements no longer provided any restraint on the quantity of Credit that could be extended and intermediated (in the "market" or "off balance sheet"). Furthermore, the marketable nature of these instruments (created in the intermediation process) cultivated speculative demand for leveraging higher-yielding securities (i.e. hedge funds buying collateralized debt obligations that had acquired private-label subprime MBS). Cheap finance literally flooded the riskiest sectors of the economy

All of this led to extreme systemic distortions in the pricing of risk - along with the attendant massive over-expansion of Credit and the economy-wide (and global) misallocation of real and financial resources. Buyers of intensively intermediated instruments (say "AAA" senior CDO tranches or auction-rate securities) in many cases could not have cared less with regard to the type of underlying loans being financed. Elsewhere, the buyer (leveraged speculator or trade partner) of agency securities could not have been less concerned with GSE balance sheet issues or California home prices. This entire process of contemporary (marketable instrument-based) intermediation developed an overwhelming propensity for financing asset-based loans instead of real economic wealth-producing investment (unlimited supplies of mortgages were viewed as a more appealing asset class than more limited quantities of corporate loans). It is not only in hindsight that this process of risk intermediation should be viewed as central to system asset price distortions and economic maladjustment.

I am tempted to write "I am as tired writing about the previous Credit Bubble as readers are reading about it." But I'm not tired. And this topic is not as much about rehashing the past as it is about providing a perspective as to why I believe the current course of policymaking will inevitably end in failure. Why? Because of the very complex and unresolved issue of Risk Intermediation.

Wall Street "finance" self-destructed in the process of intermediating Trillions of risky loans. It was the quantity of Credit and the nature of resulting spending patterns (resource allocation) that both doomed this endeavor and ensured a deeply maladjusted economic structure. This terribly flawed financial structure has morphed into a system where our government has stepped forward to supplant Wall Street as predominant risk intermediator. Basically, the Fed and Treasury are in the process of intermediating risk on a system-wide basis – to the tune of tens of Trillions – with little possibility of extricating themselves from this endeavor going forward.

This development may be welcomed by Wall Street and the markets - and it certainly goes a long way toward getting the Credit wheels rolling again. It would be expected to help spur some level of global economic "recovery." I would argue, however, at the end of the day we will see that it has only exacerbated the problems of risk mispricing, Monetary Disorder, financial and real resource misallocation, and economic maladjustment.

Our Capitalistic system has been severely injured. I don't expect meaningful structural recovery until there is some semblance of restoration to our Credit system's mechanism for the pricing and allocation finance. This, I believe, will require our system to wean itself both off of its dependence on enormous Credit expansion and away from Washington's newfound role of chief system risk intermediator and allocator (the "Government Finance Bubble).

[Apr 21, 2009] Right Wing Turns on Elizabeth Warren, Congressional Oversight Panel Head

Anonymous Jones said...
I'm sure she knew the attack dogs would eventually come after her. It's all the more reason we should be so thankful she took the job. We were very, very lucky that we were given someone with integrity, intelligence, and the incentive to do the right thing.

Even an old cynic like me can be proven wrong about people sometimes. Kudos to Elizabeth.

Luke Lea said...
She wrote The Two-Income Trap didn't she, about how transportation, childcare, etc., eat up the second paycheck?
Mannwich said...
Warren is clearly a threat to those who would like predator "business" tactics, criminality and fraud as the underpinnings of our economy and culture to continue. Not a shock, by any means they would try to smear and silence her.
Doc Holiday said...
This was a great spot for Warren not long ago:
Daily Show Clip - Elizabeth Warren Explains USA Economic History
http://www.youtube.com/watch?v=e02loKMuJFw

If I failed to post these links (below) before, this is totally on topic, and I suggest reading as much as possible about this great person:

Brooksley Born
http://en.wikipedia.org/wiki/Brooksley_Born

While on the commission and after becoming its chair two years later, Born sought comments on the need to regulate derivatives, specifically swaps that are traded at no central exchange, known as the dark market, and thus have no transparency except to the two counter-parties (no actual regulatory scheme was proposed at the time). The request for comments, called the "Concept Release," stated that the growth of trade in derivatives had prompted the CFTC to re-examine its regulatory scheme. [1] The request for comments was opposed by Federal Reserve chairman Alan Greenspan and Treasury Secretaries Robert Rubin and Lawrence Summers.[2] Specifically, on May 7, 1998, former SEC Chairman Arthur Levitt joined the other members of the President's Working Group – Treasury Secretary Rubin and Federal Reserve Board Chairman Greenspan – in objecting to the issuance of the CFTC's concept release, in which Born attempted to shed light on the dark market, citing grave concerns about the possible consequences of the CFTC's action.

Also see: The World According to Brooksley Born
http://www.derivativesstrategy.com/magazine/archive/1997/0597qa.asp

>> The lobby groups need shut down ASAP and people like Warren need more control ASAP (over the financial terrorist/nazis)!!!!

Full disclosure: The au natural author has been sitting out in the sun reading up on economics and looks forward to a long walk before dinner.

emca said...
Here's an offhanded aphorism:
when the rats are cornered, my they do squeal.

"While the bubbly and brilliant 59-year-old professor [Elizabeth Warren] is a darling of Democrats..."

This statement is a little confusing in that a good portion of the article is taken up with how she's an embarrassment to democrats and particularly the administration with her dissidence.

And as a disgruntled Democrat, I agree the that the issue is not Party, but personal responsibility; do we hold people responsible for their past transgressions? Or does wealth determine culpability?

For Republicans this is a dangerous tack politically. If Obama's policies (which as commented are little more than an extension of the Bush/Paulson team) fail, then it is not solely Obama (or democrats) who will pay the price, but all who are seen in league with "banksters".

To end this harangue, its not Geithner who should be charge of economic policy, but Warren or someone of equal integrity who shares her skepticism of bailout fever (Republican or Democrat).

I need a cold beer.

Doc Holiday said...
Is the Right Wing like The Velvet Underground?

Re: "Don't want to make this into a political blog but I see far too many snarky comments based on real ignorance about just which political party is behind what."

>> That kind of comment must fire a lot of people up, because The Bush Administration crashed The American Economy with its Ownership Society and non-regulation of accounting fraud, etc, etc, etc.... and then along comes The TARP Drama, which was a half-baked idea on the back of a napkin, and now we are to assume The Republicans had it right?

Did I miss something in the details?

I know damn well The Democrats are a clueless group of idiots but to suggest in any way, shape or form that The Bush Coup did something honest or efficient is just plain stupidity -- it doesn't take too many brain surgeons to look at how many Trillions of dollars have been poured down the drain because of the lack of leadership that we had then and now!

There obviously is a balance of power in our government with crooks on the left and right and then at the fulcrum of conservatism, we have a shadow group of opportunists that will follow the lobby group money no matter which side it's on.

Back on track -- Elizabeth Warren is a very BIG breath of fresh air in our American government garbage dump -- with the obvious exception of Paul Volcker (who is locked in a room somewhere doing nothing).

The odds of Warren or Volcker staying around much longer is highly unlikely. I imagine they will be gone before summer .... Speaking of Summers, I would think he would be very excited about using his power (again) to do to Elizabeth Warren what he helped do with Brooksley Born, e.g: "Summers resigned as Harvard's president in the wake of controversy over a talk in which he speculated that women may statistically have lesser aptitude for work in the highest levels of math and science. "

Go get her Larry, and take out Paul too; he's too friggn old and he's in the way of progress and change and all that other crap!

Harlem Dad said...
Politico's article is long on innuendo, but very, very short on facts. Is Elizabeth Warren the "Darling of the Democrats?" I should live so long. Is she drawing fire from the Right? The article offers no real evidence.

I should say upfront that I love Elizabeth Warren. Knowing that she may actually have a voice in how the Financial Services Industry conducts itself in the future gives me hope. And I agree with Yves that she is a threat to Washington insiders.

Now, to the article. Evidencing the Right Wing turning on Ms. Warren we have the following:

The dissenters worried that the alternative approaches presented in the report, including nationalization, management changes and the liquidation of failed banks, implied that the banking system was insolvent and that the current plan was already a failure.Okay, the two dissenters are the two Republicans. So what? Aren't Sununu and Neiman merely touting the current Administration's Party Line? Have we heard one word from Geithner or Summers indicating anything different from Sununu and Neiman's dissent? Has Obama even "hinted" that the banks might actually be insolvent and that his plan is a crock?

By clicking on the link provided by Yves to Politico's article I found this:

On Tuesday, Warren will spark controversy once again when her panel questions Treasury Secretary Timothy Geithner. The Treasury Department has resisted testifying before the committee for months.Right wing attacks? I'm suspect.

And as for the snarky comments from a lobbyist at the American Banksters Association, big deal. These guys get paid a bazillion dollars to whine like preschoolers on behalf of their crybaby clients.

How about the claim that Ms. Warren is the Darling of the Democrats? From Politico's text I read:

[e]ven some Democrats complain that Warren's role as a constant Cassandra could undermine already tenuous public support for the bank, auto industry and other financial rescue programs.The panel specializes in calculating the kinds of scary numbers that the Obama administration would rather not broadcast too loudly.Like $4 trillion. That's the amount the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. have spent on financial stability efforts so far, according to the panel's most recent report.Darling of the Democrats? I don't think so. Now consider this:

But Warren was still shocked when Senate Majority Leader Harry Reid asked her to chair the TARP panel."I did say to him, 'Senator, are you sure you want me?'" she said. combined with This:

The lack of consensus has fueled Republican criticisms that Warren is reaching far beyond the original intent of the panel by suggesting regulatory changes.Leads me to conclude that Congress is too cowardly to propose it's own regulatory changes. They still haven't determined which way the wind will blow on this. They want Elizabeth to both state the problem and propose the solution. If her work finds favor with the people, Congress will take the credit for hiring her. But if (when) things go from bad to terrible they can (wrongly) blame it on her.

The way I read it Ms. Warren isn't being attacked by the Right so much as she's being set up to take the fall, if they can pin it on her, by both parties.

I'm reminded of the 1976 film Rocky, when Apollo Creed's trainer tells Apollo "This man doesn't know it's a damn show. He thinks it's a damn fight!"

I'm also reminded of Ibsen's wonderful play "An Enemy of the State."

In my dreams, Elizabeth Warren is Rocky, the underdog, fighting the good fight for the people.

In my nightmares, she's An Enemy of the State screaming with her last breath "the banks are insolvent, the banks are insolvent, the banks are in-solv-ent!"Tim in Sugar Hill

Yves Smith said...
RPB,

First, if you read the Poltico article in its entirety (I excerpted only parts) both the headline and the omitted text support the thesis, I bothered to include mention of Democratic criticism, and given the relatively short except, it is more prominent than in the entire underlying article. There are passages omitted that show that discuss Democratic enthusiasm for her ideas and opposition from right wing groups like the American Enterprise Institute.

And I see you chose to make Republican = right and Democrat = left. The split is not that straightforward, so you attribute to me something that I never said. One of the reasons some Democrats are unhappy with Obama's banking policies is that they are so banker friendly. Hence, the Democrats are divided, the more conservative (centrist as they like to call themselves) versus the more liberal members. That is why some Dems are upset with Warren, which again supports the thesis.

Second, I have several Congressional staffers who write to me. They separately report the conservative machinery is after Warren.

Third, a third source (very connected) says efforts are under way to get her "booted" or pressure her to resign.

You accuse me of bias when there is far more afoot than reported in the article. But your interpretation in fact demonstrates the very failings you try to pin on me. Funny, that.

john bougearel said...
I am not particularly pleased to hear the Democrats complain that they are displeased that Warren undermines "already tenuous public support for the financial rescue programs."

This is as fascist and undemocratic ideology seeking to forbid and suppress criticism of something that stinks to the high heavens. And suppression of criticism borders on a violation of the right to free speech.

Sorry Elizabeth to see you in the crossfire. I had a feeling you should have been more forceful in that report, especially now that you are being marginalized

[Apr 20, 2009] US to Impose Conditions on TARP Repayment

naked capitalism

Yves here. Again, ideology rampant. Being "free from constraints" is seen as being aligned with the general good, when pretty much everybody except the banksters and their buddies at the Fed and Treasury think more regulation is in order.

Jim said...
All in all there is no evidence that the Administration has any will to change the supercharged financial casino model. And there's precious little evidence that the legislative branch will do anything either.

Only option seems to be to abandon the casino. Dow 50,000 will be GS partners trading with each other and won't even make the front page of any business sections.

They have killed the markets, both equities and bonds, rendering them too hazardous to enter.

Look at the Dow now...800 million shares of C doing quant fund diaper dances while no other stock does 100 million. It's a disgusting farce.

IBM's the biggest stock on the Dow, chugging along in a vapor trail of fading revenue. No one even mentions it.

Big question is...how do we close down the bond markets as they now exist and replace them with more stable wealth preservation vehicles for pension and insurance?

Wall Street is simply not up to the job, nor is Washington DC.

Maybe China can take this on for us. Or the UN (:^O)... Otherwise we might as well just disband global finance, haircut all pensions and insurance 50% (to be charitable), and save at the local post office box like the Japanese.

It really is clear that the system is gone, there is no system, but a whole lot of savings vehicles falling toward the Earth like fragments of the Shuttle....

Don said...
I'm having a hard time understanding what people are proposing. I do not believe that we can seize the banks at the present time. It would certainly be a mess. I guess if you believe that we can, all this seems silly to you. I too would rather have an FDIC seizure, but I don't see how this can be done with creating an enhanced FDIC or new agency, like the RTC, first.

If you can't do that, I'm assuming that people want us to get stock from the banks and, possibly, even get controlling interest in the banks. That has problems like the following:

http://www.nytimes.com/2009/04/20/business/20bailout.html

"The Treasury would also become a major shareholder, and perhaps even the controlling shareholder, in some financial institutions. That could lead to increasingly difficult conflicts of interest for the government, as policy makers juggle broad economic objectives with the narrower responsibility to maximize the value of their bank shares on behalf of taxpayers.

Those are exactly the kinds of conflicts that Treasury and Fed officials were trying to avoid when they first began injecting capital into banks last fall. "

And:

"Each conversion of this type would force the administration to decide how to handle its considerable voting rights on a bank's board.

Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them."

In other words, as I said, all the hybrid problems would remain, and the international problems would be worse.

Finally, Stiglitz said the following:

"Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said....

"You're really bailing out the shareholders and the bondholders," he said. "Some of the people likely to be involved in this, like Pimco, are big bondholders," he said...."

Legally, I'm not sure what he's proposing, but the largest holders of these bonds, as I've pointed out before, are:

1) Pensions
2) Insurers
3) Foreign Governments
4) Foreign Investors

1 and 2 are bailouts waiting to happen, and 3 and 4 are very bad news going forward.

As Inner Workings has pointed out:

http://blog.atimes.net/?p=901

"Reminder: why the Treasury needs the banks to look better
April 14th, 2009
By David Goldman

The next sector to collapse would be the insurers: as I've said here again and again, the big pyramid scheme in the US financial system is that the insurers own the bottom of the capital structure of the banks. Bank preferreds, trust preferreds, hybrids, etc. were the favorite repast of yield-hungry insurance portfolio managers.

The big insurance companies all are trading like junk, still. Here is the cost of five-year credit protection on two of the biggest:

It's cheaper to refloat the banks than to go in and bail out insurers after public confidence collapses."

All the recent stories about pensions, insurers, and annoyance with the dollar are related to this. I'm just having a hard time understanding what some people are actually proposing.

Don the libertarian Democrat

Yves Smith said...
Don,

I will confess I have not done a bank-by-bank analysis. However, based on what I have read, for every bank ex perhaps Cit and the smaller ones that are gonersi, if you had wiped out stockholders in seriously impaired banks and made the bondholders convert to equity, there'd be enough equity to cover the remaining losses AND no need for all the rescues. And that could have been done en masse over a weekend. You could then leave reregulation/forced restructuring (say by imposing capital charges so high on banks over a certain size they'd be uncompetitive and forced to figure out on their own how to restructure) for a second act.

But now that we've spend so much money on a bad Plan A, it will be hard to do a bondholder cramdown, in whole or in part.

April 20, 2009 12:36 AM
Jim said...
I am just past the point of thinking that there is any salvation for the wreckage of what the ordinary investor -- scaling from a middle class household to a medium sized government--once thought of as a 'normal' stock index fund or a bond fund. It's over.

Neither equity 'index baskets' nor bond funds, as opposed to actual bonds held to maturity, are good for anything now. They are just chew toys for maniacal robots. Throw in the vaporization of a trillion a year in ordinary American income and investment, and it is full stop for the very insurance and pension entities that The Policy is supposed to 'save'.

Hint: Saving the zombie banks and their captive insane robot casinos, as the only strategy to save the nest eggs held hostage, is not going to cut it in the midst of deleveraging and destructon of the real economy.

So my proposal is: stop assuming real returns at all and just assume one can somehow remain at par relative to inflation. Only concrete savings now count towards retirement, and all insurance vehicles eventually have to raise premiums to make up for lost investment returns. Real net savings need to increase about, oh 10% or thereabouts.

Above all, wealth so set aside must be protected from the zombie banks and their insane robot casinos.

So if you run a corporate or state pension fund, or an insurance company, the question becomes how to remove all financial ties to the TARP lunacy and any risk infection associated with it. In other words, exit the markets they have contaminated.

I am afraid that doesn't leave much investment space to work in. Cash, bonds held to maturity and hard assets with painful valuation assumptions may be about it. But that is Japan, again.

Kind of a bummer, but that's what once-in-a-century financial disasters are all about, wot?

--Jim in MN

April 20, 2009 12:51 AM
Cat said...
What's amazing to watch is GS and the other "strong" banks leveraging their influence to get first crack at eating the "weak" banks. Strong or weak is determine more by influence at this point. In some ways, the USG is going to let lose these dogs of acquisition knowing full well that in the aftermath the remaining banks will be so enormous they might constitute independent state entities. All that would be left is for GS to raise a private army of mercenaries to prosecute the rest of their bold plan for profitability.

That would be interesting to watch, actually.

cougar

[Apr 20, 2009] Is inflation the answer - Paul Krugman Blog - NYTimes.com

Sometime I think: what a dismal person Krugman is despite his bright spots ..
  1. Inflation is equivalent to a tax that redistributes money from savers (individuals, pension funds, 401(k) plans, etc.) to borrowers (individuals, companies, government).

    If inflation is really "the answer", then why not just go ahead and impose this saver-penalizing, borrower-gifting tax right now?

    I guess this probably wouldn't be a very popular tax. It definitely wouldn't be viewed as fair and moral.

    So by encouraging intentional hyper-inflation targeting, are you in effect proposing that the government replace an explicit saver-penalizing tax with a "stealth" tax with equivalent effects?

    Actually the inflation tax will not necessarily work. The (penalized) savers will become poorer and may respond by cutting down on spending to compensate for their loss. The (gifted) borrowers may spend part of the money they get and may use the rest to to pay off their debt. The net change in spending may end up being negative rather than positive.

    - Bill Mill
  2. Dr. Krugman,

    Wouldn't high inflation be disastrous for (nearly) insolvent banks? An increase in interest rates would devalue the "legacy" assets as their rates of return would be comparatively lower (negative). Wouldn't that just push many more banks over the edge?

    - Logan Bowers

JP Morgan Sees $400 Billion More In Bank Losses by Tyler Durden

A report by JP Morgan analyst Matthew Jozoff is putting the spotlight back on the banks, where lately everything has been seen as rosy to quite rosy. Jozoff disagrees and in fact sees another $400 billion in losses as a result of the continuing credit deterioration, and very likely major new capital infusions needed. Says Jozoff:

We find that TALF 2.0 is likely to benefit securities with the least amount of writedowns and lowest haircuts -fixed rate bonds and long-reset hybrids should have the most upside. We estimate that banks will experience about $400bn more in losses, and stress tests will reveal the need for more capital for certain institutions.
Among other things Jozoff points out is that banks will need to set aside an additional $215 billion in reserves against holdings of $2.1 trillion in residential loans not packaged into securities. As banks have taken only $85 billion in loss allowances as of Q4 2008, and Jozoff estimates the total expected residential losses at $300 billion (based on 12-16% losses on the total number mentioned above), banks will be hard pressed to fund this capital deficiency, especially now that each and every bank is rushing to repay the TARP that "it never needed in the first place." Continues Jozoff:
We expect that total losses could reach $1.3 trillion. Banks so far have taken writedowns and losses of $920bn, so they are roughly 70% through with total losses. Capital raised to date ($900bn, much of which came from governments worldwide) has been close to the amount of losses realized to date. Given the amount of losses still to come, we believe the system will need more government capital (although healthier institutions may not need more and may try to raise capital from the private sector). Bank earnings will also be a source of capital and some estimate that over the next two years, the largest institutions can see around $200bn of earnings (pre-tax, pre-provisions).

Going forward, the bulk of bank losses will come from loan books and less from securities portfolios, which have already gone through large writedowns. Most bank loans are not required to be marked-to-market, but, rather, reserves are set aside for expected loan losses to be realized in the next year or so. That is why reserve coverage ratios (reserves vs non-current loans) have plunged. In other words non-current loans are growing at a faster pace than reserves have built-up.

Even though banks don't have to reserve for total cumulative losses today, the question is how much more reserves will they need over the next few years to cover loan losses. In the case of residential loans, if total expected losses are $300bn and banks have set aside $85bn in reserves for these loans, we estimate that there could be over $200bn left to go, or about half of total projected losses across all assets.

Regardless of the validity of earlier "leaked" stress tests, this is likely a major sticking point for the administration which is currently beating its head on how to sweep these potential large future losses under the rug.

Selected Comments

[Apr 20, 2009] Too many narratives

Is Obama just a Bush III as far as economic policy goes ? I hope that's not true... It's always way too easy to judge the strategy of participants of the battle watching from sidelines...
April 15, 2009 | NYT

Brad DeLong lists three possible explanations for the Obama administration's bank policy, and expresses angst that officials don't seem to be clear about what they're actually up to. Matthew Yglesias points out that the president seemed to offer a fourth narrative yesterday. I'd add that in the past we've heard yet another narrative - that we can't imitate Sweden because we have too many banks - that happens to be all wrong.

Can I say that this very proliferation of narratives is disturbing? I don't want to claim moral equivalence with the Bushies, who were utterly cynical about such things, but the ever-shifting rationales for an unchanging policy do bring back unhappy memories of the selling of the 2001 tax cut, and for that matter - again, no moral equivalence! - of the selling of the Iraq War.

Selected Comments
  1. I think Paul is being too tough on Obama on this one. It seems to me that Delongs scenario #3 is about right. Obama is a gradualist in approach, and an institutional optimizer in practice, not a radical…yet. He is doing meds before surgery, because it is seemingly the case that all the real social program priorities will go out the window in the conflagration that will follow nationalization……unless it is so agonizingly obvious to all that it has to be done. Schiller is right: anger has to be channeled and directed at the real situation, and not allowed to be free floating and directed at the bailout as an isolated phenomena.

    Mike Dayton

    - MDayton
  2. In basic research, you often see this kind of shifting narrative just before there is a major change in how people understand a certain process. The shifting narrative is part of a process of recognizing that established paradigms have a harder and harder time explaining the exceptions to the paradigm.

    This works in science (at an admittedly slow pace) because there is constant pressure on people to discover and because there are competing factions with differing opinions. I'm not sure that it works as well in an administration because the pool of people you're dealing with and the diversity of opinions is not large enough to allow meaningful changes to take place.

    But I think the point remains. This shifting narrative is a sign that the old paradigm isn't working. Will they change course?

    - workaday joe
  3. "we can't imitate Sweden because we have too many banks"

    If you recall, there was a second part to that narrative–that being that we can not nationalize Swede-style because "our culture is different than Sweden's."

    After I heard the President's speech yesterday, I e-mailed the White House and asked them, why, if as the President contends, the banking plan and resistance to receivership is NOT based on "a certain ideology or philosophy" . . . then why did the President make those prior comments about Sweden, and imply that receivership is a radical, un-American concept.

    Notice that we still have not heard Geithner, Summers, or Bernacke debate the merits of their plan over any other option. They haven't presented us with any other options.

    - Jade
  4. It's painfully clear that Obama has continued precisely the same old failed methods of the Bush era (denial of reality, cronyism/corruption, incompetence) that Obama himself was fighting so hard against during the election campaign.

    Why is he doing this and squandering his presidency on behalf of failed bankers? Why has he allowed his presidency to be hijacked by the financial oligarchy? Why is he making his legacy hostage of Geithner / Summers policies infested with appalling conflicts of interest and corruption?

    I hope not all is lost; I hope Obama wakes up one day and realizes what mess he got himself into.

    - Bill Mill
  5. More questions:

    1. Obama called it 'preemptive government takeovers' - preemptive to what? To TARP? To the 2012 Olympics?

    2. Obama said it will 'undermine confidence' - whose confidence? Wall Street's? Or the 80+% of Americans who favor temporary nationalization?

    3. He either believes that banks are best in 'the hands of the private sector' as he said a month ago, or his decision 'has nothing to do with any ideological or political judgment we've made about government involvement in banks' as he said yesterday. Can it be both?

    Side note: There Obama goes again, with his GOP-esque attacks on 'entitlements' and social security. Sigh.

    - Ohioan
  6. I think this a really important point. Perception being such a significant part of this whole thing.

    It is a mistake however to think that this is a grand conspiracy on the part of the grand Govt/Wall street, neo-liberal, Chicago school, Straussian complex.

    Narrative proliferation is in all past and present cases cases, moral and not so moral, is not so much a problem of not knowing which is the best press release to dupe the public. This is evident in the fact of there being so many narratives and the consequent lack of clarity which enhances panic. Clearly no one in the administration actually knows what is the BEST path of action.

    Under these circs, when nothing is clear then you may as well opt for the path that will best line the pockets of those involved, in the case of Iraq, big contractors, in the case of 2001 tax cut big money and in this case bankers. Its not so much a conspiracy, they are not that sophisticated and not that clever, and not that much in control. It is just a closing of the wagons. They don't have a clue so they may as well save their own bacon.

    - scientella
  7. Narratives? I believe the proper expression is "not getting your story straight". Obama is talking out of both sides of his mouth on this isuse. He avoids any mention of bondholders:

    "it's certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess."

    But then, who is surprised? If you can double-alk on torture, illegal detention and illegal war, what is a few trillion dollars in disappropriation?

    - b.
  8. Apparently it hasn't occurred to you that if there were any consensus amongst economists about what government actions are appropriate, Obama would simply become a spokesperson for the profession and announce their instructions. He would then forge ahead with a plan that had sufficient support to overwhelm any political opposition.

    I suggest that before taking gratuitous swipes at the administration you make a serious effort to clean up your disorganized, bickering profession. By posturing as the arbiter of Truth, you're not convincing anyone and are making yourself the moral equivalent of the media shouters that you so detest.

    - Paul Dorell
  9. meh.

    Bush seemed to have specific policies he wished to pursue, and tailored his "rationales" for pursuing those policies to conform to whatever the prevailing circumstances were at the time. If there is a budget surplus, or a budget deficit, or a terrorist attack - those are all clear reasons for tax cuts. Invading Iraq was justified by whatever happened to be present in Iraq at the moment: WMD's, Al-Qaeda, freedom-fighters.

    Obama doesn't seem to be justifying the pursuit of a pre-conceived policy - he just seems confused about what to do.

    - Mark L
  10. DeLong lists 3 possible explanations. He does not say that the Obama administration has been using them all.

    I think the administration bases their action on two assumptions:

    1) Nationalizing the banks would cause a lot of disruption to the economy which makes it undesirable.

    2) Fixing the problems with the banking system would require far more money than congress will appropriate.

    1) and 2) together force the administration to try to keep the banking system afloat on the cheap. This means the specific policies they follow are not clean and pure and can easily be criticized.

    It also means that they are attempting to restart the economy by working around the banking system, for example by directly influencing mortgage rates.

    Because in the US banks are a less important source of funding than in Europe or Japan this may be a viable approach.

    - dk

[Apr 20, 2009] Four Markers of an Economic Turnaround By Barry Ritholtz

April 19, 2009

Via Barron's, we learn that Merrill's David Rosenberg has four markers that he is tracking to identify when the economy is finally making a turn and starting an extended expansion:

• Home prices.
• Personal-savings rate.
• Debt-service ratio
• Ratio of the coincident-to-lagging indicators (Conference Board).

By aggregating those four markers, Rosie calculates we are roughly 44% of the way through the "adjustment" process. While that is a tick up from last month, the improvement, he laments, has been "very modest and very slow.

"We should add that he also stresses that it's critical for both the economy and the market that payrolls stop shrinking. All the talk about jobless claims "stabilizing" is so much poppycock, he snorts. That number of claims, he notes, is still consistent with monthly payroll losses of around 700,000. As with industrial production, which is also in a vicious slump, employment must stop falling before a recession typically ends

Call us when claims fall below 400,000," he says, which is his estimate of "the cut-off for payroll expansion/contraction." Until then, he warns, "the recession will remain a reality. Rallies will be brief, no matter how violent, and green shoots are a forecast with a very wide error term attached to it."

Rosenberg also points out that the financials and consumer cyclicals have net short positions of 5 billion and 2.7 billion shares - strongly suggesting that a "not insignificant part of the rally has been provided by shorts running for cover." The Russell 2000 small-cap index is up 36% since the March low, outperforming the S&P by almost 10%. The last time the Russell outperformed the SPX was from late November to early January. Two months later, the major averages made new lows.

One other warning sign: Over the past five weeks, Rasmussen's investor-confidence index surged 32 points - unprecedented gains in so short a span. This suggests excessive trader optimism for a sustained equity-market rally."

[Apr 19, 2009] On Good and Bad Financial Innovation

Apr 19, 2009 | naked capitalism

Remember over the last decade how the mantra defending all this was "spreading risk." Funny you don't hear that anymore, because they were right. We all got the risk, whether we wanted it or not.

[Apr 19, 2009] Averting Depression as Consumer in U.S. Fades by Stephen Roach

I would still assign a very low probability to a 1930-style depression for the U.S. and the broader global economy. Monetary and fiscal authorities have made it quite clear that they are prepared to do everything in their power to avoid such an outcome. Ultimately, I suspect they will get their way. Put it together and it all smacks of a dangerous sense of dιjΰ vu: promoting a false recovery by kick-starting overextended, saving-short American consumers to borrow once again by leveraging their major asset.
Apr 13, 2009 | Bloomberg.com

Debate rages over the endgame for the Great Recession. The broad consensus of policy makers, financial market participants, business leaders and academics concurs that the world is in the midst of its worst decline since the 1930s. In making that comparison, there is a presumption that another depression is a distinct possibility if immediate steps aren't taken to contain the downward spiral.

This debate misses the point -- and dangerously so. While I have been as bearish as anyone over the past several years, I would still assign a very low probability to a 1930-style depression for the U.S. and the broader global economy. Monetary and fiscal authorities have made it quite clear that they are prepared to do everything in their power to avoid such an outcome. Ultimately, I suspect they will get their way.

Yet there is a serious and worrisome risk to this policy strategy. By fixating on the anti-depression drill, authorities are failing to address the root cause of the current crisis and recession -- the lethal unwinding of unsustainable global imbalances.

As one leading G-7 official put it to me recently, "In the short term, we need to get the world moving again. Then, over the medium term, we will tackle global imbalances." This is the essence of the "Depression Foil" -- a single-minded preoccupation with avoiding a 1930s-style collapse at all costs while putting off the requisite heavy lifting for that proverbial next day.

Short-Sighted Politicians

Unfortunately, the myopia of the political cycle pre-ordains such a policy response. A resumption of economic growth is all that ever seems to matter for poll-driven politicians and their surrogate policy makers. Tough problems are always deferred with a vacuous promise to tackle them in due course. Then that due course always is pushed out further and further in time.

This is precisely the mindset that got us into this mess. I well remember the debate over America's current account deficit -- one of the most glaring manifestations of an economy built on quicksand.

Some argued that there was nothing to worry about in a world that was now joined in a new "Bretton Woods II" paradigm, where a symbiotic relationship between the creditor (mainly China) and the debtor (the U.S.) would sustain this imbalance in perpetuity. There were others, such as Alan Greenspan, who worried about the long-term sustainability of America's external shortfall but stressed that such imbalances were likely to persist for much longer than most thought.

Imbalances Grow

The problem with the apologists is that they failed to appreciate the deeper meaning of these imbalances. The U.S. current account deficit didn't emerge out of thin air. It was the outgrowth of an unprecedented shortfall of domestic saving. Saving itself was depressed by the illusions of an asset-dependent U.S. economy and especially by the willingness of consumers to live well beyond their means by extracting equity from over-valued homes.

