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Financial Skeptic Bulletin, August 2010

[Sept 3, 2010] Looking back at August events:

Looks like a secular shift into fixed income. The average 401K investor sees the manipulation of the equity markets by HFT and other insiders. Also after the last ten-fifteen years of losses in S&P500 investments and like, return of principal is more important than return on principal.

The situation looks like a lull before storm. Rising bonds create an strange feeling of being of the deck of Titanic.

My feeling that another shakeout of the system is closer and closer be it European problems or US problems. Exact timing is unpredictable. But to me things were just look too smooth since end on 2009 despite unresolved structural problems on all levels...

Authorities are kicking can down the road. It works for a while. But as Stein said “when something can’t go on forever, it will stop.”

So the next round of fleecing 401K investors might be just round the corner...

Nemesis comment to Econbrowser What Can Sustain GDP Growth Open Economy Version

The US federal gov't borrowed a cumulative 30% of private nominal GDP for fiscal years '09 and '10, and all we got was 3.5% (vs. long-term avg. 6-7% and 5% since the '90s-'00s) nominal yoy "growth" of private sector GDP and -1.9% avg. annualized growth of private GDP since Q2 '08.

At the current debt-deflationary, slow-motion depression rate of gov't borrowing and spending, the US gov't will have borrowed and spent an equivalent of 100% of today's private nominal GDP after '15-'16 and 100% of total nominal GDP by the end of the decade.

Note that since '00 the cumulative loss of real GDP growth from the long-term 3.3% trend has been ~15-16%, which is roughly where Japan was in the late '90s.

At the trend rate of deceleration of post-'00 trend real GDP, the US real GDP will have lost 30% of growth that otherwise would have occurred at the pre-'00 trend rate, a loss equivalent to that of the 1830s-40s, 1890s, 1929-33 and 1938-39, and that of Japan since '90. Adjusted for US population growth, the cumulative per-capita loss of real GDP growth will be around 40%.

consequently, we can expect an equivalent decline in local and state gov't revenues and cuts to social services, infrastructure, public employees salaries and benefits, and pension payouts and retiree benefits.

An increasing share of local and state gov't entities will file bankruptcy, unincorporate, and default on obligations, disbanding fire and police services, transportation infrastructure, and so on.

Peak Oil, falling net energy, peak Boomer demographic drag effects, and fiscal constraints will exacerbate the debt-deflationary slow-motion depression.

http://www.bea.gov/newsreleases/national/pi/2010/xls/pi0710.xls (See table 1.)

Moreover, private wages now make up just 41-42% of US personal income, whereas rentier income, gov't wages, and personal transfers combined make up 45% of personal income and 110% of private wages. Thus, the US economy has become increasingly dependent upon rentier income, gov't salaries and benefits, and public transfers at the expense of proprietors and private workers.

Yet, what we hear most is how much gov't is doing or not doing to "stimulate the economy", or how much this politician or another is proposing to borrow and spend to "get the economy going again".

How much more debt and more gov't spending will it take?

And how much more public and private debt is required as a share of income and GDP to grow gov't wages, benefits, transfers, and public and private interest to the rentier caste?

Are we really that daft?

Keynesianism is an artifact of the reflationary/inflationary peak Oil Age era of growth made possible by abundant supplies of cheap oil and other fossil fuels. The era of cheap oil, and thus that of economic (and uneconomic) growth, is over.

Prepare for the "Greatest Depression" as part of the Great Regression back to Olduvai, friends.

B9K9 in his comment to GMI Describes "The Future Recession In An Ongoing Depression" In This Must Read Report noted:

Look, it doesn't take being a genius or even being a member of a club/group/clan to organize nefarious events to see what is occurring @ a macro level:

Demographics - Older, educated, highly skilled earners (boomers) are being replaced with younger, uneducated, low skills & wages illegal aliens.

Off-shoring - Regardless of demographics, off-shoring destroyed private sector employment.

Resource depletion - When the first Euros arrived, the entire continent was practically empty with easy to access resources literally lying on top of the ground. Today? Not so much - oil anyone? Again, this would have been a problem regardless of off-shoring and/or demographics.

Debt - 70 years worth of debt accumulation has reached the point where the marginal utility of debt has fallen below a 1:1 ratio. This would have been a problem regardless of demographics, off-shoring and/or resource depletion.

Any one of these primary drivers could sink civilizations, and have for thousands of years. The original model of the USA might, **might** have had the flexibility to adapt to these circumstances, but today, not so much.

So, when you step back and evaluate the macro perspective, it just seems really difficult to see how the USA is gonna come out of this in one piece when one considers that all four killer trends are occurring at the same time. That's why all the machinations being taken by the Fed, USG, MSM, et al really smack of the types of desperate actions taken by someone who's drowning.

What do desperate people do? Emotions begin to color their judgment until panic causes them to break & run. In the case of drowning victims, outright terror results in grabbing for anyone/anything to hang onto, regardless of other people's personal safety. (That's why lifeguards use those plastic buoys - they don't want a drowning person anywhere near them.)

So let's relate this to the markets. At this point in the game, the PTB simply do not give a shit about how transparent their bullshit is. Their hair is in their face, they can't see the shore, they're thrashing, and going down for the count. ZIRP, suspension of MTM, Fed printing for MBS/UST/GSE, legalized fraud, manipulated stats, MSM propaganda, SNAP, UI, mortgage forgiveness->retail ramp, and gunning the markets didn't work to improve **confidence** and re-ignite credit expansion. So what are they going to come up with next?

Going forward, each successive action will be increasingly more irrational, more ridiculus, and more dangerous. Losing gamblers who keep doubling down usually end up in the streets, dead or otherwise.

This whole panorama can easily be seen if one chooses to step back and take a look. Once you get the big picture, it's pretty damn easy to divine what the numbskulls are going to try & pull off next.

Rest

[Aug 31, 2010] What Can Sustain GDP Growth Open Economy Version

August 30, 2010 | Econbrowser
flow5

The key to economic growth is investment. The key to funneling savings into investment is to minimize the size of the commercial banking system. You minimize the size of the banking system by first eliminating IORs.

Then you begin to reverse the errors of the past. I.e., you reinstate REG Q ceilings for the commercial banks & drive the savings held in the CBs to the non-banks. I.e., you reverse the contraction in the Shadow Banking system and do whatever to encourage its growth. You see, the CBs never experienced disintermediation when REG Q ceilings were eliminated, only the thrifts did.

I.e., you match savings with investment. CB's don't loan out savings. They create new money when they loan & invest. The CBs pay for what they already own. You can't take money out of the CB system by giving it to the non-banks. It just results in a transfer in the ownership of those deposits.

And size isn't synonymous with profitiablity. The CB system would be smaller, but it would be more profitable. The entire economy benefits as the supply of loan funds increases, and the cost of loan funds decreases.

If you think these statements are in error, then you can't say you understand money & central banking.

The proof, out of the entire realm of economic debate, exists in only two papers. Read them before ignoring the truth & opening your mouths:

1. The Commercial & Financial Chronicle Thursday, April 6, 1967 �MONETARY POLICY BLUNDER CAUSED HOUSING CRISIS�

2. The commercial & Financial Chronicle, Thursday, June 6, 1968 �REPEAT OF 1966-TYPE CREDIT CRUNCH UNLIKELY DESPITE TIGHT MONEY�
See: Dr. Leland James Pritchard, PhD, Economics, Chicago, 1933, MS, Statistics, Syracuse

By then maybe you can say you know something.

flow5

The drive by the commercial bankers to expand their savings accounts has a totally irrational motivation, since it has meant, from a system standpoint, competing for the opportunity to pay higher & higher interest rates on deposits that already exist in the commercial banking system.

The shift from demand to time deposits has converted spendable balances into stagnant money. This transfer added nothing to the Gross National Product, and nothing will be added so long as the funds are held in the form of time deposits. Shifts from transaction deposits, to time deposits, simply increases the aggregate costs to the banking system and adds nothing to the system�s income.

But it does profit a particular bank, Citibank for example, to pioneer the introduction of a new financial instrument such as the negotiable CD until their competitors catch up; and then all are losers. The question is not whether net earnings on CD assets are greater than the cost of the CDs to the bank; the question is the effect on the total profitability of the banking system. This is not a zero sum game. One bank�s gain is less than the losses sustained by other banks.

How does the FED follow a "tight" money policy and still advance economic growth? What should be done? The money creating depository banks should get out of the savings business -- gradually (REG Q in reverse-but leave the non-banks unrestricted). What would this do? The commercial banks would be more profitable - if that is desirable. Why? Because, the source of all time/savings deposits within the commercial banking system, are demand/transaction deposits (the primary money supply)- directly or indirectly through currency or the bank�s undivided profits accounts.

That is, money flowing "to" the intermediaries (non-banks) actually never leaves the com. banking system as anybody who has applied double-entry bookkeeping on a national scale should know. The growth of the intermediaries/non-banks cannot be at the expense of the commercial. banks. And why should the commercial banks pay for something they already have? I.e., interest on time deposits.

Dr. Leland James Pritchard (MS, statistics - Syracuse, Ph.D, Economics - Chicago, 1933) described stagflation 1958 Money & Banking Houghton Mifflin,

�Profit or Loss from Time Deposit Banking� -- Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386.

Modern Money Mechanics
http://landru.i-link-2.net/monques/mmm2.html
H.8-Assets & Liabilities of Commercial Banks
http://www.federalreserve.gov/releases/h8/Current/
H.41-Factors Affecting Reserve Balances
http://www.federalreserve.gov/releases/h41/Current/
Definitions & figures are not exactly comparable between the 2 periods. Also, some figures are only available on a SA basis or a NSA basis

PS

4 comments:

1) Last time I looked (about 5 years ago), Macroeconomic Advisers had a very simple model of exports -- exports were just a function of foreign growth (can't remember the lag structure), and foreign growth is a function of US growth (again, can't remember the lag structure).

2) On the topic of stimulus, I don't have a strong view whether or not FURTHER stimulus is necessary. I do suspect we are trying to speed the recovery faster than possible, like a doctor throwing all sorts of medicine to a patient to get her recover from a cold faster than 7 days (as a result, the patient recovers in a week with a damaged liver).

3) I do believe, however, if further stimulus is deployed, at this stage, fiscal stimulus will be more effective and less harmful than more monetary stimulus. I hope by now, most people would agree that the ultra stimulative monetary policy in 2003, 2004, and 2005 was at least a contributing factor for our current mess. Current long period of ultra low rates is causing most asset classes to be mispriced, but it is difficult to know which one is the worst mispriced. At least for fiscal stimulus, its cost are more transparent.

4) Since we are talking about sustainable growth, it is useful to remember that average growth in US was 2.5% for the past 20 years.

Steven Kopits

Here's some math, using some ballpark estimates:
- 1 trillion dollar deficit
- $500 billion to be covered by tax increases
- 115 million households in the US
- top 16% of households (hh income >$100,000) to carry 80% of tax burden (this is not top 3% of households as often mentioned, but 5x larger pool)
= $400,000 million tax burden carried by 18 million households
= average annual tax burden per top 16% household: $22,000 per year (on a median hh income around $125,000 for this group)

This is not Bush versus Obama, this is Revenue versus Expenditure, and we need to get a grip on it--soon.

CoRev

Steven Kopits said:

"This is not Bush versus Obama, this is Revenue versus Expenditure, and we need to get a grip on it--soon."

Thank you, sir!

We are at a point where every discretionary dollar spent is borrowed. How long before the rest of the world catches on???? How long at this borrowing rate before the US economy collapses??? Whose economy will be left????

How long before we realize we are still rich in raw resources (coal is just one example), and for what reason are we wobbling on exporting?

[Aug 30, 2010] Carmen Reinhart Warns That Economic Recovery Could Be Slow

NYTimes.com

The American economy could experience painfully slow growth and stubbornly high unemployment for a decade or longer as a result of the 2007 collapse of the housing market and the economic turmoil that followed, according to an authority on the history of financial crises.

... ... ...

“I’m more worried than I have ever been about the future of the U.S. economy,” said Allen Sinai, co-founder of the consulting firm Decision Economics and a longtime participant in the symposium. “The challenge is unique: poor and diminishing growth, a sticky unemployment rate, sky-high deficits and a sovereign debt that makes us one of the most fiscally irresponsible countries in the world.”

Ms. Reinhart’s paper drew upon research she conducted with the Harvard economist Kenneth S. Rogoff for their book “This Time Is Different: Eight Centuries of Financial Folly,” published last year by Princeton University Press. Her husband, Vincent R. Reinhart, a former director of monetary affairs at the Fed, was the co-author of the paper.

The Reinharts examined 15 severe financial crises since World War II as well as the worldwide economic contractions that followed the 1929 stock market crash, the 1973 oil shock and the 2007 implosion of the subprime mortgage market.

In the decade following the crises, growth rates were significantly lower and unemployment rates were significantly higher. Housing prices took years to recover, and it took about seven years on average for households and companies to reduce their debts and restore their balance sheets. In general, the crises were preceded by decade-long expansions of credit and borrowing, and were followed by lengthy periods of retrenchment that lasted nearly as long.

“Large destabilizing events, such as those analyzed here, evidently produce changes in the performance of key macroeconomic indicators over the longer term, well after the upheaval of the crisis is over,” Ms. Reinhart wrote.

Ms. Reinhart added that officials may err in failing to recognize changed economic circumstances. “Misperceptions can be costly when made by fiscal authorities who overestimate revenue prospects and central bankers who attempt to restore employment to an unattainably high level,” she warned.

Several scholars here cautioned that it was premature to infer long-term economic woes for the United States from the aftermath of past crises.

The Reinharts’ research “has not yet tried to assess the extent to which different policy stances mitigated the length of the outcome,” said Susan M. Collins, an economist and the dean of the Gerald R. Ford School of Public Policy at the University of Michigan. “But the reality is that we need to have an understanding that the issues we are dealing with are severe, and that we should not expect them to be unwound in a few months.”

Ms. Collins added: “I’m very much a glass-half-full person. What we’ve seen in the past few years has been a policy success. Things are not where we want them to be, but they could have been a lot worse.”

The Reinharts’ paper was not the only one to offer somber implications for policy makers.

Two economists, James H. Stock of Harvard and Mark W. Watson of Princeton, presented a paper arguing that inflation, which has already fallen so much that some Fed officials fear the economy is at risk of deflation, a cycle of falling prices and wages, could fall even further by the middle of next year.

[Aug 30, 2010] The Age of Mammon

zero hedge

Here's one terrific example. John Swinton, the former Chief of Staff for the New York Times, was one of New York's best loved newspapermen. Called by his peers "The Dean of his Profession", John was asked in 1953 to give a toast before the New York Press Club, and in so doing, made a monumentally important and revealing statement. He is quoted as follows:

"There is no such thing, at this date of the world's history, in America, as an independent press. You know it and I know it. There is not one of you who dares to write your honest opinions, and if you did, you know beforehand that it would never appear in print. I am paid weekly for keeping my honest opinion out of the paper I am connected with. Others of you are paid similar weekly salaries for similar things, and any of you who would be so foolish as to write honest opinions would be out on the streets looking for another job. If I allowed my honest opinions to appear in one issue of my paper, before twenty-four hours my occupation would be gone. The business of the journalists is to destroy the truth; to lie outright; to pervert; to vilify; to fawn at the feet of mammon, and to sell his country and his race for his daily bread. You know it and I know it, and what folly is this toasting an independent press? We are the tools and vassals of rich men behind the scenes. We are the jumping jacks, they pull the strings and we dance. Our talents, our possibilities, and our lives are all the property of other men. We are intellectual prostitutes."

1953, 2010. SSDD (same shit, different decade...).

The Age of Mammon

“Financiers – like bank robbers – do not create wealth. They merely distribute it. While the mob may idolize holdup men in good times, in the bad times it lynches them. What they will do to the new money men when their blood is up, we wait eagerly to find out.” - Mobs, Messiahs and Markets

As our economy hurtles towards its meeting with destiny, the political class seeks to assign blame on their enemies for this Greater Depression. The Republicans would like you to believe that Bill Clinton, Robert Rubin, Chris Dodd, and Barney Frank and their Community Reinvest Act caused the collapse of our financial system. Democrats want you to believe that George Bush and his band of unregulated free market capitalists created a financial disaster of epic proportions. The truth is that America has been captured by a financial class that makes no distinction between parties. These barbarians have sucked the life out of a once productive nation by raping and pillaging with impunity while enriching only them. They live in 20,000 square foot $10 million mansions in Greenwich, CT and in $3 million dollar penthouses on Central Park West.

These are the robber barons that represent the Age of Mammon. The greed, avarice, gluttony and acute materialism of these American traitors has not been seen in this country since the 1920′s. The hedge fund managers and Wall Street bank executives that occupy the mansions and penthouses evidently don’t find much time to read the bible in their downtime from raping and pillaging the wealth of the middle class. There are cocktail parties and $5,000 a plate political “fundraisers” to attend. You can’t be cheap when buying off your protection in Washington DC.

Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also. No one can serve two masters, for either he will hate the one and love the other; or else he will be devoted to one and despise the other. You cannot serve both God and Mammon. – Matthew 6:19-21,24

It seems that Lloyd Blankfein, the CEO of Goldman Sachs, may have been overstating the case in saying his firm doing God’s work. With his $67.9 million compensation in 2007 and payment of $20.2 billion to his co-conspirators, Blankfein appears to be a proverbial camel trying to pass through the eye of a needle. This compensation was paid in the year before the financial collapse brought on by the criminal actions of Lloyd and his fellow henchmen. After having his firm bailed out by the American middle class taxpayer at the behest of his fellow Goldman alumni Hank Paulson, Lloyd practiced his version of austerity by cutting compensation for his flock to only $16.2 billion ($500,000 per employee) in 2009. I’m all for people making as much money as they can for doing a good job. But, I ask you – What benefits have Goldman Sachs, the other Wall Street banks, and hedge funds provided for America?

Never have so few, done so little, and made so much, while screwing so many.

In 2005, the top 25 hedge fund managers “earned” $9 billion, or an average of $360 million. One year after a financial collapse caused by the financial innovations peddled by Wall Street, the top 25 hedge fund managers paid themselves $25 billion, or an average of $1 billion a piece. For some perspective, there were 7 million unemployed Americans in 2006. Today there are 14.6 million unemployed Americans. While the country plunges deeper into Depression, the barbarians pick up the pace of their plundering and looting of the remaining wealth of the nation. Bill Bonner and Lila Rajiva pointed out a basic truth in 2007, before the financial collapse.

“On the Forbes list of rich people, you will find hedge fund managers in droves, but no one who made his money as a hedge fund client.” - Mobs, Messiahs and Markets

Ask the clients of Bernie Madoff how they are doing.

1920′s Redux

The parallels between the period leading up to the Great Depression and our current situation leading to a Greater Depression are revealing. When you examine the facts without looking through the prism of party politics it becomes clear that when the wealth and power of the country are overly concentrated in the clutches of the top 1% wealthiest Americans, financial collapse and depression follow. This concentration of income and wealth did not cause the Stock Market Crash of 1929 or the financial system implosion in 2008, but they were a symptom of a sick system of warped incentives. The top 1% of income earners were raking in 24% of all the income in America in 1928. After World War II until 1980, the top 1% of income earners consistently took home between 9% and 11% of all income in the country. During the 1950′s and 1960′s when Americans made tremendous strides in their standard of living, the top 1% were earning 10% of all income. A hard working high school graduate could rise into the middle class, owning a home and a car.

From 1980 onward, the top 1% wealthiest Americans have progressively taken home a greater and greater percentage of all income. It peaked at 22% in 1999 at the height of the internet scam. Wall Street peddled IPOs of worthless companies to delusional investors and siphoned off billions in fees and profits. The rich cut back on their embezzling of our national wealth for a year and then resumed despoiling our economic system by taking advantage of the Federal Reserve created housing boom. By 2007, the top 1% again was taking home 24% of the national income, just as they did in 1928. When the wealth of the country is captured by a small group of ruling elite through fraudulent means, collapse and crisis becomes imminent. We have experienced the collapse, while the crisis deepens.

It’s Good To Be the King

The Wall Street oligarchs were able to accumulate an ever increasing portion of corporate profits by inventing securitization, interest-rate swaps, and credit-default swaps which swelled the volume of transactions that bankers could make money on. These products were originally introduced as a means for corporations to hedge their risks. Wall Street shysters chose to use their “creative” financial products to build the biggest gambling casino in the history of the world. They functioned as the house, siphoning off billions in profits, but then got caught up in the hysteria and placed billions of bets themselves. This resulted in the financial industry generating 41% of all business profits in 2007. From World War II through 1980, financial industry profits ranged between 10% and 15%. Simon Johnson explains the despicable hijacking that has taken place since then.

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The original robber barons amassed huge personal fortunes, typically through the use of anti-competitive business practices. These well known titans of industry included Henry Ford, Andrew Carnage, John D. Rockefeller, and JP Morgan. They may have practiced questionable business ethics, but they did create wealth while benefitting the country as a whole. They introduced the automobile, provided the nation with steel, produced the oil that powered our economy, and brought order to industrial chaos of the day. It seems their fortunes were built by creating rather than destroying.

The disgustingly rich Wall Street wheeler dealers who live in Greenwich CT and NYC and summer in the Hamptons have created nothing. Their immense wealth has been created through draining the economic system of its lifeblood. Their financial innovations have created no lasting benefit for our society. Wall Street knowingly created no documentation (liar loans) mortgage loans, Option ARM loans, and subprime loans. You do not create products that beg for fraud unless you want fraud. The packaging of these fraudulent mortgages into CDOs and CDSs by Wall Street’s crime machine benefitted Wall Street only. Those who got the loans defaulted, lost the homes, and had their credit ruined. Wall Street financiers have lured the American public into debt with easy credit and a marketing machine geared to convince the average Joe that he could live just like the rich. Simon Johnson explained the phenomena in a recent article.

“Excessive consumer debt is an outcome of prolonged inequality – in trying to remain middle class, too many people borrowed too much, while unscrupulous lenders were only too willing to take advantage of such people.”

You Call This Capitalism?

Capitalism is supposed to be an economic system in which the means of production and distribution are privately owned and operated for profit; decisions regarding supply, demand, price, distribution, and investments are not made by the government; Profit is distributed to owners who invest in businesses, and wages are paid to workers employed by businesses. The American economy is in no way a free market capitalistic system. It has become a oligarchic consumer capitalist society that is manipulated, in a deliberate and coordinated way, on a very large scale, through mass-marketing techniques, to the advantage of Wall Street and mega-corporations.

When you hear the Wall Street class on CNBC argue against tax increases for the rich, they hark to the fact that small businesses would be hurt most by the expiration of the Bush tax cuts. There are 6 million small businesses in the US, with 90% of them employing less than 20 employees. These are not the rich. The vast majority of these businesses earn less than $1 million per year. There are only about 134,000 people in America who make on average $2.5 million per year. There are another 600,000 people who make on average $760,000 per year. Out of a workforce of 150 million, less than 1 million rake in over $750,000 per year. These are not small businesses. They are the Wall Street elite, corporate CEOs and the privileged classes that control the power in NYC and Washington DC.

The following charts clearly show that perverse incentives in the US financial system have allowed corporate executives to reap ungodly pay packages, while the middle class workers who do the day after day heavy lifting in corporations have been treated like dogs. Considering the S&P 500, which measures the stock returns of the 500 largest companies in the U.S., has returned 0% for the last 12 years, the CEOs of these companies would slightly embarrassed paying themselves 300 times as much as their average workers. Not in the age of mammon. Big time CEOs are rock stars. Outrageous pay packages are a medal of honor in a world where humility and honor don’t exist.

The Depression that currently is engulfing the nation was 30 years in the making. The criminal Wall Street financiers are the modern day John Dilingers. They have mastered the art of stealing from the masses while convincing these same people that they should admire them because they are rich. This is the oddity about Americans as pointed out by Bill Bonner and Lila Rajiva.

“The poor genuinely believe the rich are better than they are. They are smarter and better educated. The poor even support low tax rates for the rich, as long as they have a lurking chance of joining them.” - Mobs, Messiahs and Markets

The truth is that the poor have no chance of joining the the rich. The game is rigged. The poor have admired the rich for decades. But, hard times have arrived. And they are about to get harder. The rich have armed guards to keep the poor at bay. They will need an army of guards before this crisis subsides.

Leonard Cohen sums it up perfectly in his song Everybody Knows:

Everybody knows that the dice are loaded
Everybody rolls with their fingers crossed
Everybody knows that the war is over
Everybody knows the good guys lost
Everybody knows the fight was fixed
The poor stay poor, the rich get rich
That’s how it goes
Everybody knows
Everybody knows that the boat is leaking
Everybody knows that the captain lied
Everybody got this broken feeling
Like their father or their dog just died

4.542855
B9K9:

Denninger, glad to see you on board @ ZH. Too bad you brought your myopic and painfully naive viewpoints here as well. Here's a simple heads-up that will hopefully serve to clarify the situation: The state is the criminal.

What you don't seem to realize, and continually kick people off your boards for saying, is that the chief enabler, organizer & beneficiary is the US government itself. They are the ringleader, the mastermind.

To paraphrase Voltaire, if banksters didn't exist, governments would have to invent them. They are simply a means to an end. The end is all encompassing government control, fueled by a global reserve currency backed by the muscle of the US military.

MachoMan:

Bingo. Everyone thinks campaign contributions are to get favorable laws passed and to buy regulators, but why would you need to buy them when they would be forthcoming anyway? They're really just tribute payments to mobsters more or less and/or direct tax (rather than tax that goes first into the general piggybank).

Further, they operate under the control and jurisdiction of the government, not the other way around. Literally, instantly, the whole thing would turn around if the government desired. Mass prosecutions... etc. Maybe even some treason charges. But make no mistake about it, when the government decides to crack the whip, banksters cower and cringe. Not the other way around.

The Rock on Mon:

This breakdown of this moral compass is brought to you in part by the PTB (Rockefellers, Murdoch, et al.). It's all by design.

Btw, I think I read somewhere that in the year 2000, there were 18 million manufacturing jobs in the U.S. Now, ten years later, there is less than 11 million manufacturing jobs left... nice.

Speaking of mammon, here's a nice little bit of info regarding the media:

MEDIA BLACKS OUT THE FACTS

Here's one terrific example. John Swinton, the former Chief of Staff for the New York Times, was one of New York's best loved newspapermen. Called by his peers "The Dean of his Profession", John was asked in 1953 to give a toast before the New York Press Club, and in so doing, made a monumentally important and revealing statement. He is quoted as follows:

"There is no such thing, at this date of the world's history, in America, as an independent press. You know it and I know it. There is not one of you who dares to write your honest opinions, and if you did, you know beforehand that it would never appear in print. I am paid weekly for keeping my honest opinion out of the paper I am connected with. Others of you are paid similar weekly salaries for similar things, and any of you who would be so foolish as to write honest opinions would be out on the streets looking for another job. If I allowed my honest opinions to appear in one issue of my paper, before twenty-four hours my occupation would be gone. The business of the journalists is to destroy the truth; to lie outright; to pervert; to vilify; to fawn at the feet of mammon, and to sell his country and his race for his daily bread. You know it and I know it, and what folly is this toasting an independent press? We are the tools and vassals of rich men behind the scenes. We are the jumping jacks, they pull the strings and we dance. Our talents, our possibilities, and our lives are all the property of other men. We are intellectual prostitutes."

1953, 2010. SSDD (same shit, different decade...).

Always Positive:

In a way, I admire the elites, the movers & shakers, the oligarchs, the rapers & pillagers, the robber barons, the shysters - I mean THEY'RE JUST GOING FOR IT!!! No restraint, no morals, no compassion, no regrets!! Just full-on, full throttle, totally & completely selfish with only ME! as a reference point!

Isn't that just a reflection of much, even most, of society in general, even YOUR little corner of the world, writ small?

We get what we deserve and don't have long to wait. Maybe Blankfein is doing God's work, showing us ourselves.

frosty zoom :

communism becomes (de facto) capitalism...

capitalism becomes (de facto) communism...

and both in their worst forms.

it's not new york, 1932; it's moscow 1989.

guidoamm:

A good rant as far as it goes. However, as is often the case, blame is laid at the feet of proximate causes like hedge fund managers.

Upstream of fund managers and bankers there is the monetary system. In the particular case of a fiat monetary system, the logical evolution of the system leads inevitably to concentration of profits in the finance industry simply because banks and the corollary of financial institutions that operate around them are first in line to make use of newly printed money.

As fiat money conforms to the law of diminishing returns, each unit of currency is progressively devalued from the instant it is created as it is handed down to the treasury, then to the primary dealers, then to other banks till it finally reaches the pockets of the great unwashed - this is the point at which the currency has been devalued most (i.e. the point at which it has least purchasing power).

As the fiat monetary logic progresses over time, eventually the ripples of devaluation spread in ever wider circles. Thus from personal bankruptcies you move to commercial, then municipal, then state and, finally, sovereign bankruptcy becomes probable if not inevitable.

yabs:

I think this article misses the point in some respects. The CDO's etc, credit deafult swaps

are a symptom of the problem not the cause.

The cause is a monetary system that needs perpetual growth. When a mature economy like the US no longer actually needs to grow anymore

I mean it has most of the roads it needs, the shops it needs and every perosn who can get a mortgage has then there is only one option for growth

create s synthetic economy and that's what happened. the banksters are scum for not having the morals but they are really only playing the system which is the route of the problem.

It makes me laugh when I see Rothschild going around the world in a boat to promote global warming and the environment when its his families money system which has caused all the problems in the first place

growth for growths sake is a cancer and now

the cancer has overpowered the victim

death is near

[Aug 30, 2010] "Muddling through ... the prescription of the moment"

Calculated Risk

From Peter Goodman at the NY Times: What Can Be Done to Cure the Ailing Economy?

THE American economy is once again tilting toward danger. ...

