Financial Skeptic Bulletin, July 2009
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[Jul 26, 2009] Raw Story » Spitzer
Federal Reserve is ‘a Ponzi scheme, an inside job’
[Jun 12, 2009] Doomsville by Neil
Hume
[Jul 10, 2009] The Stimulus
Trap, by Paul Krugman, Commentary, NY Times
This economy can't get back on track because the track we were on
for years -- featuring flat or declining median wages, mounting consumer
debt, and widening insecurity, not to mention increasing carbon in the
atmosphere -- This economy can't get back on track because the track
we were on for years -- featuring flat or declining median wages, mounting
consumer debt, and widening insecurity, not to mention increasing carbon
in the atmosphere -- simply cannot be sustained.
[Jul 5, 2009] Yield Forecast
Further Rise Ahead in 2010 - Barrons.com
[Jul 5, 2009]
Econbrowser Back to the Stimulus Debate W, Timing, the States, and Baselines
Martin Feldstein predicts a relapse into recession (a beautiful symmetrical
W)
[Jul 5, 2009]
Whitney “I call this the great government momentum trade” by Tracy Alloway
[Jul 3, 2009] A different sort of
crowding out
Anonymous said...
I think it will be a W recovery.
After inventories are rebuilt manufacturers will discover that there
are still no buyers. Look at the cars for clunkers
to depress demand after is over. Same for RE in CA
ccie779 said...
It will be a VL shaped recovery.
Government spending makes at least 40%
of today's economy and would be interesting to see when that figure
comes down.
PacoCanada said...
I also fully expect a W, unfortunately.
The second dip will come when the govt stimulus effect fades
away, some time in late 2010 or 2011. As all mention,
there needs to be a resurgence of "non stimulus" (i.e. private-sector-led)
growth, which should take the lead after stimulus effect...
The problem seems to be in the transition between the hospital and
the street:
- Government could perhaps come up with a second mega stimulus
package, but the political context might not allow this to materialize.
- If there is a shift away from bonds towards equities due
to a perceived upward shift in GDP, bond prices will fall, interest
rates will rise, and it will make it that much more difficult
for the recovery to really take hold. This could be countered
by Fed interventions, however.
- With rising unemployment even months after the start of
the recovery (as we all know happens), will households and firms
have deleveraged enough to free up buying power to pave the
way for recovery?
Man I am worried!
Anonymous said...
Most people I know are scared "sh--less" about their jobs, debts,
401K's, etc. I think we've experienced
a "generational" shift in consumer attitudes towards debt and spending.
The deleveraging and defaulting hasn't even really begun yet.
No lasting recovery is coming.
What we've got going is the worlds largest Ponzi scheme.
Anonymous said...
Barry Ritholz wrote in his Big Picture blog: "Bottomline: An
improving, but weak report."
How could Barry make such a basic error? Sure the 2nd derivative
is improving, but -1.0% is not improving.
Clinton said...
According to Bloomberg y/y GDP is
down 3.9% from 2nd quarter 2008. Personally, I expect
2nd quarter 2009 GDP to be revised down just like all the others
quarters were.
From the article:
"GDP was down 3.9 percent from the second quarter in 2008, the biggest
drop
since quarterly records began in 1947. Last quarter’s decline was
the fourth in a
row, also the longest losing streak on record. "
http://www.bloomberg.com/apps/news?pid=20601103&sid=ayA7HltOFSHM
Donlast said...
The US economy is being re-calibrated
to a lower level of total output. The previous one
was false based on a debt binge. So why assume inventories will
be re-built? True, if inventory purge stops it will be a minor positive
but so what? Note too that if it were not for the fact that imports
fell faster than did exports the GDP metric could have been as much
as -2.5%. Better than minus 5%-6%, Yes. But again, so what.
If you are the bottom of a well down which you slipped by degrees
and the last slip was less than the previous one you are still at
the bottom of the well. Easing slippage provides no assurance that
you can climb out.
Cat said...
-1% is the new +2%. Any negative
number close to zero will be called "growth" from now on. "Not falling
as fast as last time" will be hailed as improvement.
People really do think that way. We only work well around relative
numbers.
Cat said...
Donlast: You hit it. The most frustrating
part of the last 2 years has been the constant refrain from pundits
(and two administrations) that we're going to return to our previous
experience of economic growth. Continuing this claim is completely
irresponsible. It is setting people up with false expectations rather
than preparing them for a more sober reality.
If nothing else, the cost (and eventual scarcity) of oil will force
us into a very much reduced level of productivity and already has.
The importance of free energy in the
growth seen post-WW2 simply cannot be overstated.
An era has just ended.
Any thinking person can see this, and many are relieved to see it
go. Nobody can say for sure what follows,
but it will be slower, less glamorous, and less energy intensive
than it was. Probably by an order of magnitude. Just
maybe, by more than that. Taking the opportunity now to prepare
people for that should be Job #1, but we've not seen even the first
step in that direction. People are going to wake up to a different
world at some point and may feel cheated and lied to, and start
looking around for someone (or some group) to vent their grievances
against. The European experience of
this in the last century does not inspire confidence.
plschwarz said...
"The estimates released today reflect the results of the comprehensive
(or benchmark) revision of the national income and product accounts
(NIPAs)."
Am I wrong in assuming that the figures released today are a
result of recalibration of the benchmark instrument, and that any
direct comparison with earlier estimates must be made with extreme
caution?
I would assume (??) that recalibration of the instrument would
be accompanied by using it on relevant earlier data to give a proper
comparison. Am i naive
PacoCanada said...
Quite obviously, everyone here is sane and sees the cold reality
we are all confronted with. Why the constant sidestepping by the
Obama team? DO "change" from the past, please - just be casually
sane, rational, and realistic. It would help a great deal in paving
the way forward. And it would be SO refreshing!
Emerging markets might kickstart their own internal domestic demand
and take the flag for supporting world aggregate demand to which
us Western economies could perhaps export to. Quite frankly, it
seems to be the ONLY way out of this mess that could potentially
give interesting positive growth going forward.
Otherwise, indeed, 0 or 1%will be the
new normalcy...
What do you people think?
Anonymous said...
Wow, this from Yves??? Ah, it's Ed Harrison. Damn, I'm starting
to detect blogger styles.
Ed, how can we expect an uptick in consumer
demand if people are still paying down debt?
We KNOW interest rates have nowhere
to go but up. Not the same as saying they will rise,
but paying down debt now is guaranteed to be cheaper than paying
later.
Can the government pump another 10% increase into the economy?
Hugh said...
I agree with Donlast too. What indication is there that once
companies have gotten rid of their excess inventory they will seek
to rebuild that inventory? Yes, current
inventory is a drag but wouldn't reduction and maintenance at a
new lower level just produce fresno dan's flat line?
Where does the up come from? As anonymous says, consumers are
paying down debt or saving because of fears about their jobs and
future security. So if companies aren't expanding and consumers
aren't buying where is the uptick to come from? From government?
How given current political conditions would this happen and even
if it did, would it be enough and intelligently directed (as did
not happen in the first stimulus plan)?
And how do we know that this is not part of a deflationary spiral:
cutting inventory and with it jobs which will reduce consumption
further creating another inventory overhang necessitating further
job cuts, etc.?
Neal said...
The GDP would at least be a minus 4% without the 12 percent increase
in government spending.
Does this really represent a sustainable growth pattern?
So, if the GDP turns up in the next quarter on the basis of additional
government spending, is this a real end to the recession, or just
another numbers game?
D said...
There need to be a post on the "Cash for Clunkers" program that
looks like it is going to vacuum up another few billion dollars
in the next few weeks.
One of the irony of this program is that clunkers that are at least
1984 are vehicles that by and large, have relatively modern exhaust
emission systems and greatly downsized from the behemoth engines
that are first generation electronic ignition / mechanical controls
mated with inefficient drivetrains and transmission ratios of pre-1980
cars.
The cars that qualify in the program, namely, 1984 or later models,
are actually not the most inefficient vehicles on the road.
If they are driven relatively few miles,
they actually are very economic and energy efficient if the alternative
is to consume energy to manufacture a brand new vehicle that is
in turn, driven few miles.
Furthermore, by spurring the auto industry to build and sell more
new cars when we already know peak oil is upon us is simply not
very clever
This temporary lull in oil prices is deceiving buyers to buy
more car and engine than they need.
Furthermore, the industry is within 2 to 3 years of delivering
a generation of gasoline fueled vehicles with much better
mileage --- e.g. the new Fords with
direct gasoline injection and small turbo/super chargers.
At the same time, we are still at the peak of the horsepower race
- which like the tailfin race of another era - gave us sedans like
a Toyota Corolla with standard engines that develop over 130hp in
the USA.
This level of performance is far in excess of any reasonable, sensible
need that a sedan optimized for fuel economy should have, and comes
at the expense of lifetime fuel economy penalties in the form of
heavier engines, transmissions, brakes, chassis, that is paid even
in the absence of a lead footed driver.
By having the US (and EU) governments purchase cars now to "stimulate
demand", they have taken these buyers out of the market for many
years, and perhaps, make it less likely for them to upgrade to a
truly fuel efficient vehicle that will be widely available in a
few years --- when petroleum is back to $200 a barrel and gasoline
is scarce and expensive at over $7 a gallon.
Then there is the stupidity of the program administration --- which
required cars turned in to be disabled by having a mixture of water
and sodium silicate and water poured into the engine and run ---
in effect, sanding the engine and making it unusable from the inside.
The only problem is, scrap yards routinely salvage engines and transmissions
from their wrecks --- it is probably one of the best profit makers
in a yard to salvage these parts and resell them to be either rebuilt
or, if the mileage is low enough, placed straight into another car
with a bad motor/transmission.
Not surprisingly, scrap yards are now saying they may not accept
the vehicles (unless they are compensated otherwise) because the
disabled vehicles are nearly worthless, or worse, actually cost
the scrap yard money to dismantle (drain fluids, etc.) them ---
except to be shredded and sold for scrap to China or other steel
mills.
No one that rammed this program through, which is really a car dealer
bailout and bribery program to complement the GM / Chrysler / Auto
Parts bailout program, truly understand energy economics.
While the study of energy impact on the USA has yet to be done on
this program, I have a suspicious hunch that this program will end
up costing more energy than it saves.
But Congress, in their rush to spend money, didn't think of that
one.
Ina Pickle said...
The figures will just be revised downward. That, and by Q4 even
more of the people who are losing jobs daily will have run through
all of their unemployment insurance - and a goodly number from the
beginning of the depression will have run out of even the extended
benefits. Guys, if people don't have money, they don't buy things.
What I want to know is where is the real economy going to come from.
I have yet to hear one single person, ANYWHERE, suggest what we're
going to do for an export-based economy. We had already become a
new UK, exporting services (insurance and banking) as they did when
their empire collapsed. What will we be exporting now? Where will
the jobs be developed?
Until someone can give me a solid answer on that, I don't believe
that an end to the recession is in sight. I just don't.
Seeking Alpha
U.S. equities are rallying again today, and (as usual) it is a rally
with no basis in reality. Most of the enthusiasm comes from another
string of corporate quarterly results which “beat expectations”. I had
hoped that the sheep were starting to clue-in to this silly game, however
it appears there is a still a large pack of Pavlov's Dogs out there
– who respond to their propaganda cues without a moment of actual thought.
The truth is that all of the companies “beating expectations” are
still reporting steadily worse results year-over-year – and in many
cases, much worse results. Among the few exceptions are U.S. financial
corporations. However, since accounting-fraud was legalized in the United
States (see
“FASB strong-armed into mark-to-fantasy accounting”), their bottom-lines
have had absolutely no connection to their business operations.
The obvious point here is that if expectations are set low enough,
it is almost impossible not to exceed these “estimates”. The question
that must be asked is this: given that all these “market experts” are
claiming that the U.S. economy is “turning the corner”, why are all
these same “experts” continuing to predict terrible bottom-lines for
U.S. corporations – every quarter?
The other element fueling today's rally is the continuing stream
of propaganda pretending that both employment and the U.S. housing sector
are “stabilizing”. This aspect of U.S. propaganda is especially egregious.
The optimism in U.S. housing is built entirely on the fact that declines
in U.S. home prices have not been as bad as before – when they were
falling three times as fast as during the Great Depression. This is
a result of several factors.
First and foremost, U.S. banks are holding millions of foreclosed
properties off the market. In this case, the numbers don't lie. There
were 1.9 million foreclosures in the first 6 months of 2009, and Realty
Trac (an industry-friendly group) predicts at least 4 million foreclosures
this year – meaning that the rate of foreclosures
will continue increasing. How is this “stabilization”?
These foreclosure numbers become even more interesting when we look
at the ratio of foreclosure-sales relative to total sales. With total
housing sales forecast at 4.8 million (after a recent jump in sales)
and (at least 4 million foreclosures this year alone), foreclosure sales
would have to account for over 80% of total sales in order for U.S.
banks to clear their inventory as fast as they are taking on new foreclosed
properties.
In fact, foreclosure sales have never
exceeded 50% of total sales, and in the last two months have only averaged
35% of total sales – meaning U.S. banks are selling much less than half
of their foreclosed properties. This means that contrary
to fraudulent reports that housing inventories are “moderating”, all
that is taking place is that more and more
properties are simply being taken off the market – unsold.
The other important point about U.S. banks holding millions of foreclosed
properties off the market is that foreclosure sales are the primary
force pushing down U.S. housing prices. It should be expected that with
U.S. banks holding millions of foreclosed properties off the market
that U.S. house prices would be (temporarily) less-bad.
As I have pointed out many times, U.S. delinquency rates are at all-time,
record highs – meaning that when the dust
settles at the end of this year, U.S. foreclosures will likely be well
over 4 million units (meaning all the other numbers I
discussed will get even worse). In addition, we are only months away
from the largest wave of mortgage re-sets (see
“U.S. mortgage crisis to get MUCH worse in 2010-11”) - which will
last for two years.
Meanwhile, broke-and-retiring U.S. baby-boomers will have no choice
but to dump $1 to $2 trillion of real estate onto the market, to make
up for their under-funded retirements (see
“U.S. pension crisis: the $3 trillion question”), and the HUGE cuts
which must be made in government programs for seniors, to begin to reduce
the $70 TRILLION (or so) in U.S. unfunded liabilities. This means at
least a decade of vast amounts of new inventory being dumped onto the
market. This is “stabilization”?
Then we come to U.S. employment fiction. Weekly lay-offs have “improved”
(by a measly 10%), meaning there are 'only' about 2.5 million lay-offs
per month, compared to a normal month where there would be less than
1 million. Lay-offs are 2 ½ times greater than normal, and this is called
“stabilization”?
Fraudulent government numbers are claiming that there is only a net
job loss of less than 500,000 jobs per month (which is an historically
terrible number). However, the reality is that with 2.5 million lay-offs
per month, there must be at least 1.5 million (net) jobs lost each month
– based on those weekly numbers (see
"U.S. economy to lose 20 MILLION jobs this year").
These are Great Depression-like numbers.
The fact that job losses are “stabilizing” at Great Depression levels
is not good news for anyone living in the real world. Meanwhile, the
collapse in the U.S. retail sector is just beginning to to impact retail
sector employment (see
“The Death of the U.S. Consumer Economy”), and U.S. state governments
are just beginning to make the painful budget (and employment) reductions
they must make – as a response to the largest plunge in state revenues
in history.
In short, the “big picture” of the U.S.
economy is completely clear, it's in terrible shape and rapidly getting
worse. Meanwhile, the U.S. propaganda-machine continues
to fuel the U.S. fantasy-rally with nothing more than “smoke-and-mirrors”.
The always excellent quarterly memo from Oaktree Capital Management
Chairman Howard Marks is out on the firm's Web site and this quarters'
is one of the best yet. Marks is a veteran of the markets, particularly
the value and distressed areas that I frequent, and his commentary is
a must-read.
This time out he summarizes the history of the investment markets
and the continued chasing of returns while ignoring risk that has plagued
investors over time. In particular, he thinks
the excessive pursuit of ever-higher returns, and the thoughtless use
of leverage to achieve them, is the cause of much of the current crisis.
He interestingly remarks that the democratization of investing with
brokerage firms pushing the long-term reruns of stocks and the idea
that anyone could be the next Warren Buffett was a huge disservice to
investors. Rewards were overstated and risks
understated.
The mantra of long-term returns from
stocks caused investors to totally ignore risks and push prices higher
for far longer than valuations justified. Even if stocks
do always outperform bonds and bills over the long term, as we have
found out in the last 10 years or so, 30 years can be a long time to
wait.
The letter also talks about the dangers of ignoring risks.
When all the focus is on missing an opportunity
with little-to-no thought of the chance of losing money, there is danger
in the air.
We are seeing some of that right now. Everyone feels an almost desperate
need to get back into the stock market. There is no thought given to
the risk inherent in current price levels. As
Doug Kass pointed out yesterday, they are only focusing on the good
news and dismissing anything that might counter a positive point of
view.
I am always puzzled how the desire for
larger returns causes people to buy things they do not even begin to
understand. Given that there is no way to know the real
risks contained in the balance sheet at Citigroup, why would you
ever own that stock? What is the loss exposure at Bank of America from the Countrywide
and Merrill Lynch acquisitions? I do not know and I do not think
anyone else does either.
How many years out you we discount the earnings potential for growth
stock like Green Mountain Coffee Roasters. What growth rates should I use and at what
rate should I discount back the earnings stream?
Any answer to those questions is a guess at best.
What is the probability of the holdings
in my junk bond fund defaulting? No one takes the time to figure that
out before investing and that worries me.
"It's hard to describe it as anything but ugly," said Michael Pond,
an interest rate strategist at Barclays Capital. "The market is beginning
to choke on the increases in supply."" ...After the initial shock, the
bigger concern should be whether there will be enough demand for 10-year
and 30-year auctions in two weeks' time," Pond said.
...investors seem worried about holding on to debt for too long for
fear of inflation, which eats into bonds' fixed returns over time.
Many market players believe inflation is
an inevitable consequence of the government's numerous efforts to stimulate
the economy by flooding the financial system with cash and keeping borrowing
costs low.
If demand for government debt wanes further, the Treasury will be
forced to increase the returns on bonds to lure investors, which in
turn can discourage lending by raising borrowing costs for consumers
and businesses. Long-term Treasury yields determine interest rates on
mortgages and other kinds of loans.
Treasuries got some support Wednesday
from more purchases by the Federal Reserve, which bought up $3 billion
of long-term Treasury debt. The Fed has been buying large
amounts of Treasuries this year in an effort to offset the influx of
supply.
[Jul 29, 2009] Pimco's Kiesel says: "sell your
junk."
Jul 10, 2009
Mark Kiesel, at Pimco's Pacific Investment Management Company says it's
best to sell your junk bonds now. Why is he saying this?
The key factor is that economic growth is
not there. Kiesel looks for only 1-2% growth in GDP next
year.All of this talk about "green shoots" simply is not materializing.
Kiesel says the "green shoots" are turning to weeds. He further said
that credit is not re circulating. Business financing costs range from
10-12%, making it difficult for some businesses to stay afloat.
So far, junk bonds have returned 29.6%
this year. That beats most other investments by a country mile. So,
again, do not let the "greed" monster take hold of your psyche.
The advice here is to stay in investment
grade bonds, rated Baaa or BBB- by Moody's Investment Service and Standard
& Poor's. The rate of return on these bonds is about 10-12%.
Kiesel points out that the government can print all the money they
want, but that does not change you or your business. People are fearful
that their house prices will fall. Only when people see the price decline
ending will they decide to spend more freely.
Now for those who have a strong stomach
US high default rate bonds may reach a yield of 18% this year.
What percentage of bonds should be in your portfolio? Hint. Use your
age as a guide. If you are 50 years old, you should have 50% of your
investments in bonds.
Tags:
junk bonds,
JunkBonds,
Mark Kiesel,
MarkKiesel,
Pimco
Humor aside, the way GS is making profits (excessive trading and pyramid
lending is nothing but a way to extract cash pumped in by the government
) at the time when economy is in the downturn is perverse and, well, not
entirely honest. The clawback provision in Sarbanes-Oxley should probably
be used on GS executives including Paulson.
July 28, 2006 | Bloomberg
...America stands at a crossroads, and Goldman Sachs now owns both
of them. In choosing which road to take, ordinary Americans must not
be distracted by unproductive resentment toward the toll-takers. To
that end we at Goldman Sachs would like to dispel several false and
insidious rumors.
Rumor No. 1: “Goldman Sachs controls the U.S. government.”
Every time we hear the phrase “the United States of Goldman Sachs”
we shake our heads in wonder. Every ninth-grader knows that the U.S.
government consists of three branches. Goldman owns just one of these
outright; the second we simply rent, and the third we have no interest
in at all. (Note there isn’t a single former Goldman employee on the
Supreme Court.)
What small interest we maintain in the U.S. government is, we feel,
in the public interest. Our current financial crisis has its roots in
a single easily identifiable source: the envy others felt toward Goldman
Sachs.
The bozos at Merrill Lynch, the dimwits at
Citigroup, the nimrods at Lehman Brothers, the louts at Bear Stearns,
even that momentarily useful lunatic
Joe Cassano at AIG -- all of these people took risks that no non-Goldman
person should ever take, in a pathetic attempt to replicate Goldman’s
financial returns.
For too long we have allowed others to emulate us. Now we are working
productively with Treasury Secretary
Tim Geithner and the Congress to ensure that we alone are allowed
to take the sort of risks that might destroy the financial system.
Rumor No. 2: “When the U.S. government bailed out AIG, and paid
off its gambling debts, it saved not AIG but Goldman Sachs.”
... ... ...
Rumor No. 3: “As the U.S. government will eat the losses if Goldman
Sachs goes bust, Goldman Sachs shouldn’t be allowed to keep making these
massive financial bets.
... ... ...
Rumor No. 4: “Goldman employees all
look alike.”
... ... ...
Rumor No. 5: Goldman Sachs is “a
great vampire squid wrapped around the face of humanity, relentlessly
jamming its blood funnel into anything that smells like money.”
... ... ...
Those words are of course taken from a recent issue of Rolling Stone
magazine and they are transparently false.
For starters, the vampire squid doesn’t feed on human flesh.
Ergo, no vampire squid would ever wrap itself
around the face of humanity, except by accident. And nothing that happens
at Goldman Sachs -- nothing that Goldman Sachs thinks, nothing that
Goldman Sachs feels, nothing that Goldman Sachs does -- ever happens
by accident.
(Michael
Lewis is a columnist for Bloomberg News and the author of “Liar’s
Poker,” “Moneyball” and “The Blind Side,” soon to be a major motion
picture. The opinions expressed are his own.)
Unemployment crisis in the most serious of all in this recession...
The question "How do you put together a consumer
economy that works when the consumers are out of work?" is
really rhetoric. Wall Street
deleveraging troubles are not significant in comparison with the unemployment
problems but most of government money were used for solving it. Too
little money was devoted to solving unemployment problem.
How do you put together a consumer economy
that works when the consumers are out of work?
Why this rampant joblessness is not viewed as a crisis and approached
with the sense of urgency and commitment that a crisis warrants, is
beyond me. The Obama administration has committed a great deal of money
to keep the economy from collapsing entirely, but that is not enough
to cope with the scope of the jobless crisis.
There were roughly seven million people
officially counted as unemployed in November 2007, a month before the
recession began. Now there are about 14 million.
There are now more than five unemployed
workers for every job opening in the United States. The
ranks of the poor are growing, welfare rolls are rising and young American
men on a broad front are falling into an abyss of joblessness.
Workers under 30 have sustained nearly half the net job losses since
November 2007.
This is not a recipe for a strong economic recovery once the recession
officially ends, or for a healthy society. Young males, especially,
are being clobbered at an age when, typically, they would be thinking
about getting married, setting up new households and starting families.
Moreover, work habits and experience developed in one’s 20s often establish
the foundation for decades of employment and earnings.
l. chambers
Thank you, Mr. Herbert , for this serious and needed editorial.
On a personal level, I feel that the unscrupulous morons whose failed
gambles caused this disaster are the only ones benefitting. The
folks from Goldman Sachs and Citi have the President on speed-dial,
while middle-income citizens worry, not just with their children's
education, but with simply keeping their homes.
The system is not just unfair; it is incorrigibly crooked and
nothing that happened in the last election changed that for the
better. People need to wake up and see who is really making the
decisions in our government and our country.
Recommended by 157 Readers
Jonathan G.
Very good, but short on solutions. As long as our priorities
are to pour massive sums into things with limited amplifying benefits,
such as armaments, intelligence gathering, drug enforcement, while
letting oil companies exacting a huge tax on all citizens through
windfall profits, insurance and pharmaceutical and financial companies
diverting funds into the hands of the wealthiest few, it isn't clear
what tools we have with which to fix things. High-paying jobs can't
be created by waving a magic wand.
John
The high permanent unemployment is the result of massive immigration
over the last 30 years. Technology, by design, eliminates jobs and
an outsourced job also means the loss of its supporting jobs. So
a modern society needs fewer people to run it and at the same time
jobs are leaving the country. The bubble only masked the problem
and now that the bubble has burst and excess labor is being squeezed
out in the form of high unemployment there is nowhere for workers
to go unless there is another bubble. The American people have been
losing out year after year as immigration has ramped up and the
competition for jobs has increased so much that wages (healthcare
and pensions are wages) have fallen as people will work for less
just to have a job. Everything has finally reached the end of the
line. The middle class does not have money to spend so we do not
have consumers which would put others to work. It's a real mess.
Japan is trying to solve the problem by giving financial assistance
to its foreigners in an attempt to send them home and lower its
unemployment rate. Obama and gang will not solve the problem. They
benefit too much by it. They receive the minority vote for continuing
immigration and they receive money from the U.S. Chamber of Commerce,
agribusiness and billionaire high tech entrepreneurs to continue
this assault on the American people. Massive immigration and deregulation
used to be the hallmark of the Republican Party until Clinton sold
the working people out. It is a continuation of these policies which
enriches the political class and for that reason it will continue.
Obama has not imposed the tough regulations that are necessary to
insure a healthy financial system due to the financial contributions
nor will he address the lowered wages and loss of wages caused by
immigration since it is not to his benefit to do so. Unfortunately,
our people are paying for this lack of concern by the political
class and it will continue.
Recommended by 81 Readers
LAS
During the last half of the twentieth century appliances and
computers were invented with the purpose of saving time and labor.
These devices do save labor, but our society still operates on the
premise that people are expected to work full time plus overtime.
European countries scaled back the work week to less than 40 hours
and have given workers much more vacation and family time. The unemployment
problem won't be remedied until there is a restructuring of the
way work is distributed among people. More people need to work a
shorter work week with more vacation time. The problem is exacerbated
by increasingly narrowminded human resources policies. Jobs not
requiring a college degree are now universally filled by means of
psychological tests, so a person who doesn't score on the test as
a business "type" will not be considered. At the professional level,
anyone who is older, female, a minority, has a disability or who
has gaps on a resume, etc. will fall into a cycle of unemployment.
There will be a percentage of perfectly decent people who can never
obtain full time work. The disabled, for example, have a much higher
unemployment rate in spite of anti-discrimination laws.
We will need to have a public works program in which anyone who
wants to work can sign up and work, and not just at a menial level
of jobs, as well as an and to laissez faire employment law.
The success or failure of the current stimulus package cannot
be evaluated yet because the federal government has not even given
out a great deal of the money, particularly in scientific research.
Maryanne Conheim
Bravo, Mr. Herbert -- you are a brilliant
diagnostician. Our economy and 10 percent of its work force is on
life support, and the cure is not investment bank bailouts, but
massive, WPA-style public works programs. I am sure
that President Obama knows what should be done. One can only hope
that he has the grace and stamina to sell it to the Congress.
Recommended by 64 Readers
pdxtran
About 15 years ago, The Economist carried a cover story that
asked what happened to working class men when their jobs moved overseas.
It was a sensible, well-written article that admitted that such
job losses devastated communities and caused untold social problems.
In other words, the "Free" Trade Cultists in Britain and the U.S.
KNEW that their neoliberal policies were disastrous for ordinary
working people, and yet they continued insisting the outsourcing
first production, then IT work, and then routine clerical work to
low-wage foreign countries was the route to prosperity for all.
Were they blinded by their mostly affluent origins and therefore
unable to see blue collar workers as human, or were they purposely
trying to reverse the progress that the working classes in the West
made in the twentieth century? Or were they so addled by their ideology,
"politically correct" in the original sense of the term, that if
their ideology and reality clashed, then there had to be something
wrong with reality?
If I were Economic Czarina, I would provide low-interest loans
and training to displaced workers from shutdown plants who wanted
to modernize and reopen their former workplaces. I would institute
government purchasing policies that gave preferential treatment
to manufacturers with U.S.-based workforces, no matter who the owners
of the company were. I would shut down businesses that hired illegal
immigrants and auction their tangible and intangible assets off
to new owners who promised to use legal workers. I would put people
to work on infrastructure projects, a WPA for the 21t century, building
affordable housing, new recreation areas, mass transit, and intercity
rail, and retrofitting existing communities for better access by
non-automobile transport. (Such projects might help us catch up
with Western Europe and East Asia.) How would I pay for this? Simply
by cutting the Pentagon's budget back to a strictly defensive level
and putting the world on notice that the U.S. was retiring from
the policing business, since it isn't very good at that kind of
work anyway.
Reversing the long-standing sicknesses in our economy will require
bold moves, maybe not the ones I suggested, but ones that will upset
and annoy the rich and powerful nevertheless. The Republicans will
never go against the powers that be, and the Democrats seem more
desperate for the Republicans' approval than for the voters' approval,
so I'm not optimistic about either of these political dinosaurs.
My fondest wish would be for the more progressive elements in
the Democratic Party to break away, unite with other left-leaning
groups, and form a new party that realizes something that individual
members of Congress have proved on a small scale: You don't need
PAC money if you win the loyalty of the voters through your integrity
and concern for the little person.
Recommended by 112 Readers
William
As a person under 30 myself, I do have to mention that in addition
to a bad economy, generation Y is also getting steamrolled by the
attitude that college is a place to pursue your passions rather
than learn a marketable skill that sets you apart from the crowd.
I love art history, music, pyschology, and general business as much
as the next person, but these are a dime a dozen.
Yet professors continually advised them
that this was ok, that they should pursue their passions as expensive
time consuming college degrees, rather than hobbies.
Combined with the fact that many of the degrees that are currently
still in demand required hard courses like the calculus III or organic
chem that were just too much of a hassle to take and you have a
recipe for disaster when the paper pushing jobs evaporate.
I can't stress enough the disillusionment
right now among my friends who have debt from their 4 years and
a degree that is currently worthless. For those of
us who slaved through more challenging degrees, often at the expense
of a few parties, we feel a mixture of sympathy and vindication.
I suppose that what this means for recovery is that we should
consider attacking this source of the problem as well, maybe by
offering federal reimbursement for getting a degree in a field that
is in demand (obviously a list that has to be revisited every so
often). The nation gets its talent, the citizens who take advantage
of the program get jobs. And I can assure the people who wanted
to pursue studies in artistic fields that there is plenty of time
to perfect those crafts outside of work, and often with more perspective
than if it were a career in itself.
Recommended by 41 Readers
Anna
"The first step in dealing with a crisis is to recognize that
it exists"
Thank you, Bob. There are profound systemic problems which must
be addressed. We need jobs and health care. Instead we hear mumbo
jumbo/psychobabbling about volunteering (killing whose few jobs
which still exist) and spinach eating. This is not normal.
Recommended by 65 Readers
Steve
With the Madoff fraud and the stock market crash,
there was panic earlier in the year
by society's parasite class - the wealthy speculators.
Now that the market has recovered some and the average taxpayer
has bailed out their poor investment choices, they have no further
concerns.
I can't say I blame them. For forty years now, Republican crooks
and criminals have been assuring them that only the wealthy are
of any consequence in America. They now have the right wing press
to continue this assurance.
Recommended by 82 Readers
See
Calculated Risk "The seasonal adjustment appears pretty good in the
'90s, but it appears insufficient now. I expect that the index will show
steeper declines, especially starting in October and November."
Gluskin Sheff’s chief economist and David Rosenberg appeared to be
delighted by the
rise in the Case-Schiller index of US house prices on Tuesday:
CASE-SHILLER HOME PRICE INDEX RISES - NOW
THIS IS A GREEN SHOOT!
One by one, the shocks that the U.S. economy
endured are being worked through (though there is one lingering
impediment).
The sharpest
part of the mean reversion in credit is probably over, but the credit
contraction still has a long way to go before household debt ratios
head back to anything remotely close to pre-bubble historical norms.
This in turn suggests that the trend
towards frugality will persist.
Now we have the second shock - housing -
subsiding. You couldn’t have written a better script, a day after
unsold new housing inventory plunges from 10.2 months’ supply to
a three-year low of 8.8 MS, we see the Case-Shiller home price index
rise (0.45% sequentially) for the first time since the bubble burst
in May 2006 (note that in seasonally adjusted terms, prices still
dipped 0.2% MoM) and 14 of the 20 cities eked out an increase.
Stabilizing residential real estate
prices is absolutely an essential ingredient in transitioning out
of the recession, though inventories are still far too high to warrant
a sustained upturn. Bottoming is one thing, booming is quite another.
This entry was posted by Stacy-Marie Ishmael
on Tuesday, July 28th, 2009 at 18:14 and is filed under
Capital markets,
People. Tagged with
David
Rosenberg,
green
shoots,
housing.
Calculated Risk Selected Comments
montas ankle
thanks CR.
others would prefer that you be bearish to the very end,
but by displaying restraint and balance in many of your posts,
when you come out with a potentially controversial statement
like this, well, we know that there must be a reason.
this summer will be quite the lull, and I would argue that
the low end will actually move in a rather unsticky fashion
(due to foreclosures and resales). the result is that CS will
likely show a stronger rebound than usual in the summer (NSA)
and will then pay the piper in the fall. perhaps just another
way of saying what CR just said, but I do believe it bears repeating.
the 'recovery' in home prices is a long way off.
wally
My observation is that, at least in
the Minneapolis area, "seasonal variation" is sort of a misleading
concept. Everybody lists stuff just before June. The good stuff
sells, the bad stuff lingers... by mid-winter the sellers of
what remains are highly motivated, but the product they have
for sale does not compare with what went in the summer.
So, what you are seeing is not true
seasonal variation of equal products, it is an artifact of the
fact that there is a prime selling season in this area.
Gary thinks the S&P 500 earnings will be ~ $40/share this year.
Assuming P/E 15 that gets us to fair value of 600, a 35% drop from today's
level.
We had Gary Shilling on TechTicker this morning. We'll post the
video soon.
In the meantime, here's a quick overview of Gary's outlook on things,
along with a gallery of exhibits from his recent monthly Insight.
- The economy won't start to recover until 2010
(versus the current consensus of now). It will recover because
the government will be forced into a second stimulus.
- ...the US consumer is cutting back fast. Consumer spending
will drop from 70% of GDP to 60% as consumers pay down debt and
go on a saving spree.
- Most recessions have a positive quarter or two of GDP,
so if we get one, it won't mean anything.
Looks more like statistical gimmick: stock market is one of the leading
indicators. And in turn is a side effect of stimulus package (plus possible
GS or other manipulation). In this case such a report might be a sign of
local top, not the bottom. See
The End Of The End Of The Recession
The index of leading indicators, which signals turning points in
the economy, is rising at a rate that has accurately indicated the end
of every recession since the index began to be compiled in 1959.
The index was reported this week to have risen for the third consecutive
month in June, and to have risen at a 12.8 percent annual rate over
those three months.
... ... ...
An end to recession is not, of course, the same thing as the beginning
of a boom. The indicator “has an unblemished record on calling the turning
point,” said another economist, Robert J. Barbera of ITG, “but it is
not a particularly good guide to the power of the upturn.”
Indeed, one of the strongest moves in the leading indicators came
at the end of the brief 1980 recession, as credit controls were removed.
But the economy soon fell into another, longer recession.
Mr. Bandholz thinks we may get a “W” recovery, in which early gains
are followed by weaker figures. “We do not expect this recovery to be
strong and self-sustaining,” he said. “What is lacking is support from
consumer spending.”
During the most recent three months, the strongest indicators have
been the financial ones. The Standard & Poor’s 500-stock index has risen
while the gap has widened between long-term and short-term interest
rates. The indicators index was also helped by an increase in consumer
expectations and a slowing in deliveries by suppliers. (Slower deliveries
are assumed to be caused by rising orders, although such a change could
indicate the suppliers simply laid off too many workers.)
Two of the 10 indicators — the money supply and new orders for consumer
goods — have shown declines.
Another measure compiled by the Conference Board, the index of coincident
indicators, has fallen for eight consecutive months, and dropped in
17 of the last 19 months. That indicator is often used by the economic
research bureau in dating decisions, and its failure to stabilize is
a reason that Mr. Bandholz says he thinks the downturn is not yet over.
The index of coincident indicators has fallen 6.4 percent from the
peak it reached in November 2007, making this the deepest recession
since 1960. Before this cycle, its steepest decline was a 5.6 percent
slide during the 1973-’75 downturn.
I saved this from Saturday’s Off the Charts column by Floyd Norris:
THE American recession appears to be nearing an end, but only after
it has become the deepest downturn in more than half a century.
The index of leading indicators, which signals turning points in
the economy, is rising at a rate that has accurately indicated the end
of every recession since the index began to be compiled in 1959.
The index was reported this week to have risen for the third consecutive
month in June, and to have risen at a 12.8 percent annual rate over
those three months. Such a rise, pointed out Harm Bandholz, an economist
with UniCredit Group, “has always marked the end of the contraction.”
Mr. Bandholz said he expected that the National Bureau of Economic Research,
the official arbiter of American economic cycles, would eventually conclude
that the recession bottomed out in August or September of this year.
Why isn’t the Conference Board ready to declare the recession over?
The index of coincident indicators — now down for eight consecutive
months (down 17 of the last 19 months). That indicator is often used
by the National Bureau of Economic Research in making dating decisions,
and its failure to stabilize is likely why we haven’t seen any declaration
that the downturn is officially over yet.
Source:
Leading Indicators Are Signaling the Recession’s End
Floyd Norris
NYT, July 24, 2009
http://www.nytimes.com/2009/07/25/business/economy/25charts.html
PERMALINK
Facebook 45 Responses to “Leading Indicators Say “The End is Near””
jc Says:
Not scientific but I just can’t imagine what will restore consumer
discretionary spending while wages are being lost on such a scale
and the consumer has been scared into saving. Is there anything
about the stimuli that could be causing the leading indicators to
send a false signal????
Super-Anon Says:
Too bad the consumer isn’t participating so far. It’s going to
be interesting to see how long this “recovery” lasts without them.
Lugnut Says:
- Maybe because unemployment hasn’t stabilized, much less recovered
- Maybe cause bankruptcies and foreclosures are still high, and
consumer spending is low
- Maybe cause commercial re is just now caving
- Maybe cause there is a massive deficit bomb looming over the
Treasury market that threatens the stability of all capital markets
Just MHO
primordial_ooze Says:
Total BS. Tell me why the current uptick isn’t like the 1980-81
case? The index could plunge this fall.
Past performance is no predictor of future performance.
Mannwich Says:
I wonder - can we have a true recovery with so much unemployment
and people in debt to their eyeballs? Maybe those who have good
jobs will keep the economy afloat right now, but I doubt that will
be sufficient for a true “recovery” and a climate back to growth.
Maybe once enough of that debt is defaulted on and written off but
not yet.
I think this is the new “normal” for quite a while. Not exactly
Japan but a close knock-off to it.
Mike in Nola Says:
Just an illustation of Economists trying to pass themselves off
as scientific by creating statistics and talking about them and
making predictions about them Problem is that there is little correlation
between these statistics and the real economy.
Best example is the increase in GDP that occurs during bubbles,
including the most recent one. The activity being measured is not
necessarily beneficial to the economy as a whole, but produces good
numbers. Best summed up by John Mauldin’s use of the phrase “statistical
recovery.” We will get some artificial numbers that will be touted
as better, but things won’t really be any better.
hue Says:
we’ve heard “this time it’s different” on the way up in both
recent bubbles. could this recession from two huge back to back
bubbles be different too? where signs of past recoveries don’t work
as tea leaves?
R. Timm Says:
Employment is a lagging indicator and it will lag more than usual
in this recovery. The only LEI that I see as troublesome is the
recent stock market performance. This rally is overbought and will
retrace back to 800 S&P before heading higher again.
Mannwich Says:
@jc: Are flat panel tv’s a leading indicator or lagging? Me-thinks
this level of economic activity is the new “normal”, which means
retailers are still in for a world of hurt and some will be ripe
for shorting activities. Unless many can simply pile on more debt
to their crappy balance sheets (which is possible, I suppose), many
retailers are going down in the coming years. We haven’t even begun
to see that carnage.
cvienne Says:
I love it when, for example, last week a time chart was put on
display showing the “timeline” of the 1929-1932 period…Some wanted
to negate those comparisons by saying it was essentially USELESS
to draw any type of correlation…
Do you suppose they say the same about this graph? Or does the
mind just see what it wants to see?
Mannwich Says:
@cvienne: I think you know the answer to that question. Me-thinks
it’s the latter.
globaleyes Says:
I’m bullish on interest rates, this recession and foreclosures
which means I expect all three to continue into the indefinite future.
I hope I’m wrong.
http://www.marketvane.net/bull2.jpg
ben22 Says:
I might be a little more compelled by this data comparison if
this recession were anything like the others compared to here, or
if the causes of the past recessions were the same but from where
I sit neither applies.
Like some others above I haven’t noticed that since December
2007 we moved away from being a consumer based economy so how from
here there will be a great expansion when it comes to spending,
credit expansion, and job creation which in turn increases disposable
income, not just for the currently employed, but also putting back
to work the unemployed/underemployed, is not something I can see.
I suppose it is possible that this happens, but it doesn’t seem
probable. Not with the following:
- The U-6 unemployment rate in June, at 16.5% is more than half
the rate at the bottom of the GD in 1933.
- Unemployment rates for workers 45
and older have soared to their highest level since at least 1948.
-Employed are working fewer hours, average of only 33.1/wk in May
-Part-time work is at a record high, overtime a record low.
-The loss of two million jobs in the first quarter of 2009 was the
largest in any three-month period since at least 1939, when the
data begin.
Certainly the market appears overbought right now but that doesn’t
mean it can’t stay that way for a lot longer than anyone expects.
In any event, things had better rebound quick or stocks like Macy’s,
which has run from roughly $5, to almost $14 since the March lows,
will have nowhere to go but down.
karen Says:
the presentation of the new home sales data was as hilarious
as ever.. up 11%, biggest month over month increase since… the fact
is that sales are down 22% or so from last june..
looks like a good number of california families will be going
back to one earner households.. that is when the adult kids are
pitching in to help the parents keep up with their mortgage payments..
that’ll do wonders for the real estate affordability index..
Mannwich Says:
@Mike in Nola: Boom times in debt-binging China maybe, where
they are following our previous bubble path. It worked so well here,
the Chinese thought they’d just emulate it. They’ll do OK with that
strategy until their bubble eventually pops too.
DeDude Says:
As we all know it’s always different every time, but the question
is how is it different, and what those differences do to the parameters
we are looking at. So I am wondering how much the stimulus package
(the thing that is different this time) is influencing these leading
indicatiors.
dead hobo Says:
In the weekend papers, I saw autos were heavily advertised and
heavily discounted, without regard to cash for clunkers. Either
they are reflecting the new cost structure (doubtful because both
foreign and domestic were begging for customers) or autos are not
following the fantasy recovery plan.
I went to a Marshall’s. I was surprised to see the inventory
thin and the racks spread out very obviously. Few customers and
the parking lot was almost empty in front of the shopping areas.
OK near a grocery store.
I don’t think the rumored inventory rebuild is going to happen
as vigorously as claimed by the pundits. If so, companies like Marshall’s
would be bursting at the seams and not trying to look full. Rather,
I think we’re going to a new state of equilibrium where less of
many things will be the new normal.
dead hobo Says:
Also, with oil on the rise again in spite of lowered demand …
people aren’t stupid when it comes to managing the household budget
while income is uncertain. They can be an infinity past the point
of stupefying stupidity when times are good, but reality has been
a rude visitor of late.
With oil on the rise again, people will hunker down more deeply.
Excess cash will go into the bank and maybe to a dinner at an upscale
chain restaurant.
In spite of the pundits, it’s looking more and more like a double
dip is on the horizon. We’re falling to a new equilibrium and not
going back to the former one in any reasonable time.
bdg123 Says:
This is bull-oney. These models work until they no longer work.
If one breaks down the LEI, nothing based on fundamental capital
creation in the economy has moved upward. The bullishness is all
based on the credit and risk components in financial markets. It’s
bullshit. It’s like ECRI and their WLI that is now at multi-year
highs. ECRI is also too beholden to models that work until they
no longer work. They were deer in the headlights when it came to
anticipating the shocks that hit us. And both will again be deer
in the headlights to future shocks.
Onlooker from Troy Says:
Yes, the LEI are being influenced by monetary and fiscal policy
(i.e. the stimulus package). And it’s bumping things up with a little
sugar high. But that won’t be sustainable for all the reasons outlined
by others and that have been covered here ad nauseum.
It’s apparently good for a stock market
rally, as investors don’t seem to be able to see past their noses
anymore, and the herd is riding the wave.
Once again, maybe the recession is drawing to a close on a technical
basis, producing a positive GDP print. But it really doesn’t matter
in any substantive way to most people. GDP is a rather crappy way
to assess the economic health of the nation anyway. There are many
ways that it is influenced that look good on paper but are really
not healthy. One reason is the analogy I like that it’s like looking
only at a company’s income statement while completing ignoring the
balance sheet. That’s folly when the company is really limping along
with huge debt and practically insolvent. They may be able to produce
some current income due to one time circumstances, but the longer
term prospects are terrible. Sounds like the banks, and our nation.
tradeking13 Says:
Why do we keep comparing this credit induced recession to past
business cycle recessions?
Also, isn’t “stock market prices” one of the indicators in the
LEI? I’d like to see what the relative impact the stock market is
having on the LEI.
wally Says:
Have we ever come out of a recession
loaded with the absolutely crushing levels of debt
that we now carry as a result of our gifts to the big banks at the
expense of Main Street? Have we ever come out of one with all the
credit transactions shadowed by the implicit guarantees that are
now in place?
Given that this is a first-time situation, I’d be cautious. Also,
if I were Bernanke I would be cautious about playing the saviour
role in front of the people he is robbing to ’save’.
Mike C Says:
July 27th, 2009 at 11:13 am
@ben 22
This is the kind of regulation we are going to get, hope people
start to understand that soon. This sort of regulation does nothing
to stop the already problematic conflict
of interest in this industry which is that at these companies the
rep does not get paid when the client is in cash.
Ben, there is a way around this. Why not just go independent
and start your own separate RIA firm rather then work for a wirehouse.
This is what I’ve done. Sure, you don’t have their back office support
and marketing muscle, but you can do things your way and get paid
if you decide sitting in cash is the right thing to do because you
charge a flat percentage of assets and it doesn’t matter whether
you are in stocks or cash as presumably you are actively deciding
which is better at any given time.
Been awhile since I posted so a position update. I’m about 60-70%
invested in equities and 30-40% cash. I got faked out on that bogus
head and shoulders breakdown, and trimmed 10% of my equity exposure
at SPX 870ish. Oh well, you can’t get them all right, and that is
why I always move gradually, incrementally and don’t make ALL or
NOTHING type changes.
The higher the market goes the more
I will sell off. If and when SPX hits 1200, I expect to be very
light in equity exposure. More then a few technicians
have 1200 price targets even though that number makes ZERO sense
to me from an fundamentals or valuation perspective. Incidentally,
I’ve come more around to your credit deflation view, but I think
one still cannot underestimate the impact that fiscal and monetary
stimulus could have on the market in the short-term. Go back and
reread Grantham’s quarterly letter.
http://www.tradersnarrative.com/how-high-can-this-market-go-2799.html
http://www.decisionpoint.com/ChartSpotliteFiles/090717_rr.html
”Bottom Line: The violation of the head and shoulders neckline
has proven to be a bear trap, and my opinion is that the rally from
the March lows is resuming. My upside price target is about 1200
on the S&P 500. I have to say that this doesn’t make any sense considering
what I think I know about the economy, which is why I try to ignore
fundamentals in favor of the charts.”
http://www.decisionpoint.com/ChartSpotliteFiles/090724_bt.html
”I think the weekly chart (below) does a good job of conveying
the power in this rally. We can see the breakout above the long-term
declining trend line, as well as the horizontal resistance, which
is the neckline of a reverse head and shoulders pattern. The pattern
has executed and the minimum upside price target is about 1200.”
Just curious, for those who have held and continue to hold a
“buy and hold” short position in leveraged ETFs, what do you do
here if you didn’t take any money off the table at SPX 666-700 when
the market was the most technically oversold in a generation? Do
you ride the position up to SPX 1200 if that is what is going to
happen, or do just continue to hold with the view that at some point
your fundamental valuation outlook will be proven right (SPX 450?)
DeDude Says:
And don’t forget that the economy is not reported in absolute
numbers (i.e. 14.1 trillion per year) but as a second derivative,
% annualized change. So numbers actually turns positive when the
falling ends, not when we are back to “normal”.
Onlooker from Troy Says:
Indeed it does seem crazy that we have to cover this ground over
and over again. But I guess it has to be restated continually because
there are many who just don’t see the forest for the trees and continue
to be sucked in by the noise, ignoring the larger signal. And people
will get hurt falling for it. So we try. But it does get a bit old,
doesn’t it?
The bottom line for me is that the
argument that we are on the verge of real, sustainable recovery,
and therefore a sustainable uptrend in the stock and housing markets,
is based on thin evidence and a huge dollop of hope and confidence
that we’re different and those bad outcomes just won’t happen to
us (i.e. Japan’s lost decades, another depression, etc.) On the
other hand there is huge, objective, overwhelming data stating otherwise.
I won’t bet on the hope and hubris side myself.
alfred e Says:
@DeDude correct about stimulus influencing LEI as well as daily
SLP pumps.
IMHO, the velocity of money is currently so low and will remain
low for some time, that the LEI s are way too optimistic. The big
dogs continue to pick the carcass clean.
mathman Says:
Nothing to see here, move along:
http://rawstory.com/08/news/2009/07/25/spitzer-federal-reserve-is-a-ponzi-scheme-an-inside-job/
constantnormal Says:
Yeah, the LEI says The End is Near, go check out David Rosenberg’s
& Tyler Durden’s presentation over at ZeroHedge … The End of the
End of the Recession, for the bigger picture.
Jdamon33 Says:
I’m in a leveraged 3X short ETF (FXP and FAZ). I use these to
hedge a pretty large long position(s) in my IRA’s.
I will probably just ride it up to the 1,200 level (if that is
where we are going). At that time, I will sell off all my Long IRA
funds. At some point, I believe reality
will hit the market square in the face and we will be back down
to the 800 SPX range. I don’t think we will get back to the 700’s
again, but I could be wrong.
Jdamon33 Says:
After reading Rosenbergs piece, I’m thinking FDIC backed CD’s
for the next 3 - 4 years (at least). Dire situation we have here
folks.
lakshman Says:
Hi Barry,
When I saw this in the NYT I thought you might pick up on it!
A few comments for consideration:
1. Current version of the LEI has issues, as Floyd points out,
component estimations (using econometric models), etc., but it IS
starting to fall in line behind earlier rise in ECRI’s leading indexes
(LLI & WLI).
2. ECRI’s Weekly Coincident Index, while not yet positive, seems
to be fairing better — see chart mid-page here:
http://www.businesscycle.com/resources/
3. ECRI Leading Indexes in no way represent an econometric model
that has been fitted to the data, but they are based on relationships
that predate the Great Depression, so they have some validity in
jungle variety recessions like the one that we believe is now ending.
4. both the U.S. in the 1930s and Japan in the 1990s had business
cycle expansions despite big problems:
http://www.nber.org/cycles/
http://ecri-prod.s3.amazonaws.com/reports/samples/1/BC_0907.pdf
5. unlikely to get an NBER call on recession’s end until well
into 2010 as they wait for jobs and GDP data revisions to settle
down. The estimates of those data in the near-term, made by econometric
models, systematically experience their largest errors in the vicinity
of cycle turning points.
Kind regards,
Lakshman
fusionbaby Says:
Fiction is fact. White is black. Everything is actually the opposite
of what it seems. Immorality, corruption and hidden agendas have
worked their way so deeply into the system on a viral level that
a once decent system with potential is now worthless. As regards
material and financial survival, it has reached the point now where
it is everyman for himself. We’d better have our economic solution
in place for the very different future that we are speeding into
like a locomotive. We’ve allowed ourselves to be had. All MSM, government
or industry statistics are tripe. Go out, walk around, look around,
talk to the people in the street… that is where the statistics and
trends are. And they spell TROUBLE the likes of which America has
not seen for a very very long time. And the global situation will
mirror what happens here.
cvienne Says:
1930’s “business cycle expansion” = manufacturing for future
European ally war effort
1990’s “business cycle expansion” = building out internet infrastructure
2010’s “business cycle expansion” = SHOW ME THE MONEY (and/or
the credit to pay for such expansion)
Dr. Kenneth Noisewater Says:
When we get polywell-based fusion electric power that makes electricity
too cheap to meter and makes electric or hydrogen cars feasible,
and we stop spending money on home heating and transportation, _that_
should free up enough consumer spending to pay down debt and expand
the consumer business cycle.
I’m not seeing much else being able to get over the _consumer_
debt hump.
What else out there is going to start getting 70% of the economy
going again? Massive consumer defaults?
Steve Duncan Says:
July 27th, 2009 at 8:39 pm
Hey Lakshman,
Why don’t you talk about what the ECRI Long Leading Index (LLI)
did versus the Coincident Index during the Great Depression? The
ECRI Long Leading Index went positive in 1930 while the ECRI US
Coincident Index continued to go negative for two more years until
the middle of 1932. The ECRI Long Leading Index then went negative
for a second time and followed the Coincident Index to a bottom
in 1932.
So, the initial ECRI Long Leading Index (LLI) was predicting
an end to the Great Depression in 1930 and it was wrong (and the
ECRI LLI is going to be wrong again this time). Your current ECRI
Long Leading Index (LLI) is jumping the gun due to being based on
false indicators predicting the end of the Great Recession. You
won’t tell us what the ECRI indicators are (proprietary) but they
are probably made up of some of following one time or temporary
increases due to Govt intervention: interest rate spreads, stock
prices, money supply, commodities (oil spike), and inventory rebuilding.
Keep putting that positive spin on it baby.
http://www.thestreet.com/story/10039739/1/time-tested-tools-see-no-double-dip-ahead.html
Kind regards,
Steve Duncan
bdg123 Says:
If that truly is lakshman you are
showing a large vlind spot by citing Japan post 1987 and the U.S.
post 1933. The dynamics are completely different than today.
And even though you are citing that some of your data points are
not yet positive, you are citing on your web site that the economic
recovery is at hand re the WLI
http://www.businesscycle.com/news/press/1500
I find it HIGHLY DUBIOUS that your use of some data points in
your models pre-dates the Great Depression. Some of the granularity
in statistics used are not available pre the Great Depression. And,
your own research on your site shows a correlation well past the
Great Depression. I can’t help but think you are taking a literal
liberal liberty. And, the Conference Board LEI is just as adept
as the WLI is. They are both wrong that all is clear ahead.
BusinessWeek has an interesting cover story this week about
The Leaner Baby Boomer Economy.
Calling Mercedes the "the quintessential boomer brand", BusinessWeek
estimates that Mercedes will sell a third fewer cars in America. The
article also notes efforts by companies like Nordstrom (JWN), Starwood
Hotels & Resorts (HOT), Outback Steakhouse, BMW and Target (TGT) to
offer value shopping or "cheap chic" in an effort to reach out to generations
X and Y.
By now most are familiar with this new wave of frugality. Thus the
real story is not article itself but the easy to miss sidebar statistics
as follows:
-
$400 Billion: Amount that will come out of annual U.S. consumption
as thrifty boomers push savings rate from 1% to nearly 5%.
-
47%: Boomers share of national disposable income in 2005 before
the bubble burst. Boomers contributed only 7% to national savings.
-
2.4%: Forecasted GDP growth over the next three decades as boomers
ratchet back. GDP has grown 3.2% a year since 1965.
-
69%: Portion of boomers aged 54 to 63 who are financially unprepared
for retirement.
-
78%: Boomers' share of GDP growth during the bubble years of 1995
to 2005
Those stats are from a McKinsey study, and there is nothing remotely
inflationary about any of them.In his
Town Hall Meetings Bernanke said:
"It takes GDP growth of about 2.5 percent to keep the jobless rate constant.
But the Fed expects growth of only about 1 percent in the last six months
of the year. So that's not enough to bring down the unemployment rate."
Inquiring minds might be asking: Why does it take 2.5% growth to
keep the jobless rate constant? The answer is the first 2.5%+- of GDP
is based on hedonics and imputations. In plain English, the first 2.5%+-
of GDP (if not much more) is fictional. When the economy is growing
at 2% it feels like a recession because it probably is, even though
no one will admit it.
Now consider the implications of a 2.4% GDP forecast for three decades.