In short, America's external imbalance was joined at the hip to the toxic interplay between asset and credit bubbles. Moreover, denial was global in scope. Export-led economies were delighted to draw support from bubble-dependent American consumers. And now, that house of cards has collapsed.

Repeating Mistakes

Unwittingly, the Depression Foil might well end up recreating this madness. With the risk of a depression viewed as completely unacceptable to the global body politic, the full force of the policy arsenal is being aimed at jump-starting aggregate demand -- irrespective of the consequences such results might imply for a new build-up of global imbalances.

Once again, the U.S. is leading the charge. The Fed wants to get credit flowing again to still overextended American consumers, especially in mortgage markets. The Congress wants to stop the bleeding in the housing market -- irrespective of the persistent imbalance between supply and demand. And the White House wants consumers to start spending again -- to avoid the perceived pitfalls of the "paradox of thrift" brought about by too much saving.

Put it together and it all smacks of a dangerous sense of dιjΰ vu: promoting a false recovery by kick-starting overextended, saving-short American consumers to borrow once again by leveraging their major asset.

Weakened U.S. Consumers

Fortunately, the American consumer is smarter than the quick-fix Washington mindset. Shell-shocked families -- especially some 77 million baby boomers for whom retirement planning is an urgent imperative -- know they have no choice other than to save. The personal saving rate has risen from 0.8 percent to 4.2 percent in the past six months alone, and is on its way to a new post-bubble equilibrium that I would place in the 7.5 percent to 10 percent zone.

Yet policy makers fear such an outcome. It certainly doesn't fit the script of the Depression Foil. A persistently weak American consumer is viewed as a worrisome threat to another sickening down leg for a world in recession.

This is the essence of the macro disconnect that is now shaping post-crisis policies around the world: The global economy has become overly dependent on one consumer. Yet, like it or not, this source of growth will be severely impaired for years to come -- a necessary and welcome rebalancing of the U.S. economy. However, this should not be viewed as a nail in the coffin for a Global Depression scenario.

Global Rebalancing

A retrenchment by the American consumer should be viewed as a wake-up call for other nations to fill the void by stimulating their own consumers. A globalized world needs to move from one consumer to many.

The Depression Foil blinds policy makers and politicians to the imperatives of global rebalancing. This crisis and the wrenching recession it has spawned are all about a destabilizing shift in the mix of global saving and aggregate demand.

That mix needs to be redressed. The excess spenders need to save and the excess savers need to spend. Policies that encourage such rebalancing will put the world economy on a more stable and sustainable path and go a long way in avoiding another crisis like this in the future.

The Depression Foil makes it exceedingly difficult for an unbalanced world to get its act together. The recently concluded G-20 summit was notable for its failure to address this critical challenge. Policy makers and politicians need to move beyond their depression fixation and aim at achieving better balance in the global economy before it's too late.

(Stephen Roach is chairman of Morgan Stanley Asia. The opinion expressed are his own.)

[Apr 19, 2009] Even Vigilant Investors May Fall Victim to Fraud

NYTimes.com

It's hard to thwart someone intent on committing a crime. But you can at least put your advisers on notice by not letting them trade on your behalf at all. That's what we did with Mr. Weitzman, simply because we don't think it is a good idea to give anyone that authority. If, for any reason, you need help putting an adviser's plan into action, have the adviser show you how to make the trades or transfers yourself on the Web site of the firm where you keep your money. Or, at the very least, make it clear, in writing, to your advisers that they are not to make any trades or transfers without your permission.

Janice Fetsch, head of compliance for Smith Barney and its fleet of stockbrokers, also warns people never to sign blank or even incomplete documents. And she tells her branch managers to be on the lookout for financial advisers who are suddenly living beyond their means. Smith Barney's brochure for clients on how to protect their accounts, which I've linked to on the Web version of this story, reads like a mini encyclopedia of investor paranoia. And I mean that as a compliment.

[Apr 19, 2009] Pelosi calls for panel to probe Wall Street

Democratic House Speaker Nancy Pelosi, saying that the American people are demanding "discipline and accountability" after the multibillion-dollar federal bailouts, promised Wednesday to create a legislative commission with broad oversight to investigate the causes of Wall Street irregularities and their full costs to taxpayers.

Pelosi, speaking to the Commonwealth Club of California, said she wants the panel to be modeled after the Pecora Commission, a bipartisan investigative body established by the U.S. Senate in 1932 to examine the causes and abuses of the Wall Street crash of 1929 and to prevent a repeat.

[Apr 18, 2009] How Credit Default Swaps Create Bankruptcies

Moon of Alabama

The Institutional Risk Analyst folks say Citigroup is is insolvent and needs to be either restructured or liquidated. They believe restructuring is possible by three steps:

I agree with the diagnosis. Citigroup is insolvent. But I believe that the restructuring is impossible as many Citigroup bondholders have no incentive to take a loss by agreeing to a debt for equity swap but instead have a huge incentive to let Citigroup fail.

The reason are Credit Default Swaps.

One can distinguish two types of Credit Default Swaps buyers:

On a first view type A looks like a homeowner who pays for fire insurance on her home while insurance buyers of type B are firebugs who establish insurance on some other person's house to cash-in after they burn it down.

It is obvious that the second kind of insurance buyer is a serious danger to the public and to the solvency of the insurance seller. Indeed no sane insurer, that is others than AIG Financial Services, will sell fire insurance on a home to someone else than the home owner.

As I call for ALL credit default swaps to be declared null and void I should explain why the first type of CDS buyer is also a systemic danger.

A person gives $1 million credit to Citigroup and receives a bond from it, a written declaration by Citigroup to pay back the $1 million plus a certain interest in a fixed number of payments distributed over time. The person also buys insurance for the full value of the bond. If Citigroup goes bankrupt the insurance will pay out for the full loss to the bondholder.

But Citigroup is a big company and before such companies go bankrupt and out of business they try to restructure. They will call in all the bondholders and ask those to forgive some of the debt or exchange their bonds for shares. They will also ask their workers to work for less. Such restructuring is usually good for the economy as a whole. Not all company workers get fired and the general economic disruption that occurs with any large bankruptcy will be less painful.

But here is the rub. The bondholder that has insured the Citigroup bond has no incentive to agree to any reduction in what Citigroup owns her. If Citigroup goes bankrupt the bondholder will not bear any loss. Then why should the bondholder agree to take a loss in a restructuring procedure?

Indeed the analogy of this type of CDS buyer to a homeowner that insured his home is not completely correct. A home fire insurance will not pay out 100% of the rebuilding costs of a home that had already decayed. It might pay the time-value of that house or the repair costs, but the payout for a burned down 50 year old house will usually not be enough for to pay for a brand new one of the same size and quality. This makes sure that the homeowner has no financial interest to burn the house down and gives an incentive to stop a small fire before it burns down the whole house.

But the CDS buyer of the first type will be made whole to 100%. The incentive here is not to stop the small fire but to make sure that the fire actually burns down as much of the house as is possible.

As the Financial Times reports (alt link) that is exactly what happened twice last week:

Credit default swaps, the derivatives instruments that have figured prominently in the global financial crisis, are now being blamed for playing a role in two bankruptcy filings this week.

Bankers and lawyers involved in restructuring efforts say they are concerned some lenders to troubled companies, such as newsprint producer AbitibiBowater and mall owner General Growth Properties, stand to benefit from a default because they also hold default swaps, which entitle them to payments in such events.

The same will occur with General Motors which is now trying to restructure:

The Obama administration has directed General Motors Corp (GM.N) to prepare a new restructuring plan that would pay off bondholders and the automaker's major union in stock in exchange for $48 billion in debt, people briefed on the plan said on Friday.

The GM bondholders who have in total $38 billion credit insurance will certainly not agree to a voluntary shares for debt-reduction swap. Outside of bankruptcy procedures there is little anyone can do to make them accept such. Inside a bankruptcy the insurance makes the whole. GM and Citigroup will thereby have to go into bankruptcies with all the nasty things that will be involved. Likely more jobs will be lost than necessary and more damage done to the economy as a whole while the bondholders who bought insurance will be perfectly well.

It is weird that the Obama administration and even the smart IRA folks have not grasped the problem that CDS' have created. These insurances by their very existence give an incentive to 'liquidationists'. They are institutionalized Andrew Mellon's that prefer total destruction over restructuring.

There is a way out of this: Declare all Credit Default Swaps null and void.

There is no real economic justification for these instruments. They only skew risk. If A gives a loan to B the payed interest is the gratification for taking the risk that B might default. A will demand higher interest from C if C is a higher default risk. That is the way it should be and it has worked well for thousands of years. If CDS' are allowed A will insure itself and no longer carry a risk at all. Any decay in B's financial state will give A an immediate interest to see B's total fall. This is a systemic danger that the public has a clear interest to avoid.

So lets get rid of these papers once and for all.

Posted by b on April 18, 2009 at 11:13 AM | Permalink

[Apr 18, 2009] Stiglitz Blame Summers

The Big Picture

First Krugman, now Stiglitz; let's call it "When Nobel Prize winners agree with Barry" day.

Over the past few months, I have criticized CEA director Lawrence Summers "Sacred Cows/Save the Banks" approach, rather than a save the financial system approach. And the mad attempts to bailout the bond holders also came in for some harsh words. Joseph Stiglitz agrees:

The Obama administration's bank-rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

"All the ingredients they have so far are weak, and there are several missing ingredients," Stiglitz said in an interview yesterday. The people who designed the plans are "either in the pocket of the banks or they're incompetent."

The Troubled Asset Relief Program, or TARP, isn't large enough to recapitalize the banking system, and the administration hasn't been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama's advisers have close ties to Wall Street.

"We don't have enough money, they don't want to go back to Congress, and they don't want to do it in an open way and they don't want to get control" of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. "The bank restructuring has been an absolute mess."

Rather than continually buying small stakes in banks, weaker banks should be put through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said."

I wonder what will happen if or when the public realizes the enormity of the theft that has taken place right out in plain view, before their very eyes. Don't know? Don't care? Sheeple? I simply don't get the complacency . . .

The other issue according to Stiglitz is also something we've touched upon: "America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street. Even if there is no quid pro quo, that is not the issue. The issue is the mindset."

I could not agree more . . .

  • Steve Barry Says:
    April 17th, 2009 at 9:18 am

    The public only seems to care about their 401k statements, so they are feeling better. The public is very, very stupid as a whole to be led to where we are right now. They have little financial accumen…the founding fathers warned about all this, to no avail.

  • dead hobo Says:
    April 17th, 2009 at 9:24 am

    Perception counts as much as facts a lot of the time.

    A few months or weeks ago when it looked like the world was ending, it would have been stupid beyond belief to shut down large banks. The panic would have grown exponentially. Nothing good would have come out of it.

    Now that the market indexes are up a little and analyst expectations have been soundly beat (surprise!, as in "only an idiot would be surprised" ), the economy can afford a few hits without those hits creating an exponential panic. If shutting down a parasite bank is a good idea, then go for it. I'm for it if for nothing other than to see the looks on their faces.

    I'm particularly troubled that the best profits at some banks were made at the trading desks, aka speculating on the stock market or other markets. The old Wall Street is back. Had those "Investments" gone bad then would Uncle Stupid have to pay twice?

  • jnutley Says:
    April 17th, 2009 at 9:40 am

    I'm beginning to get a different idea about this mess. In this month's Wilson Quarterly there's a review of an article in First Things: "The Return of the Best and the Brightest" by R. R. Reno. The gist is that we have a modernized (Politically Corrected?) version of the JFK staff in the White House; a group of mostly Ivy Leaguers who all have impressive academic credentials and a collegiate (Good 'Ol Classmate network?) mindset.

    So Obama supports Geithner and Summers and they support the CEOs of the Banks because they're all part of the "In" crowd. Outsiders claiming that Insiders should be cast out are going to be ignored; not just as long as possible, but until there literally is no alternative. It's inconceivable to them that one of their own should be removed for anything short of obvious genocide, so the calls for "making hard choices" are going to get no traction, and only a massively face saving group-think 180 (on the part of the new Best and Brightest) is going to change the Nation's course.

    So it's not malfeasance or even sloth based nonfeasance but blind loyalty that's preventing us from doing what needs to be done.

    Please tell me I'm deluded!

  • DL Says:
    April 17th, 2009 at 9:40 am

    "I wonder what will happen if or when the public realizes the enormity of the theft that has taken place right out in plain view, before their very eyes. Don't know? Don't care? Sheeple? I simply don't get the complacency".

    I think that the average "J6P" doesn't pay close attention to the ins and outs of the bank bailouts. The average Joe just cares about whether he has a job, or whether he has customers (if he owns a small business).

    Furthermore, Obama has most of the J6P's convinced that the wealthiest 2% of Americans will be paying for everything anyway. Of course, there's no way that this is going to be true, but the average Joe won't realize that until sometime after November 2012.

  • dave Says:
    April 17th, 2009 at 9:58 am

    While I agree 100% with Stiglitz and am angry by the complacency of the U.S. citizenry, it's (unfortunately) understandable. The average citizen does not follow the banking industry that closely. What's more discouraging is it seems that the MSM, our elected officials and other national influence makers don't seem to care either. In my opinion, when it comes to this banking bailout, Obama is Bush in sheep's clothing.

  • call me ahab Says:
    April 17th, 2009 at 10:31 am

    some_guy_in_a_cube Says:

    "policy makers constructed a financial system around a few giant corporations"

    I remember when I was in college getting my degree in "High Finance" in the early 1980's the talk was that US banks were too small and were being eclipsed by the likes of Deutsch and Mitsubishi- boy-

    fixing that sure worked out well.

  • franklin411 Says:
    April 17th, 2009 at 10:40 am

    @Mannwich:
    Politics is the art of the possible.
    Otto Von Bismarck, Aug. 11, 1867

    Just then they came in sight of thirty or forty windmills that rise from that plain. And no sooner did Don Quixote see them that he said to his squire, "Fortune is guiding our affairs better than we ourselves could have wished. Do you see over yonder, friend Sancho, thirty or forty hulking giants? I intend to do battle with them and slay them. With their spoils we shall begin to be rich for this is a righteous war and the removal of so foul a brood from off the face of the earth is a service God will bless."

    "What giants?" asked Sancho Panza.

    "Those you see over there," replied his master, "with their long arms. Some of them have arms well nigh two leagues in length."

    "Take care, sir," cried Sancho. "Those over there are not giants but windmills. Those things that seem to be their arms are sails which, when they are whirled around by the wind, turn the millstone."

    –Don Quixote, by Miguel de Cervantes - 1615

  • franklin411 Says:
    April 17th, 2009 at 10:44 am

    @ Mannwich:

    "by stubbornly refusing to compromise upon things which are right, one may often do a vast wrong." - William Allen White, March 20, 1920.

  • Mannwich Says:
    April 17th, 2009 at 10:46 am

    @franklin411: But who's unwilling to compromise or yield to any opposing view that may be at least somewhat right/helpful at this point? It sure seems like it's Summers/Geithner to me.

  • Stuart Says:
    April 17th, 2009 at 10:58 am

    "The other issue according to Stiglitz is also something we've touched upon: "America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street. Even if there is no quid pro quo, that is not the issue. The issue is the mindset.""

    Bulls Eye. One and the same they are. Add some compliant MSM, lazy headline writers, a smooth talking administration, voila … sheeple. When it hurts enough, they'll wake up.

  • Mannwich Says:
    April 17th, 2009 at 11:01 am

    @Bruce: It's not gonna happen. How do you think we've achieved this "fake prosperity" over the past 30+ years? It wasn't by actually paying for things as we go. It's not the American Way. Free lunches for everyone are….

  • wally Says:
    April 17th, 2009 at 11:13 am

    Is there really any way out of the situation we are in without extreme disruption?

    We are now in a period of suspended belief. We accept that the 'kick-the-can-down-the-road' plan really solved the problems and that now we don't have to confront them. We have spent a trillion or two to get here.
    Now what?

  • ben22 Says:
    April 17th, 2009 at 11:39 am

    BR,

    With this:

    I simply don't get the complacency . . .

    Of course YOU don't. Of course most of the people here don't. BR, who do you spend your time with? Dummies, lazies, people that spend most of their time watching tv? people that work the line at GM or Ford? Nope, you hang with economists, money managers, analysts (people that ARE paying attention, that DO know what's going on and actually CARE), and my guess is your friends that aren't in the biz, they aren't stupid, they are educated, they look into things.

    I'm not trying to rude, by I honestly think, many people in this country, when it comes to anything money, they are stupid. I say this because it's not like they can't learn, they just don't want to. It's not fun for them because there often isn't an immediate reward.

    If the public ever finds out, they won't do anything, they might have some short term, typical knee jerk reactions, but that's about it IMO.

    Steve Barry, got it right, almost, when he said the public has little financial accumen, I think we he meant was, in general, they have none.

  • vaughn Says:
    April 17th, 2009 at 11:42 am

    "I wonder what will happen if or when the public realizes the enormity of the theft that has taken place right out in plain view, before their very eyes."

    i wonder.

    i know what MANY people who DO have their eyes open would like to see happen…..
    The oligarchical DC/BANK kleptocracy that america seems to have become IS revolting after all….

  • Mannwich,

    Yeah, that could def. play out that way but that tumbling down again will have to happen again soon, very soon. Still, the way I feel lately, saying I'm pissed off, that doesn't even come close to what I feel about what has happened. It's more than that for me. I don't think most people are anywhere close to that level though. Maybe people here, but not the regular Joe out there.

    JG at GMO had a quote that I think will apply to the human behaivor as this moves forward.

    He said, when asked about what we would learn from all of this:

    In the short term a little, in the medium term a lot and in the long term… nothing.

    So, in order for the average person to really get pissed and demand a real change, not a feel good slogan, they need this to happen again in not such a long period of time. If it doesn't play out that way, then every Wall Street firm that is left will drill into people's minds that sometimes crisis just happen, and it's part of the market cycle…. and we came back from it, we always do, etc. etc. etc.

  • DeDude Says:
    April 17th, 2009 at 1:53 pm

    The second part of the remarks from Stiglitz was actually also worth the read. Half of the stimulus package was wasted on taxcuts although we know that in a downturn, taxcuts have almost no stimulus effect (people save rather than spend the money when they are scared of the future). Why the heck did we have to waste half of a stimulus package that was already to small (0.8 trillion for a 2 trillion problem) on paying respect to the same failed ideologogs that had brought us into this mess.

  • DeDude Says:
    April 17th, 2009 at 2:13 pm

    flibby @ 10:28

    "The american tax payer isn't as dumb as people think" and "opinion was running 300:1 against TARP"

    There is a true disconnect between those two sentences.

    You ask those people what the consequences of just letting the stupid institutions fall would have been, and you will see how amazingly ignorant, and prone to act on emotions, most people are. They have no clue about all the stuff that would have landed on and crushed them if their desire had been fulfilled. They don't understand how their pensions, life insurances and jobs, are all dependent on a functional financial system. They don't understand that perfectly healthy and profitable businesses can be forced to close down if credit is not available. They don't understand what kind of an exsistencial crisis is imposed on an industrialized society if an instantaneous 25% unemployment rate occurs. All they can see is that some big bad Wall Street billionaires are getting some of their hard earned money.

    I certainly don't agree with the way the TARP was implemented, but the only viable alternative discussed at that time (among all those 300:1'ers) was the idiotic idea of doing nothing, and punish the bad Wall Street people by letting it all collapse. My favorite solution was a lot better than TARP, but it was also so far to the left of the political balance in the Senate that I am glad nobody wasted time trying to get it done.

  • Daffyorbugs Says:
    April 17th, 2009 at 3:43 pm

    It used to be that the unions owned some politicians, and were an organized forum for the "little guys" views. Now, the bankers own all the politicians; the politicians appoint the regulators, and the regulators
    oversee the bankers, who call the shots for the politicians.

    Until there is some organized voice with political power the average person won't be heard.
    He's gotta get up and go to work.

  • insaneclownposse Says:
    April 17th, 2009 at 6:46 pm

    Seems to me that people are outraged and that is why Obama got elected. Most folks don't give a crap what Stiglitz says - they are going to give the current administration time to try to sort out the mess the best that it can.
    I agree though that the plan probably will fail because the current team is the same team that is responsible for the mess in the first place. However, it's too early to tell, maybe the plan will get some traction as confidence returns and the gears of finance start turning again? A lot of the problems stem from the crisis of confidence and I don't think Stiglitz gets that part of it or believes in it.
    Anyway, if Obama fails, it opens the door for a third political party to start taking power.

    • [Apr 18, 2009] INDUSTRIAL PRODUCTION By Spencer

    Angry Bear

    Industrial production fell 1.5% in March, the same as in February.

    From the peak industrial production has now fallen 13.4%. This makes it worse than the 13.0% fall in the 1974 and 1958 recessions and the 9.3% drop in the 1982 recessions. This measure says this is now the deepest post WW II recession.

    [Apr 17, 2009] Jim Rogers Believes World is Heading for Depression

    Here's an informative, in-depth interview with Jim Rogers recorded in the last month - running time ~28 minutes.

    Rogers reiterates his disgust with the recent government economic interventions, especially in London and Washington DC. He believes we are making the same mistakes that were made in the 1930s, which led to the Great Depression, and in Japan in the 1990s, which led to Japan's "lost decade" of economic growth.

    Some quick hits:

    [Apr 17, 2009] Economist's View Roubini End of Gloom

    That does not mean that S&P500 can't go higher. Remember Keynes...
    Nouriel Roubini cautions not to get your hopes up too high:

    End of economic gloom?, by Nouriel Roubini, Project Syndicate: Mild signs that the rate of economic contraction is slowing in the United States, China and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies. ...

    Investors are talking of 'green shoots' of recovery... As a result, stock markets have started to rally... This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow ... in the last two quarters, US growth will still be negative .... in the second half of the year... Moreover, growth next year will be so weak ... and unemployment so high ... that it will still feel like a recession.

    In the euro zone and Japan, the outlook for 2009 and 2010 is even worse... Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world. ...

    By this standard, many US and foreign banks are effectively insolvent and will have to be taken over by governments. The credit crunch will last much longer if we keep zombie banks alive despite their massive and continuing losses. ... So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.

    To be sure, much more aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has reduced the risk of a near depression. That outcome seemed highly likely six months ago, when global financial markets nearly collapsed.

    Still, this global recession will continue for a longer period than the consensus suggests. There may be light at the end of the tunnel -- no depression and financial meltdown. But economic recovery everywhere will be weaker and will take longer than expected. ...

    Let's hope the end is near, but if you are a monetary or fiscal policymaker, it's far to soon to let down your guard and declare victory. You have to assume it won't be over for some time yet, and plan accordingly. If things turn out better than expected the plans can stay on the self, and existing programs can be scaled back accordingly, but that can't happen until we are certain that recovery is around the corner and we are nowhere near that point yet.

    [Also see the commentary surrounding the IMF's World Economic Outlook from Yves Smith, Dani Rodrik, and Real time Economics.]

    robertdfeinman says...

    I keep saying there are two "economies" in the US. There is the where the typical working class lives which has seen a rise in unemployment with little prospect for this to be reversed quickly. This recession will drag on.

    Then there is the one noticed by the media. This is a combination of anecdotal information about those in their class (top 5-10%) and the stock market. Since many in this group depend upon financial products for much of their income they are more sensitive to changes in stock prices than are those with no investments, or only those buried in retirement plans.

    This chattering/investing class can make money even from a bear rally, it's not the absolute value of stocks that counts, just whether they can make money via transactions. The recent recovery since the drop after the first of the year has added to the pot of speculative funds available and also pulled some back into the market.

    They are also encouraged by the fact that none of the big financial firms have been "nationalized" in the past few months and seem unlikely to be so. The fact that some even want to give back the TARP funds means that these banks are ready to get back into the speculative saddle.

    All that is needed to complete the picture is a bit of IPO and merger activity to grease the wheels of the legal and investment bank advisers. We are even seeing some of this with successful sales of new share offerings.

    So, if rental prices in the Hamptons start to go up for the summer the the crisis will be "over" and CNBC can go back to cheerleading again.

    SS says...

    @Robertdfeinman

    I agree with Sewells for once. It's all over but the shouting. It will take time, the bear market rally you point to is one example of a phenomena to play out over years and decades but that will end either in socialism, fascism or simply generalized poverty. I for one am rooting for the former and hope we have the wisdom to work together to help ourselves onto a prosperous more socially conscious path out of this end stage capitalism. Qui vivra verra!.

    SS

    Turbo says...

    A 12% federal budget deficit, doubling of the Fed's balance sheet, end of the inventory correction and basing of residential real estate investment should be enough to produce positive gdp later this year and next. I'm not sure the problem going forward is necessarily a zombie financial system though - even if banks are willing to lend, I don't see where income growth for the median household is going to come from to reasonably carry any increase in debt. A double dip recession seems likely as soon as the feds and the fed try to take the economy off life support.

    sewells says...

    SS, one thing I've never figured out about socialism is how the free rider problem gets addressed. Of course the system we have has its free riders too, they just tend to be corporations. Do you think that a significant percentage of people just won't slack off to the max if there is a social safety net that will keep them in relative comfort no matter what they do?

    My view of human nature is pretty dark but that could just be all the genocides, wars, terrorism and thefts I see around me coloring my perspective.

    Equal Poverty for All says...

    SS,

    The "former" (socialism) will always end in the latter. But socialism does generally provide a more stable economy because it performs well below potential. Recessions are not visible when you are always bumping along near the bottom.

    And concentration of wealth becomes a right reserved for the political leaders.

    SS says...

    @Sewell

    It's a problem for sure but socialists will have some cards to deal with it if they were to come to power. A philosophy of the collectivity committed to all citizens should make the kind of asocial behavior you talk about less acceptable, increasing its infrequency. Secondly and not entirely facetiously there is always jail and as we should with a better safety-net have cells freed up from economic crimes of necessity which should become less common, more "correctional" facilities should be available. Finally I believe this sort of minor social deviancy of which you're speaking can not possibly be as debilitating as the theft of social control of the economy that we have just experienced from our captains of industry and finance. No system is perfect or even perfectable but I prefer one that begins from the premise of everyone working together than competing tooth and nail against each other. Thanks for the inquiry.

    SS

    don says...

    The fundamental problem is the rise in desired savings in the U.S. as individuals try to make up for loss in their wealth stock (which they had previously overvalued). This depresses aggregate demand and leads to a decline in income and may result, paradoxically, in a decline in actual savings. (Sorry for the baby econ lesson to those who know this stuff.) If savings returns to historic norms, this amounts to a decline in aggregate demand equal to about 8% of GDP compared with recent years. This all might not be so bad, were it not for a pre-existing savings glut as aging Europe, Japan and China try also to provide for the future. Of course, the whole problem is exacerbated by Asian currency policies, which have exaggerated the savings glut.
    So, I see no easy solution. Short-term fiscal stimulus can prevent the savings paradox, but it looks to me like desired savings will be a drag on aggregate demand for some time. Under these circumstances, Asian currency interventions are certainly counter-productive for their trading partners.
    Treasury once again failed to brand China as a currency manipulator, but that is a political call. Any country that consistently and substantially obtains foreign reserves is manipulating its currency. Ben might have put the U.S. in danger of being guilty of this same charge with his recent actions, but (at least as advertized) this was short-term currency manipulation.

    Echo says...

    Nouriel..."$3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world..."

    Not to mention losses incurred via reckless futures speculation, and margin calls requiring forced sales of leveraged bets. The 3.6 T number will not be soon forgotten by the rest of the world, as it nearly destroyed the entire overseas banking system. The US is still totally dependent upon foreign savings for a reasonable level of capital formation. Not a good combination.

    Monetizing private debt is not a viable long term solution. It extracts too much purchasing power from consumers, and most of it isn't used to facilitate capital formation. The central issue of virtually non existent circular flow is not even being seriously addressed. Citizens have no significant propensity to buy productive capital goods. This is not a stable long term situation for any nation.

    Bruce Wilder says...

    If "socialism" is the provision of lots of insurance ("a social safety net that will keep them in relative comfort no matter what they do"), the devil, as always, is in the details.

    High risk for relatively low-income individuals and households can press some to become highly conservative peasant serfs and peons, and others to pursue high-risk "careers" as bandits and vandals and drug-dealers, ending in the socialism of an early grave or a long prison term.

    Egalitarianism, and the cheap insurance of "socialism", can enervate a society, draining away ambition in the equivalent of union featherbedding and bureaucratic, political allocation of privilege and resources. Or, egalitarianism and cheap insurance can be liberating, relieving the risk-aversion that limits investment and opening the opportunities that draw enterprising people away from crime and other social pathologies.

    Lost in all our piety about the importance of education and "skills" to economic advancement is the extent to which a high productivity society runs on a lot of investments that cannot be captured as private returns, and therefore cannot be driven by the expectation of private returns. You need a lot of people, who can devote themselves to doing things that benefit the society, but won't secure their personal fortunes. Sure, a Bill Gates or a Steve Jobs might secure a fortune from some aspects of the computer revolution, but there were a lot of important companies that went broke, and a lot of important innovations that never made their originators a dime. The society as a whole earned a huge return on, say, TCP/IP, but no one got paid royalties -- and if someone had an IP right and pressed it, it might well have killed the golden goose. Tim Berners-Lee certainly didn't invent the WWW for the money; and, if he had, it wouldn't have worked; he wasn't a unique genius or anything like that -- someone else would have done, but whoever it was, it had to be someone, who was working a sinecure. For every Bill Gates capturing billions for dubious contributions (I'm sorry, but Microsoft should have paid us for MS-DOS and Windows 3.1), there had to be millions of computer hobbyists making no money, as well as quite a number of technical gurus, essentially giving away their achievements, to get the whole engine of growth going.

    The ideal incentive structure may be more soft pillow than sharp stick.

    An hereditary aristocracy won't make itself dynamic and innovative by adopting an official ideology of libertarianism and Social Darwinism. If "insurance" is the exclusive privilege of inherited wealth, then our elite will be populated exclusively by scions of such wealth. Someone like George W. Bush, kept in comfort no matter what he does, will rule our world.

    Mick says...

    The ideal incentive structure may be more soft pillow than sharp stick.

    A beautiful sentence but what does it mean?

    As long as you at it, what below means?

    If "insurance" is the exclusive privilege of inherited wealth, then our elite will be populated exclusively by scions of such wealth.

    mmckinl says...

    And US aggregate debt is still north of 50 trillion dollars ...

    GDP is falling, tax collections are crashing, the consumer sector is crippled ...

    Zombie nation ...

    [Apr 17, 2009] Bundesbank chief rejects De Larosiere Report

    US industrial production continues to fall in March

    Anyone who thinks that this recession is already leveling off should take a look at the latest US data on industrial production. The Fed reported yesterday that IP fell 1.5% in March after a similar decrease in February. For the first quarter as a whole, output dropped at an annual rate of 20%. It is now at the lowest level since December 1998. Capacity utilization has also hit an alarmingly new low. Here is the chart from the Calculated Risk blog. (from the chart it's now at 70%)

    [Apr 17, 2009] IMF Warns Downturn Will Be Prolonged and Recovery Shallow

    Legitimacy of key financial institutions like "government sucks" is severely undermined. finance cannot be a driver out the recession no matter how much government money are pumped into it. There is huge backlash in which will reflect in lawsuits, enforcement actions, etc. It's a zombie. High level of unemployment are limiting prospect of retail and other consumer oriented sectors. Housing is still suffering from excesses of the past. Credit card debt reckoning is looming on the horizon.

    naked capitalism

    From the summary:.
    ..recessions associated with financial crises have typically been severe and protracted. Financial crises typically follow periods of rapid expansion in lending and strong increases in asset prices. Recoveries from these recessions are often held back by weak private demand and credit reflecting, in part, households' attempts to increase saving rates to restore balance sheets. They are typically led by improvements in net trade, following exchange rate depreciations and falls in unit costs.

    Globally synchronized recessions are longer and deeper than others. Excluding the present, there have been three episodes since 1960 during which 10 or more of the 21 advanced economies in the sample were in recession at the same time: 1975, 1980 and 1992. The duration of a synchronous recession is, on average, nearly 1½ time as long as the duration of the typical recession. Recoveries are usually sluggish, owing to weak external demand...

    The analysis suggests that the combination of financial crisis and a globally synchronized downturn is likely to result in an unusually severe and long lasting recession.

    viv said...
    I thought we're now in a depression officially? I remember that post from VOXEU about a tale of two depressions, showing that this downturn globally has been even worse then the great depression.

    The IMF are being very cautious, look at how their expected credit related write downs rose to 4 trillion plus compared to less then a trillion when the crisis started.

    There's no need to guess, this is a depression and unemployment and social unrest are well on their way.

