South Side market, Chicago, with security at the door
Ilargi: In the past few days, I’ve come across a few headlines like these: Where The Hell Is The Outrage? (Mike Shedlock) and Where's the Anger, America?
At first, they made me wonder why anyone would want to ask themselves these questions today. I've asked myself and my readers the same questions many times, but I stopped doing so long ago.
Then something occurred to me. I do know at least part of the answer to those questions, and it's something I didn't realize -or put into so many words- before. That is, America doesn't get angry or outraged because it has a political leader to whom nothing sticks.
Barack Obama is the new Teflon president, and some 26 years after the term was first used to describe Ronald Reagan (and was one of very few negative labels he couldn't shake), Obama fits the term so well Reagan never had anything on him.
Wikipedia has this:
The phrase "Teflon president" was coined in 1983 by Patricia Schroeder, a then Democratic Congresswoman from Colorado, who said of then-President Reagan,"After carefully watching Ronald Reagan, I can see he's attempting a great breakthrough in political technology. He has been perfecting the Teflon-coated presidency. He sees to it that nothing sticks to him. He is responsible for nothing."Her characterization did stick, and the phrase "Teflon President" entered the American political lexicon. Jerrold M. Post, Director of the Political Psychology Program for the Elliott School of International Affairs at George Washington University, has written that:"[Reagan's] followers actively ignored data that disconfirmed their idealization" of [him], thus contributing to his image as the 'Teflon' President."Although his approval numbers "plummeted" as the Iran-Contra Affair unfolded, his "immense popularity ... was largely unscathed", and when his term ended he had the highest approval ratings of any president since Franklin D. Roosevelt. The American political magazine Mother Jones has dubbed it "one of the most durable political metaphors of our time."
The Washington Post said in 1992 that Schroeder had been :"the only Democrat who ever came up with a derogatory label that stuck to President Reagan".Nevertheless, Schroeder has more recently expressed dismay over the impact the phrase had, and said in 2004 following Reagan's death:I was hoping people would say, "Yes, he is commander in chief, he should be responsible." Instead people said, "Yes, that is a Teflon coat. How do I get one of those?"
I do realize that saying these things will not make me win any popularity contests. But then, there lies much of the rub. 9 months after being sworn in, Obama is still as close to untouchable as one can imagine among a majority of the population. The same dream of hope and change that carried him towards his January 20 inauguration still exists -more or less- unscathed for most.
On the one hand, this is due to Americans' urgent desire for "a man such as him", someone they could project their aspirations on. They're neither willing nor ready to let go of that, and therefore see no reasons to do so. It's hard to blame them for that, but it does bring about a degree of blindness to reality that can be, well, blinding.
On the other hand, since the heights of the Reagan years in the early 1980's, the art of presenting and portraying a president in the media has been perfected to a degree few are aware of. Every word, every gesture, every appearance has been carefully crafted where necessary, and charisma does the rest.
The only criticism there is of Obama and his policies comes from the looney bin, epitomized by the likes of Sarah Palin and Glenn Beck, who, judging from the stats, seem to have followers only in Texas, but whom the Obama spin team has so little trouble painting off as a few notches short of a stick that it wouldn't surprise me one bit to find out someday they were scripting them all along as well.
Now, I don't want to make this political, so I won't address political issues here, no health care, no warfare, no peace prize. I want to limit myself to finance and the economy.
The first outrage, or at least the first after Obama was elected, came (or should have come) when the then president-elect nominated his economics team. As soon as it was announced that the triumvirate of Robert Rubin, Larry Summers and Tim Geithner was to lead that team, I wrote that that was about the worst idea ever. These are the same guys, products of the Wall Street- Washington revolving doors. who a decade earlier,, with Alan Greenspan and a handful others (Phil Gramm), made sure that Glass-Steagall was repealed and the Commodity Futures Modernization Act became law.
They are responsible for 1) allowing banks and investment houses to merge and/or become too big to fail, and 2) handing the new too big to fail giants the opportunities, privileges and tools (access to deposits and government funds, insane leverage, derivatives etc.) to ... fail.
It was obvious from the get-go, for those of us who bothered to inform themselves, that Obama was about to install not so much an Economics team as a recipe for disaster. And yes, he can and should shoulder the blame for doing so. It's not as if there were no alternatives. Tonight, PBS’ Frontline airs "The Warning" (both on TV and online), which documents how Brooksley Born was shoved aside by those who would become Obama’s disastrous team during the Clinton administration. Obama could have and should have known about that, and many other matters in which his picks were involved. It comes with the job.
Then again, even if he really should, who today blames him for it? Nobody. Nobody blames a Teflon man.
And along the same lines, nobody will blame the African American population for their happiness, deep-seated and carrying the weight of centuries, at having a black man elected to the highest office in the country. Or the non-black part of the population that was simply happy to his predecessor go. But that is still no excuse for complacency about what happens on a day-to-day basis.
Which at this time culminates in what Mike Shedlock and other now wish to vent their anger at: exorbitant profits and bonuses at Goldman Sachs and other firms on Geithner's speed-dial, while record numbers of Obama voters lose their jobs and homes.
The president manages to shrug off responsibility for both extreme facts mainly due to two notions. First, by having his people blame the previous administration for what happens, and second, by having the media point away from negative news, and towards those numbers and data that the government can influence and control, as well as, of course, the rising stock markets.
So far, it works like a charm. Obama's choices for his economics team were obvious calamities for anyone with a sense of history, and the policies they are responsible for were perfectly predictable. But nobody blames the president for any of it. Come to think of it, hardly anybody even blames Summers and Geithner themselves. And no matter how you see the world, or how you argue their policies, that involves and requires an uncomfortable amount of blindness.
In 2004, Congresswoman Patricia Schroeder, who coined the Teflon president term, wrote:
As a young congresswoman, I got the idea of calling President Reagan the "Teflon president" while fixing eggs for my kids. He had a Teflon coat like the pan. Why was Reagan so blame-free? The answer can be found in the label that did stick to him — "The Great Communicator."
Reagan's ability to connect with Americans was coveted by every politician. He could deliver a speech with such sincerity. And his staff was brilliant in playing up his strengths. They made sure the setting for any speech perfectly captured, re-emphasized and embraced the theme of that speech. And, let's be honest, Reagan told people what they wanted to hear.
I know you may view this in a different light than I do, but as far as my eyes can see, what Schroeder said about Reagan in the 1980's is just as true for Obama in 2009.
Reagan led the way to the dismantling of the American manufacturing base which resulted in the hollowed out economy and society you can see today.
Obama's legacy, unless he turns an a dime, fires the revolving door vultures and focuses on people instead of bankers, will be the responsibility for the ultimate erosion of what was left of a land built on the promise of a decent and honest livelihood for all of its citizens. Still, even if he would do that, for which there are very few signs, the damage already done in the first 10 months of his presidency will take many years to undo.
But, to be honest, Reagan is largely seen as one of America's great presidents. I never said he didn't have a great spin team. Just that Obama's is even much better. So maybe they'll pull off a similar memory and legacy for him.
