Tuesday, August 18, 2009
John Williams: Numbers Show "Ongoing Depression"
In his "flash update" today, PhD economist John Williams says:
July Housing Starts Showed Ongoing Depression...
The economy continues in a severe, deepening downturn, with no meaningful signs of a pending upturn. Based on continued weakness in weekly money supply reporting, the systemic solvency crisis is intensifying and also is far from resolution.
Monday, August 17, 2009
Economists Who Invented Cap-And-Trade Say It Won't Work for Global Warming
I have repeatedly argued that - no wonder what you think about climate change - carbon trading (a type of cap-and-trade scheme) is a scam.
Now, according to the Wall Street Journal, the economists who invented the entire cap-and-trade concept say it probably won't work in regards to climate change.
Whatever you think about global warming, carbon trading is a scam which will only create a new profit-making machine and speculative bubble for Goldman Sachs, JP Morgan and the rest of the boys who caused the financial crisis.
Worse Than Herbert Hoover
When Obama was elected, many compared him to a modern day FDR. See this Time Magazine cover, for example.
On the other hand, financial writer Ed Harrison has called Obama a "black Herbert Hoover".
Who is right?
It is true that Hoover - like Obama - did not force any meaningful change or reform to the banking or financial system. See this, this and this.
It is true that Hoover - like Obama -appointed as his top economic advisers banking insiders.
It is true that Hoover - like Obama - is trying to paper over the crash with happy talk.
But - unlike Hoover - Team Obama has printed tens of trillions of dollars and - instead of giving the money to consumers or the real economy - is throwing the money at the biggest banks.
And - unlike Hoover - Team Obama is massively manipulating the markets in so many ways that it is impossible to keep track.
The Obama economic team is destroying the real economy in order to prop up the financial giants. They are indebting the country and burying us under a moutain of debt, manipulating the markets and using happy talk to try to prop up a corrupt and fraudulent system which has stolen all of the poker chips.
Obama's actions prove that he is not only not a new FDR, he is actually worse than Herbert Hoover.
Race has nothing to do with it.
China is Again Buying Long-Term U.S. Treasuries . . . Does That Mean China is Betting on Deflation?
For the first time since the financial crisis started, China is again ramping up purchases of long-term U.S. treasury bonds. Indeed, according to Bloomberg:
China’s holdings of notes and bonds climbed $26.6 billion in June to $617.7 billion, a 4.5 percent increase, while bill holdings fell 25 percent to $158.7 billion, the Treasury’s data showed.
The difference between treasury bills, notes and bonds are the length until maturity:
- Bills are issued for terms less than a year
- Notes are issued in terms of 2, 3, 5, and 10 years
- Bonds are issued in terms of 30 years
Bloomberg also noted:
When the U.S. raised $75 billion last week, a group that includes international investors purchased a record amount of 3- year notes, the biggest share of 10-year notes since 2005 and almost half of the 30-year bonds sold, according to Treasury data.
Some smart people are arguing that this means that China's head economists believe that deflation will prevail over fears of inflation.
Why?
Well, on August 14th, Bloomberg quoted the following people talking about a bond rally being tied into lowered inflation expectations:
The argument by some China watchers is that China is following the same trend.“The relief over the inflation situation and the slippage in consumer confidence very readily justify the move upwards in the Treasury market,” said Eric Lascelles, chief economist and rates strategist at TD Securities Inc. in Toronto, a unit of Canada’s second-biggest bank. “The economic story is more consistent. The inflation data is bond-bullish.” ...
“Inflation will stay tame to surprise-to-the-downside for the rest of the year,” said Alex Li, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of the 18 primary dealers that trade with the Fed. “It’s going to be good for the 5- to 7-year sector and longer.”
Treasuries surged yesterday as a report showing an unexpected drop in retail sales suggested inflation remains restrained, helping to spur higher-than-forecast demand at a record $15 billion auction of 30-year bonds.
“The economic recovery will be slow at best, which is more bullish for bonds,” said David Ader, head of U.S. government bond strategy in Stamford, Connecticut at CRT Capital Group LLC.
Sunday, August 16, 2009
Taleb: Bernanake, Summers and Geithner Are Idiots, "Economists Have Been No Better in Their Predictions than Cab Drivers"
Nassim Nicholas Taleb wrote an open letter today to British Conservative leader David Cameron saying:
For background on why modern economists got it so wrong, see this.I despair of the Obama administration's ability to fix this financial crisis and prevent future ones. I am appalled by the dangers it has been creating and its takeover by the same economic establishment responsible for this crisis...
Be careful, too, of the so-called science of economics. Economists have been no better in their predictions than cab drivers. We have an "expert" problem, in which the expert provides you with misplaced confidence, but no information. Because we think, correctly, that the dermatologist, the baker, the chemist are true experts (they know more about their respective subjects than the rest of us), we swallow the canard that the economists at the International Monetary Fund, the World Bank, the Bank of England and the US Federal Reserve are also experts, without checking their record. This reliance on faux experts is, for the most part, what got us here. Now it is continuing with the build-up of government deficit and an increased reliance on flimsy forecasts by the Obama administration.
This problem with experts was particularly acute when it came to the "risk models" on which bankers built those positions that turned sour. So it is that you are coming under pressure to provide more regulation. Alas, the need for more regulation is a myth. I have been fighting risk models both as a Wall Street trader and as a professor and my worst nightmares were the results of regulators. It was they who promoted the reliance on ratings by credit agencies. The "value-at-risk" models regulators promoted made us take more risks...