    Biggest credit bubble in history and we all read daily how preposterously the world is responding. China's loan boom is going to push up stocks, the US's fiscal stimuli and bank bailouts are a pointless exercise without the pre-requisite transparency and openness. Why are the Zombie banks allowed to live? Why is mark to fantasy allowed or AIG being used as a conduit to funnel money to other banks?

    Bloomberg openly challenge whether Japan's stimulus programs will do anything to help the economy? Japan has kicked the can down the road for 20 years and look where it is now? An economy possibly contracting at an annualized rate of 20% in the first quarter.

    Britain is technically bankrupt IMO with it's huge deficits, 450% Debt to GDP ratio and low currency reserves. Eastern Europe is on the precipice because they borrowed in foreign currencies to fund their boom, now bust.

    The Obama administrations budget deficit is projected to reach 1.8 trillion but given how Govt statistics always understate the situation, i'll give it 2.2 trillion. Plus the US Treasury has to roll over 2.56 trillion in debt this year. Where is the money going to come from? That's nearly 4.5 trillion there.

    This will crowd out the private sector, local and state governments. The bad money and misallocation of capital is driving the good money out and confidence with it. This bear rally is without any legs at all as implied by the Zero Hedge post here recently, the green shoots of recovery are more like poison ivy.

    The problem is too much debt, the government is trying to borrow it's way out of debt? Past crisis were papered over but always led to something worse down the line. The credit bubble started expanding greatly under Reagan from 1982. Since then the solution to any crisis has been an adrenaline shot of debt(credit).

    At some point the cancerous tumor of excessive debt must be removed from the system, adrenaline shots won't do. The US economy is on its death bed. The Banks must be allowed to fail, the bad debt must be defaulted on. We must start "clean" (perform triage) or perish.

    [Apr 16, 2009] The Case of the Missing Month - Floyd Norris Blog - NYTimes.com

    6:50 a.m.| Where's December?: Goldman Sachs reported a profit of $1.8 billion in the first quarter, and plans to sell $5 billion in stock and get out of the government's clutches, if it can.

    How did it do that? One way was to hide a lot of losses in not-so-plain sight.

    Goldman's 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman's earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.

    1. Regarding an earlier comment, I think the subterfuge of companies such as Goldman Sachs has a direct bearing on "poverty and unemployment."

      For example, a deal that brought Morgan Stanley and Citigroup $60 million each resulted in my unemployment!

      And these dealings of Goldman with the AIG funds…I think it has the potential to be a bigger scandal than Watergate. We may finally get to peek behind the curtain and discover the backroom machinations of the power elite.

      - Will Fletcher
    2. "prudence is the better path"

      That's a laugh. They're seeking to carry on where they left off, creating phony products that hide lack of value under a pile of complexity and poison everything they touch.

      All so they can pick up where they left off and skim more billions before sensible regulations stop them.

      - KS
    3. Of course, if someone gave me 20-30 billion indirectly (bailout through AIG, government bonds), I can also show more profit than these guys.

      When is Goldman giving the government the bailout they got as a handout from AIG. If they want to return the $10 billion loans, they should return this money and a penurious interest of 10% and a penalty of 50% because of the underhanded means by which they got that money. They asked Paulson to bailout AIG and they were the first ones to get paid.

      - tom_mason
    4. Mr Norris Once again you have exposed the inherent dishonesty of the financial sector.It seems to me that the tarp program looks more and more like an inept effort based on incorrect information and outright pandering to the financial giants.

      The government gave them funds to spur lending which they have continually failed to do and are back to their old ways of "cooking the books."

      It also seems that the "toxic asset" problem is another swindle perpertrated on the public since now the banks are not willing to sell them defeating the whole purpose of trying to increase lending..

      To paraphrase," the bigger they are the harder they should fall."

      - TEK NY
    5. Goldman's position creates an interesting transparency into the value of AG to the Federal government. What has really occurred is that AIG became the conduit through which the government could pump equity into the banks. The banks that were the counterparties on the AIG credit default swaps had their own obligation to examine the AIG credit and AIGs ability to perform under its CDS guarantees. The banks obviously did not do so. But rather than allow the banks to suffer the consequences of their poor due diligence, the government used the CDS obligations to, in effect, pump equity into the banks. Thus, because the AIG conduit money has no strings attached to the recipient banks, hose banks can go back to business as usual without any restrictions on their operations or on their pay scales. Now that the bans have their AIG money, they can repay their TARP funds and go back to being the crooks that they are. - Morris
    6. Of course, AIG would have had a much more significant adverse effect if Goldman hadn't received 100 cents on the dollar from AIG, paid using TARP funds AIG received. The more cynical of us think that's why the ex-Goldman alumni let Lehman die –but not AIG. AIG was Goldman's trading partner in CDS. What a bunch of flaming hypocrites. - Tim Connor
    7. Surely it comes as no surprise that Goldman Sachs has engaged in creative, but perhaps ethically dubious, accounting at almost the same time they are floating new shares. Nor should it be a surprise that their desire to repay TARP funds is based more on considerations of executive compensation than on shareholder value. GS has a long history of putting the interests of the firm and its partners (or managers, now they are publicly held) ahead of all others. J.K. Galbraith provided a succinct account of that firm's spectacular investment trust promotions prior to the First Great Depression in Chapter III of "The Great Crash 1929." And Kate Kelly at the Wall Street Journal reported ("How Goldman profited from subprime meltdown," Dec 2007) that GS had been making huge bets against subprime CDOs at the same time their mortgage department was peddling them to their clients. What is needed is a modern version of the Pecora Committee to investigate in depth who did what and when prior to and during the current crisis–but I doubt we could find enough Senators free from the taint of serious Wall Street money in their campaign coffers. - GaryS

    [Apr 16, 2009] Capital One Reveals Big Increase in Credit Card Chargeoffs

    The point of that story s that a chunk, probably a big chunk, of Capital One's business was targeting higher risk borrowers...However, with credit card marketing so skewed to create borrowers dependent on credit, the industry set itself up for this outcome

    From the Financial Times:

    Concerns over US credit card companies grew on Wednesday as Capital One Financial, a leading issuer, said its credit card loss rates were exceeding the unemployment rate.

    Credit card writedowns have topped the jobless rate on a handful of occasions in the past, and only once by any significant margin. That was in 2005 as a flood of borrowers entered bankruptcy and wrote off their credit card debt before the passage of a law that made it harder to file for bankruptcy.

    Credit card loss rates have in the past closely tracked the rate of unemployment. But in this recession that relationship is breaking down. Economists say this is because job losses, which pushed rates to 8.5 per cent in March, have compounded other sources of distress such as housing woes and stock volatility.

    Meanwhile, as the recession has deepened, bankruptcy filings are once more approaching pre-2005 levels, contributing to the rate of credit card losses.

    Capital One said its net charge-off rate for US cardholders – debts it believes it will never collect – rose to 9.33 per cent in March, up 1.27 percentage points in one month. It said some of the increase was because February has fewer days. Adjusted, the US card charge-off rate would have been 9 per cent in March...American Express .... reported that credit card losses of 8.6 per cent in March were offset by the sale to third parties of some previously written-off card loans.

    Brian Shniderman, head of the US credit card practice at Deloitte, said job losses had a "ripple effect" on the credit card business as even consumers who still had jobs adjusted how often and how much they spent....

    US credit card charge-offs soared in February to 8.82 per cent, a record in the 20-year history of Moody's credit card index. Moody's predicts the charge-off rate will peak at about 10.5 per cent in the first half of 2010, assuming a peak in the unemployment rate of 10 per cent.

    Selected comments

    just another social scientist said...
    I know this is a little off topic, but seems relevant in light of these write-offs.

    No one seems to have a good handle on the psychological impact the TARP fiasco has had on the average consumer. The assumption is that people fear a drop in FICO or generally feel morally obligated to pay their debts, but every day they see more stories of people supposedly shirking their own obligations or taking on more. I wish we had data to see if this is demobilizing the gargantuan efforts required for the credit risky (a group growing in size constantly, though I have yet to see any hard numbers) to simply stay afloat.

    If we thought the models which brought this on were flawed, this kind of subtle shift in public sentiment seems like it would uproot whatever other credit models are left. We only have anecdotal evidence, though the right-wing is in overdrive pushing revolution/revolt/oppression, the left already distrusted the big financial players, and the middle is made up of pragmatists like us who see how ridiculous the system has become.

    Today someone on CNBC pointed out that investors like regularity of outcomes, i.e. the rule of law. I think this is insightful if only because Obama has filled the void with his charisma. It's an open question how on earth he plans on restoring faith in a system he isn't really changing. For as much as Wall St. dislikes Obama's politics, if he can pull this off he'd be their Messiah.

    DownSouth said...
    just another social scientist said... "No one seems to have a good handle on the psychological impact the TARP fiasco has had on the average consumer. The assumption is that people fear a drop in FICO or generally feel morally obligated to pay their debts, but every day they see more stories of people supposedly shirking their own obligations or taking on more."

    Here's a link to an excellent lecture that speaks of neuroeconomics and explores how people behave depending on whether they have a positive or pessimistic worldview, positive defined as the belief they are predominately playing with heroes who are out to give them a fair shake and pessimistic defined as the belief they are overwhelmingly playing with villians who are out to screw them.

    http://thesciencenetwork.org/programs/beyond-belief-candles-in-the-dark/erin-o-hara

    O'Hara says this perspective on the world "has a priming effect" that influences how we behave or interact with others.

    For the past 30 years the United States has engaged in an orgy of selfishness, this behavior given a patina of legitimacy by the pseudoscience promoted by the likes of Ayn Rand and Richard Dawkins. If this trend is not reversed, if there is not a moral and legal reawakening so that selfishness and free-riding once again become things of opprobrium and illegality, and not adulation and legal sanction, at what point does a pessimistic worldview become ubiquitous, as has happened in Mexico, and the U.S. slips into the same type of chaos that Mexico is now experiencing?

    [Apr 16, 2009] The Case Against Re-Regulation -- Seeking Alpha

    Deregulation! It is continuously the culprit of today's global financial predicament. The word rings through the media under the harsh criticism of a thousand voices. It heralds free market economics, but it has lately been associated with the failure of the Greenspan era at the Federal Reserve, leading up to what has been the worst financial debacle in the history of the modern international financial system.

    Deregulation, however, is not the issue. It is an unfortunate victim of a crucial misunderstanding of players in this crisis of confidence, capital and corruption. Deregulation is a misnomer created by politicians and media players who misunderstand the core principles of the situation at hand.

    What has ultimately led to the simultaneous collapse of both the credit bubble and real estate bubble was poorly practiced central banking, a lack of regulatory action, and a culture of greed.

    In the United States, the Federal Reserve is the institution solely responsible for maintaining financial order. To accomplish this task, it has several tools at hand including setting monetary targets through the federal funds rate or exchange rate targets, and controlling national money supply by buying and selling government securities or other financial instruments.

    If you are in any way involved in the argument for or against free market economics, you must realize that the presence of a central bank in an economy automatically restricts free market activity. When there is an attempt to control the value of the market's currency through "open market operations", the invisible hand is restricted from doing its work.

    Through the Greenspan era, the Federal Reserve held the federal funds rate, an indicator that influences national interest rate levels, at an extremely low level following the collapse of the technology bubble. Recently, Bernanke has been terrifyingly active in flooding the market with fresh greenbacks in order to attempt to "generate confidence". This is more strongly associated to further regulation.

    Followers of this financial catastrophe have also come to the realization that the SEC, the CFTC and their fellow government regulatory bodies failed to see any of this coming. The reason for this is simply because they failed at doing their jobs. The ratings agencies, especially, although not government sponsored, simply turned their backs on the malinvestments that banks were making in the mortgage market.

    They looked into bankers' eyes, saw the greed and lust for profits, interpreted it as profound understanding of everything financial, and completely failed at accurately analyzing the risk associated with investments. At the same time, the SEC, CFTC and various other government watchdogs simply looked the other way, refusing to actually monitor the insane amounts of leverage that banks were building in investments that fundamentally made little sense. This is called ignorance, and has nothing to do with regulation or deregulation.

    Unfortunately, you cannot have greed without cial system as bedfellows.

    Wall Street has sidled up next to the US government, filled politicians eyes with success measured by wealth, and won their hearts and minds. The children of this relationship: Hank Paulson and Tim Geithner as treasury secretaries. We are faced with the possibility of corruption at the deepest level, when the appointed officials were former employers of the institutions they are to regulate. This has undoubtedly resulted in a skewing of what should be a free market, and played no small part in the safety net that has protected many of these institutions from the "perils of bankruptcy".

    The American people are searching for the culprit to their problems. In this search, the media screams in their ears, "Deregulation is evil, we must regulate." Although some may think this an oversimplification, the will is not present to continue the search when a plausible answer seems to be at hand. It's as if we are playing an orchestra, trying to come into tune, and the government says to us, "We need more musicians", failing to realize what we have is plenty. How we play our parts is what is important.

    The issue at hand cannot be measured in terms of regulation, it is not that simple. The answer is more accurate regulation by the regulatory watchdogs in place – they must do their job correctly and efficiently. The answer is sound central banking without massive fluctuation in interest rates that wreck havoc on investor and corporate confidence. The answer is corporate social responsibility based on moral business decisions with the interest of the entire economy in mind.

    [Apr 16, 2009] Most Likely Scenario for the U.S. Decade-Long Recession by Martin Hutchinson

    April 16, 2009 | Seeking Alpha

    Since sinking to a 12-year low of 676.53 on March 9, the Standard and Poor's 500 Index had risen 24% - the best such short-term rally since 1933. But this isn't 1933 and you shouldn't trust the rally. Happy Days are NOT here again, at least not yet.

    The 1933 rally came after a record-breaking decline. Real gross domestic product (GDP) fell by 25% during the Great Depression and the Dow Jones Industrial Index fell by almost 90%.

    What is less well known, however, is that valuations remained depressed for well over a decade after 1933. In 1949, when the Dow was selling at a price-to-earnings ratio (P/E) of just 7 times, it was cheaper in terms of earnings, net asset value, and GDP than it had been at its 1932 nadir.

    This time around, the S&P 500 index fell 58% from its 2007 peak to its March 9 bottom at the superstitiously significant 666. Of course, 58% is nowhere near as much as 90%. To recover from a 58% drop the stock market must rise by 138%, but it must rise by 1,000% to recover from a 90% drop.

    So it is not surprising that in spite of inflation and enormous economic growth, the Dow did not reach its 1929 level until 1954.

    The other difference between 2009 and 1933 is that the 2008 stock market peak was both higher and more prolonged than it was in 1929, which was a mere blip by comparison.

    Radio Corporation of America - 1929's equivalent of Cisco Systems Inc. (CSCO) or Google Inc. (GOOG) - never got above 28 times earnings in that market, and the Dow spent less than three years within 50% of its peak value of 381.17, only passing 200 in December 1927, and finally falling below that level in August 1930.

    In this market, the Dow was above 7,000 - within 50% of its 14,164 peak - continually from May 1997 until February 2009. Because the 2000s market was more overvalued for a longer period of time, it has further to fall, even without a "Great Depression" economically.

    The current rally has been based on signs that the U.S. banking system is not about to expire - a development I wrote about in an article entitled "The Top 12 U.S. Banks: From Zombies to Hidden Gems" in late February.

    Apart from the very largest banks, which gorged themselves on the most foolish and ill-designed products of the derivatives business, the banking system is suffering from a normal real estate downturn and is coping well with the high levels of loss that downturn has brought. With short-term interest rates well below long-term rates, banks' ongoing lending business is currently exceptionally profitable.

    The U.S. economy, as a whole, has stopped falling with ever-increasing velocity and may actually be beginning a lengthy "bottoming out" process. Had politicians avoided meddling with the monetary and fiscal systems of the globe, devoting trillions of dollars to bailouts and stimulus, the bottom we are approaching might well be somewhat deeper, but we could at least be sure that it was indeed the bottom, with recovery to follow.

    In Asian countries such as Korea, Taiwan and Singapore, where stimulus has been modest, and in China where it has created only a modest budget deficit, the sharp recession caused by collapsing exports is already coming to an end. (China, however, has a major banking and real estate problem that could still cause trouble down the road.)

    But in the United States, we can have no such assurance. Monetary policy, which was far too expansive in 1995-2008, reached expansiveness of extraordinary dimensions after last September's crisis, with the monetary base doubling and broad money expanding at a rate of more than 15%. Fiscal policy has produced record peacetime deficits - deficits that are more than double the previous peacetime record. The Federal budget deficit in 2009 will be double the 2007 balance of payments deficit, which had previously been thought of as a critical and dangerous imbalance.

    With imbalances of this size, there can be no assurance that a recessionary bottom will be followed by recovery, quite the opposite. Japan has now suffered near-recessionary conditions for almost two decades with a weak recovery in 2003-07. And that modest recovery is now being followed by a new recession as the Japanese government foolishly resorted to more wasteful public spending and debt.

    Fiscal stimulus stimulates nothing in a country where public debt is already 160% of GDP; instead it increases uncertainty and crowds out risk-taking private capital.

    The most likely scenario for the United States is a recession, or near-recession, that lasts for a decade with the economy unsuccessfully struggling against the twin problems of surging inflation and a budget deficit that crowds out private capital investment. Either real interest rates will be high to combat inflation or inflation will rage out of control.

    In such an environment, the outlook for stocks is bleak. The high stock prices of 1996-2008 have gone, and they will not return. When the excessive monetary expansion began in the spring of 1995, the Dow was at 4,000. That is equivalent to a level of 7,800 today when you inflate it by the increase in nominal GDP since 1995.

    However, 1995 was not a bear market low. It was far from it. The market had been rising for four years since its 1990 bottom and was almost 50% above its 1987 peak, just before the "Black Monday" crash.

    Thus, even if the economy had the growth prospects of 1995, a level of 7,800 on the Dow would be a reasonable expectation, not for a bear market low but for an equilibrium value. If you then take into account the markedly worse expectations for the U.S. economy resulting from excessive fiscal and monetary stimulus, 7,800 is too high.

    Take the 1949 P/E multiple of 7, and apply it to a recovering earnings level of say $60 on the Standard and Poor's 500, and you get an S&P of 420 - equivalent to a Dow of around 4,000.

    The market is no longer hugely overvalued with the Dow at 8,000, but any rally will be temporary, and we can expect an eventual low well below the 6,547 the Dow reached last month.

    Original post

    [Apr 15, 2009] Wal-Mart's Duke Sees No Early Respite

    Yahoo! Finance

    In an interview on NBC's Today show, Wal-Mart's Chief Executive Officer Mike Duke said, It's not a V recession, where we'll just bounce out and come back. This is one that is going to take a sustained change in the way that families live.

    [Apr 15, 2009] World Economy Falling Faster Than in 1929-1930

    Apr 7, 2009 | naked capitalism

    Barry Eichengreen, an expert on the Great Depression, and Kevin O'Rourke, take issue with the notion that the current downturn is less severe than the Great Depression. While the slump in the US is not as bad, that mis-states the global picture.

    Note that many economists expect the US to suffer less than the big exporters, namely China, Germany, Japan. The reason is that the economic adjustment required of surplus nations is greater than that of debtors. Similarly, in the Great Depression, the US, then a major exporter, was harder hit than the overconsuming importers such as Britain, who defaulted on their debts.

    The one bit of cheer is that this time around, government action is more aggressive, but it remains to be seen whether it is sufficient.

    From VoxEU:

    Often cited comparisons – which look only at the US – find that today's crisis is milder than the Great Depression. In this column, two leading economic historians show that the world economy is now plummeting as it did in the Great Depression; indeed, world industrial production, trade and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better.

    The parallels between the Great Depression of the 1930s and our current Great Recession have been widely remarked upon. Paul Krugman has compared the fall in US industrial production from its mid-1929 and late-2007 peaks, showing that it has been milder this time. On this basis he refers to the current situation, with characteristic black humour, as only "half a Great Depression." The "Four Bad Bears" graph comparing the Dow in 1929-30 and S&P 500 in 2008-9 has similarly had wide circulation (Short 2009). It shows the US stock market since late 2007 falling just about as fast as in 1929-30.

    Comparing the Great Depression to now for the world, not just the US

    This and most other commentary contrasting the two episodes compares America then and now. This, however, is a misleading picture. The Great Depression was a global phenomenon. Even if it originated, in some sense, in the US, it was transmitted internationally by trade flows, capital flows and commodity prices. That said, different countries were affected differently. The US is not representative of their experiences.

    Our Great Recession is every bit as global, earlier hopes for decoupling in Asia and Europe notwithstanding. Increasingly there is awareness that events have taken an even uglier turn outside the US, with even larger falls in manufacturing production, exports and equity prices.

    In fact, when we look globally, as in Figure 1, the decline in industrial production in the last nine months has been at least as severe as in the nine months following the 1929 peak. (All graphs in this column track behaviour after the peaks in world industrial production, which occurred in June 1929 and April 2008.) Here, then, is a first illustration of how the global picture provides a very different and, indeed, more disturbing perspective than the US case considered by Krugman, which as noted earlier shows a smaller decline in manufacturing production now than then.

    Figure 1. World Industrial Output, Now vs Then

    Source: Eichengreen and O'Rourke (2009).

    Similarly, while the fall in US stock market has tracked 1929, global stock markets are falling even faster now than in the Great Depression (Figure 2). Again this is contrary to the impression left by those who, basing their comparison on the US market alone, suggest that the current crash is no more serious than that of 1929-30.

    Figure 2. World Stock Markets, Now vs Then

    Source: Global Financial Database.

    Another area where we are "surpassing" our forbearers is in destroying trade. World trade is falling much faster now than in 1929-30 (Figure 3). This is highly alarming given the prominence attached in the historical literature to trade destruction as a factor compounding the Great Depression.

    Figure 3. The Volume of World Trade, Now vs Then

    Sources: League of Nations Monthly Bulletin of Statistics, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html

    It's a Depression alright

    To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimize this alarming fact. The "Great Recession" label may turn out to be too optimistic. This is a Depression-sized event.

    That said, we are only one year into the current crisis, whereas after 1929 the world economy continued to shrink for three successive years. What matters now is that policy makers arrest the decline. We therefore turn to the policy response.

    Policy responses: Then and now

    Figure 4 shows a GDP-weighted average of central bank discount rates for 7 countries. As can be seen, in both crises there was a lag of five or six months before discount rates responded to the passing of the peak, although in the present crisis rates have been cut more rapidly and from a lower level. There is more at work here than simply the difference between George Harrison and Ben Bernanke. The central bank response has differed globally.

    Figure 4. Central Bank Discount Rates, Now vs Then (7 country average)

    Source: Bernanke and Mihov (2000); Bank of England, ECB, Bank of Japan, St. Louis Fed, National Bank of Poland, Sveriges Riksbank.

    Figure 5 shows money supply for a GDP-weighted average of 19 countries accounting for more than half of world GDP in 2004. Clearly, monetary expansion was more rapid in the run-up to the 2008 crisis than during 1925-29, which is a reminder that the stage-setting events were not the same in the two cases. Moreover, the global money supply continued to grow rapidly in 2008, unlike in 1929 when it levelled off and then underwent a catastrophic decline.

    Figure 5. Money Supplies, 19 Countries, Now vs Then

    Source: Bordo et al. (2001), IMF International Financial Statistics, OECD Monthly Economic Indicators.

    Figure 6 is the analogous picture for fiscal policy, in this case for 24 countries. The interwar measure is the fiscal surplus as a percentage of GDP. The current data include the IMF's World Economic Outlook Update forecasts for 2009 and 2010. As can be seen, fiscal deficits expanded after 1929 but only modestly. Clearly, willingness to run deficits today is considerably greater.

    Figure 6. Government Budget Surpluses, Now vs Then

    Source: Bordo et al. (2001), IMF World Economic Outlook, January 2009.


    Conclusion
    To summarize: the world is currently undergoing an economic shock every bit as big as the Great Depression shock of 1929-30. Looking just at the US leads one to overlook how alarming the current situation is even in comparison with 1929-30.

    [Apr 15, 2009] BlackRock Confirms Goldman Q1 Profit Was Non-Recurring And A Result Of AIG Unwinds by Tyler Durden

    2009-04-14 | Zero Hedge

    This is kinda a huge deal... Peter Fisher, managing director of BlackRock (yes, that BlackRock), states in a Bloomberg interview that Goldman's first quarter trading profit is non-recurring in nature, and believes it was mostly due to AIG unwinds...

    Anonymous said...
    Martin Armstrong has released a new paper (google him, if you don't know his story)

    http://economicedge.blogspot.com/2009/04/martin-armstrong-behind-curtain.html

    Very enlightening piece about Goldman Sachs, and the 'Big Game'.

    [Apr 15, 2009] Zero Hedge The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans

    Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x. The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit, likely in tandem with the other top dogs on the list: RenTec, Highbridge (JP Morgan), and GETCO. In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this.

    Following on the circumstantial evidence track, as Zero Hedge pointed out previously, over the past month, the Volume Weighted Average Price of the SPY index indicates that the bulk of the upswing has been done through low volume buying on the margin and from overnight gaps in afterhours market trading. The VWAP of the SPY through yesterday indicated that the real price of the S&P 500 would be roughly 60 points lower, or about 782, if the low volume marginal transactions had been netted out. And yet the market keeps on rising. This is an additional data point demonstrating that the equity market has reached a point where the transactions on the margin are all that matter as the core volume/liquidity providers slowly disappear one by one through ongoing deleveraging.

    Unfortunately for them, this is not a sustainable condition.

    As more and more quants focus on trading exclusively with themselves, and the slow and vanilla money piggy backs to low-vol market swings, the aberrations become self-fulfilling. What retail investors fail to acknowledge is that the quants close out a majority of their ultra-short term positions at the end of each trading day, meaning that the vanilla money is stuck as a hot potato bagholder to what can only be classified as an unprecedented ponzi scheme. As the overall market volume is substantially lower now than it has been in the recent past, this strategy has in fact been working and will likely continue to do so... until it fails and we witness a repeat of the August 2007 quant failure events... at which point the market, just like Madoff, will become the emperor revealing its utter lack of clothing.

    Selected Comments:

    Kid Dynamite said...
    i used to work on the program trading desk of the top program trading firm at the time. I can tell you that the GS numbers (over a billion shares Principal) you are reporting are unlike anything i've ever seen: one example would be a huge amount of index arb - perhaps an unwind or reestablishment of an entire book: but that's clearly not the case.

    also, Program Trading (sorry, i don't know exactly how much you guys know) doesn't necessarily mean black box quant stuff - in fact, MOST of what my desk traded was not... but again, the report illustrates this: customer facilitation includes principal risk bids, and "principal" is where the black box stuff would show up.

    you can expect distortions in these numbers around 1) options expirations and 2) big index reweights (quarterly SPX, annual Russell) - but neither of these happened the week of march 30- april 3rd.

    perhaps it's some bizarre quarter end phenomenon - i'll be honest, i haven't been following the NYSE program numbers lately.

    -KD

    TPC said...
    My playbook:
    let the banks report their fictitious "better than expected" earnings over the coming two weeks and then get massively short as the industrials and the other weak legs report their earnings. By that point we should be fantastically overbought and sitting on the precipice where the market is ripe for a nice dose of reality. All I know is - the higher we go on these completely fake bank earnings the harder we will fall into the summer months.
    Sell in May and go away might never ring more true than it will in 2009....
    eh said...
    Confirmed: First-Half Budget Deficit $1 Trillion

    The government has put Madoff in jail, but come on...What is the US of A itself if not a huge Ponzi scam? Does anyone seriously believe this debt will ever be repaid?

    Beanieville said...
    Papa Bear George Soros says the danger has passed and he's back into retirement. Bear Hibernation forever. http://bit.ly/3QOpVb
    TES said...
    Tyler -

    I'm a naive reader* with some probably very dumb questions:

    - What specifically in the graphs demonstrates your point about illiquidity ... i.e., that most of the quants/program traders other than GS are basically sitting on the sidelines?

    - How does the observation that program traders close out their positions every day and the slow money does not make the arrangement a Ponzi scheme? Is it that the retreat of the big money liquidity providers leaves the slow money long an illiquid market ... too illiquid to get out of without major dislocations? Does this relative illiquidity explain why a (GS) PPT could drive the market higher in recent weeks?

    - Are you suggesting that for some of the quant players (i.e., GS), are in a sense maliciously driving up prices either to support the Administration's "sunny days ahead" posture or, more maliciously, to yank the rug out and profit on the short side? Or is the latter just a happy consequence for GS of doing their patriotic duty?

    - If GS has driven the market higher, won't they continue to do so until they complete their recently announced equity offering?

    You do absolutely incredible work.

    Thanks.

    * I'm a lawyer who worked briefly, miserably and horribly as an investment banker at Lehman Brothers in the late 90s. I quit to become a TV writer as my former cubicle mates went on to become MDs (and PMDs!) at GS and found hedge funds. Ah, well.

    Anonymous said...
    The overnight gaps have been ridiculous. SPY trades like an ADR. The historically oversold conditions of early March were ripe for this kind of manipulation. The rally seems very coordinated with the news flow out of Washington and banking sector, too coordinated. How much of that principal GSCO trading is actually the Working Group?

    [Apr 14, 2009] Bear Market Rally ? By Barry Ritholtz

    April 12th, 2009

    Is this the real thing, or just another Bear Market rally? So far, we've had 4 runs of about 20% each.
    Here are 3 things to keep in mind:

    1) Follow the Playbook: The smart investor's playbook is very different in bear markets than bull markets. In a Bull Market, you buy the dips. Lower prices are an opportunity to buy into equities at cheaper valuations. Most sales are disappointing, as prices eventually go higher. Buy & hold is the simplest, most cost effective investment strategy.

    Bear markets call for a very different set of plays: You sell the rallies; higher prices are opportunities to sell equities at premium valuations. Most buys are disappointing, as prices eventually go lower. Buy & hold is a losing strategy – trading what the market presents to you is the best risk management strategy.

    The goal during bull markets is to grow your capital; the goal during bear markets is to protect your capital.

    2) Beware the 'Conspiracy of Optimists': In the run up to the top of the bull market (October 2007), there is an overly positive view of the world, a misconception amongst the broader populace as to what is actually happening. Warning signs are ignored as foolish memes are promulgated.

    Recall these absurd rationales:

    • Damage from Subprime mortgages was "contained"
    • The US economic slowdown would "decouple" from the rest of the world;
    • The conundrum of ultralow interest rates were the result of a "excess savings"

    All three of these proved false. And, to the astute investor, these all contained warnings of the coming investment storm. We are currently hearing similar foolishness from the same perennial cheerleaders. (See the "Green Shoots" from a recent NYT debate).

    Four recent economic data points (ISM data, New Home Sales, Existing Home Sales, and Non Farm Payroll) were all spun by Wall Street as if they were positive; if you dug beneath the headlines to review the actual data, they were all terrible.

    Understand the difference between an economy that is improving versus one that "getting worse more slowly." We are experiencing the latter.

    3) Buying the very bottom isn't your goal: This often surprises people – they think they should try to buy at the bottom and sell at the top. The problem with this approach is that we don't know for sure when it's the bottom or top until after the fact. And even if you nail the low, you may not make any money.

    Here's an example: In 1966, the Dow first kissed 1,000. It did not get over 1000 on a permanent basis until 16 years later in 1982.

    But if you managed to catch the exact low in December 1974, well, then, you better have had a strong stomach – the volatility was brutal. That low was followed by a 75% rally, a 27% sell off, a 38% rally and a 24% sell off. But those are nominal numbers. Adjust the returns for inflation, and you actually lost about 75% of your money in real terms. (No thanks!)

    Instead, consider as your goal maximizing your returns on a risk adjusted basis. This means being more conservative with your investments when risk levels are higher, and more aggressive when they are lower. For many investors, dollar cost averaging into broad index funds works well. It is efficient and cost effective. If you want to be a bit aggressive, you can increase your contributions once the markets fall 30% or (like now) 50%. The time to throttle back a bit? After a 4 -7 year bull market run.

    Selected Comments

    1. snapshot Says:
      April 12th, 2009 at 9:58 am

      http://zerohedge.blogspot.com/2009/04/imminent-disinformation-schism.html

      "The Imminent Disinformation Schism"

      "There will come a point where this schism reaches a boiling point, in the meantime, the paradox is that so many of the taxpayers are also investors, who are caught in the tug of war with themselves on what the proper response to the crisis should be: happy as a result of bear market rallies, or sad when they put the facts into perspective."

      Excellent read

    2. dead hobo Says:
      April 12th, 2009 at 10:08 am

      I visited an outlet mall yesterday. It is located in a moderately affluent area. There were no crowds although shoppers were present. Most telling was an abundance of much larger than average sales. Discounts could be taken on large discounts. A couple of chain stores were closing out. It was NOT a positive sign. I was somewhat surprised because malls in January, Feb, and March appeared busier than I expected to see and there were far fewer extreme sales then. The weather was good. Taken as a whole, it was not a good sign. People are hunkering down again.