For those living in poverty, desolation, ruins, hovels and tent cities with insurmountable personal debts, it won't make any difference. They’ll have more important things to worry about than presidents and puppeteers.
Ilargi: The Automatic Earth has started its Fall Fund Drive. It appears these days in the left hand column of the site.
Without your donations there can and will be no Automatic Earth. Though clicking the ads our pages display, excuse me: "visiting our gracious sponsors, on a regular basis", helps as well.
I remain confident that you, our readers, have a pretty good understanding of the value The Automatic Earth represents to you. Still you may have to be reminded from time to time of the role you yourself play in the continued existence of this site. I know I would.
We're not asking for large amounts of money. There are many thousands of people who read us every single day. It's easy to see that if every single one of them would donate a dime for every time they read us, and what's a dime these days, we'd be doing just fine, thank you. But obviously, 95% never will.
I would love to be able to expand on what we do, to involve more people, more opinions, a more diverse view from more places in the world. And that is unfortunately not possible right now. Along the same lines, we would like for Stoneleigh to be much more involved at TAE. Not happening. On a happy note, our brand-new Twitter presence is directed from Nairobi, Kenya, by VK, the first time we’ve been able -and willing- to expand and relinquish control at least a little.
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As for those among you who have donated to us -and many have in the past 10 days-, and those who will do so in the days and weeks and months to come, please know we are deeply grateful -no, really!!- for, and humbled by, the confidence you have shown in what we do on a daily basis. And rest assured, you can have confidence in us too: we ain't done by a long shot. It’s just that we have all sorts of ideas of where this should go, which we can't afford right now to even contemplate.
The Stock Market Has Never Been This (Intermediate-Term) Overbought
If you spend a great deal of time analyzing market data, there are some dates that are easy to remember – October 29, 1929, March 23, 2000 (the date of the 2000 bubble peak in the S&P 500), August 12, 1982 (the 1982 low), October 19, 1987, and so forth. Certain years are memorable of course, marking the beginning or end of recessions, major market movements, major economic events, and the like. But individual dates are generally forgotten unless they represent some sort of outlier.
At any given time, there are a good number of historical points where market data have been generally similar in terms of broad valuation and market action, and these references provide specific examples that we can look at as we evaluate the distribution of likely market returns and risks.
In reviewing the status of the market late last week, the condition of the data was something of an anomaly in that regard. On the valuation front, stocks are presently overvalued, but to levels that we've observed at least several times in history. The anomaly relates to market action, where we can no longer find a single historical instance where stocks were more overbought on the combination of short- and intermediate-term measures we respond to most strongly. Indeed, only one instance comes close, which is November 28, 1980.
Now, if that date doesn't ring a bell, I have to admit that it didn't resonate with me either at first. On that date, the stock market was just a few months into a fresh economic recovery following the 1980 recession, employment conditions were just beginning to improve, capacity utilization was picking up, the Purchasing Managers Index had just moved back over 50, and stocks were certainly not overvalued on the basis of normalized earnings or cash flows. Indeed, the P/E multiple of the S&P 500 was just over 9, on the basis of both trailing and normalized earnings. Advisory sentiment was not strenuously bullish either, so there was little to identify it as a date to remember.
As it happened, however, November 28, 1980 was the peak of the furious advance in S&P 500 driven by enthusiasm over "less bad" economic news, though with little proven economic strength. It was the last day of the 1980 bull market. The economy later proved to have been in a short lull within a double-dip recession, taking stocks to their final lows in 1982.
One of the notable features of extreme overbought conditions is that investors rarely have much opportunity to get out, just like the fast and furious advances that clear oversold conditions tend to occur too quickly to capture unless one has already established a position. As for the present, we have rarely seen 90% of stocks suspended above their 50- and 200-day moving averages for as sustained a period as we have now observed.
This concern extends beyond intermediate-term technical conditions. On the valuation front, even if we assume that the historical growth of earnings continues unabated, without any lasting impact from the recent credit crisis, our standard methodology projects unsatisfactory total returns for the S&P 500 averaging 6.1% annually over the coming decade. More persistent economic difficulties would lower that figure, but it is already at or below the level at which every bull market since the Great Depression has ended, save for the bubble period between 1995 and 2007 (which has produced disappointing overall returns for the S&P 500), and one other instance – January 1937, which was followed by a brutal one-year loss of more than 50%.
That said, investors clearly are approaching the current market with every belief that the extreme valuations of 2007 represent the sustainable norm to which stocks should return. This despite the fact that the 2007 peak reflected rich valuation multiples against earnings that were themselves inflated by abnormally elevated profit margins. Last week, Bill Hester reviewed the evidence that forward earnings estimates presently assume a return to record profit margins observed just before the market turned down. If the expectations of investors and analysts are heavily anchored to those 2007 levels, as seems to be the case at present, then the fact that stocks are richly valued on the basis of sustainable, normalized earnings and cash flows may not be sufficient to give investors pause.
The anchoring of investor expectations to a period of rich valuations and unusually wide profit margins may not be reasonable, but it prevents any ability to “forecast” a significant near term decline, much less a sustained downtrend. At the same time, we do have sufficient evidence to indicate that market risk is not worth taking on the basis of average outcomes from the combination of valuation and market action we currently observe.
The foregoing should not be interpreted as a "call" or forecast about sustained market direction. Rather, it outlines some of the factors are behind our defensive stance. As always, we align our investment position with the prevailing Market Climate, which does not require large or extended forecasts. I would be less than forthright, however, if I didn't admit that I suspect the current overbought condition may be cleared somewhat violently.
A few weeks ago, the Center for Responsible Lending testified before the Joint Economic Committee of the U.S. Congress regarding prevailing conditions in the housing market. The CRL is a non-partisan organization focused on consumer protection. Among their main objectives is the establishment of a Consumer Financial Protection Agency to prevent abusive and deceptive lending practices.
Among these practices in recent years was a form of mortgage broker compensation called a “yield spread premium.” The YSP was an extra payment that brokers received for delivering a mortgage with a higher interest rate than one for which the borrower would usually qualify. The mortgages were then packaged up and securitized to satisfy the demand of yield-hungry lenders. The yield spread premiums typically encouraged brokers to offer “no doc” loans even when borrowers could verify their income, but also generally require the mortgage to have a prepayment penalty. A lot of these non-standard mortgages (Alt-A, Option-ARM) were written during the late stages of the housing bubble. These are precisely the mortgages that are beginning to reset, and will continue to be reset into 2012. And there is a mountain of them.
Several facts are worth noting. In September 2007, about a month before the stock market peaked and well before credit strains were obvious, the CRL testified to Congress about the wave of coming subprime foreclosures, encouraging Congress to act before the crisis escalated. “As it turned out,” the CRL noted in its latest testimony, “our predictions – dismissed by some as pessimistic – actually underestimated the dimensions of the crisis.”
