Wednesday, May 13, 2009
"Happy Talk" Can NOT Fix the Economy
Many people in government, the media and the general public believe that if there is enough "happy talk" about the economy, and enough people believe the economy is improving, it will improve.
Are they right?
Well, it is true that consumers and small investors drive a large portion of the economy. And it is true that consumers and small investors, in turn, are largely driven by their perception of what is happening.
But is it also true that when the fundamentals of the economy are lousy, or there has been a giant bubble and vast overleveraging, or there has been massive fraud, or the government has gone so far into debt that it has formed a black hole, then all of the happy talk in the world won't turn the economy around.
For example, happy talk did not work during the first couple of years of the Great Depression, once the speculative bubble and leverage of the Roaring 20s burst, leading to the inevitable crash (as economist Irving Fisher documented).
And University of Maryland professor economics professor and former Chief Economist at the U.S. International Trade Commission Peter Morici wrote in 2006:
The speculative frenzy of recent years is causing a major adjustment, and the happy talk of realtors is prolonging the process. The absence of realistic analysis about the extent of overvaluation is characteristic in an industry that sees nothing but an upward progression for values, but houses like any other asset can be overpriced.
Things are likely to get worse before they get better.
Morici was pointing out that there was a bubble in housing, and happy talk would not keep the bubble from bursting.
As Washington Post business writer Steven Pearlstein predicted in August 2007:
Despite the happy talk from Washington and Wall Street investment houses -- eerily reminiscent, by the way, of the early days of the savings-and-loan crisis of the late '80s -- these shocks [the subprime and credit crises] will have serious consequences ...
And economist James Galbraith is saying now (just as his father economist John Kenneth Galbraith said 50 years ago) - that "happy talk" won't solve the crisis.
Indeed, the chair of the congressional oversight committee of the bailouts (Elizabeth Warren) and the senior regulator during the S & L crisis (William Black) both say that hiding the true state of affairs and trying to put a happy face on an economic crisis just prolongs the length and severity of the crash.
Happy talk might have worked before the biggest bubble in history burst, the unstoppable deleveraging process began, and the too-big-to-bury fraud began and the government dug itself into a multi-trillion dollar hole of debt.
But it is now long past time for happy talk, which is why all of Obama, Geithner, Bernanke and the other cheerleaders' pep talks are failing.
Indeed, the government has been gaming the fundamental economic indicators with more and more blatant attempts to hide the true state of affairs from the public for decades:
- Nixon took the U.S. off the gold standard because the U.S. defaulted on its ability to pay debts in gold
- The social security trust fund was long ago raided
- The government has been cooking its books and hiding debt through various accounting tricks for years
- The government deletes the 2 most important classes of inflation (food and energy) from the "core" inflation figures, has suspended reporting of the M3 monetary supply, and uses the fake U-3 instead of more accurate U-6 employment figures
- The Fed has blown bubble after bubble with artificially low interest rates
- The government has supsended mark-to-market, is letting banks cook their books, rolled out the fraudulent stress tests, and is engaging in every conceivable scheme to hide the true state of affairs
Despite all that, and despite the fact that the government, CNBC, ABC, Charlie Rose and all of the other boosters have tried to put a happy face on things, it hasn't worked.
Here Are a Few of the Torture Photos Obama Doesn't Want You To See
Obama has changed his mind, and is now trying to prevent the release of the torture photos.Here are just a few of the photos he doesn't want you to see (leaked to the Sydney Morning Herald several years ago):
Governments Will Need to Issue $15-33 Trillion in Bonds
Niels C. Jensen, a partner with Absolute Return Partners LLP, has written an interesting essay on the need of governments around the world to issue bonds to pay for their respective bailouts.