Yet even as vital signs weaken ... a sense has taken hold that government policy makers cannot deliver meaningful intervention. That is because nearly any proposed curative could risk adding to the national debt — a political nonstarter. The situation has left American fortunes pinned to an uncertain remedy: hoping that things somehow get better. ... The growing impression of a weakening economy combined with a dearth of policy options has reinvigorated concerns that the United States risks sinking into the sort of economic stagnation that captured Japan during its so-called Lost Decade in the 1990s. ... Six months ago, Alan Blinder, a former vice chairman of the Federal Reserve, and now an economist at Princeton, dismissed the idea that America’s political system would ever allow the country to sink into a Japan-style quagmire. “Now I’m looking at the political system turning itself into a paralyzed beast,” he says, adding that a lost decade now looms as “a much bigger risk.” ... By default, muddling through has emerged as the prescription of the moment. "Muddling through" and "hoping that things somehow get better" seems very defeatist - but I think it is an apt characterization of the current situation. There is always more that can be done ... and I think some people are confusing cyclical deficits with structural deficits. Oh well ...

Nemo

And some people are assuming that "aggregate demand" is all that matters.

CalculatedRisk

Well, aggregate demand isn't all that matters. The key is that we have excess capacity in many industries - and excess supply in housing.

We definitely do not want to add to that excess. Instead we want to support the victims of the previous bad policies - until eventually the excesses are absorbed.

I don't understand why everyone doesn't get this. I'm tired of pounding on it.

Back in the '90s, I did some investing instruction (we all looked like geniuses!), and I was amazed at how few investors knew the difference between a one time gain and ongoing profits. So I shouldn't be surprised by how many people can't distinguish between cyclical and structural deficits

best wishes

dryfly:

TJ and The Bear wrote:

and I think some people are confusing cyclical deficits with structural deficits Not to mention those that believe it's merely a psychological issue.

And confusing cyclical recession with a structural change in the economy. .

Bond Girl:

Muddling through is not the prescription of the moment, it has been the strategy all along. Or the non-strategy.

sporkfed:

CalculatedRisk wrote:

The key is that we have excess capacity in many industries

Just about every profitable industry I can think of.
Hopefully none of the commenters tonight will find out
that they are excess capacity.

CalculatedRisk:

Yes - that is true too. Look how many people were in the v-shape recovery camp.

They just didn't get it. This will be a long road

best to all

[Aug 29, 2010] Links 8-28-10 « naked capitalism

HistorySquared:

Carmen Renhart’s paper and comments from Jackson Hole were also noteworthy. Reinhart is the co-author of “This Time is Different,” a former IMF economist, predictor of the Tequila Crises, the Asian Flu, and the Housing Crises, and along with Rogoff, has studied something like 1500 years of crises.

Historically, unemployment has stayed high for 7 years, and growth 1% below normal. She recommends cutting spending and increasing taxes to avoid a debt default (high inflation is another form of default), which is the next wave in the crises.

It’s too bad no one asked her about China or Japan’s looming disasters.

Nelcisco:

Tom Crowl has a story that seem more common these days. It’s intertesting to me that today we’re in a crisis that after 2 yrs so-called experts said we would be out of by now and yet here we are still.
Think about, if 2 years ago one would of said that housing is going to get so bad that interest rates would go to 4.5% and continuing to drop to record lows with property values down about 50% in some areas and still in July home sales down 27%, the lowest sales number in 15 yrs. experts would have laughed that person to scorn and yet here we are.

Hugh:

I really didn’t think Bernanke said anything new in Jackson Hole. Aside from saying that the Fed would not be reducing its balance sheet anytime soon, that was about it. Mostly, I think the Fed has shot all of its bolts but Bernanke is saying the Fed is still in the game. QE2? Well, it was enough to send the stock market up despite the downward revision in GDP. But QE1 really didn’t kick start recovery. It is hard to see how QE2 will. And while stocks were giddy, money is cheap now so I don’t even see this as pumping up the stock and commodities bubbles. As for the real economy, the Fed has got nothing, not that it ever made much of an effort in that direction anyway.

[Aug 29, 2010] The Elites Have Lost The Right to Rule zero hedge

One of my favorite quotes is from Joseph Schumpeter who said “everyone has elites the important thing is to change them from time to time.” Of course, this is what happens in a well functioning democracy. The problem today and the reason why the United States is on the verge of some sort of revolution (I believe it will manifest as a revolution of ideas and not an armed one) is that the election of Obama has proven to everyone watching with an unbiased eye that no matter who the President is they continue to prop up an elite at the top that has been running things into the ground for years. The appointment of Larry Summers and Tiny Turbo-Tax Timmy Geithner provided the most obvious sign that something was seriously not kosher. Then there was the reappointment of Ben Bernanke. While the Republicans like to simplify him as merely a socialist he represents something far worse.

...What Obama has attempted to do is to swipe a complete economic collapse under the rug and maintain the status quo so that the current elite class in the United States remains in control. The “people” see this ploy and are furious

...I think that with the Fed in a bind they will accelerate and become ever more aggressive in behind the scenes games. This will make markets even more volatile and extraordinarily challenging. This is financial war make no mistake about it.

trav7777:

You voted for obama, bitch

SRV - ES339 :

Which means he didn't vote for McCain / Palin... can't blame him for that!

[Aug 28, 2010] The Manufacturing Fallacy

Economist's View

Indeed, in Book II of The Wealth of Nations, Smith condemned as unproductive the labors of “churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc.”

xh:

Agreed. Free trade implies open borders to that labor can be traded, too. The fallacy lies in continuing to think in national terms when we are already in a global economy. The faster everyone realizes this and adapts to it, the smoother the transition is going to be. Resistance is futile. Those that are the most successful at adapting to changing conditions will be the most successful in the global economy, in spite of temporary and regional dislocations. Mechanisms need to be developed and implemented to minimize the impact of such dislocations instead of trying to isolate oneself from the inevitable. Trying to preserve the status quo or worse, the status quo ante, is a sure way to the dust bin of history. "Don't buck the trend."

The real problem is global financialization, which is parasitic on the global economy, by substituting rent seeking for productive investment. Michael Hudson has much to say on the present conflict between financial capitalism (rent) and industrial capitalism (investment), which financial capitalism has been winning.

Steve Bannister:

As it has turned out, Bhagwati-style trade has benefited multi-national corporations to the detriment of the majority of national citizens. Happened to the Brits, now happening to the Americans. If you wish to understand, start with Arrighi.

Arrighi, Giovanni. 1994. The Long Twentieth Century: Money, Power, and the Origins of Our Times. London: Verso.

So, it is sad that Bhagwati et al. have no sense of history, have not read Keynes, and have eschewed McCombie and Thirlwall who have much to say about this.

Keynes, John Maynard. 2008. The General Theory of Employment, Interest and Money. BN Publishing.

McCombie, J.S.L., and A. P. Thirlwall. 1993. Economic Growth and the Balance of Payments Constraint. Palgrave Macmillan.

The weight of the evidence favors Adam Smith on this topic.

beezer :

Somewhere in this article is the assumption that we can't compete in manufacturing. I'm not convinced this is so.

Another assumption is that, if we can use a 'better' source for some set of manufactured goods, we are therefore necessarily better served by doing so. Again, I can think of several common sense reasons why we should retain the ability to manufacture certain goods--even if it takes outright subsidies, or tariffs, to do so.

Besides the reasons of caution, and the ability to accomodate unexpected reversals of fortune, retaining an industry allows for participation in unexpected innovation in said industry. No one can predict whether such innovation will occur, but one can safely predict that if it does occur, and the industry no long exists domestically, then the domestic economy is unnecessarily constrained. Sort of like the law in golf that if your putt isn't long enough it can't go into the cup. Or Woody Allen's admonishment that 95% of success is showing up.

And finally, only an idiot calls some sort of human activity on a massive scale a 'fallacy' because it doesn't seem to have worked as advertised. Life is way too complicated to make such an assertion.

All a nation really needs to understand is that it is critical that it seriously participate in all of the manufacturing industries necessary for modern life. One can never count on the efforts of allies who may become enemies, much less those who are already enemies.

We need to grow up.

And then there's the matter of employment. The assumption that lost manufacturing capital, jobs and labor can be replaced without net loss of economic vitality is, to me, a breathtaking assumption. It appears to me that quite the opposite has been the real result of a laissez faire attitude towards manufacturing.

Lord:

Manufacturing has been very productive and generally still is. While some services are productive, it is generally more the exception than the rule. Services, for the most part, have not been amenable to automation that produces increasing returns to scale, nor are they scalable for the most part. The differences are significant. Trade increased widely from the feudal period to the modern period, but was never enough to lift the world out of its Malthusian state, only technology accomplished that and know how itself was never enough but its embedding into tools that could be used without it. Services are costs. This is not to say they aren't desirable or valuable, but by themselves they are consumption rather than production. It is only when they and the knowledge they represent become embedded in the devices and processes of the world that they really become productive.

Dave:

Go tell the Germans -- whose manufacturing-powered economy grew at a 9% annualized rate last quarter and whose unemployment is much lower than ours -- about the "manufacturing fallacy".

leo:

Meanwhile the only growth industries in America are hospitals, prisons and casinos.

Yeah, Clintonomics was a great success.

[Aug 27, 2010] Robert Shiller Says Double Dip Imminent

zero hedge

Those looking to sell houses are advised not to listen to the interview, as the co-creator of the Case-Shiller Home Price Index also added that he is worried housing prices could decline for another five years. He noted that Japan saw land prices decline for 15 consecutive years up to 2006.

...Also for bond fans, Shiller confirmed Rosenberg's view that bonds are not in a bubble. Hopefully Mr. Shiller bond prophecying skills in bonds are better than in houses, where it was mostly in hindsight in early 2007 when the bubble had already popped.

Caviar Emptor:

The country is in the grips of a major change which is already well underway. The old solutions don't work anymore. Most talking heads are just screaming their heads off that we should repeat the failed policies only Bigger and Harder with even more belief in unicorns and praying nine times per day instead of only 5.

The road to hell has been paved by the prophets of ignorance is bliss: "deficits don't matter!", "shop till you drop", "every American should be in a home and placing their retirement funds in the stock market". But we still haven't fully faced up to the magnitude of the folly that these policies were. And until we do we're screwed.

[Aug 27, 2010] Fears of Regime Change in New York «

"Crunch time will probably come when we cannot afford to both: 1. pay the military and 2. bail out the banks." Regime change or not, we probably are close or at some important tipping point. The economy has been "overfinancised", manufacturing is hollowed out, both state corporations and private citizens have trillions of dollars of debt, and most of political leaders are dishonest, incompetent, and negligent.

August 26, 2010 | naked capitalism

Leviathan:

Interesting comments.

In a nutshell, I would say that we are far from any organized movement on the ground. We have a lot of inchoate rage and a great deal of anxiety (bordering on paranoia), but they are layered over a substantial base (let’s say about half the country) that has not been directly impacted by this crisis and are hoping it all blows over before it reaches them.

Contrary to the class-based analytics some have offered here, I see the “contented half” as spread pretty evenly across the country and across class lines. Simply put, if you have a job and your old salary and neither need nor desire to sell your house then it is easy to sit back and hope for the best. Unfortunately, this “contented half” is also the source of many attacks on the new “welfare queens” (e.g. the long term unemployed, foreclosees and bankrupts). They pity but do not identify with friends and family members who have fallen into the discontented half. Tsk tsk, but they bought too much house/got too greedy/didn’t time the market right, etc. They do not understand that this is a musical chairs depression–it is not skill but luck and timing that determine who loses out.

On a philosophical level what is happening is that the more thoughtful members of the citizenry are reconsidering their consent for the ruling establishment. This can be a positive change with a good outcome. I have been very active in local government these past few years and saw up close how badly run it can be, how much taxpayer money is squandered because few bothered to question spending priorities Bell, CA was a wake up call. Some will learn from it. The question is whether they will turn the ship round in time.

Citizens are now waking up. There is a brief window in which the governing classes can appease them. Not necessarily by throwing money at them, but by demonstrating that there is a recognition of the problem and a PLAN to fix it.

The danger is that neither Obama and CO. nor the Republicrats seem to understand the need to do this quickly. Is it because they personally are doing fine? Yes. DC is a prosperous island in a sea of pain. Versailles, anyone?

Finally, the two most interesting suggestions made above (IMHO) are that we could be on the brink of secessionist movements (with which I definitely concur) and that there is a distinct danger of fascism rearing its head, to which I would just add, beware the growing power of top secret government. This is a state within a state and it controls a segment of the economy that is robust and rapacious, despite the crisis that has undermined most everything else. Fear the power of the banksters and oligopolists, yes. But fear these invisible power brokers at least as much. They are the unknown unknown that lurks in the bowels of DC. Even the pro-government Washington Post fears this beast. It is the most dangerous force in the world right now (and I feel quite certain that I have added to some watch list merely by writing these words). What a sinking feeling.

Sufferin' Succotash:

Somehow the notion of a disciplined and centralized political movement taking over the US doesn’t seem very convincing. The country’s too big and undisciplined for that.

A revolutionary situation is more likely to develop by means of secession movements which are by no means limited to the South or to the political Right (see Alaska, Minnesota, NYC). Nor would secessions necessarily be violent. One could visualize states and localities (especially those which send more tax dollars to Washington than they get back) “requisitioning” Federal revenues for their own purposes. A dithering and irresolute response from Inside the Beltway could easily lead to en masse secessions resembling the USSR in late 1991.

As long as the seceders didn’t do something stupid like, say, opening fire on a Federal military installation the USA could be in pieces before you could say James Buchanan.

Speaking of Buchanan and his more illustrious successor, consider a headline in the New York Times just after Lincoln took office and just before the attack on Ft. Sumter: “Wanted–A Policy.” Abe & Co. were widely perceived as weak and indecisive until the Confederates resolved matters by shooting first.

Kevin de Bruxelles:

Very interesting post. I’ve been thinking a lot about this lately. Inspired by both Barrington Moore’s Social Origins of Dictatorship and Democracy and a recent post Attempter had up about among other things Marxism. I have been trying to break down American society into classes and to understand the power relations between the classes. From what I can see there is no revolution on the horizon, but who knows maybe things will change?

In feudal times the class structure was easy. You had the peasants who produced the wealth and the aristocratic/priestly class who were parasitical and extracted as much wealth as possible from the peasants. In return the aristocrats provided military protection and occasional tickets to the afterlife. The key to stability was convincing hte peasants that their overlords rendered essential services.

In modern America you basically have four classes; two parasitical and two productive. The highest is the parasitical Rentier class which basically hovers over productive society seeking opportunities to extract rent in all its various forms. At the bottom you have the parasitical Lumpenproletariat (gang bangers, meth heads, crack ho’s and the like) who suck the life blood out of society through criminal activity and/or lives on welfare or in the penitentiary. The two productive classes are the Peasants; who are uneducated to somewhat educated people who basically follow the law and most of the time have jobs. On top of these you have the Bourgeoisie who are white-collar workers with educations and with more cultural refinement than the Peasants.

Politically both parties are under the thumb of the Rentier class. Democrats tend to be more culturally and occasionally economically aligned with the Bourgeoisie and they tend to be quite protective of the Lumpenproletariat. Republicans are economically tied to the Rentier and occasionally to the Bourgeoisie class but make strong emotional appeals to the Peasants and are quite hostile to the Lumpenproletariat and some elements of the Bourgeoisie.

The key to a strong and stable society is to diminish the two parasitical classes to the minimum. The only way a just welfare state is possible is if producers and the parasites tend to be the same people, with their status depending on their age or particular circumstances. The key to avoiding conflict is if the line between parasite and producer passes through the same person. A worker who is a parasite when young and old and occasionally when unemployed will support a welfare state while he is a producer as well. But when a Peasant sees a corrupt and greedy Rentier class combined with a huge and rapacious Lumpenproletariat sucking the life blood out of his society, he will not support for the continuation of the looting welfare state.

For there to be a productive revolution in America the Peasants and the Bourgeoisie would need to combine against the two parasitical classes. But the culture wars being driven by the media elites ensure that these two groups will stay at each other’s throats for the foreseeable future. IN some ways the Peasants would love to go after the Lumpens and many elements of the Bourgeoisie would go after the Rentiers but the key is that this will only work if both productive classes combine. A revolution led by the Bourgeoisie alone would be pretty hopeless. If the Peasants really started to rise alone (and not the current Rentier-class led Tea Party movement) their anger would be directed towards the Lumpenproletariat and away from the Rentiers and lead to a hopeless and bloody stalemate.

So it seems the current trends look good for the Rentier class. Profits and labor are more and more being outsourced. The ever-growing Lumpenproletariat not only provides live training for America’s security forces to train for future overseas duties, it also ensures that tensions between parasites and producers means that what remains of the US welfare state will continue to be dismantled. The Bourgeoisie will take a hit but they have no real options besides expatriation since they refuse to combine with the Peasants against both parasitical classes.

And of course I have not explained (nor thought as much about) what it means to actually attack a social class. My first thoughts would be that to attack the Lumpenproletariat would not only mean making sure jobs were available for those who actually did want to pass to the Peasant class, it would also mean to attack the very dysfunctional culture at its root and that means with the raising of children.. Most Lumpen adults are hopeless after a childhood of Lumpen deprivation. Attacking the Rentier class would be more straightforward, the question is acquiring the power to actually carry out attacks.

doom:

Some of the most interesting empirical work discounts class

http://sociology.ucsc.edu/whorulesamerica/theory/

stratification to focus on a ruling network at the top. But the normative stuff they come up with is oddly conservative: the Dems are your only hope, etc.

rene:

I appreciate your helicopter view on the classes of America, Kevin. One point of criticism, if they guys and gals from the Lumpenproletariat would cease to exist. There would be an awful lot of institutions such as the police/penitentiairy system, the DEA and FBI facing dramatic job losses. We MUST maintain the status-quo. We can’t afford to lose another couple of million middle-class jobs. Therefore, we have to find ways of providing the crack whores and gangsters with cheap heroine, cocaine and crack from Afghanistan, Colombia and of course Mexico.

[Aug 24, 2010] Now They Tell Us- Experts Say Housing Is A Lousy Investment And Always Will Be

Yahoo! Finance

Well, the experts are weighing in again. And, once again, they agree: Housing is a lousy investment. And it always will be.

At least that's what they're telling the New York Times:

“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”

Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.

... ... ...
Most fundamental analysis suggests the latter. Housing inventories are still inflated (we built too many houses), and the end of the housing tax credit has removed one near-term incentive to buy. Interest rates are low, which has made houses more affordable, but, nationally, house prices are still above their long-term average.
Demographics are also becoming less favorable: As baby-boomers retire, many will seek to downsize, selling off second homes and moving into smaller residences. And with high unemployment and debt loads still crippling many consumers, it's not clear who will be buying the houses the boomers want to sell.

For a particularly dour view of this critical topic, check out:

15 Signs The Housing Market Is About To Collapse

[Aug 24, 2010] The Next Bubble- Investors Flee Stocks in Droves In Favor of Bonds

Aug 23, 2010 | Tech Ticker, Yahoo! Finance

“Investors poured $480.2 billion into mutual funds that focus on debt in the two years ending June, compared with the $496.9 billion received by equity funds from 1999 to 2000, according to data compiled by Bloomberg and the Washington-based Investment Company Institute.”

[Aug 24, 2010] U.S. Financial System Still "Fundamentally Corrupt," Kotlikoff Says- Here's How to Fix It

Aug 24, 2010 | Tech Ticker, Yahoo! Finance

We have a "fundamentally corrupt financial system" and the Dodd-Frank reform bill did nothing to change it, says Boston University economics professor Laurence Kotlikoff. "Relatively little has changed except there are going to be more federal regulators who are probably going to miss major problems."

At the core of the 2008 crisis was "the production and sale of trillions of fundamentally fraudulent securities," Kotlikoff says, suggesting all levels of society participated in the fraud -- including homeowners. At the center of it all were financial intermediaries (a.k.a. Wall Street) who packaged and sold "snake oil under the guise of proprietary information" to limit or eliminate disclosure, and enabled by corrupt rating agencies, regulators and elected officials, he says.

In the accompanying video, Kotlikoff explains how we can "make Wall Street safe for Main Street."

In short, we should transform all financial companies with limited liability (banks, hedge funds, private equity firms and insurance companies alike) into mutual funds, which the professor describes as "little banks that have 100% capital requirements. "

Notably, the big mutual fund companies survived the "financial earthquake" of 2008-09 when the rest of the financial system collapsed, Kotlikoff recalls.

Click "more" to read the rest of the post and share the video.
» More

[Aug 24, 2010] U.S. Existing Home Sales in Record Plunge - Bloomberg

Sales of existing houses plunged by a record 27 percent in July as the effects of a government tax credit waned, showing a lack of jobs threatens to undermine the U.S. economic recovery.

Purchases plummeted to a 3.83 million annual pace, the lowest in a decade of record keeping and worse than the most pessimistic forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. Demand for single-family houses dropped to a 15- year low and the number of homes on the market swelled.

[Aug 24, 2010] Presenting The Holdings Of Pimco's $240 Billion Flagship Total Return Fund zero hedge

What is really funny that this is the only meaningful comment I have found... So much of Zero Hedge value...

Stringzs

Disagree with the analysis. Only 20% of PTTRX is in Mortgages. Rest is in straight treasuries/corporates. Applying the 17% markdown to the mortgages implies a 3.4% performance drag on the fund- hardly that devastating, especially given that money will flow to treasuries and drive up the prices there. And btw- the average fund has 30% in mortgages, so PIMCO is actually underweight that sector.

Of course.. this is deflation that one day will destroy that GSE pile of crap- with or without Govt guarantees.

[Aug 24, 2010] Banks Enabling Fraud Against Retail Customers

The initial story is suspect as failing to notice $300K leaving account is not very probable. But a stunning comment by Roman Berrt about about his disabled mother is a real eye-opener... However, current technoogy may provide a practical solution. I get a email everytime when more then, say $100.00 is withdrawn from my account.

naked capitalism

Then the same officials who had directed me to keep the accounts open, disappeared — systematically, for just over six months. When I sought to talk to the fraud department, I still could not get records — including my own missing bank statements — even to see the full extent of my losses. The bank officials who had directed me to keep my accounts open were unavailable at the branch — over the course of many attempts to speak with them. The police at the Sixth Precinct needed to see the missing documents, but even they could not force WaMu to hand over their — my — records. (WaMu’s own internal emails cite a $300,000 figure for my loss from fraud — I still did not have enough of my records to identify the loss. It is illegal, by the way, to withhold from an account holder his or her own records).

At eight months after the fraud discovery was confirmed — eight months of trying to communicate with officials and a fraud department who were oddly unavailable or unresponsive — I received a form letter from the WaMu Fraud Department advising me that according to the regulations, I had had a six month window for taking action; and (since WaMu had played out the clock for eight months) the letter asserted that I had waited ‘too long’ and my case was closed.

Inadvertently, subsequent to that, a WaMu bank official handed me the wrong file — wrong from his point of view; illuminating from mine, and from any consumer’s. It contained emails, some of which you can see at TheSmokingGun.com, from WaMu bank officials to one another — and including emails from and to their counsel, PR department and and the fraud department — that take as given that stonewalling a client with a fraud claim on the bank is standard practice; and yet one freaked-out bank official in the emails warns his colleagues that if their mechanisms in this regard became known, their practices would be all over the newspapers.

I was stunned by what seemed from the emails to be a systemic practice. Why would a bank want to perpetuate bank fraud rather than fight it?

As I researched the issue and spoke to other consumer bank account holders whose accounts had been corrupted by fraud, and to consumer advocates, I learned how systemic experiences such as mine — and worse experiences — are becoming. I heard from consumers across the country from all walks of life who had also been misdirected by their banks, or told that for various technical reasons their corrupted accounts could not be closed, and then faced difficulty reaching fraud departments or officials once the fraud was confirmed….

Customers assume that banking regulation and Congressional oversight means that if they find fraud on their checking accounts, there is accountability — which is not in fact the case; strong bank lobbyists translate into weak protections for consumers and, as you can see from the emails, the bank’s reasonable assumption that most customers in this situation will not be able to hold them accountable. And indeed, since legal action is time-consuming and expensive, most defrauded bank customers do eventually give up and go away…..a bank’s fraud investigation department is actually likely fraudulently representing itself as the customer’s, rather than solely the bank’s, advocate. Banks such as WaMu — and now Chase, which bought WaMu — expect such people to simply go away. They — and we — should, rather, reach out to our elected representatives for wholesale reform — and put each and every such case online, so consumers can see the worst offenders for themselves, and, with the power of the internet and their own consumer choices, protect themselves and demand accountability.

Roman Berrt:

I am (sadly) not surprised. About three years ago my mother, invalid and confined to a hospital bed in her home then and still, had a situation where a part-time caregiver took her credit cards and some checks and spent thousands of dollars of my mother’s money in a matter of days. When the fraud was discovered and my sister and I (on my mother’s behalf) notified the card issuer and bank of the fraud, they launched an “investigation” to determine if in fact fraud had occurred. It dragged on for months and at the end of that time their initial finding was that no fraud had occurred and that my mother was responsible for the charges and checks.

It took the services of a lawyer to bring the bank to its senses. In the end, it turned out that they had video surveillance from ATM machines, point of purchase locations (like the local MegaMart) and so on which showed the caregiver using the stolen card and checks but apparently they knew they’d never recover the money from the caregiver and decided that it would be easier to steamroll an old and frail woman who they thought would not be in a position to fight back.

Let me re-state that concisely: The bank/card issuer knew positively that fraud had occurred and yet chose to deny that fraud had occurred.

The banks are not our friends. They will do only what they are forced to do, and that included complying with the law.

In the end, with the services of an attorney, the bank admitted that fraud had occurred, reimbursed my mother and turned over the results of their investigation to the local DA who in turn brought charges against the thief who in turn entered a plea of guilty and wound up in jail (for a short time.) But like I said, we had to essentially force the issue. If I and my sister had not intervened, they’d have stuck my mother with the loss.

Bobbo:

Sometimes it helps if you cite UCC 4-406, the specific provision of the Uniform Commercial Code that imposes liability on the bank.

The customer’s duty is to diligently review statements and report any errors or fraud to the bank. As long as the customer promptly notifies the bank, it’s the bank’s problem.

The bank has the burden of proving that the customer was not sufficiently diligent, and that the losses could have been prevented if the customer had been diligent. Here is the text:

http://www.law.cornell.edu/ucc/4/4-406.html

Mike:

She failed to notice $300k leaving her account over a period of two years?! Sorry, I’m with the bank on this one. There is clearly fraud at play here but it is the customer, not the bank.

smells like chapter 11

The law is plain — banks are not the fiduciaries of their depositors, the relationship is one of creditor and debtor, with the bank being the debtor.

As the California Court of Appeal noted in 1991 in connection with a depositor’s claims against a bank arising out of unauthorized transfers:

Commercial Cotton ’s [an older case] characterization of a bank-depositor relationship as quasi-fiduciary is now inappropriate. While some aspects of that relationship may resemble aspects of the insurer-insured relationship, there are equally marked differences between those relationships. Since appending the quasi-fiduciary label to the ordinary bank-depositor relationship runs counter to both pre- and post- Commercial Cotton authority, and such a label provides no analytical framework against which to evaluate the propriety of extending tort remedies for contractual breaches, we no longer approve the denomination of the ordinary bank-depositor relationship as quasi-fiduciary in character. Copesky v. Superior Court, 229 Cal.App.3d 678, 280 Cal.Rptr. 338 (1991)

Should it be otherwise? Maybe so. The rule arose in the 1800’s and was based upon a banking systemn based entirely paper era where the ability of a third party to unlawfully extrract money from one’s account was far more difficult that it is in today’s electronic world.

However, current technoogy may provide a practical solution. I get a text everytime when even $1.00 is withdrawn from my account. The bank provides this service for free. That service would probably helped stopped the fraud described becuase almost anyone could pretty easily spot an unauthorized withdrawal within the 30 days of the mailing of a statement as required by UCC 4406.

If someone can’t manage this type of communication, such as an elderly or otherwise impaired person, then maybe the rules need to be adjusted to take that into account.

DownSouth:

What we are witnessing is the descent of the United States into third-world status, or into a culture of distrust and noncooperation. I call it the Mexicanization of the United States.

And I’m not sure most Americans fully understand where this all leads. In Mexico, not even the mid-level government authority (police chief, mayor, congressman) dare venture out into public without an army of bodyguards. And even then they are frequently gunned down. The assassinations are almost always marked up by the authorities as being motivated by “the drug war,” but I suspect the motivations are much more complex than that. Either way, you’re talking about a decent into a culture of violence and social chaos.

Dan Kahan in “The Logic of Reciprocity: Trust, Collective Action, and Law” describes how the descent into perdition occurs:

A relatively small fraction of the population (consisting, perhaps, of those who’ve been trained in neoclassical economics) consists of committed free-riders, who shirk no matter what anyone else does, and another small fraction (consisting maybe those who’ve read too much Kantian moral philosophy) of dedicated cooperators, who contribute no matter what. But most individuals are reciprocators who cooperate conditionally on the willingness of others to contribute. Moreover, some reciprocators are relatively intolerant: they bolt as soon as they observe anyone else free-riding. Others are relatively tolerant, continuing to contribute even in the face of what they see as relatively modest degree of defection. And a great many more—-call them neutral reciprocators—-fall somewhere in between.

Under these circumstances, individuals are unlikely fully to overcome collective action problems through reciprocity dynamics alone. No matter how cooperative the behavior of others, the committed free-riders will always free-ride if they can get away with it. Indeed, their shirking could easily provoke noncooperative behavior by the less tolerant reciprocators, whose defection in turn risks inducing the neutral reciprocators to abandon ship, thereby prompting even the tolerant reciprocators to throw in the towel, and so forth and so on. If this unfortunate chain reaction takes place, a state of affairs once characterized by a reasonably high degree of cooperation could tip decisively toward a noncooperative equilibrium in which only the angelic unconditional cooperators are left contributing (probably futilely) to the relevant public good.

As Kayan goes on to explain, the only way to stop the descent into perdition is that free-riders be punished:

Maximum cooperation, then, probably requires that reciprocity dynamics be supplemented with appropriately tailored incentives—-most likely in the form of penalties aimed specifically at persistent free-riders. Although trust and reciprocity elicit cooperation from most players, some coercive mechanism remains necessary for the small population of dedicated free-riders, who continue to hold out in the face of widespread spontaneous cooperation, thereby depressing the contributions made by relatively intolerant reciprocators. In the face of a credible penalty, however, the committed free-riders fall into line.