We replaced the heuristics of the elders with arrogant (and incompetent) beliefs, breaking, in the name of science, the chain of knowledge. Old, conservative bankers and traders have been replaced by keen young mathematical analysts, yet anyone who listened to a grandmother who survived the Depression would have been warned against debt and been better prepared than Ben Bernanke and Alan Greenspan, respectively chairman and former chairman of America's Federal Reserve.
The solution is obvious: build an economy that increases the role of well-tested traditions. Ban financial derivatives that require advanced mathematics rather than trial and error. Look at mother nature. There is a complex system built around sound principles that has insured both evolution and survival. It does not let anything get too big to fail. It breaks things early. I don't understand why people who stand against tampering with nature accept tampering with the economy that would have organically grown too. Work on building a "robust" society, capable of withstanding errors, in which the role of finance (hence debt) would be minimal. We want a society in which people can make mistakes without risk of total collapse. Silicon Valley offers a good example, where people have the chance to fail fast (and repeatedly).
The best blueprint is the very opposite of the Obama administration's economic policies ... It has been administering pain-killers without addressing the cause of disease. Obama is strengthening those who do the wrong thing. Take the "cash for clunkers" programme. It is a handout to those who bought the wrong – uneconomic – car. He is penalising people who did not make a mistake. The same applies to other "rescues". By raising taxes after the crisis, the administration is hampering evolution. Those who do well in difficult times end up paying more tax and those who lost money in the crisis pay less. The rich who got us here are being rescued by regular Joes and being subsidised by the tax system.
Obama is giving the large institutions that failed us, like the IMF and the World Bank, even more powers. He is increasingly dependent on the visionary expert who failed us and does not understand the properties of complex systems and stifling long traditions of wisdom in understanding risk. Just consider the players: Larry Summers, director of the National Economic Council (who, among other things, made both Harvard University and the banking system more fragile), Bernanke (who increased reliance on the error-prone "models") and Tim Geithner, secretary of the US Treasury (who failed to understand that property prices can take extreme deviations).
Companies, Auditors, Rating Agencies and Regulators All Committed Fraud Which Helped Blow the Bubble and Sowed the Seeds of the Inevitable Crash
Everyone knows that the Fed blows bubbles.
But William K. Black - senior regulator during the S&L crisis, professor of Economics and Law, and an expert on white collar financial crime - says that fraud by many other companies also contribute to the bubble-and-bust cycle.
In a talk Black gave in June entitled "The Great American Bank Robbery" (watch below), he gives the following examples.
Initially, during the S&L, Enron and subprime crises, outside audit firms and appraisers gave their seal of approval and a clean bill of health to the companies, allowing them to commit fraud and blow a giant speculative bubble in toxic assets.
Rating Agencies as Vectors.(capitalization and punctuation in original). In other words, he was told to make it up, and then to make up a rationalization.
Any request for loan level tapes is. TOTALLY UNREASONABLE!!! Most investors don't have it and can't provide it.
[W]e must produce a credit estimate. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so. [S&P 2001]
So the S&P analyst ended up giving AAA rating - i.e. zero credit risk - on something that had immense credit risk.
So the bubble was partly blown because, as Black says,"This was a trillion dollar industry based on don’t ask, don’t tell."
This is nothing new. Black points out that the official investigation into the S&L crisis found that in the typical large failure, fraud was invariably present.
Black also points out that the guys covering up fraud in S&L were promoted to head regulators in the 2000's. These regulators gave a wink and a nod to massive fraud and insane amounts of leverage. So the regulators helped blow the bubble and sow the seeds of the current crash as well.
Fraud By the Banks, Lenders and Financial Service Companies
But the most interesting portion of Black's talk was the role of fraud by numerous businessmen in blowing and then bursting bubbles.
Black explained that fraud by a financial company usually involves the company:
1) Growing like crazy
2) Making loans to people who are uncreditworthy, because they’ll agree to pay you more, and that’s how you grow rapidly. You can grow really fast if you loan to people who can’t you pay you back
and
3) Using extreme leverage.This combination guarantees stratospheric initial profits during the expansion phase of the bubble.
But it guarantees a catastrophic subsequent failure when the bubble loses steam.
And collectively - if a lot of companies are playing this game - it produces extraordinary losses (more than all other forms of property crime combined), and a crash.
In other words, the companies intentionally make loans to people who will not be able to repay them, because - during an expanding bubble phase - they'll make huge sums of money. The top executives of these companies will make massive salaries and bonuses during the bubble (enough to live like kings even even if the companies go belly up after the bubble phase).
And since honest regulators would stop this fraudulent activity during bubbles, the corruption of regulators ensures wild bubbles and the subsequent crashes.
Of course, the types of fraud described by Black in the S&L, Enron and 2007 meltdowns are not just for the history books. Unless stopped, they will continue and will b of the next crash.
See also Matt Taibbi's discussion of Goldman Sachs.
Watch Black's speech (loads slowly):
Saturday, August 15, 2009
Marc Faber Slams Central Banks
In an August 12th CNBC interview, PhD economist Marc Faber slammed central banks:
- Asset markets will correct and the dollar will strengthen for a couple of months
- Central bankers are money printers who create bubbles
- Transparency is worse than before
- We've bailed out the financial system and derivatives. We should let derivatives players go bankrupt, and then the system will be clean
- The big crisis is ahead of us, in 4 or 5 years time, or 10 years time. We'll have a total breakdown of the system, which will devastate the global economy.