As summarized by Nouriel Roubini, Jensen shows:
The [IMF projects that the] twelve most industrialized of the world's G20 countries will have to issue about $10 trillion worth of new bonds to cover the cost of the current crisis. However, [well-known economists] Reinhart and Rogoff estimate the true cost at $15 trillion in the best case scenario and a whopping $33 trillion - 1/3 of total global savings - in the worst case. Issuing governments may have to inflate away their debt or pay drastically higher yields if deflation does not materialize
Tuesday, May 12, 2009
Baker: If the Stress Tests are Accurate and the Banks Are Solvent, then Get the Bankers' Hands Out of Our Pockets
Everyone knows that the stress tests were a p.r. stunt and that the big banks are really all insolvent.
But economist Dean Baker has a different take on it.
Okay, Baker says. Let's pretend that the stress tests were accurate. They show the banking system has stabilized, and that none of the banks are insolvent.
Then cancel the trillions in emergency bailouts, including the PPIP toxic asset scam, the countless billions being funneled to AIG's credit default swap buyers, and all of the other crazy bailout schemes.
Banker ends with this great quote:
In short, we should take the stress test results as good news. Based on what Geithner has told [us], the bailouts should be over. It's time for the banks to stand on their own two feet and to get their hands out of our pockets.
Health Organizations Checking Top Virus Scientist's Claim that Swine Flu May Have Escaped From Lab
Adrian Gibbs isn't a wild-eyed youth. He was one of the researchers whose worked was instrumental in the creation of the flu drugs Tamiflu and Relenza, and he has written or co-authored more than 250 scientific publications on viruses during his 39-year career at the Australian National University in Canberra.
The fact that Gibbs is saying that the swine flu may have escaped from a lab is causing the CDC and other health organizations to investigate his claim. They aren't buying it at this point, but they are looking into it.
U.S. Admited Using White Phosphorous as an Offensive Weapon in 2005
People are rightly outraged that the U.S. appears to be using white phosphorous as an offensive weapon in Afghanistan.
But this is nothing new.
The U.S. admitted using white phosphorous as an offensive weapon in Iraq in 2005.
As I wrote at the time:
The Battle Book, published by the U.S. Command and General Staff College at Fort Leavenworth, Kansas, contains the following sentence:"It is against the law of land warfare to employ WP against personnel targets."Indeed, it is interesting to note that the U.S. previously called white phosphorous a chemical weapon when Saddam used it against the Kurds.
Senator Reid Pushes Loophole That Would Increase Tarp Bailout Price Tag Above $700 Billion
I've been arguing from day one that the Tarp bailout program was never actually limited to $ 700 billion. Specifically, I warned that - because that amount was only the cap on the amount lent out at any one time - the funds could be recycled so that the total price tag could end up much higher.
The uses of the Tarp money have changed since I started writing about the issue. But the issue is still there.
Last week, Senator John Thune introduced legislation which would have prevented the "recycling" of Tarp bailout funds. The Senate rejected the bill.
As Huffington Post writes:
The law that created the TARP says that any revenues from the sale of a bailed-out bank's troubled assets should go to the reduction of the public debt. But the Treasury Department says that principal repaid by banks participating in the Capital Purchase Program is fair game.
Rep. Brad Sherman (D-Calif.) was the first to question the legality of the Treasury's plan to recycle bailout dollars. "If you look at the law, it's pretty clear any money returned from these banks goes into the general fund of the United States and not a revolving bank bailout fund," said Sherman in an interview with the Huffington Post. The law is clear that revenues from the sale of troubled assets should go back to the taxpayer, but it's silent on repaid principal...
But Thune's failed amendment may have provided a bit of backdoor justification for recycling. After last week's Senate vote, Majority Leader Harry Reid (Nev.) said that, in light of the vote, bailout recycling should be allowed.
So Reid and the boys are now explicitly endorsing exactly what I warned about back in September: increasing the price tag for Tarp well above $700 billion.
Update: Bloomberg and others are calculating the actual amount of the bailout (including all programs, not just Tarp) at more than $10 trillion dollars.
Congressman Sherman gives some choice quotes here.