      The new media mythology of the stock market being a leading indicator is another example of the same incompetence of recent past economic reports. People buy stocks when good news impels them to buy stocks. There must be a tipping point of good news over bad news for any market rally to be sustainable. This is not the case today.

      Regarding the media, I have YET TO HEAR ONE REGULAR PUNDIT OR REPORTER, NOT AN OCCASIONAL INTERVIEWEE, SAY "A LITTLE CAUTION WOULD BE PRUDENT IF YOU WANT TO JUMP BACK INTO STOCKS". These people have an almost criminal spiel that implies all bad news will go away if we just ignore the reasons for it. None will be held to task, I'm sure, by anyone when the market falls back closer to pre-rally levels in a couple of weeks.

      3. Anonymous said...
      TD, your observations may be correct, but if you follow them through to the ultimate conclusion you'll understand why it doesn't matter.

      The US stock market is too big to fail. It is our bank, our life insurance, our retirement plan, our college savings fund, the retirement plans of our police forces and our firefighters. It's our hopes and dreams and worst fears all rolled up in a big ball. That's how this depression is different from the 30's. This time the stock market can't be allowed to drag along the bottom for a couple of decades, or even for 5 years.

      Inflation of course is worse, but it's like a force of nature in the eyes of the public. Everyone will get their payoff and they'll gripe about the fact that it buys nothing. But that's minimal compared to the outrage they'd feel in an outright default. When it comes to theft, people think in nominal terms, not real terms.

      So when push comes to shove, our government will use Goldman and others like them to sustain the stock market, at any cost. It's just dollars. And if the players don't like their marching orders, well then, as Mr. Obama said, it's pitchfork time.

      Anonymous said...
      TPC, Tyler Durden and others:

      Question that's been bothering the hell out of me - if everyone is expecting the bull to continue on the bs earnings of the banks, then I have a feeling they may be stepping to the sidelines for something much worse coming out of earnings season for at least one bank.

      I don't know, but my gut says opposite, i.e., market going down, is going to happen one of these days. I have inside baseball knowledge on CRE, and it is a fucking nightmare, for the REITs, for everyone involved.

      It hasn't even entered the second inning in that ball game. Combine that with worldwide recession/depression. Are we just walking out of this cause WFC - who's books are insolvent - claims to have made record profits.

      Just that claim alone should require you to call bullshit!!! Record profits!! ARe you fucking kidding me? Because of refis??

      Look, give me a cold, sober assessment of the books, how much capital is needed assuming 35% writedowns and 15% unemployment, and then I'll believe the rally.

      Until then, this is just complete bullshit. I levered in pretty heavy during the bear rally Thursday, guess we'll just have to see Monday. SDS and SRS.

      April 10, 2009 6:23 PM
      FischerBlack said...
      So GS paints the tape ahead of its capital raise, quants move to the sidelines without leverage, vanilla cash comes oops-ing out of money markets, the banks leak record earnings, and the market trends to break all VWAP dislocation records. That's a freakin' bull story if ever I've heard one.

      I've been thinking we might see INDU at 9K before this thing runs it's course. To me, now it sounds more like 10K or 11K. I hope nobody bets junior's college money on SDS calls!

      Anonymous said...
      Fisher Black, I think what Tyler is stating though is that it's going to end sooner than anyone thinks, much sooner.

      Even the bottom-tiered liquidity providers have got to be saying "what the fuck" after a 25% run on nothing but more fucking bad news.

      Can CNBC be that stupid. I know most investors I talk to say the same thing.

      tippi canoe said...
      mucho gracias for pulling the curtain just a little more open so mine eyes can see, T.

      max et al,

      perhaps we should consider one mo variable:

      4/15 = TAX DAY

      how many people you think that waited til this last weekend to do their taxes are invested in equities you think?

      considering the events of the last 12 months, how much more inspired to do you think they would be to let's say creatively reduce their tax bill if say the DJ were at 7500? how about 7000? how about 6500?

      that might be a very illuminating chart.

      p.s. to any anonjoe's out there who think this simply a battle between the bulls and the bears is missing the point.

      that's like saying the vietnam 'conflict' was simply a civil war.

      wake up little suzies.
      lift up your eyelids a little bit, whatever side you choose.

      TPC said...
      The government knows how bad things are. They know that many of our largest banks are technically insolvent and need to be recapitalized badly. That capital is unlikely to come from taxpayers now that people have bailout fatigue and Timmy is concerned that the PPIP might not work the way he had originally hoped. So, what are they gonna do? Jam stock prices higher, trounce earnings expectations for the next few weeks and then we're gonna get a flood of liquidity raises from the banks over the next 3 weeks. That way they can try yo recapitalize based on their independent "strength" rather than having to go hat in hand to the taxpayer. There are certainly plenty of suckers out there now who would give money to WFC based on their "record" (haha) quarter. This will buy the banks more time while they pray that a miracle occurs.

      Too bad none of it matters. The mountain of CRE, CC and Alt-A resets are going to overwhelm the banks and consumers for the coming 12-18 months no matter what the government does.

    [Apr 13, 2009] I Agree with Hank Paulson, not Paul Krugman

    Paul Krugman: "Industrial production is falling. Unemployment is rising. All of these things, all of the measures you use about the health of the economy are continuing to deteriorate. But they are getting worse more slowly. So, I mean... Larry's right, we're crashing... it looks like we're leveling off. But if you look at history, there were several points like that in the Great Depression, too. So, it's not clear that this is the end of the story."

    George Stephanopoulos: "Can I just press one point there because I may be wrong on the industrial production but I thought in the last couple of weeks durable goods orders were actually up, housing sales starting to come back, uh...

    Paul Krugman: "Yeah, there are bits and pieces that are... But, overall, demand is still dropping. But, there might some slight perk up in industrial production because inventories have been run down and now they need to ramp up production again. Nothing that looks like a fundamental turn. Not Yet."

    Source:

    George's Bottom Line (including the video)
    This Week
    ABC News
    April 12, 2009 11:37 AM
    http://blogs.abcnews.com/george/2009/04/krugman-gingric.html

    [Apr 12, 2009] Obama Stakes His Fortunes on Failed Banksters by Jonathan Weil

    It's clear that Summers arrogance as well as skeletons in his closet are turning people off. So much for change...
    Bloomberg.com
    When publicly owned companies change management, often the smartest thing a new chief executive officer can do is clear the decks and take a "big bath" charge to earnings. In other words, the company writes off all its worthless assets and reports huge losses, pushing every conceivable drop of red ink into the past. The new CEO gets to blame his predecessor's dumb mistakes. The company gets a fresh start with the investing public.

    Obama could have taken the same approach with the banks the moment he took office, while he still had standing to blame the financial crisis on George W. Bush's administration, stupid regulators, and corrupt lawmakers -- that is, everyone but himself.

    Executive Order

    He could have ordered all U.S. financial institutions to immediately confess whatever losses they hadn't yet recognized. And he could have backed that up by vowing to prosecute every officer, director and auditor the Justice Department could find who had approved numbers they knew to be wrong.

    Obama didn't do that. And now, six months into the government's Troubled Asset Relief Program, his administration's approach to the financial crisis is largely indistinguishable from its predecessor's. The only objective, it seems, is to buy time, in hopes that an economic recovery somehow will materialize and lift the financial system back to health.

    The Obama administration's "strategy," for lack of a better word, is to keep plying broken financial institutions with as much taxpayer money as the government can print. And so the government will keep subsidizing failed mega-banks indefinitely, rather than placing any into receivership or liquidating them.

    Taxpayers at Risk

    The latest iteration of this policy is the Treasury Department's Public-Private Investment Program. In short, struggling financial institutions will be encouraged to swap their most toxic mortgage-related assets with one another at inflated prices. The purchases will be financed by big government loans, so that taxpayers are at risk for the bulk of any losses.

    If the government wanted transparency, it would force financial institutions to write down their bad assets now, and figure out afterward which companies deserve taxpayer support. Instead, the Treasury plans to recapitalize them first, keep their current financial condition hidden, and let their failed managers stay in their jobs.

    The key assumption underlying this plan is that the declines in the values of these companies' toxic assets are the result of private investors' temporary reluctance to buy them, and that prices will rebound if Treasury can revive the markets where these assets trade.

    Proper Values

    The Treasury hasn't explained why it believes the assets' proper values are their original book values, rather than the prices unsubsidized investors are willing to pay for them. (This is one of the points made in an April 7 report by the U.S. bailout program's Congressional Oversight Panel.) If Treasury's hunch proves wrong, the government will need to rely on something other than a rising economy to restore the banks to solvency.

    So why don't Obama, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke force the banks to write down their troubled assets first, as a condition of government assistance? We can only speculate, because their explanations so far have made no sense.

    Perhaps they're scared the markets would panic if large, insolvent financial institutions started telling investors just how undercapitalized they are. There's the distinct chance some of Obama's advisers are beholden to failed banksters, because they used to work for them and may want to do so again someday.

    Manpower Shortage

    There also could be a manpower problem. The government might not have enough employees to seize all those sickly banks and supervise the process of winding them down. Probably, it's some combination of those and other factors.

    Why else would the Treasury tell the 19 biggest U.S. banks to undergo "stress tests" of their financial health, and then put the banks in charge of performing the tests on themselves? Those reasons also might help explain why regulators pressured the board that sets U.S. accounting standards to weaken the rules on mark-to-market accounting, so the banks could hide their losses and show more capital.

    Whatever the case, as long as the government refuses to remove the cancer of zombie banks from our financial system, there's little hope the U.S. will return to robust economic growth anytime soon. And the longer our wounded banks are allowed to stagger along with no end-game in sight, the greater the risk for Obama that voters will conclude he's as responsible for blowing the cleanup as others were for causing the crisis.

    He'd better act soon. Time may not be our side any longer.

    [Apr 12, 2009] In an Age of Austerity, the Miserly Thrive - NYTimes.com

    If this is true, then that means more dependence on government spendings for recovery and slower pace of recovery, if any...

    Americans' spending is down and their personal savings are up - sharply. The savings rate in the United States, which had fallen steadily since the early 1980s, dropped to less than 1 percent in August of 2008. It has since spiked to 5 percent.

    "It's huge," said Martha Olney, an economics professor at the University of California, Berkeley, who specializes in the Great Depression, consumerism and indebtedness. The rapid reversal is even more remarkable, she said, because in recessions consumers usually save less money. Not this time. "It implies a re-emergence of thrift as a value," she said.

    The gleefully frugal happily seek new ways to economize and take pride in outsaving the Joneses. The mantra is cut, cut, cut - magazine and cable subscriptions, credit cards, fancy coffee drinks and your own hair.

    ... ... ...

    Currently, there are dozens of Web sites and blogs devoted to celebrating conspicuous cutting, like Dollar Stretcher (www.stretcher.com), All Things Frugal (allthingsfrugal.com), Frugal Mom (www.frugalmom.net), and on and on. The Web site meetup.com, which helps people of like interests gather offline, lists 57 "frugal living" groups around the country, including eight formed in February and nine in March.

    ... ... ...

    One part of the gleefully frugal movement, frugalistas - frugal fashionistas who refuse to sacrifice style - may have been popularized in Britain before crossing the Atlantic. But Americans have taken it on as their own.

    A Virginia group, the Frugal and Fabulous Moms, tells prospective members: "If you are a coupon-clipping, deal-seeking, stylish and fabulous mom that loves a great deal, then this group is for you!"

    A San Francisco group met one Sunday last month for an exercise in fashion frugality: a clothing swap. About 80 women exchanged clothing, shoes and accessories and they are planning another event for April 20 where they hope to have 400 participants.

    "When a woman gets a compliment on a dress she got at a swap or the Salvation Army, she feels almost proud," said Suzanne Agasi, organizer of the event and operator of the Web site clothingswaps.com. People at the event "feel like they've scored," she said.

    "My behavior has become less strange and more of a resource," said Katy Wolk-Stanley, 41, a nurse in Portland, Ore. A practicing penny-pincher for the last decade, she is now spreading her gospel. Last May, she started a blog with tips and tactics for cutting back called The Non-Consumer Advocate.

    She knows whereof she blogs. She darns socks, dries clothes on a line she recently hung inside her house (even though it takes a few days for the clothes to dry inside), washes and reuses plastic bags and takes used clothes and furniture people leave on the street - like the slightly torn Garnet Hill duvet cover she found recently.

    ... ... ...

    Indeed, economists call it the Paradox of Thrift. While saving is desirable, if everyone does it then consumption falls, businesses fail and the economy grinds to a halt. Professor Olney, from Berkeley, said that the increased rate of savings would most likely slow down the pace of recovery but she also said that a higher savings rate was not inconsistent with a strong economy; from the 1950s to the early 1980s, the savings rate hovered around 9 percent, according to the Bureau of Economic Analysis.

    [Apr 12, 2009] Showdown Seen Between Banks and Regulators - NYTimes.com

    The tension between the industry and the administration is rising as the government's bailout fund is dwindling, putting the administration in a bind. It is all but certain to need to seek more money from Congress, which wants to see results from existing programs first.

    The fund is down to its final $134 billion, according to Treasury officials, and is expected to face new requests for money in the coming weeks to aid tottering banks, the auto industry and possibly insurance companies.

    "Between now and Memorial Day we're going to know a whole lot more about the degree of trouble the banks are in," said Senator Charles E. Schumer, a New York Democrat who is vice chairman of the Joint Economic Committee. "At the same time, we will begin to have a good initial reading as to how well the administration's programs are working."

    This month, the nation's largest banks began announcing their latest quarterly earnings. Some, like Wells Fargo, have released results early to trumpet their profitable first quarter - and possibly to give them leverage in coming negotiations with their regulator.

    The immediate concern for the administration is how to get the weaker banks to relieve their books of deteriorating mortgages and mortgage-backed securities.

    Industry analysts estimate that United States banks alone have more than $1 trillion of such mortgages on their books but have recognized only a small share of the likely losses.

    Economists at Goldman Sachs estimated recently that banks were valuing their mortgages at about 91 cents on the dollar, far more than investors are willing to pay for them.

    [Apr 12, 2009] Crisis Reshaping Wall St. as Stars Begin to Scatter - NYTimes.com

    Rats jump the ship or they still beleave in "infinite debt" growth strategy and try to replicate it on smaller scale ?
    There is an air of exodus on Wall Street - and not just among those being fired. As Washington cracks down on compensation and tightens regulation of banks, a brain drain is occurring at some of the biggest ones. They are some of the same banks blamed for setting off the worst downturn since the Depression.

    [Apr 12, 2009] The Imminent Disinformation Schism

    naked capitalism

    With articles like this coming out of Time magazine, it is inevitable that in the immediate future, the United States will be split into two partisan camps. However, this will not be the traditional schism of republicans vs. democrats, contrary to Mr. Barney Frank's attempt to start ideological partisan warfare. The real split will be of naive, easily-manipulated, small-time mom and pop investors, who only care about looking at their daily yahoo finance screens and 401(k) statements, seeing more black than red, and only focusing on what happened in the immediate past, and the forward looking taxpayers, who see the upcoming budget deficit fiasco, the social security ponzi scheme, the Medicare/Medicaid debacle, the ridiculous underfunding in public and corporate pension funds, the rising city and state taxes, the shuttering factories, the rising unemployment, the plummeting American production base, the "seasonally" upward-adjusted economic data coupled with consistently downward revised prior economic releases, the increasing savings rate and the multi trillion discrepancy in consumer purchasing power. The taxpayers are becoming angrier and angrier at the net present value destruction of future opportunities of being a U.S. citizen, while investors cheer every piece of information (whether or not supported by facts) that provides a push to their current net worth, ignorant of what this may mean for the future. There will come a point where this schism reaches a boiling point, in the meantime, the paradox is that so many of the taxpayers are also investors, who are caught in a tug of war with themselves on what the proper response to the crisis should be: happy as a result of bear market rallies, or sad when they put the facts into perspective.

    Selected comments:
    Lucifer said...
    I think that the disinformation schism is unfortunate but necessary because that is the only way people will lose faith in the old system and move on to something better.

    The 'black death' did a lot of damage to the credibility of the church and helped usher in the renaissance. If you have read history, you will know that the church also tried to downplay, mislead and misdirect people but it eventually did not work as the truth of the impotence of the church was just so obvious. The present crisis is doing that to the "guardians" of the faith of our age - financialism. It has to be exposed as the fraud it is.. hopefully through its own failings.

    anybody said...
    Re: walter (2:12 AM)

    If your own cost of borrowing is zero, you don't have to be a genius to appear to make money in the loan business. Ditto if you can suspend mark-to-market rules. Ditto if you don't explain where the TARP money went. (The operative word here is "appear".)

    See also http://www.housingwire.com/2009/04/09/credit-cost-smoke-at-mirrors-at-wells-fargo/

    Russ said...
    That's quite a depiction of the abyss. I keep waiting to hear, from the chanters of the recovery mantra, an explanation of what they claim will be the real economic basis of this recovery.

    If "recovery" is defined as the restoration of business as usual, "growth" and exponential debt, how is this supposed to be possible now that we know that this ponzi scheme bubble model for civilization is unsustainable.

    Even if it does become possible to prop up zombie banks and a zombie system with another bubble, how can any sane person expect anything but the same result. It seems to me even the boosters are just proposing an ever more vicious cycle of boom-bust, with each iteration more rapid, with the ceilings and floors of economic activity lower each time around.

    And all of this must take place amid the physical fundamentals or oil and other resource depletion.

    As for the Time article, I kept thinking by its tone, "this has to be ironic". BMull is right - it's "Mission Accomplished!"

    How anyone could seriously be such a buffoon keeps seeming hard to fathom. (Even if you really believed every word of such drivel, still after everything that's happened wouldn't you want to hedge just a little bit, out of prudence? Or maybe he's angling to become a counter-Roubini/Taleb, if what he said somehow did turn out to look "correct" in the short run.)

    The attitude of the Time piece is a good example of the purely flat earth, short-term outlook selfishness which is at the core of the "stock market" and its followers. One perception which has been new to me during this crisis is how utterly sociopathic the stock market is. Like any crack addict it has its euphorias and crashes only according to its own myopic action and outlook, without reference to any constructive social principle or plan.

    If anything, its activity is often inversely proportional to actions or perceptions based on society's longer term health. At least throughout this crisis, it has tended to reward any looting practice or proposal, and punish any hint of the people reasserting themselves, or any notion that government may actually not have its heart in the plunder expedition. (It also cheers on what reasonable people would consider bad news, like rising unemployment.) Thus it responded to the initial House rejection of the bailout scheme, or to Geithner's initial mediocre performance before Congress, with terroristic threats (plunges), while rewarding better corporatist behavior with surges.

    It's like an antisocial barometer.

    Minh said...
    Stephen Roach, Morgan Stanley Asia FT interview 04/07 "There's a risk that we'll have a further destabilizing outbreak of assets bubbles & excess leverage and another crises"

    The trust is gone. Some should work for real but won't want to and resort to excessive printing... that's my take of his argument

    Blissex said...
    The plan is working all right:

    http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=11699
    "The 1930s rhetoric was bash business -- only a handful of bankers thought that meant them. Now if you say we're going to smash the big corporations, 60-plus percent of voters say "That's my retirement you're messing with. I don't appreciate that". And the Democrats have spent 50 years explaining that Republicans will pollute the earth and kill baby seals to get market caps higher. And in 2002, voters said, "We're sorry about the seals and everything but we really got to get the stock market up."

    http://www.enterstageright.com/archive/articles/0903/0903norquistinterview.htm
    "The growth of the investor class--those 70 per cent of voters who own stock and are more opposed to taxes and regulations on business as a result -- is strengthening the conservative movement. More gun owners, fewer labor union members, more homeschoolers, more property owners and a dwindling number of FDR-era Democrats all strengthen the conservative movement versus the Democrats."

    Most USian voters are property and stock speculators, and they feel fully vested, and everybody else can go f*ck themselves. The American Dream is to MAKE MONEY FAST, and f*ck everybody else, and is alive and well.

    Anonymous said...
    Good article but you have the "two partisan camps" wrong.

    The two partisan camps are the wealthy elite rulers who have gained their power by intentional deception, and, the ruled; the deceived marks who are now engaged in a perpetual war with each other as a result of those intentional deceptions.

    The paradox and tug of war that you speak of here ...

    "the paradox is that so many of the taxpayers are also investors, who are caught in a tug of war with themselves on what the proper response to the crisis should be"

    ... has been intentionally engineered by the creation of the credit bubble and counterfeit derivative products that have debased the system and serves to pit the prudent against the not so prudent -- the scammed against the not scammed. It is meant to fuel the perpetual war in the ruled class.

    That "paradox and tug of war" is also evident in all other intentionally created divisions in society as evidenced by the MSM demonization of not only the 'not so prudent' in the current 'crisis', but also the demonization of; immigrants, Muslims, gays, etc.

    Just as false pretenses and grand deceptions were used to con the public into submissive silence in the Iraq war, the same false pretenses and deceptions are being used by the same scum bags to decimate the middle class domestically and globally.

    This is the Full Spectrum Dominance Strauss neocon game plan in action. People need to realize exactly what "Full Spectrum" means!

    The "proper response" to the 'crisis' is to not beat up on each other as the ruling elite would have us do but rather to expose the deceptions and the avowed use of deceptions by the Strauss neocons as a means to effect societal control and a ruler and ruled by the elite world.

    Deception is the strongest political force on the planet.

    i on the ball patriot

    [Apr 11, 2009] Using Corporate Bonds as an Economic Predictor

    Calculated Risk

    Evidence from Corporate Bond and Stock Markets (ht MrM who writes: "Please note that the authors construct their own bond indices, so one should not draw conclusions about their paper by looking at Moody's charts")

    Justin Lahart reports in the WSJ on a new research paper: Giving Corporate Credit Its Due (ht James)

    In a forthcoming paper in the Journal of Monetary Economics [economists Simon Gilchrist and Vladimir Yankov at Boston University, and Egon Zakrajsek at the Federal Reserve] show that spreads on low- to medium-risk corporate bonds, particularly those with 15 or more years until maturity, predicted changes in the economy phenomenally well, forecasting the ups and downs in both hiring and production a year before they occurred. Since writing the paper, they extended their analysis back to 1973 and found bonds' predictive ability still held.

    With the massive widening in corporate-bond spreads last fall, the economists' model predicts industrial production will fall another 17% by the end of the year, and the economy will lose another 7.8 million jobs on top of the 5.1 million it has shed since the recession began. Ouch.emphasis added

    I haven't seen the paper yet, but here are the spreads I've been following based on 30 year corporate bonds.

    Spread Corporate and Treasury Click on graph for larger image in new window.

    This graph shows the spread between 30 year Moody's Aaa and Baa rated bonds and the 30 year treasury.

    It looks like this spread has predicted a few extra recessions! I'm looking forward to the paper.

    Selected Comments:

    Scrooge McDuck wrote on Thu, 04/09/2009 - 5:32pm.

    Top Chinese Banker: Dollar Soon Irrelevant

    http://moneynews.newsmax.com/streettalk/china_dollar_irrelevant/2009/04/...

    Barley (member) wrote on Thu, 04/09/2009 - 7:09pm.

    "I'd like to see the H1-Bs go home"

    Why cause you cant compete?

    Blackhalo (member) wrote on Thu, 04/09/2009 - 7:16pm.

    "Why cause you cant compete? "

    I have worked with a LOT of H1-Bs, and they are fine folks and do great work. But in my experience they we not so exceptional that domestic labor could not do the job as well or better. Which is out of line with the stated propose of the visa.

    In my experience, they were used by large corps to flood specific markets and depress wages.

    Jay D.. wrote on Thu, 04/09/2009 - 7:23pm.

    "Why cause you cant compete? "

    ...........most of H1-B holders don't speak English well and have some communication problems......but they are skilled workers......I don't think kick-ass-out-of-this-country policy can solve unemployment issue......it's another linear thinking .......kindergarten stuff..........

    MrM (member) wrote on Thu, 04/09/2009 - 7:35pm.

    I'd like to see the H1-Bs go home

    Not going into free market and free trade issues, just wanted to highlight that people on H1-B visas still pay US taxes, including social security and medicare taxes. Since most of them are not going to use these services, foreigners on H1-B visas pay to support American elderly. Jus' sayin' MrM (member) wrote on Thu, 04/09/2009 - 7:47pm.

    H1-Bs are helping TPTB to impoverish the last middle-class people in the US.

    The middle class was destroyed when manufacturing was moved overseas and when growth in income was replaced with growth in debt , not when foreigners came over here to work in white collar jobs that the natives were not able or willing to take for the same pay.

    12th Percentile wrote on Thu, 04/09/2009 - 7:33pm.

    "This hiring of the best and brightest just to say you hired the best and brightest is, by the way, one of the things that is destroying our economy. "

    I concur. I used to work with a bunch of freshly minted Harvard MBAs. I'd been on the job for a few years and knew what to do based on common sense and experience. They did not, but it didn't stop them from fucking things up.

    Now it is 15 years later. Perhaps they have paid off their loans for that fancy harvard education. The ones I still know are deeply in debt with their Mercedes and McMansions. I'm retired and shorting their companies. Perhaps they teach you to borrow more than you can make at Harvard. it would seem so.

    The fact that the "wisdom" says that you have to hire all the top people from one B-school pretty much dooms you. I used to mock some of these people for their basic lack of math skills. It wasn't hard.

    Pretty lame what passes at Harvard B school. George W. Bush being a fine example. Although I think he might have nailed it when he said, "this suckas goin' down".

    my local economy has bragged about being recession proof for 20 years. It is crashing hard. Go long if you must. I don't advise it. But, then again, i can do math.

    [Apr 10, 2009] Mutual Funds Report $11.9 Billion In Inflows For Week Of April 8: Throwing Fuel Into The Rally by Tyler Durden

    If this is 401K investors, then "They forgot nothing and they learned nothing..."
    Trim Tabs has released its weekly mutual fund flow data: the company estimates that all equity mutual funds posted an inflow of $11.9 billion in the week ended Wednesday, April 8, versus a revised inflow of $3.0 billion in the previous week.

    Selected Comments

    Anonymous said...
    Anyone have a perspective on why equity ETFs have outflows while equity mutual funds show major inflows? Shouldn't they be somewhat positively correlated?
    April 9, 2009 6:46 PM
    Anonymous said...
    i told you the last time you posted this that real money was chasing the rally
    April 9, 2009 6:46 PM
    Anonymous said...
    Equity ETF = Smart Money

    Equity Mutual Funds = Dumb Money

    Anonymous said...
    So, if the entire combined market cap of all U.S. exchanges is currently around $30 trillion, this should drive stock prices up approximately 0.04%...

    No, my dear Watson, there must be another explanation!

    April 9, 2009 9:46 PM

    [Apr 10, 2009] March FOMC Minutes: Outlook Revised Down by CalculatedRisk

    4/08/2009 | Calculated Risk

    minutes for the March FOMC meeting.

    Excerpts:

    Staff Economic Outlook

    In the forecast prepared for the meeting, the staff revised down its outlook for economic activity. The deterioration in labor market conditions was rapid in recent months, with steep job losses across nearly all sectors. Industrial production continued to contract rapidly as firms responded to the falloff in demand and the buildup of some inventory overhangs. The incoming data on business spending suggested that business investment in equipment and structures continued to decline. Single-family housing starts had fallen to a post-World War II low in January, and demand for new homes remained weak. Both exports and imports retreated significantly in the fourth quarter of last year and appeared headed for comparable declines this quarter. Consumer outlays showed some signs of stabilizing at a low level, with real outlays for goods outside of motor vehicles recording gains in January and February. .... The staff's projections for real GDP in the second half of 2009 and in 2010 were revised down, with real GDP expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end. The weaker trajectory of real output resulted in the projected path of the unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year. The staff forecast for overall and core personal consumption expenditures (PCE) inflation over the next two years was revised down slightly. Both core and overall PCE price inflation were expected to be damped by low rates of resource utilization, falling import prices, and easing cost pressures as a result of the sharp net declines in oil and other raw materials prices since last summer.

    [Apr 9, 2009] Quelle Surprise! Bank Stress Tests Producing Expected Results!

    naked capitalism

    The whole point of this charade exercise was to show the big banks weren't terminal but still needed dough, and I am sure it will prove to be lots of dough before we are done. But they now have the Good Housekeeping seal, so the chump taxpayer can breathe easy that the authorities are taking prudent measures to make sure his money is being shepherded wisely.

    alex black said...
    To Richard Kline:

    Don't worry, they won't shoot us. They need someone to work and pay off the enormous debt they're creating as they loot. So we're in no danger - as long as we keep working, pay our increasing taxes, remain docile, keep our mouths shut.... We're their cash cows - literally. We'll be well cared for - maybe they'll even add steroids to our feed to increase our output!

    As far as the Ipod, I thought that was exactly why we elected Obama - because he's cool. Utterly inexperienced with no record of accomplishment, but has a nice smile. One can't buy a dog and then complain that he can't fly. He's our lovable golden retriever, out making friends. It was a nice gesture, giving the Queen an Ipod - he even loaded it with his favorite hiphop tunes. Right now the Queen is wandering around listening to it, with a puzzled expression on her face as Jay-Z is singing "I got 99 problems and not one of them's a bitch..."

    ruetheday said...
    Read between the lines:

    "the banking industry, broadly speaking, seems to be in better shape than many people think, officials involved in the examinations say.

    That is the good news. The bad news is that many of the largest American lenders, despite all those bailouts, probably need to be bailed out again"

    In other words, Citi, BoA, JPM, and Wells are toast but most of the small to midsize banks are doing ok, so "broadly speaking" there's no reason to worry since we'll just continue the status quo of bailing out the big 4.

    Anonymous said...
    Obama strikes me more and more like Clinton. Such a smooth talker you can't help but be swayed while listening. I had so much hope for him. Unfortunately it now seems obvious that he is a either a co-conspirator, a dupe, or a prisoner of Wall Street.

    I'm running out of all hope fast. We made by far the best choice in the election, but it turns out not to have mattered. Is change even possible, or is it checkmate already?

    Seriously, what is even possible? Will a democrat who doesn't serve wall street challenge Obama in the primary? I doubt it. That means we will be looking at a republican president in either 4 or 8 years. Obviously that won't help. So what hope can even be imagined?

    run75441 said...
    Richard Kline:

    You stop way short of your endictment of the banking industry and those transfusing money to it via AIG. Instead of having "casting a shadow of regulatory uncertainty over an otherwise thriving market" Larry Summers as US Treasurer, we get his trainee Timmie Geithner. Both have whom have trained under the maestro standing in "shocked disbelief" Greenspin. Is it ay wonder that banks are being declared well enough to be checked out of the treasury hospital with an appointment for another transfusion latter? They are not going to admit to anything bad.

    Meanwhile, we have those evil automakers who have been slipping those legacy autos on to the public, who can't decide which multitudes buy into it. Of the populace how many do you believe understands derivative, CDO, MBS, tranching, and CDS? 1%? If that much? How many understand the implication of higher gasoline and those evil unionized autoworkers? 60+%?

    Its all on how you color it. The experts, say banks are ok and will survive. The experts say, automotive is sick and should die. Meanwhile the perpetrators walk, companies dies, people loose jobs, and we all suffer.

    [Apr 9, 2009] Export giants sink most as world trade slumps - Times Online

    German consumers kept their credit cards firmly in their wallets while most German banks avoided the over-exuberant follies of their international rivals. While the world enjoyed a champagne lifestyle, Germany stuck to Liebfraumilch.

    The galling thing for Germany, however, is that this self-restraint did not spare its economy from a savage downturn. Official figures show Germany suffered the biggest decline of any European economy apart from Lithuania and Ireland in the final quarter of last year, shrinking by 2.1%. e country's leading banks, predicts a drop in gross domestic product (GDP) of as much as 7% this year and a rise in unemployment to 5m. Other forecasters are not so gloomy but see a GDP drop of 5% or more. Commerzbank also predicts a 7% drop in Japan's GDP.

    The reason, of course, is that Germany is exposed to what is turning into an alarming plunge in world trade. So too is Japan, which reported last week that exports in February were no less than 49% down on a year earlier, with sales to America 58% lower. The export-led economies are discovering that what began as a banking crisis has quickly turned into the biggest reversal in world trade in living memory.

    The World Trade Organisation (WTO) predicts that global trade, having grown strongly in recent years, will contract by 9% this year. This is easily the worst - barring wartime disruptions - since the big economies, led by America's abandoning of free trade, were erecting trade barriers in the Great Depression.