In the United States, however, neoclassical economic theory and its ugly twin in the fields biology and psychology—-the New Atheism preached by the likes of Ayn Rand and Richard Dawkins—-have become so dominant that we no longer believe in punishment of financial or economic crimes, or that altruistic punishers or strong reciprocators even exist. Everything is about the self, about the individual and individual fitness, and the group and group fitness be damned.

But the altruistic punishers and strong reciprocators haven’t gone away. They’re still out there, despite what the neoclassical economists and their New Atheist allies profess. And as a criminal defense lawyer in San Antonio told me many years ago, when the authorities—-the legislature, law enforcement and the courts—-don’t deliver justice, what you get is street justice.

For more on the interaction of the individual and the group (the system or the culture) and how it is the combination of these two that shapes behavior, there’s this intriguing lecture
by Amanda Pustilnik.

Here’s a link to Kahan’s essay.

Yearning to Learn:

Thank you Down South, excellent post and link. I obviously agree fully.

You call it the “Mexicanization” of America. I call this the “caveat emptorization” of America.

the caveat-emptor free-market ideologues are fools.

they laugh at financial victims as ’sheeple’ and cloak themselves in a “well they should have known better or at least learned the information”. but life is simply not long enough to learn everything.

I am a doctor and I laugh myself to pieces every time I hear them claim how smart they are and how they are able to make “informed” medical decisions. I’m sure mainly based on GoogleHealth web searches or whatever.

I have 11 years of medical training AFTER college (so not including all the pre med courses), and yet I have to rely on my own doctor’s recommendations since I am not an internist. I know that I am in her hands and that in the end I have to trust her. I am not so foolish as to think that I am “fully informed”. I am a financial dork, so am relatively informed there. But what about when I fix my car? or when I buy a house? or when I contract for legal services? In the end, I have no choice but to TRUST my counterparty.

The caveat emptorization of America is breaking that trust, and thus eventually all commerce beyond dark-ages technology will break down.

we have a very long road ahead since we can’t even trust our fiduciary agents.

koshem:

Banks rely heavily on the enormous cost a defrauded customer lawsuit incurs on the defrauded. This modern version of the Wild West takes the law out of the equation and substitutes it with raw force the banks possess.

The government itself uses the same raw force when suit by its own employees. Government agencies are, by and large, organized according to the 50s organizational practices (e.g. three employees have a supervisor who enjoys almost absolute power and doesn’t do anything but supervision).

As a result, abuse and harassment are prevalent. Many government employees injured by these abuses cannot afford to complain and internal reform is impossible. Customers and employees will be protected from abuse only when following the law will be enforced by swift and affordable reaction to violation.

nilys:

It’s a dog-eat-dog kind of climate out there. How what banks do is any different from what other companies and individuals do?

[Aug 23, 2010] Credit Card Companies Jack Up Rates Despite Flagging Economy, Super Low Funding Costs «

August 23, 2010 | naked capitalism
small business owner

Being a small business owner I can tell you that my rates have gone from 4.99% to 9.99% to the last increase 17.99% in a matter of 14 months. This does make it rather difficult to do business I now require a deposit of 50% up front prior to ordering any materials

RichFam:

Sounds like wack-a-mole. Control fees, raise rates. I did not read the suggestion to control the rate. Would banks issue less cards if the next logical step was taken and the government controlled the rate? Maybe not if its still profitable (risk adjusted, of course). But if the banks do not think its profitable that probably means less credit available, right? So I guess the next, next step is force the banks to offer credit cards and the lower fee and lower rate?

I work at a very small company and the health insurance premium increases for next year are quoted 30% higher than 2010. We use a large payroll service so that we get group rates on insurance so this is not confined to our firm. Sound familiar to the above story?

whatever…

[Aug 23, 2010] Why The Fed's Upcoming Jackson Hole Economic Symposium Could Have Wide-Ranging Implications zero hedge

Alexandre Stavisky:

Bankers love to meet in the high mountain area of Wyoming. They love the subtle innuendo of meeting and agreeing to be "in the HOLE". Afterall their whole scheme is to artificially stimulate the masses to produce while intermittantly, by dramatic and subtle moves, depriving them of their substance through printing and calculated market shocks. To shift an overwhelming amount of the wealth of this planet from the highly productive and effecient over to idle and idolatrous classes is their whole object and aim. Altogether an odious and detestable profession.

http://www.ft.com/cms/s/2/e13b361e-abe8-11df-bfa7-00144feabdc0.html

"The government could no longer issue sufficient notes – even with Havenstein’s lightening presses – to finance itself. Society started to break up. Farmers refused to sell their produce in return for what they called “Jew confetti” – an ominous portent for the future. Hungry townspeople went on raids into the countryside, slaughtering livestock, which they then carried off. More prosperous regions contemplated secession.

Fergusson shows how central to the social contract is trust in the soundness of money. Without it, the web of transactions upon which we all depend breaks down also. The result is total moral collapse."

I'm glad that the Allies defeated the Axis in the latest world war, and in doing so "saved the world for democracy". Or should we say plutocracy. It is telling that the confetti printers with the highest rank are Germans displaced millenia ago from Palestine who, again displaced, inhabit the capitals of England and colony. No homeland but where forgery of banknotes has been sanctioned through corruption. Now we enjoy the fruit of their labours within our own financial system. Like a sotted apple enjoys its riddling of worms.

And while they sup and dine upon the back-broken dreams and efforts in their Broke Back Mountain resort, they may need to tremble at the righteous indignation of the coming backlash or liberty-loving yeoman. And remember, in Jackson, of Jackson's wrath.

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves."

In a globe honeycombed with their intrigues and corruption, will there ever be another heimatsland in which to hide and fractional men rehatch fractional reserve while claiming high numerator, low denominator fractions of wealth? And will they go willingly or be dragged, hogtied--kicking and screaming to the eternal hole which is their final and just unresting place?

b_thunder:

Sure, the sole purpsoe of the Fed is to distribute cash to mega-banks.

Taking crap assets off their balance sheets, open front-running, asset bubbles. How long can this go on? QE does NOT help the economy (except for Wall & Broad, and Shanghai)

But guess what? GoldDamn likes that! GoldDamn wants it that way! And GoldDamn will get what it wants.

The QE has done nothing so far to help. It prolonged the depression. Would we rather have 18% U3 and 25% U-6 unemployment over 3 months and then start recovery, or 10% U-3, and 17% U-6 for 3 years? Most people CAN survive for 3-4 months w/out a job, they would not lose their house or their car. But the Fed chose the latter, 3-4 years of 10/17% malaise. In that timeframe very few long-term unemployed will survive financially.

Doing heckuva job, Ben!

What is needed is a sharp, quick and very painful retracement not jsut to the mean, but a significant "svershoot" to the other side in equities, and especially in RE. THe faster the fall - the faster the "smart money" will step in to buy undervalued RE. 300 million people will be better off in the long run, but 300 thousand overleavereged bankers, hedgies and PE shops won't. . THe Fed decided to crush 200+million middle class, to preserve the wealth of the ultra-high net worth crowd.

traderjoe:

I agree with you - but since the Fed is PRIVATELY owned BY THE BANKS (yes, it's true), the Fed is just doing the bidding of its owners. I can't imagine why - well I guess I can - the US government has granted a monopoly power of credit/money creation to a private organization. So QE is just one more example of transferring wealth to the banks - in return for creating credit for free out of thin air, the Fed 'purchases' an interest bearing security paid for by the US taxpayers.

Caviar Emptor:

As another leg down to the economy is starting to be telegraphed by even the official data set

I'm glad it was put this way: All the talk of "Double Dipping" is actually an optimist's view. If we're in a depression (and some of us wholeheartedly believe we are) then we're talking about another cascading level down, without a recovery to its peak (as expected in a plain vanilla recession even with a double dip). Just like we're seeing now compared with 2007.

Call it "de-leveraging", post-bubble deflation, or whatever, the point is the same: we're not in a recession or even a "double dip" recession because that implies a cyclic recovery of the pre-recession peak, followed by expansion. We're in a Depression, a crumbling economy with a downward vector.

But expect no accommodation from the Fed until it's too late. Bernanke and the Fed governors spent an entire career studying how to short-circuit and prevent a depression by riding in on a white horse with the Fed cavalry and wagon trains full of "liquidity". After flinching and not really perceiving the magnitude of the crisis he got religion and deployed "The Plan". The black swan here is that 'The PLan" is ineffectual.

Nobody in the hallowed halls of U. Chicago ever expected that one, and it will shock them. The response at that point is as uncertain and unpredictable as would be the response to aliens landing in Central Park. Prepare for growing malaise and anomie.

Cpl Hicks :

"We're in a Depression, a crumbling economy with a downward vector."

I really do not like your analysis because it seems to be both very pessimistic and very accurate.

"The black swan here is that 'The PLan" is ineffectual."

I hope somebody up there has at least a vague understanding about what's ahead for us and has at the very least a few baby steps of a plan mapped out that won't make things worse.

Caviar Emptor:

I hope somebody up there has at least a vague understanding about what's ahead for us and has at the very least a few baby steps of a plan

Well that would pre-suppose that they could consider for one moment that their world view might be wrong. That would mean that for at least a moment they don't consider themselves "Masters of the Universe", "Leaders of the Free World" and smarter than the previous bunch of academic economists and politicians who failed.

And that's on the likelihood scale of GOP not screaming for tax cuts or Dems not wanting stimulus. You see, we're still in a time period where dogma comes before all else. And clinging to dogma the hardest is rewarded by the electorate.

[Aug 22, 2010] Preserve and Protect- Mapping The Tipping Points

The economic news has turned decidedly negative globally anilling to pay any price. As a sailor, it feels like the ominous period where the crew is fastening down the hatches and preparing for the squall that is clearly on the horizon. Few crew mates are talking as everyone is checking preparations for any eventuality. Are you prepared? Apparent synthetic wealth has artificially and temporarily been created through the production of paper. Whether Federal Reserve IOU notes (the dollar) or guaranteed certificates of confiscation (treasury notes & bonds), it needs to never be forgotten that these are paper. It is not wealth. It is someone else’s obligation to deliver that wealth to the holder of the paper based on what that paper is felt to be worth when the obligation is required to be surrendered. It must never be forgotten that fiat paper is only a counter party obligation to deliver. Will they? Unfortunately, since fiat paper is no longer a store of value, it is recklessly being created to solve political problems. What you will inevitably receive will be only be a fraction of the value of what you originally surrendered." - Gordon T. Long

[Aug 21, 2010] High corporate cash levels are nothing but a mirage

"So much for the "corporate balance sheets have never been in better shape" hyperbole. Leverage is as high as ever. The only real improvement is the average maturity of the debt portfolio has been extended. Massive cash on the balance sheet is NOT a positive signal." interest deduction on debt has induced a huge scam.

You can look at each company's BS and estimate what the impact of the new rules will be. The article suggests that airlines and retailers will be hard hit. The list of companies with Operating Leases is endless. I would imagine that most of the S&P 500 will be impacted one way or the other. I did look for macro information on total outstanding operating leases and did not find a source. I think we are talking a trillion or so. Does anyone have a source for the big picture?

Mitchman :

Bruce, as someone who spent a great part of his career in the leasing business, I can tell you that about $1.3 trillion in leases is the going industry estimate for the amount of off-balance sheet obligations on listed companies. In my judgment, that number is low by a factor of 2.

old_turk :

I agree Mitchman, having spent 25 years catching the pitches of lease/salesmen. The $2.6 trillion number is reasonable, although high-end estimates I have heard for health-care alone run in the $1.5 trillion range.

Of course, being an accountant by training and balance sheet-centric by nature, I usually wanted the lease capitalized.

I come from the school that says you should match the revenues produced by the asset with the cash out needs to finance.

Call me old fashioned but that approach has made our org bullet-resistent for the last 3 or so years. Notice I did NOT say bullet proof 'cause the one that gets you, you never hear.

Young :

Christ almighty... But there's no way Wall Street or PonziGeithner are gonna let the proposed rule pass. Remember these trolls are sprung out of the Greenspan-rising-equities-is-the-most-important-thing cult...

geno-econ:

It is part of the entire global credit bubble, in part created by a new breed of financial engineers in an era of infatuation with fast talking MBAs [mine was from 1961] and politicized regulators resulting in Enrons, securitization, swaps, derivatives etc. Bottom line is every sector of economy is in debt because we have leveraged our future. Private debt now over 33 billion, pension funds 20-30% underfunded and taking on more risk, public debt increasing and unsustainable were it not for China and our fragile status as a reserve currency, and now more cracks in business leasing practices. It cannot end without pain.

Panafrican Funk... :

Just wanted to additionally point out that this would pop the CRE bubble for sure. Probably the biggest reason for the inflated CRE property values is in this capital vs. operating distinction. It's really hard for me to get a feel for just how big the pop is going to be, but 50-60% would not suprise me in the least, and 30% would be optimistic.

Cognitive Dissonance:

It makes me laugh/cry to see that it took them 25 years to come to the conclusion that lease accounting was being abused.

Bruce, the biggest failing we as honest and caring humans have is that we don't (wish to) have the capacity of the psychopathic personality. In other words, because we don't want to be a thief (well maybe not a large one) we don't think like a thief. And while we "know" there are thieves out there, we still approach the world on a daily basis assuming the thieves are only 2 or 3 % of the population.

And you would be correct to think so. OK, maybe 5%. But where we really go off the tracks is in assuming the regulators are at least trying to do their job. This is where we are raped and pillaged.

There is no reason for the regulators to be as incompetent and incapable as they consistently are unless it's intended to be this way. It's that simple. And there are hundreds of ways for the powers that be to place roadblock after roadblock in front of the regulators while still making it look like they aren't doing so. Why do you think the recent finreg bill was over 2,000 pages long?

The entire concept of regulators is that they are there simply to keep the honest people coming back to the dice table and the thieves coming to the same table to take advantage of the honest people. The regulators are there to keep selected competition out of "the game" as well as to look the other way when "da playas" are at the table. No more, no less.

Thus if the regulators are just now "discovering" something 25 years later, it's clear that "da playas" have a new game in town and they need to fleece the last of the honest money one more time and then make sure their enemies......er....irritating mosquitoes are caught and locked up for playing a game that's being retired soon for the next best thing.

Pardon my cynical slip for showing.

Mitchman

CD, in this case, the regulators are actually following the rules to the letter. Most lease accounting in the US is based on FASB 13 which, I believe dates back to the late 1950's or early 1960's. Everyone is going by the book in this case and although there have been some attempts at changing the rules, they have been half-hearted, partially because everyone has felt that the rules of the game have been working so well for everyone involved.

Cognitive Dissonance:

I agree. Let me quote myself from above.

And there are hundreds of ways for the powers that be to place roadblock after roadblock in front of the regulators while still making it look like they aren't doing so. Why do you think the recent finreg bill was over 2,000 pages long?

I agree, in this case everyone's going by the book because the book is written to allow the thieving. Oh sure, there really are rules and regs to keep things from completely getting out of hand. After all, there must be rules. BUT the rules are written to favor the few at the expense of the many. And without being insulting in the least to you my friend, most people can't see this fact because they are immersed in the game.

They know the rules so well and have been around it for so long that it all just makes sense. But pull average Joe in off the street or ask a passing space alien what he (she? it?) thinks about the "system" and they will respond in short order with a common consensus.

Rigged. And the regulators are part of the rigged game.

Mitchman :

I di not take it as an insult my dear friend and especially from such a lofty commentator as yourself. (BTW, happy anniversary!). My point was that the rules were written at a point in time when corporate leverage was not the issue that it is today. Remember that in say, 1959, securitization didn't exist. So taking a lease off the balance sheet didn't seem like such a big problem. I might also point out that under international accounting rules, where the auditor's judgment counts a great deal more than it does here in the US, taking a lease obligation off the balance sheet is much more difficult. Here in the US, under the old FASB 13, it was much easier to "game" the system. Thereby further proving your point.

Cheers.

Cognitive Dissonance:

Thereby further proving your point.

And well as yours. The more I pull back to bring the big picture into focus, the more my stomach turns. I fully understand why so many seek drink, drug or other diversions to kill the pain of the ugly truth. Unfortunately it will only change when people begin to talk about the painful truths they so desperately try to avoid. Part of our conditioning is to avoid talking about our conditioning.

Have a good weekend.

Bartanist

As a culture we tend to distance ourselves from people who speak the truth because we would rather live with a known lie than to invite an uncomfortable conflict and a resolution that might hurt the liar. Odd, no?

I recall a weeklong exec financial education trip to Wharton back in the mid-90s. One of the case studies was of Marriott corporation which at the time had superior earnings based on their degree of leverage. The lesson for us was not that we could have a more profitable company with greater leverage, but that there is greater and unreasonable risk associated with leverage.

I guess the financial engineers figure that one out. Create companies that were too big and too connected to the power structure to be allowed to fail and have the saps, errr I mean people, absorb the risk. Problem solved! Superior earnings and no risk.

Cognitive Dissonance

As a culture we tend to distance ourselves from people who speak the truth because we would rather live with a known lie than to invite an uncomfortable conflict and a resolution that might hurt the liar. Odd, no?

Precisely. And also why I selected Cognitive Dissonance as my ID. Because the funny thing about denial is that while we may be (sub)consciously pushing away the pain and dissonance, in the background, our subconscious mind is absorbing everything.

So when the time comes for the student to wake, the teacher will already be present in the form of subconscious knowledge and understanding coming to the surface to be transferred into the conscious awareness. And this often happens (relatively) quicker if there are subliminal reminders of our dissonance present.

Hence my ID.

Odd, no? :>)

Bartanist:

I would say, "In a minority, yes" .... Odd? Not to me. I think there will come a time when people will need people who have not been dead or asleep to help them with the new reality.

AssFire

The mental conflict that occurs when beliefs or assumptions are contradicted by new information. The unease or tension that the conflict arouses in a person is relieved by one of several defensive maneuvers: the person rejects, explains away, or avoids the new information, persuades himself that no conflict really exists, reconciles the differences, or resorts to any other defensive means of preserving stability or order in his conception of the world and of himself. The concept, first introduced in the 1950s, has become a major point of discussion and research.

Man, I should have selected my ID with a bit more thought.

NotApplicable:

I'm amazed at how I can talk to anyone about corruption inside of some institution that they have personal knowledge about, yet they never extrapolate this corruption out to other institutions. Since they have no personal knowledge of them, they simply trust their faith, because they cannot stand to know the alternative, that we are all fucked.

Bartanist :

The vast majority of people have been brainwashed when young and impressionable to believe that should spend their lives striving to be accepted within the power circle... or at least a well compensated slave (although they do not envision it that way at the time).

Without getting into the extremely esoteric, there is nothing finite about the system that we are living within. Rules are only rules for those that believe them to be rules and do not have the power to ignore them. Is this right? IMO, it is neither right or wrong, but only a means to an end. While the people on this board might be discussing the injustice of something, somewhere in the world there are people discussing larger problems about how to manage the entire herd of humans, somewhere else in the world there are people dying from thirst or starvation and in another part of the world people don't give a damn about materialism and are trying to figure it all out to connect their 3 halves.

Sure, I believe in honesty, personal freedom and treating others with respect. I believe in questioning, understanding doing something about it and growing. Do I really need a financial prison (err system) to help me do that? Probably not. Have I got so much invested in my first 50+ years within the system that it is damn hard to find my way out. You betcha. These prison bars are made of velvet and excrete vodka on the rocks (with an olive) and a nice juicy steak cooked to perfection.

John_Coltrane:

So true. As a working research scientist I can tell you that people believe scientists wouldn't alter results to advance their careers and receive more funding and recognition. But this is very naive as this happens all the time. Corruption and misuse of funds is rampant especially at large national laboratories where power is concentrated.

[Aug 20, 2010] Morgan Stanley's Jim Caron Apologizes For Wrong Call On Bonds, In 180 Degree Move Now Recommends A 10s30s Flattener

Competitors to "These F#@king Guys" as Jon Stewart nicknamed GS ;-)

One of the biggest economic bulls, and correspondingly bond bears, of the past year, has been Morgan Stanley's Jim Caron, whose earlier estimate of a 5.5% in the 10 Year has cost many a bond investor much money. Today, Caron appeared on Bloomberg Radio with Tom Keene, apologizing for his call, and following up on his latest release in the MS Interest Rate Strategist, which started off: "We got our rates call wrong and missed a great opportunity to be long bonds this year. The market is currently rife with tactical relative value opportunities and that’s what we will focus on going forward. We’re shifting gears and will become more tactical, playing for rate moves in either direction in shorter timeframes, rather than having our ideas hinge on longer-term macro themes." Indeed, relative value, in the form of various divergence and convergence trades, is where it is at, and where Zero Hedge has been focusing over the past year.
Keene asks Caron what he got wrong. The answers:

The amount of money staying, and accelerating, into bond funds - $190 billion and climbing according to ICI

The expected upswing in equities on the back of a 3% growth in the economy "didn't happen"

A shift in expectations as people just want to get their money back: "want safety and liquidity of bonds, more than take the risk of entering into riskier assets like equity"

The economic data starting to turn

And, of course, the Fed...

Number 156:

At least he apologized.

Im still waiting for Jim Cramer to apologize to all those people who he told not to take their money out of Bear Sterns.

bigdumbnugly:

"So if you're an expert, but totally wrong, are you really an expert?"

if your area of specialty is being wrong; then yes, quite.

American Dreams :

Tom Keene is at the height of his disinformation career. Very few are better than he at the art of distraction and obfuscation. Damn pig farm is not up and running yet!

AR :

This is a hilarious headline: "Morgan Stanley's Jim Caron Apologizes For Wrong Call On Bonds." Think about this idiocy. This guy MISSES 80% of the bond move off the 113.06/10 low in DEC bonds, and just now he wakes up? Where the fuck has he been? Cuba?

What is worse, he now wants his clients to buy treasuries when the December 2008 highs are only a few (5-6) handles away. The SEC should initiate a new law, one where it is illegal to be this incredibly stupid. This guy shouldn't apologize -- he should be sweeping streets and cleaning toilets. My goodness...

Pamela Anderson :

More than one "guy" at Morgan Stanley has issues..... David Darst OMG!

[Aug 20, 2010] From Disinflation to Deflation?

It's a schizophrenic world. On one side, there are lots of people worried about hyperinflation [0], despite forward looking indicators of inflation signalling quiescence [1] and actual price indicators going downward.

Continue reading "From Disinflation to Deflation?"

[Aug 19, 2010] Byron Wien on Economy, Markets The Big Picture

A very interesting interview to listen. Some non-trivial observations about Obama, current market and, especially, reasons for "stock aversion" among investors.

Insight on the state of the economy and markets, with Byron Wien, Blackstone Advisory.
At the 7 minute mark, Wien takes Kernan to school.

[Aug 19, 2010] Bond Bubble By Barry Ritholtz

August 19th, 2010

Yesterday, I asked if Bonds Resemble Dot Com Stocks?. The night before, I mentioned it on Fast Money, so I got to beat a few others who wrote it up. (Note that mine is a nuanced view, and not a full bubble claim).

I could not help but be amused by who is — and is not — in this camp:

In the full blown bubble camp are Nassim Taleb, Doug Kass, Jeremy Siegel and Jack Crook, Fortune and Smart Money;

Disagreeing with this notion is Brad DeLong and Pragmatic Capitalism; Minyanville is somewhat ambiguous, as is Zero Hedge.

In the Bonds are attractive in a deflationary environment are David Rosenberg and Gary Shilling;

According to the latest Commitments of Traders data, net positions in the 10-year and the long bond do not appear to be at extreme levels. Large Speculators are still net short both of these markets.

~~~

Bonds have been in a 30 year bull market, ever since Volcker broke the back of inflation; The 10 year peaked in Fall 1980 over 15% yield, today they are at 2.6%.

dead hobo:

First, I don’t think you were jumped on about this. The discussion looked fairly normal and a little more intelligent than many others.

At first, I went with the conventional wisdom. After all, oceans of money are flowing into government bonds from virtually everywhere. Yields are at historic lows that, to me, were unimaginable a few weeks ago. In addition, we just had two massive stock bubbles and one real estate bubble, courtesy of Fed manipulations, inept securities regulation and enforcement, and stupid law making. Another bubble, this time with UST securities, enhanced by Fed policies, follows the script perfectly. And, like any bubble, what blows up must eventually blow up.

In retrospect, this is far too simplistic.

This reasoning ignores interest rates as a reflection for the supply and demand for money. It ignored the uses for borrowed money, which predominantly include business investment and consumer purchases of large items. If demand existed for private uses of borrowed capital, UST rates would be much higher beyond the Fed managed short term rates. Especially in the face of massive deficits crowding out this private borrowing. There would be competition for available scarce funds.

Logically, rates should be higher because there is a demand for funds outside of UST needs. Where is it? If rates are low because of no demand, then Investment and Consumption of Durable Goods must be low. If both were competing with UST requirements, then this would be reflected in jobs, private investment and spending. Where are they?

If capital investment is low then the companies that require it are on hold. To me, not growing for an extended period of time equals stagnation. If the companies reflected in the stock markets are stagnant with respect to investment, then it is a closed system in decline and not a growing system. If they were growing, private demand for borrowed capital and interest rates would both be rising. If rates are falling, then private demand must be non-existent.

So, are bonds in a bubble or are stocks in another bubble since their current levels don’t match a logical examination of why companies grow and how companies are valued? This raises more questions about stock valuations and the velocity of money in the stock market. Are valuations more of a reflection of high HFT velocity than actual investor demand for equity investment? With oceans of money flowing into UST debt, I suspect equities are pure asset bubble and more likely to fall to a level that reflects low rates than rates are to rise to the current level of equities.

Sorry to disagree with your buddies, but can they provide an alternate explanation that doesn’t require sell side enthusiasm or knee jerk paranoia to make believable?

Mark E Hoffer

http://www.studygs.net/vocab/too.htm (too much Debt)-above

dead hobo

The only way a ‘bond bubble’ can explode is if rates rise quickly. Japan is an example of low rates in perpetuity, so support for the idea of a bubble that is resistant to bursting exists. Sudden corporate growth creating an alternate demand for capital would do it. Shenanigans from traditional buyers of UST debt might do it (china). The Fed acting responsibly and not monetizing every IOU it sees might do it. Sudden and ginormous massive demand for equities from real investors might do it.

To put it in other words, massive economic recovery or massive catastrophe will cause rates to rise. Massive recovery on short notice seems unlikely in the near future. Since the UST is the proverbial coffee can in the back yard, catastrophe is unlikely also.

The shift into UST debt is not a get rich quick with free money scheme like the past bubbles were. It’s the ultimate flight to safety because no plausible alternatives exist. The word ‘deflation’ as it has been used in this debate, is too simplistic to continue using. Hunkering down and spiral contraction seem better to me.

So, if low interest rates and the flight to safety are logical and are happening for good reason, then equities must be grossly overvalued.

foosion

You can hold a treasury to maturity and get paid off at par. Treasuries with reasonable maturities are not trading at 150% or 200% of par. You’re not going to lose 50% or 75% of your investment. Compare tech stocks 10 years ago. One situation was a bubble, the other is just high prices.

KidDynamite

barry – don’t miss TPC’s piece on it:

http://pragcap.com/the-myth-of-the-great-bond-bubble

~~~

BR: I already have that link above (Pragmatic Capitalism)

X on the MTA

In general, I think bonds have limited potential to enter “bubble” territory right now because their value has a natural cap (that they trend to as maturity approaches) and because bubbles–in my mind at least–require massive amounts of credit to finance the purchases of the asset in a bubble, and that demand for loans would, you know, be reflected in higher interest rates that would halt the appreciation of bonds.

mrmike23

I have most of my pile in Treasuries. Why? Because I remember in 2008 when the geniuses who ran the 401K for my company could not see what I was seeing and tried to keep me “invested” in the stock market. I moved all that money into a bond fund early that Spring and am very happy I did. So we had a “recovery” and a lot of the money came back to stocks but it was not because of any good news, only businesses cutting staff and restocking.

Now why would I sell my babies, my Treasuries, now that we are seeing all the problems with the PIIGS, no new “thing” to get everyone excited about to get the economy moving, a joke as a President who hasn’t a clue, possible bombing of Iran by Israel, job losses, no real estate market? So I lose a little because of opportunity costs, but, tell me, where else would I put my money? I get 4.5% on most of my treasuries. It beats annuities since I get my principal back someday(or my kids do).

inessence

Clearly a secular shift into fixed income. The average joe sees the manipulation of the equity markets by HFT and other insiders and after getting hi/her ass kicked over the last ten years or so, return of principal is more important than return on principal. Equity market participation is pumped and hyped by the financial services industry (commission brokerages) when the risk of owning equities is/has not been clearly understood by most of the investing public.

[email protected]

Mr. Ritholtz,

I definitely do not understand why people wish to call US Treasuries a bubble.. I guess maybe there is a general disagreement about the meaning of the word?

1. Some use “bubble” to describe anything that seems massively mispriced.

2. Others use “bubble” to describe something that is mispriced due to the fact that hordes of people think they can become rich by purchasing this thing.

I fall into category number 2 so I wouldn’t really refer to Treasuries as a bubble.. that just seems sort of silly. Treasuries seem to have such low yield due to the fact that money is being moved into them at a massive rate (insert explanations: [fear,conspiracy,aliens,helicopters]).

This is the one big point of disagreement I have with Nassim Taleb. He’s frequently made public statements that shorting US Treasuries is something that everyone should be doing.. and I think maybe that’s a little misleading. A lot of nimwits will (and are) out there buying up lots of TBT and asking: “WTF? When are Treasuries going to break? They can’t stay this low forever!! This is the trade of the century!!!”

Should have shorted TBT (after inventing time machine and traveling back in time). I’m sure that evil (but oh so sexy and smart) octopussy Goldman Sachs is making money hand over fist selling derivatives insuring against the “inevitable, any day now” rocket ship path of US Treasury yields.

Before the crisis of 2008.. there was less than $900 billion in Federal Reserve Bank credit outstanding.. we are now at around $2,310 billion (with much more on the way, I would figure).

This core monetary base is over 2.5 times higher than it was in August 2008.. yet the DJIA and SPX are about 10-15% lower (with QQQQ flat) and GLD is only 30% higher.