Bank Loan Loss Rate will be MUCH HIGHER than During the Great Depresion
During the depths of the Great Depression, the loss rate which banks suffered on their loans climbed as high as 3.4% (it is normally well under 2.0%).
Last month, banking analyst Mike Mayo predicted that loan loss rates could go as high as 5.5%, which is substantially higher than during the 1930s.
But the Federal Reserve's more adverse scenario for the stress tests - which everyone knows is too rosy concerning most of its assumptions - predicts a loan loss rate of 9.1%, nearly three times higher than during the 30s.
As US News and World Report wrote yesterday:
For most of the past 50 years, the loss rate on all bank loans has stayed well under 2 percent. The Fed estimates that over the next two years the loss rate could reach 9.1 percent. You know all those historical comparisons that end with "the worst since the Great Depression"? Well, 9.1 percent would be EVEN WORSE than during the 1930s. Still looking forward to a soft landing or a quick recovery?
Monday, May 11, 2009
9/11 Mastermind: "During ... My Interrogation I Gave A Lot Of False Information In Order To Satisfy What I Believed The Interrogators Wished To Hear"
The Red Cross is the organization charged with deciding what is torture and what isn't.
The International Committee of the Red Cross interviewed Khalid Shaikh Mohammed - the alleged 9/11 mastermind - at Guantanamo Bay.
Here's what KSM told the Red Cross:
During the harshest period of my interrogation I gave a lot of false information in order to satisfy what I believed the interrogators wished to hear in order to make the ill-treatment stop. I later told the interrogators that their methods were stupid and counterproductive. I'm sure that the false information I was forced to invent in order to make the ill-treatment stop wasted a lot of their time and led to several false red-alerts being placed in the U.S.Straight from the horse's mouth:
- Torture doesn't work; and
- The 9/11 Commission report was based on worthless confessions extracted by torture
Americans Supported Torture Because They Were Deceived into Thinking that it was a Necessary Evil
I have written numerous essays documenting that torture doesn't work (see this, for example).
In response, many people have commented by saying:
"Who cares whether or not it works? It is illegal, unethical and unacceptable".
Well yes, of course it is. But it is in one sense even more important that it does not work (and that it reduces our national security).
Why?
Because - as president-elect of Psychologists for Social Responsibility, Roy Eidelson, points out - most Americans supported the use of torture because they were deceived into thinking that it works and was a necessary tool in a life-or-death war on terror.
For example, Eidelson points out that a nationwide poll run in January 2009 asked a national sample of Americans, "Do you think the use of harsh interrogation techniques, including torture, has ever saved American lives since the September 11 (2001) terrorist attacks on the World Trade Center and the Pentagon?" The results: 45% "Yes" and 41% "No" (with 14% responding "Don't Know"). In other words, almost half of Americans think torture "works."
Indeed, Eidelson notes out that the administration conducted a sophisticated propaganda campaign to "sell" Americans on the use of torture.
The fact that torture is illegal, unethical and unacceptable is not enough to convince the majority of American people that those who ordered it should be prosecuted.
It is vital to spread the facts, because only the truth that torture does not work will wake the public up and lead to prosecutions.
“While Substantial Uncertainty Remains, Clinical Severity [of Swine Flu] Appears Less Than That Seen In 1918 But Comparable With That Seen In 1957”
A study published today in the journal Science concludes:
While substantial uncertainty remains, clinical severity [of the current swine flu] appears less than that seen in 1918 but comparable with that seen in 1957.
The 1957 flu killed about 2 million people, which is between four and eight times more deadly than a typical seasonal flu epidemic which cause between 250,000 to 500,000 deaths each year, according to the World Health Organization.
The 1918 flu killed between 50 to 100 million people.
Is China Falling Into a Deflationary Spiral?
Leading thinkers are today debating whether or not China is experiencing deflation.
The Telegraph writes:
It was the third month of deflation in a row ...
However, commentators said accelerating money supply, combined with an enormous surge in bank lending, meant that prices were unlikely to keep falling in the long term and would probably start rising again by the end of the year.