    ... ... ...

    Normally there is a lag between financial-market developments and real-economy effects. This time the reaction was almost immediate. The global economy "fell off a cliff" in the fourth quarter, with GDP declines of 1.5% in the eurozone, 1.6% in Britain, 6.3% annualised in America, 2.1% in Germany, 3.2% in Japan. Even China's GDP was flat and the Asian tigers went from good growth to recession at the drop of a hat. American employment has fallen by nearly 2m in the space of three months.

    Trade has been the transmission mechanism from the financial crisis to the world's factories. Pascal Lamy, the WTO's director-general, in a letter to the organisation's 153 member governments, estimates that world trade dropped by 5% in November last year, by a further 7% in December and by another 7% in January. There is no sign yet of the slide stabilising.

    Why have the banking system's woes hit trade so hard and so quickly? There are four reasons. The global recession is more severe than most thought possible. In January the International Monetary Fund was apparently at its gloomiest, predicting just 0.5% global economic growth this year. Now it expects a contraction of between 0.5% and 1%.

    [Apr 9, 2009] Asia Times Online Asian news and current affairs

    In the current global unpleasantness, there are alas no world leaders with Liverpool's economic grasp (having David Ricardo as economic advisor doubtless helped). Even compared with other recessions within living memory, such as 1974 and 1982, the reaction from the global political class has been notably panicky and hysterical - US$5 trillion of global stimulus programs, largely consisting of public spending, are unlikely to increase the stability of the global economy, and nor are the moves by three of the world's four most important central banks to "quantitative easing'' - the monetary policy of the early Weimar Republic.

    Under Weimar, the profits from "seigniorage" - the issue of new money - financed around 50% of public spending in 1919-23. Notoriously, this resulted in a trillion-fold devaluation of the mark by November 1923. In the United States today, around 15% of public spending is being financed through seigniorage - the Fed is purchasing $300 billion of Treasury bonds over six months, an annual rate of $600 billion per annum, 15% of 2009 federal spending of $4 trillion.

    The US may still be the right side of the Weimar dividing line, but in Britain the figures are more alarming. The Bank of England is purchasing 75 billion pounds of gilts over three months, an annual rate of 300 billion pounds per year or more than 65% of Britain's projected 2009 central government expenditure of 454.6 billion pounds. Of course, the Bank of England may not repeat its gilt purchases every three months, but at least in the short term it is disturbing that Britain is currently "printing money" faster than Weimar Germany.

    On the fiscal side, the figures are equally exciting. The United States, Britain and Japan are all running fiscal deficits of more than 10% of GDP in 2009. Once you factor in the newly released Organization for Economic Cooperation and Development's more pessimistic economic forecasts, they will run even larger deficits in 2010. Furthermore, if recovery is at all sluggish, the "output gaps" between those countries' actual GDP and their increasingly theoretical "full employment" GDP are likely to produce fiscal deficits close to the same level in 2011 and possibly thereafter.

    There seems to be no recognition among policymakers of how dangerous these profligate policies are. Only last week, at the Group of 20 meeting in London, the world agreed to provide yet another $1 trillion of capital to the international bureaucrats of the International Monetary Fund and the World Bank, who will on past form divert it almost entirely to governments of the countries most devoted to overspending.

    Deserving countries, in Latin America and East Asia, which have managed their affairs properly without excessive balance of payments or budget deficits will see little of this money, and nor will the beleaguered emerging markets private sector. Like the world's other fiscal deficits, the IMF and World Bank funding will have to be borrowed, and in being borrowed will create either inflation or "crowding out" of truly productive Western and emerging market corporations, whose funding needs will become more desperate as the global recession drags on.

    Except in a few countries such as Germany and China, which had previously been fiscally conservative with low or negative budget deficits, the correct amount of "fiscal stimulus" in this downturn was zero or negative. Most countries were already running substantial budget deficits in the boom, and the automatic stabilizers in all big-government economies would anyway have widened budget deficits beyond all past peacetime records, even without stimulus.

    Similarly, the global economy has been bedeviled for the last decade by excessive money creation. The correct policy in the downturn would have been to hold monetary policy tight, in order to fight the inflation threatened through past excesses and the budget deficits, providing only the minimum liquidity needed to ensure that the money markets continued functioning.

    [Apr 8, 2009] The Full Picture Broader Unemployment Hits 15.6% - Real Time Economics - WSJ

    the Labor Department's most comprehensive gauge of unemployment surpassed even its early 1980s levels. The government's broader measure, known as the "U-6″ for its data classification, hit 15.6% in March - a big leap from 14.8% in February.

    Selected Comments

    I used to analyze BLS labor data. Everyone is right on target at 15 to 20 percent. I am working part time right now and I am a full-time caregiver for my family. This whole situation makes me want to crawl under a rock. The government by taking on more debt is only going to push the long-term prospects for the middle-aged generation deeper into despair. My husband has an MBA from a top 3 b school. Ambition given the current labor market and government intervention only makes one delve deeper into despair. I am sick to my stomach. Who is going to provide the federal tax revenue to spread the wealth around when no professionals have decent paying jobs? Melissa I know of a lot of people who share your outlook, myself included. If all of this government spending went to useful areas like infrastructure and education it would be one thing, but sadly most of it is wasted. I guess one can always just play the stock market, there seems to be endless optimism there. Or is it just manipulation? We need a 1:1 comparison using the stats used during the Great Depression. I don't think we're there yet, but we're working hard: last month was the largest non event-driven job loss on record (and the third worst even with enormous economic events). The issue is that our government believes the Depression was caused by bank failures without taking into account the reason the bank failures caused mayhem was that depositors lost their money. That won't happen with today's bank failures because accounts are FDIC insured up to $250K, and most people have less than that. Conversely, what's draining the life-blood out of the consumer economy is excessive amounts of debt. This debt is secured by notes that should be virtually worthless and could be auctioned at an enormous discount, if the government wasn't propping up their value. These savings could then be passed to consumers, which would reinvigorate the economy, at the expense of bank investors (who gambled and deserve to lose). So we're using people's tax dollars to keep them in debt even though the debt is destroying the overall economy. The scary part is that despite this slowdown the trade deficit remains stubbornly high - a $400 billion a year run rate - which has to be financed with still more borrowing. How will we grow in 2010 and beyond if we have these huge debt servicing costs? The government will completely crowd out the private sector. Very, very discouraging. Despite all the Obama and CNBC / Kudlow / Cramer et al cheerleading the last few weeks, I am very discouraged. Regarding Michael's comment, the FDIC's insurance fund isn't limitless. In fact, they're reserves are at an all time low becuase of the bank failures that have already occured. The cold hard truth is that the FDIC and the country can't afford to have too many banks fail at once, at that is a very real threat right now. Look at the number of banks that have very poor capital ratios: http://www.msnbc.msn.com/id/29619237/. Normally, a bank's non-accrual loans to equity and reserves (the metric used in the list from the hyperlink) should be less than 33%. From 33%-67% the bank is considered a concern for credit quality issues. In normal times, the FDIC is on their way to shut the doors if the bank gets over 67%. Many of the banks on that list are over 300%! There are 197 banks on that list! We are in the midst of an epic banking crisis folks. Economic growth depends on banks. Lending is the tool for money supply growth, which is necessary for economic growth. Cash is like the oxygen of the economic system. The only entity that can stil borrow is the government, and it has to in order to avoid catastrophic failure. I believe Melissa from Chicago illustrates a major difference between now and the 1930's. I don't have the stats, but I'm under the impression that two income families were relatively rare in the 30's. Thus comparing today's 15%, which includes second earners who have given up, with 25% from the Great Depression, which I suspect was almost entirely made up of sole earners doesn't portray an accurate picture. When you are filled with dispair and think we're in a depression remember this - people didn't throw out leftovers during the Great Depression. Good points above on women's part in the labor force in great depression. However those points miss a point - up till women's participation in the workforce became common, it was normal for one income to support a family. These days, 2 incomes are pretty much required. A lot of women's entrance into the workforce did not so much grow family income in real terms, but divide it between 2 people.

    So who is richer, someone with a $10 bill, or 2 people with 2 $5 bills?

    Take a look at the correlation with housing prices and women entering the work force. its fascinating. It does hold less true for easily scalable things like food.

    Some good posts this PM.

    @charles 3:42, I see the ramifications of your comments slightly differently.

    Your last comment is key, simplistically, women entering the workforce doubled household income, and the added income was used to drive up house prices/buy things like granite countertops, that my parents would have never even considered in a house. Now when 1 of the 2 earners looses their income, big trouble quickly follows.

    So, it's not that woman entering the workforce didn't double family income, they did, it is that this doubling in family income was simply used to drive up house prices, to maintain the historical 3x income factor, and to take on bigger debt loads, for granite countertops, 20 x 20 floor tile, expensive cars and vacations.

    [Apr 8, 2009] Economists React No Signs of Recovery in Jobs Report - Real Time Economics - WSJ

    There is nothing in this report that points to economic recovery.

    Selected comments

    When the economy DOES stabilize, that may end up being the new normal. This is not a recession. It's a correction for the consumer spending the last few decades. Real unemployment is near 20% and growing. People who have quit working and illegals formerly working jobs under the table and otherwise are not officially recognized but in main street people know the truth. The trenchers drone on. I agree with AK and add not only a consumer spending correction but the correction also from manufacturing operations being moved to other countries and and overvalued housing market relative to risks. Sooner or later, the loss of manufacturing jobs was going to catch up. How can an economy sustain itself if the consumers did not expereince income or wealth growth? A large part of that wealth growth seemed to be in the value of housing. How much income or cash can a house create? Or a car? The catalyst of the recession may have been the realization the returns for credit were not high enough for the risk (lots of outstaning credit, slow income growth, overheated housing/collateral, etc). The economy will recover when the market clears excess inventory. The faster the clearing, the quicker the recovery. With all the uncertainty (risk) right now, this may take awhile. AK, you're right. I fear we're headed toward a new equilibrium, where the economy is 10% to 15% smaller than 2007 with little real growth over the next four or five years. I'm guessing 12% to 15% unemployment and 20% to 25% underemployment. As for the stimulus, a good try, but my concern is that a lot of it will bleed out to China and other nations from which we import. We build a new, say, multi-media museum in W. Va. (Sen Byrd's state) commemorating moonshine and the electronics will come from China, the lumber from Canada, the replicas of the copper stills from Bangladesh and the marble floors from Italy. The government stimulus is working…the government is doing fine …the rest of us on the other hand … That's a scary unemployment graph. Doesn't look so much as a something that is stablizing as a boat sinking to the bottom of the sea. pe-postInfo"> realistic look at unemployment; it is more like 12.5% using criteria used pre 1990s

    http://is.gd/qy1O

    Don't worry America unemployment is likely around 20% and you have hit the bottom? Employment is a lagging indicator, buy, buy, buy? Interestingly my favorite steak house was empty last night, wine prices are down and the women at the bar more desperate than usual. Bottom feeding is an awesome sport, socialism is easy to game, America will move to an ever declining middle, don't forget to factor socialism into your trading models, the results can be stunning. So the G20 countries have agreed to pump in $1 trillion into the world economy? Where wll that money come from? Does this mean countries will print money in their local currencies so as to not to destroy each others currency. Well coordinated effort though… The Undertaker is right: without the benefit of undocumented immigrants, our unemployment picture would be much worse. We should use them like companies use temporary workers to dampen the effects of our business cycles. All good posts. It seems that the posters are more grounded in the current economic reality than the stock market or the media. I fear that the current conditions will continue for decades, as the future economy will be hobbled by all of this reckless government spending, unfunded liabilities, National Debt and the irresponsible Federal Reserve money supply inflation. You can't get something for nothing, even if our government believes in Santa Claus, the Easter Bunny and the Tooth Fairy.

    American assets are clearly overvalued and prices need to deflate. Aggravating our current underemployment/unemployment situation is our ultra high minimum wage and expensive socialist programs. With payroll taxes, even minimum wage labor has to be costing more than $8/hour. That's way too expensive to compete with cheap Asian labor or illegal labor. Cutting the minimum wage to $4/hour would reduce the need for employers to import illegals in order to undercut the minimum wage.

    To the so called master
    Cut the minimum wage? Its strictly high school part time work now. What we need is more manufacturing to generate real jobs, and stop sending it overseas where it comes back to haunt us Follow the G-20, lately? The NWO has its first interim budget proper and its new first new world order currency, the SDR. The weighted dollar participation in the SDR's will be at most 44%, that means the dollar world reserve status is over. Americans will pay more than double for everything they like to consume, from oil to trinkets –the game is up. As far as the budget, there are no new pledges from countries because they are all bankrupt just like the IMF or the WB, only Japan and EU scraped together a few billions. The rest is suppose to come from printing SDR's by the IMF at the tune of $250B (quivalente SDR's) and levering (fractional banking system) the rest up to $1T equivalent. No mention of toxic assets (read derivatives), therefore one might conclude that hedge funds, ARM's, securititation (instead of worthwhile collateral), derivatives, and other usury means of exploitation are ALL good to go. Hyperinflation will ensue, mass poverty, corporate fascism and collapse 2009-2010. What did you do to Argentina, Chile, Nicaragua, El Salvador, Mexico, Iran, Irak, China, Russia, Haiti, Pakistan, Zimbawe, and many others? It is now coming back to hunt you, isn't it? Does anyone know what Leading Indicators we should be paying attention to?

    ------------------------------------------
    The labor market is not a leading indicator, so employment will not be the canary in the coalmine for a recovery (technically, payrolls are a coincident indicator and the unemployment rate is lagging). That being said, it will difficult to sustain any moderation in the contraction for very long while jobs are hemorrhaging. In any case, at a minimum, this report will put a damper on the "green shoots" talk for a time. However, based on less negative anecdotal reports and the sharp slowdown in the pace of increase in initial jobless claims in March, we're still looking for some letup in the labor market storm over the next few months. –Stephen Stanley, RBS

    ***** [Apr 8, 2009] Elizabeth Warren says sack CEOs?

    Hat tip rdan (hat tip vtcodger)

    Angry Bear

    The Guardian reports that Elizabeth Warren will be recommending startling act in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade." She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees.

    Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said.

    She said she did not want to be too hard on Geithner but that he must address the issues in the report. "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."

    The report will also look at how earlier crises were overcome - the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out."

    Comments (36)

    Selected comments

    sammy says:

    2 days ago, 8:39:12 PM ""Distinguished law scholar Elizabeth Warren teaches contract law, bankruptcy, and commercial law at Harvard Law School. She is an outspoken critic of America's credit economy, which she has linked to the continuing rise in bankruptcy among the middle class."

    Great. No banking experience, big chip on shoulder.

    http://www.uctv.tv/search-details.asp?showID=12620

    goodrich4bk replies:

    Yesterday, 2:50:13 AM

    "Sammy:

    As a bankruptcy attorney for 25 years who has represented many of the largest banks in California, I have more confidence in Ms. Warren than I do in Mr. Geithner. First, she remembered to pay her taxes. Second, her consumer debt studies are thoughtful, rational and firmly supported by sound empirical evidence. Third, I suggest that having no banking experience is her strongest attribute; but if you want a banker who will tell you the same things as Ms. Warren, read Volker, William Black, or --- if you want a really smart banker --- Andy Beal, profiled here:

    http://www.forbes.com/2009/04/03/banking-andy-beal-business-wall-street-beal.html

    "Gosh, goodrich4bk, I kinda think you're right. In this edition of AB, Adam Smith begins by warning us about usury, debt, and speclation. Then, Ms. Warren says the banks have a management problem--BAD MANAGERS. In my experience, the best thing to do with bad managers is fire 'em. It's only the beginning of the process, but you have to do it before you can start draining the swamp.

    [Apr 8, 2009] "Bah Humbug: Stagflation is around the Corner"

    Roger Farmer is worried about stagflation, but says the "disaster scenario is not inevitable since we may get lucky":

    Bah Humbug: Stagflation is around the corner, by Roger E. A Farmer, Commentary, Economists' Forum: Economic policy is in a muddle. Academic voices are flooding the blogosphere... On one end of the spectrum are classical revisionists who blame government for distorting market outcomes. On the other are Keynesians who think that fiscal deficits will rescue capitalism from its excesses. Both are partly wrong. Both are partly right.

    The revisionist position was outlined at a recent conference ... at the Council on Foreign Relations. The revisionists blame government intervention for deepening recessions through raising distortionary taxes and, given the increase in the size of government that is taking place under the Obama administration, they see a decade of stagnation ahead. ...

    But the idea that government is to blame for all our troubles is overstated. History has taught us that sometimes market economies may go wrong without any help from bad policy. Just ask a revisionist to explain what he means by a bubble.

    The Keynesian position is the one that currently rules in Washington and economists in the Obama administration believe, following Keynes, that deficit spending will restore full employment. According to this view, we don't need to worry about inflation until there is no excess capacity. ...

    Who is right and what will happen in the next two years?

    Over the next year, the US unemployment rate will continue to climb... and by the beginning of 2010 it will be well into double digits. Sometime around the middle of 2010, perhaps a little earlier perhaps a little later, GDP will stabilise and will begin to grow. But as the economy recovers, a new problem will arise. ...

    Inflation will reappear while unemployment is still high; perhaps in double digits. ... If the Fed tackles inflation, as it has announced it will, it must raise interest rates... As the interest rate begins to increase, the Keynesians will blame the Fed for killing the recovery by raising interest rates too soon. We will enter a decade of stagnation which revisionists will blame on the Obama administration for raising taxes and the Keynesians will blame on the Fed for raising interest rates and killing off the recovery. ...

    Since prediction is a risky business, it pays to hedge ones bets. The disaster scenario is not inevitable since we may get lucky. If market psychology dominates, as it did at the end of World War Two, bullish sentiment in the stock market and the housing market may inject new life into asset prices. If this happens, the economic recovery will be sustained and gdp will continue to grow without the reappearance of inflation. I am not hopeful. ... Of one thing I am certain: a sustainable recovery will not occur unless the stock market and the housing market recover first.

    What matters the most is not actual inflation, though that is important, it is inflationary expectations that the Fed will be concerned with. If inflation reappears while unemployment is still high, but longer run inflation expectations remain anchored, then the Fed does not have to tighten up so much and potentially stall the recovery. What's important, though, is that the Fed's commitment to bringing down inflation once the economy has recovered sufficiently to withstand higher interest rates is taken seriously by the public. If the public begins to believe that commitment is weakening, and the danger of that happening is very real, then the Fed could very well find itself in the box described above.

    Posted by Mark Thoma on Tuesday, April 7, 2009 at 05:59 PM in Economics, Macroeconomics

    [Apr 8, 2009] Willem Buiter- "Non-Negligible" Risk of Default by US and UK

    naked capitalism

    The easiest way to default, however is via inflation, but that also has the nasty side effect of "taxing" all domestic savers, not just the unfortunates who owned government paper. So the fact that Buiter even mentions explicit default is telling.

    Buiter also believes that the imbalanced nature of stimulus measures – more than is optimal from countries under financial stress like the US and UK, too little from countries with balance of payment surpluses (China, Japan, Germany) means growth once the acute phase of the crisis is past will be lower than it would be with a better response. He is also critical of the Fed's version of quantitative easing and is dubious that the commitments at the G20 to provide $1 trillion to the IMF will come through.

    He also, in passing, says (without mentioning his name) that Simon Johnsom may be correct in his view that the government is captured by the finance sector, not merely by subscribing to their wodd>

    Bonesetter Brown said...
    The unwillingness to inflict pain on the creditors is cited as a sign of "more primal" state capture. I thought the stance vis-a-vis bond default stemmed from a fear of CDS and cascading cross-default or some other post-Lehman-like event. Is that incorrect?

    Yves,

    Do you have insight into the amount of CDS written since end of 3Q08? Assuming it is still going (relatively) strong, do you have an opinion on why so little is being said/proposed about CDS by Bernanke, Geithner, et al?

    Anonymous said...
    Banksters and Treasury (Summers/Geithner) Major Rip Off Of Taxpayers!!!

    So not only have we injected billions of capital into banks, here we are again designing a program that will now take all those toxic assets off the books on the dime of taxpayer. There is nothing remotely resembling a partnership here. A partnership connotes a shared risk/profit in a venture. Again you realize how powerful language is here. "Partnership" or "legacy assets" or "investments." It is all backwards. Remember Paulson's bazooka comment? Seems like the bazooka was aimed at taxpayers.

    http://www.doctorhousingbubble.com/

    Anonymous said...
    Fantastic post, once again, Yves.

    There are many parallels to the 30's, but two things are different this time around.

    1. We had the gold standard to ditch in the 30's, and

    2. We didn't have our biggest creditors (China) currency tied to ours.

    As long as the Chinese are able to peg their currency to ours, there is little chance that we can inflate away our problems. I'm sure the Chinese know this very well.

    Hence, the reason for Buiter's concern about explicit default. I suspect that in his heart of hearts, he thinks the U.S. or U.K. is closer than he'd like to admit to default, but then again who wants to be responsible for a global panic?

    Yves Smith said...
    Anon of 3:00 AM,

    No, I haven't seen updated stats, which is funny. The press used to be better about reporting on that, and I haven't gone looking for the source of the older reports.

    As for why, I sincerely think despite AIG, Ben and Timmie see no reason to shut down or limit CDS. They have been persuaded by the dealers that AIG was irresponsible and everyone else is not. And Ben and Timmie are staunch believers in the virtues of financial innovation.

    Anonymous said...
    Thanks Yves! I agree with the post. We have to fix structural issues (imbalance) to have any healthy growth. We cannot just consume (and not produce enough). I believe it is simple common sense. Oh well not that simple and not that common...

    Also all naked CDS should be undone by just paying back the fees that were paid and may be little interest on that fee. Well current financial mess is not fair to taxpayer so why it should be fair to counterparties of AIG?

    DABbio said...
    I just love this euphemism: "I used to believe this state capture took the form of cognitive capture...but it is becoming increasingly hard to deny the possibility that the extraordinary reluctance of our governments to force the unsecured creditors (and any remaining non-government shareholders) of the zombie banks to absorb the losses made by these banks, may be due to rather more primal forms of state capture...."

    I.e., The foxes are guarding the chicken coop!!

    Anonymous said...
    A minyanville article yesterday discussed whether an end to inventory decumulation is a sufficient condition for sustained economic recovery and came to the conclusion that the perception of recovery was enough to change sentiment that a real recovery could ensued. Quite rightly they point out that demand in non discretionary items is unlikely to have fallen by more than 10 percent and so the coming reporting season may not be that bad. I can also perceive some tweaking of statistics to possibly engineer a change in sentiment at this time. This all adds to the current perception that things are getting better and it was all due to bad sentiment.

    The problem is that 10 percent drops in demand volume require cost cutting, either through services and investment or through jobs otherwise pretty much all profit gets eaten up. My back of the cigarette calculation suggest 10 percent demand decline equates to 50 percent profit decline, so expectations of reports of good earnings may be unfounded. Any jobs lost will now be feeding back through to demand and expectations that stimulus or extra spending on behalf of those still in work may outweigh lost demand due to job losses is questionable. It really depends on the velocity of job losses which an end to inventory reduction will help, but not stop without significant stimulus.

    We see Ireland in the predicament that all ideas of stimulus have been thrown out of the window and taxes have been hiked, as government spending has hit the buffers. It is only a matter of time and spending before the US and UK hit that same buffer. We already see QE not really achieving its objectives with long term government debt being sold back to the government readily and new debt still not accruing the amount of interest to raise prices. Suddenly the government looks like crowding out the demand for its own debt.

    Paul de Grauwe at euro intelligence points out that there are four deflationary spirals combining where typically during recent recessions you would only get one or two. Keynesian savings paradox, combines with Fisher's debt deflation, combines with Cost cutting deflation , combines with Bank credit deflation. Each of these requires different solutions and the combination Paul de Grauwe argues negates FED actions with interest rates and the way to save the economy is to take drastic action with the banks so they can operate almost in an uneconomic way. The other part of the solution is for central banks to take on private debt, but where Paul asserts central banks have plenty of room to increase debt he ignores the fact that governments have manipulated their debt reporting by excluding some temporary debt and excluding outstanding pension and medicare liabilities. Pauls conclusion that failure to act appropriately will cause the sustainability of the government debt to come into question seems in line with what buiter is saying.

    It looks as if the US has squandered their fire power too early with inappropriate actions. While I think the UK will go down the tried and tested inflation route that it has used before, I think the US more likely to default.

    Minyanville Surprises drive rally

    Keynes' savings paradox, Fisher's debt deflation and the banking crisis

    Anonymous said...
    What he said. No, seriously: Buiter summarizes in detail here the kind of scenario which to me has not only been the most likely but one to be feared, and thus in the back of my mind for coming on two years. We'll get at at best a flopped 'recovery' concurrent with the point when the US (and UK) public fisc finds itself caught between the Scylla of s-t-e-e-p inflation or the Charybdis of sovereign quasi-default. Even more likely they try the one and get both.

    And no, the slowing of inventory decumulation will _not_ in the present context lay a floor from which economic recovery can begin, and for exactly the reason Buiter cogently points out in his analysis: large-scale credit intermediation is hopelessly bolluxed in the Anglo-American Entente. It is not that there is not, perhaps, yet capacity in the banking system as a whole to 'lend up' a surflet of recovery but more that the rotting zombie major financials have interposed themselves at the center of the financial system such that it can't function without them but they are themselves incapable of performing this function. 'Cause, y'know, they're dead. And sucking up all the spare public money to their rotten, rotting bosoms which might otherwise go into the surviving portions of the banking system for the purposes of credit intermediation. Which is why our public financial authorities are craven and deranged on the basis of their efforts to stuff money into dead zombies.

    On one point, though, I differ slightly with Buiter, tho' it's minor. The Fed has been massively politicized for twenty years at least, so there is no question about it's 'becoming' so. And really, when the chips were down the Fed was, is, and will never be willing to cross the Treasury, so it's putative 'independence' of yore has always been a useful myth. Oh, one scrupulously maintained for appearances sake, but in substance the Fed, family quarrels aside, was always going to coordinate its actions with Treasury and White House behind the scenes. That's my view. There are good reasons perhaps for Buiter to tacitly pretend that the 'myth of independence' was real, given where he sits and who he may mean to influence to some degree. All we see now are the grasping, sweating little men behind the curtain grinding guan xi, truth, and robbery in a mill to make the sausage of currency, the curtain rent aside.

    DownSouth said...
    Buiter is right on.

    There will be no recovery until household and business balance sheets are repaired.

    To date the U.S. government has done almost nothing in this regard, and in fact has done just the opposite. By propping up the financial system, it keeps household and business debt intact, delaying or preventing it from being written off.

    [Apr 8, 2009] Calculated Risk Altman Not a normal cyclical recovery

    4/06/2009 | CalculatedRisk

    Roger Altman, former deputy Treasury secretary, writes in the Financial Times: Why this will not be a normal cyclical recovery (ht Jonathan)

    The rare nature of this recession precludes a cyclically normal US recovery. Instead, we are consigned to a slow, painful climb-out ...

    What is unusual is that this is a balance-sheet driven recession, centred on the damaged financial condition of both households and banks. These weaknesses mandate sub-normal levels of consumer spending and overall lending for about three years.

    ... To see why recovery will be slow, we can look at the balance sheet damage. For households, net worth peaked in mid-2007 at $64,400bn (€47,750, £43,449bn) but fell to $51,500bn at the end of 2008, a swift 20 per cent fall. ... household debt reached 130 per cent of income in 2008.

    This debt derived from Americans spending more than their income, reflecting the positive wealth effect. Households felt wealthier ... Now that wealth effect has reversed with a vengeance. ... household balance sheets will not be rebuilt soon. Home values will keep falling through mid-2010 and there is no precedent for equity markets, still down 45 per cent from their peak, to make those losses up in just two years. It is illogical, therefore, to expect a full snap-back in the consumer sector in 2010 or 2011. This alone mandates a drawn-out, weak recovery.

    The second key sector is the financial one. ... losses are eating into banks' capital and shrinking their capacity to add assets. Funds from the Troubled Asset Relief Program are only replacing lost capital, not increasing it. When might they end? With key categories of toxic assets still losing value, the answer is: not soon. The scale of lending needed to support a normal cyclical recovery will not materialise.

    A third constraint on recovery may involve the federal balance sheet. The fiscal and monetary engines are currently on full throttle. But, within two years, concerns over budget deficits and inflation may revive, compelling the Federal Reserve to raise interest rates and Congress to adopt deficit reduction steps. These actions, contractionary by definition, could occur before a full recovery has asserted itself. On that basis, the federal balance sheet would also limit a full recovery.

    Also, in a typical cycle, residential investment (mostly new home construction and home improvement) leads the economy out of a recession. This time there is still too much excess inventory - especially distressed inventory - for any meaningful recovery in residential investment.

    So even if the economy bottoms later this year, the recovery will probably be very sluggish for some time.

    Selected comments

    Chainsaw (member) wrote on Mon, 04/06/2009 - 9:10am.

    reposted response to hc's great post on the last thread...

    hc @ 11:25

    While I'm of the same mind about the motivations behind the FASB rules and guidance and am also a current renter waiting for a more solid bottom in housing prices, I come to some different conclusions than you. I'm definitely still trying to get my head around all of this, so I'm sure some of this is wrong.

    - as long as unemployment and REAL economic activity are depressed, consumers will be working to reduce their debt levels. thus, while this may be an inducement for banks to lend more freely, I'm not sure their will be the same appetite for debt from the customers.

    - if the banks start stashing all their REOs in Level III for the long term - they will tank the housing market. after all, these are accounting for something like 40% of existing sales.

    - not sure if the HELOC ATM can be opened again if LTV ratios continue to rise based on the V continuing to deteriorate (see above point)

    - not sure this will affect the default rates on credit cards, which is the big issue in that market. yes, if might make existing CC ABSs look better on the balance sheet, but I don't see the CC companies aggressively extending new credit to a faltering consumer or consumers looking to lever back up with doubts about their jobs and asset values (points 1 and 2)

    Just lots of moving parts and unintended consequences. Time will tell.

    Tim waiting for 2012 wrote on Mon, 04/06/2009 - 9:24am.

    This is true. Consumer spending is not bottoming IMO. People are having credit lines cut, reduced etc. I wouldn't call the last two months a recovery but whatever it was it will fail. Auto sales may have bottomed but the new baseline will still wreck havoc on the remaining auto makers.

    KEN +1 enjoy the new system.

    Shill wrote on Mon, 04/06/2009 - 9:25am.

    Right on the mark Angry Saver...no growth, just borrowing, and more borrowing and more borrowing.

    Go through some of the sheets, some people refied their property 10 time in one year!

    Average Joe wrote on Mon, 04/06/2009 - 9:26am.

    All you who wonder where to put your money in this environment, you'll find that virtually every idea is wrong.

    It's like gambling, the only way to win is to not play. Anyone with an opinion of which game is Vegas has the best odds is simply saying which game will lose you the least or the slowest.

    Like the lottery winner paraded out on the local news, or watching the final table at the WSOP, you'll be tempted by those who are lucky enough to win. It's very exciting to interview those on the sidelines who simply were able to keep what they have.

    Breaking even is winning when everything else is gambling. No one makes money off you if you don't play. If you do play, you first have to pay the salaries of those who run the game before you get your cut.

    rich wrote on Mon, 04/06/2009 - 9:28am.

    Why can't smart people get it straight?

    There will be no reversal of Bernanke's global pump-priming and money-printing until well after any recovery is underway, not before. There is no real plan or intent to reverse quantitative easing, and by definition it can't be reversed without catastrophe.

    It's beyond Bernanke's control, anyway. He's inspired the rest of the world to go along with his experiment, and all the nasty mutant economic lifeforms it creates.

    ATM card, $19 etc wrote on Mon, 04/06/2009 - 9:32am.

    The wealth effect is largely a confidence effect. We don't necessarily need to restore all of the paper wealth to get consumers spending again. We do, however, need to restore confidence that the system works, that it makes sense to plan and to budget, that there are such things as rules and laws and that these rules and laws don't change overnight subject to some pre-textual exigency (i.e. the Fed's section 13(3) powers).

    Here is an example of a potential confidence-builder:

    Fund Operator Merkin Charged With Civil Fraud
    http://www.reuters.com/article/newsOne/idUSTRE53548420090406

    "New York Attorney General Andrew Cuomo did not accuse Merkin of knowing about Madoff's massive Ponzi fraud, but said in his lawsuit that Merkin ignored irregularities and other glaring red flags related to Madoff's investments."