Something sure seems very wrong with the total money supply.. beyond just M0,M1,M2 and M3, and I’d figure that M0 is going to have to increase a lot more to compensate for the shrinking M∞ in the system (this is my pet symbol for all that stuff beyond just M3.. the stuff that creeped into the system and was propped up by $60 trillion notional CDS at the peak and nearly $300 trillion notional in interest rate swaps [I suppose others refer to this as "the shadow banking system".])

Either way, I’d probably suggest people stay out of the way of that train (and don’t short treasuries).. unless they just want some excitement..

dead hobo

Doug Kass’ Predictions for 2010

http://wallstreetpit.com/13213-doug-kass-predictions-for-2010

By editor|Dec 28, 2009, 12:35 PM|Author’s Website

Hedge fund manager and financial columnist Doug Kass shares in this CNBC interview his 20 possible outlying events for the coming year.

According to Kass:

1. Corporate profits soar 100% in the first quarter of 2010 from a year ago, while GDP jumps 4.5%.

(nope on the first and yawn on the 2nd … no context … GDP up due to great job or fun with numbers)

2. Housing and jobs fail to revive. (lots of people were saying this)

3. The U.S. dollar explodes higher. (only when euro crashes)

4. The price of gold topples. (not yet)

“Gold is going to break $900,” he said. “It’s one of the most crowded trades.” (huh?)

5. Central banks tighten earlier than expected. (Where?)

“We might see a policy mistake, everyone’s concerned about it,” Kass said. “I think we’ll follow China. China’s already trying to stem the property speculation…So one of the surprises will be a much earlier increase in the Fed funds rates than generally expected”. (hahaha)

6. A Middle East peace is upended due to an attack by Israel on Iran. (we still have 2 days)

7. Stocks drop by 10% in the first half of next year. (10% is a hiccup … that’s like saying it will rain in April)

“If we look at the consensus forecast, [stocks] are really clustered in a narrow range,” said Kass. “We get a decline and the first surprise is that corporate profits double in the first quarter and then you have an exogenous event, which hurts the market and then we get nothing for the second half of the year.” (Translation: the market will fall in H2 if something bad happens … Genius!!)

7. Kass predicts that Goldman Sachs (GS) goes private. (Not yet)

9. Second-half 2010 GDP growth turns flat. (BB was also saying similar stuff)

10. Rate-sensitive stocks outperform; metals underperform…. (bla bla bla)

reply:
——————
This looks like garden variety blather to me, not expert.

Detroit Dan
This is getting into “birther” territory. Rosenberg shoots down (with ease) the WSJ op-ed by the two Jeremies:

Yet in this whole discussion of the bond market, nowhere do the “Two Jeremies” talk about their forecasts on the Fed and on inflation. These are the two most vital components of interest rate determination and they are not even discussed in this “bond bubble” piece.

Paul B

Regarding Rosenberg, Siegel and stocks and bonds, the relative dearth of dollars vs. claims for them (35:1) means that default-free and creditworthy fixed future cash flows (Treasuries and High-Grade bonds) can satisfy the fiduciary need to match liabilities (hence, the bond bid) while investors are also coming to the conclusion that shares in many multinationals (non-cyclicals specifically) are actually a form of a more stable currency than dollars. JNJ equity can’t be a better credit than US Treasuries in nominal terms because JNJ can’t print money but it most certainly can in real terms because by owning something of value (like a pallet of band aids) a JNJ shareholder could effectively barter his shares for needs (like food and warmth) or wants (like a Porsche). The numeraire on the medium of exchange (USDs, JNJ shares, Long Treasuries) is secondary in real terms because sustainable value is driven by supply/demand and preference (1 pallet of band aids for a barrel of oil and 100 pallets for a Porsche would be expressed differently in Yen or USDs).

There simply isn’t enough base money currently to first to service debt and then to provide nominal return to stockholders. This implies the need to make more money if stocks are to rise (they could theoretically trade at 1x earnings or even at a discount if no more money is manufactured). If no more money is made, then the real value of bonds vs. stocks will widen because at least bonds define a definite payment schedule. While JNJ can’t be a better credit than USTs, JNJ stock can be more “creditworthy” than JNJ debt in the sense that it’s a claim on real assets/production. JNJ debt is a claim ONLY on USDs as are USTs. In the event of a major currency devaluation, you can bet your bippy that JNJ equity offers a real return substantially in excess of its debt.

Mike C

Shorting US treasuries is about the most certain opportunity I see right now, 10 and 30 yr especially. I don´t know if the market will correct in 1 month, 1 year or more, but yields have eventually to go up.

Eventually can be a really, really, really long time. Many people were certain JGBs were the most certain shorting opportunity for the last 15 years. Now that ship might finally be sailing (see Kyle Bass interview and point about demographic shift) but you’d have gotten killed maintaining a short position for the last 10+ years waiting for eventually.

I have no idea how you can be so certain. Question for you. Have you read and watched Hendry? Read Rosenberg? Van Hoisington? The notes that outline the similarity between Japan and the U.S. Have you read Koo? My guess is if you are that certain, then you really haven’t studied the deflationist argument very closely. I was certain about the tech stock bubble and the home price bubble. This one isn’t clear IMO at all.

Mike in Nola

Here’s an interesting little tidbit I ran across at ZH. You can probably guess what the charts reflect.

[Aug 19, 2010] Do US Bonds Resemble Dot Com Stocks

Without rampant inflation the risk being taken by bond holders is nothing compared to risk taken by dot com chasers.

Over the past few months, I have been saying US Treasuries remind me of the dot com stocks circa 1997-98 in three ways:

1) You knew momentum was taking them (much) higher;
2) You knew it was going to end badly;
3) If you were honest, you admitted you had precisely zero idea when the day of reckoning would be.

I mentioned this at the Agora conference last month, and again on Fast Money last night and Bloomberg radio this morning.

What made the dot com situation so pernicious was that anyone who was judged on relative performance (i.e., Mutual fund managers), were all but forced into these names in order to keep up. Very few people — Buffett and Grantham come to mind — manged to both avoid both chasing these names and losing their client base.

Tobias Levkovich, Citigroup’s chief U.S. equity strategist, mentions something quite similar in the Bloomberg Chart of Day:

Here is Dave Wilson:

“U.S. bonds may be just as vulnerable to a plunge as stocks were a decade ago, when the Internet bubble burst, according to Tobias Levkovich, Citigroup Inc.’s chief U.S. equity strategist.

The CHART OF THE DAY depicts how an index of monthly returns on 10-year Treasury notes since 2000, as compiled by Ryan Labs, compares with a total-return version of the Standard & Poor’s 500 Index from 1990 through 2005. The latter gauge peaked in August 2000 and tumbled 38 percent in the next two years.

About $561 billion has flowed into bond funds since the beginning of last year, according to data from the Investment Company Institute. Stock funds, by contrast, had a $42 billion outflow during the period.”

Source:
U.S. Bonds Resemble Internet Bubble, Citi Says:
David Wilson
Bloomberg, 2010-08-17 13:02:46.389 GMT

obsvr-1 Says:
August 18th, 2010 at 12:37 pm
Definitely a bubble and the chart shows a troubling similarity — there will be losses, the magnitude is yet to be determine when the bond bubble deflates (not bursts), but different from the dot com burst because many of the companies had equity valuations based on hot air so the loss in principle investment much higher.

Where is the next bubble ? Once the herd gets their @ss handed to them in bonds they may make a rush to gold to drive it to bubblicous levels.

RC Says:
August 18th, 2010 at 12:40 pm
The secular shift argument sounds so much like “new economy” talk that we heard in 1998-99 upto the point the bubble burst.
IBM selling notes at yield half that of the stock yield. Isnt that a sign of a bubble !!!

foosion Says:
August 18th, 2010 at 12:50 pm
Assuming you keep average maturity and duration at a reasonable level (the aggregate bond mkt, for example), how much are you going to lose when rates rise?

Compare losses if PE or PE10 (using 10 year avg E) reverts to its mean sometime soon.

Cash in a coffee can is always the safest alternative (actually either very short TIPS or TIPS matched to your horizon). Its returns are somewhat limited.

I’ve been hearing rates will soon go back up for at least 10-20 years. One day it might actually happen.

Gatsby Says:
August 18th, 2010 at 12:58 pm
This is an interesting comparison and an interesting question. Dead Hobo makes some excellent points.

However we can’t bridge too much of a correlation between the two run-ups. The dot-com equity rally was a typical “tulip-type” hysteria boom. Information, logic, fundamentals were ignored and animal spirits took over.

The pressure that fund managers were under is a GREAT point to raise (although apparently very few of them had heard of a stop-loss order). The question is, are we looking at the same thing happening to bonds?

The case for a secular change, I believe, does have some basis. Retail investors are a lot older and looking for more stable sources of income (or simply wealth retention).

The last 10 years have not done much to create confidence in equities for investors, and a secular shift to bonds could simply be a reflex action as part of an equities hang-over.

We are facing a very deflationary (or minimally inflationary) outlook, which is a good place for bond holders.

In the short-term we have had an 80% rebound that has put Wall Street ahead of Main Street.

David Rosenberg is another guy who has made some eloquent arguments for a secular shift to income.

As an aside, I don’t usually give much credence to an outlook on binds provided by the Chief Equity Strategist of Citi (maybe that’s just me).

At the end of the day though I am a strong believer in mean reversion. I suppose the question would remain, from a long-term perspective, where dies the mean lie?

Joe Retail Says:
August 18th, 2010 at 1:01 pm
The one who will get seriously hurt is the little guy who has been told that “fixed income” is safer because it’s government guaranteed and it offers — fixed income. Seem obvious.

What no one has told him is that a “fixed income” fund managed by an active manager can be just as volatile and just as risky as any equity fund.

So, what happens when all of the little guys who have been scared out of equity and into bond funds and similar (you’ve got to go somewhere …) learn this one the hard way?

aiadvisors Says:
August 18th, 2010 at 1:04 pm
Treasuries = dotcoms? I don’t think so. Dotcoms were pure speculation on massive profits (which would not and could not materialize) years into the future. Treasuries can and always will repay the principle amount together with the coupon interest at the designated times. There is no risk in that. The only risk to Treasuries is inflation which ain’t gonna happen anytime soon. Inflation requires money creation which requires lending and borrowing which also ain’t gonna happen in this age of deleveraging. Money supply is contracting as loans default and get paid off. Also lenders don’t want to lend due to risks of default and borrowers just don’t want to be in debt anymore. Can anyone spell liquidity trap? End of story. Treasuries remain as safe as ever albeit with lower interest income.

~~~

BR: I am not saying they are = ; I am saying there are similar feels to the end run as $ pours into the asset class . . .

call me ahab Says:
August 18th, 2010 at 1:05 pm
Two Wall Street tycoons that ended up with “pockets full of money” after the Crash were Alfred Lee Loomis and his partner and brother-in-law Landon Thorne. The two had been leading financiers for the new electric power industry in the 1920s. Loomis was also a scientist, and he became a major supporter of some of the century’s greatest scientific minds at his Tuxedo Park home. By early 1929, the two partners had liquidated all their stock holdings and put the gains into long-term Treasury bonds and cash. The reaction by their peers, so many of them forced out of business, seemed more like envy than admiration since “in the midst of so much despair, with the economic situation deteriorating day after day, Loomis and Thorne continued to profit handsomely

also-

the prime corporate bond yield average went from 4.59% in September 1929 to 3.99% in May of 1931. By June of 1938 the average corporate bond yield fell to a new low of 2.94%. Bonds returned 6.04% during the 1930s.

9 years- has it been 9 years?

so . . uh . . .why are treasuries going to bust?

The Curmudgeon Says:
August 18th, 2010 at 1:06 pm
Jeremy Seigel and Schartz did an op-ed in today’s Wall Street Journal (subscriber content) that concluded something similar –- mbonds are way overvalued, i.e., interest rates are way too low.

My take is that maybe the valuations they propose (1% interest on a four-year Treasury equating to an earnings multiple of 100) are too high because other investment alternatives are expected to decline in value. If housing is an alternative to Treasuries, then a 10% decline in housing prices over the four years would push the real yield to 11%. In other words, money doing nothing would return 10%, vis a vis housing. The extra 1% is on a Treasury bond is not the only metric to consider. Yields should go down if prices for alternative assets are expected to decline. It is that bugaboo “deflation”, though that is not often the manner in which the term is usually employed.

aiadvisors Says:
August 18th, 2010 at 1:07 pm
Furthermore, the yeild curve is distorted by a single massive buyer, the Fed, not mass investor hysteria. End of story chapter 2.

~~~

BR: Agreed

boola2 Says:
August 18th, 2010 at 1:08 pm
Dazydee is right that the chart is misleading. The chart appears to show that the S&P500 was up somewhere around 7x in 10 years, while the Treasuries have a little more than doubled in an equivalent span. Events of very different magnitudes. By using different scales and not starting the axes at zero, you can make any two upward sloping lines look similar. Not saying Treasuries aren’t very overpriced, just that this chart doesn’t show a dot com-like bubble.

Joe Retail Says:
August 18th, 2010 at 1:10 pm
aiadvisors: I agree, and you offer a clarification to my previous comment.

Direct purchase of treasuries, etc. gets you a known quantity. My own retirement fund includes a fair number of strip bonds, which will be held to maturity (haven’t bought much lately because I don’t like the current market). The difference is when people buy mutual funds thinking that it’s the same thing as buying the underlying bonds or treasuries. Then they are unwittingly open to damage at the hands of a too-clever money manager

call me ahab Says:
August 18th, 2010 at 1:15 pm
and another thought-

a 2.5% yield in a deflating economy- mayby it’s not too shabby-

of course- I guess you could put all your faith and hope in the stock market- if you like the idea of being gamed

X on the MTA Says:
August 18th, 2010 at 1:37 pm
For what it’s worth, I don’t think there is so much a bond bubble as there is a system awash in liquidity that has to go somewhere. Some money is chasing momentum, some is chasing income, some is chasing yield that has more stability than equities can provide. I do think rates are absurdly low, but that’s what happens in deflationary environments. The JGB bubble has been a “no-brainer” short for 15 years, but that trade has been a consistent loser for just as long. In general, I think bonds have limited potential to enter “bubble” territory right now because their value has a natural cap (that they trend to as maturity approaches) and because bubbles–in my mind at least–require massive amounts of credit to finance the purchases of the asset in a bubble, and that demand for loans would, you know, be reflected in higher interest rates that would halt the appreciation of bonds.

IS_LM Says:
August 18th, 2010 at 1:37 pm
Macroeconomist, economic historian, and former Treasury official, Brad DeLong, oblierates this moronic idea (as well as the WSJ op-ed by Seigel et al.). He does so on the basis of fact and reason. (For his thorough discussion of the current state of the economy, see this.) This blog post is serious fail, right down to the deceptive chart.

Evoo Kermartin Says:
August 18th, 2010 at 1:39 pm
One man’s “change in investment strategy” is another man’s “scared shitless flight to safety.”

How come nobody ever thinks to start welding a whole in the hull of the ship at the start of the Poseidon Adventure. I mean, after you’ve seen the movie enough times shouldn’t you just stay in the engine room with a blow torch and wait for the ol’ gal to roll?

tradeking13 Says:
August 18th, 2010 at 1:39 pm
Everyone is so focused on nominal yields. Inflation is currently around 1% which equates to a 1.5% real yield. If inflation were 3.5% and the 10-year were at 5%, it would be the same real yield, but no one would be calling it a bubble. Also, if we do dip into outright deflation, a 2.5% yield will look pretty good. Just ask the Japanese.

Mike C Says:
August 18th, 2010 at 2:30 pm
Excerpt from something I posted elsewhere:

Usually I agree with Barry, but in this case I think both Barry and Tobias Lefkovich (cited in the note) have it wrong.

Was listening to Louise Yamada the other day (worth listening to IMO):

http://www.financialsense.com/financial-sense-newshour/broad...

She reiterated her point that I’ve heard her make several times the past few years which is that secular lows in interest rates do NOT make V bottoms (or bond prices do NOT make V tops). There will be no crash in bond prices similar to crash in Internet stocks. She points out interest rates usually go through a multi-year bottoming process before beginning the next upcycle gradually. This is out it played out in the 1930s/40s.

I think most people continue to underestimate the long-term deflationary impact of the secular deleveraging/credit contraction that will last years. Go back and read Rosenberg the last few weeks.

[Aug 18, 2010] Are Bank Stocks Such a Good Buy

"Only a fool would have any faith in the banks, their regulators, or economists."

naked capitalism

Yves here. Aside from the general issues Steve raises, we have specific reasons to be skeptical of bank asset valuations right now. It isn’t merely that we have very low interest rates, which do a wonderful job of juicing the value of risky and long-dated financial assets. More important, there is ample evidence of regulatory forbearance, more colloquially called “extend and pretend.” We’ve pointed repeatedly to evidence of how the four biggest banks are carrying large portfolios of second mortgages at implausible valuations. Similarly, risky assets are also being carried at marks well in excess of their likely long term value.

Selected Comments

attempter:

Bank stocks are based on nothing real, just the cons enumerated here – de facto legalization of fraud via “forbearance” and simple refusal on the part of regulators to do their jobs (the former is the same thing as the latter, just dressed up in false dignity as a formal policy); de jure legalization of fraud via all the rule changes which allow extend and pretend and other forms of mark-to-make believe. Also how fraudulent accounting is allowed to result in fraudulent reportage of “profits”, which in turn legalistically enables fraudulent conveyance in the form of these “bonuses”.

Every cent of this is stolen, plain and simple.

Even though it’s fashionable for bankers to blame their so-so equity performance on the government that bailed them out, the big culprit is that financial sector will contract regardless as households and companies deleverage, plus a crappy economy means not so hot business prospects.

In the same vein, as I read the piece I was picturing all the swinish John Galt types who trade these stocks, calling and often thinking themselves brilliant “wealth producers”, when in reality they and the stocks are pure parasites on government welfare. Pure thieves, and such average, meager, ugly, shallow, boring, paltry ones, too.

Part of the great benefit of ending and restituting the Bailout will be the purging of this leech.

Safe Haven:

Fund Managers use the term “conviction” alot these days, especially where there continues to be such a great amount of uncertainty on both the top down ( de-in-stag-flation) and, bottom up ( financials tend to be more leveraged capital market bets). However, conviction is a 10 LETTER word.

FEES – is a 4 LETTER word that they generate for ugly performance of late and, at least over the last three years annualized and, marginal performance on a 5 year annualized basis!

Most equity fund managers are either flat or losing money for their clients year to date. Worse, on an annualized 3 year basis the returns are single digit NEGATIVE performance for a FEE ( make it a 3 LETTER word). 5 year annualized performance tends to look marginally better ( mid single digit returns) but, in point of fact, the retail investor seldom holds a mutual fund for a 5 year period of time with the level of volitility we have had in the past.

BANKS as attractive stocks?? It is great for those that are employed there ( compensation and carrer-wise once you have made enough you can step out). But, for retail investors, it has proved to be a losing proposition, time and time again.

[Aug 18, 2010] Boston Fed’s New Excuse for Missing the Housing Bubble NoneOfUscouddanode

"Maybe they let the bubble go on because that’s all they have left in the tank. The collapse of the bubble has laid bare the fundamentally weakness of the US domestic economy. " ... "Once the monetarist Volcker sowed the seeds of destruction of U.S. manufacturing, the only game in town was the FIRE sector, and the only ways they can show growth to maintain the illusion of healthy U.S."

August 18, 2010 | naked capitalism

Second, some very unfashionable schools of economics, namely the Austrians and the Marxists, both recognized the imbalances in the economy prior to the bust. It wasn’t just housing; the negative personal savings rate and the widening trade deficit with China were red flags.

Third is the through-the-looking glass logic: “Well, it took those (supposed) few who saw the bubble a long time to be proven right!” So how could you expect us to listen to them?” Huh? The bubble was hardly a secret, save maybe to central bankers (and that isn’t even true, William White of the BIS was issuing warnings as was ignored). The Economist made it a cover story in June 2005. And if the bubble had been arrested then, the damage would not have been very serious. The fact that it went on so long is perversely used as an excuse, when bubbles by nature go on absurdly long (as the recent example of the dot com mania vividly demonstrated). As we saw in this crisis, by the beginning of 2007, risk was so underpriced across all credit products that most market participants knew it was going to end badly, yet the vast majority stayed the course because exiting what might be too early had costs. Everyone acted as if they could all push through the door when the party stopped, and that of course proved false.

There is a good reason why economists may not be able to prick bubbles, but contrary to the Boston Fed’s lame excuses, it’s political. Ian Macfarlane, the former head of Australia’s Reserve Bank, did see that Australia’s housing market was overheated, and in 2004, used a combination of jawboning and a couple of interest rate increases to take some air out of it. But he was at the end of his term, and his successor did not continue with his efforts.

Macfarlane wrote in 2005:

Many people have pointed out that it is difficult to identify a bubble in its early stages, and this is true. But even if we can identify an emerging bubble, it may still be extremely difficult for a central bank to act against it for two reasons.

First, monetary policy is a very blunt instrument. When interest rates are raised to address an asset price boom in one sector, such as house prices, the whole economy is affected. If confidence is especially high in the booming sector, it may not be much affected at first by the higher interest rates, but the rest of the economy may be.

Second, there is a bigger issue which concerns the mandate that central banks have been given. There is now widespread acceptance that central banks have been delegated the task of preventing a resurgence in inflation, but nowhere, to my knowledge, have they been delegated the task of preventing large rises in asset prices, which many people would view as rises in the community’s wealth. Thus, if they were to take on this additional role, they would face a formidable task in convincing the public of the need.

Even if the central bank was confident that a destabilising bubble was forming, and that its bursting would be extremely damaging, the community would not necessarily know that this was in prospect, and could not know until the whole episode had been allowed to play itself out. If the central bank went ahead and raised interest rates, it would be accused of risking a recession to avoid something that it was worried about, but the community was not. If in the most favourable case, the central bank raised interest rates by a modest amount and prevented the bubble from expanding to a dangerous level, and it did so at a relatively small cost in terms of income and employment growth forgone, would it get any thanks? Almost certainly not…In all probability, the episode would be regarded by the public as an error of monetary policy because what might have happened could never be observed….

Looking back at the evolution of monetary and financial affairs over the past century shows that policy frameworks have had to be adjusted when they failed to cope with the emergence of a significant problem. The new framework then is pushed to its limits, resulting in a new economic problem. The lightly regulated framework of the first two decades of the 20th century was discredited by the Depression and was replaced by a heavily regulated one accompanied by discretionary fiscal and monetary policy. This in turn was discredited by the great inflation of the 1970s and was replaced by a lightly regulated one with greater emphasis on medium-term anti-inflationary monetary policy….

No one has a clear mandate at the moment to deal with the threat of major financial instability, but I cannot help but feel that the threat from that source is greater than the threat from inflation, deflation, the balance of payments and the other familiar economic variables we have confronted in the past.

Yves here. Now there are other measures that regulators can use to attack bubbles, since the ones that are most damaging involve borrowed funds. They can take measures to restrict the gearing used in the markets that are superheating. But Macfarlane’s comment about the resistance to intervening rings true. Just imagine the howling you would have heard from homebuilders, realtors, bankers, home decorators, land speculators, you name it, had the authorities been able to severely restrict no-doc loans and had required a minimum downpayment, say, of 10% for non FHA loans. It isn’t yet clear we have the political will to take on the people who win short term from borrowing binges.

purple:

Maybe they let the bubble go on because that’s all they have left in the tank. The collapse of the bubble has laid bare the fundamentally weakness of the US domestic economy.

Tao Jonesing:

@purple,

That’s my thesis, too.

Once the monetarist Volcker sowed the seeds of destruction of U.S. manufacturing, the only game in town was the FIRE sector, and the only ways they can show growth to maintain the illusion of healthy U.S.

GDP growth is by churning (they get paid for each transaction in which they stand between us and our assets) and by blowing asset bubbles that increase asset prices and expand credit (the FIRE sector benefits from both in the short run).

DownSouth:

Yves said: “The problem is that mainstream economics sees prices as virtuous.”

Herein lies the problem. For the simple fact is that this is not a statement of scientific convictions, but of religious convictions. The discipline of economics masquerades as science, but is in reality a value-laden endeavor that comes much closer to religious practice than scientific practice.

I started reading Robert H. Nelson’s Economics as Religion: from Samuelson to Chicago and Beyond a couple of days ago. Although I immediately agreed with Nelson’s hypothesis that the discipline of economics is religion, my first impression was that he and I were members of different congregations, that he was a free-market fundamentalist. But as I got further along in the book, I discovered it to be much more thoughtful and nuanced than that.

If we place Nelson within the larger framework identified by philosophers like Michael Allen Gillespie and Hannah Arendt, we find that the discipline of economics is not only religion, but it is more specifically Christian (or one Christianity’s begets, such as Islam). The governing concept here is a belief in paradise or utopia. Prior to the Renaissance, Descartes, Hobbes and the Enlightenment that paradise was other-worldly.

But with the advent of modernism, the utopia is now this-worldly, or secular. The discipline of economics is the religious practice that deals with the pursuit of a worldly utopia. Classic, Marxist, neoclassic, Austrian, Keynesian, you name it—-they are just like the sects and schisms of old in that they have different visions of the utopia and how to achieve it, but they all believe this worldly paradise is achievable.

And as is the case with any religion, veridical truth in these various economic sects falls victim to normative mandates.

Tao Jonesing:

@DownSouth,

“The discipline of economics masquerades as science, but is in reality a value-laden endeavor that comes much closer to religious practice than scientific practice.”

Neoclassical economics as exemplified by the Chicago School is nothing more or less than the propaganda arm of the FIRE sector. Hence, the masquerade. They don’t actually believe in anything they say and they don’t have to because the ends justifies the means.

anonymous:

Excellent, as usual, Yves. Many thanks. I’d expand the looking glass analogy far more broadly. The viewership of the networks is aging rapidly and shrinking, readership of newspapers continues to shrink, all that at a time when there is more information available than ever.

There seems to be a real skepticism at play here. It isn’t so much that the public believes the bankers spin, quite the opposite. Folks don’t expect authorities to tell the truth on any topic, so there’s a real lack of surprise or shock when facts come to light, just a deeper sense of resentment and hostility.

I’ve no idea where it will end, but with a collapse in support for the Afghanistan mission and Iraq unraveling, the public has real cause to feel ripped off.

Vangel :

“Now there are other measures that regulators can use to attack bubbles, since the ones that are most damaging involve borrowed funds.”

Regulators can begin by not fueling bubbles in the first place. The housing bubble was created by an interplay of the CRA, injections of liquidity by the Fed, HUD policies, Fannie and Freddie activities, government protected rating agencies, and the activities of a private sector looking to take advantage of the opportunities that the regulators provided. That bubble could not have taken place in a truly free market.

Tao Jonesing:

Yeah. The government made the banksters and loan originators act extremely irresponsibly and, in many cases, forced them to commit outright fraud.

Bad government. No donut for you! Poor banskters and fraudsters, we’re sorry the bad government didn’t stop you from being bad. You can have this donut.

The Fed is run by Wall Street. So are the rating agencies, who are both owned by Wall Street and a vendor to it (the customer/owner is always right). And Fannie and Freddie became a convenient mechanism for laundering fraudulent loans, which is not surprising given the revolving door for management between the GSEs and Wall Street.

And what you leave out is that the housing bubble was created to fuel a much larger, completely unregulated derivatives market. That bubble is exactly what you get when you have a truly free market: corruption, greed and hubris.

readerOfTeaLeaves:

Ah, the unfettered, free market makes the Ferenghis in Star Trek almost seem to be timid acolytes of Emily Post’s Etiquette.

But Yves posted:

But Macfarlane’s comment about the resistance to intervening rings true. Just imagine the howling you would have heard from homebuilders, realtors, bankers, home decorators, land speculators, you name it, had the authorities been able to severely restrict no-doc loans and had required a minimum downpayment, say, of 10% for non FHA loans. It isn’t yet clear we have the political will to take on the people who win short term from borrowing binges.

May I be in the first, loudest row of the Hallelujiah Chorus on this one?

No doubt many around here were in various degrees of UpCloseness to the Housing Bubble; I happened to see it at the land use, local government level and it was hideous to behold: the venalty, the greed, the insolence, the egoism were astonishing to behold among the developer and mortgage banker participants. As for the electeds…?

Such cowardice, almost weirdly synchophantic accommodators of developers as to shock the eye of a reasonable soul — or anyone paying taxes in the region.

At this point, I must note that one of my fave bits in Econned is the line about:

“Faulty financial technology not only understated risk, but its widespread adoption created a lingua franca of sorts, namely, approaches for measuring and modeling. Those standards facilitated trading and investment, since they gave investors benchmarks for how they ‘ought’ to invest and think about pricing. But these approaches were, and still are, accepted and as valid as the theory of the four humors (black bile, yellow bile, phlegm, and blood) that was the foundation of Western medical practice through the nineteenth century.

Oh, speaking of measurement?

The local electeds were just woozy with delight about ‘full employment’ — because if you ‘measure’ a job framing houses as a ‘job’, right in the same category as a teaching ‘job’, or a law enforcement ‘job’, then wheeeee! You can brag about your great ‘jobs’ so-called metric.

Nevermind about the fact that the teacher and cop ‘jobs’ provide medical, retirement, and annual employment.

Nevermind that the house framers are working for hourly, or ‘per job’ pay with little-to-none long term employment security.

This is the ‘job metric’ at the heart of the ‘policies’ driving subdivisions based on gas at 2002 prices. Wheeeee!

And who was whispering in the ears of those feckless, well-intentioned, but meek and suppliant electeds? Their buddies on the boards of local home-mortgage banks, upstanding Chamber of Commerce members every one.

And who was on the boards of those mortgage banks (and in many cases, put up significant sums to set up those mortgage banks)? The housing developers. So the circular reasoning, the HomeOwnershipSanctimonious enthusing over what is basically the economic equivalent of black bile, yellow bile, phlegm, and blood made for such an intense ideological bubble that anyone who didn’t buy into it was politically excommunicated.

Wow, do we need new economic theories, and badly.

And we need to make sure that electeds understand them, if only to give them a tiny bit of spine — at least enough to look at a ‘jobs’ report and ask some questions that might better insure the long-term fiscal discipline and viability of the jurisdictions on whose behalf they are supposed to be making decisions.

Historian:

“That bubble could not have taken place in a truly free market.”