If Bernanke is correct that it takes 2.5% GDP growth just to keep
the unemployment rate constant, and McKinsey is also correct in its
2.4% forecast, we will be stuck with 10% unemployment for decades.
GS foxes wants your money poor 401K Pinocchio ;-)
Been Down So Long It Seems Like
Up To Me, the precocious 1966 novel by the late Richard Farina,
defined the late 1960s counterculture. The stock market rally that's
pushed the Dow Jones Industrial Average back above 9000 for the first
time since early January could be given the same title, and it might
well come to define the much-wished-for financial recovery.
What's pushing the stock market upward? Mainly, unexpectedly positive
second-quarter corporate profits. But those profits aren't being powered
by consumers who have suddenly found themselves with a lot more money
in their pockets. The profits are coming from dramatic cost-cutting
-- including, most notably, payroll cuts. If a firm cuts its costs enough,
it can show a profit even if its sales are still in the basement.
The problem here is twofold. First, such profits can't be maintained.
There's a limit to how much can be cut without a business eventually
disappearing -- becoming, in effect, a balance sheet in space. Secondly,
when businesses slash payrolls to show profits, consumers end up with
even less money in their pockets to buy the things businesses produce.
Even if they hold on to their jobs, they're likely to fear that they
won't have the jobs for long, which causes them to retreat even further
from the malls.
Most companies that have reported earnings so far have surpassed
analyst's estimates, but that only means that earnings have been less
bad than analysts had feared. According to the chief investment officer
at BNY Mellon Wealth Management, if the companies that haven't yet reported
earnings show the same pattern a the companies that have reported so
far, overall corporate earnings will have dropped 25 percent over the
past year. That may not be as much of a drop as analysts had expected,
but it's still awful. Operating income for companies in the S&P 500
that have reported so far has been almost 29 percent lower than last
year, more than 80 percent lower than 2007, according to Standard and
Poors. Ouch.
"Better-than-expected" is Wall Street's euphemism these days for
"we're happier than we thought we'd be." But Wall Street is in the business
of cheer leading, even when there's really nothing to cheer about. It
wants investors to think positively, on the assumption that positive
thinking can be a self-fulfilling prophesy: If investors begin putting
more money into the market, then the market will automatically rise,
leading more investors to put in more money -- until, that is, the rally
ends because nothing has fundamentally changed in the real economy.
Keep your eye on the real economy, where unemployment and underemployment
keep rising. It's not as much fun as cheering and investing right now,
but it's far safer.
Traditionally, investment-grade bonds have paid out only 25% more
interest than Treasury bonds. So, for example, if Treasury bonds are
paying 4% interest, then investment-grade corporate bonds would typically
pay out only 5% interest.
The difference between 4% and 5% isn't huge... Treasury bonds are
thought of as the ultimate safe investment. But investment-grade bonds
are not usually considered particularly risky either.
WHY YOUR MONEY SHOULD BE IN CANADA
More proof of how well the
ABC theory of commodity investment works… the $2,400 difference.
If you had placed $10,000 into the benchmark U.S. exchange-traded
fund (SPY) one year ago, you'd have lost about $1,100 by now. If you
had placed that money into the benchmark Canadian ETF (EWC), you'd be
up about $1,400.
Why has Canada done so well versus the U.S.? Easy. The Canadian stock
market is heavily weighted toward base metals, precious metals, energy,
crude oil, natural gas, and agriculture. These sectors have a tremendous
tailwind behind them. The U.S. market has a lot of exposure to banking
and consumer spending. These sectors face a tremendous headwind.
Canada is home to the
world's safest large oil deposit. It's the world's largest uranium
producer. It's the world's largest fertilizer producer. It's also a
giant in gold, nickel, timber, and wheat production… and a safe ride
on the rails gets it all to the world's top commodity consumer. As you
can see, it's a steady uptrend for the "C" of the ABCs.
Bearish market watcher David Rosenberg, chief economist and strategist
at Gluskin Sheff, isn’t expecting a sharp rebound in the economy — the
so-called V-shaped bounce back.
With that, and the recent run-up in share prices, in mind, Rosenberg
thinks that
corporate bonds are a better bet for investors than than stocks.
Unlike the stock market, which has de facto priced in a 40-50%
earnings surge in 2010, there is no such hurdle or high-hope in
the corporate bond market, which is still largely priced for a deep
recession — a GDP contraction of 1-2% going forward and the unemployment
rate heading towards 11-12%. Insofar as the economy does not relapse
to such an extent, there is a significant cushion embedded in the
pricing of the corporate bond market this time, even after the impressive
rally — from Armageddon levels, mind you — earlier this year.
Rosenberg points to today’s
Journal story on the possibilities for bonds. In it Kent Wosepka,
chief investment officer at Standish Mellon Asset Management, had this
to say. “If you believe in a V-shaped recovery, then you buy stocks.
If you believe we’re going to bump along, then you have to go with credit.”
Readers, what kind of recovery do you think we’re going to
see? V-shaped? The dreaded W-shaped double-dip? Or the anemic “L”?
[Jul 26, 2009] The war being waged on the TARP watchdog's independence
Most significant of all, and obviously due to Barofsky's truly independent
oversight efforts, the Obama administration is now
attempting to induce the Justice Department to issue a ruling that
Barofsky's office is not independent at all -- but rather, is subject
to, and under the supervision of, the authority of Treasury Secretary
Tim Geithner. By design, such a ruling would completely gut Barofsky's
ability to compel transparency and exercise real oversight over how
Treasury is administering TARP, since it would make him subordinate
to one of the very officials whose actions Congress wanted him to oversee:
the Treasury Secretary's. Barofsky has, quite rightly, protested
the administration's efforts to destroy his independence, and has done
so with increasing assertiveness as the administration's war on his
oversight activities has increased. Why would an administration
vowing a New Era of Transparency wage war on a watchdog whose only mission
is to ensure transparency and accountability in these massive financial
programs?
It should take little effort to explain the significance of these
clashes. The amount of taxpayer money
transferred to the banking industry or otherwise put at risk for its
benefit is astronomical. Professor Nouriel Roubini
argues
in a New York Times Op-Ed today that actions by the Federal
Reserve over the last nine months helped avert a Depression, while former
Governor Eliot Spitzer
said this week that the Fed has turned into a "Ponzi scheme" that
relies on insider dealing and requires vastly increased scrutiny.
Those claims aren't mutually exclusive. It's
not surprising that transferring extraordinary sums of taxpayer money
to a particular industry will help that industry avoid collapse, but
it is still the case that the potential for extreme corruption and even
theft in such transactions is enormous (indeed, even
Roubini argues that Fed Chairman Ben Bernanke
played an important role in enabling the crisis in the first place).
No matter one's views of the wisdom of the bailout and related programs,
transparency, accountability and independent oversight are absolutely
vital, and that is what Barosksy's office was created to ensure (though
it's unlikely -- given how Washington works -- that Congress actually
expected that the person in charge of that office would take those duties
seriously and be willing to fight with senior administration officials
to protect his independence).
Spitzer recently
told Bloomberg News that President
Obama’s regulatory reforms of the financial
sector are “irrelevant” because regulatory
agencies have not been enforcing corporate
laws to begin with.
“Regulatory agencies
already had the power to do everything
they needed to do,” he said. “They just
affirmatively chose not to do it.”
Bernanke is a tool. Like many neo-classical economists he uses
an implicit assumption that what is good for wall street is good for the
nation. An interesting question is" Should the guy who missed housing
bubble (and actually was instrumental in inflating it with low rates) be
reappointed ? But it is mute. From a broader perspective it doesn't
matter who is (reappointed.
I believe the attacks on Bernanke's personal integrity were unfair
and unjustified. But I'm not sure he should be reappointed.
Professor Thoma's analogy to a doctor who kept getting it wrong -
but never gave up trying new possible cures - is pretty good. Is that
the kind of doctor I'd want?
I'd like a doctor who never gave up trying for a cure, but I'd prefer
someone with better diagnostic skills. I don't oppose Bernanke for a
second term, but I think there are better choices.
(San Francisco Fed President Janet Yellen, as an example, recognized
what was happening much earlier than Bernanke).
Rob Dawg
Two observations about Bernanke:
One, he missed the housing bubble.
_He_ _missed_ _the_ _housing_ _bubble_. How do you give anyone a
pass on that?
Two, credit for effective responses
GDD9000
Dawg - it's worse than just missing the housing bubble. The acts
he sanctioned under Bernanke I interpreted as endorsing the housing
bubble as a good thing, initially. So, his theory was wrong, and
his knowledge base then was compromised, since he couldnt possibly
understand the world of finance enough to know that what spawned
it was a leviathan.
Juvenal Delinquent
A good many of you have had the chance to work in your fields
of endeavor with workmates that are book smart, but have no idea
how things really work in the world...
Exhibit A: Benjamin Bernanke
Shylockracy
For a 300 million-strong country, the talent pool from which
to draw a FED chairman is minuscule. Of course, 'talent' here does
not mean the same as outside the rarefied heights of High Finance.
Talent here means a proven track record
of absolute subservience, unscrupulousness and militancy in favor
of the political and economic interests of the ruling bankocracy.
danm
The difference between the US and France is that probably half
of the US has some trust
------------
The difference between the US and France is that France understands
that it's a mature economy and the people do what they can to force
government to redistribute.
The US still believes it is a growth
country with a frontier attitude. Its people are
convinced that everybody will get rich if there is no government
and they let the invisible hand do its magic. But most still cling
to the hope government will fix things. Hmmmm.
Which is worse - bankers or terrorists
"Ditch bernanke, and then who takes over? (must be politically
viable.) "
I'm thinking a sock puppet could do a better job. It would also
say less stupid things during the re-appointment tour.
GDD9000
Dawg - how much do you think he was
part of the decision to keep GS at the top of the heap?
Or do they just run the show so much that they could appoint
themselves? It's just to me, so incredibly
wrong that we are propping up the status quo, and rewarding the
people that screwed everything up. And seeing as we are doing that,
it makes sense to keep Bernanke.
I think that more than anything this shows you that there isn;t
a chance in hell he isn't reappointed. Absolutely zero. I don't
even know why we debate it. And Bernanke going out on the two debate
the little people. Laughable. I wonder how many stooges will be
trotted out to say, thank you, thank you BB for saving us from ourselves.
bobn
One, he missed the housing bubble. _He_ _missed_ _the_ _housing_
_bubble_. How do you give anyone a pass on that?
Do you really think he missed it? How could he NOT have known?
I think he lied about it for reasons bad or good. Imagine what would
have happened had he said "The so-called sub-prime problem will
lead to a major recession and, BTW, most of the huge banks are insolvent.
Have a nice day."
Which is worse - bankers or terrorists
"The difference between the US and France is that France understands
that it's a mature economy and the people do what they can to force
government to redistribute."
Right, France is this way in part because of the tradition of
protest brought about by 1789, the revolution of 1848, the founding
of the Third Empire, 1968, etc. US is different, does not protest
in the same manner for political change.
And the big difference is that we have, at least currently, the
reserve currency that most the world's is purchased in. Until proven
otherwise, sink this ship and the whole world drowns with us.
danm
Speaking of which, the post notes that Bernanke "failed to notice
the patient is sick".
-----------
Maybe he saw everything just right, realizes he's stuck between
a rock and a hard place so now is just positioning himslef for his
own survival.
Over the last few decades, extreme failure has been grandly rewarded.
What does he have to lose?
GDD9000
bobn - have you also not noticed
that he suffers from Bushco syndrome? The utter inability or desire
to say that he possibly did anything wrong or was responsible in
any way? It's not a particularly endearing trait
that more and more of our leaders seem to be in possession of.
ResistanceIsFeudal
Entry of the masses into the markets, directly or indirectly
through retirement (another concept created by policy think tanks
and marketed to us) savings, was the real breaking point. So many
to fleece, so few to fleece them, so little incentive not to fleece
them. Add in superiority and entitlement mentality fostered by elite
educational institutions...
danm
And the big difference is that we have, at least currently,
the reserve currency that most the world's is purchased in. Until
proven otherwise, sink this ship and the whole world drowns with
us.
----
You've had land to distribute, resources to exploit, forests to
cut down, lakes to pollute... With 300M people, you're fast approaching
the limit.
Which is worse - bankers or terrorists
If you are Bernanke, I wonder....why even bother with the stress
of reappointment when you can get a job in the private sector working
for the Goldman Sachs Financial Terrorism Crime Syndicate.
Oh yeah, that's right because everyone knows Benny has no skillz.
Juvenal Delinquent
Bernanke reminds me of most any NFL coach that has guided 7 teams
over a span of 12 seasons to a combined win-loss record of 86-122.
Coaches like him get rehired because they have "experience"
Comrade Coinz
There is bias built in to the system -- the Fed is owned by banks
-- that works against the interests of the country regardless of
who is chairman.
That bias affects personalities to a greater or lesser extent.
I still like Paul Volcker.
My feelings are mixed on Bernanke. He has some glaring flaws,
and I don't think he is strong enough to stand up to the oligarchs
when needed.
On the other hand, my sense is that he genuinely wants a good
outcome for the country.
danm
On the other hand, my sense is that he genuinely wants a good
outcome for the country
-----------
WW2 had a good outcome but millions of lives were lost.
MrM
Good morning, all
I would like to follow up on Basel Too's comment - If you do
not re-appoint Bernanke, who do you appoint?
Can we really hope that this position will escape going to Summers?
Yellen would be a much better choice, but it is rather unlikely
she'll be able to win against Summers.
We already had "The Committee To Save The World". Are you ready
for the sequel "The Unparalleled Genius To Save The World"?
Fair Economist
I agree with basically all of the criticisms of Bernanke, but
his replacement would almost certainly be Summers, who didn't forsee
this any better than Bernanke and who has numerous personal and
financial connections to banksters and to foolish deregulation.
Bernanke still seems not to have grasped many importants aspects
of the crisis, but neither has Summers, and at least Bernanke doesn't
have Summers' potential integrity issues. So reappointing Bernanke
is the lesser of two evils.
HomeGnome
Bomber Ben is going to be reappointed with praise for "strong
leadership in these difficult times" from both Elephant and Asses.
The Congress Critters (R. Paul excepted) are pretty much clueless;
which was evident if you caught any of Bomber Ben's testimony.
Hell, all "Dr. Evil" Paulson had
to do to get 700 BILLION was threaten financial collapse and martial
law; and the lapdogs rolled over like puppies.
patientrenter
Bernanke is more than just a messenger. He is constrained on
many sides: Congress is most important, then the Treasury and WH,
then the banking industry, then professional economists and other
members of the financial community. But he does still play a leadership
role. Any of us in leadership roles recognize that it's a grey area.
Few heads of household have absolute authority! It's the same, but
even greyer, in broader leadership roles like Bernanke's.
I read a 2009 overview speech by Bernanke, just to see his own
story. It's at http://www.federalreserve.gov/newsevents/speech/bernanke20090414a.htm.
He recognizes the role of imprudent lending, and the need for prompt
action to cut off any resurgence of inflation. He also acknowledges
there was a TBTF problem.
But I think he reveals his biases even in this speech. He discusses
the pain of the credit collapse, and the measures he and others
have undertaken to mitigate the pain, in vivid and detailed terms.
He doesn't explain very well why allowing the imbalances to grow
as much as they did was a problem in the first place. (Maybe because
he doesn't believe it was such a big problem. The real problem was
the collapse. Lesson learned: Allow bubbles. Prevent bubbles popping.
On the TBTF issue, it's clear that he doesn't see any need to
bring more of our financial industry out of the TBTF category. Instead
he advocates more regulation. That assumes the regulators (like
Greenspan and him) will be better than the company CEOs (like Sandy
Weill) at avoiding excessive risk. It's not clear to me that the
regulators are any better. Sure, an ideal regulator would be better.
But the regulators we actually get are not ideal, just as the CEOs
are not. I think I'd like to see graduated capital requirements
with real bite that are higher on institutions that pose more systemic
risk (= are more likely to be backstopped by the taxpayers). I got
the impression that he is very weak on any effective anti-TBTF measure.
Perhaps that's because he has too much faith in the perfect regulator.
patientrenter
"I like honesty, but I prefer competence over honesty in the
most important jobs."
Shifting $14T of toxic assets from the private to the public sectors
balance sheet is competence?"
I am not saying that Bernanke is competent. His points of competence
and incomepetence are what we're debating here (in between noisy
and pointless global climate trench warfare salvos). I am just saying
that I don't think it's purposeful to judge him based on how much
he lies. Whether it's right or wrong, the political sphere he operates
in takes lying (or dissembling, or miscommunicating, or whatever
you would like to call it) as a job survival requirement. What matters
most to us all is what he accomplishes, not what he says. That's
why is points of policy competence and incompetence matter more
than merely the extent of his public directness and honesty.
The stimulus bill reminds me of "Kindergarten Cop" -- Schwarzenegger's
movie when he plays a cop who goes undercover as a kindergarten teacher,
and ultimately quits his policeman job to teach kindergarten on a permanent
basis.
This recession has brought employment down over six million. By industry,
these losses are disproportionately in construction and manufacturing.
By region, these losses are disproportionately in Nevada, California,
Arizona, Florida, and other housing cycle states.
Although I do not agree with it, a reasonably
coherent theory that says that the government can raise employment by
hiring idle resources. So, in this recession, an effective way to raise
employment would be to create jobs in those industries and regions with
people without work (whether raising employment passes a cost-benefit
analysis is another story).
The stimulus bill does not do that. Instead, it spends a lot in industries
and regions with few if any employment losses.
Econbrowser now claims that the stimulus bill can be effective,
because unemployment rates are high (whatever that means) in health
care and education. Let's take a look at employment changes Dec 2007
- June 2009 (millions) by industry:
- Total nonfarm payrolls: -6.5
- Construction: -1.3
- Manufacturering: -1.9
- Education and Health: +0.7
How exactly is fiscal policy going to create 3.5 million jobs by
primarily hiring people in education and health? I see only two scenarios,
both absurd and/or dishonest:
-
The construction workers become kindergarten teachers.
As I see it, Kindergarten Cop was just a movie, and in reality
changing occupations as efficiently as did Schwarzenegger will
not happen in the time frame of this recession.
-
The people in construction and manufacturing stay unemployed,
and vast numbers people in education and health delay their
retirements, forego maternity leave, or come out of retirement.
Without commenting on the likelihood of this scenario, I'll
just say that it renders the stimulus bill dishonest: America
was lead to believe that those suffering from this recession
would be helped, not that those in secure jobs would be over-worked.
Should that allay any inflationary concerns people may have about
the doubling in the size of the Fed's balance sheet? In a narrow mechanical
sense, perhaps. It is true that the new assets have not yet shown up
as an increase in the money supply, and it is true that the Fed has
the power to prevent them from doing so in the future. But my concerns
about inflation are not that the Fed would lose the ability to target
a particular level for the money supply, and certainly are not concerns
about the next six months, where I still see deflation as a bigger worry
than inflation. Instead, my concern is that the
current fiscal trajectory is fundamentally inconsistent with the
Federal Reserve choosing to keep inflation under control. Both devices,
ballooning of the Treasury's account with the Fed and enabling the Fed
in effect to borrow directly on its own, are indeed as much fiscal measures
as they are monetary. But to someone worried about the
increasing co-mingling of monetary and fiscal policy, that blurring
of the lines is not a reassuring development.
My specific worry is that we will eventually face a crisis of confidence
in the Treasury and the dollar itself. It is true, as Bernanke suggests,
that raising the interest rate paid on reserves in such a setting would
be a policy tool that could be used in response. But it would be an
unattractive measure to the point of perhaps being impossible to use
in practice, for the same reason other countries have dreaded raising
interest rates in the face of collapsing real economic activity and
a flight from their currency.
I fear that the United States government
is mistakenly assuming that it can borrow essentially unlimited sums
without undermining confidence in the dollar itself.
The real question of a successful exit strategy, in my opinion, is how
do we extricate ourselves from the
joint fiscal commitments currently assumed by the Treasury, the
Fed, the FDIC, the Medicare and Social Security trust funds, and various
and sundry implicit and explicit federal guarantees?
The answer, in my opinion, is not to be found in the Treasury doing
even more borrowing on behalf of the Fed or the Fed doing even more
borrowing on behalf of itself.
The Office of Management and Budget calculates a total for defense
spending throughout different parts of the government (it includes money
allocated to the Pentagon, nuclear weapons activities at the Department
of Energy and some security spending in the State Department and FBI).
In the 2010 budget, that figure was $707 billion, more than half of
the government's discretionary spending for the year. (Discretionary
spending is the money that's appropriated every year by Congress, rather
than entitlement programs like Medicare for which funding is mandatory).
But the real number is even higher, because, among other things,
the OMB doesn't count supplemental spending on the wars in Iraq and
Afghanistan.
The Federal Reserve, which I'd place among the optimists on this
issue, says full-trend growth isn't going to be the 3% annually of the
pre-crisis economy but more like 2.5% or even as low as 2%. Harvard
University economist Dale Jorgenson, who taught Fed Chairman Ben Bernanke,
projects just 1.6% annual growth through
2030.
If Jorgenson is anywhere near correct, the Great Recession would
make the Great Depression seem like a picnic to many people. Is there
any reason to think these projections might be right? Unfortunately,
a lot of evidence argues in favor of a very slow and tepid recovery:
-
In the boom, the economy got the benefit of the wealth effect as
families spent part of the gains in the value of their houses and
investment portfolios. Now the economy is facing a negative wealth
effect as lower home values and smaller investment portfolios cut
into household spending. Household net wealth was down 20% from
mid-2007 to the end of 2008.
-
Like U.S. businesses, American families are going to have to deleverage
their balance sheets by paying down debt. That means having less
to spend on consumption. Household debt had climbed to 130% of income
by the end of 2008.
-
Losses in the financial sector of an estimated $2 trillion (only
$1 trillion realized to date) will cut the amount of capital available
for lending and raise the price of that capital.
-
Any recovery will send the price of oil and other raw materials
higher, which will act as a drag on the economy. Taxes will climb
as governments around the world try to repay some of the debt they
had piled on to end the crisis. In the United States, interest rates
will climb as overseas investors demand a better return on all the
U.S. debt they hold.
-
Finally, many companies used cheap money to offer incentives to
keep their customers buying. Even in a recovery, sales won't bounce
back to boom-year levels.
The U.S. gross domestic product, the value of all the goods and services
produced in the country, is expected to grow 1% before the end of the
year. But that's not enough to change some of the most daunting problems
of this recession: high unemployment, stagnant wages and depressed asset
prices.
"The bottom line for the typical consumer is: Just because Wall Street
is having a party doesn't mean you are going to get your job back,"
said Christian E. Weller, a senior fellow and economist with the
Center for American Progress, a nonpartisan policy research institution.
Below is my latest column for the Huffington Post, entitled
"Wall Street's Gains Equal Main Street's Loss?":
Stock prices have been on a tear lately, bolstered by quarterly earnings
reports that have in many cases outpaced expectations and growing optimism
that the worst of the crisis-cum-downturn is behind us.
The S&P 500 index, for instance, is up more than 40 percent since
its early-March lows, while the technology-laden Nasdaq Composite has
scored a 13 percent gain -- and, through yesterday, a 12-session winning
streak -- in the last two weeks alone.
Ordinarily, a bull run like this would be cause for optimism, on
the belief that savvy investors see a light at the end of the tunnel.
But in the currrent environment, could the good news that is powering
share prices be bad news for the economy?
Consider the following recent reports from a cross-section of corporate
America:
- Microsoft announced that revenues declined more than 17 percent
amid falling global demand for PCs and servers.
According to the Financial Times, the world's largest
software company "sounded a far more cautious note about the prospects
for a recovery in the second half of 2009" and its CFO said 'it's
going to be difficult for the rest of the year....We're really still
not sure we're out of the woods.'"
- The CFO of UPS, the 100-year old package delivery giant with
a presence in 200 countries,
warned the company didn't have "any confidence that either demand
or activity is going to pick up substantially" in the next several
months.
- Diversified manufacturer 3M, with operations in 60 countries,
cautioned that it's "still facing a challenging sales environment
with no meaningful improvement in demand yet from several major
industrial customers," the
Wall Street Journal reported. "He added there is a
risk that recent upticks in orders could be a 'false dawn' caused
by an over-correction in inventory levels earlier this year by 3M's
customers rather than a sustainable recovery in demand."
- Texas Instruments, the second largest U.S. chipmaker,
said "there's little evidence yet that real growth -- based
on an improving market for cell phones, computers and other tech
products, instead of inventory corrections -- is on the horizon."
- The CEO of WPP, the world's largest advertising company, was
less-than-diplomatic
when he noted publicly that he saw "no green shoots", "no yellow
shoots" and "no moss" in the global economy.
- The Vice Chairman of General Electric, a company with 14 major
lines of business and a presence in more than 100 countries,
cautioned that "he isn't seeing an increase in orders even as
U.S. economic statistics suggest the world's largest economy may
soon shift to a recovery."
In sum, while a growing number of investors seem to believe that
Main Street is on the mend, many of corporate America's senior executives
-- who are normally not prone towards pessimistic outlooks -- are maintaining
that they see no real evidence of a revival where it counts -- on the
ground.
In fact, amid an almost single-minded focus on reported earnings
results, many of which only appear favorable in comparison to the low-ball,
company managed estimates that clueless analysts have come up with,
Wall Street hasn't been paying much attention to just how dicey things
look at the top of the income statement.
Yet as Karl Denninger of
The Market Ticker
and others have noted, many of the companies that have "beaten" expectations
so far this season -- including several of those listed above and others
such as United Technologies, Halliburton, AT&T, and Amazon -- have reported
flat or falling revenues, with year-over-year declines in some cases
of 30 percent or more.
One reason why so many businesses are apparently benefitting amid
softening sales comes down to aggressive cost-cutting. They are slashing
jobs, paring wages and benefits, scaling back capital expenditures and
valuable R&D, and putting constant pressure on suppliers to reduce prices,
forcing each of those in turn to do the same.
While such measures can provide a short-term boost to profits, it
is revenues -- money coming in the door -- that keeps businesses growing
-- and the economy humming. Morever, even where firms are seeing notable
improvements on the bottom line, odds are that few will be looking to
boost hiring without seeing solid evidence that sales are also picking
up.
Finally, racy bull markets often provide a shot of growth-stoking
confidence, encouraging owners and managers to think and act expansively,
and investors and lenders to pony up funds that can help turn big plans
into profitable opportunities. Not this time, however. The U.S. economy,
slammed by the biggest financial crises this century, remains in a vulnerable
state, and it is still exposed to numerous potholes and shocks, many
of which are just now unfolding.
Among other things,
the commercial real estate market is starting to implode,
lending conditions are worsening and many credit markets
remain frozen, no small number of financial institutions,
including commercial lender CIT Group, are close to failing or are
utterly dependent on continued public largesse, and, as noted above,
employers are shedding jobs, not adding them.
Unfortunately, because stock market investors have decided to ignore
reality in favor of false hopes and quick fixes, the euphoria they've
spawned may inhibit at least some Americans from taking the steps necessary
to cope with the challenging environment that companies like General
Electric, Microsoft, UPS, WPP, Texas Instruments, 3M, and others still
see around them.
Given all that, you might say that Wall Street's gain is their loss.
Why economic researchers are so dumb ? Questionable approach,
wasted paper...
July 24, 2009
Cute new paper out arguing that some of the stupid human tricks usually
ascribed by behavioral finance sorts to self-destructive investor behaviors
may not always and everywhere be so dumb. Maybe they’re just mostly
dumb.
The recent behavioral literature has shown that
individual investors hold concentrated
portfolios, trade excessively, and exhibit a preference for local
stocks.
These results are puzzling because in all three instances portfolio
distortions could reflect either an informational advantage or psychological
biases.
In this study, we propose a demographics-based
proxy for smartness and show that
the portfolio distortions of "smart"
investors reflect an informational advantage that generate high
risk-adjusted returns.
In contrast, the distortions of "dumb" investors arise from psychological
biases because they experience low risk-adjusted performance. When
we do not condition on the level of portfolio distortions, the average
net performance of smart investors does not beat passive benchmarks,
but smart investors outperform dumb
investors by about 3 percent annually on a risk-adjusted basis.
Further, when portfolio distortions are large, smart investors
outperform the passive benchmarks by about 2 percent and the smart-dumb
performance differential is over 5 percent. We also show that a
portfolio of stocks with smart investor clientele outperforms the
dumb clientele portfolio by about 3.50 percent annually. Taken together,
these results indicate that both behavioral and information-based
explanations for observed portfolio distortions are appropriate,
but they apply to groups of dumb and smart investors, respectively.
Source:
George M. Korniotis and Alok Kumar, “Do Portfolio Distortions Reflect
Superior Information or Psychological Biases?,” SSRN eLibrary (July
16, 2009),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1018668.
nomorespendingplz
1st 100 days - There are 2.9 million more people unemployed in
May than there were unemployed in January. The unemployment rate
went from 7.6% to 9.4%. Since May 2008, we have lost 5.5 million
jobs. The biggest losers were:
Manufacturing 1.5 million lost
Finance & Prof Serv 1.5 million lost
Construction 1.1 million lost
Retail & Leisure 1.3 million lost
good finance articles http://www.bit.ly/12NCJR
Rob Dawg
Consensus peak to trough real GDP decline of less than 4%? I
don't need to read any further to know we are off this chart. Besides,
all the "good recoveries" in the red circle are 30-50 years old.
Economists are strange people. I'd trust Conjure's dog bones
and fetishes first.
Scrooge McDuck
Commercial mortgage delinquency up 585%
Delinquencies on commercial mortgage backed securities soared
$10 billion in June, hitting a 12-month high of almost $29 billion,
according to Realpoint Research.
California led the nation with the highest amount of delinquent
loans, closely followed by Texas and Florida.
Late loans across the country are up an “astounding” 585 percent
from a year ago when just $4 billion were delinquent, reported the
Horsham, Pa.-based research firm. The low point for delinquency
was March 2007 when $2 billion was delinquent.
Take a name asswipe
According to calculations by Martin Weale of the National Institute
for Economic and Social Research the profile of the current recession
is now almost identical to the decline in Britain's output between
1929 and 1931. The 5.6pc contraction over the past year almost matches
the 5.8pc fall in the year preceding the second quarter of 1931,
during which Credit Anstalt in Austria collapsed, triggering a second
wave of economic seizure across Europe.
The recession is far deeper and more severe than those of the
early 1980s and 1990s, Mr Weale added.
"Gordon Brown is now competing with Ramsay MacDonald – not a
comparison he would much like," he said. "It looks as if we are
pretty much tracking the 1930s,
http://www.telegraph.co.uk/finance/financetopics/recession/5901961/Briti...
Tim waiting for 2012
Fact Check
between 1946-1983 spending was 63% of GDP
1983-2007 spending was just over 70% of GDP
If savings rate goes to 7% or 10% that would eliminate 1-1.3
Trillion 07' dollars from GDP and thus a 7-10% decline
in GDP.
Tim waiting for 2012
Black Dog
A lot of the stimulus package was tax cuts which I argue offer
cheap short term thrills and more pain down the road. Companies
large and small benefited greatly from the tax cuts. This will be
temporary and is already factored in to forecasts
Broward
Most people who are comfortable as I am sure you are would choose
not to spend esp if things look uncertain for the future. Also boomers
have to think about their health, wear and tear.
... ... ...
You are right that consumption increases after 65 for some people
but in the form of medical costs and you know that the gov't picks
up most of that tab through Medicare.
So gov't will definitely have to increase spending from where
we are know. Budget deficits will grow making Japan's balance sheet
a thing of envy. We may be already there.
... ... ...
Scrooge
Large companies like IBM are now accelerating "outsourcing" b/c
their margins are coming under pressure
Quality matters less when you are
talking about near term executive survival.
... ... ...
Lawyer Liz
63% was the average from 1946-1983. That was before teens had
credit cards but the country was much younger then and wages steadily
increased over that time
Now with the country aging and wages flat to down since 1983
I'd say it can go down to 58-60% easily.
That is why I expect a 9-12% decline in US Gdp overall.
Liz I pitched this to CR and he says "no way" So I take it for
what it is.
Tim Duy looks at the shape of things to come:
The Debate Continues, by Tim Duy: The debate over the shape
of the recovery continues unabated. Equities, at least
this week, are voting in favor of the V-shaped recovery, with the
Dow pushing past the 9,000 mark for the first time since January.
Never one to accept good news at face value,
Nouriel Roubini predictably took the opposite position:
A “perfect storm” of fiscal deficits, rising bond yields,
“soaring” oil prices, weak profits and a stagnant labor market
could “blow the recovering world economy back into a double-dip
recession,” he wrote in a research note today. “It is getting
more likely unless a clear exit strategy from the massive monetary
and fiscal stimulus is outlined even before it is implemented.”
Roubini, chairman of Roubini Global Economics and a professor
at NYU’s Stern School of Business, predicted that the global
economy will begin recovering near the end of 2009. The U.S.
economy is likely to grow about 1 percent in the next two years,
less than the 3 percent “trend,” he said.
Roubini based his short-term outlook on the worsening condition
of the U.S. housing and labor markets, which he called “inextricably
linked.” He said a “weak” job market will contribute to another
13 percent to 18 percent drop in house prices, bringing total
declines nationally to as much as 45 percent from their peak.
I would add to Roubini's pessimism that bond market investors
as of yet do not share the optimism of their brethren in the equity
side of the industry. The run up in yields that brought a
4-handle to the 10 year Treasury appears to have been stopped dead
in its tracks, and that maturity has pulled back to the mid threes.
If the run-up in yields foreshadowed a burst of optimism in equities,
the pull back would suggest that this rally has nearly run its course.
The challenge here is two-fold. The first challenge
is to determine how much of the recent equity run is attributable
to the weight of evidence that indicates the worst of the downturn
is behind us. With the Armageddon trade off the table, some
gains were inevitable, just as was the rise in Treasury yields.
The more difficult challenge is the strength and pattern of the
subsequent recovery. To be sure, one should not ignore the
possibility of a blowout quarter here and there, as GDP data can
bounce quickly to bounces in underlying data such as a stabilization
in auto sales. But will such a bounce reflect fundamental
underlying strength? A slow, jobless recovery - my dominant
scenario - would most likely produce the seesaw trading we saw in
the wake of the tech bubble crash, a pattern that held until the
housing bubble gained full traction. Such an outcome looks
consistent with the sentiment of
Federal Reserve Chairman Ben Bernanke in this weeks Congressional
testimony:
Despite these positive signs, the rate of job loss remains
high and the unemployment rate has continued its steep rise.
Job insecurity, together with declines in home values and tight
credit, is likely to limit gains in consumer spending. The possibility
that the recent stabilization in household spending will prove
transient is an important downside risk to the outlook.
Later,
during questioning, Bernanke reiterated:
What will the recovery look like? Slow. “The American consumer
is not going to be the source of a global boom by any means,” Bernanke
says.
Sounds like he tends toward the low end of the FOMC's range of forecasts,
and suggests, talk of withdrawal of various monetary accommodation aside,
this
looks like a reasonable forecast:
BlackRock Inc., the biggest publicly traded U.S. money manager,
recommends buying Treasuries maturing
in two to five years on expectations the Federal Reserve won’t raise
interest rates this year.
“They still see potential downside risks to growth,” Stuart Spodek,
co-head of U.S. bonds in New York at BlackRock, said in a Bloomberg
Television interview. “The Fed is not going to tighten. It has referenced
keeping rates low for an extended period of time.”
With unemployment rates still headed north,
it is tough to see the Fed tightening within the next twelve months,
if not longer. But will the job market surprise
us? No clear indications can be gained from initial unemployment
claims data which, although battered by unusual seasonal patterns,
overall remains consistent with further drops in nonfarm payrolls.
Indeed, this would be consistent with recent patterns of recession.
David Altig
declares:
...I'm quite sympathetic to DeLong's theme that the dynamics
of U.S. labor markets coming out of recessions appear to have changed
starting with the 1990–91 economic contraction. And it might be
hard for many people to argue with DeLong's point that the
U.S. economy is likely headed toward
another so-called "jobless recovery." But until more
facts are in and we're able to look back on what transpired, I think
we still, at this point, must reasonably count the current run-up
in the unemployment rate as a puzzle.
In the comments from my last piece, reader spencer
takes a different perspective, noting that forecasters have tended
to underestimate the strength of recoveries, and further notes that
recent moderate recoveries have followed atypical mild recessions.
The current recession, however, is more typical of the pre-1990 variety,
and, as such could be expected to yield a rapid recovery. A logical
analysis from a long-time observer of business cycles; as always, one
should have such an outcome on their continuum of possible events, but
I tend not to be particularly sympathetic to the mild recession, mild
recovery, big recession, big recovery analogy. It seems to be
that a cursory look at the data suggests something very different is
happening in the labor market and thus the strength of recoveries since
the early 1980s. Look, for example at the pattern of durable goods
manufacturing payrolls:
Previous to 1990, durable good jobs snapped back quickly, but that began
changing after the 1980 recession, first with a muted rebound, than
a slow return after the 1990 recession, and then with no return after
the 2000 recession. That lack of rebound alone cost the recovery
roughly 2 million jobs - and it seems that if the downturn was only
mild, we should have expected these jobs to return. We will lose
another 2 million at least by the time the current downturn is complete.
Does anyone think these jobs are coming back? Anyone?
Likewise, nondurable goods manufacturing tells an even worse story:
In previous cycles, a rapid bounce, but simply an outright cliff
dive since the mid 1990s. Again, do we think this trend will be
reversed in the upcoming recovery? Another, albeit smaller sector:
To be sure, information services was coming off a bubble, but stability
in the sector remained elusive even at the peak of the recent cycle.
These patterns suggest to me that the
last fifteen years has seen intense structural change such that even
mild recessions result in permanent dislocations. I
have trouble that in the midst of such ongoing structural change a deeper
recession will result in a less permanent dislocation. No, I suspect
many of these jobs are gone for good, placing an additional weight on
the job market during the recovery. Simply put, the danger is
that in even a moderate recovery, the remaining expanding sectors will
lack sufficient strength to compensate for these permanent losses.
Anticipating the comments, another way some might describe the patterns
in the labor markets during recent recessions is that a variety of economic
policy decisions by both Democratic and Republican administrations have
had the impact of dismembering the industrial base of the US without
encouraging the growth of sufficient replacement jobs, thereby throwing
the American middle class under the train. That, however, is such
a dark interpretation, as opposed to say, cheering the efforts of policymakers
to lessen the burden of work on Americans by encouraging foreign nations
to forsake their own consumption to provide goods for our citizens.
Bottom Line:
- I am not convinced that the
equity run up confirms much more than the power of low expectations.
Indeed, the bond market has yet to follow suit
(when I would actually expect it to lead the way). I increasingly
think that the debate between V and other shaped recoveries is really
a debate over the degree of structural change occurring in the economy.
- If you believe this is a typical cycle, and that what was demanded
and how it was produced is roughly the same after as before the
recession, a V-shaped recovery is your likely candidate. If
you believe that the current recession
is simply intensifying a period of intense structural change, than
you are looking for a U or L-shaped recovery.
Notably Bernanke, by acknowledging that the US consumer is in no
shape to continued its 25 year role as a shaper of global economic
trends, seems to be siding with the structural change side of the
coin.
Recommended LinksAndyfromTucson says...
I personally think looking at what happened in past recessions
is not very helpful for predicting the future. To paraphrase Tolstoy,
happy economies are all alike, every unhappy economy is unhappy
in its own way.
What I prefer to look at is what are the prospects for increasing
consumer demand in the next few years, because in an economy that
is two thirds consumer demand that is where any recovery is going
to come from. And when I look at US consumers I see households with
the worst balance sheets in a very long time (if not ever), who
had a zero savings rate for the last few years and so can only go
down in consumption as a percentage of income, who own more cars
than there are licensed drivers, who live in houses much bigger
than their parents lived in, and who have stuffed storage units
with the all the stuff they bought that they didn't really need.
Do we really expect to see a surge in new consumption from these
households? Is the next boom going to be fueled by a fashion for
4,000 sq. ft. homes instead of 2,500 sq. ft. homes? Or a fashion
for drivers having a different vehicle for every day of the week?
Or a fad for buying goods and putting them directly into storage
units instead of the previously traditional 6 month stay in the
home before they are put into storage? What exactly are we expecting
the US consumer to surge out to buy, and where are they going to
get the money to buy it?
Selected comments
tom a taxpayer
The taxpayers
1) give Goldman Sachs $12.9 billion free thru AIG, and
2) provide Goldman Sachs a $10 billion TARP loan: total $22.9
billion.
Goldman Sachs repays $11.4 billion for the loan. Taxpayers suffer
a 50% loss ($11.5 billion).
Goldman Sachs prefers to think of it as a 23% return to taxpayers,
record quarterly earnings of $3.4 billion for Goldman Sachs, and
setting aside $6.65 billion for record bonuses and benefits for
Goldman Sachs.
But this does not even begin to account for the hundreds of billions
in $ and benefits that the feds (and unwitting taxpayers) have given
Goldman Sachs over past few decades. Here's just a few recent examples
mentioned in the opening prayer at a recent GS board meeting:
"Thank Hank Paulson, the Godfather, for killing our competitors
Bear Stearns and Lehman, for knee capping Merrill Lynch, for
saving our behinds from billions of $ of counterparty risk at
Fannie, Freddie, and AIG. Thank Hank for colluding with the
Fed to allow us to become a bank holding company, giving us
access to vast pools of money when we were about to go bankrupt.
Thank Hank, truly a family man, for allowing the Goldman Sachs
family to control key positions at the U.S. Treasury and to
advise him on how best to fleece the taxpayers."
For Goldman Sachs to brag about a "profit" of $1.1 billion to
taxpayers when GS is the ringleader in the mob that raped and pillaged
the mortgage industry, ruined the housing market, destroyed the
credit system, endangered federal/state/municipal financing, pension
funds, and the banking system, sent the economy into a downward
spiral, endangered the world financial system, extorted the U.S.
and the world to pay them billions in ransom or face the destruction
of the world financial system and economy, and now are costing taxpayers
hundreds of billions, even trillions of $ is beyond chutzpah...it
is despicable.
Re-Remic-ing the TalfPosted by Tracy
Alloway on Jul 23 11:19.
Commercial real estate has, rather suddenly,
become the new doom-spot for the US economy.Fed
chairman Ben Bernanke is
worried about it, Morgan Stanley and Wells Fargo
posted losses because of it, and S&P is
confusing everyone about it.
The ratings agency’s
sudden about-face on downgrades for certain triple A-rated CMBS,
in particular, caused a bit of a furore on Wednesday. S&P had previously
warned that it might downgrade billions worth of CMBS because of
proposed changes to its ratings-methodology for the securities.
That sent ripples through the CMBS market, especially since only
AAA-rated CMBS is eligible for the Federal Reserve’s
Talf programme, aimed at supporting ABS issuance.
... ... ...
Structured finance to the rescue!*
*(Because it worked so well the last
time).
The last week or two I had noticed that the /DX (dollar index) had
a somewhat-odd correlation to the stock market - one that had not been
present to the same degree, if present at all, before.
Specifically, it would move just before the /ES - S&P futures
- moved, and the correlation between the two was almost lock-step.
I had mentally blocked out the worst of the possibilities until last
night, when it was said right up front by a user who had lunch with
a banker in Australia: The dollar has become a carry-trade funding
currency; he was executing an increasing number of these trades with
the dollar.
We are following Japan's script almost exactly, but our trip down
this road will be far worse than it was for them, because as a nation
we are monstrous net importers and in tremendous debt, both as consumers
and as a government, where Japan is a net exporter and their population
is full of savers.
Tuesday I wrote about the dollar decline powering this latest ramp
job in equities, but this development, if it has become widespread,
is a major problem for The United States, and opens
the yawning maw of a trap that we will find it tremendously difficult
to escape from.
Japan has been essentially trapped at zero interest rates and moribund
economic growth - essentially zero - for more than a decade. The Carry
is a big part of that, as it depresses the currency, since the carry
is essentially a short on the funding currency. As traders press those
bets the currency comes under increasing pressure, which increases import
prices (but makes exports more attractive), draining resources from
the "host" country that has become the funding currency.
Putting a stop to it means raising interest rates even if the
consequence would be a severe economic recession or worse, and
the longer it goes on, the worse the damage in the form of structural
distortions in the economy is. But refusing to raise interest rates
means that not only does the distortion continue but
the damage from ZIRP continues as well -
borrowing no longer becomes a function of interest cost .vs. marginal
utility but rather simply a matter of whether you can find someone that
will let you borrow at all.
Carry trades can also unwind due to exogenous (not interest-rate)
pressures - should there be a sharp upward spike in the dollar these
trades suddenly (and very painfully) go "underwater" as the currency
translation is an integral part of the profit (or loss) in the transaction.
This "unwind" feeds on itself as to liquidate the carry you must buy
dollars, which in turn adds yet more upward pressure on the currency,
which makes the spiral tighten even more.
This is what happened to Japan over the last year as the crisis deepened,
and it decimated their exporters (and stock market) last year.
The paradox is that you'd think this would create tremendous inflationary
pressures. But that's not what has happened in Japan - they wound up
with incredible deflationary pressures instead, because
consumption became much less desirable than
export! As such the policy "prescription" becomes yet
more easing, but with interest rates at zero the policy folks are left
scrambling for yet another knob to turn of some sort.
In the United States this will be ugly, because we're not an exporting
nation. Instead of being able to "prefer" export we are instead likely
to find quite-crazy ramps in certain import prices, specifically oil.
That in turn makes economic recovery nearly
impossible, as it sets up even more structural dollar flows out of the
country.
Nor is this supportive of asset prices in the intermediate term.
Sure, it looks good when you get a 7% stock market rally when this
begins, but have a look at the Nikkei - their market topped
at 40,000 and has never been anywhere near there since. Real estate
prices have not recovered their previous highs and remain moribund,
and the former "never get laid off" Japanese economic model has been
laid waste, with generations-long policies abandoned as simply unworkable.
This is something we should not have allowed to happen but we now
have, and it is now incumbent on The Administration and The Fed to put
a stop to it before it becomes pervasive. Determining exactly how much
"carry" is out there is difficult; if The Fed has a handle on this they
sure aren't going to divulge it, just as Japan's Central Bank never
has, but the impact, especially when you get forced unwinds, are vicious
and impossible to ignore.
For those who said "we won't make the mistakes Japan did" let me
point out that we have indeed made all of the same mistakes and now
we're getting the same results.
Why is it that Einstein's exhortation continues to echo in my head?
Insanity is doing the same thing over and over but expecting
a different result.
Any lingering thought that many public pension funds were not much
more than happy hunting grounds for Wall Street sharks came crashing
down in 2008-2009 as it became clear that public officials, pension
fund managers, and political operatives had been for all intents and
purposes bribed by rich financiers who wanted the opportunity to take
big risks, and make huge profits, with government employees' money.
With 40% of all public pension funds investing
some of their money in hedge funds in 2008, a cool $78 billion overall,
they were a huge source of investment funds for hedge fund managers
(Wayne, 2009b),
In addition to large losses for some pension funds due to the risks
taken with their money, there were legal problems and scandals for Wall
Street bankers and their political go-betweens as it was discovered
that criminal activities were part of the
picture. For example, in April, 2009, a hedge fund executive
pleaded guilty to securities fraud after admitting that he had been
paid a stunning $5 million for helping to make it possible for the politically
well connected Carlyle Group (an "equity fund" that invests large sums
of money for wealthy people) to invest $500 million of New York state
pension funds in an energy investment fund managed jointly by Carlyle
and another private equity firm (Hakim, 2009; Wayne, 2009a). There are
several other such scandals that could be recounted here, and many more
that will have surfaced after this document has been completed and on
this site for a year or two. It is like a re-run of what happened with
"other people's money" in the first ten years of the twentieth century
and then again in the 1920s.
As of 2007, institutional investors owned 76.4% of the stock in the
1,000 largest U.S. corporations, an all-time high, up from 46.6% in
1986 when the institutional investor movement began. The list of institutional
investors now includes investment companies, mutual funds, hedge funds,
insurance companies, banks, and foundations and endowments as well as
pension funds. Strikingly, public pension funds only control 10% of
these assets, double the percentage they had in 1985, but not much more
than the 8% they held in 1994 (Brancato & Rabimov, 2008). Even if public
pension funds had the political independence and will power to try to
influence corporate boards, they don't have enough assets to make a
push without allies. As for their best allies, the union pension funds,
they have been decimated for the most part by downsizing, off shoring,
and corporate failures in major manufacturing industries.
Conclusion
No one can be 100% sure, but it seems highly unlikely that institutional
investors from public employee and union pension funds ever will be
able to create a coalition of institutional investors that could do
anything more than chide, chastise, or confer with directors and executives
from the large corporations in which they invest. They are not a threat
to the current power relations in the corporate community. They actually
play their largest role when rival private investors vie for their voting
support in takeover battles, or when they agree to take part in the
profit-making schemes hatched by billionaire financial firms. However,
in spite of all their defeats, the Council of Institutional Investors
and the Corporate Library still soldier on, hosting meetings concerning
"good corporate governance," providing hopeful interviews to newspapers
and magazines about the likelihood that things are going to change soon,
and selling their advisory services to institutional investors. They
are gadflies who do well while doing good.
Looking back at the most vigorous days of the movement, from roughly
1988 to 1993, very little was accomplished. It is now possible for small
stockholders to communicate with each other more easily, thanks to a
ruling by the Securities and Exchange Commission in 1992, and corporate
executives more readily meet with institutional investors. However,
no stockholder resolutions relating to corporate governance came close
to passing during or after the heyday of the movement. Even the most
positive assessments of this activism conclude that it had "negligible"
effects on the major issues that ostensibly motivated it, higher earnings
and higher share prices (Karpoff, 2006)
An interesting jeremiad ;-) One quote: "The way I see it, Mr.
Obama just doesn't have much time before his authority and legitimacy slough
off and he is left with only his genial smile."
As president, Barack Obama is faced with the essential fraudulence
and unreality of the US economy. Notice that, as ominous as they
are, the wars in iraq and Afghanistan have generated only minimal protest
so far in the early Obama period, despite the fact that they are not
operationally different from their conduct under Bush. There is no protest
because, for now, a consensus exists that our troops are in these places
for perceived reasons -- to keep Mideast oil supply lines open... to
keep Islamic maniacs busy in their own backyard instead of on US territory...
to keep Iran in a vise... to maintain the American "empire" (take your
pick). There's something there to appeal to a broad majority of US voters.
Unlike Vietnam, Iraq and Afstan are not perceived as out-and-out frauds.
But the economy is. Since September of 2008, when Hank Paulson
began shoveling bail-outs to the very banks who screwed the world on
fraudulent and unreal securities, and left American society comprehensively
bankrupt, the consensus has only deepened on the perception of an historic
swindle. And so far, President Obama has
positioned himself as chief enabler to further swindling.
One need look no further than the rulings this past spring of the Financial
Accounting Standards Board (FASB) as authorized by the Securities and
Exchange Commission (SEC, an official government agency, created 1934),
which have allowed the biggest banks to pretend that the fraudulent
paper in their vaults does not have to be recorded as a loss on their
books.
The US economy is now dying a slow and painful death because it had
become based on activities that had nothing to do with producing real
wealth. Instead, it became dependent on rackets, that is, behavior geared
to getting something for nothing. These rackets are often summarized
under the acronym FIRE (for finance, insurance and real estate), a system
set up to strip-mine profits from the wish commonly labeled "the American
Dream" -- itself largely a product of televised advertising and propaganda.
The end product of all that was the doomed
economy of suburban sprawl, an infrastructure for daily life with no
future in a world defined by fossil fuel scarcity. The
unraveling of debt at every level now is directly related to the mis-investments
made in that way of life.
By now, it's self-evident that the "change"
voted for in November's election was too horrifying to articulate.
It still is. The suburban sprawl economy
was all we had left. Now it's gone and we're stuck with all its
deleveraging after-effects -- the worst case of "buyer's remorse" since
the fall of Nazi Germany. Thus, the only "change" that President Obama
can really work for is the health care system, which is a life-and-death
matter. The sordid rackets so ostentatiously infecting the system boil
down vividly to lives ruined and bankrupted, and a system more frightful
to deal with than disease itself. Probably the baseline truth is that
health care will end up being rationed one way or another. It's another
prime symptom of population overshoot, and a reminder that life is tragic.
As another blogger put it so nicely last week on the web (sorry,
but I forget who or where), this isn't a "recession," it's a collapse.
The excellent Dmitry Orlov
has outlined the process very nicely in his book "Reinventing Collapse"
about the parallels between the demise of the Soviet Union and the prospects
for demise of the US as currently constituted. Mikhail Gorbachev
presided over the Soviet collapse. He must have been a leader of very
subtle abilities. Not only did he survive to enjoy a busy second
act of life with a Nobel Prize in his pocket, but he accomplished a
nearly bloodless transition in a society long-conditioned to bloodletting
as the primary political act.
Here in the USA, where we have had over two hundred years experience
with peaceful power transitions -- even during the convulsions of 1860-65
-- the outcome this time might not be so appetizing. It would be one
of the supreme ironies of history if it turned out that the US was incapable
of ending its most self-destructive rackets peacefully and bloodlessly,
while the Russians shucked off its Soviet racket like an old sweater.
The way I see it, Mr. Obama just doesn't have much time before
his authority and legitimacy slough off and he is left with only his
genial smile. The "hope" vested in him will end up in a Museum
of Lost Hopes, along with the integrity of TV news and the rectitude
of the medical profession. And funding for that museum will be cut by
President Sarah Palin, representing Naziism US style -- i.e. Naziism
without the brains
Selected comments
TedC
Reading the comments here for the last few weeks has really impressed,
and depressed me about the number of people who really want a free
lunch.
All this negativity about taxes, government, etc.. WTF? How about,
when your house is on fire, you just STFU and put it out yourself?
Fire engines aren't free, you know. How about we go back to nothing
but dirt road cart tracks? who needs pavement?
I think most people are angry about feeling ripped off. The greatest
joke, though, is that the people ripping us off have convinced everybody
that it's the other guys fault. Nice to own all the media, isn't
it?
Good luck, everybody. I think the bottom line is that this planet
is good for about 1 billion people, max. Lotsa fun ahead getting
to that number, for sure!
Randall Flagg
"This is analogous to the position Barack Obama now finds himself
in. He was elected as the politician most trusted in America to
change the fraudulent and unreal operations of the US government."
'Fraid not, Pal. Barak Obama was SELECTED by the filthy rich
of this world to dupe the Murikan sheeple into believing that things
would change for the better if they went to the polls and pushed
the Diebold button for BO.
Hope is a waste of time, man. Nothing will change. Everthing
and everyone is totally fucked. The horror is coming. If your not
part of the filthy rich, equiped with your own SOG, Xe or special
ops boys, you're going to be part of the hell on earth.
aszasz
"...it will be so bad by the next election cycle that palin will
come through as the shining star..."
If Palin is on record having criticized Obama's policies that
led to shit stew, why should she not be seen as "the shinning star"?
Obama currently holds office because he was the anti-Bush. Everything
Bush was for Obama was against. Except he wasn't. He only said he
was. Enough people believed him to elevate him to "shining star"
status. Shit stew tends to dull the shine of the reigning star and
add sparkle to the coming anti-Obama.
Cognitive Dissident
JHK, it is strange that you can be so perceptive about the pending
US collapse but too simplistic about the USSR "transition". Of course
the "Communist Party" is no longer in charge, but there is perhaps
as much continuity as change - look at the lack of free elections
or free speech, (geographically limited) imperial ambitions, power
of the (ex-)KGB class, etc, etc.
In addition, unlike the unfolding US problems, the USSR collapse
was NOT due to a lack of oil - if anything, a global excess which
led to a reduction in oil revenues for a debt-laden Soviet state.
Finally, Gorbachev focussed on political "reform" while neglecting
to fix the problems in the "real economy". Here, Obama is making
the problems in the financial economy worse by bailing out the crooks,
while the political reforms are quite cosmetic.
So - while I agree with your analysis of the situation in general
- it seems that Obama is like Gorbachev only in terms of (a) "change"
rhetoric and (b) leading the country to collapse by completely misunderstanding/ignoring/etc
the fundamental problems, while being unlike in all other ways.
It all begs the question as to what extent either of them were/are
doing this deliberately as part of a wider intention to allow the
"Power Elite" to profit from a crisis as they have *always* done
historically.
JHK, will you come off the fence on this one as it relates to
Obama?
cowswithguns
If Obama is actually able to transition us peacefully like Gorbie
did in the Soviet Union's twilight, I think that would be telling
-- in a very bad way -- of what our country has become.
The looting of the treasury that has been going on since Bush
-- and continues under Obama -- is so blatant and is going to have
so many negative, real world ramifications (and all just to make
some rich robber barons whole) that it would be surprising if at
least a few banksters weren't tarred and feathered by a gang of
unemployed carpenters during the transition.
Unfortunately, though, the masses
don't understand blind credit default swaps, collateralized debt
oblgiations, etc., and the victims of a collapse-induced riot are
probably more likely to be akin to a poor immigrant family than
some Bangkok-hooker-banging, old-lady-pension-stealing, worthless-401k-hocking
well-dressed Wall Street thug.