This is important, because here is what the CRL is saying now. First, over 1.5 million homes have already been lost to foreclosure in the sub-prime category, and another 2 million subprime mortgages are currently delinquent.
But even this figure pales in relation to their data on projected foreclosures of all types. For 2009, total foreclosures are estimated to be 2.4 million. But coupling state-by-state delinquency rates and foreclosure starts (as reported by the Mortgage Bankers Association) with other data, the CRL projects that for most states, foreclosure totals will more than triple over the coming 4 years, for a total of 8.1 million foreclosures, with only about one in ten of these being saved thanks to court-supervised modifications. These figures are consistent with the reset data I've repeatedly presented - it appears to be wishful thinking to believe that the credit crisis is over. Most likely, what we've witnessed in recent months is little more than the combination of a lull in the reset schedule coupled with a wholly unsustainable burst of deficit spending amounting to over 7% of GDP.
My impression of the U.S. banking system is that it is quietly going insolvent, in a manner that will become evident only when the slack for “significant judgment” (provided by the FASB earlier this year when it altered mark-to-market rules) is taken up so tightly that the rope snaps. Presently, this slack has allowed banks some time, but the question is, time for what? The rules encourage banks to neither modify loans nor foreclose, both which would trigger a restatement of value on the mortgage asset. Meanwhile, banks are reluctant to allow “short sales” in lieu of foreclosure (where a homeowner sells a home to avoid foreclosure, but at a price less than the residual loan value, so the bank has to essentially eat the loss). This again defers the restatement of asset values for a while, but makes business sense only if home prices are expected to recover faster than the foregone interest that could be earned on new loans.
So if you talk to people who oversee these assets, including people who work with the FDIC, you'll hear that there is an inventory of unrecognized losses being built up, in hopes that the underlying mortgages will turn around without the need for loss reporting. In view of the CRL foreclosure projections, all we can think is – fat chance. The FDIC itself is already essentially broke, and is looking at options like taking premium prepayments to try and shore up its own books. Last week, an FDIC spokesman offered the interesting assurance that “our ability to raise premiums essentially means that the capital of the entire banking industry -- that's $1.3 trillion -- is available for support.”
So the banking system, which is most likely quietly undergoing its own erosion of capital, can expect to see its capital tapped by the FDIC to pay for, well, the erosion of capital in the banking system. Still, don't blame the FDIC. Our policy makers bailed out bank bondholders instead of focusing on debt restructuring. The bad assets are still in the banking system, millions of families will still lose their homes, the Treasury and Fed have jointly issued trillions in new government obligations, but the bondholders of Bear Stearns will still get 100% of their principal and interest. Despite the current enthusiasm of Wall Street, this story has probably not ended, and the evidence suggests it will end badly.
As of last week, the Market Climate for stocks was characterized by unfavorable valuations. Major indices and breadth were marked by generally positive recent trends, but intermediate-term and short-term market action is so strenuously overextended that the overall combination indicates negative expected returns. On that basis, the Market Climate shifted from mixed to negative last week.
Again, I have to emphasize that I am not "forecasting" that a near-term or extended market decline is a necessary outcome of present conditions. A decline certainly should not be ruled out, and may be more likely at this point than a near-term or extended advance, but our primary focus here is that the expected return for stocks is negative and the risk appears unusually high. Accordingly, the Strategic Growth Fund is fully hedged, for now. In response to market strength in recent sessions, I have placed a great deal of attention on the question “what is threatened?” In response to that question, we have clipped our positions in many stocks that have become fully valued, or have demonstrated weakening price/volume sponsorship, or have simply grown to more than about 2-3% of Fund value.
Always, our objective is to add to high-ranked candidates on short-term weakness, and clip lower-ranked holdings on short-term strength. The Fund presently has just over 85% of assets in stocks, with a hedge of similar size (when we sell stocks outright, we also reduce our hedge proportionately), so we are holding more cash as a percentage of assets here than is typical. We rarely have less than 90-100% of assets invested in stocks (since we can hedge their market risk), but at present, many of our most interesting candidates are also overbought and vulnerable to “spike” declines. I expect that we'll get opportunities to shift into higher ranked candidates on weakness reasonably soon, if not because of market-wide losses, then on the basis of day-to-day variability in individual stocks in any event.
In bonds, the Market Climate remained characterized by modestly unfavorable yield levels and moderately positive yield pressures. The general conditions in the precious metals market have taken us largely out of our gold stock positions in recent weeks, so the Strategic Total Return Fund currently has only about 1% of assets in that group. Though I don't want to draw too many parallels to November 28, 1980, it is interesting that gold prices had doubled in the 18 months leading up to that date, which marked a high in precious metals and precious metals shares. Over the following 18 months, gold dropped by about half, and gold shares by an even greater amount. Again, that isn't a statement of expectation in this case, since monetary conditions in particular are very different, but I did think it was an interesting feature of that period.
What I do think is important here is the potential for the U.S. dollar to strengthen in response to fresh credit concerns, as investors may still be inclined to seek U.S. government liabilities (currency and Treasury securities) as default-free safe havens. I certainly believe that over the longer term, the profligate deficit spending of the U.S. government, particularly the trillions in monetary base and Treasuries that have been issued to bail out troubled financials, will ultimately result in dollar erosion and sustained inflation. But as I've noted before, that is a problem that is likely to be expressed over a decade or so, with most of the pressure coming several years out. There is generally an “ebb and flow” in day-to-day and quarter-to-quarter events that can hold off these longer-term pressures from time to time, and fresh credit concerns would fall into that category.
Pay No Attention to the 140 P/E Behind the Curtain
by Rich Hartmann
Yes folks, it’s time to dust off those party hats… It’s Dow 10,000 time! Pay no attention to anything else folks. Especially not the S&P 500 P/E ratio… As of Oct 7, The S&P P/E Ratio is 140.82. Yep, 140!!! This isn’t my data; this is directly from the New York Fed. Here’s the link (pdf).
So, remember that little thing called dot.com? Remember all that irrational exuberance that was “the bubble”, where the P/E basic fundamentals went from the 15 range, and shot all the way up to 47… Well now, we're at 140! The funny thing is, it doesn’t even fit on the Fed’s chart. (Look for yourself) The line goes to the top, and then there is text telling you that the P/E is at 140. It is absolutely comical.
There are no fundamentals, just fake money floating around, created from thin air, looking for a place to land. (note to the Fed, when you create money, it needs to be dispersed! It doesn’t just need to be spun around the fractional reserve system of the debt, creating greed whores who will cash out bonuses of false profits from stimulus floatation …or, you get what we have today, fundamentals that fall completely out of whack.)
Pricing the S&P at 140 falls into what I call unattainable true price discovery. I discuss this at length in my “Evaporflation Theory” as true price discovery (even for stocks) will soon become unattainable. You can’t mess with the economic forces of nature. Much like Mother Nature, you don’t know how this force will punch back! An S&P P/E of 140 will likely lead to missed expectations on earnings. (Hmmmm does that sound good for all the massive pension funds that are looking to capitalize on this fake bull run, in order to recoup losses from there soon to come shortfalls?)