- If the Fed hadn't intervened, the system would be cleaned out, the system would be healthier because debt load and burden on taxpayers would be reduced
- For the central bankers of world, especially Greenspan and Bernanke, the market mechanism is allright as long as prices go up (except for crude oil)
- Today, employment in U.S. is lower than in 1999. In the meantime, the financial system has made billions of dollars and compensated useless financiers and dealers with huge rewards. The typical household is no better off than 10 years ago.
Watch the video (best in Internet Explorer):
Consumer Confidence Won't Recover Until Employment Stabilizes
The Washington Post wrote yesterday:
Darkening consumer confidence and plunging prices combined with a generally dismal outlook to dampen hopes for a quick economic recovery...
The decline itself is less meaningful than the fact that economists expected consumer confidence to rise in August. This means the experts underestimated the pessimism of American consumers, which helped send the stock market down Friday...The consumer confidence survey contained two notable findings: the lowest number of consumers in the survey's 60-year history said their personal finances are improving. Many said their net wealth is being hammered by unemployment, shorter hours and diminutive wage gains.
Of course, the government has thrown trillions at the too-big-to-fail banks, but has done next to nothing to help the struggling American people.
In the world of cheerleading corporate talking heads, the following obvious statement by the chief investment officer of $216 billion dollar investment firm Russell Investments (Stephen Wood) stands out as a breath of fresh air:
I think you're going to need to see a material stabilization in labor markets before you get meaningful and stable consumer confidence.Summers, Bernanke and Geithner can prop up the stock, bond and other markets until the cows come home, but if unemployment is still rising, consumers will not be confident, they will spend less, and - because consumer spending equals 70% of the economy - the economy won't really recover.
Friday, August 14, 2009
"The World's Source for Global Temperature Record Admits It's Lost or Destroyed All the Original Data That Would Allow a Third Party to" Model Climate
According to the Register:
The world's source for global temperature record admits it's lost or destroyed all the original data that would allow a third party to construct a global temperature record. The destruction (or loss) of the data comes at a convenient time for the Climatic Research Unit (CRU) in East Anglia - permitting it to snub FoIA requests to see the data.
The CRU has refused to release the raw weather station data and its processing methods for inspection - except to hand-picked academics - for several years. Instead, it releases a processed version, in gridded form. NASA maintains its own (GISSTEMP), but the CRU Global Climate Dataset, is the most cited surface temperature record by the UN IPCC. So any errors in CRU cascade around the world, and become part of "the science".
Professor Phil Jones, the activist-scientist who maintains the data set, has cited various reasons for refusing to release the raw data. Most famously, Jones told an Australian climate scientist in 2004:
Even if WMO agrees, I will still not pass on the data. We have 25 or so years invested in the work. Why should I make the data available to you, when your aim is to try and find something wrong with it.In 2007, in response to Freedom of Information Act requests, CRU initially said it didn't have to fulfil the requests because "Information accessible to applicant via other means Some information is publicly available on external websites".
Now it's citing confidentiality agreements with Denmark, Spain, Bahrain and our own Mystic Met Office. Others may exist, CRU says in a statement, but it might have lost them because it moved offices. Or they were made verbally, and nobody at CRU wrote them down.
As for the raw station data,
"We are not in a position to supply data for a particular country not covered by the example agreements referred to earlier, as we have never had sufficient resources to keep track of the exact source of each individual monthly value. Since the 1980s, we have merged the data we have received into existing series or begun new ones, so it is impossible to say if all stations within a particular country or if all of an individual record should be freely available. Data storage availability in the 1980s meant that we were not able to keep the multiple sources for some sites, only the station series after adjustment for homogeneity issues. We, therefore, do not hold the original raw data but only the value-added (i.e. quality controlled and homogenized) data."
Even if the Register is accurately reporting the story, I have no idea whether the motivations of the scientists at CRU are noble or not.
More importantly, I have no idea whether CRU has accurately summarized the original data. A careful and ethical scientist could do so, but a sloppy or unethical scientist might end up with different values than the actual data set.
My views on climate are complex. But the one thing I know for sure is that we need accurate data, because the stakes are high.
No Wonder the Poker Game is Ending: The Wealthiest Have Taken All of the Chips
A new report by University of California, Berkeley economics professor Emmanuel Saez concludes that income inequality in the United States is at an all-time high, surpassing even levels seen during the Great Depression.
The report shows that:
- Income inequality is worse than it has been since at least 1917
- "The top 1 percent incomes captured half of the overall economic growth over the period 1993-2007"
- "In the economic expansion of 2002-2007, the top 1 percent captured two thirds of income growth."
As others have pointed out, the average wage of Americans, adjusting for inflation, is lower than it was in the 1970s. The minimum wage, adjusting for inflation, is lower than it was in the 1950s. See this. On the other hand, billionaires have never had it better.
As I wrote in September:
As Marc Weisbrot writes in the Guardian:The economy is like a poker game . . . it is human nature to want to get all of the chips, but - if one person does get all of the chips - the game ends.
In other words, the game of capitalism only continues as long as everyone has some money to play with. If the government and corporations take everyone's money, the game ends.
The fed and Treasury are not giving more chips to those who need them: the American consumer. Instead, they are giving chips to the 800-pound gorillas at the poker table, such as Wall Street investment banks. Indeed, a good chunk of the money used by surviving mammoth players to buy the failing behemoths actually comes from the Fed...
This is not a question of big government versus small government, or republican versus democrat. It is not even a question of Keynes versus Friedman (two influential, competing economic thinkers).