Bullshit.
And speaking of Nazis, don't you think Germany would be recalled
in a much more favorable light if its people actually rose up and
killed Hitler, thus stopping the war? But they didn't, and woe be
upon them for all of history.
Posterity, I fear, will judge us the same way.
The masses are so tightly clinging to
their soon-to-be-zeroed-out 401ks and their dreams of one day being
a rich asshole that they don't want to do what's right -- stop the
looting, starting with protests in all major cities.
But, nowadays, we're like cows -- to the slaughter. Or are we
-- http://www.youtube.com/watch?v=FQMbXvn2RNI&feature=related
Also, regarding those who don't think Elliot Spitzer would make
a good AG just because of his penis -- So what Spitzer was paying
for some action? Illegal sure, but if he could have kept a muzzle
on the Wall Street crooks and thereby salvage what's left of our
republic, I would have gladly looked the other way. An overactive
penis doesn't take away your legitimacy as a political leader, so
long as you're a good one. And if Spitzer wasn't good, do you think
he would have been taken down by the people who truly run this country
(Wall Street)?
He said he would rather short bonds then stocks in the current situation....
CommodityBullMarket.com"Because they are printing money," he
says...and believes that stocks could go to very high nominal levels,
while the currency becomes worthless.
I was just catching up on Rogers latest media appearances, and found
this video on CNBC from a couple of weeks back.
Jim's still pounding the table that we've got a currency crisis on
the way...while giving a long, hard glare at the dollar as the prime
culprit.
And of course, he still loves commodities.
Enjoy the video!
Feldstein strikes me as probably the only more or less credible Reaganine
(he was . Analyses provided by Feldstein is rather weak, but the conclusion
is interesting and intuitively appealing as there is no forces that can
sustain recovery after the effect of the stimulus disappear...
Jun 21, 2009 | CalculatedRisk
From Bloomberg:
Harvard’s Feldstein Sees Risk of ‘Double-Dip’ Recession in U.S.
... “There is a real danger this is going to be a double dip and
that after six months or so we’ll have some more bad news,” [Martin]
Feldstein, the former head of the National Bureau of Economic Research
and Reagan administration adviser, said today in an interview on
Bloomberg Television. “We could slide down again in the fourth
quarter.”
The economy could “flatten out” or “even be positive” in the
third quarter, and then it’s likely
to contract again in the last three months of the year as the effects
of the federal stimulus program wear off and companies finish rebuilding
inventories, he said.
“There isn’t going to be enough to sustain a really solid recovery,”
he said, even though recent data has provided some “good news” on
the economy.
This was the key point of the
Texas Instruments post yesterday (with conference call comments
on inventory). There is a possibility of short term growth as companies
rebuild inventories, but then an extended period of sluggishness since
end demand is flat.Selected comments
splat
DOUBLE DIP ?? The first DIP hasn't finished yet... talking about
green shoots and putting on rose tinted goggles doesn't make things
better.
We are seeing structural employment changes here, basically for
the next few years there simply won't be the jobs, they'll have
been offshored, outsourced and the existing employees expected to
re-double their efforts just to stay in a job. In that environment
even the middle class will have huge problems.
I'm just waiting to hear the talk of the a "triple dip" recessions
from the usual economic nimrods.
- splat
Bob Dobbs
"Step 3: Unanticipated, ongoing, revenue declines cause
the budget crisis problem to get even worse... "
Absolutely agreed. The budget "agreement" itself is a success
to the pols in that it buys time -- whether or not it ultimately
works. "Pretend and extend" isn't just for banks.
nova
Stair steps are kind of a dip I guess.
MS
I think depression is too nice. As the Kunstler article points
out (Obama=Gorbachev) it's not a recession or even a depression....it's
a collapse.
Albeit in slow-motion.
Credit-
I hear ya! many other people did as well- I happened to get lucky
and unloaded my SPY puts for almost a 90% gain the day before the
whoosh up last week....don't get me wrong..it was luck pure and
simple. Whenever you hear about technical patterns in the MSM you
know it's a set-up.
Ciao
MS
Expected Returns
MS,
expected returns-
I think depression is too nice. As the Kunstler article points
out (Obama=Gorbachev) it's not a recession or even a depression....it's
a collapse.
I totally agree. The demise of the dollar is coming, which would
be the event that precipitates any collapse.
[Jul 22, 2009] Goldman and JPMorgan -- The Two Winners When The Rest
of America is Losing
July 16, 2009, 11:32AM
Besides Goldman Sachs, the Street's other surviving behemoth is
JPMorgan. Today it posted second-quarter earnings up a stunning 36 percent
from the first quarter, to $2.7 billion.
The resurgence of JPMorgan and Goldman Sachs gives both banks more
financial clout than any other players on the Street -- allowing both
firms to lure talent from everywhere else on the Street with multi-million
pay packages, giving both firms enough economic power to charge clients
whopping fees, and bestowing on both firms even more political heft
in Washington.
Where are the antitrusters when we need them? Alternatively, why
isn't the government charging Goldman and JPMorgan a large insurance
fee for classifying both firms as "too big to fail" and therefore automatically
bailed out if the risks they take turn sour? Instead, we've ended up
with two giants that now have most of the casino to themselves, are
playing with poker chips backed by taxpayers, and have a big say in
what the rules of the game are to be.
When JP Morgan repaid its federal bailout of $25 billion last month
it was, like Goldman, freed from stricter government oversight. The
freedom has also allowed JP, like Goldman, to take tougher and more
vocal stands in Washington against proposed financial regulations they
dislike.
JP is mounting a furious lobbying campaign against regulations that
would funnel derivatives trading through exchanges where regulators
can monitor them, and thereby crimp JP's profits. Now the Street's biggest
derivatives player, JP has generated billions helping clients navigate
these contracts and assuming counter-party risk in such transactions.
Its derivatives contracts were valued at roughly
$81 trillion at the end of the
first quarter, representing 40 percent of the derivatives held by all
banks, according to the Office of the Comptroller of the Currency. JP
has played down its potential risk exposure from these derivatives contracts,
of course, but anyone who's been paying attention over the last ten
months knows that unregulated derivatives have been at the center of
the storm.
The tumult on the Street has also given both firms extraordinary
market power. That's where much of the current profits are coming from.
JP used the crisis to snap up Bear Stearns in March and Washington Mutual
last fall, with the amiable assistance of the FDIC. The deals have boosted
JP's dominance in retail banking and prime brokerage, enabling it to
charge its corporate clients heftier fees for lending and other financial
services, and to corner more of the market in fixed-income and equities.
JP also bolstered its earnings by helping other financial companies
raise capital following the stress test results in May.
Antitrust law was designed to prevent just this sort of market power
and political heft. The Justice Department or the Federal Trade Commission
should investigate the new-found dominance of Goldman and JP -- and,
if warranted, break them up. Alternatively, Congress should impose a
surtax on the newly-exclusive group of Wall Street firms, most notably
Goldman and JPMorgan, which are now backed by implicit government bailout
insurance guaranteeing that, should they get into trouble, taxpayers
will keep them afloat. The surtax would approximate the economic benefit
to these firms of such government largesse, which I'd estimate to be
at least 50 percent of their profits from here on.
Jul 20, 2009
It is important to bear in mind what voters
actually want to see in the state budget:
The vast majority of voters surveyed said the state should balance
both spending cuts and tax increases to address the state budget
shortfall. Revenue options supported by a strong majority of voters
include:
Increasing taxes on alcoholic beverages (75% support)
Increasing taxes on tobacco (74% support)
Imposing an oil extraction tax on oil companies just like every
other oil producing state (73% support)
Closing the loophole that allows corporations to avoid reassessment
of the value of new property they purchase (63% support)
Increasing the top bracket of the state income tax from nine
point three percent to 10 percent for families with taxable income
over $272,000 a year and to eleven percent for families with taxable
incomes over $544,000 a year (63% support)
Prohibiting corporations from using tax credits to offset more
than fifty percent of the taxes they owe (59% support)
While voters strongly support these options to help California
increase its revenue, voters are strongly against specific spending
cuts proposed by Governor Schwarzenegger:
76% oppose cutting public school spending by $5.3 billion
73% oppose cutting funding for state colleges and universities
by $1.2 billion
68% oppose cutting the state's funding for health care services
by $1.1 billion
62% oppose cutting the state’s funding for homecare services
by $494 million
[Jul 21, 2009] Fed's Game is Delay and Pretend
MyCountryIsDestroyed says:
Please consider this at the most basic level.
The real measure of a nation's economic strength is its ability to
produce goods and services. On that count, the US is completely destroyed.
Even worse, TPTB have convinced a portion of the population that we
don't need to produce anything.
Instead, the US is reduced to smoke-and-mirrors, TARP, bailouts,
PPIP, $24 trillion in the hole, deception, speculation, Ponzi schemes,
scams, food stamps.........
None of the smoke-and-mirrors will really work. We all know it. Now
we are stuck with one scam after another. Please consider looking at
Paul Craig Roberts' columns that suggest that we don't really have an
economy. We replaced our economy with schemes and deception.
When are the American people going to scream "NO MORE" and do something
about it?
The Emperor has no clothes. Time to stop pretending.
Good post, must read !
Selected commentslainvestorgirl says:
Don't worry, it will all be okay once we drink the koolaid...
black swan says:
“sigmonster says:
"@black swan
In this video, Paulson indicates that his family is not invested
in Goldman........."
Sigmonster, who are you going to believe, me or that liar, Hank
"the crank" Paulson?
From the Video:
Rep. Kaptur: "Have you or your FAMILY had any financial ties or
investments related to Goldman Sachs, in any way what so ever?"
PAULSON: "No."
REP. KAPTUR: "What about Bank of America?"
PAULSON: "Not that I know of."
Obviously Paulson, like Geithner, doesn't pay attention to his tax
returns. Here is the truth:
When Paulson took the Treasury job in 2006, he sold $500 million
of his Goldman Sachs holdings and put them into to Treasuries, tax
free, and sold another $100 million in Goldman Stock, from which
he realized a $40 million dollar profit, tax free, and put them
into a family trust, the Bobolink Foundation. Then he resigned as
President, leaving his son and wife in charge of over $106 million.
Here were some of the foundation's holdings when Paulson was Treasury
Secretary:
$53 million Goldman Sachs
$397,000 Bank of America
$250,000 Countrywide (taken over with BAC bailout money)
$8.5 million Freddie and Fanny
$650,000 Hartford Insurance Group
$730,000 HSBC
$798,000 JPM
$730,000 Morgan Stanley
$830,000 PNC
$772,000 Regions Bank
$962,000 Wells Fargo
$500,000 Whacovia (which Wells Fargo acquired using TARP money that
Paulson gave them)
$500,000 Sovereign Bank
$243,000 WaMu (which JPM acquired using TARP money that Paulson
gave them)
What do all these financial institutions have in common? They were
holding Paulson family trust assets and he bailed them out with
taxpayers' money.
Paulson's Bobolink Foundation was set up to donate money for environmental
causes. In 2006, the Bobolink Foundation gave over $1.5 million
to the First Church of Christ Scientists, $453,000 to Wellsley College,
and $50,000 to Harvard Business School. I wonder if they got any
bumper stickers that said, "Save the Harvard Banksters". I can only
hope that they are an endangered species.
To prove that I am telling the truth and that Paulson is lying,
Here is a link to the Bobolink Foundation's 2006 tax returns.
http://dynamodata.fdncenter.org/990pf_pdf_archive/942/942988627/942988627_200703_990PF.pdf
Social Vandal says:
“In a book I am reading about the First Depression, it states
production in the US (from 1929 to 1931) declined 40%. I wondered
why so much then and so little now.
Well, having gone to a Dairy Queen Gril and Chill with my two youngest,
I noticed the photos on the walls all depicting 1940-1950 Dairy
Queen events. As the kids sat there giving themselves sugar-induced
diabetic comas, I thought about what life must have been like back
then.
We made all of our own TVs, Radios, Cars, Planes, Type-writers,
machine tools, steel, telephones, office equipement & supplies,
hardware, fixtures, etc. And we did so in 1929.
We had a manufacturing economy to be decreased. Today, where can
we get a 40% decline in any industry since I believe most of what
we sell we import? So, Japan takes the 40% decline in production.
We are getting a slow stangulation of retail/service jobs being
masked by fiat printing and government welfare handouts? Down from
over-time a few years ago to 33 hours per week? That does appear
to be what is happening?
Are we just holding on? Are we stretching the rubber band and will
something snap? Are we all to become wards of the state living on
extended unemployment and food stamps?
Help me here folks.
Money can't buy love but they can buy WaPo authors. For proof, look
no further than Mark Gimein ;-)
Money can't buy love? For proof, look no further than
Goldman Sachs.
Selected comments
davideconnollyjr wrote:
Mark Gimein, you must not understand what Goldman does.
Yes, there are those that berate Goldman because they are jealous,
and there are those that berate Goldman because they don't like
the white establishment, but there are those that berate Goldman
for the right reasons, because of what Goldman does. Goldman makes
much of its money essentially betting on whether things like oil,
various crops, and timber will go up, or down in the future.
Some of this doesn't take an overly bright person -- we all know
that gas prices rise during the summer, and oil prices rise during
the winter, but you still get paid for betting on these things,
though the predictability of such events lowers the odds, and you
are tying up money that could be wagered on a higher paying bet.
Who pays for all these payouts? The answer is, we do. We all pay
higher prices for fuel, home heating oil, corn, timber for building,
you name it. All of Goldman's profits ultimately come out of our
wallets. Artificially stimulating demand for products to exacerbate
price fluctuations is how Goldman makes money. It introduces volatility
into the market, and creates artificial forces that help drive markets.
It should be illegal. People that make a living manipulating other
people's money are parasites that drive up the cost of everything.
Companies that make a living artificially inducing stimulus into
the markets, and then taking it away contribute to market volatility,
and magnify price spikes via automatic, parameter set trading programs,
that execute trades before individual consumers can bail, ensuring
the margins are at least better than the people that actually front
the capital. If Mark knows what Goldman does, and still supports
it, then he is part of a big problem we have in America, of parasitic
middle men looking for big, easy paydays, at the expense of everyone
else.
maxtor0 wrote:
When you eat too far down the food chain, you disrupt the entire
sysytem.
When profits at the top are derived from removing as much as
possible from those at the bottom, eventually the system collapses.
The folks at the bottom, the ones buying merchandise from stores,
cars from dealers, houses from realtors and gasoline to fuel their
way to work, are a finite resourse.
When gas started to rise, people started cutting back, when interest
rates started to rise people cut back on spending. Eventually soo
much money was being bled from those at the bottom, that many could
no longer buy discretionary items, and pretty soon, necessary items.
As they stopped buying, the need for people to sell them stuff,
to manufacture stuff and transport stuff, dropped.
As these people no longer had an income they stopped buying as
well. Result: as the bottom collapsed, the top of the econommic
food chain crashed.
And it will again. Soon.
Gas prices again are exploding, creditcards and banks are rasing
interest rates, fees penalties and payment percentages.
The stress this puts on the food(the folks at the bottom of the
economic pyramid)insures that a crash is inevitable just like in
a food chain - when you over harvest a food source, like oysters,
crabs, bison, it collapses and you have to find a new source of
food -or starve.
Already there are ominous signs in the retail sector as spending
by consumers is once again falling, and stores are stll failing.
That's not success - that type of profit built on the system
above is merely exploitation of your resources insuring large scale
failure.
pelican4 wrote:
Goldman Sachs is not a "success"; it is a corporation driven
by total self-interest, greed and questionable ethics. It has made
billions of dollars on the backs of ordinary Americans by speculating
with our federal funds for free while doing nothing to help the
nation get back on its feet. Successful corporations are ones that
stimulate job creation for the 10% of Americans who are unemployed.
Successful investment firms are ones doing something to help individuals
get something in return other than 0% yields for their hard-earned
savings (as opposed to Goldman's speculative trading that is turning
our investment markets into volatile casinos). We do not want to
punish success, we want to punish and stop selfish greed that is
achieved at the expense of the rest of the nation.
JEAtkinsonUSNavyret wrote:
As has happened throughout the recession, the banks, investment
companies, brokers, and those who support them have missed the entire
point about why people are so enraged about the huge profits they
claim.
The point that is missed entirely by Mr. Gimein and others who
support the system as it is now, is that people are not upset by,
nor do they want to punish success. Rather, people are upset by
and want to punish a system that is so flawed that it only rewards
a small number of already wealthy players while leaving 90 percent
of the population in increasingly worse financial straits.
Between 1946 and 1970, the percentage of people sharing in the
total wealth of the county (what is called the Gini Coefficient
or distribution of wealth coefficient), was close to 46 percent.
What that means is that 46 percent of the U.S. population shared
90 percent of the wealth.
Starting with the pushing of Reagonomics in the 1980s and accelerating
in the beginning of the 2000s at a pace unheard of since financial
records were kept until the financial crisis starting in 2007, the
percentage of people sharing in the wealth of the country dropped
to the point that now, as of 2008, 1 percent of the people in the
U.S. control 90 percent of the wealth. In fact, as shown by Bureau
of Labor Statistics data, 10 percent of the population now controls
98.7 percent of the wealth in the United States.
Along with the concentration of wealth in the hands of fewer
and fewer people, the middle class income has shrunk and the lower
income levels have all ballooned as the other 90 percent of the
people vie for the remaining 1.3 percent of the money available
to them.
What that means is, like the increasingly poor and hungry in
1789 France watching the royals dining on delicacies and living
the high life while the average person was starving and dying, the
huge profits earned by companies like Goldman Sachs and J.P. Morgan
Chase do not mean anything to the normal citizen. They do not mean
anything to the normal person, because, while the banks were getting
billions in loans, the average citizens have been losing jobs, lost
the equity in their homes, lost billions in savings, and have been
pushed closer to the brink of total financial failure.
Or, in other words, the so-called “success” of those at the top
of the finance heap is seen as an affront by the average citizen,
because that success for 10 percent of the people with wealth was
built on manipulations of the system that caused nothing but pain
and suffering for the other 90 percent of the people.
What is worse, that “success” is built on false pretenses.
Normal people are required to be responsible for their own finances.
If they overspend or break the law by running up huge debts they
know they cannot pay off, the government does not step in and give
them money. Instead, normal people lose their homes and everything
they have, and, in many cases even end up in jail for such things.
The banking and finance industry on the other hand was not, and
has not been held responsible for their actions. Instead, even though
the banking and finance industries caused the problems that drove
the system to the brink of failure, governments bailed them out.
And, instead of being grateful for the bailout, the banking and
finance industry has raised interest rates and fees, frozen access
to money, and gone out of their way to squeeze as much as they can
out of the average person.
Then, after making things absolutely miserable for the average
person while continuing to live wealthy lives built on the backs
of the average people, to have companies like Goldman Sachs and
J.P. Morgan Chase come along and say, hey look at me, we made a
ton of money for our already wealthy clients”; well, that is about
like the inaccurate but famous saying of “let them eat cake” attributed
to Marie Antoinette shortly before the peasants revolted.
When long term unemployment is increasing, more and more people
are struggling to make ends meet, more and more people are doing
without health coverage, and 90 percent of the people are seeing
less value in their homes, losing savings, and seeing no rise in
income, to have the wealthy come along and say “we earned $385,000
above and beyond the salaries and benefits they already enjoy for
each of our employees is doing nothing but add insult to injury.
It is an insult, because those who caused the current financial
crisis get to enjoy profits and wealth rather than jail and punishment
while those who were victimized continue to be punished.
$3.5 billion being obscene? No, not obscene, criminal, and since
that profit was made possible by bailouts using tax payer monies,
it should be given to the tax payers, not the ones who caused the
problems in the first place.
drs James E. Atkinson, US Navy (ret)
MScIM, MBA, MScCIS, doctoral candidate (econometrics)
tyrell_corp wrote:
complete and total bullsh--. Goldman, as Matt Taibbi pointed
out, is "successful" in the way the any mafia is successful. Goldman
was not an engine for wealth creation, it produced nothing of value
for society, it didn't even invest money wisely in other successful
business (the supposed purpose of an investment bank). It Don Corleon,
it used it's political connections to rig a wealth destructing game
in it's favor. In the end there is nothing particularly clever about
it - pure gangsterism. Goldman is not about capitalism - even robber
baron capitalism, there is nothing there. They are societies parasites
pure and simple. It is a shameful portrait of America that these
people are held up as the best and brightest we have to the rest
of the world. "see how bright and clever we are at stealing money"
!!!! That game won't last long.
dgblues wrote:
It takes a peculiarly twisted money worshipper to accuse anyone
of "punishing success" in this matter. That's a mammonist Frank
Luntzian focus-grouped sound byte of distilled bullpucky.
First off, WE THE TAXPAYERS LENT THESE CRIMINALS HUNDRED OF BILLIONS
OF DOLLARS, you twit. If that's punishment, please, God, punish
the living crap out of me. Please.
The fact that Taibbi points out the obvious, that these financial
institutions bleed all of us dry with speculation -- that they in
fact create the bubbles from which they profit, and then rely on
us to bail them out if they don't get out soon enough, just outrages
you, doesn't it, Mr. Gimein? Oh my. Well, of course! The last thing
you want is for Americans to be informed that they're being scammed.
May I remind you that most of us, who had no investment interest
in the financial sector, saw our portfolios reduced significantly
by their actions. And THEY are the ones being punished? You make
me laugh.
Of course, you call our being scammed their "success." That says
everything we need to know about your credibility relative to Mr.
Taibbi's.
scone wrote:
Goldman Sachs (aka "Government" Sachs) are scum -- financial
terrorist that belong at the dock in the Hague. Who but scum would
turn be shorting the very products they have pushed on their customers?
Dilberta10 wrote:
It's not success, it's excess.The only "sucess" GS has had is
manipulating everything and everyone to their advantage.
Driving out their competition (think Lehman Brothers)and dipping
in the Fed bailout funds given to GS and in defacto Fed funds given
to AIG. Nice little ploy there.
Words cannot express my contemp for the gentleman who wrote this
"editorial" and for GS.
From Lingling Wei and Maurice Tamman at the WSJ:
Commercial Loans Failing at Rapid Pace
Many regional and community banks had excessive loan concentrations
in Construction & Development (C&D) and CRE loans. The FDIC identified
this as an
emerging risk in 2006 - so it is no surprise. These smaller banks
have been slow to recognize the related losses - possibly because many
of the deals had interest reserves that mask the performance of the
commercial building until the reserve runs dry. Then there is just more
work for the FDIC ...
Scrooge McDuck
US National Debt Clock:
http://www.usdebtclock.org/
11T national debt
2T spending to date
57T unfunded liabilities
7T private debt
[Jul 21, 2009] “Extrapolating is dangerous” by Stacy-Marie Ishmael
Jul 20 | FT Alphaville
So say Dresdner’s credit analysts in a note published on Friday.
From the report:
- Markets have been extrapolating the recent improvement in economic
data, which is a dangerous assumption.
- Similarly, investors should not extrapolate Goldman Sachs’ results
to the rest of the sector.
- Data still offer something for both bulls and bears, limiting
market moves and arguing for (wide) range trading.
- Earnings guidance should provide more clarity on the recovery
of the consumer.
On the temptation to extrapolate from
Goldman’s results, they note (emphasis FT Alphaville’s):
One important point is that not all financial institutions
are like GS or JP Morgan Chase. This week’s earnings were dominated
by banks with very strong trading operations that benefited from wide
bid/offers, as well as strong fee income from advisory and primary market
activity. We fear that the commercial and retail banks that
report in coming weeks will be relatively much more exposed to rising
provisioning on their C&I, mortgage and consumer loan books. Therefore,
we may have had the best news first, and the bad news may still follow.
And on data:
Macro indicators for the US consumer recently
paused in their upward trend, and all of this suggests investors
should not extrapolate too far, too early. Of course, for credit
investors, the manufacturing outlook is probably even more important.
One of the most cautious notes came from
SKF in Thursday’s FT. The company said the outlook is ‘incredibly
uncertain’. Many expect restocking to lift earnings growth, but SKF
stated that most of its businesses are seeing a slowing of (or an end
to) the de-stocking rather than outright re-stocking. Margins are another
critical point: so far, several companies have managed to hit earnings
estimates but disappointed on the sales front. It seems corporates have
aggressively cut costs, but further gains on that front may slow. The
crucial issue going forward is whether corporate feel demand is strong
enough to allow for increasing pricing power.
2009-07-20 | CalculatedRisk
From Atlanta Fed President Dennis Lockhart:
On the Economic Outlook and the Commitment to Price Stability .
Here is Lockhart's economic outlook:
Often a deep recession is followed by a sharp rebound in business
and overall economic activity. Unfortunately, as I look ahead, I
do not foresee this trajectory. I expect real growth to
resume in the second half and progress at a modest pace.
I do not see a strong recovery in the medium term.There
are risks to even this rather subdued forecast. The risk I'm watching
most closely is commercial real estate. There is a heavy
schedule of commercial real estate financings coming due in 2009,
2010, and 2011. The CMBS (commercial real estate mortgage-backed
securities) market is very weak, and banks generally have no appetite
to roll over loans on properties that have lost value in the recession.
Refinancing problems will not directly affect GDP—it's commercial
construction that factors into GDP—but I'm concerned problems in
commercial real estate finance could adversely affect the otherwise
improving banking and insurance sectors.
... the healing of the banking system will take time.
Working off excess housing inventory will take time. The
reallocation of labor to productive and growing sectors of the economy
will take time. It will take time to complete the deleveraging of
American households and the restoration of consumer balance sheets.
In short, I believe the economy must undergo significant structural
adjustments. We're coming out of a severe recession, and it's not
too much an exaggeration to say the economy is undergoing a makeover.
We must build a more solid foundation for our economy than consumer
spending fueled by excessive credit—excessive household leverage—built
on a house price bubble.
The surviving financial system must find a new posture of risk
taking. The balance of consumption and investment must adjust, with
investment being financed by greater domestic saving. The distribution
of employment must adjust to match worker skills, including newly
acquired skills, with jobs in growth markets. Some industrial plant
and equipment must be taken offline to remove excess and higher-cost
capacity.
As I said, these adjustments will take time and will suppress
growth prospects in the process. I believe the economy will underperform
its long-term potential for a while because of the obstacles to
growth that must be removed, adjustments it must undergo.
...
Let me summarize my argument here today. The economy is stabilizing
and recovery will begin in the second half. The recovery
will be weak compared with historic recoveries from recession.
The recovery will be weak because the economy must make structural
adjustments before the healthiest possible rate of growth can be
achieved. While this adjustment process is going on in the medium
term, I believe inflation and deflation are roughly equal
risks and require careful monitoring. Slack in the economy
will suppress inflation. And inflation is unlikely to result—by
direct causation—from the recent growth of the Fed's balance sheet.
In any event, the Fed has a number of tools being readied
to unwind the policies used to fight the recession, and it will
be some time before their use is appropriate.
"Sorry to break to the news, but the financial crisis is not over,
à la CIT. You’ve got plenty more write-offs of bad paper to come," Roach
told CNBC.
Developed economies haven’t broken out of recession yet, he said.
"Seventy-five percent of the world’s economies today are still contracting,
and the biggest piece on the demand side of the global economy is the
American consumer, who is dead in the water," Roach said.
Stock markets, along with many bonds, have rallied sharply in recent
weeks. But Roach said markets have overdone it, given the "anemic character
of the recovery."
The rally largely reflects the excess of liquidity poured into the
financial system by central banks, he said.
"Liquidity is seeking return, and right now these markets are priced
for a recovery that’s going to end up disappointing," he said.
Some experts are excited by recent news of better-than-expected corporate
earnings. But those anticipating high profits
"are going to be in for a rude awakening," Roach said.
Economist Gary Shilling agreed with Roach.
“I expect the recession to run into the early part of next year,”
he told Bloomberg. Excess home inventories and
retrenchment in consumer spending will restrain the economy, he said.
The Mess That
Greenspan MadeFaber:
"We had a crisis and nothing has been solved
... usually, a major crisis like we had should clean the system
but nothing has been cleaned.
It's gotten worse politically - this linkage between politicians
in America and
the Federal
Reserve, Treasury Department, and Wall Street.
The big crisis is yet to come. It will be huge. it will be a
total collapse."
Paper Economy
The
Federal Reserve calculates and published the total amount of CP outstanding
every week and as of the latest published period, commercial paper outstanding
is contracting at the fastest rate on record, registering a whopping
37.33% decline year-over-year.
Selected comments
motgagepayer
Oil prices are soaring, putting pressure on the consumer.
22. Tax revenues are down 28% in April.
23. Bernanke (the beagle) is having trouble rolling 1.2 trillion
in debt in 2009.
24. Social Security and Medicare are underfunded by 50 Trillion.
25. 200 trillion in derivatives exposure in US, 500 trillion worldwide.
need I go on? good articles: http://www.iamned.com
Yesterday, I posted
this chart and wondered why “Some people were calling for a housing
bottom.” That generated a ton of emails asking about for further
clarification.
The people I referred to were the usual happy talk TV suspects (and
Cramer) who have been perpetually wrong about Housing for nigh about
3 years. I not only disagree with them, but don’t respect their opinion
— essentially headline reading gut instinct big-money-losers. No
thanks.
Then there were the slew of MSM who insist each month on reporting
that 3% (+/- 11%) is a positive integer. We disposed of that
silliness on Friday.
But the crux of the email was over
this post. There are a handful of people whom I disagree wi and
process. Over the past year, these have included Doug Kass and
Lakshman Achuthan and Bill of
Calculated Risk. We may reach different conclusions about a given
issue, or disagree on timing, but these are the folks whose opinions
force me to sharpen my own.
When I tossed up that chart yesterday, I had not yet seen Bill’s
comments on the subject — but he is one of those people I can respectfully
disagree with. We simply have reached different conclusions about the
timing and shape of the eventual Housing lows.
There are a plethora of reasons why I believe we are nowhere near
a bottom in Housing prices or activity. Here are a few:
- Prices: By just about every measure, Home prices
on a national basis remain elevated. They are now far off their
highs, but are still remain about ~15% above their historic metrics.
I expect prices will continue lower for the next 2-4 quarters, if
not longer, and won’t see widespread Real increases for many years
after that; Indeed, I don’t expect to see nominal increases for
anytime soon;
- Mean Reversion: As prices revert back towards
historical means, there is the very high probability that they will
careen past the median. This is the pattern we see after extended
periods of mispricing. Nearly all overpriced asset classes revert
not merely to their historic trend line, but typically collapse
far below them. I have no reason to believe Housing will be any
different;
- Employment & Wages: The rate of Unemployment
is very likely to continue to rise for the next 4-8 quarters, if
not longer. This removes an increasing number of people from the
total pool of potential home buyers. There is another issue — Wages,
and they have been flat for the past decade (negative in Real terms),
crimping the potential for families to trade up to larger houses
— a big source of Real Estate activity. Plus, more unemployment
means more . . .
- Foreclosures: We likely have not seen the peak
in defaults, delinquencies and foreclosures. Many
more foreclosures — which are healthy in the long run but wrenching
during the process of dislocation — are very likely. These
will pressure prices yet lower. And Loan Mods are not working
— they are redefaulting in less than a year between 50-80%,
depending upon the mod conditions themselves.
- Inventory: There is a substantial supply of
“Shadow Inventory” out there which will
postpone a recovery in Home prices for a significant period of time.
These are the flippers, speculators, builders and financers that
are sitting with properties that they do not want to bring back
to market yet. Given the extent of the speculative activity during
the boom years (2002-06), and the number of foreclosures so far,
my back of the envelope estimates are there are anywhere from 1.5
million to as many as 3 million additional homes that could come
to market if prices were more advantageous.
- Psychology: The investing and home owning public
are shell shocked following the twin market crashes and the Housing
collapse. First the dot com collapse (2000-03) saw the Nasdaq drop
about 80%, then the Credit Crisis of 2008 saw the unprecedented
near halving of the market in about a year. Last, Homes nationally
have lost about a third of their value since the 2005-06 peak. Total
losses to the family balance sheet of these three events are about
$25 trillion dollars. These losses not only crimp the ability to
make bigger purchases, it dramatically curtails the willingness
to take on more debt and leverage. Speaking of which . ..
- Debt Service/Down Payment: Far too many
Americans do not have 20% to put down on a home, have poor credit
scores, and way too much debt. All of these things act as an impediment
to buying a home. At the same time, to get approved for a mortgage,
banks are tightening standards, including 1) requiring higher Loan
to Values for purchases; 2) better credit scores to get approved
for a mortgages; 3) Lower levels of overall debt servicing relative
to income for applicants. Yes, the
NAR Home Affordability Index shows houses as “more affordable,”
but it conveniently ignores these real world factors.
- Deleveraging: For the first time in decades,
the American consumer is in the process of saving money and deleveraging
their balance sheets. After a 40 year
credit binge, its long overdue. The process is likely to go
on for years, as a new generation is losing confidence in the stock
market, Corporate America and their government. Think back to the
post-Depression generation that were big savers, modest consumers,
who eschewed credit and borrowing. The damage is going to
take a while to repair.
There are more reasons I expect the Real
Estate market to remain punk for many years, but these are a good place
to start when considering the question.
The Housing Boom & Bust, and the 2002-07 credit bubble created massive
excesses. More than anything, it is going to take time to resolve them.
nova
I was hearing ad's for factoring on the radio about a year ago.
This is from the top of the search on Google
What Is Factoring?
Factoring is a way to get immediate cash. You send your invoices
to us, we advance you up to 90% of the invoice amount, we collect
the invoice and send you the remaining balance, less our fee.
Factoring is quick and convenient: a must for all growing companies
in need of capital.
We purchase creditworthy accounts receivable at a small discount
and fund you with immediate cash.
MaxedOutMama
If CIT were another type of company, government infusions or
DIP financing would make more sense. But realistically, we are in
a massive consumer retail contraction, and the receivables don't
have much value.
However CIT also got into home loans and student loans. This
shows the breakdown of CIT's business as of September, 2007.
14% home loans
14% student loans
13% manufacturing
9% retail, etc.
It's not viable because there isn't enough left.
They've burned through their loss reserves
and the losses are still coming, and will mount in the year to come.
The truly secured lenders can pick over the best,
and the semi-okay lenders can go for DIP, but the risks of the loans
in this type of environment would dictate a rate of interest which
will double the risk of many of these loans. They haven't got a
continuing business with a cash flow on most of their loans that
justifies anything but liquidation.
Being able to borrow money cheaply
from the Fed does nothing to lower effective interest rates when
the loss risk is so high. What kind of discount would
anyone on this board require on a portfolio of student loans these
days? Small retail? Gurgle. That stuff is 20-30 cents on the dollar.
nova
The Cost Of The Factor's Money
So, what is your cost of money? (Here's where it gets interesting
and where the major misunderstanding lies.)
So they end up with 30% return? Or not? Factoring is a pawnshop
for business
Let's set up an example. You're selling $100,000 worth of widgets
to General Motors every month. You ship them, then invoice GM for
the parts. Let's say you've arranged 30 day terms. You also have
terms of 2.5% for 30 days with your factor, with an advance of 85%.
You send the factor a copy of the invoice at the same time you
invoice GM. The factor checks with GM to ensure the widgets were
delivered in good condition. He then transfers $85,000 to your account
by check or wire transfer. This is usually within two days of receiving
the invoice. You've got operating money!
Thirty days later, GM pays the factor $100,000. The factor deducts
$2500, then pays you $12,500. You do this 12 months out of the year.
What's your cost of money?
In almost all cases, my prospective clients, thinking in terms
of loans, multiply the 2.5% by a factor of 12 and say, "Thirty percent!
That's too expensive."
The correct answer is, of course, 2.5% if each invoice is paid
within the first 30 days. (This percentage will go up incrementally
with any invoices which are paid over 30 days, generally 1/30 per
day, but it's still FAR BELOW the current cost of borrowing from
banks or getting lines of credit.)
To prove my statement, multiply your monthly sales to GM by 12.
That answer is $1.2 million. Now multiply the amount you paid for
each invoice by 12. That answer is $30,000. And $30,000 is 2.5%
of $1.2 million.
Please tell me where, in the banking system, you can get money
at 2.5%? That is, if you can get a bank loan at all in today's uncertain
times.
OregonGuy
A business with negative EBIT is going to have a very difficult
time changing lenders right now, even if cash flow is positive.
In manufacturing it is tough not to have negative EBIT over the
last 6 months. Just ask Alcoa (they need to hire GE-trained accountants),
MrM
...significant part of the problems we have encountered are
a result of relentless optimization, to the point of eliminating
virtually any redundancy or slack with the resultant brittle and
tightly coupled system.
This is very true. I would also say thaquence is that when tightly
coupled systems fail, one either has to fix the whole system or
take a hands-off approach and let the system find a new equilibrium.
Politically driven decisions which elements of the system to save
and which ones can be let fail only de-stabilizes the system further.
What an interesting PR issue for the Administration:
- GS reports record earnings and bonus payouts, and the Administration
has to say its improving economy, green shoots, etc.
- CIT and its customers plea for money and if the Administration
refuses it will cause public outrage, or if the Administration
bails them out, it will dramatically lower the bar of "too big
too fail".
- That's the price you pay for not taking a consistent approach
to complex problems.
km4
Defanging the Fed: Why It Needs Less Power, Not More
William Greider gives six reasons why handing the Fed more power
is a bad idea:
- It would reward failure. Like the largest banks that have
been bailed out, the Fed was a co-author of the destruction.
- Cumulatively, Fed policy was a central force in destabilizing
the US economy.
- The Fed cannot possibly examine "systemic risk" objectively
because it helped to create the very structural flaws that led
to breakdown.
- The Fed can't be trusted to defend the public in its private
deal-making with bank executives.
- Instead of disowning the notorious policy of "too big to
fail," the Fed will be bound to embrace the doctrine more explicitly
as "systemic risk" regulator.
- This road leads to the corporate state--a fusion of private
and public power, a privileged club that dominates everything
else from the top down.
http://paul.kedrosky.com/archives/2009/07/defanging_the_f.html
You'll find the following relevant and intriguing if you're not yet
familiar with it. Of course, the informal economy is anathema to the
Corporate-Owned shill Economists representing the formal economy, but
it doesn't mean it doesn't exist, and it won't become highly influential
in the years to come, even for the U.S.
"Researchers began to notice that there was no economic
explanation for how the majority of the population survived. They
didn't own land. They didn't seem to have any assets. According
to
conventional economics they should have died of hunger long ago,
but they survived. To understand this, researchers looked at how
these people actually lived, rather than at economic models.
[The peasant's] way of life was completely the opposite of how
a
human being in an industrial society survives. They didn't have
a
job, pension, steady place to work or regular flow of income...
Their aim was survival rather than the maximisation of profit.
[In the former S.U.] there are no signs of mass hunger and the
services by and large have not collapsed. Considering the chaos
of
the formal economy, this is remarkable. Teachers still go to teach
and scientists go to their laboratories even though they may not
have been paid for six months. Under normal economic rules, there
is no explanation for this. Why would they go? The answer is that
their 'jobs' help maintain social and family networks that allow
them to survive outside the collapsed formal economy. They might
grow vegetables in the institute gardens, use laboratory equipment
or run their own small businesses, run taxi services with company
cars or just trade in skills and goods among their fellow workers.
Sociologists can understand this, economists cannot.
We find in the former Soviet economies that while officials are
trying to privatise the economy, most people are living in the
informal economy that is neither communist nor capitalist... [T]he
peasants survived not through socialism, but through the informal
economy."
http://www.mail-archive.com/[email protected]/msg04564.html
The Baseline Scenario
Selected Comments
anne
WHEN DID THE SHADOW BANKING SYSTEM BECOME “THE ECONOMY”?
That’s my question for the experts. The shadow banking system
is what our policies have supported. That’s who we rescued last
fall. That’s the sector seeing the profits today. (Fab profits for
them – really crappy return for the investors who saved the sector,
however.)
And if you look closely, the profits they’re reporting come from
the shadows, not from the regulated banking sector.
What happened to all that toxic debt on their books? Has it vanished?
How can profits be declared when the books sag with toxicity?
We can continue to bleed out money to wealthy bankers and let
unemployment rise and consumer spending decrease – or we can initiate
real reform that truly answers the needs of the real economy – in
ways that get people back to work.
We seem to favor bleeding over building these days.
Kirk Tofte
I’ve said it before and I’ll say it again–the stock market went
up 700 points within an HOUR after word leaked that Obama would
name Geithner as his secretary of the treasury. Do you think Wall
Street might have been on to something that day?
Summers will never be appointed as chairman of the Fed because sector.
Wall Street has something over or “on” Obama. Half of his campaign
contributions came from corporate interests who didn’t want deal
with tougher players like either Hillary or McCain would have been…and
they’re REALLY getting what they paid for in ways that are hard
to believe.
OregonGuy
Not sure about the “vs” in the title.
The more likely scenario is Summers and Dimon laughing together
over the need to placate the sheeple with a “reform”.
They agree on a toothless Consumer Protection Agency as the
least bad (for bank interests) of the available options. As agreed,
Dimon strenuously objects in public that the CPA will “destroy banking
as we know it” as a smokescreen.Business goes on as usual. Summers
collects millions in “consulting” fees from Wall Street when he
leaves Government. Dimon buys a bigger yacht and gets that G5 he’s
always wanted.
ifaforo
Don’t see the point of the “vs” either. Summers view has always
been that financial deregulation isn’t just good for banks but is
good for the country. Summers has done or said nothing that suggests
a material change to that point of view (ask Joe Stiglitz about
that and why he has no voice in this administration).
Tippy Golden
I haven’t had time to read through the comments yet. But it seems
to me the problem is within the state of American economy itself.
Power and wealth has been captured by an oligarchy.
The very tough battle ahead is “rebalancing” the power structure
through a political process.
If can count correctly 3% on one trillion is 30 billions. So interest
payments alone are substantial.
China is thus frozen in place, damned if it does and damned if it
doesn't. It's a classic
Catch-22.
China's cache of U.S. bonds isn't worth anything unless the bonds are
sold. But selling them on any kind of scale will gut their value.
"People need to realize that China doesn't actually have any real U.S.
money," Das says. "Unless they can turn in their bonds and exchange
them for something else, they're only paper assets. Yet if they try
to exit the position, they'll destabilize the dollar, and the value
of the rest of their assets will plunge. And that's not even their biggest
problem. It's that they also need to keep buying Treasurys, or interest
rates will go up and their capital losses will be terrible."In short,
Das says, Beijing thought it had discovered the perfect scheme for establishing
independence from the West, yet it has instead made its dependence worse
than ever. And he observes that one unspoken reason that China has gone
whole-hog on its massive, $650 billion fiscal stimulus program -- creating
more factory capacity in a country that is already reeling from overcapacity
-- is that the effort gives it cover to stockpile copper, oil, iron
ore and other hard assets that it considers to be better stores of value
than dollars.
Jul 18, 2009 | CalculatedRisk
No surprise ...
From the NY Times:
State Tax Revenues at Record Low, Rockefeller Institute Finds (ht
Ann)
The anemic economy decimated state tax collections during the first
three months of the year ... The drop in revenues was the steepest
in the 46 years that quarterly data has been available.Over all,
the report found that state tax collections dropped 11.7 percent
in the first three months of 2009, compared with the same period
last year.
...
All the major sources of state tax revenue — sales taxes, personal
income taxes and corporate income taxes — took serious blows ...
Here is the report:
State Tax Decline in Early 2009 Was the Sharpest on RecordAnd
it looks much worse in Q2:
Early figures for April and May of 2009 show an overall decline
of nearly 20 percent for total taxes, a further dramatic worsening
of fiscal conditions nationwide.
Note: an
earlier report was on state pesonal income taxes - this is all state
taxes.Selected Comments
curious
Slightly OT
I was looking through the new releases to Netflix instant play
and noticed the documentary "IOUSA". I saw it when it was in theaters
and highly recommend it to everyone who reads CR.
yossarian
Is this broken down state by state? I recall Arizona's revenue's
were falling off a cliff months ago. And yet, there are still police
and
fire services. So 'collapse' is more like, 'letting the
air out of a blow up toy.. '
I'd normally think this drop in revenue really means something,...
some big changes, some social movements.
But hell, Goldman is still getting
rich, no one is burning them in effigy... so the collapse
of the welfare state .. if it happens.... is gonna be really quiet.
broward
Unions need a reset like everything else or we still
keep going down. Shared burden.
----------
True but the "investor" side of the equation like to rant about
how unions destroyed GM by demanding more return than could be sustained,
but we never hear about how investors demanded more return than
could be sustained, too. The real economy grows around 3-4%. That's
ALL you get and all this mickey mousing around of outsourcing WILL
NOT CHANGE THAT.
But you guys just dont' get it it and so you must suffer long
grievious pain until you shout out, ENOUGH, ENOUGH, I will accept
a 3% return!".
gonna be a long time, though.
Nuke
I suspect that before this crisis is over the opposite
will result. I'm pretty sure GD I resulted in the New Deal.
Blackhalo:
That was a different time. FDR had
demographics on his side. For better or worse, demographics no longer
support the welfare state model. Demographics did
in the auto industry (retiree costs), and will soon start taking
down governments.
South EU (Greece, Portugal, Spain) will be ground zero due to
VERY generous pensions, VERY low birthrates and an unproductive
economy. My family tells me it is already happening in Greece. But
who knows, maybe I'm wrong.
Blackhalo
"Demographics did in the auto industry (retiree costs),
and will soon start taking down governments."
No demographics take OVER governments. Get ready for 3 wolves
and a sheep voting on what is for dinner.
energyecon
More than 60 companies sold bonds this year to repay commercial
paper, including Consolidated Edison, Verizon Communications Inc.
in New York and Kellogg, the 103-year-old maker of Keebler cookies
and Rice Krispies cereal, according to data compiled by Bloomberg.
Non-financial companies have sold $306 billion of investment-grade
bonds this year, a record pace.
“Treasurers aren’t sleeping at night because they don’t know
if they can roll over commercial paper,” said Anthony J. Carfang,
a partner at Treasury Strategies Inc, a Chicago consulting firm.
“They’d rather lock in money for five years and pay a little more.”
Commercial paper outstanding fell $39.7 billion, or 3.5 percent,
during the week ended yesterday, its 14th straight decline, the
Fed said today. At $1.097 trillion, the CP market is less than half
its peak of $2.22 trillion in July 2007, with about 10 percent of
it owned by the Fed, central bank data show.
welcome to the party...
Angry Renter
China actually has a severe demographic problem as well.
The One Child Policy is inverting the pyramid.
However, they don't have significant state obligations to them
like our entitlement programs, and they save.
In just 30 years, people aged 65 or older are projected to make
up 22 percent of China’s population. With the reduction of some,
and elimination of other state-provided social services, these older
adults will have to count on their children to provide for their
retirement, since children are expected to be the primary providers
of support and care for their retired parents, grandparents and
parents-in-law. However, in what has come to be known as the “4:2:1
problem,” every child born under the one-child policy will have
to care for two parents and four grandparents. With largely one-child
families and no national social security plan, this responsibility
will likely fall on a younger Chinese generation that is unable
to fulfill it.
http://www.umich.edu/~ipolicy/china/6)%20Demographic%20Consequences%20of%20China%27s%20One-Child%20Policy.pdf
... GDP can still turn slightly positive.Here is a speech from San
Francisco Fed President Janet Yellen in March:
The Uncertain Economic Outlook and the Policy Responses.
[I]t takes less than many people think for real GDP growth
rates to turn positive. Just the elimination of drags on growth
can do it. For example, residential construction has been
declining for several years, subtracting about 1 percentage point
from real GDP growth. Even if this spending were only to stabilize
at today’s very low levels—not a robust performance at all—a 1 percentage
point subtraction from growth would convert into a zero, boosting
overall growth by 1 percentage point. A decline in the pace of inventory
liquidation is another factor that could contribute to a pickup
in growth. Inventory liquidation over the last few months has been
unusually severe, especially in motor vehicles—a typical recession
pattern. All it would take is a reduction in the pace of liquidation—not
outright inventory building—to raise the GDP growth rate.
emphasis added
This is a very important point for forecasters - to distinguish between
growth rates and levels. Even if the economy has bottomed, it is at
a very low level compared to the last few years, and the recovery will
probably be very sluggish.
This increase in starts means that the drag from Residential Investment
will slow or stop, and also that residential construction employment
is close to the bottom. Residential investment has been a drag on the
economy for 14 straight quarters, and just removing that drag will seem
like a positive.
And residential construction has lost jobs for several years, and
even though construction employment will probably not increase significantly,
not losing jobs will also seem like a positive.
This removes drags from the economy - and that is the little bit
of good news.
To be clear, this is not great news for the homebuilders. It will
take some time to work off all the excess inventory, so new home sales
and single family housing starts will probably stay low for some time.
And it is possible that new home sales and housing starts could still
fall further.
[Jul 26, 2009] The war being waged on the TARP watchdog's independence
Most significant of all, and obviously due to Barofsky's truly independent
oversight efforts, the Obama administration is now
attempting to induce the Justice Department to issue a ruling that
Barofsky's office is not independent at all -- but rather, is subject
to, and under the supervision of, the authority of Treasury Secretary
Tim Geithner. By design, such a ruling would completely gut Barofsky's
ability to compel transparency and exercise real oversight over how
Treasury is administering TARP, since it would make him subordinate
to one of the very officials whose actions Congress wanted him to oversee:
the Treasury Secretary's. Barofsky has, quite rightly, protested
the administration's efforts to destroy his independence, and has done
so with increasing assertiveness as the administration's war on his
oversight activities has increased. Why would an administration
vowing a New Era of Transparency wage war on a watchdog whose only mission
is to ensure transparency and accountability in these massive financial
programs?
It should take little effort to explain the significance of these
clashes. The amount of taxpayer money
transferred to the banking industry or otherwise put at risk for its
benefit is astronomical. Professor Nouriel Roubini
argues
in a New York Times Op-Ed today that actions by the Federal
Reserve over the last nine months helped avert a Depression, while former
Governor Eliot Spitzer
said this week that the Fed has turned into a "Ponzi scheme" that
relies on insider dealing and requires vastly increased scrutiny.
Those claims aren't mutually exclusive. It's
not surprising that transferring extraordinary sums of taxpayer money
to a particular industry will help that industry avoid collapse, but
it is still the case that the potential for extreme corruption and even
theft in such transactions is enormous (indeed, even
Roubini argues that Fed Chairman Ben Bernanke
played an important role in enabling the crisis in the first place).
No matter one's views of the wisdom of the bailout and related programs,
transparency, accountability and independent oversight are absolutely
vital, and that is what Barosksy's office was created to ensure (though
it's unlikely -- given how Washington works -- that Congress actually
expected that the person in charge of that office would take those duties
seriously and be willing to fight with senior administration officials
to protect his independence).
Spitzer recently
told Bloomberg News that President Obama’s regulatory reforms of
the financial sector are “irrelevant” because regulatory agencies have
not been enforcing corporate laws to begin with.
“Regulatory agencies already had the power
to do everything they needed to do,” he said. “They just affirmatively
chose not to do it.”
Bernanke is a tool. Like many neo-classical economists he uses
an implicit assumption that what is good for wall street is good for the
nation. An interesting question is" Should the guy who missed housing
bubble (and actually was instrumental in inflating it with low rates) be
reappointed ? But it is mute. From a broader perspective it doesn't
matter who is (reappointed.
I believe the attacks on Bernanke's personal integrity were unfair
and unjustified. But I'm not sure he should be reappointed.
Professor Thoma's analogy to a doctor who kept getting it wrong -
but never gave up trying new possible cures - is pretty good. Is that
the kind of doctor I'd want?
I'd like a doctor who never gave up trying for a cure, but I'd prefer
someone with better diagnostic skills. I don't oppose Bernanke for a
second term, but I think there are better choices.
(San Francisco Fed President Janet Yellen, as an example, recognized
what was happening much earlier than Bernanke).
Rob Dawg
Two observations about Bernanke:
One, he missed the housing bubble.
_He_ _missed_ _the_ _housing_ _bubble_. How do you give anyone a
pass on that?
Two, credit for effective responses
GDD9000
Dawg - it's worse than just missing the housing bubble. The acts
he sanctioned under Bernanke I interpreted as endorsing the housing
bubble as a good thing, initially. So, his theory was wrong, and
his knowledge base then was compromised, since he couldnt possibly
understand the world of finance enough to know that what spawned
it was a leviathan.
Juvenal Delinquent
A good many of you have had the chance to work in your fields
of endeavor with workmates that are book smart, but have no idea
how things really work in the world...
Exhibit A: Benjamin Bernanke
Shylockracy
For a 300 million-strong country, the talent pool from which
to draw a FED chairman is minuscule. Of course, 'talent' here does
not mean the same as outside the rarefied heights of High Finance.
Talent here means a proven track record
of absolute subservience, unscrupulousness and militancy in favor
of the political and economic interests of the ruling bankocracy.
danm
The difference between the US and France is that probably half
of the US has some trust
------------
The difference between the US and France is that France understands
that it's a mature economy and the people do what they can to force
government to redistribute.
The US still believes it is a growth
country with a frontier attitude. Its people are
convinced that everybody will get rich if there is no government
and they let the invisible hand do its magic. But most still cling
to the hope government will fix things. Hmmmm.
Which is worse - bankers or terrorists
"Ditch bernanke, and then who takes over? (must be politically
viable.) "
I'm thinking a sock puppet could do a better job. It would also
say less stupid things during the re-appointment tour.
GDD9000
Dawg - how much do you think he was
part of the decision to keep GS at the top of the heap?
Or do they just run the show so much that they could appoint
themselves? It's just to me, so incredibly
wrong that we are propping up the status quo, and rewarding the
people that screwed everything up. And seeing as we are doing that,
it makes sense to keep Bernanke.
I think that more than anything this shows you that there isn;t
a chance in hell he isn't reappointed. Absolutely zero. I don't
even know why we debate it. And Bernanke going out on the two debate
the little people. Laughable. I wonder how many stooges will be
trotted out to say, thank you, thank you BB for saving us from ourselves.
bobn
One, he missed the housing bubble. _He_ _missed_ _the_ _housing_
_bubble_. How do you give anyone a pass on that?
Do you really think he missed it? How could he NOT have known?
I think he lied about it for reasons bad or good. Imagine what would
have happened had he said "The so-called sub-prime problem will
lead to a major recession and, BTW, most of the huge banks are insolvent.
Have a nice day."
Which is worse - bankers or terrorists
"The difference between the US and France is that France understands
that it's a mature economy and the people do what they can to force
government to redistribute."
Right, France is this way in part because of the tradition of
protest brought about by 1789, the revolution of 1848, the founding
of the Third Empire, 1968, etc. US is different, does not protest
in the same manner for political change.
And the big difference is that we have, at least currently, the
reserve currency that most the world's is purchased in. Until proven
otherwise, sink this ship and the whole world drowns with us.
danm
Speaking of which, the post notes that Bernanke "failed to notice
the patient is sick".
-----------
Maybe he saw everything just right, realizes he's stuck between
a rock and a hard place so now is just positioning himslef for his
own survival.
Over the last few decades, extreme failure has been grandly rewarded.
What does he have to lose?
GDD9000
bobn - have you also not noticed
that he suffers from Bushco syndrome? The utter inability or desire
to say that he possibly did anything wrong or was responsible in
any way? It's not a particularly endearing trait
that more and more of our leaders seem to be in possession of.
ResistanceIsFeudal
Entry of the masses into the markets, directly or indirectly
through retirement (another concept created by policy think tanks
and marketed to us) savings, was the real breaking point. So many
to fleece, so few to fleece them, so little incentive not to fleece
them. Add in superiority and entitlement mentality fostered by elite
educational institutions...
danm
And the big difference is that we have, at least currently,
the reserve currency that most the world's is purchased in. Until
proven otherwise, sink this ship and the whole world drowns with
us.
----
You've had land to distribute, resources to exploit, forests to
cut down, lakes to pollute... With 300M people, you're fast approaching
the limit.
Which is worse - bankers or terrorists
If you are Bernanke, I wonder....why even bother with the stress
of reappointment when you can get a job in the private sector working
for the Goldman Sachs Financial Terrorism Crime Syndicate.
Oh yeah, that's right because everyone knows Benny has no skillz.
Juvenal Delinquent
Bernanke reminds me of most any NFL coach that has guided 7 teams
over a span of 12 seasons to a combined win-loss record of 86-122.
Coaches like him get rehired because they have "experience"
Comrade Coinz
There is bias built in to the system -- the Fed is owned by banks
-- that works against the interests of the country regardless of
who is chairman.
That bias affects personalities to a greater or lesser extent.
I still like Paul Volcker.
My feelings are mixed on Bernanke. He has some glaring flaws,
and I don't think he is strong enough to stand up to the oligarchs
when needed.
On the other hand, my sense is that he genuinely wants a good
outcome for the country.
danm
On the other hand, my sense is that he genuinely wants a good
outcome for the country
-----------
WW2 had a good outcome but millions of lives were lost.
MrM
Good morning, all
I would like to follow up on Basel Too's comment - If you do
not re-appoint Bernanke, who do you appoint?
Can we really hope that this position will escape going to Summers?
Yellen would be a much better choice, but it is rather unlikely
she'll be able to win against Summers.
We already had "The Committee To Save The World". Are you ready
for the sequel "The Unparalleled Genius To Save The World"?