The bulls will argue against me, saying: look at the financials… their numbers aren’t bad, they’re recovering!
Let’s face it folks, when your financial institutions refinance all their debt at anywhere from 0.5% to 0.015% via the government/taxpayer loans/bailouts, and then re-loan that money out to taxpayers at 5% or don’t refinance existing taxpayers loans from their 6-10%, it becomes a built in profit that borders on criminal. Until the public realizes that this simple concept: I owe the bank money. I’m now going to take money from other parts of my paycheck, and give it to the government, so the government can loan it to the bank I owe at a really cheap rate… Just so that the bank I owe, can make a larger profit margin on the money I still owe them. …and after they make a larger profit, they can give themselves a bonus above and beyond the addition profits they made by cutting costs through layoffs.
P.S. I’ve lost so much interest in economics and finance in the last year. When the financial world started to resemble something as comical as the “professional wrestling” it gets hard to take yourself serious as an analyst of that venue. For me, (or the pros like Nouriel, Krugman, Schiff) or anyone else to sit here and make realistic prognostications on what will or should happen is as ridiculous as talking about whether Hulk Hogan was really better then Andre the Giant. It’s all fake people. Whether we are fundamentally right, momentum can irrationally go another way. Even if we are wrong, governments can intervene, “manipulate/correct” or “save” the economy for whatever reason.
Intractability of Financial Derivatives
A new result by Princeton computer scientists and economists shows a striking application of computer science theory to the field of financial derivative design. The paper is Computational Complexity and Information Asymmetry in Financial Products by Sanjeev Arora, Boaz Barak, Markus Brunnermeier, and Rong Ge. Although computation has long been used in the financial industry for program trading and "the thermodynamics of money", this new paper applies an entirely different kind of computer science: Intractability Theory.
A financial derivative is a contract specifying a payoff calculated by some formula based on the yields or prices of a specific collection of underlying assets. Consider the securitization of debt: a CDO (collateralized debt obligation) is a security formed by packaging together hundreds of home mortgages. The CDO is supposedly safer than the individual mortgages, since it spreads the risk (not every mortgage is supposed to default at once). Furthermore, a CDO is usually divided into "senior tranches" which are guaranteed not to drop in value as long as the total defaults in the pool does not exceed some threshhold; and "junior tranches" that are supposed to bear all the risk.
Trading in derivatives brought down Lehman Brothers, AIG, and many other buyers, based on mistaken assumptions about the independence of the underlying asset prices; they underestimated the danger that many mortgages would all default at the same time. But the new paper shows that in addition to that kind of danger, risks can arise because a seller can deliberately construct a derivative with a booby trap hiding in plain sight.
It's like encryption: it's easy to construct an encrypted message (your browser does this all the time), but it's hard to decrypt without knowing the key (we believe even the NSA doesn't have the computational power to do it). Similarly, the new result shows that the seller can construct the CDO with a booby trap, but even Goldman Sachs won't have enough computational power to analyze whether a trap is present. The paper shows the example of a high-volume seller who builds 1000 CDOs from 1000 asset-classes of home mortages. Suppose the seller knows that a few of those asset classes are "lemons" that won't pay off. The seller is supposed to randomly distribute the asset classes into the CDOs; this minimizes the risk for the buyer, because there's only a small chance that any one CDO has more than a few lemons. But the seller can "tamper" with the CDOs by putting most of the lemons in just a few of the CDOs. This has an enormous effect on the senior tranches of those tampered CDOs.
In principle, an alert buyer can detect tampering even if he doesn't know which asset classes are the lemons: he simply examines all 1000 CDOs and looks for a suspicious overrepresentation of some of the asset classes in some of the CDOs. What Arora et al. show is that is an NP-complete problem ("densest subgraph"). This problem is believed to be computationally intractable; thus, even the most alert buyer can't have enough computational power to do the analysis.
Arora et al. show it's even worse than that: even after the buyer has lost a lot of money (because enough mortgages defaulted to devalue his "senior tranche"), he can't prove that that tampering occurred: he can't prove that the distribution of lemons wasn't random. This makes it hard to get recourse in court; it also makes it hard to regulate CDOs. Intractability Theory forms the basis for several of the technologies discussed on Freedom-to-Tinker: cryptography, digital-rights management, watermarking, and others. Perhaps now financial policy is now another one.A comment on the paper:The "what to do about it" question is as counter-intuitive as the math. The problem isn't how to stop the trading of complex CDOs/CDSs. The problem is that if this paper is supported by other complexity theorists, no buyer should ever buy another complex CDO/CDS, at any price ...
... because not even the most sophisticated buyer with the NSA's computing capacity could calculate the risk of a single complex CDO/CDS within the lifetime of the instrument. That means there's no way to know if you're paying a fair price for that risk, nor even to know whether an instrument failed through bad luck or the seller's cheating.
If this paper is correct, no one should buy any but the most transparently simple CDOs/CDOs. The rest are value-less - they can't be sold at any price - and the government won't need to do anything to stop them from being traded. No buyer will touch them.
The problem isn't how to stop the trading of complex CDOs/CDSs; if this paper is right, that will stop. The problem is the capital already invested in complex CDOs/CDSs totals several times the world's annual GDP, according to this paper, and all of that capital will be inextricably frozen for the lifetime of these instruments. That is a giant, indissoluble clot in the world's financial arteries.
Hooverville 2009: Where's the Anger, America?
Just a quick note tonight. The signs that we are slowly sinking into an economic depression are becoming rapidly evident. Lets get real for a second: Most of the middle class in this country live paycheck to paycheck. Perhaps some have a few thousand squirreled away in the bank. This might buy them a month or so...nothing more.
The video below is a sobering reminder of what happens to many of these people when they lose their jobs. How many millions will have to go on a permanent camping trip before Washington puts an end to the fraud on Wall St?
Millions of middle class Americans are running out of options as Rome continues to burn. Don't worry though, not everyone is suffering, Wall St is preparing to pocket record bonuses in the billions of $$$ courtesy of speculation using the US taxpayer as a backstop. Again America: Where is the anger?
Where The Hell Is The Outrage?
by Mike Shedlock
Where's The Outrage?
I don't know about you, but I am outraged.
I am outraged and not just about Goldman Sachs, but about a process that allows, even encourages political pandering, by time and time again rewarding leveraged riverboat gamblers and failed institutions and at taxpayer expense.
I am outraged that real people are suffering massively while the influence peddlers have stolen the country for their own personal benefit.
I am outraged at a political system that is totally unresponsive to the American people.
I am outraged by campaign contribution and lobbying processes that allows corporations to buy votes with donations.
I am outraged how legislators ignored the wishes of the people who clearly did not want these bailouts in the first place.
I am outraged that very little of this is in mainstream media. Why is this stuff not on the frontpage of every newspaper in the country or at least in the editorial pages?
I am outraged that the average US citizen is not aware of any of this, instead depending on CNBC, or "The View" for their interpretation of the world.