    If that became the standard for prosecution -- that the accused ignored irregularities and glaring red flags -- we could spend the next year watching scores of Wall Street executives face indictments. This would presumably open the door to new management and a new attitude on Wall Street. What we need now are executives in the mold of Wick Simmons, the widely-admired CEO who steered Prudential out of scandal in the early nineties. No one expects the banks to be run by saints (certainly Simmons had his detractors), but there needs to be a restored confidence that investing is a businessman's risk and that the economy is not a fool's paradise strewn with financial land mines.

    debtus wrote on Mon, 04/06/2009 - 9:35am.

    Recovery now means the slowing of the 2nd derivative of GDP growth. If GDP isn't falling as fast, we must be recovering! Hurrah!

    Anyone who believes we will see GDP growth this year or next year is delusional.

    Tim waiting for 2012 wrote on Mon, 04/06/2009 - 9:42am.

    Shnaps

    Which bloogers does Obama want us to ignore?

    "Part of the reason we don't spend a lot of time looking at blogs," he said, "is because if you haven't looked at it very carefully, then you may be under the impression that somehow there's a clean answer one way or another - well, you just nationalize all the banks, or you just leave them alone and they'll be fine." - BHO

    http://www.calculatedriskblog.com/2009/03/obama-another-750-billion-need...

    Even if we hit bottom people are delusion about the recovery. Obama is betting on 3-4% growth. I'll say 1%.

    crispy&cole wrote on Mon, 04/06/2009 - 9:43am.

    Yes, the recovery will be sluggish. I have said for sometime expect -1 to +1% growth for 2010-2011.

    [Apr 7, 2009] Stalled Economy Will Take Years to Regain Speed -

    NYTimes.com

    So even if the recession miraculously ended tomorrow, economists estimate that at least three years would pass before full employment returned and output rose enough for the economy to operate at full throttle.

    While stock market investors have embraced tentative signs of improvement in the mortgage market and elsewhere, even a sharp pickup in demand for products and services will take considerable time to play out.

    The mathematics are daunting. The shortfall is running at more than $1 trillion in annual sales and other transactions. Only once since the Great Depression has there been such a severe loss of output - in the 1981-82 recession - and after that downturn, it was seven years before the economy regained the lost production.

    Recovery from the current recession could be similarly sluggish. New occupants have to be found for empty stores. Factory owners who are hesitant to ramp up production will wait until they are sure of demand. Hiring the right people for an operation will take time. And imports, entering the country in ever greater quantities, will slow any expansion by siphoning sales from domestic producers.

    Then there is the growth rate itself. In the six years of recovery from the 2001 recession to the current one, the economy grew at an average annual rate of only 2.5 percent, adjusted for inflation. If that growth rate were to resume, just $350 billion a year would be added back, requiring three years to restore the $1 trillion in lost capacity. But getting the economy to grow at all after so much output has been lost, and so many jobs, is no easy task.

    "Excess capacity, once entrenched, perpetuates itself, and that is what is happening now," said James Crotty, an economist at the University of Massachusetts, Amherst. "Companies cannot hire workers to make more goods and provide more services until their sales go up. But people can't buy goods and services until they are hired - so the excess capacity just sits there."

    It shows up everywhere. Lawyers are booking fewer hours. Retail space goes begging. Tourism is down. So is cellphone use, airline bookings, freight traffic and household borrowing, which is less than half what it was on the eve of the recession, the Federal Reserve reports.

    With orders dwindling, manufacturers are using less than 68 percent of the nation's factory capacity, the lowest level since records were first kept in 1948. And while entrepreneurs are as inventive as ever, they may not be able to get venture capitalists to bankroll their creations.

    "We and others are funding start-ups as slowly as possible, or not at all," said Howard Anderson, a founding partner of Battery Ventures in Waltham, Mass., and a senior lecturer at the Massachusetts Institute of Technology.

    [Apr 7, 2009] Soros says U.S. faces "lasting slowdown"

    Reuters.

    "What we have created now is a situation where the banks who will be able to earn their way out of a hole, but by doing that, they are going to weigh on the economy.

    "Instead of stimulating the economy, they will draw the lifeblood, so to speak, of profits away from the real economy in order to keep themselves alive."

    [Apr 7, 2009] Stocks May See 'Correction' of 10%, Marc Faber Says (Update1) By Chen Shiyin and Susan Li

    April 7 | Bloomberg

    Global stocks may drop as much as 10 percent in a "correction" following gains in the last four weeks, before rebounding after July, investor Marc Faber said.

    The Standard & Poor's 500 Index may decline to around 750 before further gains in July, Faber, 63, said in a Bloomberg Television interview in Singapore. That's a drop of 10 percent from yesterday's close. Stocks in the U.S. and other global markets are unlikely to fall below their October and November lows, he added.

    "After the rally since March 6, we need some kind of correction, maybe around 5 to 10 percent, and after that we can maybe rally more into July," said Faber, the publisher of the Gloom, Boom & Doom report. "The economic news, while it won't be good, the rate of getting worse will slow down."

    Faber on March 9 advised investors to buy U.S. stocks, saying government actions will boost equities. The S&P 500 has since rallied 25 percent from a 12-year low through last week, the steepest rally since 1938, as rising home sales and durable- goods orders signal a bottoming in the U.S. economy. Gains may be halted by unemployment, consumer debt and concern banks will be forced to write down more loans.

    Faber told investors to abandon U.S. stocks a week before 1987's so-called Black Monday crash and said in August 2007 that U.S. shares were entering a bear market. The S&P 500 peaked at 1,565.15 in October of that year before retreating as much as 57 percent.

    Commodities, Banks

    Faber said he had bought some commodity producers in November and is now less favorable on these companies with some stocks more than doubling. He has also bought some bank stocks and predicted that Citigroup Inc. shares could "easily rebound" to around $5 a share from $2.72 currently.

    "The rebound potential for financials is quite high," Faber said.

    In Asia, stocks offer "much better value" than U.S. shares, and investors should seize the opportunity to buy the region's equities on "every setback," he added.

    "If you buy Asian equities in the next three months, over the next five to 10 years, for sure you will make money," Faber said.

    Faber is less favorable on bonds, saying they are entering a "long-term bear market" that can last for the next 15 years to 20 years.

    To contact the reporter on this story: Susan Li in Hong Kong at [email protected]; Chen Shiyin in Singapore at [email protected].

    [Apr 7, 2009] Toxic debts could reach $4 trillion, IMF to warn - Times Online

    Grαinne Gilmore, Economics Correspondent

    Toxic debts racked up by banks and insurers could spiral to $4 trillion (£2.7 trillion), new forecasts from the International Monetary Fund (IMF) are set to suggest.

    The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.

    Banks and insurers, which so far have owned up to $1.29 trillion in toxic assets, are facing increasing losses as the deepening recession takes a toll, adding to the debts racked up from sub-prime mortgages. The IMF's new forecast, which could be revised again before the end of the month, will come as a blow to governments that have already pumped billions into the banking system.

    Paul Ashworth, senior US economist at Capital Economics, said: "The first losses were asset writedowns based on sub-prime mortgages and associated instruments. But now, banks are selling 'plain vanilla' losses from mortgages, commercial loans and credit cards. For this reason, the housing market will play a crucial part in how big the bad debt toll is over the next year or two."

    In its January report, the IMF said: "Degradation is also occurring in the loan books of banks, reflecting the weakening outlook for the economy. Going forward, banks will need even more capital as expected losses continue to mount." At the same time, there is a clear shift in congressional attitudes in the United States about simply pumping money into the system, Mr Ashworth said. The British Government is also under pressure to repair its tattered finances. Injecting more money into the banks could further undermine its fiscal position.

    The IMF's jump will come as little surprise to economists who have suggested that the bad debts will be much higher than anticipated. Nouriel Roubini, chairman of RGE Monitor, expects bad debts from US-originated assets to reach $3.6 billion by the middle of next year. This figure is expected to rise when bad debts from assets elsewhere are calculated, he said.

    [Apr 7, 2009] Bill Moyers interviews William K. Black

    April 3, 2009

    BILL MOYERS: Welcome to the Journal.

    For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that "The Best Way to Rob a Bank Is to Own One." In fact, the man you're about to meet wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s.

    WILLIAM K. BLACK: These numbers as large as they are, vastly understate the problem of fraud.

    BILL MOYERS: Bill Black was in New York this week for a conference at the John Jay College of Criminal Justice where scholars and journalists gathered to ask the question, "How do they get away with it?" Well, no one has asked that question more often than Bill Black.

    The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating - after whom the senate's so-called "Keating Five" were named - he sent a memo that read, in part, "get Black - kill him dead." Metaphorically, of course. Of course.

    Now Black is focused on an even greater scandal, and he spares no one - not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname "banksters."

    Bill Black, welcome to the Journal.

    WILLIAM K. BLACK: Thank you.

    BILL MOYERS: I was taken with your candor at the conference here in New York to hear you say that this crisis we're going through, this economic and financial meltdown is driven by fraud. What's your definition of fraud?

    WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, "I create trust in you, and then I betray that trust, and get you to give me something of value." And as a result, there's no more effective acid against trust than fraud, especially fraud by top elites, and that's what we have.

    BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you're saying here, that it was in the boardrooms and the CEO offices where this fraud began?

    WILLIAM K. BLACK: Absolutely.

    BILL MOYERS: How did they do it? What do you mean?

    WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.

    BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

    WILLIAM K. BLACK: Yes.

    BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?

    WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that.

    BILL MOYERS: If I wanted to go looking for the parties to this, with a good bird dog, where would you send me?

    WILLIAM K. BLACK: Well, that's exactly what hasn't happened. We haven't looked, all right? The Bush Administration essentially got rid of regulation, so if nobody was looking, you were able to do this with impunity and that's exactly what happened. Where would you look? You'd look at the specialty lenders. The lenders that did almost all of their work in the sub-prime and what's called Alt-A, liars' loans.

    BILL MOYERS: Yeah. Liars' loans--

    WILLIAM K. BLACK: Liars' loans.

    BILL MOYERS: Why did they call them liars' loans?

    WILLIAM K. BLACK: Because they were liars' loans.

    BILL MOYERS: And they knew it?

    WILLIAM K. BLACK: They knew it. They knew that they were frauds.

    WILLIAM K. BLACK: Liars' loans mean that we don't check. You tell us what your income is. You tell us what your job is. You tell us what your assets are, and we agree to believe you. We won't check on any of those things. And by the way, you get a better deal if you inflate your income and your job history and your assets.

    BILL MOYERS: You think they really said that to borrowers?

    WILLIAM K. BLACK: We know that they said that to borrowers. In fact, they were also called, in the trade, ninja loans.

    BILL MOYERS: Ninja?

    WILLIAM K. BLACK: Yeah, because no income verification, no job verification, no asset verification.

    BILL MOYERS: You're talking about significant American companies.

    WILLIAM K. BLACK: Huge! One company produced as many losses as the entire Savings and Loan debacle.

    BILL MOYERS: Which company?

    WILLIAM K. BLACK: IndyMac specialized in making liars' loans. In 2006 alone, it sold $80 billion dollars of liars' loans to other companies. $80 billion.

    BILL MOYERS: And was this happening exclusively in this sub-prime mortgage business?

    WILLIAM K. BLACK: No, and that's a big part of the story as well. Even prime loans began to have non-verification. Even Ronald Reagan, you know, said, "Trust, but verify." They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.

    BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?

    WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

    BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

    WILLIAM K. BLACK: Right, and the investment banker that - we call it pooling - puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.

    BILL MOYERS: You're describing what Bernie Madoff did to a limited number of people. But you're saying it's systemic, a systemic Ponzi scheme.

    WILLIAM K. BLACK: Oh, Bernie was a piker. He doesn't even get into the front ranks of a Ponzi scheme...

    BILL MOYERS: But you're saying our system became a Ponzi scheme.

    WILLIAM K. BLACK: Our system...

    BILL MOYERS: Our financial system...

    WILLIAM K. BLACK: Became a Ponzi scheme. Everybody was buying a pig in the poke. But they were buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, "Triple-A."

    BILL MOYERS: Is there a law against liars' loans?

    WILLIAM K. BLACK: Not directly, but there, of course, many laws against fraud, and liars' loans are fraudulent.

    BILL MOYERS: Because...

    WILLIAM K. BLACK: Because they're not going to be repaid and because they had false representations. They involve deceit, which is the essence of fraud.

    BILL MOYERS: Why is it so hard to prosecute? Why hasn't anyone been brought to justice over this?

    WILLIAM K. BLACK: Because they didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the Savings and Loan crisis, right? Even while the institutions were reporting they were the most profitable savings and loan in America, we knew they were frauds. And we were moving to close them down. Here, the Justice Department, even though it very appropriately warned, in 2004, that there was an epidemic...

    BILL MOYERS: Who did?

    WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.

    BILL MOYERS: You talk about the Bush administration. Of course, there's that famous photograph of some of the regulators in 2003, who come to a press conference with a chainsaw suggesting that they're going to slash, cut business loose from regulation, right?

    WILLIAM K. BLACK: Well, they succeeded. And in that picture, by the way, the other - three of the other guys with pruning shears are the...

    BILL MOYERS: That's right.

    WILLIAM K. BLACK: They're the trade representatives. They're the lobbyists for the bankers. And everybody's grinning. The government's working together with the industry to destroy regulation. Well, we now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.

    BILL MOYERS: But I can point you to statements by Larry Summers, who was then Bill Clinton's Secretary of the Treasury, or the other Clinton Secretary of the Treasury, Rubin. I can point you to suspects in both parties, right?

    WILLIAM K. BLACK: There were two really big things, under the Clinton administration. One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what's called commercial banking from investment banking. That's the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan. And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn't. She tried to do the right thing to regulate one of these exotic derivatives that you're talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can't regulate. And it's this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle.

    BILL MOYERS: What did AIG contribute? What did they do wrong?

    WILLIAM K. BLACK: They made bad loans. Their type of loan was to sell a guarantee, right? And they charged a lot of fees up front. So, they booked a lot of income. Paid enormous bonuses. The bonuses we're thinking about now, they're much smaller than these bonuses that were also the product of accounting fraud. And they got very, very rich. But, of course, then they had guaranteed this toxic waste. These liars' loans. Well, we've just gone through why those toxic waste, those liars' loans, are going to have enormous losses. And so, you have to pay the guarantee on those enormous losses. And you go bankrupt. Except that you don't in the modern world, because you've come to the United States, and the taxpayers play the fool. Under Secretary Geithner and under Secretary Paulson before him... we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?

    BILL MOYERS: And why...

    WILLIAM K. BLACK: How mad is this?

    BILL MOYERS: What is your explanation for why the bankers who created this mess are still calling the shots?

    WILLIAM K. BLACK: Well, that, especially after what's just happened at G.M., that's... it's scandalous.

    BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?

    WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, �contracts, sacred.' But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.

    BILL MOYERS: The cover up?

    WILLIAM K. BLACK: Sure. The cover up.

    BILL MOYERS: That's a serious charge.

    WILLIAM K. BLACK: Of course.

    BILL MOYERS: Who's covering up?

    WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion - a trillion is a thousand billion - $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.

    These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...

    BILL MOYERS: What do you mean?

    WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.

    BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this.

    TIMOTHY GEITHNER:I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.

    Overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that build up.

    WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.

    BILL MOYERS: As?

    WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he's completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that's just plain wrong.

    BILL MOYERS: How is this happening? I mean why is it happening?

    WILLIAM K. BLACK: Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts.

    BILL MOYERS: What facts?

    WILLIAM K. BLACK: The facts about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?

    BILL MOYERS: You--

    WILLIAM K. BLACK: Taking away people's bonuses?

    BILL MOYERS: To hear you say this is unusual because you supported Barack Obama, during the campaign. But you're seeming disillusioned now.

    WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law.

    BILL MOYERS: In other words, they could have closed these banks without nationalizing them?

    WILLIAM K. BLACK: Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.

    BILL MOYERS: And that's a law?

    WILLIAM K. BLACK: That's the law.

    BILL MOYERS: So, Paulson could have done this? Geithner could do this?

    WILLIAM K. BLACK: Not could. Was mandated--

    BILL MOYERS: By the law.

    WILLIAM K. BLACK: By the law.

    BILL MOYERS: This law, you're talking about.

    WILLIAM K. BLACK: Yes.

    BILL MOYERS: What the reason they give for not doing it?

    WILLIAM K. BLACK: They ignore it. And nobody calls them on it.

    BILL MOYERS: Well, where's Congress? Where's the press? Where--

    WILLIAM K. BLACK: Well, where's the Pecora investigation?

    BILL MOYERS: The what?

    WILLIAM K. BLACK: The Pecora investigation. The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?" Where's our investigation?

    What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we've got a double tragedy. It isn't just that we are failing to learn from the mistakes of the past. We're failing to learn from the successes of the past.

    BILL MOYERS: What do you mean?

    WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn't matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, "You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you're covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn't work. You will cause your recession to continue and continue." And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan.

    BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

    WILLIAM K. BLACK: Absolutely.

    BILL MOYERS: You are.

    WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits. And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, "We just can't let the big banks fail." That's wrong.

    BILL MOYERS: But what might happen, at this point, if in fact they keep from us the true health of the banks?

    WILLIAM K. BLACK: Well, then the banks will, as they did in Japan, either stay enormously weak, or Treasury will be forced to increasingly absurd giveaways of taxpayer money. We've seen how horrific AIG -- and remember, they kept secrets from everyone.

    BILL MOYERS: A.I.G. did?

    WILLIAM K. BLACK: What we're doing with -- no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

    Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.

    BILL MOYERS: Even though Goldman Sachs had a big vested stake.

    WILLIAM K. BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn't be allowed in civilized society.

    BILL MOYERS: Yeah, like a conflict of interest, it seems.

    WILLIAM K. BLACK: Massive conflict of interests.

    BILL MOYERS: So, how did he get away with it?

    WILLIAM K. BLACK: I don't know whether we've lost our capability of outrage. Or whether the cover up has been so successful that people just don't have the facts to react to it.

    BILL MOYERS: Who's going to get the facts?

    WILLIAM K. BLACK: We need some chairmen or chairwomen--

    BILL MOYERS: In Congress.

    WILLIAM K. BLACK: --in Congress, to hold the necessary hearings. And we can blast this out. But if you leave the failed CEOs in place, it isn't just that they're terrible business people, though they are. It isn't just that they lack integrity, though they do. Because they were engaged in these frauds. But they're not going to disclose the truth about the assets.

    BILL MOYERS: And we have to know that, in order to know what?

    WILLIAM K. BLACK: To know everything. To know who committed the frauds. Whose bonuses we should recover. How much the assets are worth. How much they should be sold for. Is the bank insolvent, such that we should resolve it in this way? It's the predicate, right? You need to know the facts to make intelligent decisions. And they're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses.

    BILL MOYERS: So, you're saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?

    WILLIAM K. BLACK: That's right. And it's particularly a crisis that brings this out, because then the class of the banker says, "You've got to keep the information away from the public or everything will collapse. If they understand how bad it is, they'll run for the exits."

    BILL MOYERS: Yeah, and this week in New York, at this conference, you described this as more than a financial crisis. You called it a moral crisis.

    WILLIAM K. BLACK: Yes.

    BILL MOYERS: Why?

    WILLIAM K. BLACK: Because it is a fundamental lack of integrity. But also because, if you look back at crises, an economist who is also a presidential appointee, as a regulator in the Savings and Loan industry, right here in New York, Larry White, wrote a book about the Savings and Loan crisis. And he said, you know, one of the most interesting questions is why so few people engaged in fraud? Because objectively, you could have gotten away with it. But only about ten percent of the CEOs, engaged in fraud. So, 90 percent of them were restrained by ethics and integrity. So, far more than law or by F.B.I. agents, it's our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud.

    BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker's income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?

    WILLIAM K. BLACK: Right.

    BILL MOYERS: It was relatively a handful of people.

    WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don't prosper. So, instead of being bad for capitalism, it's what saves capitalism. "Honest purveyors prosper" is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn't need to happen at all.

    BILL MOYERS: When you wake in the middle of the night, thinking about your work, what do you make of that? What do you tell yourself?

    WILLIAM K. BLACK: There's a saying that we took great comfort in. It's actually by the Dutch, who were fighting this impossible war for independence against what was then the most powerful nation in the world, Spain. And their motto was, "It is not necessary to hope in order to persevere."

    Now, going forward, get rid of the people that have caused the problems. That's a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers, that caused the problems? That's facially nuts. That's our current system.

    So stop that current system. We're hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right? Follow what works instead of what's failed. Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they've had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.

    BILL MOYERS: William Black, thank you very much for being with me on the Journal.

    WILLIAM K. BLACK: Thank you so much.

    Selected Comments

    read, "To Seduce a Nation", Lindsey Williams

    Check out International Financiers: Conversations with Jonathan May

    Google, Figuring out the Fed...............

    "Grey Men"

    This has been going on for a very long time. No one cares!

    Posted by: bc | April 6, 2009 8:00 PM

    Obama's Financial advisors learned from the best. If there was one thing the Bush Adminitration did that was extremely harmful to the country, it was to verify that if you tell the lie long enough, the people stop asking you to tell the truth.
    You cannot embarrass politicians or corporate CEO's-there is too much money involved to let this get in the way.
    While Obama is wow'ing Europe with his rock and roll status, his appointment and bank stooge Tim Geithner, is stealing the silverware out of the White House drawers. Damage control Mr. President...

    Posted by: Justin Lee | April 6, 2009 5:40 PM

    This is exactly why I watch this show. Finally, someone willing to tell the truth, Mr. Black I love you.. I do believe that the time has come for "we the people" to get a little bit more vocal - because my love for Mr. President notwithstanding - much like FDR - we the people must force him and the Congress to start listening to "US" to WE the PEOPLE!! The elites of this country have not only been effective in making us a corporate oligarchy - but a "WELFARE" corporate oligarchy - where we the people pay on the front end, in the middle, and on the back end!!! These elitist greedheads really believe that "they are supposed" to be paid deferential treatment - it is really time for that to end!!!

    Posted by: Zora Renee | April 6, 2009 4:30 PM

    Prof. Black,

    Thank you for such a clear and concise explanation of the financial mess. As someone that voted for Obama it is disheartening to see that the Obama administration is following the same game plan of the Bush administration.

    When it comes to enforcing regulations, holding CEOs accountable, and requiring transparency President Obama is not delivering on his campaign promises.

    I have very little confidence in Geithner and I see him as just a mini-me to Hank Paulson.

    The only reason to do a cover up to this degree is that those at fault are at the highest levels of our country from banks, to politicians, to the rating agencies that were supposed to prevent this.

    There needs to be an investigation, and people should go to jail for this.

    Posted by: Scott Pershing | April 6, 2009 4:09 PM

    Just a small comment about the "Dutch saying" when the Northern provinces of the Low Countries wer fighting the Spanish. The words are from William the Silent, first "Stadhouder" of Holland. The original was in French (the Lingua Franca of the noblemen in those days):
    " Point n'est besoin d'espιrer pour entreprendre, ni de rιussir pour persιverer", which translates roughly as : "it is not necessary to hope in order to undertake , nor to succeed in order to persevere."( undertake as in "entreprise", not the funeral stuff)
    Just for the record...

    [Apr 6, 2009] Guest Post- Wall Street Back To Its Criminal Ways-

    naked capitalism

    There was a time on Wall Street when insider trading was rampant, when sellside analysts would pump stocks under the guidance of their superiors only to have their corporate finance colleagues do an equity offer shortly after, when the amount of money a bank's corporate clients paid would determine its rating, and when analysts said in internal emails a company is worthless, only to issue reports claiming the company was the next sliced bread. Then things changed for the better briefly, when Spitzer came on the stage. However, with his thunderous fall from grace in an act of utter hypocrisy, the behavior he fought so hard to curb started gradually coming back.

    Yesterday, Wall Street's shadiness came back with a vengeance.

    [Apr 6, 2009] Are Competitive Devaluations Starting

    naked capitalism

    Ambrose Evans-Pritchard, who despite his fondness of apocalyptic pronouncements, has been been for the most part right in calling this downturn, argues the world is moving toward beggar thy neighbor currency debauchment.

    [Apr 6, 2009] S&P 500 Can't See Enough Money in Final Quarter to Feed Rally By Michael Tsang and Adam Haigh

    April 6 | Bloomberg

    Investors are depending on banks more than at any time in at least 60 years to lead the U.S. out of the longest earnings slump since the Great Depression.

    American companies will end more than two years of declining income by the fourth quarter, according to analyst forecasts compiled by Bloomberg. Banks will be responsible for all of the 76 percent rebound in the final three months of the year, because without financial companies, the gain turns into a 4.5 percent decline, the data show.

    Rathbone Brothers Plc, MFS Investment Management and TD Ameritrade Holding Corp. say the reliance on banks is making them increasingly concerned that the 25 percent gain by the Standard & Poor's 500 Index since March 9, the steepest rally since 1938, will dissipate. While rising home sales and durable- goods orders show the economy may be bottoming, unemployment and consumer debt as well as prospects that banks will be forced to write down more loans may halt the gain in equities.

    "People should not get carried away," said Julian Chillingworth, the London-based chief investment officer at Rathbone Brothers, which had more than $14.6 billion in assets under management at the end of last year. "We first need to see genuine signs of economic recovery."

    In 11 recessions since 1938, stocks have rebounded an average of five months before a recovery in earnings, according to data compiled by Bloomberg. The economy has contracted for 16 months, equaling the two longest slumps -- between 1973-1975 and 1981-1982 -- since the Great Depression.

    Profit Drought

    The earnings decline that has lasted for six straight quarters will get worse before it gets better, with profits at S&P 500 companies decreasing for three more periods, Bloomberg data show. Companies from Microsoft Corp. to DuPont Co. already said profits will be disappointing.

    Analysts predict banks, brokerages and insurers will earn about $21 billion in the last three months of 2009, compared with a loss of $65 billion a year earlier, according to estimates compiled by Bloomberg.

    Financial companies led the stock market's plunge from a record high in October 2007 as Bear Stearns Cos. collapsed, Lehman Brothers Holdings Inc. went bankrupt and the government set aside at least $218 billion to prop up American International Group Inc. and Citigroup Inc. All four firms are based in New York.

    Since the S&P 500 reached a record, financial shares have lost 73 percent, the biggest slump among 10 industry groups.

    Earnings Season

    Almost $1.3 trillion in bank losses tied to subprime mortgages froze credit markets and led to a 6.3 percent U.S. economic contraction in the fourth quarter. The S&P/Case-Shiller Composite-20 Home Price Index tumbled 29 percent from a 2006 peak and the U.S. unemployment rate jumped to a 25-year high of 8.5 percent in March.

    The first-quarter earnings season starts tomorrow with Alcoa Inc., the largest U.S. aluminum maker. The New York-based company will report an adjusted loss of $368 million, after making $341 million in the year-earlier period, analyst estimates show.

    For S&P 500 companies, profits will probably fall 37 percent, according to estimates from more than 1,700 securities analysts compiled by Bloomberg. Earnings may drop 31 percent in the second quarter and 18 percent in the next before gaining in the last three months of the year, they predict. The 76 percent jump would be the biggest quarterly increase in earnings in more than two decades, based on Bloomberg and S&P data.

    'A Little Tougher'

    Getting there will depend on financial companies. Bank of America Corp. and New York-based JPMorgan Chase & Co., the two largest U.S. banks, are already saying business wasn't as strong in March as the first two months of the year.

    Kenneth Lewis, chief executive officer at Charlotte, North Carolina-based Bank of America, said on March 12 that the lender was profitable in January and February. On March 27, he said "the trading book was not as good" in March.

    JPMorgan CEO Jamie Dimon told CNBC on March 27 that the month had been "a little tougher" than in January and February. Dimon had said on the bank's Feb. 23 conference call with investors and analysts that the lender was "solidly profitable quarter to date."

    Bank of America may bounce back from an adjusted $1.59 billion fourth-quarter loss a year ago to earn $1.92 billion in the last three months of the year, analyst estimates show. JPMorgan, whose profit plunged 76 percent in the fourth quarter of 2008, may report gains of 317 percent and 222 percent in the third and fourth quarters.

    Defaulting Loans

    Analysts overestimated bank profits for at least six consecutive quarters, data compiled by Bloomberg show. Earnings may not materialize this time either because of declines in commercial real-estate values, which have yet to fully reflect the economic slowdown, according to Arlington, Virginia-based Friedman Billings Ramsey Group Inc.

    Commercial property loans in default or foreclosure jumped 43 percent in the first quarter as the contraction reduced occupancies and the credit crisis stymied refinancing, data from New York-based research firm Real Capital Analytics Inc. show. Commercial real estate values have fallen at least 30 percent since the 2007 peak and may drop 11 percent more this year, Frankfurt-based Deutsche Bank AG's real-estate unit said in a March 25 report.

    The decline may force banks to increase loan-loss provisions and write down the value of commercial property loans, which Citigroup, Bank of America and JPMorgan are all carrying at 100 percent of face value, according to estimates in a March 24 report by Richard Ramsden, an analyst at New York- based Goldman Sachs Group Inc.

    New Deal Redux?

    After losing more than half its value, the S&P 500 took 19 trading days to rally 25 percent starting March 9, the sharpest since President Franklin D. Roosevelt's New Deal policies helped pull the U.S. out of the Great Depression.

    In the past month, the S&P 500 has bounced back from a 12- year low as confidence increased that $12.8 trillion pledged by the administrations of Barack Obama and George W. Bush and the Federal Reserve to rescue the financial system will end the recession. The S&P 500 climbed 3.3 percent to 842.50 last week.

    Stocks gained as Treasury Secretary Timothy Geithner unveiled a plan on March 23 to finance as much as $1 trillion in purchases of banks' distressed assets to end the 20-month freeze in the credit markets.

    Economic reports in the past month persuaded some investors the worst of the recession was over. Sales of new and existing homes unexpectedly rose in February, according to the Commerce Department and the National Association of Realtors, while durable-goods orders increased.

    Buy or Sell

    "I'd be a buyer before I'd be a seller," said Leo Grohowski, chief investment officer at Bank of New York Mellon Wealth Management, which oversees $139 billion in New York. "This is more than an oversold bounce. We are seeing some very, very early signs that the economy may be bottoming."

    Stephanie Giroux, chief investment strategist for TD Ameritrade, the Omaha, Nebraska-based online brokerage with $210 billion in client assets, isn't convinced.

    The government's plans to kick-start growth don't guarantee a rebound in earnings and stock prices because consumer spending, which accounts for about 70 percent of the U.S. economy, will stagnate for years as Americans pay debts and businesses cut jobs, she said.

    The unemployment rate may rise to 9.4 percent by year end, according to economists' estimates compiled by Bloomberg, as companies from Detroit-based General Motors Corp. to Microsoft and DuPont fire workers to cope with plummeting demand.

    One Million Jobs

    A controlled bankruptcy by GM would squeeze production and may help eliminate about a third of the 3 million jobs in the auto industry, Joseph LaVorgna, the New York-based chief U.S. economist at Deutsche Bank, wrote in a report on March 30.

    Americans' debts have remained near all-time highs even as they reduced spending, because people thrown out of work are depleting savings and tapping credit cards. U.S. household borrowing, which has ballooned almost 11-fold since 1980, equaled $13.8 trillion at the end of 2008, or 0.5 percent less than the record reached earlier in the year, according to data compiled by Bloomberg.

    Engine Problems

    "You've taken a big engine of growth out of the system for a while," TD Ameritrade's Giroux said in an interview. "We are going to be confronted with sub-par growth as we dig out of this hole. The consumer has really driven growth in the economy, and the stock market is a proxy for that growth."

    Software makers and chemical producers are also being hit by diminishing sales:

    "The market doesn't have any evidence now that it's not getting worse," said James Swanson, Boston-based chief investment strategist at MFS, which oversees $134 billion. "We still are dealing with much worse unemployment and much worse housing numbers. This stock-market rally that we're seeing, people need to be cautious about it."

    To contact the reporters on this story: Michael Tsang in New York at [email protected]; Adam Haigh in London at [email protected].

    [Apr 6, 2009] More on robbing the US tax payer and debauching the FDIC and the Fed

    Mar 26, 2009 | FT.com Willem Buiter's Maverecon

    The US authorities have no money to fulfil their ambition of stopping large US banks from failing without taking them into public ownership. The $300 bn left in the TARP kitty is all that is available for recapitalising banks, purchasing toxic assets and providing other financial support. Congress has thrown its toys out of the pram and is unwilling to appropriate more funds for the rescue of the banking sector.

    As an aside: it is astonishing that Congress and much of the US populace are apoplectic about $165 mn (perhaps $182 mn) of bonuses paid to AIG executives and employees, when $170 billion or so of public money is at risk (and tens of billions probably already gone out of the window) in the rescue of this most undeserving of companies. Perhaps you can only get indignant about what you can comprehend… .