Fair Economist
I agree with basically all of the criticisms of Bernanke, but
his replacement would almost certainly be Summers, who didn't forsee
this any better than Bernanke and who has numerous personal and
financial connections to banksters and to foolish deregulation.
Bernanke still seems not to have grasped many importants aspects
of the crisis, but neither has Summers, and at least Bernanke doesn't
have Summers' potential integrity issues. So reappointing Bernanke
is the lesser of two evils.
HomeGnome
Bomber Ben is going to be reappointed with praise for "strong
leadership in these difficult times" from both Elephant and Asses.
The Congress Critters (R. Paul excepted) are pretty much clueless;
which was evident if you caught any of Bomber Ben's testimony.
Hell, all "Dr. Evil" Paulson had
to do to get 700 BILLION was threaten financial collapse and martial
law; and the lapdogs rolled over like puppies.
patientrenter
Bernanke is more than just a messenger. He is constrained on
many sides: Congress is most important, then the Treasury and WH,
then the banking industry, then professional economists and other
members of the financial community. But he does still play a leadership
role. Any of us in leadership roles recognize that it's a grey area.
Few heads of household have absolute authority! It's the same, but
even greyer, in broader leadership roles like Bernanke's.
I read a 2009 overview speech by Bernanke, just to see his own
story. It's at http://www.federalreserve.gov/newsevents/speech/bernanke20090414a.htm.
He recognizes the role of imprudent lending, and the need for prompt
action to cut off any resurgence of inflation. He also acknowledges
there was a TBTF problem.
But I think he reveals his biases even in this speech. He discusses
the pain of the credit collapse, and the measures he and others
have undertaken to mitigate the pain, in vivid and detailed terms.
He doesn't explain very well why allowing the imbalances to grow
as much as they did was a problem in the first place. (Maybe because
he doesn't believe it was such a big problem. The real problem was
the collapse. Lesson learned: Allow bubbles. Prevent bubbles popping.
On the TBTF issue, it's clear that he doesn't see any need to
bring more of our financial industry out of the TBTF category. Instead
he advocates more regulation. That assumes the regulators (like
Greenspan and him) will be better than the company CEOs (like Sandy
Weill) at avoiding excessive risk. It's not clear to me that the
regulators are any better. Sure, an ideal regulator would be better.
But the regulators we actually get are not ideal, just as the CEOs
are not. I think I'd like to see graduated capital requirements
with real bite that are higher on institutions that pose more systemic
risk (= are more likely to be backstopped by the taxpayers). I got
the impression that he is very weak on any effective anti-TBTF measure.
Perhaps that's because he has too much faith in the perfect regulator.
patientrenter
"I like honesty, but I prefer competence over honesty in the
most important jobs."
Shifting $14T of toxic assets from the private to the public sectors
balance sheet is competence?"
I am not saying that Bernanke is competent. His points of competence
and incomepetence are what we're debating here (in between noisy
and pointless global climate trench warfare salvos). I am just saying
that I don't think it's purposeful to judge him based on how much
he lies. Whether it's right or wrong, the political sphere he operates
in takes lying (or dissembling, or miscommunicating, or whatever
you would like to call it) as a job survival requirement. What matters
most to us all is what he accomplishes, not what he says. That's
why is points of policy competence and incompetence matter more
than merely the extent of his public directness and honesty.
The stimulus bill reminds me of "Kindergarten Cop" -- Schwarzenegger's
movie when he plays a cop who goes undercover as a kindergarten teacher,
and ultimately quits his policeman job to teach kindergarten on a permanent
basis.
This recession has brought employment down over six million. By industry,
these losses are disproportionately in construction and manufacturing.
By region, these losses are disproportionately in Nevada, California,
Arizona, Florida, and other housing cycle states.
Although I do not agree with it, a reasonably
coherent theory that says that the government can raise employment by
hiring idle resources. So, in this recession, an effective way to raise
employment would be to create jobs in those industries and regions with
people without work (whether raising employment passes a cost-benefit
analysis is another story).
The stimulus bill does not do that. Instead, it spends a lot in industries
and regions with few if any employment losses.
Econbrowser now claims that the stimulus bill can be effective,
because unemployment rates are high (whatever that means) in health
care and education. Let's take a look at employment changes Dec 2007
- June 2009 (millions) by industry:
- Total nonfarm payrolls: -6.5
- Construction: -1.3
- Manufacturering: -1.9
- Education and Health: +0.7
How exactly is fiscal policy going to create 3.5 million jobs by
primarily hiring people in education and health? I see only two scenarios,
both absurd and/or dishonest:
-
The construction workers become kindergarten teachers.
As I see it, Kindergarten Cop was just a movie, and in reality
changing occupations as efficiently as did Schwarzenegger will
not happen in the time frame of this recession.
-
The people in construction and manufacturing stay unemployed,
and vast numbers people in education and health delay their
retirements, forego maternity leave, or come out of retirement.
Without commenting on the likelihood of this scenario, I'll
just say that it renders the stimulus bill dishonest: America
was lead to believe that those suffering from this recession
would be helped, not that those in secure jobs would be over-worked.
Should that allay any inflationary concerns people may have about
the doubling in the size of the Fed's balance sheet? In a narrow mechanical
sense, perhaps. It is true that the new assets have not yet shown up
as an increase in the money supply, and it is true that the Fed has
the power to prevent them from doing so in the future. But my concerns
about inflation are not that the Fed would lose the ability to target
a particular level for the money supply, and certainly are not concerns
about the next six months, where I still see deflation as a bigger worry
than inflation. Instead, my concern is that the
current fiscal trajectory is fundamentally inconsistent with the
Federal Reserve choosing to keep inflation under control. Both devices,
ballooning of the Treasury's account with the Fed and enabling the Fed
in effect to borrow directly on its own, are indeed as much fiscal measures
as they are monetary. But to someone worried about the
increasing co-mingling of monetary and fiscal policy, that blurring
of the lines is not a reassuring development.
My specific worry is that we will eventually face a crisis of confidence
in the Treasury and the dollar itself. It is true, as Bernanke suggests,
that raising the interest rate paid on reserves in such a setting would
be a policy tool that could be used in response. But it would be an
unattractive measure to the point of perhaps being impossible to use
in practice, for the same reason other countries have dreaded raising
interest rates in the face of collapsing real economic activity and
a flight from their currency.
I fear that the United States government
is mistakenly assuming that it can borrow essentially unlimited sums
without undermining confidence in the dollar itself.
The real question of a successful exit strategy, in my opinion, is how
do we extricate ourselves from the
joint fiscal commitments currently assumed by the Treasury, the
Fed, the FDIC, the Medicare and Social Security trust funds, and various
and sundry implicit and explicit federal guarantees?
The answer, in my opinion, is not to be found in the Treasury doing
even more borrowing on behalf of the Fed or the Fed doing even more
borrowing on behalf of itself.
The Office of Management and Budget calculates a total for defense
spending throughout different parts of the government (it includes money
allocated to the Pentagon, nuclear weapons activities at the Department
of Energy and some security spending in the State Department and FBI).
In the 2010 budget, that figure was $707 billion, more than half of
the government's discretionary spending for the year. (Discretionary
spending is the money that's appropriated every year by Congress, rather
than entitlement programs like Medicare for which funding is mandatory).
But the real number is even higher, because, among other things,
the OMB doesn't count supplemental spending on the wars in Iraq and
Afghanistan.
The Federal Reserve, which I'd place among the optimists on this
issue, says full-trend growth isn't going to be the 3% annually of the
pre-crisis economy but more like 2.5% or even as low as 2%. Harvard
University economist Dale Jorgenson, who taught Fed Chairman Ben Bernanke,
projects just 1.6% annual growth through
2030.
If Jorgenson is anywhere near correct, the Great Recession would
make the Great Depression seem like a picnic to many people. Is there
any reason to think these projections might be right? Unfortunately,
a lot of evidence argues in favor of a very slow and tepid recovery:
-
In the boom, the economy got the benefit of the wealth effect as
families spent part of the gains in the value of their houses and
investment portfolios. Now the economy is facing a negative wealth
effect as lower home values and smaller investment portfolios cut
into household spending. Household net wealth was down 20% from
mid-2007 to the end of 2008.
-
Like U.S. businesses, American families are going to have to deleverage
their balance sheets by paying down debt. That means having less
to spend on consumption. Household debt had climbed to 130% of income
by the end of 2008.
-
Losses in the financial sector of an estimated $2 trillion (only
$1 trillion realized to date) will cut the amount of capital available
for lending and raise the price of that capital.
-
Any recovery will send the price of oil and other raw materials
higher, which will act as a drag on the economy. Taxes will climb
as governments around the world try to repay some of the debt they
had piled on to end the crisis. In the United States, interest rates
will climb as overseas investors demand a better return on all the
U.S. debt they hold.
-
Finally, many companies used cheap money to offer incentives to
keep their customers buying. Even in a recovery, sales won't bounce
back to boom-year levels.
The U.S. gross domestic product, the value of all the goods and services
produced in the country, is expected to grow 1% before the end of the
year. But that's not enough to change some of the most daunting problems
of this recession: high unemployment, stagnant wages and depressed asset
prices.
"The bottom line for the typical consumer is: Just because Wall Street
is having a party doesn't mean you are going to get your job back,"
said Christian E. Weller, a senior fellow and economist with the
Center for American Progress, a nonpartisan policy research institution.
Below is my latest column for the Huffington Post, entitled
"Wall Street's Gains Equal Main Street's Loss?":
Stock prices have been on a tear lately, bolstered by quarterly earnings
reports that have in many cases outpaced expectations and growing optimism
that the worst of the crisis-cum-downturn is behind us.
The S&P 500 index, for instance, is up more than 40 percent since
its early-March lows, while the technology-laden Nasdaq Composite has
scored a 13 percent gain -- and, through yesterday, a 12-session winning
streak -- in the last two weeks alone.
Ordinarily, a bull run like this would be cause for optimism, on
the belief that savvy investors see a light at the end of the tunnel.
But in the currrent environment, could the good news that is powering
share prices be bad news for the economy?
Consider the following recent reports from a cross-section of corporate
America:
- Microsoft announced that revenues declined more than 17 percent
amid falling global demand for PCs and servers.
According to the Financial Times, the world's largest
software company "sounded a far more cautious note about the prospects
for a recovery in the second half of 2009" and its CFO said 'it's
going to be difficult for the rest of the year....We're really still
not sure we're out of the woods.'"
- The CFO of UPS, the 100-year old package delivery giant with
a presence in 200 countries,
warned the company didn't have "any confidence that either demand
or activity is going to pick up substantially" in the next several
months.
- Diversified manufacturer 3M, with operations in 60 countries,
cautioned that it's "still facing a challenging sales environment
with no meaningful improvement in demand yet from several major
industrial customers," the
Wall Street Journal reported. "He added there is a
risk that recent upticks in orders could be a 'false dawn' caused
by an over-correction in inventory levels earlier this year by 3M's
customers rather than a sustainable recovery in demand."
- Texas Instruments, the second largest U.S. chipmaker,
said "there's little evidence yet that real growth -- based
on an improving market for cell phones, computers and other tech
products, instead of inventory corrections -- is on the horizon."
- The CEO of WPP, the world's largest advertising company, was
less-than-diplomatic
when he noted publicly that he saw "no green shoots", "no yellow
shoots" and "no moss" in the global economy.
- The Vice Chairman of General Electric, a company with 14 major
lines of business and a presence in more than 100 countries,
cautioned that "he isn't seeing an increase in orders even as
U.S. economic statistics suggest the world's largest economy may
soon shift to a recovery."
In sum, while a growing number of investors seem to believe that
Main Street is on the mend, many of corporate America's senior executives
-- who are normally not prone towards pessimistic outlooks -- are maintaining
that they see no real evidence of a revival where it counts -- on the
ground.
In fact, amid an almost single-minded focus on reported earnings
results, many of which only appear favorable in comparison to the low-ball,
company managed estimates that clueless analysts have come up with,
Wall Street hasn't been paying much attention to just how dicey things
look at the top of the income statement.
Yet as Karl Denninger of
The Market Ticker
and others have noted, many of the companies that have "beaten" expectations
so far this season -- including several of those listed above and others
such as United Technologies, Halliburton, AT&T, and Amazon -- have reported
flat or falling revenues, with year-over-year declines in some cases
of 30 percent or more.
One reason why so many businesses are apparently benefitting amid
softening sales comes down to aggressive cost-cutting. They are slashing
jobs, paring wages and benefits, scaling back capital expenditures and
valuable R&D, and putting constant pressure on suppliers to reduce prices,
forcing each of those in turn to do the same.
While such measures can provide a short-term boost to profits, it
is revenues -- money coming in the door -- that keeps businesses growing
-- and the economy humming. Morever, even where firms are seeing notable
improvements on the bottom line, odds are that few will be looking to
boost hiring without seeing solid evidence that sales are also picking
up.
Finally, racy bull markets often provide a shot of growth-stoking
confidence, encouraging owners and managers to think and act expansively,
and investors and lenders to pony up funds that can help turn big plans
into profitable opportunities. Not this time, however. The U.S. economy,
slammed by the biggest financial crises this century, remains in a vulnerable
state, and it is still exposed to numerous potholes and shocks, many
of which are just now unfolding.
Among other things,
the commercial real estate market is starting to implode,
lending conditions are worsening and many credit markets
remain frozen, no small number of financial institutions,
including commercial lender CIT Group, are close to failing or are
utterly dependent on continued public largesse, and, as noted above,
employers are shedding jobs, not adding them.
Unfortunately, because stock market investors have decided to ignore
reality in favor of false hopes and quick fixes, the euphoria they've
spawned may inhibit at least some Americans from taking the steps necessary
to cope with the challenging environment that companies like General
Electric, Microsoft, UPS, WPP, Texas Instruments, 3M, and others still
see around them.
Given all that, you might say that Wall Street's gain is their loss.
Why economic researchers are so dumb ? Questionable approach,
wasted paper...
July 24, 2009
Cute new paper out arguing that some of the stupid human tricks usually
ascribed by behavioral finance sorts to self-destructive investor behaviors
may not always and everywhere be so dumb. Maybe they’re just mostly
dumb.
The recent behavioral literature has shown that
individual investors hold concentrated
portfolios, trade excessively, and exhibit a preference for local
stocks.
These results are puzzling because in all three instances portfolio
distortions could reflect either an informational advantage or psychological
biases.
In this study, we propose a demographics-based
proxy for smartness and show that
the portfolio distortions of "smart"
investors reflect an informational advantage that generate high
risk-adjusted returns.
In contrast, the distortions of "dumb" investors arise from psychological
biases because they experience low risk-adjusted performance. When
we do not condition on the level of portfolio distortions, the average
net performance of smart investors does not beat passive benchmarks,
but smart investors outperform dumb
investors by about 3 percent annually on a risk-adjusted basis.
Further, when portfolio distortions are large, smart investors
outperform the passive benchmarks by about 2 percent and the smart-dumb
performance differential is over 5 percent. We also show that a
portfolio of stocks with smart investor clientele outperforms the
dumb clientele portfolio by about 3.50 percent annually. Taken together,
these results indicate that both behavioral and information-based
explanations for observed portfolio distortions are appropriate,
but they apply to groups of dumb and smart investors, respectively.
Source:
George M. Korniotis and Alok Kumar, “Do Portfolio Distortions Reflect
Superior Information or Psychological Biases?,” SSRN eLibrary (July
16, 2009),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1018668.
nomorespendingplz
1st 100 days - There are 2.9 million more people unemployed in
May than there were unemployed in January. The unemployment rate
went from 7.6% to 9.4%. Since May 2008, we have lost 5.5 million
jobs. The biggest losers were:
Manufacturing 1.5 million lost
Finance & Prof Serv 1.5 million lost
Construction 1.1 million lost
Retail & Leisure 1.3 million lost
good finance articles http://www.bit.ly/12NCJR
Rob Dawg
Consensus peak to trough real GDP decline of less than 4%? I
don't need to read any further to know we are off this chart. Besides,
all the "good recoveries" in the red circle are 30-50 years old.
Economists are strange people. I'd trust Conjure's dog bones
and fetishes first.
Scrooge McDuck
Commercial mortgage delinquency up 585%
Delinquencies on commercial mortgage backed securities soared
$10 billion in June, hitting a 12-month high of almost $29 billion,
according to Realpoint Research.
California led the nation with the highest amount of delinquent
loans, closely followed by Texas and Florida.
Late loans across the country are up an “astounding” 585 percent
from a year ago when just $4 billion were delinquent, reported the
Horsham, Pa.-based research firm. The low point for delinquency
was March 2007 when $2 billion was delinquent.
Take a name asswipe
According to calculations by Martin Weale of the National Institute
for Economic and Social Research the profile of the current recession
is now almost identical to the decline in Britain's output between
1929 and 1931. The 5.6pc contraction over the past year almost matches
the 5.8pc fall in the year preceding the second quarter of 1931,
during which Credit Anstalt in Austria collapsed, triggering a second
wave of economic seizure across Europe.
The recession is far deeper and more severe than those of the
early 1980s and 1990s, Mr Weale added.
"Gordon Brown is now competing with Ramsay MacDonald – not a
comparison he would much like," he said. "It looks as if we are
pretty much tracking the 1930s,
http://www.telegraph.co.uk/finance/financetopics/recession/5901961/Briti...
Tim waiting for 2012
Fact Check
between 1946-1983 spending was 63% of GDP
1983-2007 spending was just over 70% of GDP
If savings rate goes to 7% or 10% that would eliminate 1-1.3
Trillion 07' dollars from GDP and thus a 7-10% decline
in GDP.
Tim waiting for 2012
Black Dog
A lot of the stimulus package was tax cuts which I argue offer
cheap short term thrills and more pain down the road. Companies
large and small benefited greatly from the tax cuts. This will be
temporary and is already factored in to forecasts
Broward
Most people who are comfortable as I am sure you are would choose
not to spend esp if things look uncertain for the future. Also boomers
have to think about their health, wear and tear.
... ... ...
You are right that consumption increases after 65 for some people
but in the form of medical costs and you know that the gov't picks
up most of that tab through Medicare.
So gov't will definitely have to increase spending from where
we are know. Budget deficits will grow making Japan's balance sheet
a thing of envy. We may be already there.
... ... ...
Scrooge
Large companies like IBM are now accelerating "outsourcing" b/c
their margins are coming under pressure
Quality matters less when you are
talking about near term executive survival.
... ... ...
Lawyer Liz
63% was the average from 1946-1983. That was before teens had
credit cards but the country was much younger then and wages steadily
increased over that time
Now with the country aging and wages flat to down since 1983
I'd say it can go down to 58-60% easily.
That is why I expect a 9-12% decline in US Gdp overall.
Liz I pitched this to CR and he says "no way" So I take it for
what it is.
Tim Duy looks at the shape of things to come:
The Debate Continues, by Tim Duy: The debate over the shape
of the recovery continues unabated. Equities, at least
this week, are voting in favor of the V-shaped recovery, with the
Dow pushing past the 9,000 mark for the first time since January.
Never one to accept good news at face value,
Nouriel Roubini predictably took the opposite position:
A “perfect storm” of fiscal deficits, rising bond yields,
“soaring” oil prices, weak profits and a stagnant labor market
could “blow the recovering world economy back into a double-dip
recession,” he wrote in a research note today. “It is getting
more likely unless a clear exit strategy from the massive monetary
and fiscal stimulus is outlined even before it is implemented.”
Roubini, chairman of Roubini Global Economics and a professor
at NYU’s Stern School of Business, predicted that the global
economy will begin recovering near the end of 2009. The U.S.
economy is likely to grow about 1 percent in the next two years,
less than the 3 percent “trend,” he said.
Roubini based his short-term outlook on the worsening condition
of the U.S. housing and labor markets, which he called “inextricably
linked.” He said a “weak” job market will contribute to another
13 percent to 18 percent drop in house prices, bringing total
declines nationally to as much as 45 percent from their peak.
I would add to Roubini's pessimism that bond market investors
as of yet do not share the optimism of their brethren in the equity
side of the industry. The run up in yields that brought a
4-handle to the 10 year Treasury appears to have been stopped dead
in its tracks, and that maturity has pulled back to the mid threes.
If the run-up in yields foreshadowed a burst of optimism in equities,
the pull back would suggest that this rally has nearly run its course.
The challenge here is two-fold. The first challenge
is to determine how much of the recent equity run is attributable
to the weight of evidence that indicates the worst of the downturn
is behind us. With the Armageddon trade off the table, some
gains were inevitable, just as was the rise in Treasury yields.
The more difficult challenge is the strength and pattern of the
subsequent recovery. To be sure, one should not ignore the
possibility of a blowout quarter here and there, as GDP data can
bounce quickly to bounces in underlying data such as a stabilization
in auto sales. But will such a bounce reflect fundamental
underlying strength? A slow, jobless recovery - my dominant
scenario - would most likely produce the seesaw trading we saw in
the wake of the tech bubble crash, a pattern that held until the
housing bubble gained full traction. Such an outcome looks
consistent with the sentiment of
Federal Reserve Chairman Ben Bernanke in this weeks Congressional
testimony:
Despite these positive signs, the rate of job loss remains
high and the unemployment rate has continued its steep rise.
Job insecurity, together with declines in home values and tight
credit, is likely to limit gains in consumer spending. The possibility
that the recent stabilization in household spending will prove
transient is an important downside risk to the outlook.
Later,
during questioning, Bernanke reiterated:
What will the recovery look like? Slow. “The American consumer
is not going to be the source of a global boom by any means,” Bernanke
says.
Sounds like he tends toward the low end of the FOMC's range of forecasts,
and suggests, talk of withdrawal of various monetary accommodation aside,
this
looks like a reasonable forecast:
BlackRock Inc., the biggest publicly traded U.S. money manager,
recommends buying Treasuries maturing
in two to five years on expectations the Federal Reserve won’t raise
interest rates this year.
“They still see potential downside risks to growth,” Stuart Spodek,
co-head of U.S. bonds in New York at BlackRock, said in a Bloomberg
Television interview. “The Fed is not going to tighten. It has referenced
keeping rates low for an extended period of time.”
With unemployment rates still headed north,
it is tough to see the Fed tightening within the next twelve months,
if not longer. But will the job market surprise
us? No clear indications can be gained from initial unemployment
claims data which, although battered by unusual seasonal patterns,
overall remains consistent with further drops in nonfarm payrolls.
Indeed, this would be consistent with recent patterns of recession.
David Altig
declares:
...I'm quite sympathetic to DeLong's theme that the dynamics
of U.S. labor markets coming out of recessions appear to have changed
starting with the 1990–91 economic contraction. And it might be
hard for many people to argue with DeLong's point that the
U.S. economy is likely headed toward
another so-called "jobless recovery." But until more
facts are in and we're able to look back on what transpired, I think
we still, at this point, must reasonably count the current run-up
in the unemployment rate as a puzzle.
In the comments from my last piece, reader spencer
takes a different perspective, noting that forecasters have tended
to underestimate the strength of recoveries, and further notes that
recent moderate recoveries have followed atypical mild recessions.
The current recession, however, is more typical of the pre-1990 variety,
and, as such could be expected to yield a rapid recovery. A logical
analysis from a long-time observer of business cycles; as always, one
should have such an outcome on their continuum of possible events, but
I tend not to be particularly sympathetic to the mild recession, mild
recovery, big recession, big recovery analogy. It seems to be
that a cursory look at the data suggests something very different is
happening in the labor market and thus the strength of recoveries since
the early 1980s. Look, for example at the pattern of durable goods
manufacturing payrolls:
Previous to 1990, durable good jobs snapped back quickly, but that began
changing after the 1980 recession, first with a muted rebound, than
a slow return after the 1990 recession, and then with no return after
the 2000 recession. That lack of rebound alone cost the recovery
roughly 2 million jobs - and it seems that if the downturn was only
mild, we should have expected these jobs to return. We will lose
another 2 million at least by the time the current downturn is complete.
Does anyone think these jobs are coming back? Anyone?
Likewise, nondurable goods manufacturing tells an even worse story:
In previous cycles, a rapid bounce, but simply an outright cliff
dive since the mid 1990s. Again, do we think this trend will be
reversed in the upcoming recovery? Another, albeit smaller sector:
To be sure, information services was coming off a bubble, but stability
in the sector remained elusive even at the peak of the recent cycle.
These patterns suggest to me that the
last fifteen years has seen intense structural change such that even
mild recessions result in permanent dislocations. I
have trouble that in the midst of such ongoing structural change a deeper
recession will result in a less permanent dislocation. No, I suspect
many of these jobs are gone for good, placing an additional weight on
the job market during the recovery. Simply put, the danger is
that in even a moderate recovery, the remaining expanding sectors will
lack sufficient strength to compensate for these permanent losses.
Anticipating the comments, another way some might describe the patterns
in the labor markets during recent recessions is that a variety of economic
policy decisions by both Democratic and Republican administrations have
had the impact of dismembering the industrial base of the US without
encouraging the growth of sufficient replacement jobs, thereby throwing
the American middle class under the train. That, however, is such
a dark interpretation, as opposed to say, cheering the efforts of policymakers
to lessen the burden of work on Americans by encouraging foreign nations
to forsake their own consumption to provide goods for our citizens.
Bottom Line:
- I am not convinced that the
equity run up confirms much more than the power of low expectations.
Indeed, the bond market has yet to follow suit
(when I would actually expect it to lead the way). I increasingly
think that the debate between V and other shaped recoveries is really
a debate over the degree of structural change occurring in the economy.
- If you believe this is a typical cycle, and that what was demanded
and how it was produced is roughly the same after as before the
recession, a V-shaped recovery is your likely candidate. If
you believe that the current recession
is simply intensifying a period of intense structural change, than
you are looking for a U or L-shaped recovery.
Notably Bernanke, by acknowledging that the US consumer is in no
shape to continued its 25 year role as a shaper of global economic
trends, seems to be siding with the structural change side of the
coin.
Recommended LinksAndyfromTucson says...
I personally think looking at what happened in past recessions
is not very helpful for predicting the future. To paraphrase Tolstoy,
happy economies are all alike, every unhappy economy is unhappy
in its own way.
What I prefer to look at is what are the prospects for increasing
consumer demand in the next few years, because in an economy that
is two thirds consumer demand that is where any recovery is going
to come from. And when I look at US consumers I see households with
the worst balance sheets in a very long time (if not ever), who
had a zero savings rate for the last few years and so can only go
down in consumption as a percentage of income, who own more cars
than there are licensed drivers, who live in houses much bigger
than their parents lived in, and who have stuffed storage units
with the all the stuff they bought that they didn't really need.
Do we really expect to see a surge in new consumption from these
households? Is the next boom going to be fueled by a fashion for
4,000 sq. ft. homes instead of 2,500 sq. ft. homes? Or a fashion
for drivers having a different vehicle for every day of the week?
Or a fad for buying goods and putting them directly into storage
units instead of the previously traditional 6 month stay in the
home before they are put into storage? What exactly are we expecting
the US consumer to surge out to buy, and where are they going to
get the money to buy it?
Selected comments
tom a taxpayer
The taxpayers
1) give Goldman Sachs $12.9 billion free thru AIG, and
2) provide Goldman Sachs a $10 billion TARP loan: total $22.9
billion.
Goldman Sachs repays $11.4 billion for the loan. Taxpayers suffer
a 50% loss ($11.5 billion).
Goldman Sachs prefers to think of it as a 23% return to taxpayers,
record quarterly earnings of $3.4 billion for Goldman Sachs, and
setting aside $6.65 billion for record bonuses and benefits for
Goldman Sachs.
But this does not even begin to account for the hundreds of billions
in $ and benefits that the feds (and unwitting taxpayers) have given
Goldman Sachs over past few decades. Here's just a few recent examples
mentioned in the opening prayer at a recent GS board meeting:
"Thank Hank Paulson, the Godfather, for killing our competitors
Bear Stearns and Lehman, for knee capping Merrill Lynch, for
saving our behinds from billions of $ of counterparty risk at
Fannie, Freddie, and AIG. Thank Hank for colluding with the
Fed to allow us to become a bank holding company, giving us
access to vast pools of money when we were about to go bankrupt.
Thank Hank, truly a family man, for allowing the Goldman Sachs
family to control key positions at the U.S. Treasury and to
advise him on how best to fleece the taxpayers."
For Goldman Sachs to brag about a "profit" of $1.1 billion to
taxpayers when GS is the ringleader in the mob that raped and pillaged
the mortgage industry, ruined the housing market, destroyed the
credit system, endangered federal/state/municipal financing, pension
funds, and the banking system, sent the economy into a downward
spiral, endangered the world financial system, extorted the U.S.
and the world to pay them billions in ransom or face the destruction
of the world financial system and economy, and now are costing taxpayers
hundreds of billions, even trillions of $ is beyond chutzpah...it
is despicable.
Re-Remic-ing the TalfPosted by Tracy
Alloway on Jul 23 11:19.
Commercial real estate has, rather suddenly,
become the new doom-spot for the US economy.Fed
chairman Ben Bernanke is
worried about it, Morgan Stanley and Wells Fargo
posted losses because of it, and S&P is
confusing everyone about it.
The ratings agency’s
sudden about-face on downgrades for certain triple A-rated CMBS,
in particular, caused a bit of a furore on Wednesday. S&P had previously
warned that it might downgrade billions worth of CMBS because of
proposed changes to its ratings-methodology for the securities.
That sent ripples through the CMBS market, especially since only
AAA-rated CMBS is eligible for the Federal Reserve’s
Talf programme, aimed at supporting ABS issuance.
... ... ...
Structured finance to the rescue!*
*(Because it worked so well the last
time).
The last week or two I had noticed that the /DX (dollar index) had
a somewhat-odd correlation to the stock market - one that had not been
present to the same degree, if present at all, before.
Specifically, it would move just before the /ES - S&P futures
- moved, and the correlation between the two was almost lock-step.
I had mentally blocked out the worst of the possibilities until last
night, when it was said right up front by a user who had lunch with
a banker in Australia: The dollar has become a carry-trade funding
currency; he was executing an increasing number of these trades with
the dollar.
We are following Japan's script almost exactly, but our trip down
this road will be far worse than it was for them, because as a nation
we are monstrous net importers and in tremendous debt, both as consumers
and as a government, where Japan is a net exporter and their population
is full of savers.
Tuesday I wrote about the dollar decline powering this latest ramp
job in equities, but this development, if it has become widespread,
is a major problem for The United States, and opens
the yawning maw of a trap that we will find it tremendously difficult
to escape from.
Japan has been essentially trapped at zero interest rates and moribund
economic growth - essentially zero - for more than a decade. The Carry
is a big part of that, as it depresses the currency, since the carry
is essentially a short on the funding currency. As traders press those
bets the currency comes under increasing pressure, which increases import
prices (but makes exports more attractive), draining resources from
the "host" country that has become the funding currency.
Putting a stop to it means raising interest rates even if the
consequence would be a severe economic recession or worse, and
the longer it goes on, the worse the damage in the form of structural
distortions in the economy is. But refusing to raise interest rates
means that not only does the distortion continue but
the damage from ZIRP continues as well -
borrowing no longer becomes a function of interest cost .vs. marginal
utility but rather simply a matter of whether you can find someone that
will let you borrow at all.
Carry trades can also unwind due to exogenous (not interest-rate)
pressures - should there be a sharp upward spike in the dollar these
trades suddenly (and very painfully) go "underwater" as the currency
translation is an integral part of the profit (or loss) in the transaction.
This "unwind" feeds on itself as to liquidate the carry you must buy
dollars, which in turn adds yet more upward pressure on the currency,
which makes the spiral tighten even more.
This is what happened to Japan over the last year as the crisis deepened,
and it decimated their exporters (and stock market) last year.
The paradox is that you'd think this would create tremendous inflationary
pressures. But that's not what has happened in Japan - they wound up
with incredible deflationary pressures instead, because
consumption became much less desirable than
export! As such the policy "prescription" becomes yet
more easing, but with interest rates at zero the policy folks are left
scrambling for yet another knob to turn of some sort.
In the United States this will be ugly, because we're not an exporting
nation. Instead of being able to "prefer" export we are instead likely
to find quite-crazy ramps in certain import prices, specifically oil.
That in turn makes economic recovery nearly
impossible, as it sets up even more structural dollar flows out of the
country.
Nor is this supportive of asset prices in the intermediate term.
Sure, it looks good when you get a 7% stock market rally when this
begins, but have a look at the Nikkei - their market topped
at 40,000 and has never been anywhere near there since. Real estate
prices have not recovered their previous highs and remain moribund,
and the former "never get laid off" Japanese economic model has been
laid waste, with generations-long policies abandoned as simply unworkable.
This is something we should not have allowed to happen but we now
have, and it is now incumbent on The Administration and The Fed to put
a stop to it before it becomes pervasive. Determining exactly how much
"carry" is out there is difficult; if The Fed has a handle on this they
sure aren't going to divulge it, just as Japan's Central Bank never
has, but the impact, especially when you get forced unwinds, are vicious
and impossible to ignore.
For those who said "we won't make the mistakes Japan did" let me
point out that we have indeed made all of the same mistakes and now
we're getting the same results.
Why is it that Einstein's exhortation continues to echo in my head?
Insanity is doing the same thing over and over but expecting
a different result.
Any lingering thought that many public pension funds were not much
more than happy hunting grounds for Wall Street sharks came crashing
down in 2008-2009 as it became clear that public officials, pension
fund managers, and political operatives had been for all intents and
purposes bribed by rich financiers who wanted the opportunity to take
big risks, and make huge profits, with government employees' money.
With 40% of all public pension funds investing
some of their money in hedge funds in 2008, a cool $78 billion overall,
they were a huge source of investment funds for hedge fund managers
(Wayne, 2009b),
In addition to large losses for some pension funds due to the risks
taken with their money, there were legal problems and scandals for Wall
Street bankers and their political go-betweens as it was discovered
that criminal activities were part of the
picture. For example, in April, 2009, a hedge fund executive
pleaded guilty to securities fraud after admitting that he had been
paid a stunning $5 million for helping to make it possible for the politically
well connected Carlyle Group (an "equity fund" that invests large sums
of money for wealthy people) to invest $500 million of New York state
pension funds in an energy investment fund managed jointly by Carlyle
and another private equity firm (Hakim, 2009; Wayne, 2009a). There are
several other such scandals that could be recounted here, and many more
that will have surfaced after this document has been completed and on
this site for a year or two. It is like a re-run of what happened with
"other people's money" in the first ten years of the twentieth century
and then again in the 1920s.
As of 2007, institutional investors owned 76.4% of the stock in the
1,000 largest U.S. corporations, an all-time high, up from 46.6% in
1986 when the institutional investor movement began. The list of institutional
investors now includes investment companies, mutual funds, hedge funds,
insurance companies, banks, and foundations and endowments as well as
pension funds. Strikingly, public pension funds only control 10% of
these assets, double the percentage they had in 1985, but not much more
than the 8% they held in 1994 (Brancato & Rabimov, 2008). Even if public
pension funds had the political independence and will power to try to
influence corporate boards, they don't have enough assets to make a
push without allies. As for their best allies, the union pension funds,
they have been decimated for the most part by downsizing, off shoring,
and corporate failures in major manufacturing industries.
Conclusion
No one can be 100% sure, but it seems highly unlikely that institutional
investors from public employee and union pension funds ever will be
able to create a coalition of institutional investors that could do
anything more than chide, chastise, or confer with directors and executives
from the large corporations in which they invest. They are not a threat
to the current power relations in the corporate community. They actually
play their largest role when rival private investors vie for their voting
support in takeover battles, or when they agree to take part in the
profit-making schemes hatched by billionaire financial firms. However,
in spite of all their defeats, the Council of Institutional Investors
and the Corporate Library still soldier on, hosting meetings concerning
"good corporate governance," providing hopeful interviews to newspapers
and magazines about the likelihood that things are going to change soon,
and selling their advisory services to institutional investors. They
are gadflies who do well while doing good.
Looking back at the most vigorous days of the movement, from roughly
1988 to 1993, very little was accomplished. It is now possible for small
stockholders to communicate with each other more easily, thanks to a
ruling by the Securities and Exchange Commission in 1992, and corporate
executives more readily meet with institutional investors. However,
no stockholder resolutions relating to corporate governance came close
to passing during or after the heyday of the movement. Even the most
positive assessments of this activism conclude that it had "negligible"
effects on the major issues that ostensibly motivated it, higher earnings
and higher share prices (Karpoff, 2006)
An interesting jeremiad ;-) One quote: "The way I see it, Mr.
Obama just doesn't have much time before his authority and legitimacy slough
off and he is left with only his genial smile."
As president, Barack Obama is faced with the essential fraudulence
and unreality of the US economy. Notice that, as ominous as they
are, the wars in iraq and Afghanistan have generated only minimal protest
so far in the early Obama period, despite the fact that they are not
operationally different from their conduct under Bush. There is no protest
because, for now, a consensus exists that our troops are in these places
for perceived reasons -- to keep Mideast oil supply lines open... to
keep Islamic maniacs busy in their own backyard instead of on US territory...
to keep Iran in a vise... to maintain the American "empire" (take your
pick). There's something there to appeal to a broad majority of US voters.
Unlike Vietnam, Iraq and Afstan are not perceived as out-and-out frauds.
But the economy is. Since September of 2008, when Hank Paulson
began shoveling bail-outs to the very banks who screwed the world on
fraudulent and unreal securities, and left American society comprehensively
bankrupt, the consensus has only deepened on the perception of an historic
swindle. And so far, President Obama has
positioned himself as chief enabler to further swindling.
One need look no further than the rulings this past spring of the Financial
Accounting Standards Board (FASB) as authorized by the Securities and
Exchange Commission (SEC, an official government agency, created 1934),
which have allowed the biggest banks to pretend that the fraudulent
paper in their vaults does not have to be recorded as a loss on their
books.
The US economy is now dying a slow and painful death because it had
become based on activities that had nothing to do with producing real
wealth. Instead, it became dependent on rackets, that is, behavior geared
to getting something for nothing. These rackets are often summarized
under the acronym FIRE (for finance, insurance and real estate), a system
set up to strip-mine profits from the wish commonly labeled "the American
Dream" -- itself largely a product of televised advertising and propaganda.
The end product of all that was the doomed
economy of suburban sprawl, an infrastructure for daily life with no
future in a world defined by fossil fuel scarcity. The
unraveling of debt at every level now is directly related to the mis-investments
made in that way of life.
By now, it's self-evident that the "change"
voted for in November's election was too horrifying to articulate.
It still is. The suburban sprawl economy
was all we had left. Now it's gone and we're stuck with all its
deleveraging after-effects -- the worst case of "buyer's remorse" since
the fall of Nazi Germany. Thus, the only "change" that President Obama
can really work for is the health care system, which is a life-and-death
matter. The sordid rackets so ostentatiously infecting the system boil
down vividly to lives ruined and bankrupted, and a system more frightful
to deal with than disease itself. Probably the baseline truth is that
health care will end up being rationed one way or another. It's another
prime symptom of population overshoot, and a reminder that life is tragic.
As another blogger put it so nicely last week on the web (sorry,
but I forget who or where), this isn't a "recession," it's a collapse.
The excellent Dmitry Orlov
has outlined the process very nicely in his book "Reinventing Collapse"
about the parallels between the demise of the Soviet Union and the prospects
for demise of the US as currently constituted. Mikhail Gorbachev
presided over the Soviet collapse. He must have been a leader of very
subtle abilities. Not only did he survive to enjoy a busy second
act of life with a Nobel Prize in his pocket, but he accomplished a
nearly bloodless transition in a society long-conditioned to bloodletting
as the primary political act.
Here in the USA, where we have had over two hundred years experience
with peaceful power transitions -- even during the convulsions of 1860-65
-- the outcome this time might not be so appetizing. It would be one
of the supreme ironies of history if it turned out that the US was incapable
of ending its most self-destructive rackets peacefully and bloodlessly,
while the Russians shucked off its Soviet racket like an old sweater.
The way I see it, Mr. Obama just doesn't have much time before
his authority and legitimacy slough off and he is left with only his
genial smile. The "hope" vested in him will end up in a Museum
of Lost Hopes, along with the integrity of TV news and the rectitude
of the medical profession. And funding for that museum will be cut by
President Sarah Palin, representing Naziism US style -- i.e. Naziism
without the brains
Selected comments
TedC
Reading the comments here for the last few weeks has really impressed,
and depressed me about the number of people who really want a free
lunch.
All this negativity about taxes, government, etc.. WTF? How about,
when your house is on fire, you just STFU and put it out yourself?
Fire engines aren't free, you know. How about we go back to nothing
but dirt road cart tracks? who needs pavement?
I think most people are angry about feeling ripped off. The greatest
joke, though, is that the people ripping us off have convinced everybody
that it's the other guys fault. Nice to own all the media, isn't
it?
Good luck, everybody. I think the bottom line is that this planet
is good for about 1 billion people, max. Lotsa fun ahead getting
to that number, for sure!
Randall Flagg
"This is analogous to the position Barack Obama now finds himself
in. He was elected as the politician most trusted in America to
change the fraudulent and unreal operations of the US government."
'Fraid not, Pal. Barak Obama was SELECTED by the filthy rich
of this world to dupe the Murikan sheeple into believing that things
would change for the better if they went to the polls and pushed
the Diebold button for BO.
Hope is a waste of time, man. Nothing will change. Everthing
and everyone is totally fucked. The horror is coming. If your not
part of the filthy rich, equiped with your own SOG, Xe or special
ops boys, you're going to be part of the hell on earth.
aszasz
"...it will be so bad by the next election cycle that palin will
come through as the shining star..."
If Palin is on record having criticized Obama's policies that
led to shit stew, why should she not be seen as "the shinning star"?
Obama currently holds office because he was the anti-Bush. Everything
Bush was for Obama was against. Except he wasn't. He only said he
was. Enough people believed him to elevate him to "shining star"
status. Shit stew tends to dull the shine of the reigning star and
add sparkle to the coming anti-Obama.
Cognitive Dissident
JHK, it is strange that you can be so perceptive about the pending
US collapse but too simplistic about the USSR "transition". Of course
the "Communist Party" is no longer in charge, but there is perhaps
as much continuity as change - look at the lack of free elections
or free speech, (geographically limited) imperial ambitions, power
of the (ex-)KGB class, etc, etc.
In addition, unlike the unfolding US problems, the USSR collapse
was NOT due to a lack of oil - if anything, a global excess which
led to a reduction in oil revenues for a debt-laden Soviet state.
Finally, Gorbachev focussed on political "reform" while neglecting
to fix the problems in the "real economy". Here, Obama is making
the problems in the financial economy worse by bailing out the crooks,
while the political reforms are quite cosmetic.
So - while I agree with your analysis of the situation in general
- it seems that Obama is like Gorbachev only in terms of (a) "change"
rhetoric and (b) leading the country to collapse by completely misunderstanding/ignoring/etc
the fundamental problems, while being unlike in all other ways.
It all begs the question as to what extent either of them were/are
doing this deliberately as part of a wider intention to allow the
"Power Elite" to profit from a crisis as they have *always* done
historically.
JHK, will you come off the fence on this one as it relates to
Obama?
cowswithguns
If Obama is actually able to transition us peacefully like Gorbie
did in the Soviet Union's twilight, I think that would be telling
-- in a very bad way -- of what our country has become.
The looting of the treasury that has been going on since Bush
-- and continues under Obama -- is so blatant and is going to have
so many negative, real world ramifications (and all just to make
some rich robber barons whole) that it would be surprising if at
least a few banksters weren't tarred and feathered by a gang of
unemployed carpenters during the transition.
Unfortunately, though, the masses
don't understand blind credit default swaps, collateralized debt
oblgiations, etc., and the victims of a collapse-induced riot are
probably more likely to be akin to a poor immigrant family than
some Bangkok-hooker-banging, old-lady-pension-stealing, worthless-401k-hocking
well-dressed Wall Street thug.
Bullshit.
And speaking of Nazis, don't you think Germany would be recalled
in a much more favorable light if its people actually rose up and
killed Hitler, thus stopping the war? But they didn't, and woe be
upon them for all of history.
Posterity, I fear, will judge us the same way.
The masses are so tightly clinging to
their soon-to-be-zeroed-out 401ks and their dreams of one day being
a rich asshole that they don't want to do what's right -- stop the
looting, starting with protests in all major cities.
But, nowadays, we're like cows -- to the slaughter. Or are we
-- http://www.youtube.com/watch?v=FQMbXvn2RNI&feature=related
Also, regarding those who don't think Elliot Spitzer would make
a good AG just because of his penis -- So what Spitzer was paying
for some action? Illegal sure, but if he could have kept a muzzle
on the Wall Street crooks and thereby salvage what's left of our
republic, I would have gladly looked the other way. An overactive
penis doesn't take away your legitimacy as a political leader, so
long as you're a good one. And if Spitzer wasn't good, do you think
he would have been taken down by the people who truly run this country
(Wall Street)?
He said he would rather short bonds then stocks in the current situation....
CommodityBullMarket.com"Because they are printing money," he
says...and believes that stocks could go to very high nominal levels,
while the currency becomes worthless.
I was just catching up on Rogers latest media appearances, and found
this video on CNBC from a couple of weeks back.
Jim's still pounding the table that we've got a currency crisis on
the way...while giving a long, hard glare at the dollar as the prime
culprit.
And of course, he still loves commodities.
Enjoy the video!
Feldstein strikes me as probably the only more or less credible Reaganine
(he was . Analyses provided by Feldstein is rather weak, but the conclusion
is interesting and intuitively appealing as there is no forces that can
sustain recovery after the effect of the stimulus disappear...
Jun 21, 2009 | CalculatedRisk
From Bloomberg:
Harvard’s Feldstein Sees Risk of ‘Double-Dip’ Recession in U.S.
... “There is a real danger this is going to be a double dip and
that after six months or so we’ll have some more bad news,” [Martin]
Feldstein, the former head of the National Bureau of Economic Research
and Reagan administration adviser, said today in an interview on
Bloomberg Television. “We could slide down again in the fourth
quarter.”
The economy could “flatten out” or “even be positive” in the
third quarter, and then it’s likely
to contract again in the last three months of the year as the effects
of the federal stimulus program wear off and companies finish rebuilding
inventories, he said.
“There isn’t going to be enough to sustain a really solid recovery,”
he said, even though recent data has provided some “good news” on
the economy.
This was the key point of the
Texas Instruments post yesterday (with conference call comments
on inventory). There is a possibility of short term growth as companies
rebuild inventories, but then an extended period of sluggishness since
end demand is flat.Selected comments
splat
DOUBLE DIP ?? The first DIP hasn't finished yet... talking about
green shoots and putting on rose tinted goggles doesn't make things
better.
We are seeing structural employment changes here, basically for
the next few years there simply won't be the jobs, they'll have
been offshored, outsourced and the existing employees expected to
re-double their efforts just to stay in a job. In that environment
even the middle class will have huge problems.
I'm just waiting to hear the talk of the a "triple dip" recessions
from the usual economic nimrods.
- splat
Bob Dobbs
"Step 3: Unanticipated, ongoing, revenue declines cause
the budget crisis problem to get even worse... "
Absolutely agreed. The budget "agreement" itself is a success
to the pols in that it buys time -- whether or not it ultimately
works. "Pretend and extend" isn't just for banks.
nova
Stair steps are kind of a dip I guess.
MS
I think depression is too nice. As the Kunstler article points
out (Obama=Gorbachev) it's not a recession or even a depression....it's
a collapse.
Albeit in slow-motion.
Credit-
I hear ya! many other people did as well- I happened to get lucky
and unloaded my SPY puts for almost a 90% gain the day before the
whoosh up last week....don't get me wrong..it was luck pure and
simple. Whenever you hear about technical patterns in the MSM you
know it's a set-up.
Ciao
MS
Expected Returns
MS,
expected returns-
I think depression is too nice. As the Kunstler article points
out (Obama=Gorbachev) it's not a recession or even a depression....it's
a collapse.
I totally agree. The demise of the dollar is coming, which would
be the event that precipitates any collapse.
[Jul 22, 2009] Goldman and JPMorgan -- The Two Winners When The Rest
of America is Losing
July 16, 2009, 11:32AM
Besides Goldman Sachs, the Street's other surviving behemoth is
JPMorgan. Today it posted second-quarter earnings up a stunning 36 percent
from the first quarter, to $2.7 billion.
The resurgence of JPMorgan and Goldman Sachs gives both banks more
financial clout than any other players on the Street -- allowing both
firms to lure talent from everywhere else on the Street with multi-million
pay packages, giving both firms enough economic power to charge clients
whopping fees, and bestowing on both firms even more political heft
in Washington.
Where are the antitrusters when we need them? Alternatively, why
isn't the government charging Goldman and JPMorgan a large insurance
fee for classifying both firms as "too big to fail" and therefore automatically
bailed out if the risks they take turn sour? Instead, we've ended up
with two giants that now have most of the casino to themselves, are
playing with poker chips backed by taxpayers, and have a big say in
what the rules of the game are to be.
When JP Morgan repaid its federal bailout of $25 billion last month
it was, like Goldman, freed from stricter government oversight. The
freedom has also allowed JP, like Goldman, to take tougher and more
vocal stands in Washington against proposed financial regulations they
dislike.
JP is mounting a furious lobbying campaign against regulations that
would funnel derivatives trading through exchanges where regulators
can monitor them, and thereby crimp JP's profits. Now the Street's biggest
derivatives player, JP has generated billions helping clients navigate
these contracts and assuming counter-party risk in such transactions.
Its derivatives contracts were valued at roughly
$81 trillion at the end of the
first quarter, representing 40 percent of the derivatives held by all
banks, according to the Office of the Comptroller of the Currency. JP
has played down its potential risk exposure from these derivatives contracts,
of course, but anyone who's been paying attention over the last ten
months knows that unregulated derivatives have been at the center of
the storm.
The tumult on the Street has also given both firms extraordinary
market power. That's where much of the current profits are coming from.
JP used the crisis to snap up Bear Stearns in March and Washington Mutual
last fall, with the amiable assistance of the FDIC. The deals have boosted
JP's dominance in retail banking and prime brokerage, enabling it to
charge its corporate clients heftier fees for lending and other financial
services, and to corner more of the market in fixed-income and equities.
JP also bolstered its earnings by helping other financial companies
raise capital following the stress test results in May.
Antitrust law was designed to prevent just this sort of market power
and political heft. The Justice Department or the Federal Trade Commission
should investigate the new-found dominance of Goldman and JP -- and,
if warranted, break them up. Alternatively, Congress should impose a
surtax on the newly-exclusive group of Wall Street firms, most notably
Goldman and JPMorgan, which are now backed by implicit government bailout
insurance guaranteeing that, should they get into trouble, taxpayers
will keep them afloat. The surtax would approximate the economic benefit
to these firms of such government largesse, which I'd estimate to be
at least 50 percent of their profits from here on.
Jul 20, 2009
It is important to bear in mind what voters
actually want to see in the state budget:
The vast majority of voters surveyed said the state should balance
both spending cuts and tax increases to address the state budget
shortfall. Revenue options supported by a strong majority of voters
include:
Increasing taxes on alcoholic beverages (75% support)
Increasing taxes on tobacco (74% support)
Imposing an oil extraction tax on oil companies just like every
other oil producing state (73% support)
Closing the loophole that allows corporations to avoid reassessment
of the value of new property they purchase (63% support)
Increasing the top bracket of the state income tax from nine
point three percent to 10 percent for families with taxable income
over $272,000 a year and to eleven percent for families with taxable
incomes over $544,000 a year (63% support)
Prohibiting corporations from using tax credits to offset more
than fifty percent of the taxes they owe (59% support)
While voters strongly support these options to help California
increase its revenue, voters are strongly against specific spending
cuts proposed by Governor Schwarzenegger:
76% oppose cutting public school spending by $5.3 billion
73% oppose cutting funding for state colleges and universities
by $1.2 billion
68% oppose cutting the state's funding for health care services
by $1.1 billion
62% oppose cutting the state’s funding for homecare services
by $494 million
[Jul 21, 2009] Fed's Game is Delay and Pretend
MyCountryIsDestroyed says:
Please consider this at the most basic level.
The real measure of a nation's economic strength is its ability to
produce goods and services. On that count, the US is completely destroyed.
Even worse, TPTB have convinced a portion of the population that we
don't need to produce anything.
Instead, the US is reduced to smoke-and-mirrors, TARP, bailouts,
PPIP, $24 trillion in the hole, deception, speculation, Ponzi schemes,
scams, food stamps.........
None of the smoke-and-mirrors will really work. We all know it. Now
we are stuck with one scam after another. Please consider looking at
Paul Craig Roberts' columns that suggest that we don't really have an
economy. We replaced our economy with schemes and deception.
When are the American people going to scream "NO MORE" and do something
about it?
The Emperor has no clothes. Time to stop pretending.
Good post, must read !
Selected commentslainvestorgirl says:
Don't worry, it will all be okay once we drink the koolaid...
black swan says:
“sigmonster says:
"@black swan
In this video, Paulson indicates that his family is not invested
in Goldman........."
Sigmonster, who are you going to believe, me or that liar, Hank
"the crank" Paulson?
From the Video:
Rep. Kaptur: "Have you or your FAMILY had any financial ties or
investments related to Goldman Sachs, in any way what so ever?"
PAULSON: "No."
REP. KAPTUR: "What about Bank of America?"
PAULSON: "Not that I know of."
Obviously Paulson, like Geithner, doesn't pay attention to his tax
returns. Here is the truth:
When Paulson took the Treasury job in 2006, he sold $500 million
of his Goldman Sachs holdings and put them into to Treasuries, tax
free, and sold another $100 million in Goldman Stock, from which
he realized a $40 million dollar profit, tax free, and put them
into a family trust, the Bobolink Foundation. Then he resigned as
President, leaving his son and wife in charge of over $106 million.
Here were some of the foundation's holdings when Paulson was Treasury
Secretary:
$53 million Goldman Sachs
$397,000 Bank of America
$250,000 Countrywide (taken over with BAC bailout money)
$8.5 million Freddie and Fanny
$650,000 Hartford Insurance Group
$730,000 HSBC
$798,000 JPM
$730,000 Morgan Stanley
$830,000 PNC
$772,000 Regions Bank
$962,000 Wells Fargo
$500,000 Whacovia (which Wells Fargo acquired using TARP money that
Paulson gave them)
$500,000 Sovereign Bank
$243,000 WaMu (which JPM acquired using TARP money that Paulson
gave them)
What do all these financial institutions have in common? They were
holding Paulson family trust assets and he bailed them out with
taxpayers' money.
Paulson's Bobolink Foundation was set up to donate money for environmental
causes. In 2006, the Bobolink Foundation gave over $1.5 million
to the First Church of Christ Scientists, $453,000 to Wellsley College,
and $50,000 to Harvard Business School. I wonder if they got any
bumper stickers that said, "Save the Harvard Banksters". I can only
hope that they are an endangered species.
To prove that I am telling the truth and that Paulson is lying,
Here is a link to the Bobolink Foundation's 2006 tax returns.
http://dynamodata.fdncenter.org/990pf_pdf_archive/942/942988627/942988627_200703_990PF.pdf
Social Vandal says:
“In a book I am reading about the First Depression, it states
production in the US (from 1929 to 1931) declined 40%. I wondered
why so much then and so little now.
Well, having gone to a Dairy Queen Gril and Chill with my two youngest,
I noticed the photos on the walls all depicting 1940-1950 Dairy
Queen events. As the kids sat there giving themselves sugar-induced
diabetic comas, I thought about what life must have been like back
then.
We made all of our own TVs, Radios, Cars, Planes, Type-writers,
machine tools, steel, telephones, office equipement & supplies,
hardware, fixtures, etc. And we did so in 1929.
We had a manufacturing economy to be decreased. Today, where can
we get a 40% decline in any industry since I believe most of what
we sell we import? So, Japan takes the 40% decline in production.
We are getting a slow stangulation of retail/service jobs being
masked by fiat printing and government welfare handouts? Down from
over-time a few years ago to 33 hours per week? That does appear
to be what is happening?
Are we just holding on? Are we stretching the rubber band and will
something snap? Are we all to become wards of the state living on
extended unemployment and food stamps?
Help me here folks.
Money can't buy love but they can buy WaPo authors. For proof, look
no further than Mark Gimein ;-)
Money can't buy love? For proof, look no further than
Goldman Sachs.
Selected comments
davideconnollyjr wrote:
Mark Gimein, you must not understand what Goldman does.
Yes, there are those that berate Goldman because they are jealous,
and there are those that berate Goldman because they don't like
the white establishment, but there are those that berate Goldman
for the right reasons, because of what Goldman does. Goldman makes
much of its money essentially betting on whether things like oil,
various crops, and timber will go up, or down in the future.
Some of this doesn't take an overly bright person -- we all know
that gas prices rise during the summer, and oil prices rise during
the winter, but you still get paid for betting on these things,
though the predictability of such events lowers the odds, and you
are tying up money that could be wagered on a higher paying bet.
Who pays for all these payouts? The answer is, we do. We all pay
higher prices for fuel, home heating oil, corn, timber for building,
you name it. All of Goldman's profits ultimately come out of our
wallets. Artificially stimulating demand for products to exacerbate
price fluctuations is how Goldman makes money. It introduces volatility
into the market, and creates artificial forces that help drive markets.