I am outraged how special interest groups have exercised their power to monopolize the economy for the benefit of themselves, US citizens be damned.
I am outraged that all these bailout programs are doing nothing to alleviate the massive consumer debt problems. Every program, virtually every program was designed to bailout lending institutions, not consumers.
I am outraged at fees charged by banks receiving bailouts.
I am outraged over government pension plans and government pay scales massively out of line with the private sector.
I am outraged that Congress and this administration thinks the solution to massive budget deficits are still higher budget deficits in excess of a trillion dollars.
I am outraged about indictments. Paulson Admitted Coercion to force a shotgun wedding between Bank of America and Merrill Lynch yet no indictments were handed out. Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis.
I am outraged that US citizens are not concerned enough and not educated enough to demand change.
I am outraged that the two party system has failed. Neither party has delivered meaningful change on budgets, on taxes, on social security, on deficit spending, on the size of government, on military spending, or fighting needless wars.
I am outraged at a Fed that purports to be "inflation fighters" when the only source of inflation in the word are central bankers, and their fractional reserve lending policies.
I am outraged that Greenspan and Bernanke could not see a housing bubble that 1000 bloggers could see.
I am outraged at the selective memory of Bernanke when speaking to Congress about these problems.
I am outraged that Bernanke's one sided response to asset bubbles, letting them grow without end, then bailing out the financial institutions that cause them.
I am outraged the Fed exists at all. It is a useless organization that cannot see bubbles, that panders to banks, that supports inflationary policies that are tantamount to theft by fraud.
I am outraged that the Obama Administration promised changed and did not deliver. "Yes We Can" was a lie. The reality is "It's Business As Usual, Only Worse, With Higher Deficits".
I am outraged there is not enough outrage over this.
Where the hell is the outrage?
Fannie, Freddie shares dive on zero-value prediction
A new analysis of loss-ridden mortgage giants Fannie Mae and Freddie Mac tries to nail shut the coffin on their common stocks. In a report, financial services research specialist Keefe Bruyette & Woods says the companies’ shares would have zero value under the workout scenario the firm believes is most likely: the creation of new Fannie and Freddie entities as mortgage guarantors owned by the banks that use their services, while the government continues to support the old Fannie and Freddie loan portfolios as they wind down.
Keefe may not be telling speculators in Fannie and Freddie shares anything they didn’t already suspect, but the report still must be spooking some of those players today: Fannie’s shares were down 25 cents, or 17%, to $1.21 at about 10:45 a.m. PDT; Freddie was off 31 cents, or 18%, to $1.41. "There is general consensus that the primary role of the agencies in the future is in the loan guarantee business and not in the investment business," Keefe analysts led by Bose George wrote in the report. "By creating ‘bad banks’ of the existing portfolios and putting the existing portfolios into receivership, the government can limit its losses and define its role in supporting the mortgage industry through the crisis and create an exit strategy."
But that exit strategy would leave nothing for shareholders, the Keefe analysts assert. They believe that the companies’ combined $96 billion in debt to the Treasury -- which seized them 13 months ago after saying the firms were in danger of failing -- will grow in the near term as mortgage defaults continue to rise. Even presuming that the old Fannie and Freddie portfolios would earn net operating profits over the next 10 years as the mortgage crisis abates, the companies still would have negative equity at the end of that period because of what they owe taxpayers, Keefe says.
"In this scenario, both the common and preferred equity of the [companies] should be worthless," the firm says. "Our bad bank analysis suggests that the companies will still owe the government almost $100 billion by the end of year ten. As a result, we are ... cutting our price targets to $0." Speculators ran wild with Fannie and Freddie shares in August, driving both up more than 200%. Fannie peaked at $2.04 on Aug. 28; Freddie peaked at $2.40 the same day. But the stocks have been drifting lower since then as interest has waned.
Yet another housing bailout on the way
Just as federal officials seek to wind down many bailout programs, the Obama administration announced Monday yet another initiative to prop up the housing market. Administration officials unveiled a plan to aid state and local housing finance agencies, which provide mortgages to first-time and lower-income homebuyers and enable the development or rehabilitation of rental properties. Officials declined to put a pricetag on the program, but said there would be no cost to taxpayers.
"This initiative is critical to helping working families maintain access to affordable rental housing and homeownership in tough economic times," said Treasury Secretary Tim Geithner. Under the initiative, the Treasury Department, along with Fannie Mae and Freddie Mac, will purchase housing bonds issued by the finance agencies. This will give the groups the funding needed to make new loans. Also, the government will provide a temporary credit program to allow the agencies to refinance their existing bonds to more favorable terms.
The measure will enable housing agencies to lend to hundreds of thousands of families and enable the development or rehabilitation of tens of thousands of rental units, administration officials said. The agencies operate in all 50 states and in many cities. The agencies will pay fees to participate in the program, which officials say will cover its cost. They are still working with the agencies to determine the extent of support needed. Earlier news reports said the initiative could cost as much as $35 billion.
The finance agencies have had a tough time funding mortgages since the bond markets went haywire last year. As a whole, they are operating at only 20% to 25% of their usual capacity, with some groups halting their lending completely, said Susan Dewey, president of the National Council of State Housing Agencies. While the administration says the program comes at no cost to taxpayers, the Treasury Department is ultimately responsible if an agency defaults on its debt payments. The agencies have a good track record. They generally make 30-year, fixed-rate mortgages and require full documentation. The delinquency rate on agency mortgages is comparable to that of prime loans given to homeowners with good credit backgrounds, according to administration officials.
While the government is starting to pull back its support of the banking industry, officials said it is too early to tell when it will withdraw from the housing market. Congress is considering extending an $8,000 tax credit for first-time homebuyers, which ends next month. The credit will have been used by 1.8 million homebuyers, at least 355,000 of whom would not have bought a house without the tax break, by the end of November, according to estimates by the National Association of Realtors.
20 Year Old Buys Home With $183,000 FHA Loan And Just 3.5% Down
Denise Tejada bought a house last month at the age of 20, thanks in large part to a loan guaranteed by the Federal Housing Authority. This story offers a dramatic demonstration that, despite the housing bubble causing the worst economic downturn in generations, the ideology of home ownership is alive and well in the United States and still being supported by the government. Without question, Tejada's loan is toxic--to her and to the taxpayers who are backing the loan. Her house cost $155,000. Tejada's loan was apparently made on a micro-down payment of just 3.5%, the minimum down payment to qualify for an FHA loan. On top of this, however, she got an additional government backed loan to make improvements. Her total loans amount to $183,0000. In short, she was immediately underwater on her new house.
The monthly payments on her debt amount to $1328. Her income is $2470, leaving her with just $285 a week to live on. She's paying 54% of her income to make the mortgage payments. She earns that income by holding down one full time and two part time jobs. Obviously, this woman has a strong work ethic. But it also means her income is precarious. With unemployment still rising, she obviously should be worried about losing one of her three jobs. A loss of one of them would likely leave her unable to make the debt payments. Tejada appears to be using imaginary numbers about the value of her house. She says that when she bought it, the house was just a “box” with no kitchen or bathroom. Now it is "gorgeous". She claims the renovation has increased the value of her home from $155,000 to $255,000.