It is a question of focusing any government funding which is made to the majority of poker players - instead of the titans of finance - so that the game can continue. If the hundreds of billions or trillions spent on bailouts had instead been given to ease the burden of consumers, we would have already recovered from the financial crisis.
John Schmitt and Nathan Lane showed that the United States is not the nation of small businesses that it is regularly dressed up to be for electoral campaign speeches and editorials. If we look at what percentage of our overall labour force is self-employed, or what percentage of manufacturing workers or high-tech workers are employed in small businesses – well, the US ranks at or near the bottom among high-income countries.In other words, the idea that America has more small businesses than other countries is false. More small businesses would be good, as it would mean that more of the "little guys" would have poker chips to play the free market game with.
As economist Paul Krugman noted after reading the study: "One more American myth bites the dust."
Similarly, breaking up the big banks would lead to more competition and allow smaller banks to fill the lending needs of individuals and small businesses.
Roberts: "By Spinning the Financial News, the Appearance of Recovery Is Created, and this Lures People Back into the Stock and Real Estate Markets"
Former Assistant Secretary of the Treasury and former editor of the Wall Street Journal Paul Craig Roberts has the quote of the day on the economy:
By spinning the financial news, the appearance of recovery is created, and this lures people back into the stock and real estate markets where they can lose the remainder of their wealth.
"Obamacare Is to Health Reform What Bank Bailouts Are to Financial System Reform, Which Is to Say it Is the Opposite of What its Name Implies"
Pop quiz.
Guess who wrote the following, someone on the left or the right:
These are not really "town meetings" at all, at least in the sense of the town meetings I grew up with, and started out covering as a young journalist in Connecticut--that is, meetings called and run democratically, with leaders elected from the floor, open to all residents of a community.
These "town meetings" are really nothing but propaganda sessions run by members of Congress who are trying to burnish their fraudulent credentials as public servants, and trying to perpetrate a huge fraud of a health care bill that purports to be a progressive "reform" of the US health care system, but that actually further entrenches the control of that system by the insurance industry, and to a lesser extent, the hospital and drug industry.
ObamaCare is to health reform what bank bailouts are to financial system reform, which is to say it is the opposite of what its name implies...Americans are about to be royally screwed on health care reform by the president and the Democratic Congress, just as they've been screwed by them on financial system "reform."
The appropriate response to this screw-job is the one the right has adopted: shut these sham "town meetings" down, and run the sell-out politicians out of town on a rail, preferably coated in tar and feathers they way the snake-oil salesmen of old used to be handled!
This is not about civil discourse. This is about propaganda. The Obama administration and the Democratic Congressional leadership have sold out health care reform for the tainted coin of the medical-industrial industry, and are holding, or trying to hold, these meetings around the country to promote legislation that has essentially been written for them by that industry--legislation that will force everyone to pay for insurance as offered, and priced, by the private insurance industry. What a deal for those companies--a captive market of 300 million people! There will be little or no effort to control prices, and the higher costs will be financed through higher taxes..
This isn't "reform." It's corruption, pure and simple...The only proper response at this point is obstruction, and the more militant and boisterous that obstruction, the better...
The only proper approach to the wretched health care legislation currently working its way through Congress at this point is to kill it and start over. At these "town meeting" staged events, Obama and the Democrats need to hear, in no uncertain terms, that we don't want no stinkin' ObamaCare.
If you guessed someone on the right, you'd be wrong. The above was written by a prominent liberal writer, Dave Lindorff.
Lindorff is right: the "townhall meetings" are actually staged events to begin with (and see this).
And Huffington Post confirms that the White House is including big giveaways to the healthcare industry as part of its plan.
And the New York Times says that Obama assured drug companies that his plan won't significantly reduce drug costs.
Indeed, leading investigative reporter Greg Palast - who studied healthcare economics at the Center for Hospital Administration Studies at the University of Chicago - says that Obama got next to nothing in return for his concessions to the healthcare lobby.Specifically , he says that the "$80 billion in healthcare savings" claim touted by Obama is not very impressive:
Over ten years, they will reduce the amount at which they would otherwise raise drug prices. Got that? In other words, the Obama deal locks in a doubling of drug costs, projected to rise over the period of "savings" from a quarter trillion dollars a year to half a trillion dollars a year. Minus that 2%.
We'll still get the shaft from Big Pharma, but Obama will have circumcised the increase.
And what did Obama give up in return for $80 billion? ... Obama agreed to dump his campaign pledge to bargain down prices for Medicare purchases. Furthermore, Obama’s promise that we could buy cheap drugs from Canada simply went pffft!
I'm strongly for a healthcare system which provides better healthcare to more people for less money. But Obama's proposal is a sham.
Thursday, August 13, 2009
Economist: Claim that Economy Has Recovered “Is Like Somebody Borrowing Money from Their Uncle and Then Celebrating that Their Income Has Gone Up”
John Hussman - PhD economist and former professor of economics and international finance at the University of Michigan - has a great quote:
If you look carefully at the economic data that shows improvement, and correct for the impact of government outlays, it is difficult to find anything but continued deterioration in private demand and investment. What we do see is a government that has run what is now a trillion dollar deficit year-to-date, representing some 7% of GDP.
That sort of tab will undoubtedly buy some amount of Cool-Aid, but it has been something of a disappointment to watch how eagerly investors have guzzled it down. It is not at all clear that short-term, deficit-financed improvement necessarily implies sustained growth in the context of a deleveraging cycle. This is like somebody borrowing money from their Uncle and then celebrating that their income has gone up.