It should be illegal. People that make a living manipulating other
people's money are parasites that drive up the cost of everything.
Companies that make a living artificially inducing stimulus into
the markets, and then taking it away contribute to market volatility,
and magnify price spikes via automatic, parameter set trading programs,
that execute trades before individual consumers can bail, ensuring
the margins are at least better than the people that actually front
the capital. If Mark knows what Goldman does, and still supports
it, then he is part of a big problem we have in America, of parasitic
middle men looking for big, easy paydays, at the expense of everyone
else.
maxtor0 wrote:
When you eat too far down the food chain, you disrupt the entire
sysytem.
When profits at the top are derived from removing as much as
possible from those at the bottom, eventually the system collapses.
The folks at the bottom, the ones buying merchandise from stores,
cars from dealers, houses from realtors and gasoline to fuel their
way to work, are a finite resourse.
When gas started to rise, people started cutting back, when interest
rates started to rise people cut back on spending. Eventually soo
much money was being bled from those at the bottom, that many could
no longer buy discretionary items, and pretty soon, necessary items.
As they stopped buying, the need for people to sell them stuff,
to manufacture stuff and transport stuff, dropped.
As these people no longer had an income they stopped buying as
well. Result: as the bottom collapsed, the top of the econommic
food chain crashed.
And it will again. Soon.
Gas prices again are exploding, creditcards and banks are rasing
interest rates, fees penalties and payment percentages.
The stress this puts on the food(the folks at the bottom of the
economic pyramid)insures that a crash is inevitable just like in
a food chain - when you over harvest a food source, like oysters,
crabs, bison, it collapses and you have to find a new source of
food -or starve.
Already there are ominous signs in the retail sector as spending
by consumers is once again falling, and stores are stll failing.
That's not success - that type of profit built on the system
above is merely exploitation of your resources insuring large scale
failure.
pelican4 wrote:
Goldman Sachs is not a "success"; it is a corporation driven
by total self-interest, greed and questionable ethics. It has made
billions of dollars on the backs of ordinary Americans by speculating
with our federal funds for free while doing nothing to help the
nation get back on its feet. Successful corporations are ones that
stimulate job creation for the 10% of Americans who are unemployed.
Successful investment firms are ones doing something to help individuals
get something in return other than 0% yields for their hard-earned
savings (as opposed to Goldman's speculative trading that is turning
our investment markets into volatile casinos). We do not want to
punish success, we want to punish and stop selfish greed that is
achieved at the expense of the rest of the nation.
JEAtkinsonUSNavyret wrote:
As has happened throughout the recession, the banks, investment
companies, brokers, and those who support them have missed the entire
point about why people are so enraged about the huge profits they
claim.
The point that is missed entirely by Mr. Gimein and others who
support the system as it is now, is that people are not upset by,
nor do they want to punish success. Rather, people are upset by
and want to punish a system that is so flawed that it only rewards
a small number of already wealthy players while leaving 90 percent
of the population in increasingly worse financial straits.
Between 1946 and 1970, the percentage of people sharing in the
total wealth of the county (what is called the Gini Coefficient
or distribution of wealth coefficient), was close to 46 percent.
What that means is that 46 percent of the U.S. population shared
90 percent of the wealth.
Starting with the pushing of Reagonomics in the 1980s and accelerating
in the beginning of the 2000s at a pace unheard of since financial
records were kept until the financial crisis starting in 2007, the
percentage of people sharing in the wealth of the country dropped
to the point that now, as of 2008, 1 percent of the people in the
U.S. control 90 percent of the wealth. In fact, as shown by Bureau
of Labor Statistics data, 10 percent of the population now controls
98.7 percent of the wealth in the United States.
Along with the concentration of wealth in the hands of fewer
and fewer people, the middle class income has shrunk and the lower
income levels have all ballooned as the other 90 percent of the
people vie for the remaining 1.3 percent of the money available
to them.
What that means is, like the increasingly poor and hungry in
1789 France watching the royals dining on delicacies and living
the high life while the average person was starving and dying, the
huge profits earned by companies like Goldman Sachs and J.P. Morgan
Chase do not mean anything to the normal citizen. They do not mean
anything to the normal person, because, while the banks were getting
billions in loans, the average citizens have been losing jobs, lost
the equity in their homes, lost billions in savings, and have been
pushed closer to the brink of total financial failure.
Or, in other words, the so-called “success” of those at the top
of the finance heap is seen as an affront by the average citizen,
because that success for 10 percent of the people with wealth was
built on manipulations of the system that caused nothing but pain
and suffering for the other 90 percent of the people.
What is worse, that “success” is built on false pretenses.
Normal people are required to be responsible for their own finances.
If they overspend or break the law by running up huge debts they
know they cannot pay off, the government does not step in and give
them money. Instead, normal people lose their homes and everything
they have, and, in many cases even end up in jail for such things.
The banking and finance industry on the other hand was not, and
has not been held responsible for their actions. Instead, even though
the banking and finance industries caused the problems that drove
the system to the brink of failure, governments bailed them out.
And, instead of being grateful for the bailout, the banking and
finance industry has raised interest rates and fees, frozen access
to money, and gone out of their way to squeeze as much as they can
out of the average person.
Then, after making things absolutely miserable for the average
person while continuing to live wealthy lives built on the backs
of the average people, to have companies like Goldman Sachs and
J.P. Morgan Chase come along and say, hey look at me, we made a
ton of money for our already wealthy clients”; well, that is about
like the inaccurate but famous saying of “let them eat cake” attributed
to Marie Antoinette shortly before the peasants revolted.
When long term unemployment is increasing, more and more people
are struggling to make ends meet, more and more people are doing
without health coverage, and 90 percent of the people are seeing
less value in their homes, losing savings, and seeing no rise in
income, to have the wealthy come along and say “we earned $385,000
above and beyond the salaries and benefits they already enjoy for
each of our employees is doing nothing but add insult to injury.
It is an insult, because those who caused the current financial
crisis get to enjoy profits and wealth rather than jail and punishment
while those who were victimized continue to be punished.
$3.5 billion being obscene? No, not obscene, criminal, and since
that profit was made possible by bailouts using tax payer monies,
it should be given to the tax payers, not the ones who caused the
problems in the first place.
drs James E. Atkinson, US Navy (ret)
MScIM, MBA, MScCIS, doctoral candidate (econometrics)
tyrell_corp wrote:
complete and total bullsh--. Goldman, as Matt Taibbi pointed
out, is "successful" in the way the any mafia is successful. Goldman
was not an engine for wealth creation, it produced nothing of value
for society, it didn't even invest money wisely in other successful
business (the supposed purpose of an investment bank). It Don Corleon,
it used it's political connections to rig a wealth destructing game
in it's favor. In the end there is nothing particularly clever about
it - pure gangsterism. Goldman is not about capitalism - even robber
baron capitalism, there is nothing there. They are societies parasites
pure and simple. It is a shameful portrait of America that these
people are held up as the best and brightest we have to the rest
of the world. "see how bright and clever we are at stealing money"
!!!! That game won't last long.
dgblues wrote:
It takes a peculiarly twisted money worshipper to accuse anyone
of "punishing success" in this matter. That's a mammonist Frank
Luntzian focus-grouped sound byte of distilled bullpucky.
First off, WE THE TAXPAYERS LENT THESE CRIMINALS HUNDRED OF BILLIONS
OF DOLLARS, you twit. If that's punishment, please, God, punish
the living crap out of me. Please.
The fact that Taibbi points out the obvious, that these financial
institutions bleed all of us dry with speculation -- that they in
fact create the bubbles from which they profit, and then rely on
us to bail them out if they don't get out soon enough, just outrages
you, doesn't it, Mr. Gimein? Oh my. Well, of course! The last thing
you want is for Americans to be informed that they're being scammed.
May I remind you that most of us, who had no investment interest
in the financial sector, saw our portfolios reduced significantly
by their actions. And THEY are the ones being punished? You make
me laugh.
Of course, you call our being scammed their "success." That says
everything we need to know about your credibility relative to Mr.
Taibbi's.
scone wrote:
Goldman Sachs (aka "Government" Sachs) are scum -- financial
terrorist that belong at the dock in the Hague. Who but scum would
turn be shorting the very products they have pushed on their customers?
Dilberta10 wrote:
It's not success, it's excess.The only "sucess" GS has had is
manipulating everything and everyone to their advantage.
Driving out their competition (think Lehman Brothers)and dipping
in the Fed bailout funds given to GS and in defacto Fed funds given
to AIG. Nice little ploy there.
Words cannot express my contemp for the gentleman who wrote this
"editorial" and for GS.
From Lingling Wei and Maurice Tamman at the WSJ:
Commercial Loans Failing at Rapid Pace
Many regional and community banks had excessive loan concentrations
in Construction & Development (C&D) and CRE loans. The FDIC identified
this as an
emerging risk in 2006 - so it is no surprise. These smaller banks
have been slow to recognize the related losses - possibly because many
of the deals had interest reserves that mask the performance of the
commercial building until the reserve runs dry. Then there is just more
work for the FDIC ...
Scrooge McDuck
US National Debt Clock:
http://www.usdebtclock.org/
11T national debt
2T spending to date
57T unfunded liabilities
7T private debt
[Jul 21, 2009] “Extrapolating is dangerous” by Stacy-Marie Ishmael
Jul 20 | FT Alphaville
So say Dresdner’s credit analysts in a note published on Friday.
From the report:
- Markets have been extrapolating the recent improvement in economic
data, which is a dangerous assumption.
- Similarly, investors should not extrapolate Goldman Sachs’ results
to the rest of the sector.
- Data still offer something for both bulls and bears, limiting
market moves and arguing for (wide) range trading.
- Earnings guidance should provide more clarity on the recovery
of the consumer.
On the temptation to extrapolate from
Goldman’s results, they note (emphasis FT Alphaville’s):
One important point is that not all financial institutions
are like GS or JP Morgan Chase. This week’s earnings were dominated
by banks with very strong trading operations that benefited from wide
bid/offers, as well as strong fee income from advisory and primary market
activity. We fear that the commercial and retail banks that
report in coming weeks will be relatively much more exposed to rising
provisioning on their C&I, mortgage and consumer loan books. Therefore,
we may have had the best news first, and the bad news may still follow.
And on data:
Macro indicators for the US consumer recently
paused in their upward trend, and all of this suggests investors
should not extrapolate too far, too early. Of course, for credit
investors, the manufacturing outlook is probably even more important.
One of the most cautious notes came from
SKF in Thursday’s FT. The company said the outlook is ‘incredibly
uncertain’. Many expect restocking to lift earnings growth, but SKF
stated that most of its businesses are seeing a slowing of (or an end
to) the de-stocking rather than outright re-stocking. Margins are another
critical point: so far, several companies have managed to hit earnings
estimates but disappointed on the sales front. It seems corporates have
aggressively cut costs, but further gains on that front may slow. The
crucial issue going forward is whether corporate feel demand is strong
enough to allow for increasing pricing power.
2009-07-20 | CalculatedRisk
From Atlanta Fed President Dennis Lockhart:
On the Economic Outlook and the Commitment to Price Stability .
Here is Lockhart's economic outlook:
Often a deep recession is followed by a sharp rebound in business
and overall economic activity. Unfortunately, as I look ahead, I
do not foresee this trajectory. I expect real growth to
resume in the second half and progress at a modest pace.
I do not see a strong recovery in the medium term.There
are risks to even this rather subdued forecast. The risk I'm watching
most closely is commercial real estate. There is a heavy
schedule of commercial real estate financings coming due in 2009,
2010, and 2011. The CMBS (commercial real estate mortgage-backed
securities) market is very weak, and banks generally have no appetite
to roll over loans on properties that have lost value in the recession.
Refinancing problems will not directly affect GDP—it's commercial
construction that factors into GDP—but I'm concerned problems in
commercial real estate finance could adversely affect the otherwise
improving banking and insurance sectors.
... the healing of the banking system will take time.
Working off excess housing inventory will take time. The
reallocation of labor to productive and growing sectors of the economy
will take time. It will take time to complete the deleveraging of
American households and the restoration of consumer balance sheets.
In short, I believe the economy must undergo significant structural
adjustments. We're coming out of a severe recession, and it's not
too much an exaggeration to say the economy is undergoing a makeover.
We must build a more solid foundation for our economy than consumer
spending fueled by excessive credit—excessive household leverage—built
on a house price bubble.
The surviving financial system must find a new posture of risk
taking. The balance of consumption and investment must adjust, with
investment being financed by greater domestic saving. The distribution
of employment must adjust to match worker skills, including newly
acquired skills, with jobs in growth markets. Some industrial plant
and equipment must be taken offline to remove excess and higher-cost
capacity.
As I said, these adjustments will take time and will suppress
growth prospects in the process. I believe the economy will underperform
its long-term potential for a while because of the obstacles to
growth that must be removed, adjustments it must undergo.
...
Let me summarize my argument here today. The economy is stabilizing
and recovery will begin in the second half. The recovery
will be weak compared with historic recoveries from recession.
The recovery will be weak because the economy must make structural
adjustments before the healthiest possible rate of growth can be
achieved. While this adjustment process is going on in the medium
term, I believe inflation and deflation are roughly equal
risks and require careful monitoring. Slack in the economy
will suppress inflation. And inflation is unlikely to result—by
direct causation—from the recent growth of the Fed's balance sheet.
In any event, the Fed has a number of tools being readied
to unwind the policies used to fight the recession, and it will
be some time before their use is appropriate.
"Sorry to break to the news, but the financial crisis is not over,
à la CIT. You’ve got plenty more write-offs of bad paper to come," Roach
told CNBC.
Developed economies haven’t broken out of recession yet, he said.
"Seventy-five percent of the world’s economies today are still contracting,
and the biggest piece on the demand side of the global economy is the
American consumer, who is dead in the water," Roach said.
Stock markets, along with many bonds, have rallied sharply in recent
weeks. But Roach said markets have overdone it, given the "anemic character
of the recovery."
The rally largely reflects the excess of liquidity poured into the
financial system by central banks, he said.
"Liquidity is seeking return, and right now these markets are priced
for a recovery that’s going to end up disappointing," he said.
Some experts are excited by recent news of better-than-expected corporate
earnings. But those anticipating high profits
"are going to be in for a rude awakening," Roach said.
Economist Gary Shilling agreed with Roach.
“I expect the recession to run into the early part of next year,”
he told Bloomberg. Excess home inventories and
retrenchment in consumer spending will restrain the economy, he said.
The Mess That
Greenspan MadeFaber:
"We had a crisis and nothing has been solved
... usually, a major crisis like we had should clean the system
but nothing has been cleaned.
It's gotten worse politically - this linkage between politicians
in America and
the Federal
Reserve, Treasury Department, and Wall Street.
The big crisis is yet to come. It will be huge. it will be a
total collapse."
Paper Economy
The
Federal Reserve calculates and published the total amount of CP outstanding
every week and as of the latest published period, commercial paper outstanding
is contracting at the fastest rate on record, registering a whopping
37.33% decline year-over-year.
Selected comments
motgagepayer
Oil prices are soaring, putting pressure on the consumer.
22. Tax revenues are down 28% in April.
23. Bernanke (the beagle) is having trouble rolling 1.2 trillion
in debt in 2009.
24. Social Security and Medicare are underfunded by 50 Trillion.
25. 200 trillion in derivatives exposure in US, 500 trillion worldwide.
need I go on? good articles: http://www.iamned.com
Yesterday, I posted
this chart and wondered why “Some people were calling for a housing
bottom.” That generated a ton of emails asking about for further
clarification.
The people I referred to were the usual happy talk TV suspects (and
Cramer) who have been perpetually wrong about Housing for nigh about
3 years. I not only disagree with them, but don’t respect their opinion
— essentially headline reading gut instinct big-money-losers. No
thanks.
Then there were the slew of MSM who insist each month on reporting
that 3% (+/- 11%) is a positive integer. We disposed of that
silliness on Friday.
But the crux of the email was over
this post. There are a handful of people whom I disagree wi and
process. Over the past year, these have included Doug Kass and
Lakshman Achuthan and Bill of
Calculated Risk. We may reach different conclusions about a given
issue, or disagree on timing, but these are the folks whose opinions
force me to sharpen my own.
When I tossed up that chart yesterday, I had not yet seen Bill’s
comments on the subject — but he is one of those people I can respectfully
disagree with. We simply have reached different conclusions about the
timing and shape of the eventual Housing lows.
There are a plethora of reasons why I believe we are nowhere near
a bottom in Housing prices or activity. Here are a few:
- Prices: By just about every measure, Home prices
on a national basis remain elevated. They are now far off their
highs, but are still remain about ~15% above their historic metrics.
I expect prices will continue lower for the next 2-4 quarters, if
not longer, and won’t see widespread Real increases for many years
after that; Indeed, I don’t expect to see nominal increases for
anytime soon;
- Mean Reversion: As prices revert back towards
historical means, there is the very high probability that they will
careen past the median. This is the pattern we see after extended
periods of mispricing. Nearly all overpriced asset classes revert
not merely to their historic trend line, but typically collapse
far below them. I have no reason to believe Housing will be any
different;
- Employment & Wages: The rate of Unemployment
is very likely to continue to rise for the next 4-8 quarters, if
not longer. This removes an increasing number of people from the
total pool of potential home buyers. There is another issue — Wages,
and they have been flat for the past decade (negative in Real terms),
crimping the potential for families to trade up to larger houses
— a big source of Real Estate activity. Plus, more unemployment
means more . . .
- Foreclosures: We likely have not seen the peak
in defaults, delinquencies and foreclosures. Many
more foreclosures — which are healthy in the long run but wrenching
during the process of dislocation — are very likely. These
will pressure prices yet lower. And Loan Mods are not working
— they are redefaulting in less than a year between 50-80%,
depending upon the mod conditions themselves.
- Inventory: There is a substantial supply of
“Shadow Inventory” out there which will
postpone a recovery in Home prices for a significant period of time.
These are the flippers, speculators, builders and financers that
are sitting with properties that they do not want to bring back
to market yet. Given the extent of the speculative activity during
the boom years (2002-06), and the number of foreclosures so far,
my back of the envelope estimates are there are anywhere from 1.5
million to as many as 3 million additional homes that could come
to market if prices were more advantageous.
- Psychology: The investing and home owning public
are shell shocked following the twin market crashes and the Housing
collapse. First the dot com collapse (2000-03) saw the Nasdaq drop
about 80%, then the Credit Crisis of 2008 saw the unprecedented
near halving of the market in about a year. Last, Homes nationally
have lost about a third of their value since the 2005-06 peak. Total
losses to the family balance sheet of these three events are about
$25 trillion dollars. These losses not only crimp the ability to
make bigger purchases, it dramatically curtails the willingness
to take on more debt and leverage. Speaking of which . ..
- Debt Service/Down Payment: Far too many
Americans do not have 20% to put down on a home, have poor credit
scores, and way too much debt. All of these things act as an impediment
to buying a home. At the same time, to get approved for a mortgage,
banks are tightening standards, including 1) requiring higher Loan
to Values for purchases; 2) better credit scores to get approved
for a mortgages; 3) Lower levels of overall debt servicing relative
to income for applicants. Yes, the
NAR Home Affordability Index shows houses as “more affordable,”
but it conveniently ignores these real world factors.
- Deleveraging: For the first time in decades,
the American consumer is in the process of saving money and deleveraging
their balance sheets. After a 40 year
credit binge, its long overdue. The process is likely to go
on for years, as a new generation is losing confidence in the stock
market, Corporate America and their government. Think back to the
post-Depression generation that were big savers, modest consumers,
who eschewed credit and borrowing. The damage is going to
take a while to repair.
There are more reasons I expect the Real
Estate market to remain punk for many years, but these are a good place
to start when considering the question.
The Housing Boom & Bust, and the 2002-07 credit bubble created massive
excesses. More than anything, it is going to take time to resolve them.
nova
I was hearing ad's for factoring on the radio about a year ago.
This is from the top of the search on Google
What Is Factoring?
Factoring is a way to get immediate cash. You send your invoices
to us, we advance you up to 90% of the invoice amount, we collect
the invoice and send you the remaining balance, less our fee.
Factoring is quick and convenient: a must for all growing companies
in need of capital.
We purchase creditworthy accounts receivable at a small discount
and fund you with immediate cash.
MaxedOutMama
If CIT were another type of company, government infusions or
DIP financing would make more sense. But realistically, we are in
a massive consumer retail contraction, and the receivables don't
have much value.
However CIT also got into home loans and student loans. This
shows the breakdown of CIT's business as of September, 2007.
14% home loans
14% student loans
13% manufacturing
9% retail, etc.
It's not viable because there isn't enough left.
They've burned through their loss reserves
and the losses are still coming, and will mount in the year to come.
The truly secured lenders can pick over the best,
and the semi-okay lenders can go for DIP, but the risks of the loans
in this type of environment would dictate a rate of interest which
will double the risk of many of these loans. They haven't got a
continuing business with a cash flow on most of their loans that
justifies anything but liquidation.
Being able to borrow money cheaply
from the Fed does nothing to lower effective interest rates when
the loss risk is so high. What kind of discount would
anyone on this board require on a portfolio of student loans these
days? Small retail? Gurgle. That stuff is 20-30 cents on the dollar.
nova
The Cost Of The Factor's Money
So, what is your cost of money? (Here's where it gets interesting
and where the major misunderstanding lies.)
So they end up with 30% return? Or not? Factoring is a pawnshop
for business
Let's set up an example. You're selling $100,000 worth of widgets
to General Motors every month. You ship them, then invoice GM for
the parts. Let's say you've arranged 30 day terms. You also have
terms of 2.5% for 30 days with your factor, with an advance of 85%.
You send the factor a copy of the invoice at the same time you
invoice GM. The factor checks with GM to ensure the widgets were
delivered in good condition. He then transfers $85,000 to your account
by check or wire transfer. This is usually within two days of receiving
the invoice. You've got operating money!
Thirty days later, GM pays the factor $100,000. The factor deducts
$2500, then pays you $12,500. You do this 12 months out of the year.
What's your cost of money?
In almost all cases, my prospective clients, thinking in terms
of loans, multiply the 2.5% by a factor of 12 and say, "Thirty percent!
That's too expensive."
The correct answer is, of course, 2.5% if each invoice is paid
within the first 30 days. (This percentage will go up incrementally
with any invoices which are paid over 30 days, generally 1/30 per
day, but it's still FAR BELOW the current cost of borrowing from
banks or getting lines of credit.)
To prove my statement, multiply your monthly sales to GM by 12.
That answer is $1.2 million. Now multiply the amount you paid for
each invoice by 12. That answer is $30,000. And $30,000 is 2.5%
of $1.2 million.
Please tell me where, in the banking system, you can get money
at 2.5%? That is, if you can get a bank loan at all in today's uncertain
times.
OregonGuy
A business with negative EBIT is going to have a very difficult
time changing lenders right now, even if cash flow is positive.
In manufacturing it is tough not to have negative EBIT over the
last 6 months. Just ask Alcoa (they need to hire GE-trained accountants),
MrM
...significant part of the problems we have encountered are
a result of relentless optimization, to the point of eliminating
virtually any redundancy or slack with the resultant brittle and
tightly coupled system.
This is very true. I would also say thaquence is that when tightly
coupled systems fail, one either has to fix the whole system or
take a hands-off approach and let the system find a new equilibrium.
Politically driven decisions which elements of the system to save
and which ones can be let fail only de-stabilizes the system further.
What an interesting PR issue for the Administration:
- GS reports record earnings and bonus payouts, and the Administration
has to say its improving economy, green shoots, etc.
- CIT and its customers plea for money and if the Administration
refuses it will cause public outrage, or if the Administration
bails them out, it will dramatically lower the bar of "too big
too fail".
- That's the price you pay for not taking a consistent approach
to complex problems.
km4
Defanging the Fed: Why It Needs Less Power, Not More
William Greider gives six reasons why handing the Fed more power
is a bad idea:
- It would reward failure. Like the largest banks that have
been bailed out, the Fed was a co-author of the destruction.
- Cumulatively, Fed policy was a central force in destabilizing
the US economy.
- The Fed cannot possibly examine "systemic risk" objectively
because it helped to create the very structural flaws that led
to breakdown.
- The Fed can't be trusted to defend the public in its private
deal-making with bank executives.
- Instead of disowning the notorious policy of "too big to
fail," the Fed will be bound to embrace the doctrine more explicitly
as "systemic risk" regulator.
- This road leads to the corporate state--a fusion of private
and public power, a privileged club that dominates everything
else from the top down.
http://paul.kedrosky.com/archives/2009/07/defanging_the_f.html
You'll find the following relevant and intriguing if you're not yet
familiar with it. Of course, the informal economy is anathema to the
Corporate-Owned shill Economists representing the formal economy, but
it doesn't mean it doesn't exist, and it won't become highly influential
in the years to come, even for the U.S.
"Researchers began to notice that there was no economic
explanation for how the majority of the population survived. They
didn't own land. They didn't seem to have any assets. According
to
conventional economics they should have died of hunger long ago,
but they survived. To understand this, researchers looked at how
these people actually lived, rather than at economic models.
[The peasant's] way of life was completely the opposite of how
a
human being in an industrial society survives. They didn't have
a
job, pension, steady place to work or regular flow of income...
Their aim was survival rather than the maximisation of profit.
[In the former S.U.] there are no signs of mass hunger and the
services by and large have not collapsed. Considering the chaos
of
the formal economy, this is remarkable. Teachers still go to teach
and scientists go to their laboratories even though they may not
have been paid for six months. Under normal economic rules, there
is no explanation for this. Why would they go? The answer is that
their 'jobs' help maintain social and family networks that allow
them to survive outside the collapsed formal economy. They might
grow vegetables in the institute gardens, use laboratory equipment
or run their own small businesses, run taxi services with company
cars or just trade in skills and goods among their fellow workers.
Sociologists can understand this, economists cannot.
We find in the former Soviet economies that while officials are
trying to privatise the economy, most people are living in the
informal economy that is neither communist nor capitalist... [T]he
peasants survived not through socialism, but through the informal
economy."
http://www.mail-archive.com/[email protected]/msg04564.html
The Baseline Scenario
Selected Comments
anne
WHEN DID THE SHADOW BANKING SYSTEM BECOME “THE ECONOMY”?
That’s my question for the experts. The shadow banking system
is what our policies have supported. That’s who we rescued last
fall. That’s the sector seeing the profits today. (Fab profits for
them – really crappy return for the investors who saved the sector,
however.)
And if you look closely, the profits they’re reporting come from
the shadows, not from the regulated banking sector.
What happened to all that toxic debt on their books? Has it vanished?
How can profits be declared when the books sag with toxicity?
We can continue to bleed out money to wealthy bankers and let
unemployment rise and consumer spending decrease – or we can initiate
real reform that truly answers the needs of the real economy – in
ways that get people back to work.
We seem to favor bleeding over building these days.
Kirk Tofte
I’ve said it before and I’ll say it again–the stock market went
up 700 points within an HOUR after word leaked that Obama would
name Geithner as his secretary of the treasury. Do you think Wall
Street might have been on to something that day?
Summers will never be appointed as chairman of the Fed because sector.
Wall Street has something over or “on” Obama. Half of his campaign
contributions came from corporate interests who didn’t want deal
with tougher players like either Hillary or McCain would have been…and
they’re REALLY getting what they paid for in ways that are hard
to believe.
OregonGuy
Not sure about the “vs” in the title.
The more likely scenario is Summers and Dimon laughing together
over the need to placate the sheeple with a “reform”.
They agree on a toothless Consumer Protection Agency as the
least bad (for bank interests) of the available options. As agreed,
Dimon strenuously objects in public that the CPA will “destroy banking
as we know it” as a smokescreen.Business goes on as usual. Summers
collects millions in “consulting” fees from Wall Street when he
leaves Government. Dimon buys a bigger yacht and gets that G5 he’s
always wanted.
ifaforo
Don’t see the point of the “vs” either. Summers view has always
been that financial deregulation isn’t just good for banks but is
good for the country. Summers has done or said nothing that suggests
a material change to that point of view (ask Joe Stiglitz about
that and why he has no voice in this administration).
Tippy Golden
I haven’t had time to read through the comments yet. But it seems
to me the problem is within the state of American economy itself.
Power and wealth has been captured by an oligarchy.
The very tough battle ahead is “rebalancing” the power structure
through a political process.
If can count correctly 3% on one trillion is 30 billions. So interest
payments alone are substantial.
China is thus frozen in place, damned if it does and damned if it
doesn't. It's a classic
Catch-22.
China's cache of U.S. bonds isn't worth anything unless the bonds are
sold. But selling them on any kind of scale will gut their value.
"People need to realize that China doesn't actually have any real U.S.
money," Das says. "Unless they can turn in their bonds and exchange
them for something else, they're only paper assets. Yet if they try
to exit the position, they'll destabilize the dollar, and the value
of the rest of their assets will plunge. And that's not even their biggest
problem. It's that they also need to keep buying Treasurys, or interest
rates will go up and their capital losses will be terrible."In short,
Das says, Beijing thought it had discovered the perfect scheme for establishing
independence from the West, yet it has instead made its dependence worse
than ever. And he observes that one unspoken reason that China has gone
whole-hog on its massive, $650 billion fiscal stimulus program -- creating
more factory capacity in a country that is already reeling from overcapacity
-- is that the effort gives it cover to stockpile copper, oil, iron
ore and other hard assets that it considers to be better stores of value
than dollars.
Jul 18, 2009 | CalculatedRisk
No surprise ...
From the NY Times:
State Tax Revenues at Record Low, Rockefeller Institute Finds (ht
Ann)
The anemic economy decimated state tax collections during the first
three months of the year ... The drop in revenues was the steepest
in the 46 years that quarterly data has been available.Over all,
the report found that state tax collections dropped 11.7 percent
in the first three months of 2009, compared with the same period
last year.
...
All the major sources of state tax revenue — sales taxes, personal
income taxes and corporate income taxes — took serious blows ...
Here is the report:
State Tax Decline in Early 2009 Was the Sharpest on RecordAnd
it looks much worse in Q2:
Early figures for April and May of 2009 show an overall decline
of nearly 20 percent for total taxes, a further dramatic worsening
of fiscal conditions nationwide.
Note: an
earlier report was on state pesonal income taxes - this is all state
taxes.Selected Comments
curious
Slightly OT
I was looking through the new releases to Netflix instant play
and noticed the documentary "IOUSA". I saw it when it was in theaters
and highly recommend it to everyone who reads CR.
yossarian
Is this broken down state by state? I recall Arizona's revenue's
were falling off a cliff months ago. And yet, there are still police
and
fire services. So 'collapse' is more like, 'letting the
air out of a blow up toy.. '
I'd normally think this drop in revenue really means something,...
some big changes, some social movements.
But hell, Goldman is still getting
rich, no one is burning them in effigy... so the collapse
of the welfare state .. if it happens.... is gonna be really quiet.
broward
Unions need a reset like everything else or we still
keep going down. Shared burden.
----------
True but the "investor" side of the equation like to rant about
how unions destroyed GM by demanding more return than could be sustained,
but we never hear about how investors demanded more return than
could be sustained, too. The real economy grows around 3-4%. That's
ALL you get and all this mickey mousing around of outsourcing WILL
NOT CHANGE THAT.
But you guys just dont' get it it and so you must suffer long
grievious pain until you shout out, ENOUGH, ENOUGH, I will accept
a 3% return!".
gonna be a long time, though.
Nuke
I suspect that before this crisis is over the opposite
will result. I'm pretty sure GD I resulted in the New Deal.
Blackhalo:
That was a different time. FDR had
demographics on his side. For better or worse, demographics no longer
support the welfare state model. Demographics did
in the auto industry (retiree costs), and will soon start taking
down governments.
South EU (Greece, Portugal, Spain) will be ground zero due to
VERY generous pensions, VERY low birthrates and an unproductive
economy. My family tells me it is already happening in Greece. But
who knows, maybe I'm wrong.
Blackhalo
"Demographics did in the auto industry (retiree costs),
and will soon start taking down governments."
No demographics take OVER governments. Get ready for 3 wolves
and a sheep voting on what is for dinner.
energyecon
More than 60 companies sold bonds this year to repay commercial
paper, including Consolidated Edison, Verizon Communications Inc.
in New York and Kellogg, the 103-year-old maker of Keebler cookies
and Rice Krispies cereal, according to data compiled by Bloomberg.
Non-financial companies have sold $306 billion of investment-grade
bonds this year, a record pace.
“Treasurers aren’t sleeping at night because they don’t know
if they can roll over commercial paper,” said Anthony J. Carfang,
a partner at Treasury Strategies Inc, a Chicago consulting firm.
“They’d rather lock in money for five years and pay a little more.”
Commercial paper outstanding fell $39.7 billion, or 3.5 percent,
during the week ended yesterday, its 14th straight decline, the
Fed said today. At $1.097 trillion, the CP market is less than half
its peak of $2.22 trillion in July 2007, with about 10 percent of
it owned by the Fed, central bank data show.
welcome to the party...
Angry Renter
China actually has a severe demographic problem as well.
The One Child Policy is inverting the pyramid.
However, they don't have significant state obligations to them
like our entitlement programs, and they save.
In just 30 years, people aged 65 or older are projected to make
up 22 percent of China’s population. With the reduction of some,
and elimination of other state-provided social services, these older
adults will have to count on their children to provide for their
retirement, since children are expected to be the primary providers
of support and care for their retired parents, grandparents and
parents-in-law. However, in what has come to be known as the “4:2:1
problem,” every child born under the one-child policy will have
to care for two parents and four grandparents. With largely one-child
families and no national social security plan, this responsibility
will likely fall on a younger Chinese generation that is unable
to fulfill it.
http://www.umich.edu/~ipolicy/china/6)%20Demographic%20Consequences%20of%20China%27s%20One-Child%20Policy.pdf
... GDP can still turn slightly positive.Here is a speech from San
Francisco Fed President Janet Yellen in March:
The Uncertain Economic Outlook and the Policy Responses.
[I]t takes less than many people think for real GDP growth
rates to turn positive. Just the elimination of drags on growth
can do it. For example, residential construction has been
declining for several years, subtracting about 1 percentage point
from real GDP growth. Even if this spending were only to stabilize
at today’s very low levels—not a robust performance at all—a 1 percentage
point subtraction from growth would convert into a zero, boosting
overall growth by 1 percentage point. A decline in the pace of inventory
liquidation is another factor that could contribute to a pickup
in growth. Inventory liquidation over the last few months has been
unusually severe, especially in motor vehicles—a typical recession
pattern. All it would take is a reduction in the pace of liquidation—not
outright inventory building—to raise the GDP growth rate.
emphasis added
This is a very important point for forecasters - to distinguish between
growth rates and levels. Even if the economy has bottomed, it is at
a very low level compared to the last few years, and the recovery will
probably be very sluggish.
This increase in starts means that the drag from Residential Investment
will slow or stop, and also that residential construction employment
is close to the bottom. Residential investment has been a drag on the
economy for 14 straight quarters, and just removing that drag will seem
like a positive.
And residential construction has lost jobs for several years, and
even though construction employment will probably not increase significantly,
not losing jobs will also seem like a positive.
This removes drags from the economy - and that is the little bit
of good news.
To be clear, this is not great news for the homebuilders. It will
take some time to work off all the excess inventory, so new home sales
and single family housing starts will probably stay low for some time.
And it is possible that new home sales and housing starts could still
fall further.
The imperative for the debt-bloated West is to cut spending systematically
for year after year, off-setting the deflationary effect with monetary
stimulus. This is the only mix that can save us.
My awful fear is that we will do exactly the opposite, incubating
yet another crisis this autumn, to which we will respond with yet further
spending. This is the road to ruin.
- AEP: The imperative for the debt-bloated West is to cut spending
systematically for year after year, off-setting the deflationary
effect with monetary stimulus. This is the only mix that can save
us.
I don't seem to understand how this combination of spending cuts
and stimulus is going to do the job of saving us.
If we (the government and the taxpayers) cut our spending for years
on end, our economy must shrink, as would our GDP. In a shrinking
economy, when debts are paid down, the quantity of money also will
shrink (not to speak of its velocity).
Where will the money to stimulate come from? Thin air, again, to
dampen the rise of the currency? And exactly what is there still
to be stimulated? Nobody is buying, so who's to invest?
I'm wondering what such a policy will end in.
- Ambrose, Ambrose please be calm. Here in Amerika the previous
administration assured us "deficits don't matter" and the current
administration is hell bent on proving that. Also our diligent Federal
Reserve reminds us WE have the worlds reserve currency AND the printing
presses!!! So rather than wind up like Ireland I suspect we will
end up like Weimer Germany and then watch out for Amerika because
we also have the worlds largest millitary.
TT
The United Nations has called for a return to state-led "industrial
policy" for poorer countries in what amounts to a rejection of free-market
thinking.
Right, enough with the Goldman Sachs bashing. When everyone form
Krugman to Huffington to the Wall Street Journal editors get in one
the action, it's time to step back, inhale, exhale and take another
look. Sure, Goldman is a cabal bigger and more pernicious then the heads
of all the Five Families, and without the code of honor to boot. They
steal whatever they can, they cheat whoever they can and they’ll lie
to their wives ten times on monday mornings, before breakfast.
But that doesn't mean they are the major problem. Once again, we're
getting it all wrong, in the same way we missed the mark complaining
about $700 million in AIG bonuses against the backdrop of a thousand
times that in Wall Street bailouts. Once you see what that adds up to,
it's not wonder that furor died quietly in the night, is it?
Goldman Sachs can only get away with stealing, cheating and lying
if they're allowed to do so. There is a very obvious first line of defense
against such actions, which should for all intents and purposes be illegal,
and where they're not yet, be made so yesterday. You all know who's
in that defensive line. You pay them. It's what you call your government.
If your government stubbornly and steadfastly
refuses to -in order to stop the cheating and lying- apply the laws
where they're applicable, and change them where they need change, why
would you expect Goldman to stop engaging in their favorite pastimes?
Wouldn't you agree that that is not wholly and entirely the smartest
assumption to make?
It's not Goldman that fails. Goldman even does what it is by law
required to do: maximize the returns for its shareholders. If
it wouldn't, its directors could be sued.
It's not Goldman, it's the government that fails. The government
looks after Goldman's interests, bails them out with dozens of billions
of dollars, most of which are never repaid, looks the other way when
laws are broken, won't change those laws that fail to protect the public
etc. The list of where and when the government fails to protect the
people who voted it in is so long, and so deep, that if we would take
an afternoon to try and list all applicable points, we would by the
end want to crawl into a deep dark corner in order to hide the deep
dark red color of our cheeks.
And I think that is why we won't make that list, of how our governments
fail us. We intuitively know where that would inevitably lead. That
is, our own shame.
Because we all know very well who put that government there, the
Obama's, the Geithners, Barney Franks, Chris Dodds and Nancy Pelosi's.
Blaming Goldman Sachs for your problems and your anger is nothing
but a cheap diversion. Who did you vote for, and if it was the Democrats,
what are they doing with their new found power? How is today different
from 6 or 4 or 2 years ago? How different? Do you still believe in that
change, or is it time to change your beliefs?
Whatever you do, don't blame Goldman. Don’t even blame Obama.
Blame yourself. In the end, that's the only way you can keep a grip
on power. And on your life.
Again, we continue to see the same sort of theme in industrial and
consumer products reporting - Harley Davidson (NYSE: HOG) reported units
shipped down 30% year over year yesterday, anate future; in order for
it to do so, revenue must come back up, and in order for revenue to
come back to pre-bust levels, we would have to re-inflate the credit
bubble - which simply cannot happen.
Multiples are going to continue to contract.
Those analysts and market callers who are all over the momentum trade
can in fact make a good buck trading the momentum, but that's all they're
trading - they sure aren't trading earnings acceleration or even stabilization.
The move in the market off the 666 levels in March has been driven
by a false premise, egged on by CNBC and the other "mainstream media"
- that this is a typical recession, it is short-lived, and we will soon
go back to previous spending and business patterns.
That is not going to happen, yet it is what everyone in the media
and analyst community is looking for and basing their valuation and
market timing calls on.
I don't know how long we have to continue to put up numbers like
this before people wake up, but wake up they eventually will.
When Harley Davidson ships 30% fewer motorcycles, when GE sells 17%
less "stuff" (including their financial cooking) and when company after
company, including Intel, IBM and others come out with revenue numbers
that are down double-digit percentages on an annualized basis,
there is no possible way you can justify
the multiples that these firms are selling at.
When The Port of Long Beach shows container shipments down nearly
30%, when freight carloadings are down nearly 25% year over year, when
sales tax receipts are down in the double digits and when income tax
collections, both personal and corporate have effectively collapsed
there is simply no argument that "the recession is over" or that "trend
growth is around the corner."
The fact of the matter is that port, rail and tax receipts are not
subject to being "gamed" by government number-crunchers, they do not
play "seasonal adjustments" (since they're year-over-year numbers),
they do not represent wishes, dreams, or desires.
They represent real-time, high-frequency, "right now and in your
face" economic performance metrics and are impossible to argue with.
If you, as an investor, are trying to use the market as a "forward
indicator" of economic conditions, you need to look at these numbers
to see whether or not what the stock market is telling you can be validated
with actual economic performance - not in quarterly reports to be published
in a few months (the typical economic lead-time cited for the market)
but in the "right here and now" reality of economic activity.
What those high-frequency data sources are telling us, here and now,
today, is that we are in the middle of a
25-30% economic contraction - exactly as I predicted
would occur in 2007.
The problem with this level of indicated weakness in the economy
is that we have shielded firms, especially banks, from taking the losses
that should have come last year and in 2007 related to their over-extension
of credit. Now those institutions are going to have to live with
the reality of a much smaller economy, meaning that they will be forced
to turn to dramatically increasing credit costs to customers to avoid
drowning (e.g. increasing credit card rates and spreads), which is exactly
what they're doing. This in turn will suck even more money out
of consumers pockets, dragging consumption down even further and will
force even more defaults.
This is a vicious cycle that can only be broken when the defaults
that are being hidden behind the curtain of our financial institutions
are forced into the open and disposed of. Yes, this will likely
cause those firms to go bust. But the economic penalty we are
and will continue to pay for allowing The Bezzle to continue in these
firms will, if not stopped, soon choke off any hope of recovery, just
as it did in 1930, and lead to precisely the same sort of economic result.
Everyone seems to be hollering about
the "wonderful performance" of the banks that have reported thus far,
but let's be honest - if you can borrow for nothing and charge 30% interest
on plastic, you make a fortune, right? Well, for
a while - until the squeeze of contracting incomes and increasing interest
charges force your customers to default, at which point the charge-offs
and defaults this forces in the rest of your portfolio (e.g. mortgages)
kill you dead.
I see exactly nothing in any of the reported numbers thus far this
quarter suggesting that we've turned an economic corner or that there
will be a recovery this year or even next.
We could be near or at the bottom, but we're not, and it is precisely
because we have protected the financial institutions from the consequences
of their own folly in preference to the borrower (to a large degree
the consumer) that this has happened. I have warned repeatedly
that the actions of our regulators and government, on the path they
are on, will make durable economic recovery impossible.
The anvil of these bad loans, being carried far above actual fair-market
value, will remain as a millstone around the neck until we either earn
them out or default them.
Our government and regulators have chosen "earn them out".
The problem is that this path cannot succeed because "earn them out"
requires that the economy return to trend growth - that is, 3-4% GDP
- before next year. That is not going to happen; the government
backstop and artificial support only work so long as they continue,
and we cannot continue to borrow two trillion a year for the purpose
of propping up these institutions in excess of their natural earnings
power in the economy.
Yet without defaulting the bad debt that's exactly what has to happen.
If Roubini's prediction of sub-1% growth
(if that) for the next couple of years is correct the squeeze between
available revenue and required cash-flow from operations to keep the
numbers black at the bottom of the page will become python-like over
the next 12-18 months, and as the grip tightens reportable earnings
will continue to contract, ultimately leading to a collapse when cash
flow is exceeded by expenses.
This is the dreaded "double dip", except that it won't be a "W" as
Roubini has postulated - it will look like the first three legs, but
the right side "/" will instead be a flat line as credit capacity on
the borrowing side collapses, destroying the banks ability to profit
- without borrowers there is no interest to charge and no money to make!
Bottom line: Those who bet on the market "going much higher"
from here are going to find themselves once again holding a bag handed
to them by the media and market callers, just like they did in 2000
when it was said "this is just a small correction in the market" as
the Nasdaq came off 5,000.
Looks like everything is artificial now, including S&P500 prices.
This high-speed financial masturbation that GS performs so successfully
makes me question any stock moves, up or down. In such circumstances why
401K investors would be in stock market at all. The already lost 25% or
more for the last ten years. Enough is enough. Let Wall Street sharks eat
each other.
Hank Paulson’s
testimony yesterday was informative, if only because it illustrated
that he himself still understands little about the origins and nature
of the global crisis over which he presided. Perhaps his book,
out this fall, will redeem his reputation.A fundamental principle
in any emerging market crisis is that
not all of the oligarchs can be saved. There is an adding
up constraint – the state cannot access enough resources to bail out
all the big players.
The people who control the state can decide who is out of business
and who stays in, but this is never an overnight decision written on
a single piece of paper. Instead, there is a process – and a struggle
by competing oligarchs – to influence, persuade, or in some way push
the “policymakers” towards the view:
- My private firm must be saved, for the good of the country.
- It must remain private, otherwise this will prevent an economic
recovery.
- I should be allowed to acquire other assets, opportunities,
or simply market share, as a way to speed recovery for the nation.
Who won this argument in the US and on what basis? And have
the winners perhaps done a bit too well – thinking just about their
own political futures?
On who must be saved, we see the new dividing line. If you
have more than $500bn in total assets, post-Lehman, you make the first
cut. If you’re below $100bn (e.g., CIT), you can go bankrupt.
On remaining private, the outcome is more complicated. Citigroup
had the best political connections in the business, but turned out to
be so poorly managed that the state essentially had to take over – in
a complicated and ultimately unsatisfactory way. Bank of America’s
relatively weak political connections meant that the impulse purchase
of Merrill Lynch could go very badly – and also led to a bizarre form
of government takeover.
The prevailing idea and organizing principle for this new sorting
is not
Lloyd Blankfein’s “we’re the catalyst of risk” – investment banks
are peripheral, rather than central, to nonfinancial risk taking and
investment in this country. It’s
Jamie Dimon’s idea: just don’t demonize the competent bankers, let
us take things over and we’ll smooth it all out.
The problem with this approach is its “success”, from the point of
view of the remaining bankers – their market share is up so sharply
that it’s embarassing. Of course, they can still argue that banking
is a global industry with many competitors (some of which are even bigger,
with more state assistance, promising much craziness in the years ahead).
But the real issue now is concentration in the political marketplace.
Hank Paulson dealt with a dozen big banks/similar institutions with
deep connections to Capitol Hill and a very powerful small banking lobby.
Tim Geithner is looking at just a couple of big banks that are still
independent . Probably we should start to divide our big banks
into the “nationalized” and the “nationalizers”.
The small banks still have clout – and you’ll see them in force on
the regulatory reforms debate this fall – but they know now that they
don’t get bailouts, and access to contigent state capital-on-amazing-terms
is the ironic basis of modern financial power.
We are looking at a concentration of political power in the US banking
system that we haven’t seen since the 1830s: Shades of Andrew Jackson
vs. the
Second Bank of the United States. We put up with a lot from
our banking elite in this country, but historically we draw the line
at financial power so concentrated it can confront the power of the
President.
The logic for reform and for breaking up the big banks begins to
build. Bank of America’s fall was, in some senses, a fortunate
accident for Goldman and JP Morgan. But it has also given them
an excessive and unsustainable degree of political power.
Of course, you also have to ask: Who can break that power, when,
and how?
By Simon Johnson
The World Bank has given warning that global economy will fall
into a "deflationary spiral" unless urgent action is taken to reduce
high levels of excess capacity in industry. By Ambrose Evans-Pritchard
Published: 6:21PM BST
'Significant excess capacity has been built up and unless this issue
is addressed, we will face a deflationary spiral' Photo: GETTY
IMAGES
Justin Lin, the bank’s chief economist, said factories running idle
around world threaten to trap economies in a vicious cycle, risking
further spasms of financial stress, requiring yet more rescue packages.
"Significant excess capacity has been built up and unless this issue
is addressed, we will face a deflationary spiral and the crisis will
become protracted," he told an audience in Cape Town.
Related Articles
Mr Lin said capacity use had fallen to 72pc in Germany, 69pc in the
US, 65pc in Japan, and as low as 50pc in some developing countries,
mostly touching lows not seen in modern times.
The traditional cure for countries caught in slumps is to claw their
way back to health through devaluation, but this cannot be done today
because the crisis is global. "No country can count on currency depreciation
and exports as a way out of recession. Unless we deal with excess capacity,
it will wreak havoc on all countries. There is urgent need for global,
co-ordinated fiscal stimulus," he said.
Investments should be focused on infrastructure in poor countries
that are bearing the brunt of the crisis. The downturn is already likely
to trap over 50m more people in extreme poverty this year.
Mr Lin said some $30 trillion has been wiped off global stock markets
and a further $4 trillion off US house prices, creating powerful deflationary
headwinds. While emergency measures have eased the financial crisis,
they have not stopped it turning into a deeper "real economy" crisis
entailing mass lay-offs.
The comments came as the Bank of Japan agreed to extend its quantitative
easing (QE) policies – mostly the purchase of corporate debt – and warned
that business investment is "declining sharply". Headline inflation
has dropped to minus 1.1pc.
Michael Taylor at Lombard Street Research said Japan has been too
timid, repeating the error of its Lost Decade when it failed to carry
out QE on a sufficient scale.
"Japan is already back in deflation, and it is here to stay. This
year the economy will shrink by around 7pc, dramatically increasing
the output gap and intensifying deflationary pressures. Cash earnings
are down 3pc in the last year,"
The Bank of Japan downgraded its growth forecast, predicting that
the economy will contract 3.4pc in the fiscal year to next March. This
follows a catastrophic fall in output at a 14.2pc an annual rate in
the first quarter, the worst ever recorded.
While industrial output has bounced over the summer, there are concerns
that it may have been flattered by an "inventory rebound" as companies
rebuild stocks.
Eurostat confirmed on Wednesday that the eurozone has slipped into
deflation. Prices fell 0.1pc in June.
[Jul 17, 2009] Paulson Defends Role in BofA -- Merrill Lynch Merger
Fmr. Treasury Sec. Henry Paulson testified before the House Oversight
& Gov't Reform Cmte. on his role in the Bank of America (BofA) merger
with Merrill Lynch. The Cmte. is investigating whether the government
inappropriately pressured BofA to move ahead with the deal.
This is the third in a series of hearings. Previously, the Cmte.
heard from Fed Chair Bernanke & BofA CEO Ken Lewis.
Why didn’t you obtain an executed fee and commitment letter or definitive
agreement on the guarantee provided by the government for assets of
the combined Merrill Lynch and Bank of America? After all, you were
a seasoned Goldman Sachs investment banker well before
you became upper management or Treasury Secretary.
In that capacity, you wouldn’t have been permitted to give such a
commitment without such a letter. Why did the government act differently
here?
There is no economy left to recover. The US manufacturing economy
was lost to offshoring and free trade ideology. It was replaced by a
mythical “New Economy.”
The “New Economy” was based on services. Its artificial life was
fed by the Federal Reserve’s artificially low interest rates, which
produced a real estate bubble, and by “free market” financial deregulation,
which unleashed financial gangsters to new heights of debt leverage
and fraudulent financial products.
The real economy was traded away for a make-believe economy. When
the make-believe economy collapsed, Americans’ wealth in their real
estate, pensions, and savings collapsed dramatically while their jobs
disappeared.
The debt economy caused Americans to leverage their assets. They
refinanced their homes and spent the equity. They maxed out numerous
credit cards. They worked as many jobs as they could find. Debt expansion
and multiple family incomes kept the economy going.
And now suddenly Americans can’t borrow in order to spend. They are
over their heads in debt. Jobs are disappearing. America’s consumer
economy, approximately 70% of GDP, is dead. Those Americans who still
have jobs are saving against the prospect of job loss. Millions are
homeless. Some have moved in with family and friends; others are living
in tent cities.
Meanwhile the US government’s budget deficit has jumped from $455
billion in 2008 to $2,000 billion this year, with another $2,000 billion
on the books for 2010. And President Obama has intensified America’s
expensive war of aggression in Afghanistan and initiated a new war in
Pakistan.
There is no way for these deficits to be financed except by printing
money or by further collapse in stock markets that would drive people
out of equity into bonds.
The US government’s budget is 50% in the red. That means half of
every dollar the federal government spends must be borrowed or printed.
Because of the worldwide debacle caused by Wall Street’s financial gangsterism,
the world needs its own money and hasn’t $2 trillion annually to lend
to Washington.
As dollars are printed, the growing supply adds to the pressure on
the dollar’s role as reserve currency. Already America’s largest creditor,
China, is admonishing Washington to protect China’s investment in US
debt and lobbying for a new reserve currency to replace the dollar before
it collapses. According to various reports, China is spending down its
holdings of US dollars by acquiring gold and stocks of raw materials
and energy.
The price of one ounce gold coins is $1,000 despite efforts of the
US government to hold down the gold price. How high will this price
jump when the rest of the world decides that the bankruptcy of “the
world’s only superpower” is at hand?
And what will happen to America’s ability to import not only oil,
but also the manufactured goods on which it is import-dependent?
When the over-supplied US dollar loses the reserve currency role,
the US will no longer be able to pay for its massive imports of real
goods and services with pieces of paper. Overnight, shortages will appear
and Americans will be poorer.
Nothing in Presidents Bush and Obama’s economic policy addresses
the real issues. Instead, Goldman Sachs was bailed out, more than once.
As Eliot Spitzer said, the banks made a “bloody fortune” with US aid.
It was not the millions of now homeless homeowners who were bailed
out. It was not the scant remains of American manufacturing--General
Motors and Chrysler--that were bailed out. It was the Wall Street Banks.
According to Bloomberg.com, Goldman Sachs’ current record earnings
from their free or low cost capital supplied by broke American taxpayers
has led the firm to decide to boost compensation and benefits by 33
percent. On an annual basis, this comes
to compensation of $773,000 per employee.
This should tell even the most dimwitted patriot who “their” government
represents.
The worst of the economic crisis has not yet hit. I don’t mean the
rest of the real estate crisis that is waiting in the wings. Home prices
will fall further when the foreclosed properties currently held off
the market are dumped. Store and office
closings are adversely impacting the ability of owners of shopping malls
and office buildings to make their mortgage payments.
Commercial real estate loans were also securitized and turned into derivatives.
The real crisis awaits us. It is the
crisis of high unemployment, of stagnant and declining real wages confronted
with rising prices from the printing of money to pay the government’s
bills and from the dollar’s loss of exchange value. Suddenly, Wal-Mart
prices will look like Nieman Marcus prices.
Retirees dependent on state pension systems, which cannot print money,
might not be paid, or might be paid with IOUs. They will not even have
depreciating money with which to try to pay their bills.
Desperate tax authorities will squeeze the
remaining life out of the middle class.
Nothing in Obama’s economic policy is directed at saving the US dollar
as reserve currency or the livelihoods of the American people.
Obama’s policy, like Bush’s before him,
is keyed to the enrichment of Goldman Sachs and the armament industries.
Matt Taibbi describes Goldman Sachs as “a great vampire squid wrapped
around the face of humanity, relentless jamming its blood funnel into
anything that smells like money.” Look at the Goldman Sachs representatives
in the Clinton, Bush and Obama administrations. This bankster firm controls
the economic policy of the United States.
Little wonder that Goldman Sachs has record earnings while the rest
of us grow poorer by the day.
Paul Craig Roberts was Assistant Secretary of the Treasury in the
Reagan administration. He is coauthor of
The Tyranny of Good Intentions.He can be reached at:
[email protected]
Looks like Goldman lost some friends in high places...
Jul 14, 2009
Proof, as if we needed it, that Wall Street inhabits a parallel universe.
While the rate of US unemployment creeps towards double digits and businesses
across the heartland struggle to stay afloat,
Goldman Sachs
tots up quarterly profits of $3.44bn.
The Goldman money-making machine is running at $38m per day - or
$1.58m per hour. For each second it takes to read this, Goldman will
make another $439 of profit.
How do they do it? They're not really telling us. Almost all of the
bank's earnings come from trading. But Goldman explains away $10.78bn
of revenue from its trading and principal investments operation in just
four vaguely worded paragraphs of a
press release.
On a conference call, chief financial officer David Viniar waffled
on about a "terrific client franchise" and a "very strong culture of
risk management". What this amounts to is that Goldman is fast, ruthless,
opportunistic and canny in its multi-billion dollar bets on the direction
of financial markets.
Awash with dollar bills just weeks after repaying $10bn in government
aid, Goldman is taking heat as never before. In
a lengthy oeuvre for Rolling Stone magazine, journalist Matt Taibbi
characterised the firm as "the great American bubble machine", offering
a roll-call of Goldman alumni in powerful government positions and blaming
the bank for every financial bubble since the Great Depression.
"The world's most powerful investment bank is a great vampire squid
wrapped around the face of humanity, relentlessly jamming its blood
funnel into anything that smells like money," writes Taibbi.