Mish - a leading proponent of the theory that global deflation is the trend for the foreseeable future - believes that China will get dragged down by deflation:
Consumer prices are falling year over year in China. Bear in mind that falling prices do not constitute deflation which is a monetary phenomenon (a reduction in money supply and credit) not a price phenomenon. In this case we see both.
I'm Not Just Sitting Here Being Lazy . . . I'm Travelling at 1,000,000 Miles Per Hour
The "Great Attractor" is a region of space in the Centaurus Supercluster with a mass tens of thousands times greater than our Milky Way galaxy.
This may be a radio wave image of a portion of the center of the Great Attractor (scientists aren't positive they're focusing on the right area):
The Great Attractor has such a massive gravitational pull, that it is pulling our entire galaxy and all of the nearby galaxies towards it at the speed of 1,000,000 miles an hour (see this, this and this).
We don't feel any movement because everything on Earth and in our galaxy is moving at the same speed. In other words, we don't feel the movement for the same reason that we don't feel the Earth rotate: everything around us is rotating at the same time.
So don't call me lazy . . . I'm moving at a million miles per hour.
And in other astrophysics news, scientists have just discovered a black hole as large as 18 billion suns. Indeed, scientists say that black holes may get even bigger:
So just how big can these bad boys get? Craig Wheeler of the University of Texas in Austin, US, says it depends only on how long a black hole has been around and how fast it has swallowed matter in order to grow. "There is no theoretical upper limit," he says.
Will Lamarck Have the Last Laugh After All?
In other words, Lamarck believed that interaction with one's environment changes your body, and those changes are passed on to your children.
For well over a hundred years, biology teachers have taught that Lamarck was an idiot, and that inheritance of acquired characteristics is impossible.
However, a new scientific study shows that environmental influences can, in fact, change one's genetic make up.
Can that genetic change, in turn, get passed on to one's kids? The study did not look at that question.
However, there is actually an entire field of science called "epigenetics", which studies changes in phenotype (appearance) or gene expression caused by mechanisms other than changes in the underlying DNA sequence.
Epigeneticists say that genetic changes can be caused by interaction with the environment may last for multiple generations.
But can such changes be passed down to all future generations? Was Lamarck right after all, or does inheritance of acquired characteristics only apply to a very limited set of genes or only over the course of several generations (with Darwinian evolution still accounting for the bulk evolutionary changes)?
These are hot scientific questions, and further research needs to be conducted before we have the answers.
Friday, May 8, 2009
Why the Government's Attempt to Instill False Confidence Will Backfire
The government is doing its best to try to "restore confidence" in the economy. Indeed, Obama's top economics advisors believe they can fool people into believing that everything is fine, and then the economy will recover.
And for that reason, defenders of the status quo think that it is important for everyone to keep quiet about how severe the crisis really is.
Are they right?
No.
As economist Irving Fisher pointed out (as recounted by economist Steve Keen):
Hobbled by this naive belief in equilibrium, the economics profession was as unprepared for today’s crisis as it had been for the Great Depression. Now that the crisis is well and truly with us, all conventional “neoclassical” economists can offer is the hope that the crisis can be overcome by a good, strong dose of confidence.
From [Irving] Fisher’s point of view, such a belief is futile. In an economy with an excessive level of debt and low inflation, he argued that confidence was irrelevant–and in fact dangerously misleading, as he knew from painful personal experience.
Time Calls Geithner a "Con Man" and the Stress Tests a "Confidence Game"
Time Magazine assesses Geithner and the stress tests in a reasonably honest article entitled "Stress Tested: Has Geithner's Bank Confidence Game Worked?".
A "confidence game" is, of course, just the formal name for a con job.
Time writes:
In a remarkable bit of salesmanship, Geithner has managed to package [the negative realities regarding the banks' health] as positive...