Straight GOP line, and complete ignorance. Bubbles have taken place throughout history in free markets.

http://en.wikipedia.org/wiki/Economic_bubble

Basic reason: people are not perfectly rational. Seems obvious, but recognizing that gives some small credence to government intervention, so the right as is their fashion, refutes the basic facts that lead to conclusions against their ideology.

Siggy:

Yves said: “The problem is that mainstream economics sees prices as virtuous.”

That’s idea that has always puzzeled me. I’ve always felt that prices were allocative and in that, amoral in that who got how much, more or less, was entirely a secular proposition within the framework of a transaction or set of transactions. Those with more get more. I’ve never endorsed the idea of sharing without recompense.

The study of Economics as religion. Yes, one can reasonably assert that the acceptance of various tenets is predicated on something other than a rationale that is imbued with a veridical line of logic. As that crosses into the realm of pure faith, one can readily see that assigning economics to the religion bin is quite rational and veridcal.

As to veridical truth. Now that made me think. Thank you for that. Lovely catchy phrase.

As to new and probably recurring mea culpas that aver whocouldanode. Well, they certainly tell you how dumb and quite possibly malicious the inmates of the parthenon of economics happen to be.

I tend to favor the Austrian view, but favoring is not equivalent to fully endorsing. In 2000 I noted the beginnings of an acceleration in house prices. by 2002 I was convinced that we were experiencing a house price bubble while the general level of consumption prices were increasing at a very moderate rate. This led me to conclude that we were experiencing a Gresham’s Dynamic wherein too-easy-credit-money (I’m of German descent and freight train words make perfect sense to me)was supplanting traditional credit money. Too much credit money and you get an increase in credit money funded purchases and prices.

I pondered, how does, and when does, one short this obvious bubble. After all, the dictum: ‘what can’t go on forever, won’t', was and is very much in line with my experience over the past 50 years. Ah those lovely little RMBS and their faith companions CDS. 2005 was position time and 2007 was collection time.

So, if the greater fools in Fed Land want to believe in efficient markets and that no fraud is worthy of prosecution, let them have at it. With a modicum of freedom I can do a work around that brings home the bacon. Now, of late, the bacon is less than a pond by the package at yesterday’s price. So, this whole affair is convoluted in the fact that we have this worthless fiat paper. Mind you, it’s a lovely printing job; nonetheless, those Federal Reserve Notes don’t buy as much as they once did in the not that distant past.

Now dealing with that core problem is mentally difficult and mathematically rigorous. It’s a really tough slog to assemble the appropriate data, not to mention just what shall the null hypothesis be. In lieu of that tough row, we’ll just endorse whatever it is that our leader says and be on our way.

Pity their way does not lead to the exit door. Pity it leads to a conference room were all can huddle and muddle along creating chaos in the production component of our political economy.

Evoo Kermartin:

“[E]conomics is really really bad at fieldwork.”

Yes, yes, YES! Anyone who analyzes data without considering the reliability of the data is not a scientist. Company audits have been a public scandal since Enron. For starters, huge GIGO problem, huge.

jomiku:

I read the paper when the link from the Boston Fed appeared in my inbox. I think you mischaracterize the point somewhat. They looked at what economists said. They found that most waffled, even prevaricated, saying in one breath that it looks like a bubble and in the next that it might not be bad or one doesn’t know how it will end (meaning a slow down, not a pop). They found that the sentiments of actual economists were so mixed that people relying on those sentiments could easily have been misled about the bubble. I did not read the paper as saying that noonecouldaknown, but instead as a statement that look, here are what economists actually said and now we focus on the pessimists who were right but that’s not the way it looked at the time to actual economists.

My read of the paper was that it shows well how difficult it is for people to know what they’re in the midst of. It shows the difficulties of policy making because odds are really, really good that the right views will be surrounded if not inundated with loads of junky statements, some that outright argue for the opposite of right and most that waffle so much that relative inaction becomes the most weighted course.

Evoo Kermartin:

Is that you, Kartik? An analytical methodology that cannot distinguish signal from noise is unsound.

Bill Wood:

Greenspan II (the sequel, aka Helicopter Ben) promises to continue to apply the same old one-size-fits-all reflexive monetary policy in his misguided attempt to revive an economy already severely damaged by this very same putative solution. This is pretty much the equivalent of a coach taking a wounded athlete and sending him back into the field of play after loading him up with steroids and pain killers.

So far kicking the can down the road in this way has been far more successful than I would have guessed. But as a strategy, it won’t last forever. In much the same way that a bingeing drunk will sooner or later collapse, the collective refusal of our business and political leaders to acknowledge their own responsibility for our worsening economic conditions will ultimately fail as well. By then perhaps they’ll have constructed a narrative that lays the blame for all of this on some foreign enemy. Let’s hope that they don’t get away with that.

Dan Myer:

To be a ’serious’ economist, must you ignore common sense?

When models and actresses enter the ‘house flipping’ business and countless (and I really mean, countless) TV shows are spawned around ‘Flip this House’, ‘house flippers’, etc. You HAVE to know that we are in a bubble. Frenzies do not always create bubbles, but all bubbles are accompanied by such frenzies. Not only marked by TV shows, but also common references to the housing market at the time as “hot, exploding, soaring” etc.

What do serious economists think about the endless ‘gold’ commercials on TV now and the abundance of cnbc-mass-audience-appeal shows such as “Fast Money”, “Mad Money”, “options action”…deploying the same old terms when a company happens to beat its quarterly earnings guidance: “exploding, hitting the cover off the ball, popping, ripping”.

I believe this is why our founding fathers had the wisdom to prescribe a congress composed of ‘common men’, rather that ‘trained’ (serious) legislators. For some reason, our educational and political systems scorn common-sense reasoning. Yet, common sense tells you that we are in a world of trouble on many fronts…even when the ’serious’ are blind.

Ishmael :

They looked at what economists said. They found that most waffled, even prevaricated, saying in one breath that it looks like a bubble and in the next that it might not be bad or one doesn’t know how it will end (meaning a slow down, not a pop).
—————————————————
This has been a major problem with main stream economists and news reporting. Any more if some one was blown to pieces the newspaper would report the subject appeared dead. No one in power has the cohones to say things as they are.

I had a letter to the editor published in the Boston Globe in 2005 or 6. I can not remember. Anyway, in this letter I clearly pointed out that housing was forming a bubble and that it would be devastating to a large percentage of new home owneres.

I started beating this drum around 2002 and people indicated I was nuts. I have been around the housing industry for 42 years and have seen numberous bubbles (Oklahoma, Texas, Australia, Boston) anyone with half a brain could have seen this would end in tears. All it would have taken to kept this bubble from happening is people in positions of power to come out and speak unhedged that housing was forming a bubble and where that would lead.

Even Robert Shiller was always speaking in a hedged manner.

Ed:

Poor Bob Shiller, still can’t get no respect.

Namazu:

Yves said: “The problem is that mainstream economics sees prices as virtuous.”

Amen. From your blog to the ears of Krugman and others who can’t see the bubble in Treasuries.

Ishmael:

Ed:

Check out the interest rate on the 30 year Japanese Bond. That will give you idea how low interest rates can go and how high up bonds can go. Of course this is like a year or two horizon. After that watch out below. Japan will probably lead the way down.

CingRed:

You mean the emperor aka economist has no clothes?

“Economic theory provides little guidance…” While I agree with the whole sentence the shortened version is more correct.

“While optimistic forecasts held by many market participants in 2005 turned out to be inaccurate” those projections were not “unreasonable” given what was understood about the economy and housing market dynamics in the years before housing prices crashed and helped create one of the worst economic downturns in generations.”

What this says is that they still don’t understand the exponential function. You can’t sustain a growth rate in an expense that is greater than the growth rate of income.

I once argued with a corporate VP that they could not expect to continue their 30% per year growth rate because in x years they would “be” the entire US economy. They didn’t understand it, and apparently neither does economic theory. I have sent our state legislators graphs and data showing how the rates of increase in tuition vs income will shortly make it impossible to justify the expense of going to college. We face the same exponential math in the area of health care expenses vs income.

The matter of not being able to design policy that would have targeted and prevented the bubble is completely false, as they were systematically removing or ignoring such policies causing an acceleration of the expanding bubble. While it is easy to understand the political pressure against removing the punch bowl just when the party gets going, we have to understand that doing the right thing has never been the popular route.

The other major blindness that economics has is their seeming lack of being able to distinguish between wealth and money. If they do understand the difference then their policies are clearly designed to decrease the wealth of the general population.

readerOfTeaLeaves :

Ah, the lowly exponent, which is daily used in biology and environmental studies (as well as other fields) seems to be outside the range of thinking of the mortgage bankers, realtors, builders, developers, and local electeds of my acquaintance. Compound interest, they understand.
The lowly exponent, not so much.

Exponents are less apt to produce the sort of ‘equilibrium pricing’ they all seem to assume exists.
Bah.

B Con:

How many economists does it take to pop a bubble? Answer: None – because they can’t see it.

That was a great post. The state of macroeconomics is dismal and its not clear where the revolution that overthrows the clown prince kingdom will come from.

Raging Debate:

Once the plebes have been sheared they cannibalize themselves. The bankers will fund the revolutions on which political group that supports their kind of model flavor. Who funded the American revolution?

Jim:

Congratulations to you, Down South, for trying to get to the bottom of things.

Isn’t politics, finally, also political theology–meaning that all political concepts are secularized versions of theological concepts.

And if this seems a valid hypothesis then isn’t it imperative that all of us take a careful look at the process by which our deepest desires, longings and feelings take conceptual form–especially when this process seems to necessitate the use of tradition-laden language and inherited ideas, goals and visions of the future.

Strangely enough, it is perhaps the frank acknowledgment of these traditions and a closer examination of their contents, as embedded in both politics and economics, that may offer us a way out of our contemporary morass.

up over:

Clarifications re the Australian situation:
* The boom was 2002-03 not 2004 and the rate rises you are referring to happened in late 2003.
* Macfarlane’s extended term ended in late 2006 – he took a three-year extension
* His successor, Glenn Stevens, expresses himself differently but did not walk away from the idea that asset and credit markets matter (see, eg, his speech to their 50th anniversary symposium earlier this year)
* Actually, RBA kept raising rates for several years afterwards, including in the middle of an election
* If the RBA was banging on about housing less after 2004 it is because their bubble did actually fizzle after 2004 so there was less to bang on about. Nationally, the dwelling price to income ratio has been flat since then, with a few bumps. Prices boomed in Perth (mining boom and population growth running faster than supply could meet) but the east coast was pretty flat even in nominal terms for some years.

Suffice to say I disagree with your characterisation of the Australian episode.

ChrisPacific:

“Economic theory provides little guidance as to what should be the ‘correct’ level of asset prices — including housing prices,” the new paper published by the bank says.

Bullshit. The value of an asset is the net present value of the cash it generates over its lifespan. In the case of a house, it’s the rent you could earn from it over the time you own it (or the rent you don’t have to pay as a result of living in it, which amounts to the same thing), minus maintenance and expenses, plus the expected sale price at the time you sell it, all with an appropriate discount factor applied based on the return you need to make it worthwhile due to cost of financing, risk of drop in prices or prevailing rent, etc.

There is one factor peculiar to residential house pricing that I haven’t factored into the above, namely the American Homeowner premium (it is the right and destiny of every American to own their own home etc.) which tends to result in people paying higher prices than might be justified economically. However, I suspect this has remained relatively constant over time. What makes a bubble is inflated expectations around the last term (expected future sale price). Normally wage growth acts as a brake on this because if house prices climb faster than wages for an extended period, it becomes impossible for average buyers to afford them. In the recent case, the MBS industry and predatory financing effectively removed this constraint, which allowed the bubble to grow.

I’m not an economist and I can do this. It’s not hard. Property investors make these calculations regularly and to a high degree of accuracy. Are economics professors expected to ignore this stuff as a condition of entering the profession? This seems akin to a mathematics professor publicly denying the existence of the multiplication table.

[Aug 18, 2010] Mel Brooks and the Bankers

Economist's View

This is from Thorvaldur Gylfason. He argues that bankers may have been playing a game similar to the game played in Mel Brooks' The Producers, and if that's true, "the perpetrators should be heading to jail":

Mel Brooks and the bankers, by Thorvaldur Gylfason, Vox EU: In Mel Brooks’ brilliant film and Broadway musical The Producers, an over-the-hill Broadway producer, Max Bialystock and his hapless accountant, Leo Bloom recognize two great truths. It is very hard to produce a hit and very easy to produce a flop – and they can make more money by producing a flop than by producing a hit. Max uses his expertise to ensure that the play flops. He selects the worst play ever written (Springtime for Hitler) – an ode to Hitler, a terrible director, and an awful male lead. Max understands critics’ key role in determining the success of Broadway plays, so he pretends to attempt to bribe the most prominent critic in order to enrage him and make sure that he will pan the play.

Max then (literally) seduces his investors, raising a million bucks from “little old ladies” by selling far more than 100% of the potential profits. If the play fails almost immediately, the investors will not expect to receive any money and Max and Leo can run away to Rio with the investors’ money.

The plot fails, however, because the show turns out to be a hit. It is so excruciatingly bad that the audience assumes it is a clever satire. Bialystock and Bloom land in jail when they are unable to pay over 1000% of profits to the investors. In prison, Max and Leo promptly set out to try the same scam. The story ends there because even Mr. Brooks could not imagine what happened next.

Real-life Bialystocks and Blooms

Not all the CEOs running the fraudulent savings and loans (S&Ls) in California and Texas in the 1980s and 1990s saw The Producers, but all of them could have played Max’s role convincingly. They shared Mr. Brooks’ insight into why the massive frauds use accounting as their “weapon of choice”, structure their efforts to fail, and recruit an accountant as their most valuable fraud ally. The fraudulent CEOs and their accounting allies were the real-life Bialystocks and Blooms. They bankrupted the S&Ls, enriching themselves and their friends along the way, at the expense of stockholders, creditors, and taxpayers.

Fraudulent lenders maximize their (fictional) income by making exceptionally bad loans and growing very rapidly. Borrowers that will frequently be unable to repay their loans are numerous (allowing the lender to grow rapidly) and will pay a higher interest rate (yield). The combination of rapid growth and high interest rates produced guaranteed, record income in the near term during the S&L debacle and the current subprime lending crisis.

During the ongoing subprime mortgage loan crisis, the rating agencies and the top tier audit firms played the real life role equivalent to the critic that Max pretended to try to bribe to make sure that Springtime for Hitler received a terrible review. Unlike the critics, who Max realised he could not succeed in bribing, the rating agencies and the top tier audit firms gave rave reviews to toxic subprime mortgage paper. The rating agencies claimed the toxic waste was pristine “AAA” – the safest of the safe. The elites that we count on to advise us on quality in the real world are more corruptible than the elites in the fictional world that Max and Leo inhabited.

In the words of Professor Paul Romer (quoted from Johnson and Kwak 2010), “Over the last fifty years, the Federal Aviation Administration, the airline manufacturers, and the airlines worked together to make a highly complex air travel system more efficient and much safer… in contrast, our financial regulators and banks have made our financial system less efficient and much more dangerous.”

In time, the regulators and the American justice system caught up with the S&L frauds. More than a thousand priority white-collar felony convictions resulted from the S&L debacle. Also, high-ranking politicians who had aided and abetted the S&L operators and accepted donations from them were driven from office and power, including Jim Wright, Speaker of the House of Representatives from 1987 to 1989. The “Keating Five” were deeply embarrassed for their intervention on behalf of the most notorious fraud, that perpetrated by Charles Keating at Lincoln Savings. One senator was reprimanded by the Senate Ethics Committee, another two were criticized for acting improperly, and two more, while cleared of impropriety, were criticized for poor judgment, including Senator John McCain, the former presidential candidate.

Repeated games

But this is a trick you can pull only once, you might think. Well, a few years later the people in charge at Enron thought they might try something similar, and for a while it looked as if they might succeed. Their fraud was exposed as well, however, and they brought down with them Arthur Andersen, one of the big five accounting firms in the US. And then there was WorldCom, and hundreds of others. Prosecutors were able to arraign only the most notorious of these frauds.

The crisis that started in 2007 also contains significant elements of fraud. The crooks still understand Max and Leo’s scam, but this time the regulators and prosecutors appear to be as clueless as the little old ladies that Max conned.

Perhaps we need to send the regulators and prosecutors to remedial showings of The Producers. Alternatively, we could have them become familiar with modern economics and white-collar criminology. Inspired by the experience of regulators who had dealt with the S&Ls and understood fraud – and perhaps also by Mel Brooks – George Akerlof, the Nobel-Prize winning economist, and Paul Romer published in 1993 a famous article entitled “Looting: The Economic Underworld of Bankruptcy for Profit.” In 2005, the white-collar criminologist, economist, and lawyer William Black published a book entitled “The best way to rob a bank is to own one”. Again, the title says it all. In an appendix, the book reproduces a memo from Charles Keating that reads, in part, “get Black – kill him dead.” In the 1980s, Mr. Keating ran the Lincoln S&L Association, running it into the ground in 1989 at a cost to the federal government of over $3 billion and leaving about 23,000 customers with worthless bonds. Mr. Keating, a generous backer of the five aforementioned senators, the “Keating Five”, served four and a half years in jail.

Built to fail

Mr. Black has listed the four main characteristics of fraudulent banks.

They grow very rapidly;

They make really bad loans at high yields (because only borrowers who have no intention of paying back will borrow at exorbitant interest);

They pile up huge debts; and

They set aside pitifully small loss reserves.

This, in a nutshell, is what many of the failed S&Ls in California and Texas did in the 1980s. The key thing to realize is that such banks are built to fail. The owners and operators of the S&Ls could live lavishly as long as their scam lasted, or longer, as many of them, even after serving time in jail, walked away rich at the expense of innocent bystanders.

At some point, though, the threat of getting caught may lead some to try to subvert the law. As Professor James Galbraith put it in his testimony in the US Senate 4 May 2010, “This is where crime and politics intersect.” This is where law and order enter the picture if financial regulation has failed to rein in the banks as it did before the onset of the current crisis in 2007. The National Transport Safety Board investigates every civil-aviation crash in the US. In Europe, national Civil Aviation Accidents Commissions perform this vital role. Their principal concern is public safety. For reasons of consumer protection and public safety, finance needs to be viewed the same way as civil aviation. When things go wrong, there is a clear need for credible crash analysis to secure full disclosure. If laws were broken, the public has a right to know. Mel Brooks would agree – Bialystock and Bloom went to jail.

References

Akerlof, George A and Paul M Romer (1993), “Looting: The Economic Underworld of Bankruptcy for Profit”, Brookings Papers on Economic Activity 2, 1-73.

Black, William K (2005), The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry, University of Texas Press.

Brooks, Mel (1968), The Producers – A Gay Romp with Adolf and Eva at Berchtesgaden, a film written and directed by Mel Brooks starring Zero Mostel and Gene Wilder. Academy Award for best original screenplay.

Brooks, Mel (2001), The Producers, a Broadway musical based on the film. Three Tony Awards, including for Best Musical and Best Book of a Musical.

Brooks, Mel (2005), The Producers, a film adapted from the Broadway adaptation.

Galbraith, James K (2010), “Statement before the Subcommittee on Crime, Senate Judiciary Committee”.

Johnson, Simon, and James Kwak (2010), 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, Pantheon Books.

Selected Comments

mrrunangun:

The banksters are protected from prosecution. They bought protection with large political campaign contributions to both sides, so they are protected no matter who wins an election.

They have cost the taxpayers $800billion+ and not only are not in jail, they still have the same jobs atop the banking world in most cases and a lot of that $800billion funded their bonus pools instead of recapitalizing their shareholders' banks.

There is no limit to how much you can steal from the public with the government's blessing as long as you know how to share.

Patricia Shannon :

"They make really bad loans at high yields (because only borrowers who have no intention of paying back will borrow at exorbitant interest)"

=====================================

I disagree. From my experience, I expect many of the borrowers were simply unrealistically optimistic. Some people are like that naturally, and our society encourages it. In fact, if you are not unrealistically optimistic, you are often denigrated.

Bruce Wilder:

The core of a con game is to convince the mark that he's in on the con. Some banks really did "market" home mortgages on that kind of basis, encouraging liar loans (no documented income), or "pick-a-payment" adjustable-rate loans ("you'll sell the house in a couple of years, for a profit, before payment adjusts; don't worry.")

cm:

And with a probably large number of liar loans, while the mark would be signing on the dotted line, they wouldn't take an active role in supplying the actual "liar" parts.

In an apparent situation where "everybody is doing this", many people would not question the details of "standard contracts" esp. when driven by a strong desire to make it work.

Bruce Wilder :

I wonder why there isn't more criticism of "for-profit" business organization. The S&Ls, prior to the reform that resulted in their spectacular demise were mutual companies, nominally owned by their depositers. The idea was that people in the community lent their money to the S&L and the S&L lent its money to people in the community.

cm:

It's the usual principal-agent problem. Most depositors are absentee owners, realistically speaking. I'm a member in one or two credit unions too, but I'm not very much inclined to spend my evenings perusing the financials and reports.

save_the_rustbelt:

I've read through a pile of books this summer, and the best so far for explaining in detail (but readable) is Gasparino's book ("The Sellout"), really lays out the horrors of Wall Street.

K Ackermann:

Here's a paper written with great restraint on the Iceland banking crisis.

http://www.voxeu.org/index.php?q=node/4965

It is textbook Bill Black control fraud. The hubris hinted at is sickening.

Bill Black has all but begged to be put to work, and I find it extremely telling that the government can't find a job for him.

rjs:

Janet Tavakoli :

"Someone like [Robert] Rubin is able to wreak destruction, collect an ungodly profit, then go along his merry way, pontificating about how 'markets have an inherent and inevitable tendency -- probably rooted in human nature -- to go to excess, both on the upside and the downside.'

This from the man who, as Bill Clinton's Treasury secretary, was vociferous in opposing the regulation of derivatives -- a key factor in the current economic crisis -- and who lobbied the Treasury during the Bush years to prevent the downgrading of the credit rating of Enron -- a debtor of Citigroup."

Voters must demand that Congress uncovers and publicizes facts and prosecutes the financial system's massive multi-year frauds. This will mean thousands of felony prosecutions, enforcement actions, and civil actions.

http://www.huffingtonpost.com/janet-tavakoli/how-to-thwart-the-assassi_b_682538.html

[Aug 17, 2010] Johnny Cash - Sixteen Tons

I owe my soul to the company store

cappsoutlaw

god bless johnny cash how we need you now to bring country back to the blue collar roots

mace41canuck

johnny liked this song because of how the coal miners were basically slaves getting paid with currency only good for local stores in the community ..rough life back in the day with no real pay ...meanwhile the mining company got rich

1982IronFist

@Aurdos

The Federal Govt is the company store today. We work and they take and leave us with debt. The people who produce are literally getting older and deeper in debt because of the govt. spending so much on the politically connected and favored

Aurdos

The company store today is the goddamn banks bleeding Americans dry.

[Aug 17, 2010] Rates Fall as Market Fears Economic Weakness By FLOYD NORRIS

NYTimes.com

The second negative factor from lower interest rates now is harder to quantify, but may be of growing importance. Those people who depend on their savings to provide income now earn far less from their thrift than they used to receive. Some avoided sharp declines by purchasing longer-term certificates of deposit from banks. But as those C.D.’s mature, the banks are offering low rates even on long-term deposits.

[Aug 16, 2010] The Future of Finance

The Big Picture

Did you know that the London School of Economics has a “Paul Woolley Centre for the Study of Capital Market Dysfunctionality?”

[Aug 15, 2010] cisco-comments-mixed-signals-recovery.html

lawyerliz:

Does "mixed" really newspeak for down?

Speed:

KD has a post on this - he brings up the fact that Cisco has become a financier with loans creatively accounted for - that is, they're not.

CISCO- Anyone Remember LUCENT- - The Market Ticker ®

lawyerliz:

There are a number of words, I'd like to ban, if I were Queen of the World.

One of them is challenges.

[Aug 15, 2010] Stocks vs Bonds

“It’s for good reason the stock market was dubbed “the bond market’s idiot kid brother.” :-)

The Big Picture

My disdain for the efficient market hypothesis came about by observing the difference between the stock and bond markets. It was apparent that the Fixed Income traders were of a “rational” mindset so often lacking in the equity world.

Indeed, I have frequently called Bonds the market that acts as “Adult Supervision.”

So I got a kick out of Mike Santoli’s reminder this morning in Barron’s:

“It’s for good reason the stock market was dubbed “the bond market’s idiot kid brother.”

Mike also points out an interesting data point regarding the Industrial’s dividend yield:

“Telling a similar story in a different way, the dividend yield of the Dow Jones Industrial Average components, at 2.65%, is essentially equal to the 10-year Treasury yield. The folks at Morgan Stanley note that over the past 50 years the Dow’s yield has exceeded that of the 10-year Treasury for only one period—the end of 2008 into early 2009, as the financial crisis climaxed.”

Idiot kid brother indeed.

The Curmudgeon:

August 14th, 2010 at 11:45 am
But you know when the bond markets start acting like bratty kids on a sugar high, it’s katie bar the door time.

Above-the-fold in today’s Wall Street Journal:

http://online.wsj.com/article/SB10001424052748703960004575427690901781072.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

Junk Bonds Hit Record

U.S. companies issued risky “junk” bonds at a record clip this week, taking advantage of keen investor appetite for returns amid declining interest rates and tepid stock markets.

The borrowing binge comes as the Federal Reserve keeps interest rates near zero and yields on U.S. government debt are near record lows. Those low rates have spread across a variety of markets, making it cheaper for companies with low credit ratings to borrow from investors.

call me ahab:

BR- also- what of your 900 call on the S&P (as heard on Kudlow)-

900 seems to be a particularly rosy scenario

wildebeest :

@ahab

“Keynesian theory enjoyed a tremendous run, but is now for all intents and purposes dead…”

I’m not an economist so I guess I get surprised by how often people trash talk Keynesian theories. I always thought that when it is correctly applied governments run surplus in good times and deficits in bad times (yes/no?). Presumably is also assumes a degree of competency in government and in the Fed. So when has Keynesian theory actually been applied through the complete cycle? So what seems to take place in Keynes name doesn’t seem to be Keynesian to me. Sure people want to borrow to kick the can further down the road but the other side of the theory — responsible government in times when there is no crisis — is never applied.

If governments fuck things up in the (apparent) good times it is hardly surprising that theories don’t work so well when the shit hits the fan.

Australia is the only country I can think of in the last 20-30 years that has run surpluses in the good times.

The Curmudgeon:

First there’s not an iota of difference between whether money comes from the Fed or the fisc. It still represents a claim on the earnings of future taxpayers.

AIG is an $80 billion hole. Fannie and Freddie, so far, almost double that. But this:

“The money was used to prevent a second Great Depression, to avoid massive cuts on the state and local level that would have led to mass starvation, and to prevent us from eating our own seed-corn by slashing education and investment in the future.”

Mass starvation? Really? You been to a Wal-mart or Costco lately? There’s enough food in your average Wal-mart to feed a small city for a week, and many of the patrons appear as if they’ll try to get it down in might shorter time than that. I’ll leave it at that. I can’t see how you could really be serious that we faced mass starvation. We not only produce enough food to feed ourselves, we export more food than any country on earth.

So far as the fiscal and monetary stimulus preventing the next Great Depression, I’d say that the verdict is not yet in. This thing ain’t over. Not by a long shot. But not to worry. We won’t starve. We just won’t buy as many iPads.

constantnormal:

sooooo … either the stock market is going to run into decreasing profits and cut dividends accordingly, or the bond market is going to begin to experience increasing defaults, and see rates rise accordingly … or both … or neither.

Bob_in_MA:

Mike Santoli, once again, shows his lack of insight.

For the 30 years before 1960, during a period of deleveraging and QE, it was generally the other way around, with dividends often twice as high as Treasury yields.

Which period is most like ours?

ACS Says:

Sure, I trust Uncle Sam with my money for 10 years. I’m certain it will be returned at the end and the principal worth just as much in real terms as now. Also, I expect the interest on that money will remain above the inflation rate between now and then. How can I lose?

scharfy

I think the sane older brother has gotten drunk and is acting up…

The bond market has lost its mind…
http://runningofthebulls.typepad.com/toros_running_of_the_bull/2010/08/the-bond-market-has-lost-its-mind.html

and

Credit market quite possibly insane
http://www.distressed-debt-investing.com/2010/08/credit-market-quite-possibly-insane.html

worthy reads…

[Aug 15, 2010] Talking Business - The Real Reason for Ousting H.P.’s Chief

NYTimes.com

The consensus in Silicon Valley is that Mr. Hurd was despised at H.P., not just by the rank and file, but even by H.P.’s top executives. (Perhaps this explains why Ms. Lesjak was so quick to denigrate him once she took over.) “He was a cost-cutter who indulged himself,” was one description I heard. His combined compensation for just his last two years was more than $72 million — a number that absolutely outraged employees since their jobs were the ones being cut.

Rob Enderle, a well-known technology consultant, noted that in recent internal surveys, nearly two-thirds of H.P. employees said they would leave if they got an offer from another company — a staggering number. “He didn’t have the support of his people,” Mr. Enderle said. Although he was good at “holding executives’ feet to the fire, he seemed to be the only one benefiting from H.P.’s success,” Mr. Enderle continued. “He alienated himself from the people who might have protected him.”

[Aug 15, 2010] An Inventory Of Conservative Beliefs That Are Destroying America. by Chris Herbert

August 13th, 2010

Taking the mile high view of conservative economic concepts.

Government BAD, private economy GOOD. That’s the underlying philosophy of conservative Republicans and a majority of so-called Tea Partiers. Rule no. 1. It’s loosely based upon the Chicago school of economics, but has morphed into something almost no real economist recognizes as a coherent philosophy. Even Adam Smith would disagree with much of it. Never mind Keynes. But in politics, as in bad journalism, the rule is never let the facts get in the way of a good story.

Deficits are always BAD. Again that’s the Republican/Tea Party point of view. Balanced budgets are normally advisable. But in a recession, deficits happen. This is where government spending can ‘prime the pump’ to help spur recovery. Otherwise, the private economy takes longer to recover, or can even get more sick. Even conservative economists understand the deficit issue, although they disagree somewhat with what types of deficit spending helps the most.