The
New York Times has joined in, in typically more restrained fashion.
It reported that Goldman's traders were known in the Big Apple as the
Bandits of Broad Street and quoted an unnamed executive at a rival bank
who compared Goldman staff to bellicose "orcs" in the Lord of the Rings.
Gazillions of dollars in profits don't look good when employment
is evaporating from the US economy at a rate of more than 400,000 jobs
a month. But in the eyes of many critics, the most objectionable aspect
of Goldman's success is that the bank's earnings are shared by such
a small number of already ultra-wealthy people. Goldman distributes
49% of its revenue to employees who may get an average pay packet of
as much as $900,000 this year.
The former New York governor Eliot Spitzer hit the nail on the head
during a
Bloomberg television interview this morning. While observing that
Goldman made a "bloody fortune", he said the immediate issue was not
the rights or wrongs of making a profit - but the question of where
the proceeds go.
"It's obviously better that banks be making money than losing it,"
said Spitzer. "The question is does that generate jobs - which is the
word we haven't heard anything about - out in the real economy."
After an infusion of billions of taxpayer dollars to keep Wall Street
banks afloat, Spitzer asks whether any significant portion of Goldman's
capital will go into sustainable employment - say, in biotech or new
energy: "Their job, from a macroeconomic perspective should be to raise
capital and put it into those sectors that will create jobs. If they're
not getting that done, then why are we supporting them in the way we
have?"
While you may be loathe to listen to lessons in propriety from a
man with as colourful a recent past as Spitzer, he has a point. Goldman's
earnings are a warning flare. After the cataclysmic events of the past
18 months, are we simply going to allow bankers to go back to enriching
themselves through an elaborate, opaque form of casino trading which
is semi-detached from the rest of society?
Selected comments
Anyone who thinks Goldman's only got a TARP loan from the US government
is sadly mistaken. Goldman's were at the absolute front and centre of
the biggest financial redistribution of taxpayers money to the banks
- $100s of billions going either directly or indirectly to them, billions
more in fees and charges. The Whitehouse has simply become another branch
of Goldman Sachs, their to raid the wealth of society for the benefit
of a tiny bunch of banking oligarchs.
damiendamien
15 Jul 09, 9:53am
Lets not forget the $12 billion of magic AIG payments they got miraculously
without any sort of haircut (thanks Hank!), the considerable evidence
they took out said CDS knowing AIG didn't have the ability to cover
them and would have to be bailed out, essentially betting against the
taxpayer. The 1% tax they paid as a corporate last year, the elaborate
tax planning individuals there use to avoid income tax and of course
opaqueness of their balance sheet still loaded with level 3 mark to
fantasy land assets (all these are also applicable to our own beloved
BarCap)
JimVinFalz 15 Jul 09, 2:35pmFrom that socialist rag, The Economist:
"For a firm that probably would have collapsed without government
capital, debt guarantees and fast-track approval to turn itself
into a commercial bank (not to mention a multibillion-dollar payout
as a counterparty of American International Group), such largesse
is cheeky at best, distasteful at worst."
The key is to keep your torso well clear of the "blood funnel" of
Goldman Sucks.
...banking regulation has created a mechanism that amplifies the
effects of shocks and accentuates cyclic fluctuations in the indebtedness
of financial intermediaries.
I think there are dangers when political power becomes concentrated
in too interconnected to fail financial institutions, and this potential
contributor to the crisis deserves more emphasis.
The third quarter is just started 15 days ago. and the question
is what is driving recovery other then technicalities (bounce from the bottom).
The problem is that unemployment is still ticking up.
July 14, 2009 | Slate Magazine
The Recession Is Over! What America's best economic forecaster is
saying.
Could our long national nightmare be over? The economic contraction,
this Great Recession, began in December 2007, and there's no apparent
end in sight. As the unemployment rate has
spiked,
analysts have thrown cold water on Federal Reserve Chairman Ben Bernanke's
March sighting of "green shoots." The
stock market's spring rally has fizzled.
But in this season of doubt, I'm prepared to declare that the recession
is really, most probably over. Why? Well, it's not because the economists
surveyed by the Wall Street Journal believe it'll end in
this quarter. (These guys wouldn't know an economic inflection point
if it hit them upside the head. All through 2008, when the economy was
contracting, they projected growth for the year.)
No, two of the best and most objective forecasters, who are not connected
to investment banks or to the CNBC noise machine, have recently called
the upturn. Macroeconomic Advisers, the St. Louis-based consulting firm
that compiles a monthly GDP index, reported to its clients Monday that
while second-quarter GDP was tracking at negative 0.1 percent (recession),
the third quarter was tracking at 2.4 percent
growth.
The folks at the
Economic Cycles
Research Institute agree enthusiastically. It's not because they've
detected green pea shoots in Central Park. Rather, it's because we've
seen the three P's, says Lakshman Achuthan, managing director at ECRI,
which has been studying business cycles for decades and was one of the
few outfits to call the last two recessions with any degree of accuracy.
The economic data that get the most play in the news— unemployment,
retail sales—are coincident or lagging indicators and historically have
not revealed much about directional changes in the economy. ECRI's proprietary
methodology breaks down indicators into a long-leading index, a weekly
leading index, and a short-leading index. "We watch for turning points
in the leading indexes to anticipate turning points in the business
cycle and the overall economy," says Achuthan. It's tough to recognize
transitions objectively "because so often our hopes and fears can get
in the way." To prevent exuberance and despair from clouding vision,
ECRI looks for the three P's: a pronounced rise in the leading
indicators; one that persists for at least three months; and
one that's pervasive, meaning a majority of indicators are
moving in the same direction.
The long-leading index—which goes back to the 1920s and doesn't include
stock prices but does include measures related to credit, housing, productivity,
and profits—hits bottom and starts to climb about six months before
a recession ends. The weekly leading index calls directional shifts
about three to four months in advance. And the short-leading index,
which includes stock prices and jobless claims, is typically the last
to turn up.
All three are now flashing green. According to Achuthan, the long-leading
index growth rate has been recovering since November 2008, the weekly
leading index has been recovering since last December, and the short-leading
index growth rate bottomed in February 2009. In sequence, each turned
up, "and by April the three Ps had all been satisfied." Sure, corporate
profits continue to disappoint, and the unemployment rate is climbing.
But for ECRI, which navigates by relying exclusively on its instruments,
that's only a part of their picture. They're the Spocks of the economic
forecasting crowd—unemotional, uninvested in anything but the logic
of what history and their dashboard tell them. "From our vantage point,
every week and every month our call is getting stronger, not weaker,
including over the last few weeks," says Achuthan.
"The recession is ending somewhere this
summer." In fact, it may already be over.
There's plenty of ground for skepticism, in part because the news
flow is still quite negative, especially when it comes to corporate
profits. ECRI's response? "Indicators are typically judged by their
freshness, not their prescience. Since most market-moving numbers are
coincident to short leaning, while corporate guidance is often lagging,
it is no surprise that analysts do not discern any convincing evidence
of an economic upturn."
Still, Achuthan warns that one of the
most important indicators—employment—isn't showing recovery yet.
The reason: The combination of deleveraging and the long-term
decline of manufacturing is hindering job creation and destroying existing
jobs. After the last recession ended in 2001, the service sector created
jobs, but payroll employment continued to fall through 2003 because
millions of jobs were lost in the manufacturing sector during
the expansion. "We may see some echo of that in this recovery."
But while employment is vital, payroll jobs growth alone doesn't make
the difference between recession and expansion.
"We've always felt that employment is very
important, but it's a roughly coincident indicator,"
said Achuthan. "We would not expect the employment indicators to be
mirroring anything we're seeing in the leading indicators." ECRI notes
that job losses and unemployment claims are off their worst levels.
"If we're right and the recession is over,
the job market should improve by year's end."
Of course, improvement doesn't mean the sort of 1990s-vintage broad-based
employment growth that boosts wages and expands benefits coverage. And
without the tailwind of cheap money and a housing boom, it's difficult
to see—as it always is at the beginning of expansions—what is going
to produce large-scale jobs growth.
The recession is over! Let the jobless recovery begin!
Selected comments
mcwop says
Agreed that the problem is NOT lack of liquidity, it is the lack
of credit worthy borrowers, higher lending standards, and home price
drops that are killing equity lines. I suspect many people will
not be able to borrow again until the end of 2010, and possibly
2011.
Rob says:
Paying attention to money aggregates is a fool's game.
They are meaningless unless velocity is really well behaved and
it isn't.
JLR says:
“The fed funds rate is at zero and not all of the special lending
facilities have been utilized at anythig near capacity. I think
that the plot shown here is just evidence that the fed no longer
has the control over the money supply that it once did.
Tao Jonesing says:
“David Rosenberg had a chart in one of his "Breakfast with Dave"
reports a few weeks back showing the cash reserves of banks. That
chart looks remarkably like your M1 chart.
Basically, the money that the Fed printed back in 2008 has simply
accumulated in the banks.
mcwop argues that the reason for this accumulation is "the lack
of credit worthy borrowers, higher lending standards, and home price
drops that are killing equity lines." I disagree. Those things are
just symptoms of the real problem, which is banks that are insolvent
or on the brink of insolvency. They simply have too many toxic assets
(and soon to be toxic assets) on their books to lend out that money
except to the lowest risk customers.
Clearly, in a crisis like this, printing money and giving it
to the banks is as useless as cutting taxes.
The liquidity created just accumulates
and does not find its way into the economy. Milton Friedman was
wrong, and monetarism is now truly dead.
Can we try to go back to Keynes' prescription, which requires
that the money that gets printed be delivered directly to the end
consumer without a middleman?
Tao Jonesing replies:
See Steve Keen's post about "the roving cavaliers of credit"
and ask yourself whether the Fed ever had the level of control over
the money supply that it once had.
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
@VtCodger,
I think JLR's point about the velocity of money nicely encompasses
mcwcop's "lack of credit worthy borrowers" thesis, my "insolvent
banks" thesis and your "lack of interest in borrowing" thesis, all
of which, if true, reduce the velocity of money. And I think they're
all true.
The evidence leads me to my counterfactual question. Can the deleveraging
process be stopped through fiscal interventions? Admittedly, it will
be interesting to quantify the losses and calculate the costs of intervention
to assess if intervention is feasible by looking at the aggregate numbers
before answering the question. I have not analysed the aggregate numbers
for the US, UK or Spain. But I doubt
intervention is feasible. So maybe we need to drop the orthodox prescription
to contain this systemic banking sector crisis, such
as:
- rigorous examinations of the credit quality of the major banks’
balance sheets, such as the US government’s stress tests, are a
pointless exercise when credit quality continues to deteriorate;
- removal of non-performing loans from bank balance sheets is
pointless because it addresses the present stock of non-performing
loans and not the flow;
- and bank recapitalisation is ineffective when the flow of non-performing
loans will lead to future losses.
My sense is that in the US, even if intervention on the order of
magnitude required was feasible (and I doubt it), the political will,
financial resources, and economic wisdom to intervene to offset the
assets and wealth losses are simply not there. So as painful as it is,
maybe the leveraging process has to proceed
and the government should stand by ensuring only the payment system,
and facilitate the deleveraging process.
I realize those conclusions are unconventional. Comments are welcome.
Comments
-
Leveraging in the recent decades has enabled growth from cheap
money for the global economy. It has also created a huge amount
of "not needed" money - readily invested into a cascade of bubbles
in the stock and commodity markets...
Look at the S&P500.
The "bubble" startet 30 years ago. When the pendulum will swing
back - we will see 200 - 300 again! Image what this will mean
for our pension plans...
So, what is your solution: Let it happen? OK, let's sell
short and make a fortune. Bernanke will at least secure the
payment system...
Best regards
Manfred Baumgärtner
www.bvb-consult.com
- Just one observation on house prices: when prices fall below
replacement cost, which is now the situation in the US in many
areas, there would seem to be a natural floor over the medium
term in that housebuilding will shudder to a halt and supply
reduction will have its impact.
For an IT specialist the statement "computer sales are picking up faster
than had been expected" looks like dark humor. What if this is just GC trading
computer malfunction ? Of if GC computers are betting that they
can find greater fool who'll snap S&P500 they pushed to 930 on higher levels
on Fed-induced recovery expectations...
Yahoo
Investors are betting on the economy again. Strong earnings and an
upbeat forecast from Intel Corp. pulled investors into the stock market
Wednesday as hopes grew that the economy could be starting to recover.
The chip maker's results signal that computer
sales are picking up faster than had been expected.
2009-07-15 | CalculatedRisk
Back in February I pointed out that I expected to see some economic
rays of sunshine this year. But I never expected an
immaculate recovery forecast from the FOMC.
Although I've argued repeatedly that a "Great Depression 2" was extremely
unlikely, I think the other extreme - an immaculate recovery - is also
unlikely.
It is probably a good time to review the usual engines of a recovery.
(see
Business Cycle: Temporal Order for the order in and out of a recession)
The following table shows a simplified typical temporal order for
emerging from a recession.
When Recovery Typically Starts
| During Recession |
Lags End of Recession |
Significantly Lags End of Recession
|
|
| Residential Investment |
Investment, Equipment &
Software |
Investment,
non-residential Structures |
| PCE |
Unemployment(1) |
Housing usually leads the economy both into and out of recessions (this
was true for the Great Depression too). However this time, with the
huge overhang of excess inventory and high levels of distressed sales,
it seems unlikely that residential investment will pick up significantly
any time soon.Note: Residential investment is mostly new home construction
and home improvements.
And that leaves Personal Consumption Expenditures (PCE), and as households
increase their savings rate to repair their balance sheets and work
down their debt, it seems unlikely that PCE will increase significantly
any time soon. Maybe there will be a pickup in auto sales from the current
depressed levels, but in general a strong increase in PCE seems unlikely.
So even if the economy bottoms in the 2nd half of 2009, any recovery
will probably be very sluggish.
Most companies are not investing in new
equipment and software - other than the normal equipment replacement
purchases - because they already have too much capacity.
They will not need to expand until their sales pick up significantly.
So it seems unlikely that investment in equipment and software would
boom until consumer spending has increased.
Of course increased U.S. exports would help - but export to whom?
China, and a few others ... but most of the world is also hurting.
I still think the keys are Residential Investment (RI) and PCE, and
therefore I think the recovery will be sluggish. The increasingly severe
slump in CRE and non-residential investment in structures will be interesting,
but that is a lagging indicator for the economy.
(1) In recent recessions, unemployment
significantly lagged the end of the recession. That is very
likely this time too.
Crisis of state finance is just a new stage of the crisis... "States,
counties, cities, and municipalities are where the rubber meets the road
and government actually produces the communal goods and services you consume."
Washington is bluffing that it will not bail out California, and
every other state suffering from collapsed revenues and massive job
losses. If cuts in police and schools don’t force DC off from its current
position, then the math will. Because in many states the aggregate revenue
losses and looming cuts to state payrolls will largely render the intended
effects of federal stimulus as moot. Frankly, unless Washington prints
money and bails out every state that needs capital, including California,
federal power will decline amidst this severe economic recession, and
the process of a soft American devolution will begin. If you think this
idea is outrageous, then you’ve still not come to terms with a core
reality of our current situation: the structure of this financial crisis
is wholly different than any in our post-war era.
This isn’t a recession. This is collapse.
In
Recession vs. Collapse published in March, this blog explained that
in a normal recession existing savings are used to support government
debt issuance and that those who remain employed increase their savings
to also support government debt issuance. Neither phenomenon is at work
today. Yes, the savings rate has soared in the US. But this
has not resulted in any actual accrued savings.
Because private sector debt came to define
the internal structure of the US system, savings currently is little
more than debt service. Also, bank purchases of US Treasuries
are really just a result
of the circularity of monetization. It’s
just money from the FED being recycled into Treasuries. There is no
privately driven growth of bank deposits, in the aggregate. Americans
as a class are broke. What the savings rate more accurately measures
is a collapse of consumer spending.
The internal composition of the US economic and financial system
when it hit 2007/8 was very different than in previous recessions, even
the severe recession of 1980/82. It’s this internal composition that’s
now determinative, to the outcome. The sawdust
of debt, and the monetization of assets rather than the production of
goods, continually came to define the internal composition of the system.
The economy cannot, therefore, express the same kind of resilience it
has done so often, since WW2.
This is the core problem of this collapse and why the prospect for
recovery is dim. Americans can’t actually rebuild the savings that the
banking system needs to escape from the current mess. Individually,
Americans are trapped by debt and cannot spend. In
The Seigniorage Curse, I explain that one of the primary mechanisms
for the hollowing out of the American economy over many years was the
dollar advantage, which at first was earned. And then, came to be un-earned.
By the time the US reached the 21st century,
our primary manufactured product was debt, and dollars.
Is it any wonder that once that system collapsed, that we quickly gave
up 100% of the phantom job growth that had been sitting on top of the
debt bubble? The current level of employment
in the United States has now
returned to the levels of June 2000.
Enough said.
Washington apparently has a fresh dilemma on its hands, just inside
of 6 months after the new administration came to power. Clearly the
economic team, even though they were given almost 18 months to study
the nature of the current crisis (starting in the Summer of 2007), incorrectly
judged this recession to be of the post-war variety. Is that any surprise?
Nothing in the public record since the
year 2000 indicates that Larry Summers, Ben Bernanke, or Tim Geithner
understood that we had been building a skyscraper of private sector
debt in textbook blow-off style, since the deflation scare of 2001.
Now, two years after FED repair operations began on the broken credit
system, and over 3 years since US real estate topped in price, major
portions of the country are staring at further home price declines in
most major markets. Indeed, it appears that the same macro cycle of
the last two Autumns is about to repeat, with more waves of foreclosure,
more withdrawals from savings and investment to pay for living expenses,
and
the attendant bailouts of financial institutions that comes around
each time.
Washington can’t really take a pass on this situation. If the federal
government decides it can wait while “the states rebuild their balance
sheets and clean up their payrolls” (as in past recessions) they’ll
be waiting forever. None of that is underway.
It’s no surprise therefore that the country is already being prepped
for a second stimulus. Sure, Washington would like to act tough and
tell the States to clean up their act. This is the moral hectoring version
of Ben Bernanke saying in 2006 he doubts US real estate will ever decline
year over year, or Treasury Secty Paulson saying that the front-end
of the crisis was just a problem contained to sub-prime. We’ve seen
this script before. If California issuing IOUs in a state where banks
refuse to accept them doesn’t get the message across, nothing will.
We are on the front end, not the back end,
of a crisis within the States.
Unless Washington prints up dollars and bails out the States, of
what use is Washington? Exactly what services can Washington provide,
if California is let go? Left on its own, there would no doubt come
an initial hooray from rubber-neckers and I-Told-You-So-ers.
A newly broken relationship between Washington and the states might
also quicken the pulse of anti-federalists, who feel we are long overdue
for a tip in the balance of power. Perhaps it would all work out well.
For the best, even?
In Washington today the annual budget deficit crossed
the one trillion mark. In Sacramento, there is a 26 billion dollar
shotgun hole in their budget. (One
hopes that CALPERS is marking to market, because if they’re not, that
would be a new liability for Sacramento to deal with).
Meanwhile, Autumn approaches and whole range of rather nasty choices
looms over the school system. Imagine living in a prime area of California
and watching your house decline by 40%, your household income knocked
for an initial 30%, and the after-school programs and town services
get cut. Now throw some fees and tax hikes on top of that mess. For
the coup de grace, imagine California voters sitting down each night
to another wave of bailouts from Washington to financial corporations.
Under those circumstances it seems quite unlikely Washington can say
no, to the States.
Photos:
Barack Obama, Golf Swing Without a Club, Reuters.
FDR, via the Smithsonian.
July 15, 2009 | www.ritholtz.com
One of our longstanding complaints has been that the traditionally
reported measure of Unemployment, U3, dramatically under-reports unemployment
in America. It is far too narrow and ignores too many people that want
to work full time, but cannot.
We have detailed this over the years, and last summer, modestly proposed
the media
begin reporting U6, the broadest measure of joblessness. (see
Previously, below)
So you can imagine our pleasure when yet another MSM gets hip to
this. In the rpesent instance, it is the New York Times,
Part-Time Workers Mask Unemployment Woes:
In California and a handful of other states, one out of every
five people who would like to be working full time is not now doing
so.
It is a startling sign of the pain that the Great Recession is
inflicting, and it is largely missed by the official, oft-repeated
statistics on unemployment. The national unemployment rate has risen
to 9.5 percent, the highest level in more than a quarter-century.
Yet it still excludes all those who have given up looking for a
job and those part-time workers who want to be working full time.
Include them — as the Labor Department does when calculating
its broadest measure of the job market — and the rate reached 23.5
percent in Oregon this spring, according to a New York Times analysis
of state-by-state data. It was 21.5 percent in both Michigan and
Rhode Island and 20.3 percent in California. In Tennessee, Nevada
and several other states that have relied heavily on manufacturing
or housing, the rate was just under 20 percent this spring and may
have since surpassed it.
Of course, we also know from history that unemployment will continue
to rise, even after the recession is officially over (so we got that
going for us, which is nice).
Surprisng to see Oregon with the worst Unemployment in the nation
— I would have guessed Michigan.
Click for interactive graphic
Previously:
A Closer Look at Unemployment (September 2007)
http://www.ritholtz.com/blog/2007/09/a-closer-look-at-unemployment/
Unemployment Reporting: A Modest Proposal (U3 + U6) (June 2008)
http://www.ritholtz.com/blog/2008/06/unemployment-reporting-a-modest-proposal-u3-u6/
Pervasive Pollyannas of Prosperity (July 2008)
http://www.ritholtz.com/blog/2008/07/pervasive-pollyannas-of-prosperity/
NFP: Even Worse Than Reported (December 8th, 2008)
http://www.ritholtz.com/blog/2008/12/nfp-even-worse-than-reported/
Persons “Marginally Attached to the Labor Force” (July 4th, 2008)
http://www.ritholtz.com/blog/2008/07/persons-marginally-attached-to-the-labor-force/
Source:
Part-Time Workers Mask Unemployment Woes
DAVID LEONHARDT
NYT, July 14, 2009
http://www.nytimes.com/2009/07/15/business/economy/15leonhardt.html
Selected comments
- mark Says: July 15, 2009 at 8:12 am
David Rosenberg
has also pointed out in one of his recent notes that continuing
claims are much worse than reported since so many are now on Federal
extended unemployment benefits which are not reported in the headline
data. Counting everyone give a new record not just in absolute numbers
but also as a percentage of the workforce.
People dropping off state unemployment rolls and going on Federal.
Now that’s a green shoot we can believe in.
A Poster Child for Financial Insanity
William K. Black, associate professor of economics
and law at the University of Missouri, Kansas City, is a former financial
regulator. His book, “The Best Way to Rob a Bank is to Own One,” focuses
on the role of “control fraud” in financial crises.
It’s difficult to decide which is more insane: the efforts of the
Bush and Obama administrations to recreate the failed financial markets,
e.g., collateralized debt obligations that produced the worst global
financial crisis in three generations, or continuing to make obscenely
wealthy the financial idiot-savants that caused the crisis.
Goldman Sachs is the poster child for both forms of insanity. The
news that Goldman has purportedly earned astonishingly large profits
in the latest quarter and plans to pay many billions of dollars in “bonuses”
to people who are already in the top 1 percent of the wealth distribution
raises issues in two categories: performance and pay.
Goldman’s profits show that government is maximizing moral hazard
at firms that pose a risk to the entire economic system.
Personally, I’m more concerned by the performance. I care about pay
primarily because it creates perverse incentives
to engage in accounting/securities fraud and other forms of abuse.
There are two possible explanations of Goldman’s performance
— and they are both frightening. “Economic recovery” is not a possible
explanation. Reports of “green shoots” simply means that things are
getting worse at a slower rate than six months ago. The recession, already
our worst in modern history, is getting worse.
Goldman is the textbook case of “moral hazard.” It recognizes that
both administrations have guaranteed that it will not be allowed to
fail no matter how badly it is run. (Treasury Secretary Geithner, in
a portion of a speech ignored by the media, twice used the phrase “capital
insurance” to describe our new policy. The taxpayers no longer insure
only depositors — we insure the shareholders, or more precisely, the
senior officers.)
“Moral hazard” is well known in insurance and economics. If there is
little downside to the senior officers and if they can capture the upside,
e.g., through massive bonuses, then it pays to either engage in ultra
high-risk gambles, or the sure thing, accounting fraud. Either explanation
is frightening because it is simply a matter of time before this strategy
causes an even bigger financial crisis than this one.
Of course, you can’t send out a memo to 10,000 employees and tell
them explicitly to engage in either ultra high-risk strategies or accounting
fraud. That’s the genius of bonus systems — you can send the same message
without risk of prosecution. When the Business Roundtable was looking
to respond to the Enron and WorldCom wave of “control frauds,” they
choose as their spokesman Franklin Raines, then chief executive of Fannie
Mae. A reporter asked him why there were so many scandals on Wall Street.
Mr. Raines replied:
“Don’t just say: ‘If you hit this revenue number, your bonus
is going to be this.’ It sets up an incentive that’s overwhelming.
You wave enough money in front of people, and good people will do
bad things.”
Goldman’s profits should teach us (1) that our policies are maximizing
moral hazard, (2) at firms that pose a systemic risk to the entire economic
system, and (3) changing executive compensation to minimize the perverse
incentives is not “merely” a matter of fairness — but essential to protecting
ourselves from future crises.
Selected comments
- We “the people” got “taken” by Goldman Sachs. Its obvious, its
unethical, morally indefensible. But, it is exactly what Wall Street
is all about, and it is exactly why Wall Street exists. The idea
that anyone at Goldman Sachs will feel the least compunction about
fleecing the country while it suffers an economic meltdown–is fantasy.
These people have no consciences and will take every penny we let
them steal. They are economic sociopaths and well rewarded exactly
for that quality.
- Just tax them–pass a higher employer contribution tax rate for
employees making over $400,000 per year, and an even higher one
for employees making over $1million per year.
Then, tax the bonuses
to employees at higher rates also, with the above cut-offs.
Until the entire federal bailout money is repaid with 24% interest–the
rate banks are charging credit card holders.
- It’s interesting that our colonial ancestors, whose names and
spirit are always being invoked by politicians–particularly conservative,
“fiscally-responsible” Republicans–would have hung from the highest
tree the bankers, “regulators” (enablers would be a better term)
and politicians who allowed all this to happen.
Revolutions have happened over far less. But here, with more
tools for knowledge than ever in our 21st century, we go about our
daily lives worrying about Jon and Kate, Michael Jackon’s resting
place, who will marry some bachelorette, and other pressing issues.
The United States will fall, and it deserves to. Time to pass
the torch on to someone else in the quest for a better way of life,
for we blew our magnificent bounty a long time ago.
— John
- I am convinced that their gain comes from the same sort of activities
that they participated in over the last 10 years. They are not building
anything long term or useful. I have
no doubt that Goldman is profiting on the bankruptcy and near bankruptcy
position of many American corporations, that didn’t and won’t receive
bail out money, to the benefit of foreign investors and the detriment
of the United States. They are robber barons.
—
Dennis
- “a clear and comprehensive explanation of how exactly Goldman
made the money”?
Here’s a very straightforward one: Had Treasury not pumped over
$100 billion into AIG, Goldman would have been out over $10 billion.
The entire profits they just reported would have been wiped out.
That seems to answer to me how exactly Goldman made the money.
— dt
- Where is this money really coming from? They aren’t pulling
it out of thin air. We are all,… the whole global community, paying
more for something, somewhere along the line due to these obscene
“profits”. The relationship with Exxon Oil is a lot clearer,… one-to-one,…
one extra dollar at the pump, one windfall dollar in Dallas,
but this Goldman scam, it is insideous,
like cancer, or like roaches.
They slime around, out of sight, under the radar, making stock
and commodity trades, in positions directly
counter to my 401k or my grocery store check out total.
They take these extra fees now - supposedly - from state, local
and county debt…. HELLO- , every extra billion they usurp is money
me and my neighbors pay back to someone in taxes. This is NOT a
zero sum game. They win, America loses, I’m repulsed by it.
Earth to Obama, … . . . (sos). Can you PLEASE regulate this nonsense.
I know you are too intimidated to tax the incentive out of it.
— charles c
- Investment banking became the basis of the modern US economic
system , and it is also the basis of most global economic systems
.
Making money with money , nothing else matters.
How much better can it get ?
Unlimited supply of it , no worries , a healthy, clean world
for everybody to enjoy .
If we all participate in it , we don’t have to work anymore ,
make nothing , produce nothing , we only have to go to school to
become an investment banker or commodity trader .
Wow…..America -- Can it get any better ?
— Henry Detlef
- Goldman is as profitable as the Mafia is. There profits come
from the most astute coercions possible.
This comes at the expenses of the taxpayers and all entities
who have to pay Goldman’s fees. Do you think that they are happy
to pay those high fees? No - but they don’t have a choice because
Goldman control the game. It is obvious that when profits are constantly
that high you’re dealing with a racket.
If Goldman had not bought the congress they would be in jail.
I wish they’ll go the way of Marion Jones and will have to give
the gold back - and their glory when the fraud will be exposed.
— Bill Delamin
- these idiot-savants are thieves. these are no super-humans.
they are ordinary, greedy, selfish, self-absorbed gamblers. they
play poker to ‘develop trading skills’. disgusting excuses for human
lives. gambling other people’s money for a living while having cab
drivers and school teachers pay for their excesses via tax subsidies.
the only reason they go into public service afterwards is to propagate
their power even further and preserve their privilege through covert
corruption. lynch them all - they won’t be missed.
— Rob
"Yet they continue to enjoy a grossly asymmetric deal, socialized losses
versus privatized gains."
One of the reasons I expect the recovery to be slow despite improvements
in the financial sector is that the economy cannot go back to where
it was before the crisis hit. The financial and housing sectors need
to shrink, too many economic resources were used unproductively in support
of these activities, and the automobile sector is also in transition.
While the debate rages over whether the years ahead will be dominated
by in-flation, de-flation, or some combination of the two, a quick look
at the reasons why so many people are so terrified of inflation is in
order.
This is not meant to be an all-inclusive discussion, simply an overview.
1. They've been printing so much
money, it's got to go somewhere
Yes, I know, the newly created trillions of dollars that monetary authorities
around the world have sent out to failing
banks, auto companies, insurance companies, and others - much of
that money is currently just sitting there as bank reserves, not entering
the economy in the form of new bank loans that would have this sum leveraged
up to who knows how many tens of trillions of dollars.
Of course, that's today's story.
Tomorrow's story (probably sometime next year) will be one of economies
that have hit bottom, at which time, banks will be more willing to lend
and consumers more willing to borrow. That's when all the newly printed
money starts to create inflation.
The doubling of oil prices seen earlier this year is just a teaser for
what's to come since central banks quickly lose control over where the
money goes once it starts to move again. Of course, if there is no economic
recovery, that money will just sit there and there will be little or
no inflation. But, if we do manage to pull ourselves up out of this
mess, we'll see the highest inflation in generations as policymakers
will be loathe to repeat the mistakes that led to the 1937 recession,
following the Great Depression.
2. The government's inflation numbers are bogus
When inflation does come roaring back, you probably won't see too much
of it showing up in the government's
Consumer Price
Index (CPI) data since this measure has been systematically
neutered over the last thirty years to make rising prices seem as though
they're not all that bad compared to what we saw back in the 1970s.
You hear a lot about how economic policies have "defeated" inflation
over the last few decades when, in fact, much of the lower inflation
numbers have to do with cheap oil from the Middle East, cheap imported
goods from Asia, and, most importantly, changes in the way the Bureau
of Labor Statistics calculates the inflation statistics.
Since home prices were stripped out of the index in 1983, it's hard
to imagine how we could ever see inflation over ten percent again since
housing rental costs now account for more than 30 percent of the index.
With the glut in housing due to the recently popped bubble (a bubble
that would not have been possible if home prices had not been stripped
from the inflation data), we'll have downward pressure on rents for
years to come.
The bad news is that domestic services and energy will keep on rising
and this will feel like 20 percent inflation even when the government
says it's only six.
3. Peak oil is real and it is near
The ongoing recession/depression has been a boon to those who have long
scoffed at the whole notion of Peak Oil - that cheap energy, fossil
fuel that comes gushing up from out of the ground with little or no
effort and has served as the very foundation of the world economy over
the last 80 years or so, will soon be a thing of the past.
Since changes in global energy consumption are inextricably tied to
changes in economic growth, the only way that peak oil is not going
to be a problem in the years ahead is if the global economy grows at
a much slower pace. Slow growth means less jobs which mean lots of people
have lots of idle time on their hands and governments don't generally
like that.
Look for item #1 above to solve many of the world's economic problems
in the near-term while creating even bigger inflation problems in the
long-term as a return to world-wide economic growth once again stresses
the relatively limited energy production capacity as it did last year.
4. Rich, smart people are buying gold
I don't know about you, but when I hear about people like John Paulson
of Paulson and Company buying billions of dollars in gold bullion for
his hedge fund and when stories begin to circulate about very wealthy
individuals buying bullion by the truck load, apparently OK with the
whole idea that it neither earns interest or pays a dividend - then
I start to worry a little bit.
Most of the rich people in the world are rich for one very good reason
- because they're smart.
And even though most of the investment world still doesn't have much
of a clue about the nature of money and how, after almost four decades,
a very long experiment with a world overflowing with fiat money is now
going horribly wrong, a lot of smart people with a lot of money have
figured it out.
In private clubs, board meeting rooms, and social gatherings all around
the world, the likes of which neither you nor I will ever experience,
they are swapping stories about how to buy and store gold because rich,
smart people know the long history of paper money.
Paper money, issued by government fiat and backed by nothing other than
confidence in the issuing government to act responsibly, has never endured.
Governments always abuse this power and to think that it will be different
this time is not only not very smart, it is naive.
5. The central bank does not fear inflation
The single most important reason to fear inflation is that the Federal
Reserve and its minions of economists, accountants, and ne'er do wells
do not fear it.
Never before have there been so many signs of impending financial calamity
that have been missed by so many central bankers, economists, and policy
makers around the world that there is absolutely no reason to think
that they will be any better able to spot early signs of rip-roaring
inflation than they were able to spot signs of a stock market bubble,
a credit bubble, or a housing bubble.
In fact, even if there are indications of monstrous price increases
on the horizon, the Federal Reserve and others will likely embrace the
arrival of rising prices since what they really fear is de-flation.
On this side of the Atlantic, they are determined to avoid a repeat
of the 1930s when a sound money system had a completely different set
of dynamics and they are loathe to do anything substantive to combat
inflation until they are sure that they have vanquished their nemesis
- de-flation.
Sure, they'll keep talking about "exit strategies"
and how to "remove the accommodation" that has been provided over the
last year or so in the form of trillions of newly created dollars, but
they don't really mean it.
In the next few years we'll be creating a whole new chapter of economic
history, one where inflation will play a central role. When the historians
look back at 2009 they'll wonder, "Why wasn't anyone worried about inflation
back then? When they could have done something about?"
July 15, 2009 | Debtwatch
The widely believed proposition that this financial crisis was “a
tsunami that no-one saw coming”, and that could not have been predicted,
has been given the lie to by an excellent
survey of economic models by Dirk Bezemer, a Professor of Economics
at the University of Groningen in the Netherlands.
Bezemer did
an extensive survey of research by economists or financial market commentators,
looking for papers that met four criteria:
“Only analysts were included who:
- provide some account on how they arrived at their conclusions.
- went beyond predicting a real estate crisis, also making the
link to real-sector recessionary implications, including an analytical
account of those links.
- the actual prediction must have been made by the analyst and
available in the public domain, rather than being asserted by others.
- the prediction had to have some timing attached to it.”
On that basis, Bezemer found eleven researchers who qualified:
|
Researcher |
Role |
Forecast Date |
| Dean Baker, US |
Co-director, Center
for Economic and Policy Research |
2006 |
| Wynne Godley, US |
Distinguished Scholar,
Levy Economics Institute of Bard College |
2007 |
| Fred Harrison, UK |
Economic Commentator |
2005 |
| Michael Hudson,
US |
Professor, University
of Missouri |
2006 |
| Eric Janszen, US |
Investor & iTulip
commentator |
2007 |
| Stephen
Keen, Australia |
Associate
Professor, University of Western Sydney |
2006 |
| Jakob Brøchner Madsen
& Jens Kjaer Sørensen, Denmark |
Professor and Graduate
Student, Copenhagen University |
2006 |
| Kurt Richebächer,
US |
Private consultant
and investment newsletter writer |
2006 |
| Nouriel Roubini,
US |
Professor, New York
University |
2006 |
| Peter Schiff, US |
Stock Broker, investment
adviser and commentator |
2007 |
| Robert Shiller,
US |
Professor, Yale
University |
2006 |
Having identified eleven researchers who did “see it coming”, Bezemer
then looked for the common elements in the way that these researchers
analyzed the economy. He argued that if there were common elements—and
if these differed from the approach taken by the overwhelming majority
of economists, who didn’t have a clue that a crisis was approaching—then
the only useful economic models would be ones that included these common
elements.
He identified four common elements:
- “a concern with financial assets as distinct from real-sector
assets,
- with the credit flows that finance both forms of wealth,
- with the debt growth accompanying growth in financial wealth,
and
- with the accounting relation between the financial and real
economy.”
A non-economist might look at these elements in puzzlement: surely
all economic models include these factors?
Actually, no. Most macroeconomic models lack these
features. Bezemer gives the topical example of the OECD’s “small global
forecasting” model, which makes forecasts for the global economy that
are then disaggregated to generate predictions for individual countries—like
the ones touted recently as indicating that Australia will avoid a serious
recession.
He notes that this OECD model includes monetary and financial variables,
however these are not taken from data, but are instead derived from
theoretical assumptions about the relationship between “real” variables—such
as “the gap between actual output and potential output”—and financial
variables. As Bezemer notes, in the OECD’s model:
“There are no credit flows, asset prices or increasing net worth
driving a borrowing boom, nor interest payment indicating growing debt
burdens, and no balance sheet stock and flow variables that would reflect
all this.”
How come? Because standard “neoclassical” economic models assume
that the financial system is like lubricating oil in an engine—it enables
the “real economy” to work smoothly, but has no driving effect—and that
the real economy is a miracle machine that always returns to a state
of steady growth, and never generates any pollution—like a car engine
that, once you take your foot off the accelerator or brake, always returns
to a steady 3,000 revs per minute, and simply pumps pure water into
the atmosphere.
The common elements in the models developed by the Gang of Eleven
that Bezemer identified are that they see finance as more akin to petrol
than oil—without it, your “real economy” engine revs not at 3,000 rpm,
but zero—which can contain large doses of impurities as well as hydrocarbons.
The engine itself is seen as a rather more typical gas-guzzler that
pumps not merely water and carbon dioxide, but sometimes unhealthy amounts
of carbon monoxide as well.
That’s encapsulated in the flowchart that Bezemer copied from a paper
by Michael Hudson, shown below. Without credit from the Finance sector,
producer/employers don’t get the finance needed to run their factories
and hire workers; but with credit they accumulate debt that has to be
serviced from the cash flows those businesses generate.
The component left out of the above flowchart—but incorporated in
all the models praised by Bezemer for seeing the crisis coming—is that
the finance system can fund not merely “good” real economy action but
“bad” speculation on financial assets and real estate as well. This
also leads to debt, but unlike the lending to finance production, it
doesn’t add to the economy’s capacity to service that debt.
The growth in thus unproductive debt was the common element identified
by Bezemer’s “Gang of Eleven”, which was why we most definitely did
see “It” coming.
I’ll finish this analogy-laden article with a sideswipe at an inappropriate
one—that this crisis is “like a tsunami”. Though that image captures
the suddenness and devastating nature of the crisis, it is wrong not
merely once but twice in characterizing how it came about.
Firstly, unlike a tsunami, this crisis was predictable by economists
who take what Bezemer characterized as a “Flow-of-fund or accounting”
approach. Secondly, a tsunami is actually caused by a huge shift in
the planet’s tectonic plates, and the shift itself relieves the tension
that caused the tsunami in the first place: in a sense, the tsunami
resets the system to a tranquil state.
This financial tsunami was caused by the bursting of asset price
bubbles driven by excessive levels of debt, but the bursting of those
asset bubbles hasn’t eliminated the debt—far from it. Instead, economic
performance for the next decade or more will be driven by the private
sector’s attempts to reduce its debt levels, and this will depress economic
activity for years. Unlike a tsunami, a debt crisis is a wave of destruction
that keeps on rolling unless the debt is deliberately eliminated.
Everything that is being done by policy makers around the world is
instead trying to restart private borrowing. A better analogy is therefore
not a tsunami but a drug overdose—and our “neoclassical” economic doctors
are attempting to bring the patient back to health by administering
more of the same drug.
marvenger said,
mind boggling small number. I can’t help but
feel capitalism needs this ignorance
to function, if people knew the game no one would play.
How on earth is Goldman Sachs getting away with their bonuses.
they received over $20b in gov funds through the AIG conduit. I
think I’m starting to know how the Romans felt when Nero became
Emperor. All hail the The United States of Goldam Sachs
Philip said, in July 15th, 2009 at 2:11 pm
Excellent work by Bezemer, and well done Steve. This finding confirms
James Galbraith’s statement when he was interviewed by the New York
Times about the US property bubble. He correctly said that out of
15,000 professional economists in the US, about 10-12 actually saw
the bubble before it burst.This is what happens when economic
and financial policy is crafted by neoclassical economists.
gordon said, in July 15th, 2009 at 2:34 pm
Well done, Steve, being recognised internationally at last. And
the final analogy does seem more apt.But I do wonder about many
others that I have read who also recognised the unsustainabilty
of the debt bubble well in advance yet receive no recognition in
this report. What about Doug Noland with his epic Credit Bubble
Watch at Prudentbear, and the myriad of goldbugs?
Still, a good start.
MACCA said, in July 15th, 2009 at 3:44 pm
Thanks very much – again- Steve.Looking at the stranglehold Banksters
have on Govts, I am not confident at all that just because the current
dominance of neoclassical economic theory has been proved resoundingly
wrong , will it be discarded for what is obviously the correct “stock
to flow” versions.
Debt and credit as we all know is enormously profitable and very
big business. The “gang of eleven” economic models are anathema
to Big Bank business models and therefore will struggle to gain
any acceptance from the Bankster minions in Govts.
mannfm11 said, in July 15th, 2009 at 6:14 pm
I am not an official economist, but you might plug mannfm11 in google
and see the writings over the past 8 years where I called for the
same thing. But, there is a guy Steve might know, Doug Noland who
studied in Australia in 2002, but continued to write for the Prudent
Bear Fund prior to, during and after 2002. His post, called the
Credit Bubble Bulletin, tracked all the different financial bubbles
and Doug was waiting for this disaster much before Roubini ever
even thought about it. I believe Doug testified in front of Congress
about the dangers of allowing the GSE’s to pump credit and securitize
it. I read one of his posts which said that credit was like a shark,
once it stops swimming it dies. Doug’s most recent writing was about
China’s current lending, which he says has put them now in the credit
bubble twilight zone where they are either going to have to accelerate
their lending going forward or collapse, meaning they are now repeating
what Greenspan and Wall Street did which started this mess in the
1990’s. I am not sure that the deflation of Japan didn’t start a
chain reaction, where we are now running all bubbles to stay afloat.
The world response is clearly absurd, more of the hair of the dog
that bit you. It seems they are only making Goldman Sachs many more
billions.
2009-07-14 | CalculatedRisk
The
Manufacturing and Trade Inventories and Sales report from the Census
Bureau today showed more evidence of declining inventories.
Click on graph for larger image in new window.
The Census Bureau reported:
Manufacturers' and trade inventories, adjusted for seasonal variations
but not for price changes, were estimated at an end-of-month level
of $1,368.1 billion, down 1.0 percent (±0.1%) from April 2009 and
down 8.0 percent (±0.4%) from May 2008.
The above graph shows the 3 month change (annualized) in manufacturers’
and trade inventories. The inventory correction was slow to start in
this recession, but inventories are now declining sharply.However,
even with the sharp decline in inventories, the inventory to sales ratio
has only declined to 1.42 in May - since sales have fallen sharply too.
There has been a race between declining sales and declining inventory.
Even as sales start to stabilize (appears to be happening), inventory
levels are still too high compared to the lower sales levels, and further
inventory reductions are probably coming.
While professor Roubini is an opportunist who is a rather bad forecaster
(but like clocks that stop working shows time correctly one time a day,
can be right on certain issues) and has prognostications this a distinct
"recession porno" flavor, still official forecasts are too rosy....
...Professor Roubini
wrote today:
In the U.S., the unemployment rate, currently at 9.5%, is poised
to rise above 10% by the fall. It should peak at 11% some time in
2010 and remain well above 10% for a long time.
...
But these raw figures on job losses, bad as they are, actually understate
the weakness in world labor markets. If you include partially employed
workers and discouraged workers who left the U.S. labor force, for
example, the unemployment rate is already 16.5%; even temporary
employment is sharply down....Moreover, many employers, seeking
to “share the pain” of the recession and slow down the rate of layoffs,
are now asking workers to accept cuts in both hours and hourly wages.
Thus, the total effect of the recession
on labor income of jobs, hours and wage reductions is much larger.
Paper pushers from Goldman and like will fight against this pretty sound
idea...
naked capitalism
If macroprudential supervision or any such related effort at reducing
the odds of systemic economic crises unfolding from financial instability
is to be successful, the core analytics will need to be built around
a stock/flow coherent approach macroeconomics. The ground work in this
area has been already been done by the likes of Claudio Borio, Wynne
Godley, Levy Institute research associates, and others working in financial
stability projects within various national and international institutions.
Without paying attention to unsustainable sectoral cash flows
and the resulting balance sheet leverage building up over time, financial
vulnerabilities that can trip up the entire economy – indeed, as we
have seen, the entire global economy - will remain largely invisible
to investors, entrepreneurs, and policy makers. Perhaps that
serves the interests of asset bubble perpetrators, but after recent
events, it is high time to question whether those interests should remain
paramount.
Selected comments
Ina Pickle said...
I don't think that those were bullish calls in the slightest.
I think that she very clearly said that the banks are being handed
a HUGE quarter, and to be very careful not to be short them in the
near term. DUH. She said a 15% bounce wouldn't surprise her.
She also continued to say what she's been saying all along: that
the core business of banks doesn't make money. I think this is consistent,
just pointing out that the rules are completely changed.
She also made some extremely bearish sounds about the long run:
consumers aren't coming back, no new lending, one offs, etc.
What, do you disagree with her on GS? Seems to me that the market
should just price in that they are in
a unique position as the government sponsored gorilla in the
markets. They have a license to print money.
emca said...
Meredith also predicts unemployment will reach 13%-15%.
Bullish on banks but not America, I
guess. May have something to do with what Ed suggested
below, that GS has entered the realm of international financial
mechanization and, I would add, should be judged on that variable
(all grumblings by fellow peons damned).
The phenomena of Goldman's was not
entirely unpredictable. Earlier this year the New York Times speculated
on Goldman's 'competitive' advantage given brain-drain resulting
from their (Goldman's) unfretted ability to compensate its troops.
Added the demise of organizations with might dull their competitive
edge (i.e. Lehman's) and Goldman's political acumen, one can only
shrug at marvelous insight Meredith Whitney (et. al.) are now yacking
up.
From this station the train does part, to what destination we
care not, as it is the only vestige moving away.
Edward Harrison said...
Ina Pickle,
I have to admit, you're right about Whitney. She IS saying the
same things. The problem I have is not with WHAT she is saying,
but the stress and the tone.
I wish she would acknowledge that her tone and stress are different
because that would make her statements that much more credible.
On substance, I agree with her very much i.e.
the banks are benefiting from government largesse and accounting
rule changes. I don't agree that the underlying earnings
power of banks is negligible however.
For now, that's neither here or there
because we both agree that a lot of money is going to be made by
GS and probably by JPM, WFC and BAC. Citi is another story.
naked capitalism
Last week, I followed up Yves Smith’s excellent post on “Why
Big Capital Markets Players Are Unmanageable” with
“More on why big capital markets players are unmanageable.”
I would like to extend the discussion beyond the U.S. border into a
look at how the universal banking model abroad encroached on the U.S.
banking system and created a response that made the repeal of Glass-Steagall
an inevitability.
... ... ...
...ironically, the U.S. banking system is much more prone to systemic
risk today than it was a year ago or a decade ago. Moreover, these
institutions still have an enormous amount of so-called toxic assets
on their balance sheet hidden in Level Three assets (see post “Level
Three Assets: banks are hiding the ball on credit writedowns”).
These assets have not been written down to reflect present market values.
And, many more writedowns from commercial real estate and credit cards,
leveraged loans and high yield bonds remain to be taken.
My conclusion, therefore, is that the likely technical recovery toward
the end of this year or the beginning of 2010 is a
fake recovery. Much underlying systemic weakness remains.
Moreover, the U.S. banking system post-crisis is more concentrated and
more vulnerable than ever before. Will bringing back Glass-Steagall
solve this? No. This post demonstrates that there are forces
in the global marketplace that make Glass-Steagall a relic of the 1930s.
Nevertheless, a move away from the self-regulatory nonsense of the last
generation is warranted. Enforcement of existing regulations, regulation
of OTC derivatives and the shadow banking system are all important steps
that need to be taken. However, above all, I am most concerned
with the concentrated risk in our financial system. I see no other
way to reduce this concentration than to break up too big to fail institutions.
If you do see another way please feel free to comment
Selected Comments
Joe Costello said...
-
Hi Edward,
While there's some points to your history, I'd say
its pretty industry standard view of what happened, especially over
the last three decades.
One thing is the banks played a role in opening up the S&L industry
so they could get their grimy paws all over that. Check out Greider's
analysis in
"Who Will Tell the People?"
Also, you drop profitability and "internationalization" in there
as reasons.
1) Getting money from money is much of the time profitable, the
size of the profits is the issue. Everyone hates to see other people
make more than themselves, especially Wall Street and the banks.
Its ok to regulate certain aspects of the financial system to low
profits and if people aren't happy with that, they can get into
another business.
2) Internationalization, it was the corporations that created
this system. It's not some a priori force of nature. There's ability
to protect things from forces deemed harmful. You write this very
much how the narrative has been the last three decades. The mega-corporations
were behind the whole corporate globalization process and they kept
using it for reasons that things had to change, while they were
the force behind the whole process. So, when you say internationalization
as a cause, its not, it is a process we allowed to be created.
Finally, Glass Steagall was not a
relic. It's greatest importance and that of many of the regulations
of the era were to separate the money supply and sectors, so that
if there was a problem in one area, it didnt instantly spread across
the whole system. Again, it's ok if your going to
lend money to certain areas of the economy, its not tremendously
profitable, just enough, that keeps things stable. Like I said if
you want bigger profits go somewhere else.
This is why all the talk from Obama
et al is not getting to the point. You don't need a systemic regulator,
you need rules and regulations that don't allow bubbles,
we had them for fifty years and they
worked well, sure some can always be updated, but there's a lot
of wisdom from what they did in the 30s we could relearn. I'm not
a neo-New Dealer.
The financial sector needs to be caged back up, it needs to be
shrunk by at least half.
Yves Smith said...
-
Ed,
I have to differ a wee bit with your history.
Citibank had universal banking aspirations since the early 1980s.
Ditto JP Morgan, BT was keen since the late 1970s to get into investment
banking, but didn't think having consumer deposits was a plus and
famously sold their branch network
And by "universal banking" most people meant the euorbanks, like
DeutscheBank, which even as of the 1970s had been permitted for
more than a century to own unlimited stakes in industrial companies
and underwrite and trade securities. So this was a long standing
model, not a new model. The Germans and Swiss just were not very
good at the investment banking part, sine their securities markets
were not as deep and developed as the US.
Also, the US bank acquisitions of UK brokers post 1986 were notably
unsuccessful. The view among investment bank prior to this exercise,
and it appeared to confirm their prejudices, is that commercial
banks would screw up any securities industry deal by imposing new,
inappropriate management systems on the staff, leading them to quit.
The first kind of investment banking deal I recall succeeding was
the Swiss Bank Corporation acquisition of O'Connor & Associates,
a derivatives trading firm. I was very much surprised they kept
the people and were successful at skill transfer. They had a JV
in 1992 and did the full acquisition in 1993. If anyone knows of
any earlier deals that could be deemed successful, I'd be interesting
in knowing about them.
And Glass Steagall was shot full of holes by the time it was
formally repealed in 1998. The main practical impact was allowing
the Citi-Travellers merger to proceed. Look, I had Citi as a client
in the 1980s and as of 1986, they had bought and sold an industrial
company, meaning not as an M&A advisor (that was perfectly kosher)
but moving it through their balance sheet. This appeared to be one
of those typical Citi "let's do it because we can" sort of the way
engineers take apart and reassemble washing machines for fun. Any
regulator would have been horrified. And the real waivers took place
in the later 1980s and 1990s.
The big deal for the commercial banks was the rise of derivatives.
New product, the highest tech, they got in on the ground floor,
and balance sheet strength was important in that business.
Talk about centralization!
"The credit system, which has its focus
in the so-called national banks and the big money-lenders and usurers
surrounding them, constitutes enormous centralization, and gives this
class of parasites the fabulous power, not only to periodically despoil
industrial capitalists, but also to interfere in actual production in
a most dangerous manner— and this gang knows nothing about production
and has nothing to do with it.” [1]
Ten years ago, a quote from Marx would have one deemed a socialist,
and dismissed from polite debate. Today, such a quote can (and
did, along with
Charlie’s photo) appear in a feature in the
Sydney Morning Herald—and
not a few people would have been nodding their heads at how Marx got
it right on bankers.
Jul 12, 2009
This
story and associated
slide show in Spiegel Online (hat tip Tailwind) about William White,
former chief economist at the BIS (Bank
for International Settlements), offers new hope that maybe, just maybe,
the global economy will someday be put on a steadier course.
William White predicted the approaching
financial crisis years before 2007's subprime meltdown. But central
bankers preferred to listen to his great rival Alan Greenspan instead,
with devastating consequences for the
global economy.
2009-07-12 | CalculatedRisk
Professor Roubini
thinks the economy will be in recession through the end of 2009,
and that the recovery will be "shallow". More from Christian Menegatti
at RGE Monitor:
The general consensus is that this recession will end sometime in
the second half of 2009. While RGE Monitor expects more quarters
of negative real GDP growth in 2009, we also expect the pace of
contraction of economic activity to slow significantly. We forecast
negative real GDP growth in Q2 2009 and Q3 2009, and for real GDP
to remain flat in Q4. After the sharp contraction in economic activity
in 2009, growth will reenter positive territory only in 2010, and
then at a very sluggish rate, well below potential.
Paul Kasriel at Northern Trust is a little more optimistic:
When We Get “There”, Will We Know It?
Back in April, our forecast update commentary was entitled, “Are
We There Yet?” The “there” referred to a resumption of real growth
in the overall economy. Our answer in April was “no,” which also
happens to be our answer in July. When will we get there? Our answer
in April was the fourth quarter of this year, which also happens
to be our answer now. Assuming we get there in the fourth quarter,
would most households and businesses in America know it if they
were not so informed by the media? Probably not.
We anticipate another “jobless recovery,”
which implies a relatively feeble one. We would not be surprised
to hear terms early in 2010 such as “double dip.”
I think Kasriel might be a little too optimistic about 2010.Jan Hatzius
at Goldman Sachs sees a little positive GDP growth starting in Q3, and
a sluggish recovery (no link).
Here are the quarter by quarter real GDP (annualized) forecasts from
Northern Trust and Goldman:
| Quarter |
Northern Trust |
Goldman Sachs |
| Q2 2009 |
-2.2% |
-1.0% |
| Q3 2009 |
-2.1% |
1.0% |
| Q4 2009 |
2.3% |
1.0% |
| Q1 2010 |
1.2% |
1.5% |
| Q2 2010 |
2.4% |
1.5% |
| Q3 2010 |
2.4% |
2.0% |
| Q4 2010 |
3.3% |
2.0% |
I think the real GDP growth will turn slightly positive sometime
in the 2nd half of this year, but my guess is 2010 will be barely positive,
with the unemployment rate rising for most of 2010.
More signs of the coming collapse of living standards engineered by
wall streeters and banksters
The Big Picture
Speculator: Policymaker Foe or Friend?
I believe it was sometime in late 2002 - or perhaps early 2003. I
recall one of the major macro hedge fund managers appearing on CNBC.
He made what I thought at the time was an extraordinary comment:
"The government wants me to buy junk bonds,
so I'm buying junk bonds."
It was always my view that Fed chairman Greenspan directly targeted
the leveraged speculating community, as necessary, for use as a mechanism
for monetary stimulus/reflation. The Greenspan Fed would actively manipulate
market interest-rates, hence speculative profits.
If financial crisis erupted - such as with
the collapse of Long-Term Capital Management, the bursting of the Tech
Bubble, or 9/11 - Greenspan would immediately collapse short-term borrowing
costs, assure the marketplace ample liquidity and, accordingly, inflate
the price of most fixed income securities.