Facts are important too, and some think Geithner and the government are fudging them. Nouriel Roubini, the hard-headed pessimist who foresaw the financial crisis, wrote Tuesday in the Wall Street Journal that the overall positive message of the stress tests "would be good news if it were credible," but it's not...Roubini is not alone in questioning whether the government used appropriately pessimistic assumptions in conducting the stress tests, especially as the financial sector faces a potential flood of commercial real estate losses that could mirror the residential market's recent woes.
Still, even if the numbers are based more on positive thinking than cold hard facts, it's tough not to be impressed by what Geithner and company have accomplished. In addition to the boost in public confidence, they've apparently figured out how to get the banks to support Geithner's other iffy program, the one designed to rid banks of toxic assets.[GW's Comment: This is the program where the banks are buying each others' toxic assets so they can dump the tab on the American taxpayer]
All of which goes to show that whatever his faults, Tim Geithner knows how to game America's confidence in the banking system. But does that mean the stress tests themselves are one big confidence game? Perhaps. The playwright David Mamet said such scams get their name not from the confidence the victim places in the con man, but the trust the con man pretends to place in the victim to elicit trust in return. By that standard, Geithner may be the most effective con man around, for better and for worse.
Government Will Backstop All Funds Required by the Stress Tests
Tim Geithner was interviewed by Charlie Rose yesterday.
Geithner said that the government will backstop the funds raised from private investors used to meet the cash requirements called for by the stress tests. So already, we know that the stress test procedure is not a free market procedure.
Moreover, Rose asked what would happen if a bank couldn't raise the required funds within 6 months. Geithner said that, in that case, the government would just give the funds to the bank.
So not only is the methodology for the stress tests a joke, but the procedure going forward is as well.
Thursday, May 7, 2009
Is Everyone In Washington Being Blackmailed?
Obama's Attorney General - Eric Holder - approved "extraordinary renditions" during the Clinton presidency.
And so now Republicans are blackmailing Holder, saying they will focus the spotlight on his role in approving renditions if Holder pulls back the cover too far on torture under the Bush administration.
The Economy Will Not Recover Until The Perpetrators Of Our Crises Are Held Accountable
One of the leading business schools in America - the Wharton School of Business - has written an essay on the psychological causes and solutions to the economic crisis. Wharton points out that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable:
According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the crisis today is not one of confidence, but one of trust. "Abusive financial practices were unchecked by personal moral controls that prohibit individual criminal behavior, as in the case of [Bernard] Madoff, and by complex financial manipulations, as in the case of AIG." The public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9/11. "Normal expectations of what is safe and dependable were abruptly shattered," Sachs noted. "As is typical of post-traumatic states, planning for the future could not be based on old assumptions about what is safe and what is dangerous. A radical reversal of how to be gratified occurred."
People now feel more gratified saving money than spending it, Sachs suggested. They have trouble trusting promises from the government because they feel the government has let them down.
He framed his argument with a fictional patient named Betty Q. Public, a librarian with two teenage children and a husband, John, who had recently lost his job. "She felt betrayed because she and her husband had invested conservatively and were double-crossed by dishonest, greedy businessmen, and now she distrusted the government that had failed to protect them from corporate dishonesty. Not only that, but she had little trust in things turning around soon enough to enable her and her husband to accomplish their previous goals.
"By no means a sophisticated economist, she knew ... that some people had become fantastically wealthy by misusing other people's money -- hers included," Sachs said. "In short, John and Betty had done everything right and were being punished, while the dishonest people were going unpunished."
Helping an individual recover from a traumatic experience provides a useful analogy for understanding how to help the economy recover from its own traumatic experience, Sachs pointed out. The public will need to "hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again." In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again, he argued.
Note that Sachs urges "hold[ing] the perpetrators of the economic disaster responsible." In other words, just "looking forward" and promising to do things differently isn't enough.
Are the "perpetrators of the economic disaster" being held accountable?
So far, Obama, Summers, Geithner, Bernanke and crew have tried to paper over the cause and severity of the financial crisis, instead of honestly addressing them. They haven't lifted a finger to hold anyone accountable (other than a Madoff or two), but have actually thrown billions of dollars at the perpetrators, or else appointed them to government posts.