If only government would just stay out of the way and let private corporations do what they think is best. Another ‘morph’ of the Chicago school philosophy with which even members of that school won’t always agree. From Love Canal to the BP disaster, to the financial collapse of two years ago, it’s painfully obvious to all but the ultra right wing of the Republican Party that this is bad advice and worse policy. The truth is that failure to sensibly regulate the banking industry turned a garden variety housing bubble into the worst recession since the Great Depression.

Medicare, Medicaid, Social Security — all wasteful socialist systems that should be done away with as soon as possible. Again, a right wing fantasy, totally at odds with historical reality. All of these programs have benefited millions upon millions of American who would otherwise be impoverished. Can they be more efficient? Sure. Should they be eliminated? Even right wing Republicans dare not make such a claim. If they did it would be the political death knell for the Republicans. Besides, there’s those inconvenient Europeans with socialist health care systems that provide better health care results for half the money. The right’s response: That simply cannot be. See rule No. 1 about government always BAD and private business always GOOD.

World trade is always good for everyone. The more trade the more good. Economists of all stripes are taking another, less sanguine, look at this belief. Balanced trade is being allowed into the public arena once again, as it was always allowed until the Chicago school rose to ascendancy in economics. Entire industries and their often well paying jobs have been shipped overseas. It was heralded as a good thing. Not so much anymore, as the American economy became 70% consumption. Industries shipped overseas, in the meantime, have gone through several iterations of innovation (durable goods a prime example) and what was once an American strength has turned into a serious weakness.

The dearth of capital investment domestically, caused by this economic philosophy, created severe economic dislocation in America. And it still continues. The resulting trade deficits act like a leak in the economic tire. Money pumped into the local economy goes overseas through the trade deficit ‘leak.’

Ironically, foreign competitors use good old fashioned mercantilism with capital controls and currency manipulation to beat the pants off domestic industry, which exercises the only option they have left — they invest overseas, not in America. This wrongheaded economic belief has made America the prime time chump of the global economy.

Yet it still persists. Amazing stupidity.

We don’t have an energy problem at all. We just need to “drill baby drill” and we’ll have all the cheap energy we could want. Forever. Again, a philosophy looking for some justification. Every developed or developing country on the planet disagrees with this attitude. Seriously. Every damn one of them disagrees. Of all the head scratching ideas the right has, this one takes the cake.

I call this industry ‘Big Fossil.’ It’s an industry that receives billions of dollars in annual subsidies. Billions. The right won’t even consider doing away with the subsidies! The right has fought every effort to reduce the stupendous amount of pollution, and damage, this industry creates every day. The costs of fighting this pollution adds additional billions annually.

It’s like the smog encrusted Los Angeles of the 1970s never existed! Young people in Los Angeles today probably don’t even realize that their city was at one time enveloped in dangerous clouds of fossil burning smoke from industry, utilities and inefficient automobiles. The right fought change then (and thankfully lost) just as they fight it now.

And don’t forget that pesky rule no. 1: Government BAD, private business GOOD. Always and forever.

Same for Industrial Agriculture. Another subsidized industry to the tune of $4-$7 billion. This subsidy, for corn primarily (coupled with a tariff protecting domestic sugar) has transformed farming in America. Small farms were almost made extinct. Food diversity disappeared under the onslaught of subsidized corn. Where there were thousands of meat processing plants 40 years ago less than 10 super processors produce more than 90 percent of the protein Americans consume.

We’ve become an agriculture mono culture. And such cultures have never survived in history. Plus, to add insult to injury, the food produced approaches toxicity. And overuse of the artificial fertilizers these mega farms need to exist, has resulted in huge ‘dead zones’ in the Gulf of Mexico where the nitrogen runoff has lowered oxygen levels below that which can sustain marine life.

Still, as with Big Fossil, Industrial Ag is protected by the Republican right wing. Socialism for their patrons is fine, apparently. In these two cases one must ignore rule no. 1. Which the right wing has no problem doing, it appears.

On and on. Mythical beliefs of how the world actually operates. When these same beliefs run afoul of patron industries, discard them and hope no one’s looking too closely.

It’s tough to persuade someone when their livelihood depends upon not being persuaded.

[Aug 14, 2010] Krugman unplugged on our decline and fall

Krugman sums up our current dilemma - we're entering an endgame of unparalleled greed driven by denial and spectacularly bad judgment.

In effect, a large part of our political class is showing its priorities: given the choice between asking the richest 2 percent or so of Americans to go back to paying the tax rates they paid during the Clinton-era boom, or allowing the nation’s foundations to crumble — literally in the case of roads, figuratively in the case of education — they’re choosing the latter.

It’s a disastrous choice in both the short run and the long run.

In the short run, those state and local cutbacks are a major drag on the economy, perpetuating devastatingly high unemployment. Paul Krugman

[Aug 14, 2010] The Checking Account Scam - How Wells Fargo Gouged Its Customers

Does RICO statute applies to Wells Fargo ?

The Agonist

How the System Was Rigged to Create Overdrafts

Prior to 2000, Wells Fargo did its best to minimize overdrafts in customer accounts. Its computers processed all credits to the account first, followed by ATM withdrawals and debit card purchases, followed by checks and then Automated Clearing House transactions (the ACH is used by banks to process debits such as PayPal charges or monthly mortgage or rental payments where the customer has agreed to an automatic debit). In every step, Wells Fargo used low to high sequencing; the smallest debits would go first and the largest would go last. This entire process mimicked the way the consumer managed their account using a traditional checking account balance, which ranks all transactions in chronological order. When an overdraft occurred on the bank’s records, the consumer would have known had they been keeping their checkbook balance up to date.

In 1998 Wells Fargo announced it was merging with Norwest Corp., a bank conglomerate in Minneapolis that specialized in consumer banking. While the Wells Fargo name was retained in this merger, when it came to consumer banking the Norwest people were running the show. They ordered all Wells Fargo units to conform to the Norwest way of banking, which included the use of high to low sequencing when it came to processing checking account transactions. Wells Fargo California, which is the defendant in this case, began to comply in 2001.

From 2001 to 2002 Wells Fargo initiated three computer modifications for its checking account back office operations.

1) In April 2001 Wells Fargo began processing all debit card transactions on a high to low sequencing basis, meaning that overdrafts were much more likely to occur. Overdraft fees were $22 per overdraft, but whereas prior to the change the customer would have to pay this fee but once, afterwards the customer could incur dozens of overdrafts on a single day simply by charging items as small as a $3 coffee purchase at Starbucks. Wells Fargo put a cap on the total number of overdrafts allowed before it required the customer to pay up the balance; this was 10 overdrafts or $220 in total. Once customers fell into this overdraft trap, however, they were afterward assessed a fee of $33 for each future overdraft.

2) Later in 2001, a second computer change commingled all debit card transactions with all checks and ACH debts that were processed, and the entire pool of debits was put into a high to low sequence. This greatly expanded the possibility that large value debits would push customer accounts into overdraft.

3) In 2002, Wells Fargo added a new twist to its processing, called the shadow line of credit. This was a number assigned to each account that represented the total dollar amount of overdrafts the customer was allowed to incur at what is called the Point of Sale – usually the cash register where a debit card was presented. Prior to this change, Wells Fargo rejected transactions at the Point of Sale if they created an overdraft, but now many more transactions were allowed to go through – up to the credit limit - precisely because they created an overdraft. The shadow line amount was not communicated to the customer; in fact none of the bank’s promotional or legal material revealed the existence of the shadow line. Judge Alsup complained that even by the end of the trial, despite repeated requests, Wells Fargo refused to divulge to the court any details about the shadow line of credit concept, how it worked, or how if affected the plaintiffs. One can reasonably presume, therefore, that the shadow line of credit algorithm was designed to optimize the dollar amount of overdrafts the customer could incur, before the customer presented a real credit risk to the bank if it defaulted on paying its overdraft fees.

Management’s Real Intentions Were to Optimize Revenue From Overdrafts

In explaining these changes, Wells Fargo argued that these were all best practices within the banking industry, that its regulator (the Office of the Comptroller of the Currency) authorized banks to sequence checking accounts on a high to low basis, and that customer surveys showed customers were eager to get large overdraft privileges in order to avoid the embarrassment of having transactions rejected at the Point of Sale. Judge Alsup found that less than 25% of banks nationwide employed high to low sequencing, that the OCC did not authorize such sequencing (though to be sure, it never squelched the practice until Congress outlawed this method unless the customer agreed in advance), and that Wells Fargo could come up with no written evidence that customers demanded this overdraft service, or that Wells Fargo even took into account customer desires when it made these changes.

Instead, Judge Alsup referenced several memos from management written in preparation for these changes, identifying the fee revenue to be generated as a result of them. The first change was expected to produce $40 million in additional revenue in the first year, and the second and third changes an additional $40 million. Judge Alsup found that both of these projections were reasonable approximations of the new revenue actually achieved. Furthermore, these new revenue amounts were essential in converting Consumer Banking at Wells Fargo from a sleepy backwater that looked at overdraft fees as a penalty for bad customer behavior, into a supercharged profit center that looked at overdraft fees as a desired result to be optimized for each account. These management memos also noted that 4% of all retail customers generated 40% of all overdraft fees, and that these were valuable customers because of their earnings potential for the bank.

Synoia

Limits to Growth

There is a demand for continual profits, profit growth and an expectation that any institution must always keep growing.

As companies mature, and find it hard to keep growing at their historical rates, which is natural for any system, they turn to practices which:

1. Enrich Management: Do bad deals (acquisitions and mergers, and the history of this is replete with poor deals, ask Daimler about Chrysler)
2. Screw their shareholders: Poor dividends, see (1)
3. Screw their customers: As did Wells Fargo
4. Screw their employees: Pay and Benefits get cut, outsourcing and a climate of fear.

The underlying root cause is its better for corporation to fission at this stage in life, as do amoeba, that is reproduce asexually. Its not in the interests of management (see (1) above) who are rewarded for a "large organization"with excessive pay and benefits, and not rewarded, at maximizing shareholder profits, from many smaller overall more profitable companies.

Size is the enemy. Ask any amoeba

[Aug 13, 2010] Obama Falls Short; Gary Shilling Sees 10 Years of Low Growth + Rising Unemployment

2% average growth for the next 10 years, rising unemployment. Public works are important.

Aug 12, 2010 | Yahoo! Finance

A new WSJ/NBC poll shows 64% of Americans believe the economy hasn't hit bottom, up from 53% in January. And about two-thirds say President Obama has fallen short on handling the economy and the budget deficit.

Obama's "big mistake was over-promising in a situation where it was very difficult for anyone to deliver," says Gary Shillling, president of A. Gary Shilling & Co.

"They obviously didn't understand the depth of the problem," he said, referring to the administration's promise in 2009 that unemployment would peak at 8% if the $787 billion stimulus package was passed.

The real problem, Shilling says, is the deleveraging process. Given the decades it took for the leverage to build up, it's folly to think the deleveraging process can be quick and painless, he says. "It isn't just that 2008 was a bad dream from which we've awoken and it's back to business as usual."

Indeed, Shilling says Americans are right to believe the economy hasn't bottomed yet; in fact, he says we're just at the beginning of a prolonged period of economic malaise.

Shilling's forecast is that U.S. GDP growth will average just 2% for the next 10 years. That isn't terrible but is a long way from the 3.3% growth he says is necessary to keep the unemployment rate steady.

As a result, he expects the pressure to increasingly mount on politicians to do "something" to fight joblessness. The problem, however, is "push is coming to shove in the sense of the political need for stimulus compared to the size of the deficit," Shilling says. "I think they've reached a Mexican standoff" in Washington.

[Aug 13, 2010] Deflations coming says gary shilling and its going to clobber the stock market by Henry Blodget

Aug 12, 2010 | Tech Ticker, Yahoo! Finance

All through the market rally and budding economic recovery of the past 18 months, most people concluded that the crisis was over and it was time to start worrying about inflation again. But strategist Gary Shilling of A. Gary Shilling & Co. stuck by his guns:

It was DEFLATION we needed to worry about, Gary said. And it was BONDS, not stocks, that investors should be buying.

Well, Gary's bearishness on the stock market caused him to miss a nice run, but he has been dead right about bonds. And he has also been right about the potential for deflation--as evidenced by the recent Consumer Price Index numbers and the fact that most other strategists have come to agree with him.

So what's Gary's current outlook?

Same as it ever was:

Prepare for chronic deflation, buy bonds, and sell stocks.

Why is Gary still expecting deflation? Because consumers still have way too much debt, and this debt will take decades to work off. Also, consumers are saving money again, which means they aren't spending it. Banks have plenty of cash and reserves, but the demand for money just isn't there. And when consumers are strapped and credit is contracting, prices tend to fall. (See Gary's charts here >

Gary's biggest concern about his deflationary outlook, in fact, is that most strategists have come to agree with him (the crowd is often wrong). But, for now, is sticking with his call.

[Aug 09, 2010] And Scene ICI Reports 13th Consecutive Week of Massive Domestic Equity Outflows As Banks Start To Panic

Retail investors are dunzo... "banks are starting to panic that as a result of collapsing trade volumes, profit target misses and massive layoffs are just around the corner."

08/04/2010 | zero hedge

What more can we say here that we have not said for 12 times in a row already. Retail investors are dunzo. The latest update from ICI shows that the week ended July 28 saw a record 13th consecutive outflow from domestic mutual funds as stocks bloody surged. Good thing the HFT algos can now essentially communicate with each other in the actual unique flow patterns of cancelled stock bids, thereby announcing to all other participants the plans of one which promptly become those of all, in the most under the radar concerted effort to "club" the market's HFT participants as one big trading force. As for retail: it is all over. We won't even chart the latest move. Figure it out: nearly $50 billion in outflows YTD as the market is well green. When the coordinated computerized front running game (of stupid carbon based lifeforms) in which one Atari machine sells to another, and repeats into infinity, while all book liquidity rebates, comes to an end and the theater is finally perceived to have been burning all along, watch out for the binary stampede.

But don't take our word for it. According to the FT, banks are starting to panic that as a result of collapsing trade volumes, profit target misses and massive layoffs are just around the corner.

US banks with Wall Street operations are bracing for a slump in trading profits this year after the third quarter got off to a poor start, with global economic uncertainty and Europe’s sovereign debt woes leading to a slowdown in market activity in July.

Executives said volumes and profitability last month were even lower than during the sluggish second quarter, with hedge funds particularly reluctant to take big bets on equities and debt.

“July was a miserable month for trading,” one senior banker said. “If August and September don’t rebound sharply, banks will be forced to cut jobs.”

The squeeze in trading profits highlights the rising importance of groups’ consumer and commercial banking operations, whose performance is improving as the economy heals.

The lack of activity led many banks to miss internal targets for trading revenues in both fixed income commodities and currencies – a key recent driver of profitability – and equities.

John Brady, senior vice-president at MF Global, said: “A lot of the drop we have seen in trading volumes during June and July follows violent changes in markets during the preceding months.”

Retail investors have also shunned stocks. US equity mutual funds have been hit by 12 straight weeks of outflows totalling $40.7bn, says the Investment Company Institute.

Better make that very unlucky 13.

[Aug 09, 2010] BNY Asks If Retail Investors Are Leaving US Stocks In Mutual Funds And ETFs, Then Who Is Buying Stocks zero hedge

"If retail investors are leaving U.S. stocks in both 401(k)s (read mutual funds) and brokerage IRAs/investment accounts (read ETFs), then who is buying stocks so that the market is still up (modestly) on the year?" His observation is simple: "Investors are shifting assets in both mutual funds and ETFs away from U.S. stocks and into fixed income"

zero hedge

One of Zero Hedge's favorite indications of rationality (in addition to following what credit does, without fail to the chagrin of permabullish equity fanatics) in the face of Fed-induced capital markets psychopathology, is following the flow of funds into various asset categories. Last week we pointed out that ICI reported the 13th sequential outflow from domestic equity mutual funds, validating our persistent skepticism that the money pushing stocks higher on margin is certainly not coming courtesy of retail accounts, which represent the bulk of holders behind the $10 trillion market cap of US stocks. Incidentally the retail redemptions are also occurring at the ETF level, and in total now amount to $32 billion for mutual funds, and $6 billion for ETFs. The paradox of a rising stock market in the face of massive redemptions has forced others, namely BNY ConvergEx' Nicolas Colas to ask the same question: "If retail investors are leaving U.S. stocks in both 401(k)s (read mutual funds) and brokerage IRAs/investment accounts (read ETFs), then who is buying stocks so that the market is still up (modestly) on the year?" His observation is simple: "Investors are shifting assets in both mutual funds and ETFs away from U.S. stocks and into fixed income. The moves are dramatic: there is 2-4x more money moving into fixed income than is leaving stocks. Fresh savings, in other words, are going directly into bonds. There is also some modest shift to international investing, mostly in equities, but not on the same order of magnitude as the bond trade."

In this environment, we believe that in addition to the recently floated idea of annuitizing 401(k), a new revision to retirement planning will be made to allocated even more capital to the equity portion of 401(k) plans, now that the Fed is about to imminently get back to monetizing treasuries thereby making the question of just who buys Treasurys on margin moot.

Cognitive Dissonance

BNY Asks "If Retail Investors Are Leaving US Stocks In Mutual Funds And ETFs, Then Who Is Buying Stocks?"

Just a wild ass guess but maybe it's Big Brother who's buying stocks to pump the market and create the illusion that all must be well since stocks (meaning 401(k)s and personal investment accounts, including variable annuities) are way up from the bottom, thus keeping popular resentment and anger within the Ponzi supporting middle to upper middle class suppressed and below boiling towards the bankster bailouts and obscene pay packages?

After all, if the supporting cast of government, military industrial complex and health care workers can be led to believe that the financial cream floating to the top is being shared to some extent ("Well I hate what's going on but at least I'm getting a piece of the pie") a few more months or years can be gained for the final fleecing before the entire stinking mess comes crashing down.

seventree:

it's Big Brother who's buying stocks to pump the market

That would also answer the underlying question, Who would buy stocks today and expect to ever see their money again? The question becomes moot of course if it is not their money but ours (or more accurately, freshly imagined money).

pitz:
That was the prevailing school of thought prior to the hyperinflation in Weimar Germany. Yet when all the dust had settled, only the large-cap, non-financial equity owners were able to preserve any value.
So diss the ownership of non-financial stocks at your peril.

maddy10:
True
But all common stock went poof.

Pity we can't buy Preferential stocks and shares like Buffet

pitz:
Not all common stock. Just the common stock of financial entities, and some junior industrials.
House prices also went to something near zero.

Germans who retained ownership of these productive enterprises, through common shareownership, strongly supported and financed Hitler, and his attacks on what was believed to be a "Jew-controlled" financial system.

maddy10:

I am not sure about that
Just quoting wikipedia

Says that the 'Golden era' make believe that happened after weimar collapse was funded by american financial houses and for allowing loans from american banks Germany got a place in League of nations in 1926

And Hitler's party became popular after the crash of 1929 that crashed all German interests again- That instigated the anti jew sentiment [minority though] coz the Jewish interests in Germany kept all the preferential shares that were still honoured by American "Jewish" Banks but common stocks were not. That enraged the german nationalists.

can't claim reference on Wiki , I know

MrSteve
My history reading shows only PM and agricultural holding owners in Weimar Germany maintained value through the hyper inflation. The industrialists went BK due to "supply chain" failures when no one would deliver against worthless payment purchase orders. Certainly we see non-financial ever-increasingly scarce domestic manufacturers going BK left and right in our own economy now. Meanwhile, farmland values and gold remain high. And in a rare display of modesty and doubt for WWW. postings, Am I wrong?

[Aug 08, 2010] We Speak on CSPAN’s Washington Journal About Big Corporations and the Economy

naked capitalism

Yves Smith:

My views happen to be middle of the road as of the Reagan era. Reagan himself panicked when unemployment hit 8% (which would be an even lower threshold now given changes in how it is measured) and began some closet Keynesian measures, pushing against our trade partners, and ultimately got support of the then G5 to engage in coordinated currency intervention (the Plaza Accord) to lower the value of the dollar to improve our trade deficit.

In other words, when fealty to “free market” concepts produced large scale job losses, Reagan retreated, big time.

The country has moved massively to the right since then. If correcting right wing falsehoods and overstatements makes me look leftie, so be it. We are in the midst of a plutocratic land grab by Mussolini style corportratists (aka socialism for the rich). If you aren’t upset about it, you are either not paying attention, deluded, or part of the problem.

George:

Yves, I thoroughly enjoyed your CSPAN appearance and appreciate your sounding the alarm.

Susan Eisenhower said that President Eisenhower’s original warning about the military-industrial complex referred to a military-industrial-congressional complex. He had a good relationship with Congress, and he dropped the reference to it to preserve the relationship. I think that the problem is actually much larger now and could be characterized as Large Corporate-Government complex.

tawal:

However I wish someone would have asked you about this: I believe that our federal government is responsible for providing its citizens with a safe and healthy environment. In 2005, yes it’s already 5 years ago, the Civil Engineering trade group stated that we needed to spend 1.5 trillion dollars over 5 years in order to make our infrastructure safe.

The fact that our country’s capital was without electricity for I don’t know how many consecutive hours last week says that we have alot of WORK that needs to be done.

Every summer the beaches in some of this country’s most wealthy zip codes are closed because of high bacteria count from dilapidated sewer systems.

This is domestic work that our domestic corporations can undertake, providing jobs. I wish someone would have asked you about what impact of US government spending on such projects would have done to improve the velocity of money presently.

Further, every person who wants a job helping with the clean up of the oil spill in the gulf, should have one right now. There is no reason for unemployment in this country; we have a lot of necessary work to do.

[Aug 07, 2010] Guest Post Projecting Yield Curve Slopes

Bonds are only as safe as the currency.

zero hedge
FranSix

One thing people aught to be aware of is that a top in the bond market is not like a top in the stock market and can take years to roll over due to aggregate demand.

Don't expect a sudden collapse, its not going to happen. Instead, certain tax implications with hoarding large amounts of taxpayer funded cash becomes a liability.

Because there is so much emphasis on the short term market for funds, banks will be obliged to seek a tax loophole in negative repo rates and short term treasury rates will drop below zero at that end of the curve and put downward pressure on the long end as cash emerges to be placed at the long end.

A lot of now-moribund derivatives sitting on the Fed's book are based on interest rates, so I presume that they will start to clear and trade again with negative interest rates.

There have been changes to the tax regime and to financial regulations, I am almost certain that they will reflect a conscious anticipation of this outcome, but I don't want to swim through the gobbledy-gook.

Getagrip:

Let me get this straight; FRNs (debt) are used to buy bonds (debt) and as long as the FRN debt holds up, this vicious circle will perpetuate? What if the FRNs fail/collapse? I see the two as one in the same and will tell you -- bonds are only as safe as the currency.

Jim in MN:

What fascinates me is the prospect of long bonds going to zero yield. I never thought it would be possible, and it would just make a lot of people's heads (and CPUs) explode, but when you consider the amount of toxic debt not written off, and the potential tsunami of financial devastation that 'losing it' on rates would entail, it just seems like the big money has no choice but to keep a fat finger on the scale, continuing to buy buy buy the long end no matter what the yield. Over time, say a couple more years, why shouldn't the long bond plumb some freaky yield depths? Indeed, it must according to this kind of yield curve analysis.

Just a broken system. No haircuts, no peace.

[Aug 06, 2010] Is the Unemployment Problem Cyclical or Structural?

The "cyclical" and "structural" labels do not have a strong conceptual foundation in economics. Both involve a lot of what economists call "hand-waving" a reference to what lecturers do, when they have to skip over an issue, which they are not ready, or are not able, to analyze. It's that lack of conceptual foundation that makes this "debate" feasible.

August 5, 2010

I have a new post at MoneyWatch:

Is the Unemployment Problem Cyclical or Structural?

If it's mainly cyclical, does that mean the government is powerless to help?
Bruce Wilder:

If the government fails to "help", does that mean the government is "powerless", and being "powerless", the government cannot be held responsible for the state of affairs?

It seems to me that's the "real" question, behind the "cyclical" v. "structural" debate.

More precisely, it's not an argument about substantive points of economics, economic theory or even economic policy analysis -- though it could be turned into one, if there was a will to do so. The "cyclical" and "structural" labels do not have a strong conceptual foundation in economics. Both involve a lot of what economists call "hand-waving" a reference to what lecturers do, when they have to skip over an issue, which they are not ready, or are not able, to analyze. It's that lack of conceptual foundation that makes this "debate" feasible.

"Feasible" as what? Feasible, as an effort to induce the mass hypnosis, necessary to manufacture consensus and a legitimating conventional wisdom. Those, who lost the political struggle over power, politics and policy, of course, see what is coming, and offer predictions of narrative gambits as a prophylaxis against the inevitable post-hoc rationalizations. It doesn't work.

It didn't work in earlier rounds. It would be shocking, if anything changed at this late date. Just a reminder of how well earlier rounds of conventional wisdom manufacture worked: Ben Bernanke.

Gentle Ben, a reactionary Republican, has been re-appointed Fed Chairman and treated, in conventional wisdom at the technocratic hero-of-the-crisis. Objectively, he was one of the principal architects of the crisis, and he chose and implemented a remedy, that has condemned the country to stagnation and the continued debilitating skim of a predatory financial system, but, hey . . . he's soft-spoken and hired PK at Princeton, so he's a great guy, and really knowledgeable, even if he is wrong about most everything.

We are being moved as a body politic, step-by-step, away from the clear recognition that this economy is a product of human hands, an artifact -- not the weather -- and if that economy screws the a large part of the labor force and home "owners", while benefitting JPMorganChase and GoldmanSachs, that's by design.

Roger Chittum :

"Structural unemployment is defined as unemployment arising from technical change such as automation, or from changes in the composition of output due to variations in the types of products people demand. For example, a decline in the demand for typewriters would lead to structurally unemployed workers in the typewriter industry."

So "structural unemployment" does not include unemployment arising from offshoring of jobs or the RMB currency peg? If unemployment arising from offshoring and globalization is not structural, cyclical, or frictional, then it must be something for which we don't even have language that lets us discuss it, let alone consider making changes. How convenient for defenders of the globalization status quo.

Fred C. Dobbs:

Wiki:

'Cyclical or Keynesian unemployment, also known as deficient-demand unemployment, occurs when there is not enough aggregate demand in the economy. It gets its name because it varies with the business cycle, though it can also be persistent, as during the Great Depression of the 1930s. Cyclical unemployment is caused by a business cycle recession, and wages not falling to meet the equilibrium level. Cyclical unemployment rises during economic downturns and falls when the economy improves.'

When jobs leave the country, they're not coming back, any time soon. This is not 'cyclical'.

Lawrence:

One thing the stimulus did not do was to spur new lending. That's not all that surprising with FAS 157 forcing banks to "mark-to-market". Maybe "mark-to-fiction" was better after all. There were not that many Enrons out there to damage the economy like what I saw on balance sheets nearly two years ago as a result of FAS 157.

Although you might call this a "balance sheet" recession, there is a liquidty crisis going on. The customers I have cannot let their age reports get out of hand: cash is king, you know. Many of their customers have been cut off because they no longer have the ability to pay in net 21 days. The firm I work for will cut any customer off if they pay in greater than 45 days. Since short term credit to aid a firm's cash flows is difficult to obtain, only the strong are still working, but only at a percentage of what they were doing three years ago. If stimulus were to help spur more lending, then we might see more commerce rather quickly, thus increasig demand to hire more workers.

Hawkewinde:

FAS 157 forcing banks to "mark-to-market"

"forcing" is a bit strong marking to market was around a long time before FAS 157. Even afterward, there's Level 3. Tell us about that

Until then, it sounds a lot like the ole talking point about "forcing banks" to lend under CRA or any other such blaming of increased street sign presence for the phenomena of speeding & crashing

Lawrence

i like where you're coming from but short term credit is primarily used for 3 things:

1) payroll
2) inventories
3) investment carry

If it doesn't go straight to 1), it's not injuring to demand. At least not sustainably so.

Lawrence:

To give an example, I booked trucks for Campbell Soup for awhile. They paid me in 90 days from date of invoice, but their credit was outstanding. I was willing to take them on, which was unusual for the industry I'm in. One day I asked why they pay in 90 days, and I was told they use no short term credit to pay their bills in less time. In other words that is how their cash flows work, and either accept the reality of it, or do no business with them.

Yes, payroll is a big part of the need for short term credit, but it also is necessary to aid cash flows to pay customers who will cut them off from any future business.

Most firms pay in net 21 days from date of invoice, that was until FAS 157 came along. Procurement officers at Sysco Foods began watching watching their age reports more stringently the day FAS 157 went into effect. I watched truck orders decline since then. Many shippers and receivers, wholesale or retail, were using lines of credit to build their inventories with so they could pay in net 21 days.

By June 2008, many receivers either saw their lines of credit drastically reduced, or were completely cut off.

Hawkewinde:

"it also is necessary to aid cash flows to pay customers"

Indeed, i agree solvency and liquidity are necessary conditions for each other where equity cash is limited. But equity remains the end game for recovery, even if mark-to-market insolvency is temporarily arrested.

The old keynes' w/p=mpl/(mpc+mpi) is an airtight argument for avoiding payroll cuts but I think it still begs the question of capacity, supply & demand for goods, and consequently the deflationary spiral.

The last time this structural-vs-cyclical debate flared up it was the late 50's whence there was no shortage of monetary inflation. I even think Samuelson's famous Demand-pull/push dichotomy giving direction to the Fed in '61 seems to be a bit overplayed given concomitant tax cuts and minimum wage hikes under Kennedy.

Thanks for the excellent illustration of a real-world example by the way. IMO more of this kind of real-world testimony is needed to get people thinking about the form & substance of vertical and horizontal integration problems in deflationary environments. It's a highly STRUCTURAL world of problems out here in any case.

Min:

"One thing the stimulus did not do was to spur new lending."

No, the bank bailouts did that. Remember? "So they can start lending again." ;)

It just hasn't happened yet. But not to worry. ;) If historical patterns hold, lending will start to return this fall or winter.

BTW, isn't lending part of pending small business legislation?