RBS Chief Credit Strategist: Markets Have Priced in a V-Shape Recovery ... Markets Will Crash When Data Shows That Type of Recovery Isn't Happening
Royal Bank of Scotland's chief credit strategist - Bob Janjuah - after predicting a big "relief rally" over the early summer, is advising clients to sell out of global equity and commodity markets and prepare for another crash as winter nears.
As the Telegraph writes:
Janjuah's advice is German bonds:"I expect this risk rally to continue into – and maybe through – a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September 'tipping zone', driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets."
The key indicators to watch are business spending on equipment (Capex), incomes, jobs, and profits. Only a "surge higher" in these gauges can justify current asset prices. Results that are merely "less bad" will not suffice...
While media headlines have played up the short-term bounce of corporate earnings, Mr Janjuah said this is a statistical illusion. Profits were in reality down 20pc in the second quarter from the year before. They cannot rise much as the West slowly purges debt and adjusts to record over-capacity. "Investors are again being sucked back into the game where 'markets make opinions', where 'excess liquidity' is the driving investment rationale.
Mr Janjuah advises investors to seek safety in 10-year German bonds in late August or early September.Janjuah thinks that the crash can be delayed a year:
Governments might put off the day of reckoning into the middle of next year if they resort to another shot of stimulus, but that would store yet further problems. "If what I fear plays out then I will have to concede that the lunatics who ran the asylum pretty much into the ground last year are back in control."Why would that create more problems? Because, says Janjuah:
The elephant in the room is the spiralling public debt as private losses are shifted on to the taxpayer, especially in Britain and America. "Ask yourself this: who bails out Government after they have bailed out everyone?"
Wednesday, August 12, 2009
Taleb: Our Leadership Is "Literally Incompetent". They Are Making Things Worse and "Rewarding The People Who Got Us Here"
Nassim Nicholas Taleb told it straight on CNBC today, saying:
- "We still have leadership that's literally incompetent"
- The government doesn't see the problem. They are just applying patches
- The risks to the economy that were there before are still there. In fact, the risk to the economy is probably worse now than before. Fewer people employed today with same level of debt. We are just converting private debt into government debt
- Government has a lack of understanding of the disease. The government is treating a guy with lung cancer for a headache. Government hasn't recognized problem of deleveraging. Structural changes have not been addressed. They're not working on a cure. Not working to remove tumor
- Obama has rewarded the people who got us there
Congressional Oversight Panel Versus Summers, Bernanke and Geithner
Yesterday's report by the Congressional Oversight Panel on the bailouts concludes that banks remain threatened by billions of dollars of bad loans on their balance sheets, and more could fail if the economy worsens, and that - if unemployment rises sharply or the commercial real estate market collapses – the banking system could again crash:
The report will say: The financial system [still remains] vulnerable to the crisis conditions that [the bailout] was meant to fix...The head of the Oversight Panel, Elizabeth Warren, says:
Financial stability remains at risk if the underlying problem of toxic assets remains unresolved.
By and large, the toxic assets that brought us to this point are still on the books of the banks.As Nouriel Roubini writes:
Legacy loan program participation is voluntary and many banks refuse to sell their loans because doing so would crystallize book losses. Even though the government was prepared to prop up prices by offering cheap financing to loan investors with leverage up to 6 times, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay...And as David Corn writes:
Recent FASB fair value accounting changes allow banks not to mark their assets held for sale to market but to use more lenient hold-to-maturity prices...
Moreover, "recent government policies have further reduced the pressure on banks to sell. The Federal Reserve’s stress tests on the 19 biggest bank holding companies concluded that only one — GMAC, the former financing arm of General Motors — needed so much additional capital that it would have to turn to the government for a new cash bailout...
The current rhetoric about the deleveraging process is based on fantasy rather than data. In reality, true deleveraging by households, corporate firms and financial institutions has not really even started as private losses and debts of households, financial institutions and even corporations are being socialized and put on the back of the balance sheet of governments. As a consequence, lending remains impaired while re-leveraging of the public sector leads to an even bigger solvency problem down the line for the sovereign...
This is all about those toxic assets--now euphemistically referred to by the US government as "legacy assets"--that were at the core of the economic meltdown. Though some economic news of late has been not so bad--economic contraction slowing, job losses leveling off, banks passing stress tests--these toxic assets still pollute the nation's financial system and endanger it.If the toxic assets are such a problem, why hasn't the government done anything about them?
On Tuesday, the Congressional Oversight Panel, which was set up to monitor the $700 billion Troubled Assets Relief Program (aka the Big Bank Bailout), put out another of its monthly reports, and this one notes that the Treasury Department has not used its TARP billions to purchase this junk--which includes both lousy commercial and residential mortgages and securities based on lousy mortgages--and that billions of dollars of toxic assets remain on the books, threatening the security of numerous financial institutions.
In other words, whoops.
What's happened is that accounting changes have made it easier for banks to contend with these assets. But this bad stuff hasn't gone anywhere. It's literally been papered over. And it still has the potential to wreak havoc...
In a conference call with a few reporters (myself included) . . . recalling that toxic assets were once the raison d'etre of TARP, [Elizabeth Warren, the Harvard professor heading the Congressional Oversight Panel] added, "Toxic assets posed a very real threat to our economy and have not yet been resolved."
Yes, you've heard about various government efforts to deal with this mess. With much hype, Secretary Timothy Geithner in March unveiled a private-public plan to buy up this financial waste. But the program has hardly taken off, and it has ignored a big chunk of the problem (those "whole loans")...