PhD economist Dean Baker recently made a similar point, lambasting the Federal Reserve for blowing the bubble, and pointing out that those who caused the disaster are trying to shift the focus as fast as they can:
The current craze in DC policy circles is to create a "systematic risk regulator" to make sure that the country never experiences another economic crisis like the current one. This push is part of a cover-up of what really went wrong and does absolutely nothing to address the underlying problem that led to this financial and economic collapse.
The key fact that everyone must always remember is that the story of the collapse was not complex. We did not need great minds sifting through endless reams of data and running incredibly complex computer simulations to discover the underlying problem in the economy. We just needed some people who understood the sort of arithmetic that most of us learned in 3rd grade.
If the people at the Fed, the Treasury, and in other key positions had mastered arithmetic, and were prepared to act on their knowledge, they would have taken steps to stem the growth of the housing bubble. They would have prevented the bubble from growing to the point where its inevitable collapse would bring down both the U.S. economy and the world economy...
We didn't need some super-genius to solve the mystery. We just needed an economist who could breath and do arithmetic. But the DC policy crowd tells us that if only we had a systematic risk regulator this disaster could have been prevented.
Okay, let's do a thought experiment. Suppose we had our systematic risk regulator in 2002. Would this person have stood up to Alan Greenspan and said that the country is facing a huge housing bubble the collapse of which will sink the economy?...
Alan Greenspan said that there was no housing bubble; everything was just fine. Would our systematic risk regulator have said that Greenspan was nuts and that the whole economy was a house of cards waiting to collapse?Anyone who believes that a risk regulator would have challenged the great Greenspan knows nothing about the way Washington works. The government is run by people who first and foremost want to advance their careers.
And, the best way to advance your career in Washington is to go along with what everyone else is saying. If that was not completely obvious before the collapse of the housing bubble, it certainly should be obvious now.
How many people in government have lost their jobs because they failed to see the bubble? How many people even missed a promotion? In fact, the top financial officials in the Obama administration, without exception, completely missed the housing bubble. One might think it was a job requirement.
This lack of accountability among economists and economic analysts is the core problem that must be tackled. Unless these people are held accountable for their failures in the same way as custodians and dishwashers, there will never be any incentive to buck the crowd and point out looming disasters like the housing bubble.
The reality is that we have a systematic risk regulator. It is called the Federal Reserve Board. They blew it completely. We will do far more to prevent the next crisis by holding our current risk regulator accountable for its failure (fire people) than by pretending that we somehow had a gap in our regulatory structure and creating another worthless bureaucracy.
Remember also that the Wharton study pointed out that "the public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9/11."
Indeed, the government's responses to both crises have been similar:
- After 9/11, no one was held accountable for something that - at the very least - should have been prevented
- Instead, a new super-bureaucracy was created (the Department of Homeland Security), just as some super-risk-regulator is now being proposed for the economy
- And as with 9/11, the government is creating a commission which will be sure not to "assign blame"
As the Wharton essay says, the economy will not recover until the perpetrators of our crises are held accountable. But - unfortunately - the government is doing everything possible to avoid holding anyone accountable.
This is what I've been saying for a long time.
Taleb: Global Crisis "Vastly Worse" Than 1930s, Buy Gold and Copper
Investment advisor, risk expert and "Black Swan" author Nassim Nicholas Taleb said today:
The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent ...
The global economy is facing “big deflation,” though the risks of inflation are also increasing as governments print more money...Gold and copper may “rally massively” as a result...
“We’re going to get to the point where recovery is just not soaring and they’re going to do the same again. We’re going to have a very slow recovery from here.”...
Gold, copper and other assets “that China will like” are the best investment bets as currencies including the dollar and euro face pressures...
And see this.
Note: Numerous other experts agree with Taleb that this could be worse than the Great Depression.
I am not an investment advisor and this should not be taken as investment advice.
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