Lawrence:

I thought the bailout money was supposed to be used to pay bankers' bonuses for their ineptitude, and to also help industry wide bank consoldiation.

don:

It seems apparent that the unemployment cannot be entirely structural. High structural unemployment would reduce demand for goods and services and so creates cyclical unemployment.

I think part of the problem might be definitional. For example, unemployed housing construction workers - are they cyclically unemployed because the recent overbuilding was cyclical, or structurally unemployed because the overbuilding was so extensive that the overhang will last a long time? Or should we use some average of past housing cycles to get the structural and cyclical components?

It's not even clear that the distinction has that much to do with the proper government policies - structurally unemployed workers with an extended period in which there will be no opportunity for work are a wasted resource that can be used with little opportunity cost. Putting them to work would eliminate the cyclical unemployment their unemployment creates. The only cost I can think of (over that in putting cyclically unemployed workers to work) is if they would have spent the time unemployed training for another occupation. But it seems more likely that they would merely lose job skills and perhaps take up counterproductive habits.

anne:

"One thing the stimulus did not do was to spur new lending...."

Corporate interest rates reflect there being ample credit availability. Corporate earnings are high, interest rates low, so where is the problem with credit availability?

Hawkewinde:

anne
from your database,

in terms of inflationary vs deflationary environments,

what were the 1920's like
what were the 1950's like

Min :

What about attributional unemployment? I.e., you are unemployed because you are an unemployed kind of person. We are seeing that now, with so much long term unemployment. Instead of seeing that as a systemic problem caused by the financial crisis, potential employers are attributing that to some undefined flaw in the unemployed person. That happened during the Great Depression, as well.

This can affect self-image, as well, becoming a self-fulfilling prophecy.

"Well, I wouldn't give a nickel for the bum I used to be.
Worked as hard as any man in town.
Got a pretty gal,
She thinks the world of me.
A man would be a fool to let her down.

Go bum again.
Go bum again."

-- Fast Freight

save_the_rustbelt:

I think a more relevant problem maybe geographical mal-distribution.

There is some employer self-fulfilling prophesy, Joe has been unemployed for a long time so something must be wrong with Joe.

But I think in a hotter economy Joe would get a job, or Joe could get a job if he could sell his house in Michigan and move to Texas.

Hawkewinde :

Mr Thoma,

Since you have academic credentials and perhaps an expense account, maybe you could comment on Demsetz' findings on the "significant" connection between unemployment and structural factors:

http://heinonline.org/HOL/LandingPage?collection=journals&handle=hein.journals/jlecono4&div=6&id=&page=

What is the nature and methodologies of the studies that have already been done on this phenomena?

don:

Mark - just read your post here more carefully. I think you meant to say "If it's mainly structural, does that mean the government is powerless to help?"

stunney:

http://www.dailykos.com/story/2010/8/5/890685/-BREAKING:-Christina-Romer-To-Resign-From-WH

anne:

Hawkewinde:

in terms of inflationary vs deflationary environments,

what were the 1920's like
what were the 1950's like

http://www.usinflationcalculator.com/inflation/historical-inflation-rates/
http://www.measuringworth.com/inflation/

January 15, 2009

Inflation Rate, 1920-1929

(Percent change) *

1920 ( 15.6)
1921 (- 10.5) Harding
1922 (- 6.1)
1923 ( 1.8) Coolidge
1924 ( 0.0)

1925 ( 2.3)
1926 ( 1.1)
1927 (- 1.7)
1928 (- 1.7)
1929 ( 0.0) Hoover, contraction begins, August

* Consumer price index

anne :

Hawkewinde:

in terms of inflationary vs deflationary environments,

what were the 1920's like
what were the 1950's like

http://www.usinflationcalculator.com/inflation/historical-inflation-rates/
http://www.measuringworth.com/inflation/

January 15, 2009

Inflation Rate, 1789-2008

(Percent change) *

1950 ( 1.3)
1951 ( 7.9)
1952 ( 1.9)
1953 ( 0.8) Eisenhower
1954 ( 0.7)

1955 (- 0.4)
1956 ( 1.5)
1957 ( 3.3)
1958 ( 2.8)
1959 ( 0.7)

* Consumer price index

anne:

Hawkewinde:

in terms of inflationary vs deflationary environments, what were the 1920's like; what were the 1950's like

http://www.measuringworth.com/inflation/

January 15, 2010

Inflation Rates

1920 - 1929 = -1.73

1950 - 1959 = 2.15

[Aug 05, 2010] Auerback -- The Real Reason Banks Aren’t Lending

naked capitalism

Most people believe the economy crashed between 1929 and 1932 and then remained depressed until the Second World War, which finally mobilized the economy’s idle resources and brought about a full recovery. That’s complete bunk if you calculate the unemployment data correctly (see here for an explanation) . Even leaving aside the unemployment calculations, it is abundantly clear that, once the Great Depression hit bottom in early 1933, the US economy embarked on four years of expansion that constituted the biggest cyclical boom in U.S. economic history. For four years, real GDP grew at a 12% rate and nominal GDP grew at a 14% rate. There was another shorter and shallower depression in 1937 largely caused by renewed fiscal tightening (and higher Federal Reserve margin requirements). This second depression has led to the misconception that the central bank was pushing on a string throughout all of the 1930s, until the giant fiscal stimulus of the wartime effort finally brought the economy out of depression.

That’s incorrect. The financial dynamics of the huge economic recovery between 1933 and 1937 are extremely striking. Despite their insistence that changes in the stock of money were behind all the cyclical ups and downs in U.S. economic history, even economists Milton Freidman and Anna J. Schwartz in their “Monetary History of the United States” conceded that the money aggregates did not lead the U.S. economy out of the depression in 1932-1933.

More striking, private credit growth seemingly had nothing to do with the takeoff of the economy. Industrial production, off the 1932 low, doubled by 1935. By contrast, bank credit to the private sector fell until the middle of 1935. Because of the collapse in nominal income during the depression, the U.S. private sector was more indebted than ever in the Depression lows. Yet somehow it took off and sustained its takeoff with no growth in private credit whatsoever. The 14% average annual increase in nominal GDP from early 1932 to 1935 resulted in huge private deleveraging, largely as a consequence of aggressive fiscal stimulus.

Tim Geithner should be aware of this, but like his old colleagues at the Fed, his main obsession remains deficit reduction, which is why he is now expending considerable political capital on allowing the Bush tax cuts for the wealthy to expire. Ironically, one of the more amusing aspects of this particular issue is the sight of Republicans such as Mike Pence and Eric Cantor arguing that job creation is more important to Americans than deficit reduction (hence, we should extend the Bush tax cuts for the wealthy, even as their party fought vociferously against extending unemployment insurance benefits for the past several months).

The reasoning of Cantor and Pence is perverse, but on balance — however disingenuous and politically insincere — we support the GOP’s born again support for job creation over deficit reduction. We just wish they would refocus on something that would really help reduce unemployment, such as a Job Guarantee Program. A disproportionate amount of the stimulus program has been enjoyed by those who least need it. We would like to see the Obama Administration at least begin to make the case that fiscal stimulus, whether via tax cuts or direct public investment, is still required to generate more demand and employment. They should not concede anything in this area to the politically insincere GOP, which never met a tax break for the top 2% of the population that they didn’t like.

There might well be very good reasons, on grounds of social equity, to minimize the income gap between the rich and the poor, but Geithner and Obama are not making the case for the elimination of the tax breaks on these grounds. Rather, they continue to do so on the basis that this is the “fiscally responsible” thing to do. This is also consistent with the President’s odd championing of a “bipartisan commission” to study entitlement “reform”, where the focus appears to be on cutting Medicare and Social Security — in effect gutting the Democrats most substantial social legacy of 20th century.

The only concern about government deficit spending should be a whether it generates inflation, in which case it should of course be slowed down. None of those critique the ongoing fixation on fiscal sustainability, or “pork”, or “entitlement reform”, do so on the basis that there are “no limits” on government deficit spending, as has been alleged. What we do argue is that deficit cutting per se, devoid of any economic context, is not a legitimate goal of public policy for a sovereign nation. Deficits are (mostly) endogenously determined by the performance of the economy. They add to private sector income and to net financial wealth. They will come down as a matter of course when the economy begins to recover and as the automatic stabilizers work in reverse (i.e. tax receipts rise and social welfare expenditure comes down). When our policy makers begin to understand this, we can stop with the counsel of despair and actually do something that reduces unemployment today, not years from now — when it will be far too late

[Aug 04, 2010] The Biggest Lie About U.S. Companies by Brett Arends

It all sounds wonderful for investors and the U.S. economy. There's just one problem: It's a crock. American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression. According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s. The debt repayments made during the financial crisis were brief and minimal: tiny amounts, totaling about $100 billion, in the second and fourth quarters of 2009.

August 3, 2010 | Yahoo! Finance

You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they've paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.

You could hear this great news pretty much anywhere — maybe from Bloomberg, which this spring hailed the "surprising strength" of corporate balance sheets. Or perhaps in the Washington Post, where Fareed Zakaria reported that top companies "have accumulated an astonishing $1.8 trillion of cash," leaving them in the best shape, by some measures, "in almost half a century."

Or you heard it from Dallas Federal Reserve President Richard Fisher, who recently said companies were "hoarding cash" but were afraid to start investing. Or on CNBC, where experts have been debating what these corporations are going to do with all their surplus loot. Will they raise dividends? Buy back shares? Launch a new wave of mergers and acquisitions?

It all sounds wonderful for investors and the U.S. economy. There's just one problem: It's a crock.

American companies are not in robust financial shape. Federal Reserve data show that their debts have been rising, not falling. By some measures, they are now more leveraged than at any time since the Great Depression.

You'd think someone might have noticed something amiss. After all, we were simultaneously being told that companies

(a) had more money than they know what to do with;

(b) had even more money coming in due to a surge in profits;

yet (c) they have been out in the bond market borrowing as fast as they can.

Does that sound a little odd to you?

A look at the facts shows that companies only have "record amounts of cash" in the way that Subprime Suzy was flush with cash after that big refi back in 2005. So long as you don't look at the liabilities, the picture looks great. Hey, why not buy a Jacuzzi?

According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s.

The debt repayments made during the financial crisis were brief and minimal: tiny amounts, totaling about $100 billion, in the second and fourth quarters of 2009.

Remember that these are the debts for the nonfinancials — the part of the economy that's supposed to be in better shape. The banks? Everybody knows half of them are the walking dead.

Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP. That's a postwar record. In 1945, it was just 20%. Even at the credit-bubble peaks in the late 1980s and 2005-06, it was only around 45%.

The Fed data "underline the poor state of the U.S. private sector's balance sheets," reports financial analyst Andrew Smithers, who's also the author of "Wall Street Revalued: Imperfect Markets and Inept Central Bankers," and chairman of Smithers & Co. in London.

"While this is generally recognized for households," he said, "it is often denied with regard to corporations. These denials are without merit and depend on looking at cash assets and ignoring liabilities. Cash assets have risen recently, in response to the fall in inventories, but nonfinancials' corporate debt, whether measured gross or after netting off bank deposits and other interest-bearing assets, is at peak levels."

By Smithers' analysis, net leverage is nearly 50% of corporate net worth, a modern record.

There is one caveat to this, he noted: It focuses on assets and liabilities of companies within the United States. Some U.S. companies are holding net cash overseas. That may brighten the picture a little, but the overall effect is not enormous, and mostly just affects the biggest companies.

That U.S. companies are in worse financial shape than we're being told is clearly bad news for those thinking of investing in U.S. stocks or bonds, as leverage makes investments riskier. Clearly it's bad news for jobs and the economy.

But why is this line being spun about healthy balance sheets? For the same reason we're told other lies, myths and half-truths: Too many people have a vested interest in spinning, and too few have an interest in the actual picture.

Journalists, for example, seek safety in numbers; there's a herd mentality. Once a line starts to get repeated, others just assume it's correct and join in.

Wall Street? It's a hustle. This healthy balance-sheet myth helps sell stocks and bonds. How many bonuses do you think get paid for telling customers the stark facts, and how many get paid for making the sale?

[Aug 04, 2010] Deep_Dish_with_Dave_080410

Currently, the S&P 500 is a lock between 1,000 and 1,200 and we are now right at the midpoint. This range-trade pattern will break at some point and my sense is that it will be to the downside, and at that time we will see who has the cash (to put to work) and who’s left with the trash (and about to be trashed).

I see once again that the S&P500 is at a crossroad, but this time after a huge bounce. The market is having as much trouble now with resistance levels as it was encountering difficulty breaking below support levels just a short month ago.

Currently, the S&P 500 is a lock between 1,000 and 1,200 and we are now right at the midpoint. This range-trade pattern will break at some point and my sense is that it will be to the downside, and at that time we will see who has the cash (to put to work) and who’s left with the trash (and about to be trashed).

The level of complacency over the economic outlook is palpable and so reminiscent of the fall of 2007 when everyone believed the Fed could navigate us into a soft landing in the face of a credit collapse. Now the pundits have all but abandoned the ECRI index as a leading indicator (even the architects have) of economic activity. The ISM is dipping, but still above 50, didn’t you know. Corporate earnings were stellar in the second quarter — who cares if the results were skewed more to April than June? The savings rate has spiked to 6.4% in June, and many pundits see this as a valve for the U.S. consumer to reload the spending gun as opposed to a new secular theme of frugality.

So, many market commentators and prognosticators still see this cycle as a classic post-war correction in GDP than what it really is — the aftershocks of a post-bubble credit collapse. A double-dip recession may well be averted, but the risks are not trivial and the major point here is that the statistical recovery that was underpinned by the arithmetic contributions to GDP growth from inventories and the massive support from unprecedented fiscal and monetary ease is proving to be extremely fragile. Why else would Democratic senators now be voicing opposition to allowing the Bush tax cuts to end (the ones they criticized vehemently in the 2008 election) and why else would the Fed be hinting strongly at extending its quantitative easing strategies if the consensus view of 2.75% real GDP growth, was realistic? The odds of something closer to zero are higher than many think.

[Aug 04, 2010] Banking system on verge of new crisis, hedge fund Noster Capital warns -

Telegraph

London-based fund Noster Capital is betting against five major European banks, including Barclays in the UK, Spain's BBVA, and Switzerland's UBS.

... ... ...

However, he claims the biggest danger remains the US housing market, where he said there was the potential for a new shock as more Americans default on home loans as mortgages come up for refinancing.

Mr Noronha points to a new wave of low-quality "Alt-A" and "Option ARM" mortgages that face refinancing, which he warns could lead to a new fall in US real estate values, which could translate into a further series of losses for financial institutions still exposed to the US property market, which triggered the original crisis in 2007.

[Aug 04, 2010] obama administration is dead wrong about taxes david malpass says

Pretty funny shill for the wealthy... The most funny part that he tries to distance himself from Washington, despite the fact that all his profits from the stocks casino depend on Government benevolence toward financial speculators.

Yahoo! Finance

"Data show the economy is very sensitive to the top marginal tax rate; that's where much of the innovation is done."

discoverybg31:

That is the most hilariously ludicrous stupidity,

...The SBA was almost eliminated by the Bush administration. The bank bailouts were orchestrated by the Bush administration. The Republicans are blocking a bill to create a fund for small business loans, a lot of which was written by Olympia Snowe. They don't care about small business. They care entirely about the ultrarich elite. The "tax increase" they are talking about only affects 2% of the population. On top of that, countries that are talking about lowering their top tier tax rates are going from 70+% down. Our top rate is 35%. He's an idiot.

Ardelean:

France - 1789 had similar economical problems, mainly accumulation of resources by the rich while the rest of the people
were destitute.

THEN they invented a "MACHINE"... (HEAD Trickle Down Theory..) and got things back in "BALANCE".

It's interesting to watch History repeat...

[Aug 04, 2010] GMI Describes "The Future Recession In An Ongoing Depression" In This Must Read Report

Economists set policy, engineers and geologists do not. Economists do not understand the limits to exponential growth. Engineers do. Geologists studying oil production curves do. At the point aggregate energy inputs peak, there is nothing the monetary regimes can do. Because, to be perfectly blunt, you can't PRINT OIL.

"Breakdown of GDP shows that pretty much the entire bounce in the economy was driven by government spending and an inventory rebuild, both of which to be topping out... All th signs are now pointing to an economic contraction beginning in the latter part of the year... What makes me concerned is that there is rapidly mounting evidence that the US economy will be back in recession within the next two quarters... What is more concerining is that behind the data that is suggesting that we will be in a recession in short order, we have huge amount of data that suggests that we are still in the middle of depression... The overhelmimg evidence suggests that the US economy is headed into a recession by Q4 2010 or Q1 2011, and this will be against a backdrop of an ongoing depression. It is far too early to tell how deep the recession will be. In the normal course of evnets it would be expected to be relatively mild, but we are not in the normal course of events so we need to anticipate a wider error in forecasting.
Battleaxe:

In the paper he talks about Strauss & Howe's book "The Fourth Turning". That book, though not absolutely perfect in every way, was uncanninily accurate in its predictions of the future, being written in the 90s. The point that Raoul Pal discusses from the book is that this 80 year cycle is going to end badly (as they all do), no matter what the Fed or anybody else tries to do to prevent it.

The sooner they give up and let this rotten mess fail, the sooner we get through the inevitable bad times and hopefully get on to the good times that can follow. The most important thing isn't to try and keep this crisis from happening; it's to try and make sure we come out on the other side as good as possible.

Leo Kolivakis:

Just keep buying them [on] dips, Raoul.:)

traderjoe:

Read your piece the other day when you discussed that this was a regular cyclical recovery. That seems to ignore all of the evidence of how we got into this recession and how it will be playing out. I get the reflation at all cost argument. Seems to be working. Don't get at all calling this a regular recession (business cycle) as opposed to a balance sheet recession. That's why I think all of their actions will eventually fail.

VK:

Great summary! Consumer metrics has declined sharply in the last month or so, we're closing in on 4pc contraction right now in the eCONomy and yet it's going to be a prolonged period of deflation, deleveraging and depression.

midtowng:

Negative 2.5% of GDP sounds about right to me. Although I wouldn't put it out so far as Q4. Some time this quarter is closer to it.

Then followed by another extremely weak recovery. It's a step-down Depression. Not all at once or the frog (aka workers) might jump out of the pot.

B9K9:

Look, it doesn't take being a genius or even being a member of a club/group/clan to organize nefarious events to see what is occurring @ a macro level:

Demographics - Older, educated, highly skilled earners (boomers) are being replaced with younger, uneducated, low skills & wages illegal aliens.

Off-shoring - Regardless of demographics, off-shoring destroyed private sector employment.

Resource depletion - When the first Euros arrived, the entire continent was practically empty with easy to access resources literally lying on top of the ground. Today? Not so much - oil anyone? Again, this would have been a problem regardless of off-shoring and/or demographics.

Debt - 70 years worth of debt accumulation has reached the point where the marginal utility of debt has fallen below a 1:1 ratio. This would have been a problem regardless of demographics, off-shoring and/or resource depletion.

Any one of these primary drivers could sink civilizations, and have for thousands of years. The original model of the USA might, **might** have had the flexibility to adapt to these circumstances, but today, not so much.

So, when you step back and evaluate the macro perspective, it just seems really difficult to see how the USA is gonna come out of this in one piece when one considers that all four killer trends are occurring at the same time. That's why all the machinations being taken by the Fed, USG, MSM, et al really smack of the types of desperate actions taken by someone who's drowning.

What do desperate people do? Emotions begin to color their judgment until panic causes them to break & run. In the case of drowning victims, outright terror results in grabbing for anyone/anything to hang onto, regardless of other people's personal safety. (That's why lifeguards use those plastic buoys - they don't want a drowning person anywhere near them.)

So let's relate this to the markets. At this point in the game, the PTB simply do not give a shit about how transparent their bullshit is. Their hair is in their face, they can't see the shore, they're thrashing, and going down for the count. ZIRP, suspension of MTM, Fed printing for MBS/UST/GSE, legalized fraud, manipulated stats, MSM propaganda, SNAP, UI, mortgage forgiveness->retail ramp, and gunning the markets didn't work to improve **confidence** and re-ignite credit expansion. So what are they going to come up with next?

Going forward, each successive action will be increasingly more irrational, more ridiculus, and more dangerous. Losing gamblers who keep doubling down usually end up in the streets, dead or otherwise.

This whole panorama can easily be seen if one chooses to step back and take a look. Once you get the big picture, it's pretty damn easy to divine what the numbskulls are going to try & pull off next.

Shameful :

I agree with your macro view but I disagree about the "irrational" actors on the top anyway. This is the century of change, and many have written about a post industrial world. We don't get from A to Z without turmoil. To make it to a post industrial world it necessitates turmoil, so the serfs will accept the new way of living, or barring that simply die off. After all population reduction and a greatly reduced standard of living has to be sold to the serfs, and you don't sell it in good times.

Now I don't think it's possible to pull out of the tailspin even if they wanted to for the reasons you mention. I think this is the reason you see the seed vaults, armored redoubts, and remote property of many of the big boys. When you see a storm coming (or helped make) you take precautions.

For the lower tier guys, sure I can see the desperation. They are picking up nickels in front of the steam roller. But I have to think the big boys would have seen this coming, and had the resources to prepare for it. The collapse is all but certain after all, for the reasons you mention.

B9K9:

Good points. I might add that any characterization of rational vs irrational does not necessarily correlate with income/power. There are plenty of people, like Bernanke, who appear to be true believers, while OTOH, there are plenty of poor/modest people who sure as shit can figure out what is occurring and are rapidly preparing.

Sure, there are plenty @ the very top who saw this coming. I think they saw what was occurring and just bet on the trends rather than actively worked towards hatching a plan to make it all happen. That's why I opened with prefatory remarks about there didn't need to be a secret club to cause all of these events to play out. If history is any guide, and so far it's batting 1.000 percent, these trends & transitional change-overs have been occurring since yeast eventually morphed into humans.

So, back to the rational vs irrational comparison. We've got irrational folks - like Leo - or those who are just really good @ trolling for hits. Then we've got the rational minority who look at these larger macro trends, shake their heads, and figure there's just no way this thing is gonna fly.

So that means the astute person will conclude the trick is to forgo considering fundamentals and just position themselves to take advantage of increasingly desperate actions taken by the true believers - those both in/out of power.

We know for an indisputable fact that the actions taken to date have failed. Not that they really had a chance, but still there was an outside possibility. Now, however, we're entering the land of diminishing marginal returns. In football, this is when a team abandons their original game plan (typically oriented around ball/clock control) and begins to execute increasingly high risk, low probability plays. Unless there is a miraculous, come from behind victory, we all know the outcome.

Same true for the USA. It's getting late & the clock is running out. What do coaches & tyrants have in common when it's all slipping away through their fingers?

Rebel :

I used to live in the start-up world in Silicon Valley. Many of the uber-rich venture capitalist I know are doing exactly what you are describing . . . building compounds in remote areas. I see them taking fairly extreme measures to prepare for what they must perceive is happening.

I now live in an area where the average income is probably around $15K per year. Yesterday, I needed to have a heavy item moved from a storage shed about twenty miles from my house, to my house. I was driving around, and saw a Mexican loading a lawnmower onto a trailer after mowing someone's yard. The trailer looked like it could carry the item I needed moved. I stopped and asked him if he would move this item for me. He said he would do it for $50 (using his pickup and trailer, 40 miles round trip.) I gave him a $50, and keys to the storage shed and told him where I lived. I went home, and about an hour later he showed up with the item, and two other men to help unload it.

After he unloaded it, he commented on my little flock of 10 chickens. He said he had 250 chickens. He did not feed them, but they did fine scavenging for food. He said he did not have time to fool with them but gave eggs to all his friends, and sold eggs for $1 a dozen to anyone who wanted to buy them.

He also had a large garden, and he has a set of scales at the entrance and a money box. He lets anyone come and pick anything they want for $1 a pound, and on the honor system they leave the payment in the box. He said that he did not think anyone was cheating, and felt like most people were leaving extra money in the box.

He also sells produce from the garden to local supermarkets. The garden is fertilized with the chicken droppings, and watered by a windmill and simple irrigation system. He also had some pigs, and he fed them the excess from the garden, and if pickings were slim for the scavenging chickens, he would give them excess from the garden. He said he worked 12 hours a day mowing grass for people, but on most days he comes home to more money in the box from his garden than what he makes mowing. He also said he has a fruit orchard, and is starting a pecan orchard. He is doing all this on 10 acres that he owns free and clear. He said he had not bought food from the grocery store in the last 5 years. He also sad on the weekend he makes up food boxes with his eggs and produce and delivers it to needy old people in the area.

I found this man fascinating. He had no formal education, had never heard of the Fed, and was completely clueless on the economy. He was not preparing for a collapse or disaster, he was just doing what he has always done, and that is to provide for his family, and others in the community . . . and yet, he is probably the most prepared person I have met.

Should things collapse, I think many of the uber-rich will be OK, as they clearly see the mess that is coming, and are making arrangements. At the same time, many of the people viewed as being low in the socio-economic scale will be OK because they have relevant skills, and know how to take care of themselves. It is the vast number of people in the middle that I think are in for a reckoning. People who don't know how to do anything but shuffle paper or sit in front of a keyboard.

ToNYC :

I think Darwin had it right by way of Schumpeter.

feeb :

Fascinating story, Rebel. Thanks for sharing.

I am about as prepared as I can be, situation being considered - but I still live just a few miles outside of Washington DC so I'm clearly not THAT prepared. When moving recently, my fiance gave me a lot of looks and tongue-in-cheek comments about the weight of my safe, the sheer volume of food in my apartment, and because she's from Massachusetts...my guns. She's not a big fan of those.

I recognize that I and many others of my ilk have foregone productive education and employment in favor of easy money...I barely work 40 hours a week in a good week, I do ok at $100K+, and I have been in this position since I was 24 years old. This equation is utterly imbalanced...but I recognize it. Most of the people I speak with - either strangers I run into or friends I have known for years, they think the Fed is just another silly DC institution, they think the status quo will return, and they have been thoroughly brainwashed.

I think the most difficult thing about our present situation is finding a balance between preparedness and allowing yourself to live for today. I used to take the preparedness thing too far - I was loaded with index and bank stock puts on 3/15/08 (then of course I sold them in April and May...WAAAAAY too early)...I thought that was it and then it wasn't. I think that over-emphasis on dramatic change made me very negative and downcast in my every day life. But now I save everything I can (this while paying for a wedding, sigh) but I also go out and live life to the fullest. I travel at least once a month just for fun to new, random destinations. I talk to people more, especially people from different walks of life...people like your chicken farming mexican friend. Society has long-derided people with typical blue-collar skills but the real parallel is the man who can only lift himself up by putting others down...this behavior is very transparent and very pathetic.

I hope to convince my fiance to join me in a more independent lifestyle somewhat akin to your own, but I don't see that being feasible in the next 5 years and I fear there simply isn't that much time left. Be well and be proud of where you are in life - it sounds pretty fantastic ;)

DoChenRollingBearing:

Shameful, B9K9, Rebel,

Most excellent comments above. I think many have seen this coming, and it is up to each of us to decide our fate in this dangerous time.

...

Any of you going to join our little protest against the system Thursday August 12 by pulling $500 from your local ATM. If enough of us do it, it will get some attention that there ARE some of us who will ACT. Hope to see you all in line, get there early!

This applies to you non-USA ZH-ers as well. If you are mad at the system, well take 500 Euros, 50000 Yen, 20000 Rupies, etc. In fact, since Asia and European banks open before ours do, YOU GUYS would be starting the worldwide protest!

trav7777:

It had no chance of working. Economists set policy, engineers and geologists do not. Economists do not understand the limits to exponential growth. Engineers do. Geologists studying oil production curves do. At the point aggregate energy inputs peak, there is nothing the monetary regimes can do. Because, to be perfectly blunt, you can't PRINT OIL.

When EROI goes to unity, it is literally all over. I mean all. No amount of free cash can make water yield more energy going downhill than it took to pump it uphill.

This is where economics collide with thermodynamics and you will bear witness to what is real science and what bows down before it.

Mr Lennon Hendrix:

We will write this on Bernanke's tombstone.

[Aug 03, 2010] Is this a "Quasi Recession" or simply a "Recession"-

fedwatcher:

Actually it is a full blown Depression when you compare it to the "Great Depression":
- back then there was no unemployment insurance
- back then there was no food stamps
- back then there was a gold backing to the dollar for government to government transfers
- back then there was no Social Security and no Social Security Disability payments
- back then there was no Medicare nor any Medicade
- back then there was no FDIC and depositors lost everything when a bank closed its doors

What we have today is massive defficits which all go into our phoney GDP numbers making them look positive rather than negative.

Kar Denninger has updated his chart. See it below:
PICTURES

martyg:

This is not a recession. Tt is a depression. Even the 1929 drop didn't have as many negatives as we have now. The printing press is covering up everything. And the unemployment figures and the unsold housing numbers reek with lies.

civil-disobedience:

A great discussion of QE Spiral or a Deflationary Unwinding Spiral? * How Fun! *

Civil thinks that the Fed WILL QE whatever it takes, because it buys time, slows eventual collapse, and preserves the Banks & Gov longer.

QE is the only thing preventing a complete & immediate deflationary collapse, starting with the big banks.

As investors in US & World see additional QE, they will refuse to roll over existing debt. This tends to increase interest rates & the need for more QE. Eventually, over 10-20 years, they will have to QE much of the $50T!!! Maybe sooner.

The more QE done, the sooner more will have to be done. A QE spiral.
The more QE done, the less likely a slow deflationary de-leveraging becomes.

A "normal, orderly" deflationary unwinding is no longer possible. Too much bad debt & unstable derivatives.

The Fed/Gov will choose the only path that preserves continuity of Gov and the US Banking System. At least for now.

The choice appears to be:

1. No more QE. Thus, Immediate deflation spiral & collapse of Gov/Fed/banks. Very Bad & Immediate.

2. Much More QE. Slow devalue of all US currency. Over 5-10-20 years. Currency will be trashed.

Pick your spiral! Slow death or fast death. * YIKES! *

Civil thinks they will definitely choose #2, and preserve Gov/Banks. The less-bad alternative, in short term.

Read Karl's posting on Bullard's Article, * AND * all -3- pages of comments on Karl's comment board.
Difficult reading, but worth it. IMO.

Bullard is an Inflation Hawk, and even he thinks more QE may be preferable.