    The US authorities are reduced to begging, stealing and borrowing the rest of the funds they believe they will need. The two main proximate sources of funds are the FDIC and the Fed. The ultimate sources of funds will be (1) the US tax payer and the beneficiaries of future US spending programs that will have to be cut, (2) the holders of nominally denominated liabilities of the US state, including the monetary liabilities of the Fed and US Treasury bills and bonds.

    Owners of dollar-denominated debt instruments will see the real value of their claims on the government eroded by future inflation if, as I expect, the recent and prospective future increases in the US monetary base (driven by credit easing and, in the future also be quantitative easing) cannot be reversed in the future. The main obstacle to such a reversal will be the US fiscal authorities, who are unlikely to let the Fed dump large amounts of US Treasury debt, acquired by the Fed as part of its quantitative easing program, into the markets.

    I believe that the raids by the US Treasury on the FDIC and on the Fed are illegitimate and, in the case of the FDIC, quite possibly illegal.

    Selected comments

    User4388690

    Amen Professor Buiter!

    As you will recall, a battle cry of the American revolution was "NO TAXATION WITHOUT REPRESENTATION!" As your post so clearly illustrates, the future tax burden the Treasury and the FRB are going to lay on the taxpayer is enormous and the process is being conducted opaquely. What is more egregious is that it is being done by "leveraging" the FDIC in order to deliberately AVOID Congressional approval. If the American populace still included the likes of John Adams and Thomas Jefferson, I think we know where such shenanigans would lead us. Luckily for Secretary Geithner, mass lobotomies have been performed since Jefferson's time and many Americans would be hard pressed to name anyone in government below Obama

    What Americans will be able to understand is a threat to the solvency of the FDIC. Should it become apparent that the FDIC is so burdened in protecting banks' assets that it can no longer protect their liabilities, the final missing link to the 1930's will be resurrected.

    carol

    Willem,
    Under Conclusion: ¨Tim Geithner, Larry Summers, Ben Bernanke and Sheila Blair all appear to believe that to save the banking sector you have to save the existing banks as going concerns. ¨

    Yes, because these banks are all ΄too well connected to fail΄ (and that seems not to have changed with the recent regime change).
    BTW, the FDIC chairman΄s name is Sheila Bair.

    ¨Bernanke's words that a proper special resolution regime for non-banks would permit the Conservator or Administrator to "unwind it slowly, protect policymakers, and impose haircuts on creditors and counterparties as appropriate," truly are music to my ears.¨

    Does this music suggest that you believe that FED/Treasury would have used the FDIC-like receivership powers for AIG?
    Why, when for several months now that power has not been used for zombiebank Citygroup?
    Would Lloyd Blankfein have allowed that to happen? (Goldman Sachs CEO Blankfein was in on the meeting with NY-FED and Treasury deciding the bailout of AIG; Goldman getting the biggest part of AIG giving away on par taxpayers΄ bailout money.)

    AI Trader

    Excellent analysis. One thing you seem to have missed is that the unwinding of derivatives within whatever framework the Fed chooses to enact does not fix the fundamental problem of the stream of payments into those derivatives. In other words, if you still have a large enough number of mortgage holders (whether commercial or residential - the problem is expanding) who cannot maintain their payments you will still have insolvency at some level and in some institutions regardless of how many layers above this are unwound in the 3rd, 4th, 5th tiers of derivatives upon them.

    Unless and until the Fed, BoE, and even the European regional banks understand that they must take a haircut on their loan payments and principal this "downturn" will continue. If you also take into consideration the accelerating unemployment figures and collapsing world trade as seen in the drop in the BDI, then it should be obvious that the global economy will continue to suffer until reset at a lower level. The quickest way to do this is to attack the fundamental problem of mortgage relief.

    Once (if) this is done we will finally be able to see some light at the end of the tunnel. If this is not done the tunnel will be long and dark indeed.

    the.Duke.of.URL

    "in view of the astonishing survival rate of CEOs and other top managers in the zombie banks, they may even believe that to save the banking system you have to rely on the continued contribution of those whose past best efforts brought us this crisis and debacle."

    This was the reason often given for keeping certain Nazis in their previous positions after the war. It was false then. It is false now. Paul Volcker has himself said he finds the Nuremberg excuse brought in to excuse the behavior of bankers unacceptable.

    The top bankers and their unbankable banks should go.

    [Apr 6, 2009] Goldman Sachs is basically right about the bank rally, but… by David Goldman

    April 3rd, 2009

    …the question is: what are bank stocks worth? Robert Merton, remember, defines a stock as an option on future cash flows. When those cash flows do not exist or are quite uncertain, it's hard to use the dividend discount model.
    Right now, Citigroup (for example) is priced exactly to option value. Using the option calculator for [...]

    Selected comments

    1. DodgerUSA Says:
      April 3rd, 2009 at 12:27 pm

      "Whether Citigroup exists as a going concern depends mainly on the whim of the federal government. When the market feared nationalization, the value of the option collapsed to $.97."

      The question then becomes: Is Obama rational? Does he want economic growth and stabilization, or does he want chaos and an increasing U.S. reliance on government spending? I accept your argument that nationalization would be disastrous for the country and that the impact on insurers would cause chaos. But does Obama want this? Scary thought. (I am not convinced YET that Obama is simply a Slick Willy type [of] opportunist. Perhaps I read too much Melanie Phillips. I hope I am wrong).

      Thanks for explaining the Citi valuation in a bit more detail. If Citi and B of A do return to profitability, perhaps they can (very) eventually raise their dividends (hello easier to value DDM model) and in Citi's case, do a reverse stock split to attract some buyers and gain some additional upside.

      Thanks again for the great posts! This blog is incredibly informative.

    [Apr 6, 2009] Time to Remove the "L" from "BLS"

    Back to USSR ? It looks like the current government statistics distorts economic data on the scale typical for the USSR.
    Mish's Global Economic Trend Analysis

    For seven consecutive months the Bureau of Labor Statistics (BLS) has revised downward, prior job loss data.

    The New York Times mentioned this on March 6 in Will Job Numbers Keep Being Revised Down?

    Robert Barbera, the chief economist of ITG, points out a more disturbing trend: The Labor Department keeps concluding that its initial estimates were too optimistic.

    Here are the total job losses reported for recent months, as originally reported and as shown in the latest revisions.

    August 2008: Initially 84,000, revised to 175,000
    September 2008: Initially 159,000, revised to 321,000
    October 2008: Initially 240,000, revised to 380,000
    November 2008: Initially 533,000, revised to 597,000
    December 2008: Initially 524,000, revised to 681,000
    January 2009: Initially 598,000, revised to 655,000
    February 2009: Initially 651,000, as released today.

    On average, from August through January, the first estimate was too optimistic by 112,000 jobs.

    [Apr 6, 2009] Senior S&L Regulator Says Government Engaging in Massive Cover-Up of Economic Crisis: "The Entire Strategy Is to Keep People from Getting the Facts

    Washington's Blog

    William K. Black was the senior regulator during the S&L crisis, and an Associate Professor of Economics and Law at the University of Missouri (bio).

    Black says that massive fraud is what caused the economic crisis. As one example, he explains that everyone involved knew that the CDOs which packaged subprime loans were not AAA credit-worthy (which means that they are completely risk-free). He also said that the exotic instruments (CDOs, CDS, etc.) which spun the mortgages into more and more abstract investments were intentionally created to defraud investors.

    Moreover, Black says that the government's entire strategy in dealing with the economic crisis is a massive cover-up:

    [They] don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up....

    Geithner is ... covering up. Just like Paulson did before him....

    These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed....

    Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts....

    [Question] Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

    [Black] Absolutely....

    They're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses.

    [Question] So, you're saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?

    That's right. And it's particularly a crisis that brings this out, because then the class of the banker says, "You've got to keep the information away from the public or everything will collapse."

    Watch the interview here.

    [Apr 5, 2009] Bankrupt Brits

    "The US per capita bankruptcy rate is 3.47 times the British rate." High military expenditures help...
    Apr 4, 2009 | Calculated Risk

    From The Times: Bankrupt Britain: 340 people go bust every day

    Begbies Traynor, the insolvency and restructuring group, reckons more than 35,000 firms could go under this year – equivalent to more than 95 a day. The figure would be 18% higher than during the previous peak in the 1990s crash. Nick Hood at Begbies said he would not be surprised if the number rose to 40,000 by the end of the year.

    Begbies forecasts that as many as 125,000 people will go bust this year – well above the 107,000 peak in 2006 – equivalent to 342 people a day.
    ...
    In America an average 5,945 bankruptcies were filed each day last month by troubled consumers – the highest level since October 2005.

    The Q1 bankruptcy stats for the U.S. will be very ugly. There was a spike in bankruptcy filings in the U.S. in 2005 prior to the new bankruptcy law taking effect - the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Over 2 million bankruptcies were filed in 2005 - and that is a tough record to beat, but I wouldn't be surprised if 2009 is the 2nd worst year ever in the U.S.

    Selected comments

    mock turtle (member) wrote on Sat, 04/04/2009 - 10:22pm.

    more current (not perfect) numbers re military spending by nation
    from wikipedia

    1 United States........................651,163,000,000 2009[3][4]
    2 People's Republic of China ....70,242,645,000 2009[5]
    3 France ...................................61,571,330,000 2008-2009[6]
    4 United Kingdom .....................61,280,890,000 2008[7]
    5 Russia ...................................50,000,000,000 2009[8][9]
    6 Japan ......................................48,860,000,000 2008[10]
    7 Germany.................................45,930,000,000 2008[11]
    8 Italy......................... ................40,050,000,000 2008[12]
    9 India ......................................32,700,000,000 2009-2010[13]
    10 Saudi Arabia......................... .31,050,000,000 2008[14]
    11 Turkey......................... ..........30,936,000,000 2008[15]
    12 South Korea ...........................28,500,000,000 2008[16]
    13 Australia .................................24,802,000,000 2008[17]
    14 Brazil ......................................23,972,836,012 2009[18]
    15 Canada ...................................19,507,013,000 2008-2009[19]
    16 Spain .......................................18,974,000,000 2008 (est.)[20]
    17 Iraq .........................................17,900,000,000 2008
    18 Israel .......................................13,300,000,000 2009[21]
    19 Netherlands.............................12,000,000,000 2008[22]
    20 Poland .....................................11,791,000,000 2009[23]
    21 Republic of China.....................10,500,000,000 2008
    22 Greece......................... .............7,934,000,000 2007[24]
    23 Pakistan ....................................7,800,000,000 2008
    24 Singapore ..................................7,600,000,000 2009[25]
    25 Colombia ....................................7,480,000,000 2007[26]
    26 Sweden ......................................6,309,137,714 2007[27]
    27 Iran .............................................6,300,000,000 2005[28]
    28 Mexico ........................................6,070,000,000 2006[29][30]
    29 Norway........................................5,725,000,000 2007
    30 North Korea.................................5,500,000,000 2005

    mt

    Rob Dawg (member) wrote on Sat, 04/04/2009 - 10:14pm.

    I know it is past LawyerLiz's bedtime but:
    http://www.reuters.com/article/newsOne/idUSTRE53200O20090403
    U.S. property bust threatens condo "death spiral"
    Thu Apr 2, 2009 8:37pm EDT
    By Jim Loney

    MIAMI (Reuters) - Rust pokes through the peeling paint on the railings, pest control has been curtailed and the palm trees are no longer being fertilized at the 1940s-era Miami Modern condominium building in Miami Beach.

    The condo association has been forced to cut expenses because the owners of 11 of the 28 apartments in the modest two-story building are delinquent, victims of a mammoth U.S. real estate collapse that has hit Florida especially hard.

    With so many cash-strapped owners failing to pay their monthly fees for upkeep, the condo board last year had to raise $40,000 with a special levy to fill a giant hole in the $80,000 annual budget, but only managed to collect $19,000 from the owners who are still able to pay their bills.

    Florida's condominium and homeowners' associations are facing what experts call a trickle-down disaster from the property crisis. Dozens and perhaps hundreds of condo buildings have budget shortfalls as thousands of owners, under water on their mortgages or in foreclosure, stop paying monthly fees.

    "I call it a death spiral," Miami Beach city commissioner Jerry Libbin said. "It's a catastrophe in the making."

    [Apr 4, 2009] Why small companies keep shedding jobs -

    Apr. 1, 2009 | CNNMoney.com

    Employment at small businesses with 500 or fewer employees decreased by 614,000 positions in March, marking one of the sharpest drops yet in 14 consecutive months of declines, according to an employment report released Wednesday by payroll processor ADP (ADP, Fortune 500).

    The magnitude of the losses indicates that the recession is ravaging the small companies that employ an estimated half of America's workers.

    Compared to large firms with more than 500 employees, which shed 128,000 jobs, those with fewer than 50 employees lost 284,000 jobs.

    ... ... ...

    "It's the domino effect," says Pat Veesart, director of the Kansas Small Business Development Center at Garden City Community College. "In a city like Wichita, for example, there are layoffs in the aircraft industry and there's an ancillary effect with the suppliers, but also an ancillary effect with the bars and restaurants who cater to the employees of those firms when they are on lunch breaks."

    [Apr 4, 2009] Summers Earned Millions in D.E. Shaw Salary, Bank Speech Fees By Timothy J. Burger and Kristin Jensen

    April 3 | Bloomberg

    Lawrence Summers, director of President Barack Obama's National Economic Council, took in more than $2.7 million in speaking fees paid by organizations thoe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Jason Todd this week said investors should sell U.S. stocks as earnings keep weakening. Goldman Sachs Group Inc. cautioned against moving into shares of so-called cyclical businesses, which are dependent on economic growth, from "defensive" shares because a sustained market rally may take longer to unfold.

    [Apr 4, 2009] U.S. May Keep Losing Jobs After Unemployment Hit 25-Year High By Bob Willis and Rich Miller

    April 4 | Bloomberg

    The U.S. may suffer further job losses in the coming months after employers cut payrolls by 633,000 in March and the unemployment rate jumped to a 25-year high of 8.5 percent.

    A host of companies -- from manufacturers such as Johnson Controls Inc. and Dana Holding Corp. to service providers like International Business Machines Corp. and even the U.S. Postal Service -- have announced plans to eliminate jobs in the face of depressed demand from their customers.

    "We expect labor-market conditions to remain appalling for many months to come," Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, wrote in a client note following yesterday's report from the Labor Department.

    The risk is that a continued hemorrhaging of jobs triggers another round of spending cuts by consumers, pushing the economy deeper into a recession just as it is showing signs of steadying after plunging in the fourth quarter.

    "We are not out of the woods yet," Federal Reserve Vice Chairman Donald Kohn said in a speech in Wooster, Ohio, yesterday. He added that the central bank and administration of President Barack Obama must remain "flexible and open" to taking further measures to help the economy.

    ... ... ...

    Since the recession began in December 2007, the economy has lost about 5.1 million jobs, the worst in the postwar era, Labor Department figures released yesterday in Washington showed. Some 3.3 million have been cut in the last five months, including 651,000 in February, when the jobless rate was 8.1 percent.

    The job losses have been widespread, though they have been particularly large in manufacturing, construction and temporary-help services. Those three industries have accounted for nearly two-thirds of the jobs eliminated during the recession.

    "In the past, businesses seemed to show a bit of caution in their payroll reductions," said Joel Naroff, president of Naroff Economics in Holland, Pennsylvania, and Bloomberg's best economic forecaster for 2008. "Now, the philosophy seems to be cut massively now and ask questions about whether too much has been done later."

    Protracted Slump

    Companies in such industries as automobiles and home building may be more aggressive in paring payrolls because they don't expect demand to recover anytime soon, said Vincent Reinhart, a former Fed official now at the American Enterprise Institute in Washington.

    Yesterday's report showed factory payrolls fell by 161,000 in March after dropping 169,000 in February. The decrease included a loss of 17,500 jobs in auto manufacturing and parts industries.

    There were signs last week that the worst of the recession may have passed for some areas of the economy, as reports showed improvements in manufacturing and housing, the industries in steepest decline.

    The Institute for Supply Management's factory index climbed to 36.3 in March, a third consecutive increase that brought it closer to the breakeven point of 50. The number of contracts to buy existing homes in February rose 2.1 percent, according to the National Association of Realtors. Also, consumer purchases advanced for a second straight month in February, the Commerce Department said March 27.

    Auto Industry

    Still, the manufacturing slump that began more than a year ago may intensify should General Motors Corp. be forced into bankruptcy, economists said. As many as 1 million additional auto-industry jobs may be lost and unemployment would climb to 11 percent, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

    The auto slump has already rippled through the industry. Johnson Controls, a maker of car interiors and batteries, said last month it will shut 10 factories and cut about 4,000 jobs. Dana, the truck-axle manufacturer that exited bankruptcy in 2008, said it will boost its payroll reduction to 5,800 this year, 800 more than previously announced.

    "We are taking the difficult actions necessary to survive," Dana's Chief Executive Officer John Devine said in a March 16 statement.

    Service industries, which include banks, insurance companies, restaurants and retailers, cut 358,000 workers after a 366,000 decline in February. Financial firms cut payrolls by 43,000, after a 44,000 decrease the prior month. Retail payrolls decreased by 47,800 after a 50,800 drop.

    In addition to cutting jobs, companies also reduced hours for those still on payrolls. The average number of hours worked fell to 33.2 per week, down six minutes from February and the lowest since records began in 1964.

    [Apr 4, 2009] OCC: More Seriously Delinquent Prime Loans than Subprime

    Anonymous says:

    First! It's not surprisng: Fannie's and Freddie's automatic underwriting systems allowed DTIs far higher than even subprime's outrageous DTIs. That is on top of interest only arrangments. In subprime, the borrower was required to pay principal and interest. It comes down to the arrogance of the people wth better credit being better people.

    Anonymous says: Today, 1:29:45 PM

    The CR headline is totally misleading. The article itself says:

    "This decline in credit quality was evident in all loan risk categories, with subprime mortgages showing the highest level of serious delinquencies."

    Anyone that thinks there are a higher percentage of prime loans that are delinquent is smoking crack.

    Anonde mouse says: Today, 1:33:12 PM

    At the end of the year, just under 90 percent of mortgages were performing, compared with 93 percent at the end of September 2008.
    Ouch, that's quite a jump. Wonder what the end of Q1-2009 gonna look like.

    bearly says: Today, 1:32:42 PM

    Long treasuries getting kicked in the teeth today. Almost daring BS Bernanke to step in and defend. What is the line in the sand on

    Treasury Trying to Defend Bank Gaming of Public-Private Partnership

    Sentiments expressed in comments are not encouraging to say the least. What poor 401K investor should do in this situation ?

    naked capitalism

    a said...
    "Oh my God, do they believe the garbage they shovel out?"

    The worst of it is, I think they do.

    killben said...
    "The dishonesty of this crowd is just breathtaking. The Bushies were blatantly high handed, while Team Obama prefers the Big Lie and assumes we are all too dumb to see through it"

    Amen to the dishonesty!!

    Swedish Lex said...
    I wrote the following on NC a few days ago (apologies for quoting myself):

    "Geithner's toxic asset plan, the more I think about it, seems to have been intentionally designed to be opened to gaming by the large zombie banks. Why? Because it keeps them relatively intact with possible up-side at taxpayers' expense. That way, the U.S. will continue to host some of the most powerful financial institutions in the world and will thus be able to use them as another tool to project influence and power globally. The Obama Administration will be, more or less and directly or indirectly, controlling those institutions. Obama (Summers, Geithner, etc.) will thus be commander in chief of the U.S. financial system too.

    This would then be an explanation why a Swedish solution was never seriously considered. The likely outcome of that would have been the dismantling of Citi, BoA, etc.

    Geithner's plan and the Obama Administration's policy proposals make sense if you regard them as the U.S. Government taking in the major financial aircraft carriers for serious repair with the intention to re-commission them soon.

    That the performance of the U.S. economy would have been better applying an alternative solution and that most of the other alternatives would have been more equitable is beside the point.

    It is up to the citizens of the U.S., really, to protest against them banking the cost of maintaining the U.S. financial empire."

    If Obama and Geithner had come to London yesterday for the G 20 with the Citis and BoAs of this world in parallel being sent to the Chapter 11 scrap yard, then the political clout of U.S. would have been significantly reduced.

    I prefer to think that the rationale for the Geithner plan (risky public/public partnerships with the up-side diverted to a few, selected, interest groups) is geopolitical, in which case it can be rationalised. If, on the other hand, it is plain vanilla corruption, things are just getting a lot worse.

    Richard Kline said...
    So Yves, the system _is_ a game. Or at least such has been the state of high finance since onselling and making book on it supplanted lending and underwriting. It has long mattered not whether the deal nets out so long as the numbers look look good until the deal goes down; we simply see the continuation of that kind of here.

    What has struck me most for the past year, since Marcy 08, is the stupendous arrogance of the American governmental executive in its actions. And as you say the scale if not the face of that arrogance has only _increased_ since the New Lot were sworn in. Do they believe what they are telling us? Well in my view that believe that they are telling us what is good for us. Or better what is good for THEM, and that the rest of us don't matter a damn as long as we don't stink while they trundle us down the street in a chair on wheels to the PayDay Loan shop and hold our rigid fingers about a pen to sign over our check forevermore. With the Repubs we knew on the evidence of eight years (and really eighty years) that they had a complete contempt for their country, due process, and anyone anywhere earning less than six figures net per annum; one expected arrogance and self-dealing. With the New Lot, they have the audacity to tell us that they know whats best; they how have never run a lemondade stand for a profit but feel entitled to lie to our faces about their acts and goals. Arrogance of literally incredible scale near matched only by their ineptitude.

    Timmy G has labored mightily and delivered of himself this banksters' bastard monstrosity, but Son of Moloch is an abomination upon the land. ---But sez I, let 'em try, 'cause that hies nearer the day we'll all get Biblical on their anti-collectivist asses.

    Anonymous said...
    Will someone explain to me what is the difference between these folks and a mafia?

    They truly believe they are above the law and their arrogance seems to have doubled or tripled since the crisis began. They use to steal in the cover of darkness now they do it in broad and have the nerve to tell you there is nothing you can do about it.

    Where is the law? How can anyone feel safe?

    Anonymous said...
    The one issue I didn't see addressed here is this:

    Many believe that some large banks are hopelessly insolvent. The banks themselves don't believe that. At most they may believe that they have a temporary problem, for which the government is providing a solution, also temporary. And in some cases, if only the "challenged" assets were properly priced, they would have no need for temporary government assistance. So, under this scenario, the government comes in and shuts them down. The bank holding companies sue (as Wamu, Inc. has done) for billions in damages or seek injunctive relief to undo the receivership - tying up the government for many months in costly litigation. In other words, the assumption seems to be that a receivership will be done by fiat, without vigorous and litigious protest from the banks.

    I see PPIP as a rather elaborate (and expensive) way to get a third party valuation that will be persuasive, if not to the banks, at least to the courts. Call it paying for an appraisal.

    There are other problems with PPIP - possibility of gaming it, being one. And FASB's action may have upset the government's strategy. I'm not suggesting that it will work. I just haven't seen the adversarial aspects discussed.

    Juan said...
    anon @4:01 AM,

    think of it as state capture. while not generally admitted, this is a structural feature, i.e. the legal-political arrangement called 'the state' is always captured, its simply a matter of which class or class segment is in control.

    what we're seeing today is a moreless logical outcome of, on one hand, the decline of industry, and on the other, the turn to finance and increasingly speculative activities that began, this time, during the 1970s.

    not to draw a sharp line between the two hands since they can fuse into something once called 'finance capital' in which - for a period - the dominant partner is the financial...apparently just what mr. change et al believe, are told, they must perpetuate and know no better.

    [Apr 4, 2009] Moody's Warns of Worst Corporate Default Rate since WWII

    Apr 01, 2009 | CalculatedRisk

    From Reuters: Moody's downgraded $1.76 trln U.S. corp debt in Q1

    ... Moody's Investors Service downgrading an estimated $1.76 trillion of debt, a record high ...

    The downgrades included a record number to the lowest rating categories, signaling the approach of the worst defaults since at least World War Two ...

    "The most prominent new driving force behind credit rating reductions would be deterioration of commercial real estate," [Moody's chief economist John Lonski] said. ...

    Moody's has forecast that the U.S. default rate will peak around 14.5 percent in November.
    emphasis added

    [Apr 3, 2009] Inflation and the Fed

    Economist's View

    Simon Johnson and James Kwak argue that Ben Bernanke is "radically redefining his institution," and that his "willingness to pump money into the economy risks unleashing the most serious bout of U.S. inflation since the early 1980s, in a nation already battered by rising unemployment and negative growth."

    ... ... ...

    In short, Bernanke is making the biggest bet placed by a U.S. central banker in decades, wagering that he can pull the economy out of a deep crisis by creating money without unleashing high and long-lasting inflation.

    mmckinl:

    The way in which Bernanke and Geithner are dealing with the crisis there will be no inflation but the fate of Japan ... years of stagnation, lower stock prices and lower real estate prices.

    Bernanke and Geithner are trying desperately to salvage bad debt to underwrite stock and bond holders. Under their scenario of Zombie Finance all that printed money will never get to circulate through the system but will be eaten up by deteriorating assets as it passes through the Zombie Finance sector. Obama's stimulus will never get recirculated and the economic spurt it was designed to create will die in the cradle.

    The question then becomes; Will there be a dollar crisis? As the economy deteriorates the underlying value of the dollar deteriorates as well. But isn't this happening to all countries right now? Isn't just about everyone printing money? It's all relative.

    If and until massive amounts of debt are rationalized through writeoffs it is deflation ahead. Both stock and bond holders need to take hefty haircuts at Zombie Banks. Until then, that giant sucking sound of tens of trillions in bad derivatives will drown any animal spirits in it's own afterbirth.

    Dave:

    Finally an economist who makes some sense. When all the private sector debt has been moved onto the public balance sheet and cannot be serviced by the issuance of worthless dollars, the only way will be UP baby.

    Then we will see a sudden and catastrophic shift in the economic "steady-state" (ha - though the entirity of modern economic theory seems to be predicated on ideas of steady state equilibrium and DSGE etc, there is in fact NO such thing [1])

    Engineers (yes I admit it) understand the nature of linear and (more importantly) non-linear dynamical systems, and the tendency for such systems to reach bifurcations or sudden state transitions that conventional linear analyses would not suggest. This is classic chaos theory in action. A Lorentz attractor would be such an example of a sudden state transition benhaviour (http://en.wikipedia.org/wiki/Lorenz_attractor)

    [1] The fundamentally flawed equlibrium hypothesis would have to go down alongside the "gaussian" distribution argument for stock price evolutions as one of the single most flawed simplifying assumptions in any field of scientific endeavour. I am constantly amused to meet economists who profess an opinion about the trajectory of complex dynamical systems like national (or international) economies, yet who have not taken more than a cursory undergraduate-level course in basic integration / differentiation - much less ordinary differential equations (ODE's), much less partial differential equations (PDE's) and forget altogether the idea they might even be aware of non-linear techniques (H-inf, internal models, state-space methods or lyapunov stability analyses).

    James Kroeger:

    Bernanke's strategy is risky, and only time will determine whether he is being brave in averting a larger crisis, or reckless in unleashing inflation that could increase quickly and uncontrollably.Why is it, Mark, that you are not ridiculing this notion unmercifully? Is it possible that even you, a respected macroeconomist, are not aware of just how easy it is for the Fed to take money out of the economy as it is for it to put new money in? Nah, that can't be it.

    Let us review just how easy it is for the Central Bank to control 'uncontrollable' inflation. Let's see, how did Volker do it? Oh yeah, he increased the reserve requirement. Worked pretty well, didn't it?

    It can also throttle inflation by simply selling the [interest-bearing] paper it currently has on its balance sheet, thereby removing money from the economy. Selling paper in the secondary markets (or to foreign banks) removes loanable funds from bank balance sheets, driving up interest rates.

    If it ever runs out of Treasuries [or AIG 'assets'] at the same time that inflation is beginning to accelerate, it could sell 'sterilization bonds' like the PBOC does. This assumes that Congress has given the Fed the authority to do so. If it does not have the authority, it shouldn't be at all difficult to persuade Congress to give it such authority.

    Please do the right thing, Mark, and give this foolish notion that the Fed might not be able to control inflation the ridicule it deserves...

    James Kroeger:

    I am constantly amused to meet economists who...have not taken more than a cursory undergraduate-level course in basic integration / differentiation - much less ordinary differential equations (ODE's), much less partial differential equations (PDE's) and forget altogether the idea they might even be aware of non-linear techniques (H-inf, internal models, state-space methods or lyapunov stability analyses) You're joking, right? There may be a few such economists around, but not many.

    bakho:

    The buffer against runaway wage inflation is the globalization of labor. A large percentage of the world's population is unemployed or underemployed in low productivity jobs.

    Inflation based on commodity price inflation is much more of a threat and requires a technological response. For example, inflation in the late 1970s caused by oil shock was tamped down for almost 2 decades by Carter energy policy that reduced US demand for oil by over 20 %. It was only after oil demand returned to 1978 levels (around 2000) that oil price inflation returned.

    Many economists want to overwork less effective monetary policy because it has been removed from the need for political consensus and can be imposed by economic technocrats.

    Other more effective measures such as regulatory, fiscal and efficiency policies may be more effective, but their implementation is less assured. This has a big effect on the conversation and reinforces the wrong headed notion that monetary policy should always be the tool of first choice.

    Beezer

    I'm going to make a wild assumption. Everyone is right. Yes, inflation expectations can influence individual decisions that will reinforce inflation. Yes the Fed can suck money out of the system and raise capital requirements, essentially eliminating monetary inflation. Yes, commodity resource shortages can create supply/demand inflation which, in turn, drops demand dramatically in consequence,(particularly if the Fed is sucking money out of the body economic's circulatory system at the same time). Yes globally the world's economy is in a steady state of underutilization, particularly regarding labor, and Yes this dampens inflation as well. And Yes large populations in developed countries are retiring compared to those entering the workforce, and this will dampen consumption demand and, therefore, inflation. And finally (at least in this truncated list) Yes it appears economics may have a math problem or two, or three.
    If I had three hands instead of two, I'd still be left throwing up all three in surrender.
    The point being, I guess, is that there's no lack of understanding and there's no lack of tools. The key concept may be "utility."

    Bernanke and Geithner, in an historic coordination, are purposefully stepping in where private banking has left the field. Utility. Both have called for regulatory reform to have yet another tool to unwind TFTF institutions, resulting in smaller, less risky systems. More utility.

    The gasping world is staggering under a lack of dollars, not a surfeit. Trillions of the world's reserve currency, some assert equal to the world's annual output, has evaporated. The U.S. is a net lender now, not a borrower.

    The one thing I sense is missing is an appreciation that valuing the dollar goes far beyond the U.S. It is, in fact, the world's currency and it's value depends upon the world's production utilization. Right now that utilization is unusually suppressed. That does not argue for inflation.

    bakho

    They are correct that the POTENTIAL for inflation is present IF the money supply is NOT correctly tightened once the velocity of money increases.

    A little inflation for a short period would not be terrible because it would help reset US consumer and mortgage debt. It doesn't hurt to look ahead but we have a pretty good understanding of how to attack inflation. How to attack our current downturn is much murkier. Therefore, it makes sense to replace the current problem that is more difficult to attack with one that is easier to solve.

    As for energy policy, Carter put us on the path to less dependence on foreign oil. It was a comprehensive program of sticks and carrots to reduce energy use. Reagan halted all progress in energy conservation and led the way to $4 gas and record oil profits. This is why BigOil (and the media they buy with their advertising) loves Reagan and reviles Carter.

    robertdfeinman:

    I've been pointing to the parallels between now and the Carter/Nixon period for several years now, to no avail.

    The key similarities are that we waged (and lost) wars that didn't need to be undertaken without funding them. We also ran up large deficits and refused to raise taxes. There were also oil shocks (the current one is in temporary remission).

    Now inflation is seen as a good thing for borrowers and a bad thing for lenders. Right now the US government and the vast number of its citizens are borrowers. Having to pay back with inflated dollars eases their burden. So they favor inflation. In the prior period labor had enough strength so that wages tended to keep pace with inflation and most workers only fell slightly behind. This is probably not true this time.

    Those who oppose inflation are lenders, primarily banks and the wealthy. When their interests can get the upper hand you get a Paul Volcker who triggers massive unemployment to protect the wealthy. With the banking sector being in disarray now it is not clear if they can get their men installed in key positions. This is why there is so much concern over Geitner, does he work for the bankers or not?

    Even some economists are pushing for "mild" inflation. They seem to think deflation is worse, but inflation once it starts is hard to control.