"I bought my house for $155,000. And now, after all the fixing, after all the remodeling, my house is worth $255,000. So just within a month period, I made a $100,000," she tells Market Place's Scott Jagow. As far as we can tell, this is just mark-to-imagination valuation. She doesn't give any indication about how she arrived at the conclusion that she has made a $100,000 gain in just a month. Even if her improvements had dramatically increased the value of the house beyond the cost of the improvements themselves, she would have to contend a declining housing market. From last year to this year, the median price of homes sale in Oakland, California has declined 28%.
Tejada sees her house as an investment rather than a home. And she is planning on buying more homes, despite the fact that her income is already strained by her debt. This three bedroom house is just her "first house" and is "a little too big for me." This is the opposite direction house buying traditionally moved in, with young people buying a small fixer-upper or renting and moving into larger homes as their incomes and family size increased. Tejada has started big.
Tejada, a first generation immigrant from Guatemala, isn't going to college. If that was ever the American dream, it isn't hers. She's going into home buying. Her older brother also bought a house. Indeed part of the reason she bought her house so young was that she wanted to beat her brother, who bought his house at the age of 21. She is very happy about the fact that her friends seem impressed that she owns a home. "This is the kind of mentality that our dad pretty much embedded in us since we were 12 years old," she says.
Her father bought a house shortly after moving to the United States. Shortly after buying the home, the family started acquiring nicer things. New cars, new televisions, that kind of thing. When Tejada's brother asked about where they were getting the money for these things, the father said it was all because of the house. That sounds a lot like the father was using his house as an ATM, most likely borrowing from a home equity line of credit to purchase consumer goods. As the value of the house increased during the housing bubble, the family seemed to be getting richer. Most likely, they were simply acquiring more debt. This way of thinking has been passed on to Tejada--who believes she made $100,000 in a month.
The Tejada family obviously has a very strong worth ethic and a savings ethic as well. Unfortunately, something appears to have gone haywire when it comes to homes. The children were encouraged to work and save but then to spend their savings on homes and to be completely unafraid of massive amounts of debt. This is, in short, a living breathing example of the ideology of home ownership at work. We wish the Tejada's nothing but the best of luck. We hope she really can keep paying her mortgages and that she somehow makes money on her house. But it is outrageous that the FHA is guaranteeing her loans, putting the taxpayer on the hook for her precarious financial situation.
Housing Trade Groups Urge Obama Administration to Back Tax Credit
Three major U.S. trade groups are urging the Obama administration to back an extension of the $8,000 first-time home-buyer tax credit set to expire Nov. 30. "Our fragile economy is just beginning to show signs of recovery. We should not jeopardize that recovery by letting the tax credit expire," the Mortgage Bankers Association, the National Association of Home Builders and the National Association of Realtors wrote in a letter Monday to senior administration officials.
The letter was sent to Treasury Secretary Timothy Geithner, National Economic Council Chairman Lawrence Summers and Department of Housing and Urban Development Secretary Shaun Donovan. Lawmakers from both parties, including Senate Majority Leader Harry Reid (D., Nev.), are pushing for an extension of the tax credit. House and Senate panels will hold hearings addressing the tax credit this week. The White House, however, so far has been silent on whether it supports an extension.
The large price tag for prolonging the tax credit is likely to put off many would-be supporters, including many on Capitol Hill concerned about the widening budget gap. The cost of a Senate measure to extend the tax credit through June 30, 2010, and broaden it to cover all buyers of a principal residence, not just first-timers, would cost $16.7 billion, congressional analysts said. Critics of extending the tax credit say it is an inefficient way of boosting the economy because it helps many people who would have bought a home anyway. There are also concerns that extending the tax credit could exacerbate surging vacancy rates for rental housing. The realtors group estimates the tax credit -- enacted last year and revamped early this year as part of the economic stimulus package -- has generated about 355,000 home sales that wouldn't have otherwise occurred.
Warren: Housing Market Getting Worse
There's been a lot of talk lately about a recovery in the housing market – even reports of bubbles re-inflating in certain markets. Elizabeth Warren, chair of the Congressional Oversight Panel, isn't buying it. "We see things getting worse in the housing market," Warren says, citing the pernicious effects of foreclosures, which rose 5% in the third quarter to a total of 937,840, according to RealtyTrac. "The long-term impact of high foreclosure rates on our housing market and overall economy would be disastrous," Warren warns, citing estimates that 10 to 12 million U.S. homes could ultimately go into foreclosure. "We have to get foreclosures under control."
Why the sense of urgency? A single foreclosure property brings prices down an average of $5000 for every house in a two-block radius and costs investors an average of $120,000, she says. In its most recent report, Warren's panel criticized the Treasury's foreclosure modification efforts as "inadequate" and "targeted at the housing crisis as it existed six months ago, rather than as it exits right now." Specifically, the Treasury program is targeted at subprime borrowers hit with ballooning mortgage payments vs. prime borrowers hit by job losses. As for the "morality question" of whether the government should be bailing out homeowners, Warren says "I'm passed that," noting "there's plenty of unfairness to go around."
More importantly, "ultimately the American taxpayer -- thanks to Fannie, Freddie and FHA -- is going to stand behind many of these mortgage," she says. "We need to be thinking more globally what is cheapest possible way to bring this crisis to an end." One solution: Force investors holders these mortgages who may be betting on a government bailout to take a haircut, as occurred with GM and Chrysler creditors. "That's why they call it investing," Warren says. "You make profits in good times, take losses in bad times. That's the fundamental part of this [modification effort] that's missing."
FDIC Failed to Limit Commercial Real-Estate Loans, Reports Show
The Federal Deposit Insurance Corp. failed to enforce its own guidelines to rein in excessive commercial real estate lending by at least 20 banks that later collapsed, reports by the agency’s watchdog show. The FDIC’s Office of Inspector General analyzed 23 lenders taken over by regulators from August 2008 to March and found that for 20, the agency’s examiners didn’t identify the issue early enough or should have taken stronger supervisory action after recognizing the banks had dangerously high levels of the loans before they failed. The findings are in separate reports posted this year on the inspector general’s Web site.
“It’s often we’ll see in our reports that the FDIC detected problems in the bank in a timely fashion, but in some cases forceful corrective action wasn’t required by the FDIC to be taken quickly enough,” Jon Rymer, the FDIC’s inspector general, said in a telephone interview. The failure to follow up on the 2006 recommendation, that banks avoid letting commercial real-estate holdings exceed 300 percent of capital, has emerged as FDIC Chairman Sheila Bair steps up her effort to expand the agency’s role in regulating the financial-services industry.