This signaled to the leveraged players that it was an opportunistic
time to buy risk assets - especially corporate debt and mortgages. These
purchases would reduce market borrowing costs, increase Credit Availability,
and boost marketplace liquidity. And like clockwork, ultra-loose financial
conditions would work their magic on the equities and real estate prices,
as well as the real economy. After awhile, speculators simply loaded
up on risk assets - anticipating the next crisis and Fed-induced speculative
profit bonanza.
With the Fed able and willing to manipulate
speculative profits and (along with the GSE) "backstop" marketplace
liquidity, leveraged speculation flourished and expanded to unimaginable
dimensions. The leveraged speculating community evolved into the most
powerful monetary force in history - and the Federal Reserve was soon
playing with a bonfire.
July 8 - New York Times (Edmund L. Andrews):
"Reacting to the violent swings in oil prices in recent months,
federal regulators announced... that they were considering new restrictions
on 'speculative' traders in markets for oil, natural gas and other
energy products.
The move is a big departure from the hands-off approach to market
regulation of the last two decades. It also highlights a broader
shift toward tougher government oversight... In the case of oil
and gas trading, regulators made it clear that they were willing
to move, without waiting for Congress to act on Mr. Obama's overhaul,
invoking their existing powers.
The Commodity Futures Trading Commission
said it would consider imposing volume limits on trading of energy
futures by purely financial investors... 'My firm
belief is that we must aggressively use all existing authorities
to ensure market integrity,' said Gary Gensler, chairman of the
commission...
He said regulators would also examine whether to impose federal
'speculative limits' on futures contracts for energy products."
Mr. Gensler's comments really caught the markets off guard. Isn't
he a long-time Wall Street, free-markets guy? And while one can view
the clampdown on "speculative" energy trading as simply part of the
tough new post-Bubble regulatory backdrop, I suspect there's more to
it.
The good ole' days of policymakers enticing the leveraged players
into junk bonds and mortgages have past. Recall that the Bernanke Fed
cut rates 200 bps during 2008's first quarter. Instead of the typical
signal to buy US debt securities, speculative flows rushed to trade
out of dollar securities for real things that can't be so easily devalued
away. Over several months, commodities prices rocketed to record highs,
as crude oil reached an astounding $145 a barrel. At that point, the
leveraged speculating community had been lost as a reliable Fed monetary
management tool. Indeed, the inevitable day had arrived when speculation
was viewed as one huge problem in a gigantic mess.
Washington has a dilemma. Unprecedented monetary and fiscal stimulation
are being employed in hopes of spurring rapid economic recovery. But
these policy measures risk unwieldy - and self-reinforcing - speculative
flows out of dollar securities and into "undollar" assets such as energy
and commodities. And recall that it was about a month ago that the dollar
was breaking down, commodities were on a run, and crude was approaching
$75. At that that time, 10-year Treasury yields jumped to almost 4%
and MBS yields spiked to 5.07% (up more than 100bps in a month). Housing
and economic recoveries were in trouble.
Ironically, stock investors a month back were interpreting the rise
in commodities and market yields as positive confirmation that recovery
was taking hold. Fast forward a month - with crude and commodities now
sinking - and sentiment has shifted somewhat negatively. I tend to hold
the view that markets fluctuate - and news/analysis is there waiting
to follow market direction. I don't want to over-read commodities price
moves as an indicator of the vitality of global reflation.
As expected, the US economy is lodged in deep mud. Europe remains
very weak. But the global reflation thesis rests first and foremost
upon happenings in China and Asia. China, in particular, is living up
to all my reflationary expectations - and then some.
China's preliminary June bank lending data was out this week. Incredibly,
loans increased by $224bn. First half loan growth surpassed $1.0 Trillion,
about three times the year ago rate and way above government forecasts.
As a Credit analyst, these numbers gave me the chills. The Chinese Credit
system appears to have commenced the "terminal phase" of Credit excess.
Export industries may remain weak, but Chinese housing, auto and equities
markets - the current focal point of Credit expansion - are generally
robust.
Perhaps Chinese authorities are already moving behind the scenes
to try to rein in excesses. Yet a key facet of a Credit Bubble's "terminal
phase" is that it becomes a formidable challenge to muscle the Jeanie
back in the bottle. Over time, Bubble economies become increasingly
unstable. As we witnessed here at home, a point is reached where policymakers
view the risks of bursting the Bubble as too great - and they justify
and rationalize. Too many - individual and institutions - become dangerously
exposed to inflated asset prices. The unbalanced and maladjusted economy
becomes acutely vulnerable to a downward spiral. Erratic behavior engulfs
assets markets, economic activity and speculative flows, creating confusion
and policymaker paralysis. And, especially relevant to the current Chinese
predicament, an increasingly unequal distribution of (Bubble economy)
wealth creates a volatile social backdrop. When push comes to shove,
authorities will generally feed the Credit beast - and the unchecked
"terminal phase" is left to run completely out of control.
"Macro" analysis remains as fascinating as it is challenging. Here
at home, Washington seems poised to move against unhelpful speculation.
The marketplace has good reason to fear heavy-handedness. But don't
be surprised if it turns out more a case of light coddling: "Speculators
please take notice that it is to your advantage to buy corporate bonds
and mortgages instead of oil futures contracts." Fiscal and monetary
policymakers are formulating a recovery strategy. I would expect them
to pull out all the stops - and not give up easily - in their efforts
to accomplish objectives.
And despite the recent bludgeoning meted out in the commodities markets,
I'm not keen to abandon the global reflation thesis. At its root, global
reflation is premised upon a synchronized global government finance
Bubble consequent to bursting Credit Bubbles and the breakdown in the
global dollar reserve system. I am comfortable with the thesis yet recognize
the analysis is tough and the circumstances fluid. Mostly, uncertainty
and market volatility are as expected.
The global system remains in historic, uncharted, troubled and uncertain
waters. But with $2 Trillion of US federal debt issuance on tap this
year - perhaps matched by upwards of (a previously unimaginable) $2
Trillion of Chinese bank Credit growth - ongoing "Monetary Disorder"
remains the best bet. And, of course, our policymakers are keen to this
dynamic, and it would be typical of policymakers in such a predicament
to resort to increasingly creative means to try to stabilize a desperately
unstable pricing system. Can Washington rein in speculative flows? Can
they channel and mobilize them?
[Jun 12, 2009] Devil’s in the details for defaults by Tracy Alloway
Jul 10 | FT Alphaville
An interesting report is out from Standard & Poor’s on Friday, entitled
“The Devil is in the Details: Understanding the Variation in Corporate
Default Rates and Rating Transitions.” Now doesn’t that sound exciting?
(Ahem)
The thrust of the piece is that while it’s obvious global corporate
default rates increase overall in times of crisis, they do not necessarily
rise at the same levels across sectors, regions and ratings-classes.
For instance, and perhaps predictably, the
default rate for AAA- and AA-rated corporates tends to be much lower
than for speculative grade-rated stuff.
Related links:
Brace yourselves for record defaults - FT Alphaville
Corporate credit bears - FT Alphaville
[Jun 12, 2009] Doomsville by Neil
Hume
Jul 10 | FT Alphaville
Lest anyone was thinking of turning bullish after listing to the
siren calls of
Bond and
Winder, we present the following counterpoint.
From an email doing the rounds in the City of London on Friday morning
(The author is an MD at one of the big banks):
US Housing
It lead us into this recession & it will likely lead us out.
- This asset class is the collateral spine of household & bank
B/S. It remains a sine qua non for the mkt.
- Unfortunately, foreclosure filings are +18% yoy (May),
- the mort delinquiency rate (9.12%) is a record,
- prime defaults have just doubled (yoy) to 2.9%,
- new and existing home sales are still barely off their Jan lows
(you’d need to see a 50% increase from here to be consistent with
flat gdp), unsold inventory is still at 10.2 mths (even without
shadow inventory from banks & Securitised Mort Trusts),
- 30% of mort are in negative equity & rising,
- 18.1% hse prices is still ugly….
US Consumer
Too much debt, not enough credit.
- Declines in the housing & equity mkts have removed c$14tr from
his net worth (Fed) at a time when he’s 3x the leverage of 20 yrs
ago & carrying $13.5tr of debt. That process of de-leveraging is
just starting.
- Delinquencies on Home Loans just hit 3.5% (ABI), a number that
will grow in tandem with unemployment & US Personal bankruptcies
(ABI) were +35% last seen.
- Look at the recent & salutary examples of the banks and Japan’s
lost decade to remind us just how painful & prolonged the de-leveraging
process can be.
- The savings rate just hit 6.9%. It has reverted to 10% in prev
deep downturns. That cld be exacerbated by a baby boomer generation
who in previous recessions cld get credit & had a higher propensity
to spend (in their 30’s) but who now can’t get credit & have a greater
propensity to save (as they’re now in their 50’s).
- The latest non-farm number (-472,000) wasn’t just worse than
expectations, but was worse than the very worst print seen in either
of the ‘80-’82, ‘90-’01 or ‘01-’02 downturns.
- Initial Jobless yesterday were better, but Continuing claims
were worse (& a record high).
- Unemployment (beware the lagging mantra) is relevant because
this is a credit related crisis & unemployment’s continued rise
to & thru 10% (The Congressional budget is based on 8.1% ‘09) will
generate more delinquencies & foreclosures.
- Moreover, the “leading” indicator components of the non-farm
report-Hours worked (still at a record low & with a 70% correlation
to GDP) & Temporary Hires (-37/-) are still showing falling leaves
rather than green shoots.
- Credit cards (the lender of last resort) are seeing record charge
offs (Moody’s:-10.6% vs 9.9% in Apr) & cc outstandings are falling
at a 20% annualised rate with consumer credit contracting by over
$50bn since Lehman hit the tape. Remember, the consumer is just
starting, not just ending his de-leveraging process.
US Insiders
A vote of No confidence.
- 51% of CEO’s (Business Roundtable) expect lower capex (the inventory
replenishment is now a given for the mkt) & 49% expect lower payrolls
going fwd.
- Directors sold $2.9bn of stock in June (Trimtabs).
- The Sell/Buy ratio is a monster 10x, so the green shoot callers
might be selling it, but the Corp insiders
aren’t buying it.
US Dividends
70% of US equity rtns since 1900 (LBS) have been generated by dividends.
-In Q2 just 233 S&P names raised their divi (a record low) & 250 names
actually cut (2nd worst ever reading).
US Valuation
Valuations are not at a level that discounts any ongoing negative
news.
- Mkt bottomed (666) on 11.7x. The ave of the last 11 bear mkts
(where over 70% have seen a lower bottom) has been 9.9x (Haver)
& there’s nothing ave about this recession.
- Going all the way back to 1929 (NDR) and we find that PE multiple
expansion has averaged 10% in the first 3 mths & 22% in the first
6 mths of recovery.
We just clocked up 40%! With the “P” already there we need the “e”
to catch up real fast to validate this rally.
US Technicals & Volume
Better to wear out than rust up? -Dow has broken its 8300 Head &
Shoulders neckline support & 200 day move ave (FTSE has broken its 4295
Triple Top neckline, 200 day & failed to breach its channel top). Dow
theory (DJT has failed to validate the main index highs) is also firmly
in the bear camp. S&P has been clinging on by its fingernails but the
breach below its 200 @ 887 & a subsequent fall below major support @
875 wld frighten lots of rabbits.
-Ave daily vol has contracted by 30% on the S&P & c 50% on the Dow
over the last 3 mths (Trimtabs). -Bear mkt bottoms (19 going back to
the war) have typically been associated with steady eddy rallies on
good vol (Hussman). The 4 episodes that were the exception & saw rel
light vol also only rallied modestly. We’ve just belted the biggest
rally since the Depression on thin vol with just slightly less depressing
news….which reminds me of the Sage of Omaha’s axiom that “you can’t
make a baby in a day by making 9 women pregnant”.
Light trading vol (compounded by higher vol on recent down days vs
lower vol on recent up days), and a diminished response to “positive”
news imply that we don’t need to see strong selling pressure to roll
us over some more. Just buyer’s fatigue. And we need to beat (a 62%
beat rate in Q1) not just meet consensus eps forecasts for Q2.
US Issuance
Today’s problem or tomorrow’s promise? May clocked up $64bn & June
was similar. The prev record issuance was $38bn. There have only been
12 mths since ‘98 that Corp issuance has exceeded $30bn & the ave rtn
of the S&P over the nxt qtr was btwn -4% to -7% (Trimtabs)
US Quotes (recent)
- Moody’s:-”US housing won't hit bottom until 2010″.
- Hayashi (Jpn Economy Minister) “The US economy has yet to hit
bottom”.
- S&P:- “CMBS credit deterioration
is just beginning” ($400bn of commercial property
re-sets to y/e). I think this space is armed & dangerous.
- IMF:-”The retrenching of the US consumer is a huge adjustment
that the whole global economy is going to have to absorb”.
- Buffett (who’s a bull remember) “I had a cataract op on my eye
recently & I still can’t see any green shoots”.
- Moody’s:-”US housing wont hit bottom until 2010″. Hayashi (Jpn
Economy Minister) “The US economy has yet to hit bottom”. S&P:-
“CMBS credit deterioration is just beginning” ($400bn of commercial
property re-sets to y/e). I think this space is armed & dangerous.
IMF:-”The retrenching of the US consumer is a huge adjustment that
the whole global economy is going to have to absorb”. Buffett (who’s
a bull remember) “I had a cataract op on my eye recently & I still
can’t see any green shoots”.
US/China
Our knight in shining armour. But…
- The US is 25% of global gdp & China is 8%.
- -6% Chinese gdp grth (which we’re all now excited about)
is actually still consistent with an ongoing global recession.
- For every 1% that the US consumer shrinks, the Chinese consumer
needs to expand by 6%.
- Jpn shipments to China dropped -29.7% in May (-25.9% in Apr).
- 1/3rd of China’s gdp are exports (47% for Asia)….& those mkts
are still contracting.
People are talking up de-coupling again, despite the fact that that
particular chocolate teapot got melted before.
And finally
California, Russian banks, CMBS, Sovereign risk (Baltic states),
Swine Flu….
Still bullish?
(H/T Grim Reaper)
The problem is that renegotiation exposes lenders to two types of risks
that can dramatically increase its cost.
And the Fed economists respond:
We argue for a very mundane explanation: lenders expect to recover
more from foreclosure than from a modified loan. This may seem surprising,
given the large losses lenders typically incur in foreclosure, which
include both the difference between the value of the loan and the
collateral, and the substantial legal expenses associated with the
conveyance. The problem is that renegotiation exposes lenders
to two types of risks that can dramatically increase its cost.
The first is what we will call “self-cure” risk.
As we mentioned above, more than 30 percent of seriously delinquent
borrowers “cure” without receiving a modification; if taken at face
value, this means that, in expectation, 30 percent of the
money spent on a given modification is wasted. The second
cost comes from borrowers who redefault [30 and
45 percent]; our results show that a large fraction of borrowers
who receive modifications end up back in serious delinquency within
six months. For them, the lender has simply postponed foreclosure;
in a world with rapidly falling house prices, the lender will now
recover even less in foreclosure. In addition, a borrower who faces
a high likelihood of eventually losing the home will do little or
nothing to maintain the house or may even contribute to its deterioration,
again reducing the expected recovery by the lender.
I'd argue for a third reason: If it became widely known that lenders
routinely reduce the principal balance for delinquent borrowers with
negative equity, this would be an incentive for a large number of additional
homeowners to stop paying their mortgages.These economists would
argue that the lenders are behaving rationally and that foreclosure
- when all costs are considered - is frequently the least costly alternative.
Vonbek777
In 2001 (may have been 2002, memory is fuzzy), right after my parents
got back from a 4 year army tour in S. Korea, I had the opportunity
to have dinner with my parents and a gentleman and his wife from
Texas who had been involved with the board of Nations
Bank, then
Bank of America, and then a mortgage security company he started.
Basically he explained how they were making these mortgages and
then selling them almost immediately in large packages as securities.
Almost instant profit, little
risk, actually used the term "like taking candy from a
baby."
I brought up the fact that from my uneducated point of view this
was like financial alchemy and turning lead into gold never worked
in the long run. The answer to that was 'well that will be a problem
for someone else, not me, I am just following the law.
This country was founded upon the smart taking financial
advantage of the stupid.' After the dinner I got in a huge argument
with my dad about the issue. I said that the whole problem with
America was that we no longer made products, we just made
money out of nothing. Selling imaginary financial products
which only made money do to fee and markups in value for the elite.
It was all a scam. Dad said I had class envy, and as long as I thought
poor, I would be poor and jealous of those who worked for a living.
Jump to now, and in my opinion nothing has changed, it is just
everyone knows the emperor doesn't have any clothes on now...my
dad now blames deregulation and select individuals who 'gamed' the
system. In my opinion, this isn't a select problem of a few people
without scruples, but a reflection of the new reality of America.
The only way to get
rich is to take advantage of someone else.
Basel Too
here's a good explanation on the relationship between servicers,
lenders, borrowers, and MBS, and the legal hurdles for modification.
http://www.brokencredit.com/?p=2099
Effective Demand
Especially if they can afford the same house now. The lender
exercises the terms of the loan. the borrower exercises the terms
of the loan. The market and price discovery work. New loans are
generated using more rational criteria.
Also you have to foreclose because you remove the ruthless default
risk (defaulting just to get a loan mod) and the self-cure risk.
The highest NPV for the bank and the whole banks portfolio would
be to foreclose. You give people the choice they signed up for.
mmckinl
GEE, Doesn't seem there is much you can do. I guess we could
always let this whole housing and bank thing play itself out....
Nah
~~~~~
That's what they are doing ... letting it play out ... after
giving the banks trillions ... It's called the "Audacity of Hope
"
mmckinl
Comrade Coinz is exactly correct ....
"In the end, all
banker gambles get paid off with
taxpayer
money and they own all the empty houses while millions
are homeless."
and so is lawyerliz ...
"why is
moral hazard ok for
rich bankers, but not Joe 6 pack? "
pavel.chichikov
There's a horrible fascination in watching the Titanic and the
iceberg on a collision course.
Re that gentleman from Texas: The problem is moral and cultural.
That's the reason for the bad practice and policy, and the prevailing
Tragedy of the Commons. The gent from Texas was only living it out.
When Pres. Bush said that Wall Street got drunk, he was referring
to the captain and the officers of the watch on the Titanic.
pavel.chichikov
"IMO, they are more about the national idea of the social
contract and the national sense of the social justice."
Engrave it. Hang it on the wall.
pavel.chichikov
"As a student in modern political philosophy class (the only
political science course I ever took), I basically said the social
contract was nonexistent and a served only to conceal the non-consensual
nature of the use of force by government to seize private property
and our inability to refuse the deal."
RIF, that can't be entirely true, or our society would be a Hobbesian
field of battle, avoiding collapse only by the exercise of monarchical
power. No, the cynical abusers live side by side with those who
serve willingly because service to others is still alive.
Firemen don't rush into burning buildings for the pay.
ResistanceIsFeudal
sm_landlord
No system is perfect, but some are better than others at certain
things.
Our systems seem to have combined some of the worst aspects of oligarchy
and populism.
Yes but I do not think it is a recent phenomenon. I think we
just have much better visibility into the process now, and that
visibility is forcing us to acknowledge just how awful the system
really is.
July 11, 2009
IF asked to identify the intellectual founder of their discipline,
most economists today would probably cite Adam Smith. But that will
change. Economists’ forecasts generally aren’t worth much, but I’ll
offer one that even my youngest colleagues won’t survive to refute:
If we posed the same question 100 years from now, most economists would
instead cite
Darwin, renowned for the theory of evolution, was a naturalist, not
an economist, and his view of the competitive struggle was different
from Smith’s in subtle but profound ways. Growing evidence suggests
that Darwin’s view tracks economic reality much more closely.
Smith is celebrated for his “invisible hand” theory, which holds
that when greedy people trade for their own advantage in unfettered
private markets, they will often be led, as if by an invisible hand,
to produce the greatest good for all. The invisible hand remains a powerful
narrative, but after the recent economic wreckage, skepticism about
it has grown. My prediction is that it will eventually be supplanted
by a version of Darwin’s more general narrative — one that grants the
invisible hand its due, but also strips it of the sweeping powers that
many now ascribe to it.
Smith’s basic idea was that business owners seeking to lure customers
away from rivals have powerful incentives to introduce improved product
designs and cost-saving innovations. These moves bolster innovators’
profits in the short term. But rivals respond by adopting the same innovations,
and the resulting competition gradually drives down prices and profits.
In the end, Smith argued, consumers reap all the gains.
The central theme of Darwin’s narrative
was that competition favors traits and behavior according to how they
affect the success of individuals, not species or other groups.
As in Smith’s account, traits that enhance individual fitness sometimes
promote group interests. For example, a mutation for keener eyesight
in hawks benefits not only any individual hawk that bears it, but also
makes hawks more likely to prosper as a species.
In other cases, however, traits that
help individuals are harmful to larger groups. For instance,
a mutation for larger antlers served the reproductive interests of an
individual male elk, because it helped him prevail in battles with other
males for access to mates. But as this mutation spread, it started an
arms race that made life more hazardous for male elk over all. The antlers
of male elk can now span five feet or more. And despite their utility
in battle, they often become a fatal handicap when predators pursue
males into dense woods.
In Darwin’s framework, then, Adam Smith’s invisible hand survives
as an interesting special case. Competition, to be sure, sometimes guides
individual behavior in ways that benefit society as a whole. But not
always.
Individual and group interests are almost
always in conflict when rewards to individuals depend on relative performance,
as in the antlers arms race. In the marketplace, such
reward structures are the rule, not the exception. The income of investment
managers, for example, depends mainly on the amount of money they manage,
which in turn depends largely on their funds’ relative performance.
Relative performance affects many other rewards in contemporary life.
For example, it determines which parents can send their children to
good public schools. Because such schools are typically in more expensive
neighborhoods, parents who want to send their children to them must
outbid others for houses in those neighborhoods.
In cases like these, relative incentive structures undermine the
invisible hand. To make their funds more attractive to investors,
money managers create complex securities
that impose serious, if often well-camouflaged, risks on society.
But when all managers take such steps, they are mutually offsetting.
No one benefits, yet the risk of financial crises rises sharply.
Similarly, to earn extra money for houses in better school districts,
parents often work longer hours or accept jobs entailing greater safety
risks. Such steps may seem compelling to an individual family, but when
all families take them, they serve only to bid up housing prices. As
before, only half of all children will attend top-half schools.
It’s the same with athletes who take
anabolic steroids. Individual athletes who take them may perform better
in absolute terms. But these drugs also entail serious long-term health
risks, and when everyone takes them, no one gains an edge.
If male elk could vote to scale back their antlers by half, they
would have compelling reasons for doing so, because only relative antler
size matters. Of course, they have no means to enact such regulations.
But humans can and do. By calling our attention to the conflict between
individual and group interest, Darwin has
identified the rationale for much of the regulation we observe in modern
societies — including steroid bans in sports, safety and hours regulation
in the workplace, product safety standards and the myriad restrictions
typically imposed on the financial sector.
Ideas have consequences. The uncritical celebration of the invisible
hand by Smith’s disciples has undermined regulatory efforts to reconcile
conflicts between individual and collective interests in recent decades,
causing considerable harm to us all. If, as Darwin suggested, many important
aspects of life are graded on the curve, his insights may help us avoid
stumbling down that grim path once again.
The competitive forces that mold business behavior are like the forces
of natural selection that molded elk. In each case, we see instances
of socially benign conduct. But in neither can we safely presume that
individual and social interests coincide.
Robert H. Frank, an economist at Cornell, is a visiting faculty member
at the Stern School of Business at New York University.
See also
Unemployment rate, United States Helping banksers was probably done
with excess zeal. Now Government needs to concentrate on problem of unemployment.
It's fairly evident that the national "unemployment
rate" (U3) produced by the Department of Labor's Bureau of Labor Statistics
represents a low-end figure ... “It will
be a big public-policy problem.” that can doom the reelection
chanced for Obama...
There is a blog devoted to the problem:
unemploymentadvice.blogspot.com
July 10 | Bloomberg
Rebecca Alvarez says she’s “barely hanging on.”
Without a job for seven months, the 48-year-old computer- network
administrator said she’s stopped dining out, cut back cable-television
services and put off paying a photography class bill from her 14-year-old
son’s school in Monrovia, California. She
is among more than 4 million Americans who have been looking for work
for more than 26 weeks, representing 29 percent of the unemployed, the
most since
records began
in 1948.
Hundreds of thousands of lost jobs in
industries such as autos and
construction
haven’t been replaced with new ones, shrinking payrolls by 6.5 million
since the recession began in 2007, Labor Department figures show. The
June
jobless
rate reached 9.5 percent, the highest since 1983.
“We are going to have a huge pool of
unemployed, second only to the Great Depression,” said
Allen Sinai,
chief economist at Decision Economics in New York. “It will be a big
public-policy problem.”
Benefits Run Out
As many as 650,000 workers may exhaust
even their extended benefits within three months, said
Maurice Emsellem, policy co-director for the
National Employment Law Project, a nonprofit advocacy group headquartered
in New York.
That means Obama may need to aim directly at reducing joblessness,
said
Mark Zandi, chief economist at Moody’s Economy.com in West Chester,
Pennsylvania. Among options: enhanced job training, tax credits for
businesses that take on new employees or a temporary cut in payroll
taxes.
The U.S. traditionally hasn’t had to deal with long-term joblessness.
During the last 30 years, Americans who were thrown out of work took
an average 15.8 weeks to find new positions. In June, the
average duration of unemployment was 24.5 weeks, the longest since
records began in 1948. The number of people collecting unemployment
benefits
reached a record 6.88 million in the week ended June 27.
Peak Unemployment
While unemployment will peak between
10.5 percent and 11 percent in the U.S., it will remain high and stay
above 7 percent, said
Mohamed El-Erian, chief executive officer at Pacific Investment
Management Co., manager of the world’s largest bond fund.
“The United States right now is in transition,” El-Erian said in
an interview from Pimco headquarters in Newport Beach, California. “It’s
coming out of one regime. It’s on this bumpy and painful journey to
what we’ve called here the new normal.”
Alan Blinder, the former Fed vice chairman
(one of Greenspan's cronies -- NNB) who is now an economics
professor at Princeton University, isn’t as pessimistic as El-Erian
about the economic outlook. He says he sees the jobless rate peaking
at 10 percent or a little higher in the first half of next year, then
gradually coming down.
The proportion of unemployed workers
who have
permanently lost
their jobs -- as opposed to those on temporary layoff -- reached a record
53.5 percent in June, government figures show. About
six people are seeking work for every job opening, the most since the
government began keeping such records in 2000. A year ago, the ratio
was a little more than two-to-one.
‘Plain Depressing’
“Being out of work for three weeks is very different from being out
of work for 30 weeks,” said
Dirk van Dijk, director of research for Zacks Investment Research
Inc. in Chicago. “It is a very scary prospect. Economically it further
depresses your spending and psychologically it is just plain depressing.”
A measure of consumer sentiment fell in July to the lowest level
since March, as mounting job losses undermined confidence. The Reuters/University
of Michigan
index slid to 64.6, less than forecast, from 70.8 in June, a report
today showed.
The average American is ill-prepared for a lengthy spell of unemployment,
said van Dijk. Households reduced their
savings
in the last expansion -- putting aside less than 1 percent of disposable
income in 2005-2006, compared with an average 6 percent the previous
30 years -- and thus didn’t have much in reserve.
Savings Gone
“I don’t have any more savings,” said Alvarez, who is drawing jobless
benefits and “trying to avoid” taking other government assistance. “I’m
down to living on $200 a week.”
Home-equity borrowing is no longer an option for many families. House
prices
are down about 25 percent from their 2006 peak, according to the National
Association of Realtors in Washington. And banks, stung by $1.5 trillion
of writedowns and credit losses since 2007, are getting stingier. The
Federal Reserve’s latest quarterly survey of senior loan officers showed
about 65 percent of banks lowered credit-card limits.
Even the highly educated are finding
it tough to get work. Washington resident Alexandra Moller,
34, who holds a law degree and two master’s degrees, has been unemployed
since September. She’s searching for a position with the federal government
or a nonprofit organization.
The most frustrating part is “the constant refrain that it’s such
a hard time to find something,” she said. “It adds to a certain resignation
that it’s going to take a long time.”
Lowered Expectations
The surfeit of job seekers is forcing people to lower their salary
expectations. Liz Mandel, who lost her job in January as a senior clinical-data
manager at a biopharmaceutical company, said she has had to look for
positions that pay about $15 less an hour than what she earned before.
“I absolutely, definitely feel anxious,” said the 42- year-old San
Francisco resident.
Earnings per hour for production workers climbed at a 0.7 percent
annual pace in the second quarter, the least since records began in
1964, according to government figures.
That’s putting a squeeze on spending, even for essentials. A national
poll of unemployed workers conducted in November by
Peter D. Hart Research Associates in Washington for the National
Employment Law Project found that more than
two-thirds had cut back on food expenditures.
Long-term joblessness is also a “profound
problem” for housing, said
Paul Willen,
senior economist at the
Boston Fed.
“If a person becomes unemployed, they’re going to start missing mortgage
payments,” he said. “The main exit strategy for a troubled borrower
is another job. At this time, it’s extremely hard to find one.”
Mortgage Delinquencies
Mortgage delinquencies rose to a record in the first quarter, and
about one in every eight Americans is now late on a payment or already
in
foreclosure, according to the Washington- based
Mortgage Bankers Association.
Unemployment also has “immense social costs,” said
JoAnn Prause, senior lecturer at the University of California in
Irvine’s Department of Psychology and Social Behavior.
“Bouts of unemployment have been associated
with increases in depression, reduced self-esteem, and increases in
alcohol abuse,” she said.
That’s prompting calls for added stimulus.
“We’re going to need more medicine,”
Warren Buffett, chief executive officer of Omaha, Nebraska-based
Berkshire Hathaway Inc., said in a June 24 interview. “We’re going to
have more unemployment.”
Worker Training
Besides beefing up jobless benefits, economists are calling for more
training and education programs, tax changes and government support
for corporate investment.
Obama’s original stimulus package provided $3.95 billion for training,
including $750 million in grants to prepare and place workers in jobs
in high-growth and emerging industries.
Senators
Sherrod Brown, an Ohio Democrat, and
Olympia Snowe, a Maine Republican, proposed legislation to pair
companies offering new jobs with workers seeking specialized skills.
The bill would “allow local people to come up with what they need
to train workers,” Brown told a New America Foundation
conference in Washington on June 24.
Sinai, of Decision Economics, wants Obama to reconsider providing
tax credits to companies that take on more workers.
Before becoming president, Obama proposed offering
a $3,000 tax
credit for each
new-hire.
"Animal spirits" can also be interpreted as the level of confidence
in the fairness of the system. It's gone...
July 10 | Bloomberg
The worst recession in half a century may be prolonged because consumers
see few signs
job
losses and declines in home prices are ending, economists
Nouriel Roubini and
Robert Shiller said.
“The fundamental problem, as
Franklin Delano Roosevelt said in 1933, is fear,” Shiller, a Yale
University professor, said yesterday on Bloomberg Radio’s “Surveillance.”
The Great Depression was deepened by a “sense of lost confidence or
animal spirits that was a self-fulfilling prophecy. The worry is that
we will have the same kind of issue arising again,” he said.
... ... ...
The recession will probably continue for six months as companies
struggle to pay their creditors, he said. The cost of protecting corporate
bonds in the U.S. from default jumped to the highest in six weeks on
July 8, according to Phoenix Partners Group data.
“The wave of corporate defaults is going to be massive,” Roubini
said. “We’re not out of the woods.”
Unmanageable Risks
Both Shiller and Roubini said a lack of regulation allowed banks
to take unmanageable risks, leading to the government’s takeover of
American International Group Inc. and the collapse of Lehman Brothers
Holdings Inc.
Home
prices in 10 major U.S. metropolitan areas fell 0.7 percent in April,
the least since June 2008, according to a S&P/Case-Shiller home-price
index, the latest sign that the worst of the housing slump may be passing.
Sales of existing homes increased in April and May, while new construction
rose in May from a record low.
“A slowing in the rate of decline is good news, and it suggests that
it will continue to slow in coming months,” Shiller said
Personally, I don't buy into either camp. In a recession this deep,
recovery ... depends on consumers who, after all, are 70 percent of the
U.S. economy. And this time consumers got really whacked. Until consumers
start spending again, you can forget any recovery ...
From Robert Reich:
When Will The Recovery Begin? Never. (ht
Bob Dobbs)
The so-called "green shoots" of recovery are turning brown in the
scorching summer sun. In fact, the whole debate about when and how
a recovery will begin is wrongly framed. On one side are the V-shapers
who look back at prior recessions and conclude that the faster an
economy drops ...
Unfortunately, V-shapers are looking back at the wrong recessions.
...
That's where the more sober U-shapers come in. They predict a
more gradual recovery ...
Personally, I don't buy into either
camp. In a recession this deep, recovery ... depends on consumers
who, after all, are 70 percent of the U.S. economy. And this time
consumers got really whacked. Until consumers start spending again,
you can forget any recovery ...
Eventually consumers will replace cars and appliances and other
stuff that wears out, but a recovery can't be built on replacements.
Don't expect businesses to invest much more without lots of consumers
hankering after lots of new stuff. And don't rely on exports. The
global economy is contracting.
Eventually the economy will start growing again ... but I think the
"recovery" will be very sluggish.Reich suggests the only market for
cars will be replacements - but the replacement level (based on
scrappage rates) is in the 12 to 13 million range. And that would
be a significant increase from the
current 9.7 million annual sales rate. That is still well below
the peak, but recovery is from the bottom of the cliff - and is not
measured from the previous peak.
Something is fishy about Goldman reaction to the alleged stealing of
code. The code in question requires special hardware and special access
to NISE platform. So in no way Goldman is in any danger from "copycats".
What are the benefits for Goldman in bringing to the public attention the
fact that it milks transactions on NISE ? If this is a retaliation,
then it 's very badly thought out because it already became a PR disaster
for Goldman. And Goldman prices itself for top brains.
The video linked below is a must-see piece of journalistic skepticism.
The duo at Bloomberg News are discussing the recent alleged theft of
trading code by a former Goldman employee Sergey Aleynikov who moved
to a hedge fund called Citadel. Their commentary is incredulous.
Their tone seems to ask: “Is the Government working for Goldman now?”
Here are a few gems:
Selected comments
This economy can't get back on track because the track we were on for
years -- featuring flat or declining median wages, mounting consumer debt,
and widening insecurity, not to mention increasing carbon in the atmosphere
-- This economy can't get back on track because the track we were on for
years -- featuring flat or declining median wages, mounting consumer debt,
and widening insecurity, not to mention increasing carbon in the atmosphere
-- simply cannot be sustained.
My prediction, then? Not a V, not a U. But an X. This economy can't
get back on track because the track we were on for years -- featuring
flat or declining median wages, mounting consumer debt, and widening
insecurity, not to mention increasing carbon in the atmosphere -- simply
cannot be sustained.
The X marks a brand new track -- a new economy. What will it look
like? Nobody knows. All we know is the current economy can't "recover"
because it can't go back to where it was before the crash. So instead
of asking when the recovery will start, we should be asking when and
how the new economy will begin. ...
Selected comments
steve from virginias says...
There ... here ...!
It would be bracing if our politically timorous President would
get on television and level with the American people.
That would almost convince me to go out and buy a TV!
First of all the President would have to tell Americans that
the relentless consumption of fossil fuels has permanently broken
the United States economy. It is broken completely. The returns
on commercial activities are exceeded by input costs. This is true
not only in America but in Europe and Japan and the rest of the
world.
The President would also have to tell the American people that
years of debt - incurred to hedge against increasing energy prices
- have effectively pauperized the country by exchanging physical
value for worthless paper claims upon it.
He would tell the country that it faces the greatest challenge
of its history. He would tell Americans that there was no turning
back to the 'easy living' past of Business as Usual. He would tell
Americans that the only course for the future was hard work and
sacrifice and more sacrifice.
He would tell Americans that the good times that lasted since
the end of World War Two are more or less permanently over and that
the payment for those good times are about to begin.
He would tell Americans that there were no easy monetary or fiscal
fixes for the predicament we have consumed ourselves into.
He would tell Americans and the world that the debts that had
been incurred over the past twenty five years would be repaid. He
would tell Americans that all citizens would have to work as hard
as possible to see that this was done.
He would offer himself as an example, by foregoing a salary,
but foreswearing vacations, by eliminating his perks; the helicopters
and limousines and private airplanes.
He would offer to fire the ineffective officials who had mislead
the public and had violated public trust; Geithner, Summers, Goolsbie
... the entire Goldman-Sachs alumni. He would promise to investigate
both financial negligence and wrongdoing. He would end all further
bailouts and stimulus plans. He would promise that the United States
would begin living within its financial - and energy means.
He would demand back the trillions handed as gifts to the richest
people in the world under the pain of prosecution.
He would end both wars in Iraq and Afghanistan and withdraw forces
in three weeks or less. He would shut down the unsupportable archipelago
of worldwide US military bases.
He would close Guantanamo in 48 hours and remove prisoners to
either trials or release. He would promise to prosecute torturers.
He would end the national security state and the various states
within states enforced by private contractor armies.
He would promise Americans that should the currency collapses
that no American would go hungry or freeze. He would level with
the public about the unpayable Social Security and Medicare promises.
He would promise that the government would not steal any more
of the citizens' wealth. He would promise social order and security.
He would set priorities for fuel use so that food is available to
all at all times.
He would end the Americans' 'love affair with the car'!
He would put Americans to work; tearing down vacant buildings,
constructing street car systems around the country, and shrinking
the unsupportable infrastructure overhang. He would put a million
new organic farmers to work.
He would prepare the country for the worst because the storm
that is breaking over this country is greater than any disaster
that America has faced in its history.
He would tell Americans that the corporations and their servants
in the Capital have left the land rich in resources and potential
... a ruin. He would level with the people and tell them that this
was done simply for greed.
He would purge the money lenders and money takers from the temple
of civic virtue!
In other words, Barack Obama would be a different person than
who he is!
I hate to break it to you Mr. Krugman, but you are beating a
dead horse!
kharris says...
I just can't help myself. Krugman's ideas seem right, but he didn't
write right and that's a problem when you are in marketing.
June jobs data did not make clear the stimulus was too small. "One
month's data does not make a trend" blah, blah, blah. June jobs data
were emotionally important because the hope was for a continued, steady
trend toward fewer losses, and instead we got more losses. Evidence
the stimulus was too small started to mount up even as the stimulus
bill was being debated, with the jobless rate rising 0.4% per month
in 3 of the 4 months prior to passage. Anybody familiar with the behavior
of that series knows a rapid deterioration tends to persist.
Bruce's point is one I would make, too. While "fail" is a loaded
word, it is not incorrect to say that a policy that proved to small
to the task at hand has failed. It is not politically useful to do so,
because the bad guys will quote you to death.
The answer is to avoid using a failure/success dichotomy and find
some other way to convey the idea.
I edit my colleagues work a good deal, and when they demonstrate
an urge to say things that are kinda right, kinda wrong and likely to
mislead their reader, I tell them they have a writing problem, rather
than an analytic problem. They have chosen an expression to convey their
meaning which doesn't do the job. I' afraid that Krugman is falling
into that trap right now, saying things that aren't as useful as they
could be, because he is boxed in by the words he has chosen.
Feng,
The way that Krugman knows the stimulus is too small is just math
and a bit of logic. If you wanted to fill a hole 1/3 of the way, and
the hole proved bigger than you thought, then the stuff you provided
to fill the hole won't be enough, and you need more. The hole is bigger
than Obama, Blue Chip, or CBO thought. Krugman isn't judging the technical
quote
...GS, through access to the system as a result of their
special gov't perks, was/is able to read the data on trades before it's
committed, and place their own buys or sells accordingly in
that brief moment, thus allowing them to essentially steal buttloads
of money every day from the rest of the punters world.
Two things come out of this:
1. If true, this should be highly illegal, and would, in any
sane country result in something like what happened to Arthur Andersen...
(2. ... is way off point....)
God help Goldman if this is true and the government goes
after them. This would constitute massive unlawful
activity. Indeed, the allegation is that Goldman alone
was given this access!
God help our capital markets if this is true and
is ignored by our government and regulatory agencies, or generates
nothing more than a "handslap." Nobody in their right
mind would ever trade on our markets again if this occurred and does
not result in severe criminal and civil penalties.
There apparently is reason to believe that Sergey might
have been involved in exactly this sort of coding implementation.
Specifically, look at the patent claims cited on DailyKos; his expertise
was in fact in this general area of knowledge in the
telecommunications world......
This is precisely the sort of thing that a Unix
machine, sitting on a network cable where it can "see" traffic potentially
not intended for it, could have an interface put into what is called
"promiscuous mode" and SILENTLY sniff that traffic!
ASSUMING THE TRAFFIC IS PASSING BY THE MACHINE
ON THE WIRE THIS IS TRIVIALLY EASY FOR ANY NETWORK PROGRAMMER OF REASONABLE
SKILL TO DO. IF THAT TRAFFIC IS EITHER UNENCRYPTED OR IT IS EASY
TO BREAK THE ENCRYPTION.....
Folks, I have no way to know what the
code in question does, but if there's anything to this - anything at
all - there is a major, as in biggest scam of the century
- scandal here - something much, much bigger than Madoff or Stanford.
What would this mean, if it was all to prove up?
It would mean that Goldman was able to "see" transaction
order flow - bid, offer, and execute messages - before they were committed
in the transaction stream. Such a "SNIFF" would be COMPLETELY
UNDETECTABLE by the sender or recipient of the message.
The implication of this would be that they would
be able to front-run any transaction where the data was visible to them,
thereby effectively "stealing pennies" from each transaction they were
able to front-run.
Again: I have absolutely nothing on the
content of the allegedly-stolen code nor can I validate the claim made
that Goldman had "special network access." Nothing. All
I have to go on with regards to "market manipulation" (which such a
program would be, writ large!) is the
statement of the US Attorney that I cited in my earlier Ticker.
This may be nothing more than a crazy conspiracy theory
put out by someone at Daily Kos. But consider the following:
The last few days the the market has traded "organically."
I and many other market participants have noted that prior to the
week before July 4th the market had been acting "very odd" - normal
correlations between interest rate, foreign exchange the the stock
markets had been on "tilt" for the previous couple of months, with
the amount of "tiltage" increasing dramatically in the last three
or four weeks. In fact, many of my usual indicators that I
use for daytrading had become completely useless.
Suddenly, just before the July 4the weekend, everything
started correlating normally again. I have no
explanation for this "light-switch" change but it aligned
almost exactly with the day the NYSE had "computer problems" and
extended trading by 15 minutes. Was there a
configuration change made to their networking infrastructure,
one asks?
Zerohedge's information, if you believe it,
seems to point toward some sort of distortion.
The cite above claims statistically "as likely as an asteroid hitting
earth it is not true" proof of distortion in the market. I
have not analyzed the data to independently validate
that conclusion, but even if the odds of these "effects" in the
market being random chance are only as good as getting hit by a
tornado this afternoon......
Every market participant deserves answers on this point.
Specifically to the NYSE and all other markets where
colocation connections are made and allowed:
- Was it possible for message traffic to be "seen" by computers
on your network and colocated into your infrastructure by
other than the originator and recipient every market participant
who had or has equipment colocated on the NYSE infrastructure
must be immediately served with a subpoena for a true and complete
copy of all software operating on every machine connected to said
infrastructure for immediate forensic investigation to ascertain
if any participants were indeed "sniffing" traffic and front-running
orders.
The charge made on the pages of Daily Kos is
incredibly serious. If this happened it is
a case of literal robbery of every market
participant for the entire duration of the time that the code in
question was executing on the network, with losses to market participants
potentially running into the hundreds of billions of dollars.
Market participants deserve an answer to these questions.
What is the inference of potentially illegality here?
“That Goldman Sachs may just possibly have used security access
codes and built a system to acquire trading information PRIOR to
transaction commit time points at NYSE.
The profitability of this split-second information advantage
would have been and could have been extraordinary. Observed yielding
profits at $100,000,000 a day. [summary to address complaints with
respect to complexity.]
GS has special access inside the system from its status assisting
the Working Group on Financial Markets (colloquially the Plunge
Protection Team) created by Presidential Order two decades ago.
GC also acts as Special Liquidity Provider for NYSE.
With 60% dominance of NYSE program trading, what’s good for Goldman
defines what shows as overall market performance.”
There is likely to be more info about this trickling out over the
coming days and weeks. Stay tuned . . .
Hat tip Bill King
Sources:
Goldman Sachs’s $100 Million Trading Days Hit Record
Christine Harper
Bloomber, May 6
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7HGVAn8w73Y&
Jonathan Weil Says:
Goldman Sachs Loses Grip on Its Doomsday Machine
http://www.bloomberg.com/apps/news?pid=20601039&sid=aFeyqdzYcizc
Never let it be said that the Justice Department can’t move quickly
when it gets a hot tip about an alleged crime at a Wall Street bank.
It does help, though, if the party doing the complaining is the bank
itself, and not merely an aggrieved customer.
Another plus is if the bank tells the feds the security of the U.S.
financial markets is at stake. This brings us to the strange tale of
Goldman Sachs Group Inc. and Sergey Aleynikov.
Aleynikov, 39, is the former Goldman computer programmer who was
arrested on theft charges July 3 as he stepped off a flight at Liberty
International Airport in Newark, New Jersey. That was two days after
Goldman told the government he had stolen its secret, rapid-fire, stock-
and commodities-trading software in early June during his last week
as a Goldman employee. Prosecutors say Aleynikov uploaded the program
code to an unidentified Web site server in Germany.
It wasn’t just Goldman that faced imminent harm if Aleynikov were
to be released, Assistant U.S. Attorney Joseph Facciponti told a federal
magistrate judge at his July 4 bail hearing in New York. The 34-year-old
prosecutor also dropped this bombshell: “The bank has raised the possibility
that there is a danger that somebody who knew how to use this program
could use it to manipulate markets in unfair ways.”
Marie Antoinette Says:
July 9th, 2009 at 9:16 am It occurs to me that this story (whatever
its final parameters) will have a major impact on popular opinion for
the simple reason that 99% of Americans have no idea that Wall Street
has become nothing more than Las Vegas East by the takeover of the quants
in recent years. It no longer has much relationship to the “real” (tattered)
economy.
These guys are bookies and numbers runners and Washington exists
only to serve them.
When America wakes up to THAT fact, watch out.
If the banks do not want to lend and the consumers do not want to
borrow and instead are focused on paying off debt and saving more money
at the same time as mass mood is falling and geopolitical tension is
rising, we have the perfect setup for a credit contraction and stock
market crash followed by economic depression.
- Better, as so often, to follow an aphorism
of Warren Buffett’s: invest only in businesses that an idiot can run,
because sooner or later an idiot will.
- "One of the lessons that investors seem to have to learn over and
over again, and will again in the future, is that not only can you not
turn a toad into a prince by kissing it, but you cannot turn a toad
into a prince by repackaging it. But very imaginative people in the
securities market try to do that. If you have bad mortgages they do
not come better by repackaging them. To some extent the chickens are
coming home to roost for the mortgage originators and securitisers."
Warren Buffett, Financial Times, October 26, 2007
- If something is up 220% — after a 97% collapse -- this is
not a recovery.
This Russian guy looks extremely naive and dumb to be classified as
a spy: outbound FTP transfers are routinely checked by corporations (often
they are blocked by a proxy). It is possible that was too greedy, but doing
such things close to your termination date is really suicidal. Any decent
programmer understand that, especially a programmer who used to work at
a networking provider like IDT. So much for an industrial espionage case.
The hypothesis that he overdid the archiving of some modified open source
Erland libraries looks more or less plausible although I do not understand
why he needed to download something to the German server while UCB stick
is more then enough for the purpose. It's also unclear why he did not used
diffs against the reference published version (if we assume that Goldman
version has some bugs fixed or some enhancements implemented) instead of
full code if this is an open source.
From the coolest
possibly-corporate-espionage story of the week:
If only the FBI were to tackle cases of national security and loss
of life with the same speed and precision as they confront presumed
high-frequency program trading industrial espionage cases... especially
those that allegedly involve Goldman Sachs.
The original is from
Reuters.Selected comments
Jack says:
“"...the proprietary advantages are part of the system and have the
blessings of the regulators." Talbot
To say that a structure or process is "built-in" to a system is not
to say that the system is working in accordance within the free market
frame work so frequently sited as the most efficient and equitable form
of market activity. The the regulators, really the regulations,
accept such a system only suggests that the foxes are watching
the hen house. Generally those foxes are satisfied to continuously
make off with the
best of the eggs.
Some times they get greedy and try to make off with the entire flock.
That's when we observe the markets in free fall, crashing into the dust.
The issue becomes ever more clear when we then witness the foxes
licking their respective chops as the regulators prepare to restore
the entire flock and coop and send the bill to the farmer whose livelihood
has been decimated.
A nice allegory that begs the question of who is there that
will ride to hounds and rectify the situation?
|
Country |
Military expenditures -
dollar figure |
Budget Period
|
| World |
$1100 billion |
2004 est. [see Note 4]
|
| Rest-of-World [all
but USA] |
$500 billion |
2004 est. [see Note 4]
|
|
United States |
$623 billion |
FY08 budget [see Note 6] |
|
China |
$65.0 billion |
2004 [see Note 1] |
|
Russia |
$50.0 billion |
[see Note 5] |
| France |
$45.0 billion |
2005 |
| United Kingdom |
$42.8 billion |
2005 est. |
|
Japan |
$41.75 billion |
2007 |
| Germany |
$35.1 billion |
2003 |
| Italy |
$28.2 billion |
2003 |
| South Korea
|
$21.1 billion |
2003 est. |
|
India |
$19.0 billion |
2005 est. |
| Saudi Arabia |
$18.0 billion |
2005 est. |
| Australia |
$16.9 billion |
2006 |
| Turkey |
$12.2 billion |
2003 |
| Brazil |
$9.9 billion |
2005 est. |
| Spain |
$9.9 billion |
2003 |
| Canada |
$9.8 billion |
2003 |
| Israel |
$9.4 billion |
FY06 [see Note 7] |
| Netherlands |
$9.4 billion |
2004 |
The ability of policymakers to reduce military expenditures is actually
seldom discussed topic, But it might the most important factor in creating
inflation and destruction of the dollar as a reserve currency... “You can
always count on Americans to do the right thing - after they've tried everything
else.” Winston Churchill
Here’s the question: can the U.S. run up a huge deficit now as long
as it shows a credible plan to reduce it over the long-term? I have
suggested that healthcare (and social security) be a main target of
that longer-term deficit reduction plan. But, is this a trade-off that
can actually work? Your comments are appreciated.Here is the original
post. Enjoy. (Note: I filed this post under the categories Health care
and Banana Republic.)
I think a technical recovery will happen in the Q4 to Q1 timeframe.
But this recovery is likely to be weak, if it happens at all. Downside
risk remains. Unfortunately, the Obama administration has fired all
its bullets, spending huge political capital bailing out the big banks
and putting together a
weak stimulus package we all knew was going to fail.
Now, Joe Biden is trying to save face, talking as if recovery is
guaranteed and
no further stimulus is necessary. Yet, on the eve of the G-8 summit,
it
takes Gordon Brown to remind us that the
Great Depression II meme is still at play. If the United States
wants to keep deflationary forces at bay, it will need to support the
economy with fiscal stimulus.
The problem is the U.S. government budget deficit. In April, in a
post called “The
Cult of Zero Imbalances,” Marshall Auerback made the case for stimulus,
aware of the downside risks for the dollar and bond prices because of
that deficit. Yes, there are risks for America associated with deficit-inducing
stimulus in the short-term, but they can be mitigated
if the Obama Administration actually showed a
plan to reduce the longer-term deficit. But, as
David Leonhardt has argued, Obama’s team has
no deficit reduction plan whatsoever.
-
-
-
shargash said...
-
I think your question is moot. There will be no credible plan to
reduce the deficit in the future. If such a plan were crafted, the
first place to look to reduce spending should be the military.
The US spends more than the rest of the world combined, and 10x
what either Russia or China spends. As a starter,
cut the military budget in half. As you point out, we also need
healthcare price reform. The problem is that I'm not sure that cutting
defense spending in half coupled with significant healthcare reforms
are enough.
-
Brick said...
-
There are a number of different questions here which need to be
broken down. Firstly there is the question of whether a further
stimulus is appropriate and I might be tending towards agreeing
it might be. The second question is whether it is appropriate to
increase the deficit to pay for the stimulus and here I would suggest
it might not be. This might be achieved by rebalancing the budget
towards more labour intensive fields rather than low employment
expensive items. I expect this to be ignored because of the political
structure and lobbying that goes on in the US.
The next question is whether the
deficit is sustainable and I think a big mistake is being made in
looking at the deficit purely as relative to GDP.
What should be looked at is the size of the deficit relative
to available investment. Where Italy may be able to look at available
investment as an inexhaustible pool the same probably will not apply
to the US. Having said that I don't
expect the collapse of the dollar or treasuries in the next few
months, but rather in a longer time frame as the deficit approaches
60 percent of GDP.
The big question to be answered is whether taxes will be raised
at the right point if at all. Most economies including those in
Europe have a good record of raising taxes when the need arises,
while the US has a very bad record with such policies likely to
completely undermine the political structure there.
I doubt whether healthcare reform will reduce deficit without
some sort of price capping which will be fought tooth and nail by
some very strong lobby groups. Bold steps are required and it all
looks rather timid at the moment.
-
ronald said...
-
Of course deficit's matter but when the economic system has crashed
the debate needs to be broader then what is framed by the financial
sector press. The fact that American standard of living is in for
a reduction is not news nor has it been for a number of years. The
idea that average middle class workers can afford large homes, multiple
auto's, ATV's and assorted hi-tech gear,cheap healthcare and large
pensions makes good political slogans but has no reality.
-
RTD said...
-
If the stimulus is successful at jump starting the economy, it will
at least partially pay for itself through higher tax revenues. In
any case, I don't see any viable alternatives to fiscal stimulus,
however imperfect it may be, right now. The laissez-faire, let them
fail and "come what may, let the heavens fall" crowd is insane.
Monetary policy has done just about all it can at this point. Short
of a debt jubilee, which will never happen in the absence of a violent
revolution, there aren't any other alternatives to fiscal stimulus.
My biggest worry is a partial recovery later this year or early
next year, followed by another leg down, in which case even a second
stimulus will likely be too little too late.
The reality is that
the bursting of a credit bubble on this scale has only happened
a few times in modern history - 1990's Japan, the Great Depression,
and the 1873-1879 depression. While there are measures that can
be taken to soften the blow, there are no quick fixes - this is
the lesson we don't seem to want to learn. Bubbles MUST be prevented,
Greenspan couldn't have been more wrong when he said it's easier
to just clean up after the fact.
--RueTheDay
The overall debt is now slightly over 80 percent of the annual output
of the entire U.S. economy, as measured by the gross domestic product.
Interest payments on the debt alone cost $452 billion last year —
the largest federal spending category after Medicare-Medicaid, Social
Security and defense. It's quickly crowding out all other government
spending. And the Treasury is finding it harder to find new lenders.
The debt gap is "something that keeps me awake at night," Obama says.
He pledged to cut the budget "deficit" roughly in half by the end
of his first term. But "deficit" just means the difference between government
receipts and spending in a single budget year.
This year's deficit is now estimated at about $1.85 trillion.
Deficits don't reflect holdover indebtedness from previous years.
Some spending items — such as emergency appropriations bills and receipts
in the Social Security program — aren't included, either, although they
are part of the national debt.
The national debt is a broader, and more telling, way to look at
the government's balance sheets than glancing at deficits.
According to the Treasury Department, which updates the number "to
the penny" every few days, the national debt was $11,518,472,742,288
on Wednesday.
The overall debt is now slightly over 80 percent of the annual output
of the entire U.S. economy, as measured by the gross domestic product.
By historical standards, it's not proportionately as high as during
World War II, when it briefly rose to 120 percent of GDP. But it's still
a huge liability.
Also, the United States is not the only nation struggling under a
huge national debt. Among major countries, Japan, Italy, India, France,
Germany and Canada have comparable debts as percentages of their GDPs.
Where does the government borrow all this money from?
The debt is largely financed by the sale of Treasury bonds and bills.
Even today, amid global economic turmoil, those still are seen as one
of the world's safest investments.
That's one of the rare upsides of U.S. government borrowing.
Treasury securities are suitable for individual investors and popular
with other countries, especially China, Japan and the Persian Gulf oil
exporters, the three top foreign holders of U.S. debt.
But as the U.S. spends trillions to stabilize the recession-wracked
economy, helping to force down the value of the dollar, the securities
become less attractive as investments. Some major foreign lenders are
already paring back on their purchases of U.S. bonds and other securities.
And if major holders of U.S. debt were to flee, it would send shock
waves through the global economy — and sharply force up U.S. interest
rates.
... ... ...
Some budget-restraint activists claim even the debt understates the
nation's true liabilities.
The Peter G. Peterson Foundation, established by a former commerce
secretary and investment banker, argues that the $11.4 trillion debt
figures does not take into account roughly $45 trillion in unlisted
liabilities and unfunded retirement and health care commitments.
That would put the nation's full obligations at $56 trillion, or
roughly $184,000 per American, according to this calculation.