The Congressional Oversight Panel warned that "troubled assets remain a substantial danger" and that this junk--which cannot be adequately valued--"can again become the trigger for instability." Warren's panel does propose several steps the Treasury Department can take to reduce the risks. But it's frightening that Treasury needs to be prodded by Warren and her colleagues, who characterized troubled assets as "the most serious risk to the American financial system."
It's also frightening that this fundamental issue barely registers a blip on our collective Attention-O-Meter. The panel's report warranted merely a small article on the second page of The New York Times' business section. White House reporters didn't ask press secretary Robert Gibbs about it... But Treasury not taking all necessary steps to avert another financial collapse? That's a yawner. The Obama White House--and all of us--better hope that this panel is worrying needlessly.
Because, the government's entire strategy in dealing with the economic crisis has been to try to artificially prop up the prices of the toxic assets. Everything Summers, Geithner and Bernanke have done is to try to pretend that the toxic assets aren't really that toxic. See this.
The government has, in essence, changed the accounting rules to allow the giant banks to call toxic sludge "organic health food", has itself overpaid for a variety of toxic assets to try to artificially drive up the "demand" for them and to re-start the securitizated asset market, and has done everything else it can think of to put lipstick on the pig and call it a fashion model.
Unfortunately, none of that will restore trust in the financial system.
Because Summers, Geithner and Bernanke cannot force consumers to trust a corrupt system, and because of problems in the commercial real estate market and long-term changes in consumer spending habits, their efforts will ultimately fail.
Poll: What's Up With the Town Hall Protests?
I am genuinely confused about the town hall protests.
Liberal writers I respect say the protests are wholly orchestrated by big healthcare companies and their insurers, with the help of Fox News and other media outlets, in order to defeat something which is good for people but bad for the big healthcare businesses.
Conservative writers I respect say that the protests are not simply about healthcare, but are spontaneous and authentic demonstrations by the American people against horrible government policies under Obama, Bush and other administrations which are bankrupting our country. They say that any violence at - or guns brought to - the protests are a form of cointelpro type disruption by the government itself
Then again, trend forecaster Gerald Calente writes:
The White House and the media have labeled protestors “conservative fringe elements,” or as players in staged events organized by Republican operatives that have been egged on by Fox news and right-wing radio show hosts.In a new poll, I asked "What's Up With the Town Hall Protests?"
In regard to this latest wave of outbursts, health industry interests opposed to any reform are also being blamed for inciting the public. But organized or spontaneous is not the issue...
While most protestors exhibit little grasp of the complex 1000 page health care reform document (that nary a legislator has read either), their emotion is clearly real and un-staged.
Rightly or wrongly, the legislation is regarded as yet another straw on the already overloaded camel’s back. A series of gigantic, unpopular government-imposed (but taxpayer-financed) bailouts, buyouts, rescue and stimulus packages have been stuffed down the gullet of Americans. With no public platform to voice their opposition, options for citizens have been limited to fruitless petitions, e-mails and phone calls to Congress … all fielded by anonymous staff underlings.
Now, with Congress in recess and elected representatives less than a stone’s throw away, the public is exploding.
Here's the final vote (poll voters were able to choose more than one answer):
1. They are an authentic outpouring of protest from the American people regarding proposed healthcare legislation which they passionately dislike. | 91 (24%) |
2. They are orchestrated by big healthcare companies and their insurers, with the help of right-wing politicians and media. | 134 (35%) |
3. They are the result of misplaced anger at the government's economic policies which have crashed the economy, redistributed wealth up to the wealthy, and put us into debt. | 126 (33%) |
4. Something else entirely is going on, and the media is distorting the truth. | 59 (15%) |
5. This is the start of a second American Revolution. | 106 (27%) |
Note: I know nothing about the healthcare debate or about the benefits versus downsides of a "public option". I simply haven't spent any time looking into it, and so I haven't yet formed any opinion.
Experts Say We Must Force Conversion of Debt to Equity
Many top economists and economic analysts argue that we have to convert debt to equity to save the economy.
For example, Nassim Nicholas Taleb wrote last month:
The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that we had in the 1980s. This does not sit well with globalisation. Our view is that government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity. There is no other option.
And Nouriel Roubini writes today:
The current rhetoric about the deleveraging process is based on fantasy rather than data. In reality, true deleveraging by households, corporate firms and financial institutions has not really even started as private losses and debts of households, financial institutions and even corporations are being socialized and put on the back of the balance sheet of governments. As a consequence, lending remains impaired while re-leveraging of the public sector leads to an even bigger solvency problem down the line for the sovereign...
To do: The right way to resolve a problem of excessive debt relative to equity capital for households, firms and financial institutions is to reduce such debt and convert it into equity.
Converting debt to equity is not uncommon. For example, it is a common solution for companies which are insolvent. As Wikipedia summarizes it:
It is possible for some organizations to enter into alternative types of borrowing and repayment arrangements which will not result in bankruptcy. For example, companies can sometimes convert debt that they owe into equity in themselves. In this case, the creditor hopes to regain something equivalent to the debt and interest in the form of dividends and capital gains of the borrower. The "repayments" are therefore proportional to what the borrower earns and so can not in themselves cause bankruptcy. Once debt is converted in this way, it is no longer known as debt.Recently, Obama directed GM to convert debt to equity, and he could force the insolvent banks to do the same thing.
Indeed, investors often prefer "convertible debt" (debt that can be subsequently be converted into equity) in certain situations, such as start-up businesses. If the bondholders in the financial giants don't want to convert their debt into equity because they are holding out for a better deal, they should be forced to do so for the good of the economy.Because conversion of debt to equity dilutes the shares of current equity holders, the government would need to educate shareholders about the need for conversion.