Bair, a 55-year-old appointed by President George W. Bush, is lobbying the Democratic-led Congress to give the FDIC the authority to unwind any failing bank holding companies. The FDIC’s powers are limited to disassembling commercial banks and thrifts, and it lacks authority to unwind Federal Reserve- regulated holding companies such as New York-based Citigroup Inc. and Bank of America Corp. in Charlotte, North Carolina, that have businesses beyond taking deposits and making loans.
“We should ask the prudential regulators why they did not do more to push banks to pay attention to their guidance,” Representative Brad Miller, a Democrat from North Carolina, said in an interview. “If they thought their conduct was unsafe, it’s unsound, they certainly should have stopped it.” Miller sits on the House Financial Services Committee, which oversees the FDIC and the banking industry. “We are in process of addressing any existing gaps in supervisory policy with respect to commercial real estate lending,” FDIC spokesman Andrew Gray said in a prepared statement. “The FDIC has also stepped up our off-site surveillance program to assist our examiners in targeting those institutions with elevated risk profiles so that corrective action programs are instituted in a timely and constructive manner.”
Regulators have closed 99 financial institutions this year, the most since the 179 in 1992 during the savings-and-loan crisis. Matthew Anderson, a partner with Oakland, California- based Foresight Analytics LLC, a real-estate market consulting firm, said the number of failed banks will climb rapidly in part because delinquency rates on commercial real estate mortgages are “rising substantially.” Defaults on commercial real estate loans totaled $110 billion, or 6 percent of all such loans, in the second quarter. That’s 11 times the level in the fourth quarter of 2006 when the guidelines were released. Defaults may rise to $170 billion by the fourth quarter of 2010, Foresight Analytics said.
The risks are greater for community banks with assets of $10 billion or less, Anderson said, because commercial real estate loans make up a bigger percentage of their business. Smaller banks don’t have the capital to compete with large banks for mortgages and consumer loans, so they turn to local-market lending, where they have an advantage. Commercial real estate loans will pose the biggest risk to banks for several quarters, Bair told Congress on Oct. 14.
Declining real-estate values caused by rising vacancies, falling rental rates and weak sales are contributing to losses, Comptroller of the Currency John Dugan, the regulator of national banks, said at the same congressional hearing. Along with Dugan and the Federal Reserve, the FDIC in 2006 set a threshold -- 300 percent of a bank’s capital -- for safe levels of commercial real estate loans. The guidance was aimed at helping regulators identify banks with high loan concentrations that warranted greater supervisory scrutiny.
At the time, smaller and mid-sized banks opposed the guidelines. Bankers said they feared federal examiners would treat the thresholds as absolute limits, threatening a lucrative business for community lenders.
The regulators said the thresholds were not limits and that federal bank examiners would use the guidelines to identify lenders with risky levels of such loans. “The guidance was put out in boom times,” said Kevin Petrasic, a lawyer at Paul, Hastings, Janofsky & Walker LLP in Washington and former special counsel at the Office of Thrift Supervision. “Profits were very high. There wasn’t a full realization of what we were staring at.”
The FDIC reiterated the importance of strong capital and risk-management practices for banks with high concentrations of commercial real-estate loans in a March 2008 letter. By September 2008, commercial real-estate loans represented 1,329 percent of total capital at Security Pacific Bank in Los Angeles, a bank that collapsed two months later. The level “far exceeded the capital criteria thresholds for additional supervisory oversight,” according to a review in May by the FDIC inspector general. The bank’s failure cost the FDIC fund about $210 million.
In December 2007, FirstBank Financial Services of McDonough, Georgia, had concentrations of 645 percent, more than double the recommendation. The FDIC didn’t take any enforcement action until 2008 “when there were significant and quantifiable losses in the bank’s loan portfolio,” the inspector general found. The bank failed in February, costing the FDIC fund about $111 million. The FDIC and state regulators were slow resolving banks with other issues. It took almost two years to shut New Frontier Bank, the largest lender in northern Colorado with $2 billion in assets, after agencies identified in mid-2007 a rise in soured loans, increased reliance on volatile funding and weak management. State regulators shut the bank April 10.
Bair, Dugan and Timothy Ward, the Office of Thrift Supervision’s deputy director of examinations, supervision and consumer protection, said last week they are planning to issue guidelines on how to modify troubled commercial real-estate loans to reduce defaults. U.S. banks held $1.8 trillion in commercial real-estate loans as of the second quarter, representing 24 percent of outstanding bank loans, according to Foresight Analytics. Commercial real estate loans represent 39 percent of the $4.7 trillion in total real-estate loans. Of 95 U.S. bank failures before September, 71 were caused by non-performing commercial real-estate loans, said Chip MacDonald, a partner specializing in financial services at Atlanta-based law firm Jones Day.
“The supervisory process has to have more consistency in the good times and not just in the bad times,” said John Bovenzi, a partner at Oliver Wyman, a New York-based management consulting firm, and FDIC chief operating officer until this year. “It’s historically been harder to show effectively that changes need to be made when times are good.” A surge in bank closings pushed the FDIC deposit insurance fund, which pays the cost of unwinding failed institutions, into a deficit, requiring the FDIC to replenish the reserve without overburdening hobbled banks. Last month, it proposed that banks prepay three years of premiums to raise $45 billion.
Bair told a Senate subcommittee on Oct. 14 that bank failures will continue to rise, reaching a peak next year, while costing the fund $100 billion through 2013. Some analysts are more pessimistic. Christophrer Whalen, managing director of Institutional Risk Analytics, a Torrance, California, firm that evaluates banks for investors, said the deposit insurance fund will run a deficit of $300 billion to $400 billion and about 1,000 banks will fail or be merged through 2012.
The FDIC examines and supervises about 5,160 banks for safety and soundness, according to the agency’s Web site. The FDIC and state regulators share oversight for the banks, and each sends examiners to the banks on average every other year. “We should have been more strict,” Joseph Smith, North Carolina’s bank commissioner and chairman of the Conference of State Bank Supervisors, said in a telephone interview. Two banks have failed in Smith’s state this year. “Had we required the reduction of CRE lending, it would have been thought of as an intrusion by regulators into the businesses of banks and to the operations of local economies,” Smith said. “Yes, it would have been the right thing to do. It would have caused a firestorm then. That might have been better than a firestorm now.”
A sterling crash is a godsend
Britain has twice averted disaster over the past century by a timely – if humiliating – crash in sterling. In neither case was it obvious that this would lead to a decade-long revival in British fortunes. Commentators told us in 1992 that exit from Europe's Exchange Mechanism would ignite inflation. They misjudged the slack in the UK economy, and the M3 monetary collapse.
Cheap Asian exports were, in any case, starting to cap global goods prices. It opened the way for 14 years of low-inflation growth, the longest stretch of unbroken expansion in UK history. The last phase was bogus, driven by 120pc mortgages and Gordon Brown's fiscal blow-off – too loose by 5pc of GDP, adjusted for the cycle. But the first decade was real.