    If I had to predict I would say the temptation to pay down the national debt with watered money will prove more irresistible to policy makers than the alternative. Apparently the budget office is projecting an additional $10-15 trillion in debt over the next decade. Paying it off with billion dollar notes as happened in Germany or Zimbabwe will look good to some.

    I don't see the arguments about expectations being very useful. The most that happens if one expects future inflation is that one shifts to shorter term financing so as not to be stuck with fixed return bonds of long maturity. This tendency away from long-term debt has already taken place over the past decade, most firms won't have to change their behavior much if they get more worried. Just look at the rise of financing by commercial paper and the demise of 30 year Treasuries as typical indicators.

    Everyone wants to stay close to liquid. A sign that inflation is never far from people's thoughts.

    Lilguy:

    I'm kinda stuck between the Johnson/Kwak Weimar Republic view of the US dollar and the Japanese "lost decade" experience. My gut (and I don't know what data or analysis would be better) tells me that all the stimulus now in train will be inadequate to actually turn the economy around--especially the Geithner Plan money for Wall Street--so an experience like the 1990s Japanese economy seems more likely for the next several years. Moreover, if the Administration's answer to the failure of its fiscal policy is more of the same, we'll still end up in a Japanese-still economic funk.

    There is substantial logic leading to either conclusion, but I'd really like to see a little more evidence one way or the other.

    [Apr, 2, 2009] The G20 has lost the plot

    "the bitter phase of mass unemployment is yet to come."

    by Ambrose Evans-Pritchard

    Telegraph

    Global demand is contracting. The deficit states (US, Spain, UK, South Africa, Australia, Greece, Eastern Europe) cannot - and should not - carry the main responsibility for keeping it buoyant. That would merely perpetuate the vast imbalances that lie behind much of this crisis.

    So if the surplus states refuse to step into the breach, global demand will collapse. The mercantilist export powers are already being hit hardest by this downturn. Japan's exports fell 49pc in January: Germany's GDP has been contracting at 8pc or so (annualized) over the last six months, the worst performance of any major economy in the Atlantic region - although the bitter phase of mass unemployment is yet to come.

    Selected comments

    joseph April 02, 2009

    The French and Germans have an educated society to deal with, and don't tolerate their privileged mouthpieces in the media, talking a load of bollocks. the case is the opposite in England, our media excels in irrelevant garbage which sound intelligent ,if your thick, or there is a vacuum between the ears, or giving us their privileged masters, their agenda.

    Jusjacqueline, April 02, 2009

    China/Germany are getting it in the neck, because Germany decides to go the high-tech route whilst China goes the slave route-building up huge reserves. But at no point do you AEP decide that the cronyism of London and Wall Street are not to blame.JP Morgan, GoldmanSachs and many more rescued whilst Lehmans and other were sacrificed, not crony enough. We don't have free markets if we did these banks would have failed and bankers would not have ripped us off over the last ten years to the tune of $10Trillions.

    Ian April 02, 2009

    In broad terms the G20 never knew what the plot was; that is evident from the issues up for discussion. There are more "players" with more than a passing interest in the world's trade and financial systems who have been "ripped off" for years by the dollar system and its institutions, aided by US banks selling fraudulent, worthless assets to the rest of the world. The US$ as the world's reserve currency has to go; the sooner the better. Banks have to be properly regulated, and not by themselves or compliant regulators. Those countries at the centre of these financial shenanagins (the US, the UK and Switzerland) should be independently audited to establish their exact financial state. A solution also needs to be found for toxic assets (too late in my view). Then, and only then, might it be possible to rebuild from a sound base. This article shows a lack of reality; a reality which will soon manifest itself. Given the poor quality of the issues for discussion revealed in the press, I strongly suspect that there is another agenda here, but one which is not for public consumption.

    NickinFrance

    Sorry but trying to claim that free markets were all just zippedee-do and would have been fine if wasn't for Gordon Brown and co. just won't do. Nobody forced the banks to buy packages of dodgy mortgages when they didn't have the faintest clue what was in them. Gordon Brown did not, to the best of my recollection, pass any laws obliging this. Nor did he pass a law obliging every financial institution in the country to make offers of unsecured credit daily to every citizen in the land, irrespective of thier ability to pay. (Nor by the way was this a "guaranteed" result of low interest rates - it didn't happen in France or Germany). Nor did the goverments of the day prescribe 6xsalary 120% mortgages, or business models predicated on exclusively borrowing money from volatile wholesale markets, to lend out long. Or insist or massive lending to emerging economies by thier banks. Or... well I could go on, but you get the idea. Now of course governments had some responsibility in not stopping this getting out of control the way it did. But to somehow claim that the free market would have been hunky-dory if it weren't for the government just flies in the face of the evidence and common sense. This is like saying that if I go and rob a bank, it isn't my fault if the policing was lax - the lax policing "made me do it". Try that one in court. April 02, 2009 05:27 PM GMT

    Ohanraohanrahan

    It seems to me that the world wants to return to the era from which we've just come. Essentially, leaders are saying consumerism must be reinvigorated. On order to achieve this, credit must be made available. In the meantime, all the failed credit is bring underwritten by the banks. Consumers are tightening their belts. A case in point is the car industry. What is the point on saving it? They must start again and rethink their build quotas.

    Kaitain

    Oh, bollocks, Ambrose. The Anglo-Saxon economies HAVE been the main problem, and everybody knows it. There, the triumph has been of buccaneering speculators working the system to siphon off wealth from the wealth-generators: fraudsters and thieves whose crimes are never obvious in a single step, and who rely upon income streams from taxpayers and/or the spectre of an inflationary bailout to make their schemes work. The French and Germans have every right to be angry and to want to curtail Anglo-American klepto-capitalism.

    [Apr 3, 2009] Guest Post- Pensions Face Severe, Synchronized Downturn

    naked capitalism

    OECD chief economist Klaus Schmidt-Hebbel said jobless numbers in the Group of Seven rich nations would nearly double to almost 36 million and would rise by 25 million across the OECD as a whole by late 2010.

    "The impact of the recession on societies will be very substantial," he said, noting that unemployment rates would reach double digit levels in most countries for the first time since the early 1990s.

    DOWNSIDE RISKS

    As leaders of the G20 group of rich and emerging countries begin to arrive in London for a summit to address the crisis, the report said "risks remain firmly tilted to the downside."

    It said the largest danger was that the weakening economy might further undermine the health of financial institutions, forcing them to curtail lending beyond what is anticipated.

    [Apr 3, 2009] Japanese Expert Criticizes US Wishful Thinking on Economic Crisis

    naked capitalism
    fresno dan said...
    I have said it many times - US = Japan.
    The fact remains that we are in fact poorer. I am maybe 200 to 300K lighter - I accept that but it means my level of expenditure simply cannot be as high as it would have been.
    I saw a graph of a micro increase in car sales at Calculated Risk. I think the years of 17 million a year are over for a long, long time. Not to mention how much of GDP was due to MEW (mortgage equity withdrawal). Its gone, and it ain't coming back.
    Anonymous said...
    The old economic rules from decades ago are being re-instated and researchers and politicians are struggling to get their heads round the fact that many of the assumptions of their working and political life have been wrong.
    These are people who want to leave a legacy of knowledge or achievement and are resistant to starting from scratch with new policies. Not only are they resistant to re-modelling their views but they are too busy papering over the cracks and covering up the fact that they were responsible.
    Take this report from an ex regulator that Washington had the power to stop this. Misdirection and half truths seem to be the norm and blind faith in current policies seem little more than wishful thinking. As for the non conforming assets then if the treasury prints enough money eventually they can pay somebody to take the assets of the banks balance sheets.
    Nobody is really shouting though that non recourse loans and the concept that every American deserves their own home might have been part of the problem. Nobody says that securitisation hampers the disposal of non performing assets and if they had just charged a little bit more and organised things differently then the problems would have been easier to deal with.
    No politician turns round to their electorate and says you need to change and these are the consequences, they prefer to secretly tax them more. Regardless of whether the banks recover and pessimism is overcome there have been fundamental shifts in attitude that no amount of stimulus can change. Banks will have changed their risk models and that will not be undone, consumers will know that assets can fall in price and will not withdraw equity as they used to. I am also not happy with the suggestion that pessimism is somehow irrational, I look round and I see both optimism and pessimism among by friends with unemployment being a big driver. I see little evidence that any of the stimulus packages will do more than soften the blow of unemployment and hence the decline in optimism. The guy on the street is too busy living to be irrational and claims otherwise could well be proved wrong.
    DownSouth said...
    How does the Japanese crisis or our crisis today, and the official response, differ from this?

    Hoover had tried to keep hands off the economic machinery of the country, to permit a supposedly flexible system to make its own adjustments of supply and demand. At two points he had intervened...but otherwise he had mainly stood aside to let prices and profits and wages follow their natural course. But no natural adjustment could be reached unless the burdens of debt could also be naturally reduced through through bankruptcies. And to Americans, as in other parts of the world, the economic systems had now become so complex and interdependent that the possible consequences of widespread bankruptcy to the banks, the insurance companies, the great holding-company systems, and the multitudes of people dependent upon them--had become too appalling to contemplate. The theoretically necessary adjustment became a practically unbearable adjustment. Therefore Hoover was driven to the point of intervening to protect the debt structure--first by easing temporarily the pressure of international debts without cancelling them, and second by buttressing the banks and big corporations with Federal funds.

    Thus a theoretically flexible economic structure became rigid at a vital point. The debt burden remained almost undiminished. Bowing under the weight of debt--and other rigid costs--business thereupon slowed still further. As it slowed, it discharged workers or put them on reduced hours therby reducing purchasing power and intensifying the crisis.

    --Frederick Lewis Allen, Since Yesterday

    [Apr 3, 2009] Geithner's dirty little secret By F William Engdahl

    This is Corporatism in best Mussolini style, plain and simple...
    Apr 3, 2009 | Asia Times

    US Treasury Secretary Tim Geithner, in unveiling his long-awaited plan to put the US banking system back in order, has refused to tell the dirty little secret of the present financial crisis. By refusing to do so, he is trying to save de facto bankrupt US banks that threaten to bring the entire global system down in a new more devastating phase of wealth destruction.

    The Geithner proposal, his so-called Public-Private Partnership Investment Program, or PPPIP, is not designed to restore a healthy lending system that would funnel credit to business and consumers. Rather it is yet another intricate scheme to pour even more hundreds of billions of dollars directly to the leading banks and Wall Street firms responsible for the current mess in world credit markets, without demanding they change their business model.

    Yet, one might say, won't this eventually help the problem by getting the banks back to health?

    Not the way the Barack Obama administration is proceeding. In defending his plan on US TV recently, Geithner, a protege of Henry Kissinger and before his present posting president of the New York Federal Reserve Bank, argued that his intent was "not to sustain weak banks at the expense of strong". Yet this is precisely what the PPPIP does. The weak banks are the five largest banks in the system.

    The "dirty little secret" that Geithner is going to great degrees to obscure from the public is very simple. There are only at most perhaps five US banks that are the source of the toxic poison causing such dislocation in the world financial system. What Geithner is desperately trying to protect is that reality. The heart of the present problem, and the reason ordinary loan losses are not the problem as in prior bank crises, is a variety of exotic financial derivatives, most especially credit default swaps.

    In the Bill Clinton administration of 2000, the Treasury secretary was Larry Summers, who had just been promoted from number two under former Goldman Sachs banker Robert Rubin to be number one when Rubin left Washington to take up the post of Citigroup vice chairman. As I describe in detail in my new book, Power of Money: The Rise and Fall of the American Century, to be released this summer, Summers convinced president Clinton to sign several Republican bills into law that opened the floodgates for banks to abuse their powers. The fact that the Wall Street big banks spent some US$5 billion in lobbying for these changes after 1998 was likely not lost on Clinton.

    One significant law was the repeal of the 1933 Depression-era Glass-Steagall Act, which prohibited mergers of commercial banks, insurance companies and brokerage firms such as Merrill Lynch or Goldman Sachs. A second law backed by Treasury secretary Summers in 2000 was an obscure but deadly important Commodity Futures Modernization Act of 2000. That law prevented the responsible US government regulatory agency, Commodity Futures Trading Corporation (CFTC), from having any oversight over the trading of financial derivatives. The new CFMA law stipulated that so-called over-the-counter (OTC) derivatives like credit default swaps, such as those involved in the AIG insurance disaster, (and which investor Warren Buffett once called "weapons of mass financial destruction"), be free from government regulation.

    At the time Summers was busy opening the floodgates of financial abuse for the Wall Street Money Trust, his assistant was none other than Tim Geithner, the man who today is US Treasury Secretary, while Geithner's old boss, the self-same Summers, is President Obama's chief economic adviser as head of the White House Economic Council. To have Geithner and Summers responsible for cleaning up the financial mess is tantamount to putting the proverbial fox in to guard the henhouse.

    What Geithner does not want the public to understand, his "dirty little secret", is that the repeal of Glass-Steagall and the passage of the Commodity Futures Modernization Act in 2000 allowed the creation of a tiny handful of banks that would virtually monopolize key parts of the global "off-balance sheet" or OTC derivatives issuance.

    Today, five US banks, according to data in the just-released Federal Office of Comptroller of the Currency's Quarterly Report on Bank Trading and Derivatives Activity, hold 96% of all US bank derivatives positions in terms of nominal values, and an eye-popping 81% of the total net credit risk exposure in event of default.

    The top three are, in declining order of importance: JPMorgan Chase, which holds a staggering $88 trillion in derivatives; Bank of America with $38 trillion, and Citibank with $32 trillion. Number four in the derivatives sweepstakes is Goldman Sachs, with a mere $30 trillion in derivatives; number five, the merged Wells Fargo-Wachovia Bank, drops dramatically in size to $5 trillion. Number six, Britain's HSBC Bank USA, has $3.7 trillion.

    After that the size of US bank exposure to these explosive off-balance-sheet unregulated derivative obligations falls off dramatically. Continuing to pour taxpayer money into these five banks without changing their operating system, is tantamount to treating an alcoholic with unlimited free booze.

    The government bailout of AIG, at more than $180 billion so far, has primarily gone to pay off AIG's credit default swap obligations to counterparty gamblers Goldman Sachs, Citibank, JP Morgan Chase and Bank of America, the banks who believe they are "too big to fail". In effect, these institutions today believe they are so large that they can dictate the policy of the federal government. Some have called it a bankers' coup d'etat. It definitely is not healthy.

    Geithner and Wall Street are desperately trying to hide this dirty little secret because it would focus voter attention on real solutions. The federal government has long had laws in place to deal with insolvent banks. The Federal Deposit Insurance Corporation (FDIC) places the bank into receivership, its assets and liabilities are sorted out by independent audit. The irresponsible management is purged, stockholders lose and the purged bank is eventually split into smaller units and when healthy, sold to the public. The power of the five mega banks to blackmail the entire nation would thereby be cut down to size. Ooohh. Uh Huh?

    This is what Wall Street and Geithner are frantically trying to prevent. The problem is concentrated in these five large banks. The financial cancer must be isolated and contained by a federal agency in order for the host, the real economy, to return to healthy function.

    This is what must be put into bankruptcy receivership, or nationalization. Every hour the Obama administration delays that, and refuses to demand a full independent government audit of the true solvency or insolvency of these five or so banks, costs to the US and to the world economy will inevitably snowball as derivatives losses explode. That is pre-programmed, as a worsening economic recession mean corporate bankruptcies are rising, home mortgage defaults are exploding, unemployment is shooting up.

    This is a situation that is deliberately being allowed to run out of (responsible government) control by Treasury Secretary Geithner, Summers and ultimately the president, whether or not he has taken the time to grasp what is at stake.

    Once the five problem banks have been put into isolation by the FDIC and the Treasury, the administration must introduce legislation to immediately repeal the Larry Summers bank deregulation including restoration of Glass-Steagall and the repeal of the Commodity Futures Modernization Act of 2000 that allowed the present criminal abuse of the banking trust.

    Then serious financial reform can begin to be discussed, starting with steps to "federalize" the Federal Reserve and take the power of money out of the hands of private bankers such as JP Morgan Chase, Citibank or Goldman Sachs.

    F William Engdahl is author of A Century of War: Anglo-American Oil Politics and the New World Order; and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca). His newest book, Full Spectrum Dominance: Totalitarian Democracy in the New World Order (Third Millennium Press) is due out at end of April. He may be reached through his website, www.engdahl.oilgeopolitics.net.

    (Copyright 2009 F William Engdahl).

    [Apr 1, 2009] Speech 'Rebuilding the Economy by Rebuilding America' By Felix Rohatyn

    I am a capitalist but I do worry that capitalists may, through short-sightedness, greed, and/or vanity, bring our system into jeopardy. We need to move past the simplistic notion that we all will prosper if government would only "get out of the way."
    April 1, 2009 | FT.com

    Felix Rohatyn, president of FGR Associates and former US ambassador to France, to the Economic Club of Chicago on March 24, 2009.

    It is good to be back at the Economic Club of Chicago and to see so many friends. It is always a privilege to speak here and I am grateful to be your guest.

    We meet today at a time of grave concern about the global economy and our position in it. As Roosevelt did almost eighty years ago, we are searching for a strategy for reviving America and allowing us to lead. I believe that a central component of that strategy must be significant new investment in our public infrastructure.

    I have argued for greater attention to infrastructure for many years. President Obama's stimulus program now includes infrastructure, and his budget for next year proposes a federal infrastructure bank to fund projects of regional and national significance – an idea that holds great promise for smarter, more effective federal spending.

    I hope that these early initiatives, as important as they are in themselves, will lead to the massive level of infrastructure investment that we need in order to secure our future quality of life, increase economic productivity and create millions of jobs.

    As of now, we must end the sterile debate over "big" or "small" government that has stopped us from making the investments we need to prosper. For almost three decades, we have been seized by a caricature of government as fundamentally inept and wrong-headed. But as we have seen in recent events, this makes for a better speech than a rule for governing. Governor Mario Cuomo once said to me: "We should have all the government that we need but only the government that we need." He was right.

    I am a capitalist but I do worry that capitalists may, through short-sightedness, greed, and/or vanity, bring our system into jeopardy. We need to move past the simplistic notion that we all will prosper if government would only "get out of the way."

    My experience in both government and business has taught me that sometimes, particularly in times such as these, government clears the way. Throughout American history, government investment has served as a platform for economic growth and a more affluent and inclusive society. From the Louisiana Purchase and the Erie Canal, through the creation of the Land Grant colleges, to the Interstate Highways and the G. I. Bill, government investment was pivotal.

    These important episodes offer us important lessons. One is that none of them was born of consensus. In retrospect, we regard the Louisiana Purchase and the Erie Canal as "no-brainers." But in their day, many people thought those projects were wasteful budget-busters –they could not see how valuable these investments would be. And I worry that today our budget rules don't distinguish adequately between investment and consumption, leaving us with too little of the former, and too much of the latter.

    Moreover, the opposition to these investments was often self-interested and privileged. The elite private universities saw no need for the Land Grant Colleges. Private utilities were appalled by the idea of TVA. And there were simply political elites who feared that the sweeping change investments bring would undermine their own power.

    A third lesson of these episodes is that few of them ever work out perfectly. The railroad barons rode the Transcontinental Railroad to great and undeserved wealth. Speculators found room to maneuver within the Homestead Act. There were often great abuses of good programs. But the fact that these programs weren't perfect doesn't mean they weren't worthwhile. The prospect of problems should focus us, but not immobilise us.

    I mention these events because I hope that President Obama's recent stimulus will be the beginning of a rebalancing of investment and consumption in our economy, and a long-term reappraisal of what our government does and why.

    In fact, infrastructure is only one of a number of pressing, national investment needs.

    Too many children go to school in dilapidated facilities. Too many suffer from illnesses because we underinvest in public health. We must make the transition to a domestically-based, carbon-free economy. We need to complete a broadband, Internet network. These are the investments that will define our future, as surely as the Land Grant Colleges or the Panama Canal did in their day.

    The stimulus package passed by the Congress was not perfect. But I am dismayed when I hear it derided as wasteful public spending, or that infrastructure spending is unwarranted because some of it would take a year to get underway.

    There is clearly a need for stimulus – we need to create employment. But we need to balance the short- and long-terms more artfully. We may need another stimulus in very short order.

    This is another lesson reinforced by the current crisis – the recognition that we need to invest federal dollars consistently and rationally.

    Again it's not just infrastructure. We may soon invest in salvaging the auto industry; I think we should. But that investment will be wasted if we do not implement an energy tax program that will make the investments in new automobile technology worthwhile.

    Our global competitors are investing in their own futures. If China's investments in education match its massive investments in infrastructure, China will become even more competitive. The Chinese already have plans to construct 300,000 km of rural roads and nearly 100 new airports. In fact, a recent article in the New York Times noted that China is using the need for domestic fiscal stimulus as a platform for making new, public investments that will make them a better competitor.

    For many years, I have looked for a different approach to the way we finance infrastructure. Our current programs are good at spending money, but not at getting something in return. They subsidise construction but spend too little on maintenance. They skirt the issue of what users are obliged to pay. And they do not make different types of investments compete for scarce taxpayer dollars.

    Americans are willing to pay for infrastructure if they get value for their money. Recent polling results show that 94 perceive purposes – such as the construction of new facilities, as opposed to the refinancing of old ones.

    When we add it all up, these new realities require a new system for appraising, selecting, and funding our public works.

    Two years ago, a bipartisan Commission chaired by Senator Warren Rudman and myself unanimously recommended creating a National Infrastructure Bank. All the infrastructure funding programs would be folded into the Bank, and any major federal investment in an individual project would have to be approved by the Bank's evaluators.

    The Bank would be able to negotiate with the individual state or local sponsors of a project. Alternatively, it could help groups of states come together for projects with national implications, such as the upgrading of the national rail freight nexus in Chicago or high-speed inter-city rail that saves energy and frees up airspace while addressing security concerns, or many others.

    It would also create an avenue for private investors to put risk capital into new projects and protect their involvement through the Bank's own participation. In short, it would treat Infrastructure like an investment, and not just a jobs program.

    The Bank would be capitalised by giving it the amounts that now go into the existing programs, about $60-70bn per annum. But the Bank would be free to support projects in any number of ways, as would a private sector bank in a competitive environment.

    The American Society of Civil Engineers estimates it will take $2,200bn dollars to bring our infrastructure to an acceptable level within five years. This is a staggering sum, and it speaks to the negligence of which we have been guilty. The $120bn allocated in the stimulus is only a small part of a solution. However, the Bank could make significant strides towards filling these needs by issuing its own long term bonds and, with conservative leverage, could raise several hundred billion dollars initially, and become self-financing over time. Thus, the Bank could become a strong partner with domestic and foreign sources of capital to finance our infrastructure investments. The goal of $500bn of new investment over the next five years would be readily achievable if we refocused federal programs and added outside sources.

    This would require a sweeping reorganisation of the way we invest in our country, and at this time may seem like a far-fetched proposal. But the problems we face are so important and our tools so outdated that only a full reorganisation will do.

    I know that consideration of infrastructure financing must be weighed in the context and climate of the economic issues we face, here at home and all over the world: energy security; the prospect of global climate change; the need to reform our health care system; security against terror and the proliferation of weapons of mass destruction, to name but a few.

    It is a disconcerting list, and fixing these problems will not be easy. But we are now talking about these problems realistically. I do not know if President Obama will succeed in his arduous agenda. But at least we now have an agenda, and that is the first step.

    Within this framework, one of the most important issues is the necessity for the western democracies to forge even stronger ties aimed at global growth and stability. The difficulties in the organisation of the recent G20 Summit have not been encouraging on that score.

    The last years of the 20th Century were years of astounding wealth creation. The markets demanded cheap money and the Fed gave it to them. Reckless speculation and excessive leverage were aided and abetted by regulators blind to what was happening. With the repeal of the Glass-Steagall Act in 1999, our leading financial firms were given the license to become too big to fail and they, in turn, became too big to be managed. New financial creations, hedge funds and private equity, invented by bankers and traders all over the world, were searching for higher and higher returns. The markets then turned into casinos and the Bernie Madoffs and Allen Stanfords became heroes to those they would destroy. Close behind came the global financial crisis. And then the music stopped.

    It is futile to search for one responsible party; everyone who matters was guilty. The question now before us is how we might meet the challenge of this remarkable moment and rebuild our country.

    We have so far not found a secure formula to reverse these developments. The United States has taken the lead in urging strong stimulus by the developed countries, which is beginning to create a split between the positions of the US and the UK on the one hand, and the rest of the world on the other.

    I believe the Europeans are wrong about stimulus, but they have ample reason to distrust American views. During the last two years an increasing level of controversy has surrounded our capital markets and, in particular, executive compensation, which gives rise to a general critique of American capitalism in today's world.

    During my four years as United States Ambassador to France, I spent considerable time and effort singing the praises of American market capitalism. It was met generally by European skepticism of its dangers and of its harshness. America's capitalism over the decades has had enormous successes, but we must now show that our system is fair and that we are prepared to manage it pragmatically if we are to continue being the leaders of the world.

    When the Prime Minister of China, our biggest creditor, publicly raises questions as to the security of Chinese assets in the US, it is time to give some serious thought to this issue. The recent controversies involving some of our biggest investment firms, banks and insurance companies require that the United States react with high standards – that we stand for the creation of wealth within a framework of fairness.

    I know from my own experience that crises can lead to the kinds of reforms that build confidence and stability. My own involvement with a major financial crisis was the crisis of New York City in 1975. That crisis had been brought about by excessive lending by our banks and reckless spending by the City.

    We succeeded in rescuing the City in the face of opposition created by President Ford's Administration. It was not until President Giscard d'Estaing of France and Chancellor Helmut Schmidt of Germany warned President Ford of the danger of a bankruptcy of New York, that we were able to negotiate a modest federal loan to the City. But this averted the catastrophe of a bankruptcy that would have seriously wounded both the City as well as the State of New York. It was an early symptom of global financial integration.

    We succeeded in rescuing the City and used our momentum to put New York's fiscal house in order, thanks in large part to my friend and leader, Governor Hugh Carey. But the crisis New York City faced was less dangerous than today's global crisis. In 1975, the banks were the rescuers – today they are the rescued. Many have been as short-sighted as New York itself was more than 30 years ago.

    We're now learning the cost of inadequate regulation and oversight . We will inherit partial ownership of a number of financial institutions and, if we do not stabilise the economy, we may have to nationalise several big banks temporarily – a circumstance fraught with danger. This was recently predicted by former Fed Chairman Alan Greenspan, a fervent supporter of deregulation. It may be that our government will turn out to be the only credible and large enough entity to provide financial shelter to some of our large financial institutions.

    Market capitalism is a sophisticated system that requires adherence to sophisticated rules; we are now witnessing what happens when these rules are ignored. The financial system must be regulated with an eye to system risk. Institutions must maintain adequate capital and submit to greater transparency and strict boundaries on the kinds of businesses they enter.

    We cannot count on the conservativism or common sense of the system or its managers for its long-term stability. America must be a trustworthy partner in economic policy, and must keep its own house in order. These are the rules. After we come out of this crisis, we must remember how it happened, and make sure they are never broken again. This may be easier said than done, but the world depends on our doing it.

    [Apr 1, 2009] Closer Than I Thought?

    Financial Armageddon

    I am often lumped together with the "deflationistas" by those who have not (taken the time to) read my books (e.g., Financial Armageddon and When Giants Fall) or my posts on the subject of the two 'flations at www.financialarmageddon.com and www.economicroadmap.com.

    But the truth is that I have always expected the Great Unraveling to be a multi-phase process, with deflation coming first and then inflation (unlike some other well-known prognisticators who haven't quite gotten the progression right). In fact, here is an excerpt from the table of contents for my March 2007 bestseller:

    PART TWO: RISKS

    5. Economic Malaise
    6. Systemic Crisis
    7. Depression
    8. Hyperinflation

    As to when the changeover might occur, I have often indicated that I would keep an eye on the financial markets, news reports, and the actions taken by our government (and others) for guidance.

    More recently, in a post entitled "The Next Phase," I suggested that we might begin to see the the supply of money being created by authorities overwhelm the wealth being destroyed by defaults and deleveraging by the end of this year.

    As it happens, the relative lack of concern about inflation among policymakers and mainstream economists is leading the contrarian in me to wonder whether the turning point is even closer than that.

    That premonitory sense seemed even more pronounced when I read the following Financial Times commentary by Edward Chancellor, "Inflation Looms Over Deflation Risk."

    Economists of monetarist and Keynesian persuasions disagree about many things. However, they are currently united in their views on inflation. They see the risk of deflation as being far greater. This conventional wisdom is reflected in extremely low yields for government bonds in Europe and the US. Yet a resurgence of inflation may be closer than many believe.

    Monetarists concede that central banks are printing money in vast amounts to stimulate their economies. This will not lead to inflation, they say. The newly minted cash is not being lent out but stored in bank vaults. The "money multiplier", to use the technical term, has collapsed. It is no secret why this is happening. Households and businesses are over-stretched and fearful about the future. As a result, they are borrowing less and saving more. As long as such fears persist, according to monetarist logic, the Federal Reserve can carry on printing money with impunity.

    The aim of the central bank's policy of quantitative easing is to dispel the threat of deflation and get people to borrow and spend more. The "unconventional measures" being undertaken by central banks around the world are novel and unproven. If the authorities overreact to the spectre of deflation and print more money than is necessary, inflation expectations might suddenly pick up. The continued hoarding of money depends on people believing that a fiat currency, such as the US dollar, will remain a store of value in future. If this confidence dissipates due to excessive measures by the Fed, then cash would be considered a hot potato. The velocity of circulation would rise and inflation surge.

    Inflation expectations might also shift if the markets lose confidence in the state of the public finances. Washington is set to produce a deficit this year of $1,800bn (£1,237bn, €1,325bn). The cost of bailing out Wall Street runs to several thousand billion dollars more. Meanwhile, the Fed has promised to expand its balance sheet by more than $2,000bn. Governments that issue debt in their own currencies and control their monetary printing presses do not tend to go bust. Rather, the sovereign default takes place covertly through a depreciation of the currency.

    If market participants come to suspect the US government faces insuperable financial burdens and that the Fed is losing its political independence, inflation expectations are liable to change rapidly. Clearly, this issue is a concern to China's leaders who, having acquired an enormous mountain of Treasury bonds in their foreign exchange reserves, are aware that Americans might seek at some stage to inflate away their foreign obligations.

    Keynesian economists do not focus on inflationary expectations or on the money supply. Instead, they point to the dramatic collapse of demand in the global economy as a sign that deflationary forces will be around for a long while. Goldman Sachs estimates the current "output gap" to be about 8 per cent of global GDP. Inflation will not pick up until this spare capacity has shrunk, according to Goldman.

    This argument should be viewed sceptically. There are times when inflation and economic activity move in the opposite direction. For instance, periods of rising inflation and unemployment are relatively common during emerging market crises. The US witnessed something similar during the stagflation of the 1970s. Leading indicators suggest the US economy is set to decline sharply in the first quarter. The last time these indicators were so dire occurred in 1974. Yet there was no deflation in that year. Rather the inflation rate climbed to 12 per cent.

    The British economist Peter Warburton of Economic Perspectives raises fresh doubts about the output gap in an intriguing new paper ("Making the Case for an Early Return of Inflation"). Mr Warburton argues the expansion of global trade over the past couple of decades exerted downward pressure on inflation. During the boom years, the global supply chain was tuned to perfection, he says. The credit crisis, however, has fractured this supply chain; companies have gone bust, working capital has been hard to come by, and inventories have been run down. As a result, the productive capacity of the global economy has shrunk and the world has become more inflation prone. "An aggressive stimulus package to aggregate demand," writes Mr Warburton, "which seeks to restore the status quo ante will encounter inflationary tendencies at lower levels of activity than before".

    The deflationary consequences of the credit crisis may persist for some time. However, an early revival of inflation is not off the cards. Prudent investors should start implementing measures to protect their portfolios against such an outcome.

    Selected Comments

    Jan Burr | March 30, 2009 at 12:23 AM

    The link says ...

    "The continued hoarding of money depends on people believing that a fiat currency, such as the US dollar, will remain a store of value in future. If this confidence dissipates due to excessive measures by the Fed, then cash would be considered a hot potato. The velocity of circulation would rise and inflation surge."

    The other way of looking into it is that it might not be so easy for U.S. to act on its own and inflate its way out of this mess since any debasement of the dollar is not going to be taken lightly by its trading constituents and hence this provides a natural check and balance to creation of inflation. Thus it is unlikely that Fed can print its way to inflation!

    Also your basic assumption debasement of dollar leads to spending and therefore demand and inflation is incorrect as it is more likely they will move into gold and send it up to the moon while not doing anything for the demand for other products.

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