Tuesday, August 11, 2009
The Truth About Unemployment
The mainstream news is citing the decline in unemployment from 9.5% to 9.4% in July as proof that the economy is stabilizing.
But is that true?
Distortions in the Numbers
Well, as the New York Times pointed out in July:
Include [those who have given up looking for a job and those part-time workers who want to be working full time] — 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.
And see this.
The Times wrote a second article on August 7th pointing out that the unemployment rate had only declined because 400,000 people gave up their search for work and left the labor force. And see this.
Indeed, as the Times notes in a third article, Americans are going to China to look for work.
In addition, economists and financial analysts point out that auto workers who would normally be laid off this time of year have been retained because of changes to the auto industry from the auto bailouts.
For example, PhD economist John Williams wrote on August 7th:
July usually sees a regular pattern of planned automobile production line shutdowns to accommodate retooling for the new model year, but recent disruptions to the auto industry have changed pattern this year. Without the usual pattern of shutdowns, the government’s computers nonetheless responded by creating the usual offsetting boost in jobs, not only in the auto industry, but in supporting industries as well. The auto industry itself was alone among durable goods manufacturing industries in showing a reported, seasonally-adjusted monthly gain in July, up by 28,000 jobs.
Williams also said that certain distortions in unemployment figures are being caused by the severity of the financial crisis itself, but that - when these distortions subside in the months ahead - unemployment will increase. He also notes that official unemployment models tend to underestimate unemployment during recessions.
Indeed, if the aforementioned distortions are removed, Williams says that July unemployment figures would have actually increased slightly from June. Indeed, Williams says that accurate unemployment figures rose from 17.5% in December to 20.6% in July.
And Dave Rosenberg of Gluskin Sheff notes that tens of thousands of the new jobs in July were created by the government itself:
There have been large fluctuations in the federal government payroll too. After hiring a slew of Census workers in the spring, there were 57,000 layoffs in May-June and then we saw in today’s report that 12,000 federal workers were “hired” in July. Again, mathematically, this contributed about 20,000 to today’s headline number. In other words, and we have no intent on raining on anyone’s parade, there was about 100,000 non-recurring payrolls in that top-line figure. It may be dangerous to extrapolate today’s report into a view that we are about to fully turn the corner on the job market front.
Financial commentator Max Keiser says that unemployment is actually increasing and wages are falling. Keiser also says that the only sector in the U.S. which is actually strengthening is the military-industrial complex because of wars abroad. And see this.
And many economists point out that the length of time people are remaining unemployed is skyrocketing. As the Washington Post notes:
Another disturbing development was that the number of people out of work for 27 weeks or longer reached a record 5 million, accounting for a third of the unemployed. That suggests to some economists that those job losses were caused by structural changes in the economy and that many of those people won't be called back to work once the economy picks up. The longer people are out of work, the harder it becomes for them to find jobs and the more likely they are to exhaust savings or lose their homes to foreclosure.
No wonder even Paul Krugman writes:
That slight dip in the measured unemployment rate last month was probably a statistical fluke.Where Is Unemployment Going From Here?
Unemployment is a "lagging" indicator. In other words, if the economy crashes in one month, unemployment will not peak until several months or years later.
So we have to ask 2 questions:
1) How bad were conditions in 2008 and early 2009?
and
2) What will conditions be in the future?
A look back at how bad conditions were shows that they were probably worse than those at the beginning of the Great Depression.
Says who?
Fed Chairman Bernanke and many other top economists (and see this).
Indeed, former Secretary of Labor Robert Reich wrote in April that the unemployment figures show that we are already in a depression.
And Chris Tilly - director of the Institute for Research on Labor and Employment at UCLA - points out that some populations, such as high school dropouts and African-Americans, are hit much harder than other populations. In other words, regardless of the population at large, these people are already experiencing depression-level unemployment. And see this and this.
Europe’s largest bank - RBS - warns:
Even if the economy starts to turn up the headwinds will be formidable,” [the company's CEO] warned. “The green shoots are short in duration and you need to be cautious about interpreting them. Even if growth returns, unemployment will rise for some time afterwards ...What Will Future Conditions Look Like?
When he was presented with the July unemployment numbers, even President Obama tempered his enthusiasm by saying that the official unemployment numbers will rise to 10% later this year.
And the Federal Reserve predicted in July that high unemployment will cause the eventual economic recovery to be drawn out and weak for years to come. In other words, the Fed is worried that we're trapped in a vicious cycle, where a poor economy will lead to high unemployment numbers, and unemployment will lead to less consumer spending which will worsen the economy.
Unemployment is always a lagging indicator, and given the record low number of average hours worked, it will turn around especially slowly this time. Until then, people will continue to lose their jobs and wages will remain flat, and any small rebound in housing prices is unlikely to help more than a few people refinance their way out of unaffordable mortgages. So unless the other part of the equation – monthly payments – changes, the number of foreclosures should just continue to rise.
Indeed, the Washington Post notes:
The country's growing unemployment is overtaking subprime mortgages as the main driver of foreclosures, according to bankers and economists, threatening to send even higher the number of borrowers who will lose their homes and making the foreclosure crisis far more complicated to unwind.
And see this.
Moreover, a
Today, the Congressional Oversight Panel on the bailouts issued a report saying that small and medium sized banks are especially vulnerable, the report will say, in part they hold greater numbers of commercial real estate loans, "which pose a potential threat of high defaults."