Mish has NO chance of performing his well Choreographed Deflation-Victory-Dance anytime soon. IMO.

http://market-ticker.org/archives/2539-James-Bullard-We-Blew-It.html

http://tickerforum.org/cgi-ticker/akcs-www?post=143885

http://research.stlouisfed.org/econ/bullard/pdf/SevenFacesFinalJul28.pdf

Required Intellectual Capital

Individual financial institutions, however, do not care enough about the systemic effects of their actions – these costs are “externalities” to their decision-making. But from a social point of view this is a big deal and an important reason why the recession of 2008-10 was so severe. We should therefore have substantially higher capital requirements than heretofore – presumably far above what regulators currently have in mind.

Second, we should really set capital requirements for types of assets not – as is done currently – by types of lenders. Banks obviously have an incentive to “leverage up”, meaning to borrow more relative to their equity. If we regulate banks, these same transactions will migrate to other more shadowy parts of the financial system.

Probably the most innovative part of authors’ proposals is that we should set higher margin requirements against asset-backed securities. Allowing anyone – irrespective of what you call them – to borrow heavily against such assets is simply not a good idea. Unfortunately, this approach is completely absent from the current regulatory reform toolkit.

[Aug 02, 2010] Knives Out for Elizabeth Warren

August 1, 2010 | naked capitalism

purple:

The corruption goes too deep for reform, I’m afraid.

NOTaREALmerican:

The corruption has always been there. The country used to be large enough (wealthy enough) to hide it.

If the middle class is truely shrinking (long term) then the peasants will start noticing we’re no better (politicially) than the old Soviet Union. We’re a long way from that tho. There’s still way too many dumbasses that worship their slow motion flags and eagles.

Until a measureable amount of the middle-class end-up broke (broken) it’s still much easier for their tiny brains to continue to blame “those people” for their problems.

attempter:

The CFPB is intended to be a Potemkin organization. It’s intended to be ineffectual.

That’s why it was housed in the Fed, where it’s guaranteed to impotently rot.

Even if Warren were appointed and really is all she’s cracked up to be, she’d simply end up expending all her energy in pointless infighting against massive bureaucratic, congressional, and “industry” resistance. Almost certainly she’d accomplish nothing.

But meanwhile, as we see here, her appointment would evidently revive false hope that “reform” is possible. (Indeed, if Obama and Wall Street were more clever, they might make a big show of appointing her, knowing they won’t let her actually accomplish anything.)

So her appointment, like any other spark of luminescence among the putrescence, just conjures false hope, protracts the agony, and makes it less likely that we could achieve the necessary critical mass of anti-system consciousness in time to be able to act upon it before we’re all enslaved. Anything which even for a moment makes “reform within the system” look at all plausible has wasted a moment we don’t have.

Time is running out, very quickly.

Jackrabbit:

I wish they would stop talking in code.

“Not confirmable” = too many in Congress are in the pockets of the Financial Industry.

She’s an “activist” = she’s independent minded and not prone to the group-think and sucking up that is expected of a regulator.

sgt_doom:

“..and we stop electing dysfunctional presidents such as Bush and Obama..”

Naaah, the sock puppets for Wall Street who temporarily move into the White House, be it America’s first Simian elected president, George Weasel Bush, or his more intelligent and articule replacement, Barack Obama (and keeping Bush forever loyalist and lackey, Robert Gates in as SecDef pretty much tells us all the score), things will always be the same until the Financial-Intelligence Complex, which runs the Big Show, is reduced to rubble.

Nothing else will change anything…..

Independent Accountant:

If the CPA is to be of any value to the public, Warren should head it. If not her, who? Lloyd Blankfein?

Bill :

No doubt we are being “gamed” by both sides of the argument , pro, anti Warren . I trust neither side with my rights in hand . But I have done due diligence on Warren . I think she would do the best job she could and would not fold to the corrupt voices over her . If she was a neutered position why are the Big 5 spending millions to lobby against her . She is a start . A good start . I agree with the first poster . If we get a Fed/ Central Bank puppet at this time , all hope , near term is lost for financial reform . Tea Party be damned .New wolf in sheeps clothes , new boss same as the old boss .

Robert Hurley:

I hope Ms Warren gets confirmed. I must say the level of discussion here has sunk to that of NRO. Under the current 60 vote hurdle, Obama cannot get his way. Obama is not perfect but when have we ever had a perfect President. Too many here would settle for no loaf rather than half a loaf and seem to wish for no loaf. Where would that get us?

[Aug 02, 2010] 25% of Americans Have Bad Credit Scores

July 31st, 2010 | The Big Picture

franklin411:

Barry…

lack of credit + extreme income inequality + extreme concentration of wealth = stagnation.

Look at the French Revolution. Wealth was so concentrated in the hands of a few wealthy aristocrats and the church that there was no room for an innovative middle class. After all, why should extremely rich people take a chance by investing in new/unproven/innovative technology? They’re already rich, so there’s no incentive. Eventually, of course, the mountain of poor and the tiny French middle class grew tired of carrying their aristocratic overlords. Thankfully for most French, the Great Terror finally took care of that!

In the US, we were smarter for most of the 20th century. We realized that you have to give working/middle class people the ability to innovate, and you have to give the rich a disincentive to hoard wealth.

The Progressives accomplished the latter with the progressive income tax and the estate tax, and the Great Society accomplished the former by breaking the back of cyclical poverty for poor whites and opening doors of economic opportunity to the white middle class.

[Aug 02, 2010] Alan Greenspan The Financial System Is Broke

zero hedge

What_Me_Worry :

"At the moment there is no sign of that because the financial system is broke and you can not have inflation if the financial system is not working."

Hmm, isn't the case for inflation, through devaluation, exactly because there is a broke financial system?

Spitzer:

Yes, you are correct.

Greenspan is talking about demand pull inflation, not currency inflation.

When the real economy is broke and not capable of servicing the debt through taxation, the debt and the dollar will be sold and the value will plummet. (INFLATION)

Either that or Mongolia and Afghanistan's economies must be booming because they have 20%+ inflation.

merehuman:

Go shop for food. Thats where i see a steady upward pricing. Makes me feel good all over since i am eating my homegrown veggies.

jdrose1985:

Its only a matter of time before you dollar bulls will get carried out on a stretcher.

Bingo.

On a long enough timeline...

Time is more important than price for when time is up, price will reverse. -Gann

Only gov't debt I'm bullish on is cash equivalents baby

Internet Tough Guy:

Jdrose must have a really special grocery store, or he hasn't noticed the packages getting smaller:

http://consumerist.com/2008/04/breyers-ice-cream-shrinks-to-15-quarts.html

http://www.jtirregulars.com/2009/09/incredible-shrinking-toilet-paper-ro...

http://www.dailymail.co.uk/news/article-1190395/Shrinking-Mars-bar-Size-. ..

http://www.mouseprint.org/2007/11/05/dial-soap-the-incredible-shrinking-...

Sorry jdrose, no falling prices in the stores. Now go look at the price of ag commodities. Parabolic.

jdrose1985:

well a dozen eggs is still a dozen eggs, a gallon of milk is still the same gallon, local veggies are mostly unchanged to slightly lower, i don't buy toilet paper (whoops, just kidding), ice cream and candy bars aren't my thing.

Ag prices going parabolic? Look at a yearly chart of DBA

LOL. you must be looking at the 1 min charts or something. DIdn't you get ol Spitzers memo? we're talking macro ec here, heh

_Biggs_ :

Your argument is flawed (see second paragraph). Milk and eggs may have stayed similar in price at the store, but prices paid to producers crashed and are just now rebounding (higher profits at the retail level). This promotes consolidation of producer numbers in the hands of Corporation X chosen by the banks via who gets loans while they are losing their ass. Smaller producers go bankrupt while larger corp's gain more numbers....banks win because it creates a huge amount of debt.

Contents within packaging are shrinking within the same packaging for the same price. Ingredients changing...ie lower protein contents, etc. Higher profits. The corp's obviously think we're stupid. I can give examples if you want.

You get less of what you buy for the dollar. It is just more subvert.

[Aug 02, 2010] Stockman: How the GOP Destroyed the U.S. Economy By Barry Ritholtz

August 1, 2010 | The Big Picture

Over the years, I have described myself politically as a “Jacob Javits* Republican.” For those of you unfamiliar with the Senator from NY, Javits was a social progressive, a fiscal conservative, “a political descendant of Theodore Roosevelt’s Progressive Republicanism.”

After he “retired” in 1980, the GOP took a very different turn: The emphasis on Fiscal conservatism was lost. Balanced budgets were no longer a priority. In terms of electoral politics, the embrace with the Religious Right was a deal with the devil. It married the party to a backwards combination of social regressiveness and magical thinking. Ideology trumped facts, and conflicting data and science was ignored.

In short, the party became more focused on Politics than Policy.

I bring this up as an intro to David Stockman’s brutal critique of Republican fiscal policy. Stockman was the director of the Office of Management and Budget under President Ronald Reagan. His NYT OpEd — subhed: How the GOP Destroyed the US economy — perfectly summarizes the most legitimate critiques of decades of GOP economic policy.

I can sum it up thusly: Whereas the Democrats have no economic policy, the Republicans have a very bad one.

The details are what makes Stockman’s take so astonishing. Here are his most important observations, of which I find little to disagree with:

• The total US debt, including states and municipalities, will soon reach $18 trillion dollars. That is a Greece-like 120% of GDP.

• Supply Side tax cuts for the wealthy are based on “money printing and deficit finance — vulgar Keynesiansism robed in the ideological vestments of the prosperous classes.”

• Republicans abandoned the belief that prosperity depended upon the regular balancing of accounts — government, trade, central banks private households and businesses.

• Once fiscal conservatism was abandoned, it led to the serial financial bubbles and Wall Street depredations that have crippled our economy.

• The Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement.

• Who is to blame? Milton Friedman. In 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold.

• According to Friedman, “The free market set currency exchange rates, he said, and trade deficits will self-correct.” What actually occurred was “impossible.” Stockman calls it “Friedman’s $8 trillion error.”

• Ideological tax-cutters are what killed the Republicans’ fiscal religion.

• America’s debt explosion has resulted from the Republican Party’s embrace, three decades ago, of the insidious Supply Side doctrine that deficits don’t matter if they result from tax cuts.

• The GOP controlled Congress from 1994 to 2006: Combine neocon warfare spending with entitlements, farm subsidies, education, water projects and you end up with a GOP welfare/warfare state driving the federal spending machine.

• It was Paul Volcker who crushed inflation and enabled a solid economic rebound — not the Reagan Supply Side Tax cuts.• Republicans believed the “delusion that the economy will outgrow the deficit if plied with enough tax cuts.”

• Over George W. Bush 8 years in office, non-defense appropriations gained 65%.• Fiscal year 2009 (GWB last budget): Tax-cutters reduced federal revenues to 15% of GDP — lower than they had been since the 1940s.

• The expansion of our financial sector has been vast and unproductive. Stockman blames (tho but not by name): 1) Greenspan, for flooding financial markets with freely printed money; and 2) Phil Gramm, for removing traditional restrictions on leverage and speculation.

• The shadow banking system grew from a mere $500 billion in 1970 to $30 trillion by September 2008 (see Gramm, above).

• Trillion-dollar financial conglomerates are not free enterprises — they are wards of the state, living on virtually free money from the Fed’s discount window to cover their bad bets.

• From 2002 to 2006, the top 1% of Americans received two-thirds of the gain in national income.

I find it fascinating that the most incisive criticism of the irresponsible GOP policies has comes from two of its former stars: Bruce Barlett and now David Stockman. Sure, Krugman, Stiglitz, DeLong and others have railed against Bush policies for years. But it seems to take an insider’s critique to really give the debate some punch.

Its funny, but when I criticize Bush, I get accused of being a liberal Democrat (I am not). I am simply giving my honest perspective of an utterly ruinous set of irresponsible policies that did lasting damage to America. The critiques of Obama does not generate the same sort of reaction. I suspect brain damaged partisans of the left suffer from somewhat different cognitive deficits than brain damaged partisans of the right.

Here’s to hoping that reality-based economic policies are somewhere in our future.

Note: Brain damaged partisan comments will be unceremoniously deleted

Source:
Four Deformations of the Apocalypse
DAVID STOCKMAN
NYT, July 31, 2010
http://www.nytimes.com/2010/08/01/opinion/01stockman.html

[Aug 01, 2010] Guest Post- Inside the New GDP Numbers - Consumer Metrics Institute

July 30, 2010 | Jesse's Café Américain

The 2.4% figure will garner all of the headlines, but the more important "real final sales of domestic product" continues to be weak, growing at a reported 1.3% annualized rate. The real cause for concern is that the reported inventory adjustments dropped from a 2.64% component in the revised 1st quarter to a 1.05% component during the 2nd quarter. If factories have begun to realize that end user demand remains anemic, the inventory adjustments could well go negative soon, pulling the reported total GDP down with it.

[Aug 01, 2010] A “Two in Three Chance” of a Double Dip

It is a modern day depression. Fed managed to glue Humpy-Dumpy together for the last 5 quarters with massive stimulus. One the stimulus wear off it will be much more sluggish economy. Inventory replenishment cycle of over too. It can be negative GDP growth. In any case it is depression when one year into statistical recovery central bank is still contemplating stimulating growth. Economy will slow during the next several quarters. In 2011 it will be even more sluggish as stimulus effects will dissipate. But it is not necessarily difficult to predict the course of this "recovery." As long as the consumer sector remains suppressed [jobs, housing, real earnings are dismal], you can kiss a "normal" recovery goodbye.

July 30, 2010 | The Mess That Greenspan Made

David Rosenberg was on Tech Ticker the other day talking about the growth prospects for the U.S. economy, his dour view of things increasingly aligning with the real world after each passing week and each new batch of economic data.

I understand there is now a law in Canada that requires citizens who speak in public to use the word “process” pronounced “prōcess” in their first sentence so that listeners will immediately recognize their country of origin. I could be wrong, but that’s what I heard.

[Aug 01, 2010] Economists Expect Slower Growth in 2nd Half - NYTimes.com

Jul 30, 2010

By MOTOKO RICH
Two steps forward, one step back.
That describes the current thinking about a year into the putative economic recovery.

On Friday, the government will release its report on the nation’s output for the second quarter, showing how much, if at all, the economy downshifted as the summer began.

Many economists — concerned about the sluggish pace of job creation, dwindling housing activity and decelerating retail sales — say that slowdown is continuing this summer and have recently downgraded their expectations for the second half of the year.

“Practically every Street economist took a knife to Q2 and Q3 G.D.P. growth,” David A. Rosenberg, chief economist for Gluskin Sheff, wrote last week in a note to clients, referring to Wall Street forecasts for gross domestic product. For the second-quarter results to be released Friday, economists project a modest annualized gain of 2.6 percent, down from 2.7 percent in the first quarter and 5.6 percent in the final quarter of last year.

Though some people started the year hoping for stronger results, economists say that the slow pace of growth should have been expected.

“So far, the recovery is remarkably normal for a postfinancial-crisis recovery,” said Kenneth S. Rogoff, a professor at Harvard and co-author, with Carmen M. Reinhart, of “This Time Is Different,” an economic history of financial crises.

“It doesn’t mean that we should cheer that it’s been so grim,” added Mr. Rogoff, who is a former chief economist of the International Monetary Fund. “But on the other hand, it’s not necessarily a reason to panic.”

Even shares in companies that are more ebullient, like Delta Air Lines and Amazon.com, have been driven down by nervous investors when executives announced plans to increase capacity or hire aggressively.

Perhaps Ben S. Bernanke, chairman of the Federal Reserve, put it best this month when he described the outlook for the United States economy as “unusually uncertain.”

The news in recent weeks has been rather bleak. A crucial index of consumer confidence, which was rising strongly earlier this year, dropped for the second month in a row in July, while sales of existing homes have fallen for two consecutive months. Employers are adding fewer jobs than they were just a few months ago, and banks are lending less to companies than they were a year earlier, even after relatively good second quarter-corporate profits.

Earlier this year, expectations were much higher. The National Association of Home Builders, for example, forecast that buyers would sign contracts for 467,000 new homes this year; now it is projecting that they will buy just 375,000 homes — down almost 20 percent.

“We just thought that overall, the economy would have been doing better than it’s been doing,” said Bernard Markstein, senior economist with the home builders.

At the start of the year, manufacturing seemed to be staging a comeback as companies replenished inventories that fell very low during the recession. Many economists assumed that once products were back on shelves, consumers would start buying enough to deplete warehouse inventories. Now, consumer demand appears not quite strong enough.

Many companies that have reported impressive results this earnings season, including bellwethers like United Parcel Service and 3M, indicated that their sales swelled mostly outside the United States.

As a result, companies are still not hiring nearly as many people in the United States as policy makers — and the unemployed — want. The unemployment rate, at 9.5 percent, is not far off the peak of 10.1 percent, and 6.75 million people have been out of work for more than six months.

Part of the slowdown stems from the expiration of stimulus measures like the home buyer tax credit and the cash for clunkers program to bolster auto sales. But it is also perhaps the inevitable aftermath of a protracted era of credit-driven excess, buoyed by inflated housing prices.

Earlier this year, some economists projected stronger growth rates in part because they were looking at recessions in the early 1990s and the early 1980s. The problem with such analogies is that the latest recession was precipitated by a financial crash rather than more cyclical boom-and-bust factors.

Many Wall Street economists and investors have “been too willing to see this as a normal cyclical event distorted by some crazy things going on in housing,” said Ian Shepherdson, chief United States economist at High Frequency Economics, “whereas this was almost entirely driven by what was going on in the financial markets and houses.”

Consumers who used their skyrocketing home values to borrow ever larger sums of money to feed further spending are now paying off that debt, which hampers their spending. That process is “very slow and painful,” said Joshua Shapiro, chief United States economist at MFR Inc. “There is not that much that can be done about it, as much as politicians would love to find some silver bullet.”

In fact, politicians are debating quite ferociously whether more needs to be done to usher the economy along. The fiercest arguments are over whether to inject further stimulus spending into the economy and whether to let the tax cuts for the wealthy enacted under President George W. Bush expire at the end of the year.

There are those who argue that the current slowdown is just a hiccup, caused in part by tremors in Europe and concerns about a hard landing in China.

“We were hit by these shocks,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “But as we get additional evidence that the European economies are able to withstand the debt crisis and as banks are showing they have stronger capital and Chinese policy makers are successfully able to avoid any sharp downturn, that will be reflected in higher confidence among U.S. businesses and consumers.”

On the ground, slow growth has spawned a cautious mood that is feeding — you have it — slow growth.

“A lot of people are looking at things with the glass half empty,” said Douglas C. Yearley Jr., chief executive of Toll Brothers, the home builder. “And they’re temporarily on the sidelines.”

Companies, meanwhile, are not yet ready to capitalize on good news. Although 3M, which makes things as diverse as Post-it Notes and screen coatings for iPads, announced strong earnings growth in the second quarter, its chief executive, George W. Buckley, told analysts that he expected a slowdown in the second half and that “hiring will likely be low.”

At U.P.S., the company’s familiar brown trucks delivered an average of 153,000 more packages a day in the United States during the second quarter than in the comparable period a year earlier.

But the company, which has about 18,000 fewer people in package sorting centers and on driving routes in the United States than at its peak two years ago, said it was not yet hiring in great numbers. “The bottom line is that the growth in the U.S. just isn’t quite there in terms of generating jobs right now,” said Norman Black, a U.P.S. spokesman.

Industrial companies may wait to hire until early next year, after they have maximized productivity gains among current workers. “Traditionally, when you come out of a down cycle, there’s normally a fairly high reluctance to hire,” said Scott R. Davis of Morgan Stanley. “Investors and boards of directors don’t want to see them hire people until business is 100 percent back.”

Some businesses are desperate to hire but just do not see the demand to justify it. Dan Cutillo, the owner of a string of pizza delivery shops near Toledo, said penny-pinching customers are not ordering as much. At one of his stores, he said, the staff is now half the size it was a year ago.

“I should be doing larger sales,” Mr. Cutillo added. “I should be hiring more people.”

[Aug 01, 2010] Are Treasuries the Last Diversifier Left zero hedge

Jul 30, 2010

dnarby:

"The output gap is deeper than we previously thought, but there is another reason why the Fed will remain on the sidelines for longer than we think: it wants to see asset reflation translate into mild inflation and avoid a protracted deflationary scenario at all cost."

Well then... They better get QEv2.0 online ASAP.

Oh and "mild". Ha ha. Ha ha ha ha. Heh. Good 'un.

"Importantly, Fed policy remains geared entirely towards banks, allowing them to continue borrowing on the cheap to invest in risk assets all around the world as they shore up their balance sheets. This is why I remain bullish on stocks."

Annnnnd... This is why the S&P, adjusted for inflation, has returned -30% for the last ten years...And is poised to double that return! What a steal, stocks 'r cheap BUYBUYBUYBUYBUY!!!

Holy crap. This is so thouroughly pooched.

Do people really believe this horse$@#%?

UncleBen:

Leo, you've said many times that they'll reflate the "markets" at ALL costs. What you never seem to want to consider is that once the TBTF's and CONgress-trolls have completed their escape from said market, the rest of the great unwashed that are long will not know what hit'em during the ensuing cascade lower that is sure to come

A Proud Canadian :

The SM was chased up in the 80s and 90s (along with housing and "toys") because of that massive hive of Boomers. Now, "we" are retiring and there is just no replacement for our extra cash to drive the market higher. You can't ignore the effect of the boomer generation...from schools and universities in the 50s to 70s to housing boom and the SM boom. We have turned the corner now, though, and the buying days are over......well, maybe catfood.

Rainman :

If the Fed will do whatever is necessary to combat deflation, so far the bond market has grown more and more brazen in dissing Ben. I also remain skeptical the Fed can win that fight. The 10y at 2.9 is amazing to me, but makes perfect sense under the pressures of a slaughtered housing market coupled with the work of the invisible hand and the growing prospect of a hard landing on deflation island ( aka Japan ).

I agree, though, that deflation will create a lot of dead bodies. More casualties than we want to imagine. But it looks like it will be hard to avoid. Take away the effects of stim and QE and you're looking at negative organic GDP. We can easily build an argument for stagflation under those assumptions. Going forward is all red ink on public sector joblessness, maybe a half million. I don't think the electeds have the balls to bail the States before November and afterward the one party rule extravaganza will likely be over.

If we see prolonged defaltion and a long term continued suppression of fear ( covertly suppressed/covered by our masters of course ), the biggest brain fart I have is about commodities. Especially gold.

In a modestly compromised environment, a lot of this would just be the normal blurry. Today I am nearly blind.

Hedge Jobs :

good post Leo, thank you.

your comment "Fed policy right remains geared entirely towards banks, allowing them to continue borrowing on the cheap to invest in risk assets all around the world as they shore up their balance sheets. This is why I remain bullish on stocks."

i agree with you, this may continue and from a trading perspective go with the flow. You are correctly saying that markets are artificially inflated and this is the problem. From an investment perspective though no one is going to touch this market except the fools, until you run out of them.

coat tail the algo's and the FED and trade it up if you can but based on your post investors should continue to come out of any artificialy inflated markets. As we all know too well artificiallly inflated markets can only remain detached from reality for so long.

Bagbalm:

Do you notice all the revisions are to worse numbers? If it was an honest miss some would be a little high some a little low. But ALL the revisions are bad news. This is because the government numbers are all bare faced lies from scum sucking criminals who wish to suck you into making bad decisions based on falsehoods about fake prosperity.

pitz:

Japanese deflation isn't a monetary phenomenon, but rather, one of the state of external demand.

This is the mistake that commentators often make when they try and discuss Japan, and try to link Japan's monetary policy with deflation.

litoralkey:

A simple way to demonstrate this would be a 4 axis graph that shows:

1. start at 1980 or so(maybe the start of Carter recession?)

2. Japan trade flow, import, export, net from then to present

3. US trade flow, import, export, net from then to present

4. US-Japan trade flow, paired, and net.

Add second graph showing GDP , debt and debt to gdp ratios of each country.

then be snarky and add in Argentina and Greece as addendum graphs.

All to drive home your point:

Japan didn't collapse due to exports. The US and PIIGS have no such saving grace.

This is not rocket science.

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Financial Skeptic Bulletin, August 2010

Best | Rest

[Sept 3, 2010] Looking back at August events:

Nemesis comment to Econbrowser What Can Sustain GDP Growth Open Economy Version

Best | Rest

[Aug 30, 2010] The Age of Mammon

You need to read a post and the comments to it to appreciate it.

[Aug 15, 2010] Stocks vs Bonds

“It’s for good reason the stock market was dubbed “the bond market’s idiot kid brother.” :-)

[Aug 15, 2010] An Inventory Of Conservative Beliefs That Are Destroying America. by Chris Herbert

August 13th, 2010

[Aug 04, 2010] GMI Describes "The Future Recession In An Ongoing Depression" In This Must Read Report

[Aug 02, 2010] Stockman: How the GOP Destroyed the U.S. Economy By Barry Ritholtz

August 1, 2010 | The Big Picture

[Aug 31, 2010] What Can Sustain GDP Growth Open Economy Version

August 30, 2010 | Econbrowser

[Aug 30, 2010] Carmen Reinhart Warns That Economic Recovery Could Be Slow

[Aug 30, 2010] The Age of Mammon

[Aug 30, 2010] "Muddling through ... the prescription of the moment"

[Aug 29, 2010] Links 8-28-10 « naked capitalism

[Aug 29, 2010] The Elites Have Lost The Right to Rule zero hedge

[Aug 28, 2010] The Manufacturing Fallacy

[Aug 27, 2010] Robert Shiller Says Double Dip Imminent

[Aug 27, 2010] Fears of Regime Change in New York «

August 26, 2010 | naked capitalism

[Aug 24, 2010] Now They Tell Us- Experts Say Housing Is A Lousy Investment And Always Will Be

[Aug 24, 2010] The Next Bubble- Investors Flee Stocks in Droves In Favor of Bonds

Aug 23, 2010 | Tech Ticker, Yahoo! Finance

[Aug 24, 2010] U.S. Financial System Still "Fundamentally Corrupt," Kotlikoff Says- Here's How to Fix It

Aug 24, 2010 | Tech Ticker, Yahoo! Finance

[Aug 24, 2010] U.S. Existing Home Sales in Record Plunge - Bloomberg

[Aug 24, 2010] Presenting The Holdings Of Pimco's $240 Billion Flagship Total Return Fund zero hedge

What is really funny that this is the only meaningful comment I have found... So much of Zero Hedge value...

[Aug 24, 2010] Banks Enabling Fraud Against Retail Customers

[Aug 23, 2010] Credit Card Companies Jack Up Rates Despite Flagging Economy, Super Low Funding Costs «

August 23, 2010 | naked capitalism

[Aug 23, 2010] Why The Fed's Upcoming Jackson Hole Economic Symposium Could Have Wide-Ranging Implications zero hedge

[Aug 22, 2010] Preserve and Protect- Mapping The Tipping Points

[Aug 21, 2010] High corporate cash levels are nothing but a mirage

[Aug 20, 2010] Morgan Stanley's Jim Caron Apologizes For Wrong Call On Bonds, In 180 Degree Move Now Recommends A 10s30s Flattener

Competitors to "These F#@king Guys" as Jon Stewart nicknamed GS ;-)

[Aug 20, 2010] From Disinflation to Deflation?

[Aug 19, 2010] Byron Wien on Economy, Markets The Big Picture

A very interesting interview to listen. Some non-trivial observations about Obama, current market and, especially, reasons for "stock aversion" among investors.

[Aug 19, 2010] Bond Bubble By Barry Ritholtz

August 19th, 2010

[Aug 19, 2010] Do US Bonds Resemble Dot Com Stocks

Without rampant inflation the risk being taken by bond holders is nothing compared to risk taken by dot com chasers.

[Aug 18, 2010] Are Bank Stocks Such a Good Buy

"Only a fool would have any faith in the banks, their regulators, or economists."

[Aug 18, 2010] Boston Fed’s New Excuse for Missing the Housing Bubble NoneOfUscouddanode

August 18, 2010 | naked capitalism

[Aug 18, 2010] Mel Brooks and the Bankers

Selected Comments

[Aug 17, 2010] Johnny Cash - Sixteen Tons

I owe my soul to the company﻿ store

[Aug 17, 2010] Rates Fall as Market Fears Economic Weakness By FLOYD NORRIS

[Aug 16, 2010] The Future of Finance

[Aug 15, 2010] cisco-comments-mixed-signals-recovery.html

[Aug 15, 2010] Stocks vs Bonds

“It’s for good reason the stock market was dubbed “the bond market’s idiot kid brother.” :-)

[Aug 15, 2010] Talking Business - The Real Reason for Ousting H.P.’s Chief

[Aug 15, 2010] An Inventory Of Conservative Beliefs That Are Destroying America. by Chris Herbert

August 13th, 2010

[Aug 14, 2010] Krugman unplugged on our decline and fall

[Aug 14, 2010] The Checking Account Scam - How Wells Fargo Gouged Its Customers

Does RICO statute applies to Wells Fargo ?

[Aug 13, 2010] Obama Falls Short; Gary Shilling Sees 10 Years of Low Growth + Rising Unemployment

2% average growth for the next 10 years, rising unemployment. Public works are important.

Aug 12, 2010 | Yahoo! Finance

[Aug 13, 2010] Deflations coming says gary shilling and its going to clobber the stock market by Henry Blodget

Aug 12, 2010 | Tech Ticker, Yahoo! Finance

[Aug 09, 2010] And Scene ICI Reports 13th Consecutive Week of Massive Domestic Equity Outflows As Banks Start To Panic

Retail investors are dunzo... "banks are starting to panic that as a result of collapsing trade volumes, profit target misses and massive layoffs are just around the corner."

08/04/2010 | zero hedge

[Aug 09, 2010] BNY Asks If Retail Investors Are Leaving US Stocks In Mutual Funds And ETFs, Then Who Is Buying Stocks zero hedge

[Aug 08, 2010] We Speak on CSPAN’s Washington Journal About Big Corporations and the Economy

[Aug 07, 2010] Guest Post Projecting Yield Curve Slopes

Bonds are only as safe as the currency.

[Aug 06, 2010] Is the Unemployment Problem Cyclical or Structural?

I owe my soul to the company store