On the Net:
MarketWatch
For months, policymakers from Federal Reserve Chairman Ben Bernanke
on down told investors that a second-half recovery was a safe bet.
Investors, optimists by nature, eventually bought in.
But now, even though the second half has actually arrived, the curtain
on the recovery has so far remained down and questions are being raised
on whether it will go up at all.
Suddenly notable economists say the whole thing might not happen.
Others, including Harvard economist Martin Feldstein, predict the curtain
may go up for a brief period but then go crashing back down.
Bogus increase in profits will not last: "In fact, according to
Hecht's data, it's hard to see where Wall Street could pull in more profits
besides trading."
More likely, banks are taking advantage of new accounting rules that
allow them to place a higher paper value on the mortgages than the price
they actually paid for them. These "mark-to-market" changes took effect
just in time for the second quarter. Bank profits have improved for
months because of the
new accounting rules that allowed banks to mark up the value of
the troubled assets already on their books. What is new is that banks
are buying more MBS to add to that tally. Banks could buy the
MBS at low prices in the market, which would boost the banks' own trading
fees, since banks get paid whenever they trade for their own accounts.
Banks could also record as "profit" the
difference between the price they paid and the price that the securities
are thought to be really worth. They make money because
they're buying more MBS, recording more profit on both the old and new
ones, and paying themselves fees.
There are several other reasons to keep the champagne corked before
celebrating the apparent newfound health of banks. Wall Street bonus
estimates—especially early in the year—are often useless. Things change.
Michael Hecht told The Big Money that Wall Street is doing
well now, but for the rest of the year, "It won't be the crazy outsize
business we've seen over the past few months. We're concerned about
how sustainable this is. Things are OK but not on fire."
Hecht believes that Wall Street has benefitted
from temporary boosts that won't be significant by the end of this year:
the fall of Lehman and Bear, the fact that Citigroup and Morgan Stanley
have reduced their leverage and become smaller, and
the large "spreads" between bond prices
and Treasury bond prices, which fuel trading profits but are destined
to shrink by December.
In fact, according to Hecht's data, it's
hard to see where Wall Street could pull in more profits besides trading.
The business of advising on mergers and acquisitions is hibernating
for now: Completed acquisitions were down 56 percent this year compared
with the same time in 2008. No record bonuses there. Underwriting activity—helping
companies sell stocks and bonds—rose only 9 percent and totaled $5 billion
in fees for the second-quarter months of April, May, and June. Equity
underwriting—helping companies sell stock—was down in June, a letdown
after a boom in May when several banks including Morgan Stanley, U.S.
Bancorp, Fifth Third, and others all raised money to meet stress-test
requirements and ensure an escape from the government's onerous Troubled
Asset Relief Program.
THE HIGHS FOR THE YEAR IN TREASURY YIELDS may have been reached in June,
according to this column's semiannual sampling of interest-rate forecasts
from prominent seers. But by mid-2010, the
benchmark 10-year note could be considerably higher than the 3.50% it
yielded Thursday.Though the consensus of the group
is that, to varying degrees, the U.S. economy will be on the road to
recovery in the second half of this year, they mostly agree
the Federal Reserve will maintain its accommodative
policy, including maintaining its 0-0.25% target for the overnight federal-funds
rate through the middle of next year.
July 2 2009 |
FT.com
What if the US
unemployment rate rises above 10 per cent and stays there for an
extended period? This is a question that is not being asked enough,
even though it entails yet another historical anomaly that will further
complicate policy formulation and open it up to greater political interference.
The unemployment rate is traditionally characterised as a lagging
indicator and, as such, is viewed as having limited predictive power.
After all, unemployment is a reflection of decisions taken earlier in
the cycle so the rate always lags behind the realities on the ground
– or so says conventional wisdom.
This conventional wisdom is valid most, but not all of the time.
There are rare occasions, such as today, when we should think of the
unemployment rate as much more than a lagging indicator; it has the
potential to influence future economic behaviours and outlooks.
Today’s broader interpretation is warranted by two factors: the speed
and extent of the recent rise in the unemployment rate; and,
the likelihood that it will persist at high
levels for a prolonged period of time. As a result, the
unemployment rate will increasingly disrupt an economy that, hitherto,
has been influenced mainly by large-scale dislocations in the financial
system.
In just 16 months, the US unemployment rate has doubled from 4.8
per cent to 9.5 per cent, a remarkable surge by virtually any modern-day
metric. It is also likely that the 9.5 per
cent rate understates the extent to which labour market conditions are
deteriorating. Just witness the increasing number of
companies asking employees to take unpaid leave. Meanwhile, after several
years of decline, the labour participation rate has started to edge
higher as people postpone their retirements and as challenging family
finances force second earners to enter the job market.
Notwithstanding its recent surge, the
unemployment rate is likely to rise even further, reaching 10 per cent
by the end of this year and potentially going beyond that. Indeed, the
rate may not peak until 2010, in the 10.5-11 per cent range; and it
will likely stay there for a while given the lacklustre shift from inventory
rebuilding to consumption, investment and exports.
Beyond the public sector hiring spree fuelled by the fiscal stimulus
package, the post-bubble US economy faces considerable headwinds to
sustainable job creation. It takes time to restructure an economy that
became over-dependent on finance and leverage. Meanwhile, companies
will use this period to shed less productive workers.
This will disrupt consumption already reeling
from a large negative wealth shock due to the precipitous decline in
house prices. Consumption will be further undermined by uncertainties
about wages.
This possibility of a very high and persistent
unemployment rate is not, as yet, part of the mainstream deliberations.
Instead, the persistent domination of a “mean reversion”
mindset leads to excessive optimism regarding how quickly the rate will
max out, and how fast it converges back to the 5 per cent level for
the Nairu (non-accelerating inflation rate of unemployment).
The US faces a material probability of both a higher Nairu (in the
7 per cent range) and, relative to recent history, a much slower convergence
of the actual unemployment rate to this new level. This paradigm shift
will complicate an already complex challenge facing policymakers. They
will have to recalibrate fiscal and monetary stimulus to recognise the
fact that “temporary and targeted” stimulus will be less potent than
anticipated. But the inclination to increase the dose of stimulus will
be tempered by the fact that, as the fiscal picture deteriorates rapidly,
the economy is less able to rely on future growth to counter the risk
of a debt trap.
Politics will add to the policy complications.
The combination of stubbornly high unemployment
and growing government debt will not play well. The rest
of the world should also worry. Persistently high unemployment fuels
protectionist tendencies. Think of this as yet another illustration
of the fact that the US economy is on a bumpy journey to a new normal.
The longer this reality is denied, the greater will be the cost to society
of restoring economic stability.
The writer is chief executive and co-chief investment officer
of Pimco. His book, When Markets Collide, won the 2008 FT/Goldman Sachs
Business Book of the Year
MonkeyBusinessBlogWhat's funny here is Moody's is actually starting
to do its job when they say;
Analysts at Moody's Investors Service warned Tuesday that U.S. banks
with debt that is rated by the
Moody's Corp. unit face about $470 billion in losses through next
year. If the economy continues to suffer, those losses could swell to
$640 billion, and Moody's would likely accelerate its bank-debt downgrades.
"In such a scenario, absent continuation,
and likely deepening, of U.S. government capital and liquidity support
programs for the banking industry, numerous banks would be insolvent,"
the Moody's analysts wrote.
Are we facing a deflationary spiral[1]
or will the monetary and fiscal stimulus ultimately create (hyper) inflation?
Unfortunately, the answer is less straightforward. There is no question
that, in a cash based economy, printing money (or ‘quantitative easing’
as it is named these days) is inflationary. But what actually happens
when credit is destroyed at a faster rate than our central banks can
print money?
... ... ...
The return of the boom & bust
Going forward, not only will economic growth disappoint, but the
economic cycles will become more volatile again (see chart 1) with several
boom/bust cycles packed into the next couple of decades. This is a natural
consequence of the Anglo-Saxon consumer-driven growth model having been
bankrupted.
Growing consumer spending over the past
30 years led to rapidly expanding service and financial sectors both
of which will now contract for years to come as overcapacity forces
players to downsize.
... ... ...
The liquidity trap
We are effectively caught in a liquidity trap. The Bank of England,
the European Central Bank and the Federal Reserve have all flooded their
banking system with enormous amounts of liquidity in recent months but
what has happened? Instead of providing liquidity to private and corporate
borrowers as the central banks would like to see, banks have taken the
opportunity to repair their balance sheets. For quantitative easing
to be inflationary it requires that the liquidity provided to the market
by the central bank is put to work, i.e. lenders must lend and borrowers
must borrow. If one or the other is not playing along, then inflation
will not happen.
[Jul 5, 2009] Herd Mentality On Steroids
immobilienblasen
It seems I
wasn't far off..... Everybody is once
more chasing the same strategy.......
No wonder when computer trading ( must see clip
Themis Trading: "Principal Program Trading Is A Way To Get The Market
Go In Your Direction" ) & models are the dominant force on the exchanges
these days.....
This leaves unfortunately little room for "common sense".....
I doubt that this will end as hilarious ( see
"Depression-Era Bear Market Rallies" ) as in the following clip
.....
FT Alphaville
June 29 (Bloomberg) — Investors are moving in lockstep like
never before, driving up stocks, commodities and emerging markets
and risking a replay of last year, when they all plunged the most
since World War II.
The Standard & Poor’s 500 Index, whose increase in the
past three months was the steepest in seven decades, is rallying
in tandem with benchmark measures for raw materials, developing-
country equities and hedge funds. The so-called correlation
coefficient that measures how closely markets rise and fall together
has reached the highest levels ever, according to data compiled
by Bloomberg . .
The correlation coefficient for the S&P 500 and the Reuters/Jeffries
CRB index of commodities has been at 0.74 for the last 60 days.
A value of 1 means perfectly correlated, but to give
you the historical significance of a reading of 0.74 — it’s the
highest correlation in at least five decades, according to Bloomberg
The S&P is also increasingly (weirdly) moving in tandem with the
price of crude oil, with the correlation value above 0.7 in June.
The correlation between the S&P and the MSCI Emerging markets index
is also apparently the tightest since Russia defaulted on its debt
in 1998The rather dramatic increase in correlation should be
a bit of a worry for investors, since it makes diversification rather
difficult.
> Here another stunning chart.....
Martin Feldstein predicts a relapse into recession (a beautiful symmetrical
W)
A "W" Recession?Martin Feldstein has recently raised
the possibility that we might experience a relapse into recession (a
beautiful symmetrical W), with the next dip
in 2010. In my view, this means (1) we should have opted for a bigger
and better composed stimulus package, and (2) the timing of expenditures
in the stimulus package might not be as problematic as many commentators
have indicated. From
Bloomberg:
"I think we're going to see a temporary substantial improvement,"
Feldstein, the former head of the National Bureau of Economic Research
and a Reagan administration adviser, said today in an interview
on Bloomberg Radio. "I emphasize the words temporary and substantial."
Feldstein -- a member of the private panel that dates the start
of recessions and recoveries -- suggested the economy will contract
into next year, and that the pattern of economic turnaround will
be more of a seesaw than what he called "a beautiful symmetrical
W."
Interestingly, neither the
OECD nor Deutsche Bank project such a "W" shaped trajectory. Nor
do any of the forecasters in the May WSJ survey.
Selected Comments
steve from Virginia
Hmmmm ....When you are in a war, the important thing is to fight
the correct enemy. Our current enemy is presented here as a business
cycle recession with credit defects, causing liquidity shortages.
If you look at credit creation as a hedge against rising energy
costs beginning in 2002 it is possible to cast the current situating
as an energy price problem, instead.
Added stimulus that has reached the
economy so far has maintained average oil costs @ a level above
$45 a barrel. The average cost for 2008 was $70 a barrel and the
current price is very close to $70 a barrel. The assumption that
this price is not sufficient to effect the economy is just that
... an assumption.
The Federal Reserve considered the increases in oil price from
2002 onward to be sufficient to justify increasing Funds rate. Perhaps
this was overdue, but the Fed did misunderstand
both the deflationary pressure generated by increased oil cost as
well as the aim of the finance industry during that period to render
fungible all cost inputs to finance - including oil costs.
You can read minutes of FOMC meetings on the Federal Reserve
System webpage.
When the Fed raised interest rates beginning in 2003, it shattered
the ability of structured finance to maintain asset bubbles in real
estate and structured securities. Cheap credit became expensive
and when added to expensive oil, the total costs began to eliminate
profits and generate defaults.
The Fed is in an identical dilemma now - whether to raise rates
in the intermediate term or reduce the flows of liquidity or unwind
its grossly unbalanced 'balance sheet'. It clearly cannot continue
to expand its holdings of bank etc. paper forever. However, to reverse
the easing process would shatter the ability of the now- damaged
money brokers to maintain the asset bubble in public finance!
We are going in circles!
What does this tell you? That the
problem isn't in finance per se, since neither Wall Street nor the
Fed are interested in remediating credit risk. The problems are
elsewhere and there is nowhere to look but at oil prices.
Oil over $45 a barrel is an economy killer. Unfortunately, the
clock cannot be turned back to the time of cheaper oil. Alas, valuable
real resources have been irretrievably consumed and the underpinnings
of industrial 'progress' are currently being priced into systemic
unaffordability by the industrial process itself.
This being the case, it is more likely
that the recession will be more of a 'stair step' rather than an
alphabet sort of thing. The stairs will descend and
as no person in any establishment is taking the energy issue seriously
except for desperate efforts to restart the bubble/hedge machine,
the stairs will descend in monotony punctuated with terror until
either the bottom is reached - a 14th century way of life for all
Americans - or until the establishment wakes up and starts crafting
an alternative strategy.
This is a war and the first step
is to correctly identify the enemy. The second is to engage directly.
The simplest and most direct form of attack on this problem is to
conserve oil by not using it. Simple - hard, too. But it will be
done. Either by planning, discipline and good policy or by the back
steps.
Ivars
I agree with Feldstein. Dynamics of accumulated capital ( I am
not sure if there is any, but the rise in oil prices despite recession
suggests there is.)
GWG
Another possible scenario for a W shape is that cap and trade
legislation is passed which increases the cost of everything, causing
the economy to fall back into a steep decline.
DickF: (Note: this is a sophistry
of the worst king --NNB; in reality it is employment that matter)
Previously, I argued that the recession was likely to be long,
so speed would not be of the essence…
The logic of this statement escapes me. If you actually believe
that “stimulus” will create a recovery how can you argue that waiting
to inject the stimulus is a good thing? The argument is internally
contradictory.
Let’s look at the argument.
1. We are in economic decline so we need monetary stimulus to
generate a recovery.
2. But stimulus will have no impact on recovery because the recession
will be long even with a stimulus.
3. The recession will be long so we shouldn’t inject stimulus until
the economy begins to start recovery (implying that the stimulus
should be injected as the recession enters recovery).
4. But if the recession begins to recover even before any stimulus
is injected then why do we need stimulus?
5. Internal contradiction - stimulus generates recovery, but recovery
must begin before we stimulate.
There is no way around it. The logic is contradictory. Either
stimulus works or it doesn’t. If it works do it. If it doesn’t then
drop it.
Folks, over and over those who believe in this stimulus are making
the argument that it is not working. The belief is insane. Supporters
are saying yes, it is not working but it will, it will.
Not only is it not working it is making things worse.
DickF
First, it's important to realize that the end-February assessments
were based upon early January forecasts completed by the previous
(Bush) Administration, and finalized on February 3. When taken in
that light, I don't believe the forecasts were that much out of
line with private sector forecasts.
Once again we have contradictory logic. The logic is, the Bush
administration created the problem [a position I agree with btw],
so since the estimates used by the Obama administration are actually
Bush estimates they must be right.
No, No, No! The Bush administration
was wrong on economics and our current recession was started by
his disastrous economic moves, but we are looking at the second
Bush administration in the Obama administration. They are continuing
the same policies as Bush. The only difference is that they are
massively larger and they are being structured to give Democrats
the ability to pay their supporters with tribute taken from their
enemies.
DickF
But now to the problem with the analysis. This analysis looks
at only one half of the equation. It looks at stimulus as the answer
to the recession and it assumes that since most of it will not be
injected until 2010 recovery will come in 2010.
But how and when will we pay for the stimulus? As the stimulus
is distributed will it come from tax revenue? So does that mean
increased taxes? Axelrod seems to say yes. So if we increase taxes
doesn't that counter any effect of stimulus since just mathematically
it will with draw as much as stimulus injects?
How will we pay for the stimulus? Will we borrow from US citizens?
Not likely since citizens are feeling the recession more than the
government. So are we going to borrow from other countries? China
and Japan have pulled back their buying of US debt and Europe is
trying to finance their own recession. Borrow? Not likely.
So that leaves us with inflation. The stimulus will need to be
funded with monetary expansion. Right now the currency has found
a relatively stable level of value relative to other currencies
and to gold, but what will happen when trillions of dollars are
injection into the world economy? Inflation saps the strength out
of any economy. Inflation throughout history has not only drive
the economy to instability but it has driven the economy to political
instability. Look at France in the late 1700 where hyper-inflation
led to the rise of Napoleon. Look at Germany where hyper-inflation
in the 1920s led to the rise of Hitler. Look at Argentina, Brazil,
Zimbabwe. We are racing headlong toward economic and political instability
unlike anything ever seen in the history of our country, maybe even
the history of the world.
Bob_in_MA
I think the employment effect of
the stimulus bill will be hard to discern, not because it is or
isn't a failure, but because most of the effect will be to moderate
declines.
For instance, the stimulus calls for $142B in infrastructure
outlays over several years, peaking at $31B in FY2010.
But state and local spending on construction was at an annual
rate of $289B in March, up 45% from 2004 when it was $200B. So without
the stimulus bill, and all the state revenue shortfalls, it would
be reasonable to assume this spending would fall $50-75B/year. In
the best year, the stimulus will make up half of that.
Add in the fact that private nonresidential
construction is likely to fall significantly over the next year
or two, and we are just not going to see a noticeable effect on
construction employment from the stimulus. It will just be falling
less quickly.
Same with the school aid. Here in my small town, they are laying
off something like 5-6 teachers instead of 14.
That's not to say the stimulus is failing or wasn't well crafted,
just that its positive contributions will be difficult to see in
aggregate numbers.
GK
It will not be symmetrical. That would imply that the second
recession will be as severe as the first, which is unlikely.
In 1980-82, the first was much smaller than the second. The reverse
will happen here, resulting in the same 3-year combined recession.
The second recession here will be about 8 months, starting in early
2010 and ending at the end of 2010.
GK
Again, I ask the all-important question that is under-discussed
:
The 'potential GDP' line : when do we get back to it? 2012? 2013?
never?
Or does the line itself move permanently downward? Getting back
to the line will require a calendar year of 8% GDP growth (like
we saw in 1983).
kb
Really, did anyone expect the impact to be discernable in four
months after the bill's passage?
You mean, besides the Administration?
Menzie Chinn
kb: Depends what you think is discernable, in terms of statistical
uncertainty. You can't prove that the effect is zero given the noise
in the series, and the fact that one needs to take a stand on the
counterfactual. By the way, pay attention to footnote 2:
These estimates, like the aggregate ones, are subject to substantial
margins of error. One additional source of uncertainty concerns
the impact of the state fiscal relief.
And recall this report pertains to the Administration's proposal,
not HR 1 as passed.
John Lee Hooker
@GK :
for getting back to the 'potential GDP' line we need the next bubble.
The next bubble is called "global warming" aka cap-and-trade. Paul
Krugman is already lobbying for that, see his blog.
We will be back soon.
@kb :
Menzie wanted to tell you : always read the fineprint (i.e. footnote
2). Esp. in insurance contracts, a very helpful strategy.
Anon
Mr. Krugman has some interesting and strong comments about the
magnitude of the current stimulus plan.
http://www.nytimes.com/2009/07/03/opinion/03krugman.html?_r=2
Alan
DickF, a couple of comments:
* So if we increase taxes doesn't that counter any effect of
stimulus since just mathematically it will with draw as much as
stimulus injects?
See this rebuttal from Krugman:
http://krugman.blogs.nytimes.com/2009/04/06/one-more-time/
Your view, DickF, is the old 'Treasury
view'/conservation-of-mass-type argument of the 1930s, which has
been criticized by a number of economists.
* How will we pay for the stimulus? Will we borrow from US citizens?
Not likely since citizens are feeling the recession more than the
government. So are we going to borrow from other countries? China
and Japan have pulled back their buying of US debt and Europe is
trying to finance their own recession. Borrow? Not likely
Again, see Krugman's post:
http://krugman.blogs.nytimes.com/2009/06/06/wheres-the-money-coming-from/
Bottom line: the answer to your question: the US government is
borrowing more from their OWN citizens than from overseas.
* So that leaves us with inflation. The stimulus will need to
be funded with monetary expansion. Right now the currency has found
a relatively stable level of value relative to other currencies
and to gold, but what will happen when trillions of dollars are
injection into the world economy?
Your point is theoretically valid, but does not usefully characterize
the current state of affairs, which is:
- we currently have an excess of desired savings over investment
(the 'paradox of thrift'); the injection of govt money can absorb
some of this excess saving;
- market indicators of inflation, such as TIPS spreads (which,
I know, is not a perfect proxy due to liquidity effects and
factors like not allowing indexation for deflation) do not indicate
much inflationary pressure. On the contrary....
- Bernanke has made it clear that he would not allow deficits
to be inflated away (although some people wish he would!), and
I think the market views this announcement as credible
***********************
As I said, your point is theoretically valid, in the sense that
it highlights the identification problem inherent in analysis of
the stimulus: we need to know whether the public expects the deficit
to be inflated away or not, so that we can be confident that we're
measuring the 'fiscal multiplier' rather than the slope of the Phillips
curve.
Meredith Whitney appeared on CNBC Monday afternoon with some insightful
comments on the recent rally in banks.
Via
Clusterstock:
They were overdone all the way into this rally.
What happened was the government — I call
this the great government momentum trade — the government enabled the
banks to have better than expected, better than even the banks could
organically deliver, first-quarter earnings. That looks like it could
continue into the second-quarter and the third-quarter.
The banks rallied from well below tangible book multiples to almost
two times tangible book multiples. It was something, even though I said
it was going to happen, I couldn’t believe it with my own eyes because
the underlying core earnings power of these banks is negligible.
For fundamental investors you invest on what you know to be the rules
of the market. With the government involved no rules of the market apply.
… And things that I never imagined that I would see in my lifetime you’re
seeing in terms of government intervention. So shorts covered
because they couldn’t play, shorts covered after they lost a lot of
money because they couldn’t play, and then the long-only guys are grossly
underinvested and so they see the rally and they’ve got to reweight
and so it’s a crazy positive momentum based
on no fundamental improvement. Zero fundamental improvement.
Last year you had the market impact the economy and this year you’re
going to have the economy impact the markets. So however manufactured
these earnings are going to be you’re still going to have unemployment
come in worse than expected, you’re still going to have consumer defaults
worse than expected and you’re still going to have consumers not spend
money … More people are going to lose their jobs and have less
available credit lines to spend and that’s a ruse (?) that no great
government momentum trade can really guard against.
I will be the first to admit I don’t know the rules, what
the government’s going to do. I mean, I think that on a core basis I
absolutely would not own these stocks. When the market turns,
and I think that stocks are grossly overvalued, when the market turns
and how it turns hard and fast investors are going to be furious.
The saddest thing is that how this thesis I had would play out
is tangible book values would increase because the government bought
back agency paper, remember, and relaxed FASB rules, so tangible book
values would increase and so you saw money start to come in. Now the
long-only money’s coming in and the long-only money came in last year
and they got their heads chopped off. You’re going to see the same thing
happen. The biggest danger we face here, from a market point
perspective, is having the retail investor shut out for a protracted
period of time. They just feel abused again and lied to again.
Disregarding the rather uneven tone of the above (”I saw this coming”
but “I admit I don’t know the rules” of the new regime), Whitney is
making some good points.
As she notes, the government is now firmly on the side of the banks,
helping them earn vast sums in their fixed income units and relaxing
accounting rules to assist their earnings (crucially, banks will be
able to
earn their way out of the SCAP capital requirements). Investing
in banks now is placing your faith in the power of the US government
to force through a recovery in the sector.
If that’s too much for you then you can watch the rest of the CNBC
interview, with Whitney’s recommended (non-bank) investments,
here.
www.robertreich.blogspot.com
Someone recently approached me at the cheese counter of a local supermarket,
asking "what can I do?" At first I thought the person was seeking advice
about a choice of cheese. But I soon realized the question was larger
than that. It was: what can I do about the way things are going in Washington?
People who voted for Barack Obama tend to fall into one of two camps:
- Trusters, who believe he's a good man with the right
values and he's doing everything he can; and
- Cynics, who have become disillusioned with his bailouts
of Wall Street, flimsy proposals for taming the Street, willingness
to give away 85 percent of cap-and-trade pollution permits, seeming
reversals on eavesdropping and torture, and squishiness on a public
option for health care.
In my view, both positions are wrong.
A new president -- even one as talented and well-motivated as Obama
-- can't get a thing done in Washington unless the public is actively
behind him. As FDR said in the reelection campaign of
1936 when a lady insisted that if she were to vote for him he must commit
to a long list of objectives, "Maam, I want to do those things, but
you must make me."
We must make Obama do the right things. Email, write, and phone the
White House. Do the same with your members of Congress. Round up others
to do so. Also: Find friends and family members in red states who agree
with you, and get them fired up to do the same. For example, if you
happen to have a good friend or family member in Montana, you might
ask him or her to write Max Baucus and tell him they want a public option
included in any healthcare bill.
(I'm back here July 10.)
baselinescenario.com
The banking industry is exceeding all expectations. The biggest
players are
raking in profits and planning much higher compensation so far this
year, on the back of increased market share (wouldn’t you like two of
your major competitors to go out of business?).
And banks in general are managing to project
widely a completely negative attitude towards all attempts to protect
consumers.This is a dangerous combination for the
industry, yet it is not being handled well. Just look at the current
strategy of the
American Bankers’ Association.
Edward L. Yingling is justifiably proud of his organization’s position
as one of the country’s
most powerful lobbies.
His testimony to Congress on the potential new Consumer Financial
Protection Agency plainly shows where his group stands. The most
revealing quote, highlighted in the ABA’s
own press release, reads:
“It is now widely understood that the
current economic situation originated primarily in the largely unregulated
non-bank sector,” he said. “Banks watched as mortgage brokers and others
made loans to consumers that a good banker just would not make and they
now face the prospect of another burdensome layer of regulation aimed
primarily at their less-regulated or unregulated competitors. It is
simply unfair to inflict another burden on these banks that had nothing
to do with the problems that were created.”
The premise here is false. If major
banks had really not been involved in the mortgage fiasco, we would
not have had to roughly double our national debt-to-GDP in order to
save the US and world economy.
Within the banking community, and presumably within the ABA’s membership,
there is serious tension. The small banks feel – overall with
some justification – that the essence of the recent problem was not
about them. But they can’t bring themselves
to suggest publicly that the economic and political power of the largest
banks should be curtailed.
Small banks have always had clout in the American political system,
particularly when they work through the Senate. But we have not
always had our current kind of crisis. The executives of these
banks lived comfortably in the 1950s and 1960s; their kind of banking
was boring, stable, and nicely remunerated.
It is the changing nature and power of the largest financial institutions
– banks of various kinds – that has
damaged our system since the 1980s;
the rise in financial services compensation is part symptom and part
pathogen. Big banks present the major risk going forward – to
both the economy in general and to smaller banks in particular.
Most banks are “small enough to fail” (seven
closed yesterday). It is absolutely not in their interest
to have some banks that are perceived to be “too big to fail” and to
ever re-run any version of the last two years.
The ABA should be discussing and addressing this issue. Instead,
it is making all banks unpopular by opposing sensible legislation aimed
at protecting consumers – look at the public relations context provided,
for example, by
Citi’s recent move on credit cards.
The ABA’s leadership needs to quickly rethink its approach.
By Simon Johnson
Xorox
Don’t think that your vote counts for much.
Your representatives and senators are
bought and sold in the beltway.
Big banks and big business own Washington. Financial institutions
have too much influence over legislative activities and any regulation.
Ditto for health insurers and drug companies, dominating any movement
towards universal health care.
The revolving door between regulators,
big business, and lobbyists is an appalling nightmare for US taxpayers.
When will the people put a stop to this nonsense?
Lavrenti Beria
Xorox,
Don’t forget foreign policy, specifically Middle East policy.
How do you think its possible to produce AIPAC authored, anti-Iranian
resolutions in the House with only five or so votes against?
Could fear and money have something to do with it do you think?
The “the people” will “put a stop to this nonsense” when
they are willing to stop voting and participate in mass demonstrations
and the general strike and not until. Parliamentary means of
changing these realities are the stuff of pipedreams. The criminality
involved in most of these abuses is so egregious that it has
spelled an end to American democracy. Americans should behave
in accordance with what’s real, not what they imagine to be
real.
Bayard
Simon, I find this less than fascinating,
that the ABA, a shill of the oligarchs, would choose to speak and
act in such a way. What we need is an equivalent opposing force
to offset their rhetoric and power.
And, I don’t see one blooming on the horizon, although, inspite
of what one blogger said about 30 to 40% unemployment, the actual
rate has climbed to 20 with another 5 in the offing, once California
is forced to do business exclusively by IOU’s, and the many other
states in similar straits go up in smoke.
This is just another stage in the upcoming oligarch meltdown.
The prop up of the economy is falling short and the piper is
awaiting payment. Sometime in the next
six months, the next crest of the economic tsunami will hit, and
then the firebrands will take to the streets. If
the single payer folks are vociferous (and unheard), just wait for
the next wave, after the remaining taxpayers see what the Congress
is NOT doing to get us back on track.
I feel for Obama. He picked the right people for the job, but
failed to understand that Larry and Tim are not “get tough” guys.
They are brilliant, but way to close to the forest to hold the trees
at bay.
I am betting that many of those whose rates have just been raised
by CITI are going to either (a) default by not being able to keep
up, or (b) default intentionally, as a rebellion.
By the way, you need to look next
at the state bond markets, now that most states are running major
deficits, and their bond issues can’t get ratings.
They will default, and that chain reaction will be spectacular
(they can’t find guarantors with their ratings dropping). And this
is also true of municipal bond issuers.
The key economic figures in Obama administration are not that different
from key economic figures in Bush II administration...
July 3, 2009
Spencer
at Angry Bear:
The right is having a lot of fun commenting about the economic forecast
by the Obama team being too optimistic. ... I guess they are right,
Obama along with everyone else has massively
underestimated the damage Team Bush did to our economy.
Angry Bear
rdan
Money Central presents a dilemma for shareholders in goods and services:
The old notion that profitable companies with good growth prospects
should have rising share prices -- and that failures like GM should
be gone, or at least trading in the pennies -- is history.
Today, a hedge fund investing billions
using a quantitative formula can stall a stock; a couple of hedge
funds aligned can turn a profitable company into a Dow laggard.
Toss in a few short sellers and you have the great Wall Street collapse
of September 2008.
It wasn't always this way. Before the machines and the shorts
took over Wall Street, stocks were evaluated by an underlying company's
prospects. Buy-and-hold investing ruled the day. Investors such
as Warren Buffett and Bill Miller were the models.
Those fellows are a far cry from this generation's masters of
the universe. Traders are in charge now. They rule the market. They
dominate volume. That stock you bought because you thought the company
was in good shape? It's a pawn in the hands of a computer model
or some supertrader like Steven Cohen at SAC Capital Partners or
Bridgewater Associates' Ray Dalio.
To move a security, they don't need to own it. They can have
a short position. They can put an order to sell 1 million shares
in a dark pool, those anonymous marketplaces that operate outside
the walls of the exchanges. They can own options or futures contracts.
Buy enough GM puts and watch the price begin to fall under the pressure.
Obvious, but plays havoc with the investing side of the tax cut and
savings equation meme.Guest says:
I agree that there is a lot of stock
market manipulation going on now. And it's not all monetary manipulation.
There is also a constant stream of propaganda designed to influence
investors' expectations of the future.
But I find your example of GM a little hard to swallow. This
company has been loosing money for years. That's why it's so deeply
in debt. It wasn't the falling share price that did GM in. It was
the money loosing operations and the borrowing that did it in.
coberly says:
you could be right. but let me ask
if you are not describing the internal dynamics of an industry
that creates no value.
it looks from here like American produces less and less of anything
people actually use, but the people who sell paper make money on
the disequilibrium of Chinese workers making things they cannot
afford to buy themselves, at wages they can only live on because
their own landlords and grocery stores are priced at that wage level.
to some extent American workers "profit" from this situation
themselves, as they enjoy products produced by cheaper labor abroad.
but this is an unstable equilibrium,
and prone to collapse like a house of cards.
i would argue, if i had the data, that this has more or less
been the case for "capitalism" since 1700 or so, which means either
that the American empire could go the
way of the Spanish empire, or the whole world may run out of exploitable
resources first.
i realize this is incoherent. but i'll leave it in case those
better informed than i am can flesh it out better.
mcwop says:
“Bankrupt companies do not always simply trade at zero, Also,
remember a short seller must BUY the security back to close their
position, which means there is demand for the stock. if I borrowed
shares that I must replace, then I need to go to the market and
buy those, which gives what might be worthless shares some residual
value based on demand from short sellers.
mcwop replies:
“Here are some data:
Stocks of the 20 largest U.S. companies
that declared bankruptcy since 1980 rose an average 18 percent one
week after filing for court protection from creditors,
according to data compiled by Bloomberg and BankruptcyData.com,
a Boston-based research firm. The increase diminished to 3.1 percent
over a month and turned into a 15 percent loss within three months
as the shares began to be removed from exchanges, the data show.
The gains have little to do with expectations for a recovery.
Instead, the shares rally as investors who had wagered on a decline
buy the stock back to complete their trades, said John Carey, a
fund manager at Pioneer Investment Management.
Advances also reflect speculation a
company will return money after paying creditors.
http://www.app.com/article/20090602/BUSINESS/90602034/0/NEWS/Bankruptcy+could+lead+to+short-term+stock+boost+for+GM+shares
The article linked in this AB blog post is terrible, incomplete,
and untrue IMO.
jeff in indy
“it certainly changes the definition and make up of the "investor
class." those of us w/comparative pennies to throw at the market
through mutual funds simply hope the fund managers have a clue and
understand nimbleness.
hence, those of us that now make
up the sheeple of the investor class will have re-learn an old/new
phrase. . . passbook savings account. i certainly
don't begrudge these new masters of the universe, just don't take
away the ability to become one.
Today we begin with two fascinating reports from readers. We
start with correspondent Bob Z.'s report on Las Vegas condos--one of
several Ground Zeros for the housing bubble.
A house is a money pit, but a vacant house is a liability. We have
nearly 20 million of these liabilities all over the country and
every one of them is looking for cash, whether it be for taxes,
insurance, mortgage payments, condo fees, maintenance and repairs
or basic standby utility service. With rising unemployment and declining
rents, I submit that we are not at bottom yet.
Those who think the real estate bottom
is in should look at real estate markets in Las Vegas, Phoenix or
Miami/Fort Lauderdale. In Las Vegas, there is a huge
condo complex called Meridian at Hughes Center located 2 blocks
from the Strip. 2BR 2BA condos that sold for $540K in fall 2005
were going for about 120K at the beginning of 2009.
My uncle wanted to invest in a couple of units in January but
I told him "not yet." I watched the units drop to $99K around March
or April, and thought about buying one, but didn't. Today those
2BR units 2 blocks from the Strip can be had for $75K, or about
15 cents on the peak bubble dollar. Another Vegas complex I follow
has units that sold at $191K in 2006 now going for $35K.
Is this the bottom for Vegas? Well, I lived there for 8 years,
and I don't think the bottom is in just yet. We are getting
closer, but the bottom will not be in until we see some of these
properties going for 10 cents on the peak bubble dollar.
I see similar price declines in Phoenix and Fort Lauderdale, and
I think those cities are also getting closer to bottom but they're
not there yet.
The reason is simple: We still have
rising unemployment and hundreds of thousands of new foreclosures
every month. The supply of houses exceeds demand, yet builders are
still building new houses!
This is an economic depression. The
difference between this depression and the 1930s is that today we
have unemployment payments, welfare payments, Social Security and
Medicare. Those government programs are why we don't
have armies of hobos wandering around the country and massive lines
at soup kitchens.
But government tax receipts have
fallen off a cliff. If we wait awhile, we will see government no
longer able to borrow money, at which point it will be forced to
print money or cut spending. Either alternative will
finally put the lie to Mr. Bernanke's "green shoots" nonsense, and
we will see the proverbial stuff hit the fan.
"Audacity of hope" is for Goldman bankers only...
The stimulus package had two components, new spending and tax cuts.
Everybody knew that the spending component would take time to put into
place, six months or more for a lot of the infrastructure projects,
and that meant that we needed something to increase demand and provide
a bridge until the new spending comes online.
Enter the tax cuts that the GOP insisted upon, tax cuts that were
a larger part of the stimulus package than I thought justified. These
cuts were to come online immediately and stimulate demand until the
spending could begin taking up some of the slack later in the year.
I would have preferred targeted, non-infrastructure spending that could
have been put in place almost as fast as the tax cuts (particularly
those that simply require making existing programs more generous), but
that type of spending was considered wasteful because it didn't add
to our long-run capacity for growth and hence had little chance of being
part of the stimulus package.
The problem was partly bad luck. A crisis hit and we had the bad
luck of having an administration that opposed active intervention and
though there was a bit of a stimulus attempt through a one time tax
rebate, a strategy theory predicts won't do much to help, the real action
in terms of stimulating the economy was left to the new administration.
So nothing was done, nothing could have been done until the new administration
took over, and given the insistence that any new spending be on infrastructure
projects with clear benefits, tax cuts were the main hope for an immediate
effect.
So if the policy has failed at this point, it is not the spending
component since, fully consistent with predictions when it was enacted,
it was going to be months before it could be of any help. What failed
is the GOP's insistence that tax cuts be used to provide an immediate
boost to the economy. Increasing food stamps, unemployment compensation,
payments to help states with declining revenues and increasing demands
for social services, payments to help unemployed workers maintain health
care, digging (needed) holes, there were many, many other ways to provide
more immediate relief and stimulate the economy at the same time, but
no, it had to be tax cuts or nothing.
Finally, I want to note that what we maximize matters. For example,
we can maximize GDP growth over the next ten or twenty years, or we
can maximize employment over the next few months. Which we choose to
maximize has a big effect on the policies we put in place.
If we use the stimulus money to maximize
GDP and growth - which is essentially what we did - that will have a
much slower effect on employment than if we maximize employment directly.
The efficiency argument always leads you to maximize output, and efficiency
prevailed in the structure of the current package, but I think an argument
can also be made that maximizing employment provides social benefits
that are just as large, or larger.
Just noticed this, which makes a surprisingly similar point:
A Message to President Obama: Stop Priming the Pump, Hire the Unemployed,
by Pavlina R. Tcherneva: Many have called President Obama’s stimulus
plan a return to Keynesian policy. Some of us who like reading Keynes
professionally or for leisure have already been scratching our heads.
I have wondered in particular whether the plan isn’t set up to work
in a manner completely backwards from what Keynes himself had in mind
when he advocated economic stabilization by government.
There are two things to remember about Keynes’s fiscal policy proposals:
1) government spending was always linked to the goal of full employment...
and 2) to achieve macro-stability and full employment, the government
had to employ the unemployed directly into public works.
By contrast, most modern economists believe that 1) there is some
natural level of unemployment that includes the structurally unemployed,
which governments cannot generally tackle, and that 2) public employment
is an inefficient use of public resources.
So, when the government is called to action, the economic profession
has replaced Keynes’s “fiscal policy via public works” with a “leaky
bucket pump-priming mechanism.”
How is the latter policy supposed to work? Instead of employing the
unemployed directly, the idea is to generate large enough government
expenditures to produce a level of economic growth that would, in turn,
gradually reduce unemployment. For example, the government could spend
money on various private sector contracts, stimulate different private
industries, offer investment subsidies and tax cuts, and increase unemployment
insurance payments, in hope that it will boost GDP sufficiently to reduce
unemployment to desired levels. This is essentially the underlying logic
behind President Obama’s stimulus package. But it is also a bit of a
gamble.
Not all of these injections will be effective because the fiscal
stimulus enters the economy through “a leaky bucket”. Some of the money
will be lost in transit (because of administrative costs, for example)
and much of it will have no direct job creation effects (e.g. the tax
cut component of the recovery act). Nevertheless, despite this leaky
bucket, the theory goes, sooner or later, large enough government expenditures
will produce the kind of growth that would reduce unemployment. ...
All of this is ... why Keynes never had any “leaky bucket” or “pump
priming” idea in mind. For him “the real
problem fundamental yet essentially simple…[is] to provide employment
for everyone” (Keynes 1980, 267) and the most bang for
the buck from fiscal policy would be achieved via direct job creation.
This he called “on the spot” employment via public works.
As I have argued elsewhere,
it is useful to think of Keynesian fiscal
policy, not as aggregate demand management, but as labor demand management.
...
Commentators often call this a policy of “make work” but Keynes didn’t
advocate digging holes, burying jars with money and digging them out,
or any other similarly worthless projects. The key was to marry the
two goals: to employ the unemployed directly and to make sure that they
do useful things. Once they are put to work on a particular project,
Keynes argued, “there can be only one object in the economy, namely
to substitute some other, better, and wiser piece of expenditure for
it” (Keynes 1982, 146). We might as well ask a very basic question:
is there really a shortage of useful things to do?
If we insist on calling ourselves Keynesians again, and more importantly,
if President Obama’s plan for economic stabilization should generate
rapid reduction in unemployment, it would help to set fiscal policy
straight. Instead of relying on “leaky fiscal buckets”
we could return to “labor demand management”
a la Keynes that provides immediate employment opportunities to the
unemployed via bold and creative public works projects, which generate
useful output and services for all.
When CNBC tells that stocks will be "range bound" the most
probable direction is down ;-)
CNBC.com
Barry Knapp, Barclays Capital
head of U.S. equity portfolio strategy, said
he thinks the stock market could stay range bound for a bit longer.
He said there could be a move higher with some good earnings improvements
and a decent pickup in industrial production, but it's likely to finish
the year around current levels. For the most part, he expects to see
a weak earnings recovery.
"We might be in a little bit of
a dead spot, between when the economy bottoms out and when it starts
to pick up. It might be middle to late third quarter before it starts
to pick up," said Knapp.
tech|ticker
While the economy may be getting less bad it’s time for corporate
America to put up or shut up. "Some portion of the
rally was based, not just on economic stabilization, but the idea growth
will follow," Greenhaus says. "If you don’t get that second half of
the story it’s going to be very hard to continue to rally equity prices."
Even if earnings and guidance do surprise investors, Greenhaus believes
the days of 3% growth are gone; “that’s a fairly ambitious goal going
forward,” he says, predicting a more muted recovery with 1-2% growth
for the foreseeable future.
[Jul 2, 2009] Goldman again
Posted by Tracy Alloway on Jul 01 11:50. Matt Taibbi’s Rolling
Stone
article on Goldman Sachs has been making tidal-sized waves in the
blogosphere for the
past week.That’s unsurprising given that it begins with the following
unnerving paragraph:
The first thing you need to know about Goldman Sachs is that it’s everywhere.
The world’s most powerful investment bank is a great vampire squid wrapped
around the face of humanity, relentlessly jamming its blood funnel into
anything that smells like money.
It then goes on to accuse GS of helping to inflate no less than four
asset bubbles — 1920s equities, internet stocks, mortgages and oil —
with their alumni permeating regulatory and federal halls of power to
turn America into one “giant pump and dump scam”.
Unsurprisingly, Goldman was none too pleased with the coverage.
Here for instance, is GS spokesman Lucas van Praag, refuting some
of the claims via
Felix Salmon earlier this week:
. . . Taibbi’s article is a compilation of just about every conspiracy
theory ever dreamed up about Goldman Sachs, but what real substance
is there to support the theories? We reject the assertion that
we are inflators of bubbles and profiteers in busts, and we are painfully
conscious of the importance of being a force for good. .
. .
Now, Taibbi has shot back. You can read his full response
here, but he’s essentially refuting the claim that his article was
biased and that Goldman was not given the chance to tell its side of
the story. From a journalistic point of view, we find the following
section from Taibbi’s retort particularly interesting:
. . . Actually I did contact Goldman and gave the bank every opportunity
to respond to the factual issues in the article [by sending them a list
of questions]. I’m bringing this up because their decision not to comment
on any of those questions was actually pretty interesting. . . . I intentionally
put a lot of yes/no questions on that list. If the underlying thinking
behind any of those questions was faulty, it would have been easy enough
for them to say so and to educate us as to the truth. Instead, here
is the response that we got:
“Your questions are couched in such a way that presupposes
the conclusions and suggests the people you spoke with have an agenda
or do not fully understand the issues.”
You have to have swallowed half a lifetime of carefully-worded p.r.
statements to see the message written between the lines here. That this
is a non-denial denial is obvious, but what’s more notable here is that
they didn’t stop with just a flat “no comment,” which they easily could
have done. No, they had to go a little further than that and — and this
is pure Goldman, just outstanding stuff — make it clear that both I
and my sources are simply not as smart as they are and don’t understand
what we’re talking about. So the rough translation here is, “No comment,
but if you were as smart as us, you wouldn’t be asking these questions.”
.
Ouch.
"Now, of course, we have AIG’s
counterparty list. And guess who tops it?"
Mar 16, 2009 |
FT Alphaville
Now, of course, we have AIG’s
counterparty list. And guess who tops it?
Goldman Sachs.
Goldman is the proud recipient of $12.9bn in payments from AIG and
AIGFP. (Specifically, $2.5bn from CDS collateral postings, $5.6bn from
Maiden Lane III payments for CDS positions, and $4.8bn in payments related
to securities lending. The Maiden Lane III portfolio was, of course,
created in December specifically help reduce the burden of CDS collateral
postings facing AIGFP proper - it bought the underlying CDO tranches
from the CDS counterparties)
For the record then, it certainly was not the NYT that was “seriously
misleading”.
We wonder whether things might yet get uncomfortable for Goldman.
After all, they’re in rather an awkward position: on the one hand, according
to their above PR line, they didn’t need AIG’s money at all (it was,
to paraphrase, immaterial whether AIG went under or not). And yet, on
the other hand Goldman is - gosh - the largest recipient, via
AIG, of taxpayers’ money.
-
elh nyc
Mar 18 02:50 Finally. Such a great post. I guess it is finally
getting out into the wider media world. Even the WSJ has picked
it up : ) Unfortunately, "evil financial people getting big
bonuses" is just so much hotter than "Ambac novates contracts
at 40; Government pays face." That protection Goldman so had
so sagely bought: what exactly did they think it was going to
be worth? We had a couple of examples last year of financial
institions failing and I think Lehman ended up being about 10c
and the Icelandics about 1-2c. So they needed to be pretty sure
about their counterparties. There's a little hubris going on.
-
-- Report
User3636985
Mar 17 19:06 And is it such a coincidence that the US Treasury
was headed by ex-Goldman CEO Henry Paulson? Or that a number
of ex-Goldman executives continue to work at Treasury? Is it
fair to say the Mr. Paulson was also seriously misleading in
his ideas to bail out firms instead of taking them over outright,
letting management go, and selling the firms' assets back to
the private sector?
-
-- Report
Benjamin Epstein
Mar 17 13:21 Finally somebody is bringing this matter to
the open. If GS's hedges against AIG losses were "immaterial"
to GS, then GS should return to the US taxpayer immediately
the $12B in counter-party payments that they received from the
AIG bail-out. It is pathetic that there has not been a word
from Washington on this matter. Likewise the media is barely
covering this important story that well demonstrates how the
US taxpayer has been manipulated into saving the GS aristocracy.
-
-- Report uchisaiwaiso
Mar 17 08:51 I'm with you Singapore Don. I still find it
staggering that nobody went harder after GS. The dramatic switch
to a financial holding company (FHC) was utter bunkum, but everybody
accepted it would miraculously put the company on a rock solid
footing (it does nothing of the sort). It was pure media manipulation,
in fact. (Same goes for MS). They definitely benefit from a
halo effect, even though they were up to their necks in principal
investing and classic high leverage HF activities.
- Laker
Mar 17 00:01 Outstanding work. At this point, I'd be shocked
if Paulson and his GS cronies didn't save AIG for the sole purpose
of saving GS. As an American taxpayer, I can't tell you how
excited I am about the opportunity to pay this off.
- Irish Hedge fund guy
Mar 16 22:42 excuse me joachim, as someone around in the
russia 98 crisis, if I am owed 10bn from AIG & they do not pay..
I am out the cash. Perhaps If I have securitized collateral
or some such opaque GS b&*^sh(t but I think it is very self
evident how AIG had to be saved to save GS. At least if they
were anyway humble
-
-- Report
joachim
Mar 16 18:19 sounds like GS were insuring some of their
other credit risks with AIG and clearly that insurance would
have been ineffective without the bailout. Additionally GS would
have had trades with AIG as a counterparty but where GS would
have held collateral which may or may not have retained its
value. Finally GS may have had insurance against the AIG credit
exposure. It does not follow that the GS exposure to AIG was
the whole of the $12.9bn as this attributes no value to collateral
and hedges. But the payments to GS and others confirm that AIG
was a huge counterparty and that was why it had to be rescued.
No surprise here.
- shadow
Mar 16 16:05 Definition of a hedge fund,be long -be short,but
never hedged-thats called arbitrage.Please name a hedge fund
that hedges itself-that went out the window when they discovered
50:1 leverage by placing bets in one direction!Much more profitable.All
student S of the markets understand that Wall Street is a Ponzi
scheme,and the biggest players are JPM,GS and AIG.And when everyone
is insolvent,whats the value of a hedge?The only hedge fund
out there is you and me-but we're called taxpayers!
Broad employment is highly correlated to the production cycle...only
one third of it is manufacturing jobs. If and when recovery materializes
production jobs gains are going to be minimal and you can still lose service
sector jobs...
Posted by Stacy-Marie Ishmael on Jul 01 13:58.
Comment.US companies cut more jobs than forecast in June, according
to data released by ADP Employer Services on Wednesday.
The ADP jobs report showed a drop of
473,000 private sector jobs on a seasonally adjusted
basis from May to June
7/01/2009 | CalculatedRisk
From David Leonhardt at the NY Times:
A Forecast With Hope Built In
In the weeks just before President Obama took office, his economic
advisers made a mistake. They got a little carried away with hope.
... Without the stimulus, they saw the unemployment rate — then
7.2 percent — rising above 8 percent in 2009 and peaking at 9 percent
next year. With the stimulus, the advisers said, unemployment would
probably peak at 8 percent late this year.
We now know that this forecast was terribly optimistic.
Here is the January forecast with the actual data ...
Click on graph for larger image in new window.
This graph compares the actual quarterly unemployment rate (in red)
with the Obama economic forecast from January 10th:
The
Job Impact of the American Recovery and Reinvestment Plan
There are two possible explanations that the administration was
so wrong. ... The first explanation is that the economy has deteriorated
because the stimulus package failed. ... The second answer is that
the economy has deteriorated in spite of the stimulus.
Very little of the stimulus has been spent so far, so it is premature
to say it failed. However Romer recently was
quoted in the Financial Times:
Ms Romer said stimulus spending was “going to ramp up strongly through
the summer and the fall”.“We always knew we were not going to
get all that much fiscal impact during the first five to six months.
The big impact starts to hit from about now onwards,” she said.
Ms Romer said that stimulus money was being disbursed at almost
exactly the rate forecast by the Office of Management and Budget.
“It should make a material contribution to growth in the third quarter.”
So we should see an impact in the 2nd half of 2009 ... and that starts
now!
Selected Comments
Tim waiting for 2012 (,
profile)
Hope should be optional not standard in Econ Forecasts14% UE
here we come. 9% I hardly knew thee...
mock turtle (profile) wrote on Tue, 6/30/2009 - 9:48 pm
i saw what might be part of the "stimulus" expenditures (not
to be confused with tarp and the many fed windows) as i recently
drove cross country
massive road work coast to cost and huge number of wind turbines
being assembled in iowa, wyoming and washington state
i guess that the planned infrastructure improvements will not
be enough to stem the financial blood letting
something more and something different is obviously needed
couldnt we have public trials and executions of the most notorious
bankstas...think of the ticket sales receipts and the sales tax
collections!
kurtyboy (profile) wrote on Tue, 6/30/2009 - 10:02 pm
Why does DAVID LEONHARDT hate America?
Kidding, of course.
But why is anyone wondering about the efficacity of a stimpack
that heavily (historically big) favors tax cuts instead of direct
stimulus? Whether you are a Keynesian or not, the numbers always
tilt in favor of DS over TC when it comes to calculating the multiplier
effect of government stimulus. So--why be surprised that the package's
impacts are late to the party?
And for that matter. why be surprised that the effects are not
as great as hoped? In this case, the ARRA tried to bridge the philisophical
divide of government responsibility with a package that had a "post-partisan"
flavor, and will end up only pleasing those with short-term view
of this nation's potential for production.
This is Bush's "soft prejudice of low expectations" applied differently
and writ large.
I hope Ms. Romer takes the time to contemplate how much of her
own soul is now mortgaged, without any hope of a loan modification.
YLSP (profile) wrote on Wed, 7/1/2009 - 1:00 am
Percentage of outlays spent by stimulus (parenthesis is total
obligations, ie how much money given to each dept)
I excluded depts less than $1B. Figured that was noise (but there
were some like DoD who was at 1% spent of $0.95B).
Dept Education 17% ($45B)
HHS 72% ($30B)
Dept Labor 33% ($20.5B)
DoT 1.9% ($19B)
SSA 99% ($13B)
HUD 13.6% ($5.1B)
EPA 0.3% ($4.4B)
USDA 66%($3.23B)
DoJ 21% ($1.73B)
Granted this seems really small amount for promised $600B (I
think $200B of the $800B is actually tax benefits)... but to me
it doesn't seem like the idea that most
of these funds are going to roll into the economy will help;
in fact we've got $13B from Social Security into the economy as
well as a lot from HHS... these are actually scary numbers for expenditures...
of course I don't know if the Feds outlay it to the states who then
account for it and are not actually "spending" it as much as it
appears.
Lucifer (profile) wrote on Wed, 7/1/2009 - 1:47 am
Corporate Bonds Show Lehman Doesn’t Matter With 9.2% Return
http://www.bloomberg.com/apps/news?pid=20601087&sid=aLjElB1YB3Pg
By Bryan Keogh and Cristina Alesci
July 1 (Bloomberg) -- Nowhere is the recovery in financial markets
more evident than in corporate bonds, where Lehman Brothers Holdings
Inc.’s bankruptcy is becoming a distant memory.
U.S. investment-grade company debt returned 9.2 percent in the
first half of the year, outperforming Treasuries by 13.7 percentage
points, the most on record, according to Merrill Lynch & Co. index
data. Corporate bonds also did better than the Standard & Poor’s
500 Index of stocks, marking the first time since 2002 that the
fixed-income securities outshined both Treasuries and equities.
- can they save my poor SPY puts before end of July though.......puts
on those darned
green shoots w10949
- Oh good, Phoenix is only declining 20%/yr as opposed to 40%/yr declines
seen last month. Rob Dawg
- money quote from Mark Haynes re Case-Shiller report: ..."there's
something there." volker the viking
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July 26th, 2009 at 9:50 pm
Dismantling the Temple ( the Fed )
http://www.thenation.com/doc/20090803/greider/single
By William Greider
July 15, 2009
six key points
1. It rewards failure. Like the largest banks that have been bailed out, the Fed was a co-author of the destruction. During the past twenty-five years, it failed to protect the country against reckless banking and finance adventures. It also failed in its most basic function–moderating the expansion of credit to keep it in balance with economic growth.
2. Cumulatively, Fed policy was a central force in destabilizing the US economy. Its extreme swings in monetary policy, combined with utter disregard for timely regulatory enforcement, steadily shifted economic rewards away from the real economy of production, work and wages and toward the financial realm, where profits and incomes were wildly inflated by false valuations. Abandoning its role as neutral arbitrator, the Fed tilted in favor of capital over labor.
3. The Fed cannot possibly examine “systemic risk” objectively because it helped to create the very structural flaws that led to breakdown. The Fed served as midwife to Citigroup, the failed conglomerate now on government life support. Greenspan unilaterally authorized this new financial/banking combine in the 1990s–even before Congress had repealed the Glass-Steagall Act, which prohibited such mergers.
4. The Fed can’t be trusted to defend the public in its private deal-making with bank executives. The numerous revelations of collusion have shocked the public, and more scandals are certain if Congress conducts a thorough investigation.
5. Instead of disowning the notorious policy of “too big to fail,” the Fed will be bound to embrace the doctrine more explicitly as “systemic risk” regulator. A new superclass of forty or fifty financial giants will emerge as the born-again “money trust” that citizens railed against 100 years ago. But this time, it will be armed with a permanent line of credit from Washington.
6. This road leads to the corporate state–a fusion of private and public power, a privileged club that dominates everything else from the top down. This will likely foster even greater concentration of financial power, since any large company left out of the protected class will want to join by growing larger and acquiring the banking elements needed to qualify.