Indeed, largely because of the commercial real estate crash, the FDIC expects 500 banks to fail in coming months.
The Congressional Oversight Panel report also says that banks remain threatened by billions of dollars of bad loans on their balance sheets, more could fail if the economy worsens, and that - if unemployment rises sharply or the commercial real estate market collapses – the banking system could again crash:
The financial system [still remains] vulnerable to the crisis conditions that [the bailout] was meant to fix...While the panel focuses on toxic loans, this holds true with toxic derivatives as well. As I have written in previous essays, the CDOs, CDS and other derivative side bets on the subprime and alt-a and commercial mortgages still haven't been reigned in, and they still have a high risk of bringing down the entire financial system unless they are either banned or brought to heel. The derivatives market is many times bigger than the world's real economy, and if that market crashes again, things could be bad, indeed.
Financial stability remains at risk if the underlying problem of toxic assets remains unresolved.
Indeed:
The government's entire strategy in dealing with the economic crisis was to try to artificially prop up the asset price of these toxic assets. Unfortunately, that strategy has failed miserably.In an interview on Reuters Television, the chairman of the congressional oversight panel, Elizabeth Warren, said no one even knows the value of the toxic assets still on banks' books.
VALUE OF TOXIC ASSETS UNKNOWN
"No one has a good handle how much is out there," Warren said. "Here we are 10 months into this crisis...and we can't tell you what the dollar value is."
Estimates are that "somewhere between $600 billion and $1.5 trillion in toxic assets (is) spread across the balance sheets of the small and the large banks," Warren said, adding: "That's a lot."
Marc Faber Says America Will Launch More Wars to Distract from Bad Economy
The claim that America would launch more wars to the help the economy is outrageous, right?
Certainly.
But leading economist Marc Faber has repeatedly said that the American government will start new wars in response to the economic crisis:
Is Faber crazy?
Maybe. But top trend forecaster Gerald Calente agrees.
As Antiwar's Justin Raimondo writes:
I certainly hope Faber and Calente are wrong. But they are both very smart guys who have been right on many of their forecasts for decades. Even when their predictions have been viewed as extremely controversial at the time, many of them have turned out to be right.As Gerald Celente, one of the few economic forecasters who predicted the ‘08 crash, put it the other day, "Governments seem to be emboldened by their failures." What the late Gen. William E. Odom trenchantly described as "the worst strategic disaster in American military history" – the invasion of Iraq – is being followed up by a far larger military operation, one that will burden us for many years to come. This certainly seems like evidence in support of the Celente thesis, and the man who predicted the 1987 stock market crash, the fall of the Soviet Union, the dot-com bust, the gold bull market, the 2001 recession, the real estate bubble, the “Panic of ‘08,” and now is talking about the inevitable popping of the "bailout bubble," has more bad news:
"Given the pattern of governments to parlay egregious failures into mega-failures, the classic trend they follow, when all else fails, is to take their nation to war."
As the economic crisis escalates and the debt-based central banking system shows it can no longer re-inflate the bubble by creating assets out of thin air, an economic and political rationale for war is easy to come by; for if the Keynesian doctrine that government spending is the only way to lift us out of an economic depression is true, then surely military expenditures are the quickest way to inject "life" into a failing system. This doesn’t work, economically, since the crisis is only maksed by the wartime atmosphere of emergency and "temporary" privation. Politically, however, it is a lifesaver for our ruling elite, which is at pains to deflect blame away from itself and on to some "foreign" target.
It’s the oldest trick in the book, and it’s being played out right before our eyes, as the U.S. prepares to send even more troops to the Afghan front and is threatening Iran with draconian economic sanctions, a step or two away from outright war.
A looming economic depression and the horrific prospect of another major war – the worst-case scenario seems to be unfolding, like a recurring nightmare ...Forecaster Celente has identified several bubbles, the latest being the "bailout bubble," slated to pop at any time, yet there may be another bubble to follow what Celente calls "the mother of all bubbles," one that will implode with a resounding crash heard ’round the world – the bubble of empire.
Our current foreign policy of global hegemonism and unbridled aggression is simply not sustainable, not when we are on the verge of becoming what we used to call a Third World country, one that is bankrupt and faces the prospect of a radical lowering of living standards. Unless, of course, the "crisis" atmosphere can be sustained almost indefinitely.
George W. Bush had 9/11 to fall back on, but that song is getting older every time they play it. Our new president needs to come up with an equivalent, one that will divert our attention away from Goldman Sachs and toward some overseas enemy who is somehow to be held responsible for our present predicament.
It is said that FDR’s New Deal didn’t get us out of the Great Depression, but World War II did. The truth is that, in wartime, when people are expected to sacrifice for the duration of the "emergency," economic problems are anesthetized out of existence by liberal doses of nationalist chest-beating and moral righteousness. Shortages and plunging living standards were masked by a wartime rationing system and greatly lowered expectations. And just as World War II inured us to the economic ravages wrought by our thieving elites, so World War III will provide plenty of cover for a virtual takeover of all industry by the government and the demonization of all political opposition as "terrorist".
An impossible science-fictional scenario? Or a reasonable projection of present trends? Celente, whose record of predictions is impressive, to say the least, sees war with Iran as the equivalent of World War III, with economic, social, and political consequences that will send what is left of our empire into a tailspin. This is the popping of the "hyperpower" bubble, the conceit that we – the last superpower left standing – will somehow defy history and common sense and avoid the fate of all empires: decline and fall.
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