The ERM error was not the exchange rate as such. What mattered was the constraint on monetary policy. It forced us to import German rates designed to crush a boom while Britain was in a property slump. Today's events have no parallel, though it is worth looking back at Britain's forced retreat from the Gold Standard in September 1931. The event was calamitous. Gold had been the monetary anchor of the imperial era. Failure to cut spending triggered the final denouement. The Labour government collapsed. Naval ratings at Invergordon refused to set sail in protest over pay cuts. Events were reported in screaming headlines as a "mutiny". Bolsheviks sang the Red Flag around bonfires. Those reading newspapers in New York, Berlin, and Paris were led to think that the British Empire was crumbling.
Keynes was triumphant, "chuckling like a boy who has just exploded a firework under someone he doesn't like", wrote Skildelsky. Treasury fears of inflation proved wrong. What followed was an industrial resurgence in the Midlands. The 1930s was a rare decade when Britain greatly outperformed the US and Europe. It is why the mood of defeatism in France never quite took hold over here. France was a mirror image. It had reserves to tough it out on gold, but by doing so forfeited recovery. The social cost rose year after year. Pierre Laval resorted to dictatorial powers to enforce his "500 deflation decrees". Machine guns were deployed against strikers in Toulon. By 1936 the country was ungovernable. Communists took power in the Popular Front. Investors withdrew funds. France was forced off gold anyway. By then it was a broken nation.
There are such echoes today on the fringes of euroland. Countries trapped in debt deflation with an over-mighty currency – or euro pegs/dirty floats – are receiving the Laval treatment. Latvia is more or less re-enacting the 500 deflation decrees. Greek conservatives have paid the price for attempting austerity. Hellenic Socialists won a landslide with pie-in-the-sky spending pledges. Portugal is limping on with a minority government after voters defected to Maoists and Trotskyists. Romania's government has collapsed, unable to enforce IMF retrenchment.
Irish deflation has reached 6.5pc. "We have never seen price falls on such a scale: the illusion that money cannot gain in value is something that must be seriously addressed," said central bank chief Patrick Honohan. Good luck. Politically, these countries face what options traders call "time decay". The longer it lasts, the worse it gets.
Jean-Claude Trichet, European Central Bank president, said this week that "the euro was not created to be a global reserve currency." Trop tard, monsieur. China and fellow export states increased foreign reserves by $413bn in the third quarter. Barclays Capital says 63pc went into euro and yen assets. So the euro trades at 10 yuan, or $1.49 against the dollar, and near parity against sterling. As long as Asian states hold down their currencies to gain export share, this slow torture can continue – regardless of the underlying health of the eurozone. "The euro is doomed to be strong, unfortunately for them," said HSBC strategist David Bloom.
This is not to underplay the gravity of Britain's crisis. We are in a worse state today than in 1992 or 1931. Our budget deficit is 13pc of GDP. We are living £175bn a year beyond our means. Sterling's slide may overshoot so badly this time that it triggers a run on the gilts market. But there are risks whatever we do. My (unpopular) view is that the Bank of England has saved this country from depression by printing money a l'outrance, and inviting markets to sell sterling.
David Cameron should not have questioned the Bank's strategy so lightly. The only way out is to cut spending as Canada did in the early 1990s and to offset the effects by printing as much money as it takes, for as long as it takes. The greatest error would be to repeat the loose fiscal/tight money policies of Japan in the first part of its Lost Decade, a mix that has driven public debt to 215pc of GDP. That way lies ruin. A crashing currency is not a pretty sight. Yet the iron rule is that once you have debauched your economy, you must let the exchange rate reflect reality. To pretend otherwise is to dig your nation deeper into a hole.
Home-Buyer Credit Is Focus of Inquiry
The Internal Revenue Service is examining more than 100,000 suspicious claims for the first-time home-buyer tax break, another sign of potential trouble for the soon-to-expire program. The measure, adopted in February as part of the economic-stimulus bill, gives first-time buyers an $8,000 tax credit in an effort to boost sales and stimulate the moribund housing market. The program is set to end Nov. 30, but housing-industry leaders are lobbying Congress to extend it.
More than a million claims for the credit have been received so far, and housing-industry experts estimated that the credit has helped generate about 350,000 home sales that wouldn't otherwise have occurred. But some lawmakers and tax experts now say there is evidence that a significant number of the claims might prove to be unjustified, or even fraudulent. "I am concerned about recent reports that there have been fraudulent schemes involving the credit," Rep. John Lewis (D., Ga.), chairman of a House Ways and Means oversight subcommittee, said in a statement. The subcommittee is planning a hearing on the problems on Thursday.
The IRS said it was investigating 167 "criminal schemes" involving the credit, according to the subcommittee. IRS officials on Monday declined to describe the suspected schemes or provide additional details. At a recent hearing of a White House tax advisory panel, Bonnie Speedy, national director of AARP Tax-Aide, a volunteer service for low-income people, suggested that abuse of the home-purchase credit appeared to be widespread, in part because of relatively loose standards for claiming the credit.
The credit "has some fraud issues because it's not being done at the time of the sale," said Ms. Speedy. "People are filing for the home credit who don't have a right to file for it." Taxpayers don't have to file their claims as part of a real-estate transaction and instead can file or amend their income-tax returns to claim the credit. A spokesman for the National Association of Realtors, Lucien Salvant, said, "Any time there is a lot of money around, there is going to be people attracted to it with evil intent."
Housing-industry officials recently have stepped up their lobbying for an extension of the credit. In a letter to the Obama administration on Monday, the National Association of Realtors, the National Association of Home Builders and the Mortgage Bankers Association called for a 12-month extension of the credit. They also asked that the tax break be extended to all home buyers -- not just first-time purchasers -- and noted that they were urging Congress to expand its value. "Our fragile economy is just beginning to show signs of recovery," the letter says. "We should not jeopardize that recovery by letting this tax credit expire."
Mr. Salvant said the industry groups weren't suggesting any changes to the credit policy aimed at diminishing possible fraud. The idea of extending, or expanding, home buyers' tax credit has been met with skepticism from some lawmakers, who cite the potential costs and impact on the surging federal budget deficits. One proposal by Sen. Johnny Isakson (R., Ga.) and others to extend the credit and make it available to all home buyers through June 2010 carries a price tag of about $16.7 billion. That proposal would raise the income ceiling for eligible home buyers to $150,000 per year for an individual and $300,000 for a couple. Currently the credit phases out for individuals earning more than $75,000 and married couples earning more than $150,000.
Ted Gayer, an economist at the Brookings Institution, a liberal think tank based in Washington, estimated that the current credit costs the government about $43,000 for each additional home sale it generates, because most of the two million or so home buyers expected to claim the credit would have bought a house anyway. Expanding the credit to all home buyers would raise the government's cost per additional home sale to more than $250,000, he said.
Era of cheap mortgages is over, British homeowners warned
Britain's homeowners are to be warned tomorrow that the era of cheap and abundant mortgages is over and will not return. In a radical review of the mortgage market, the Financial Services Authority will launch plans to tighten up regulation and crack down on risky lending as part of reforms that will slow house price growth for a generation. However, the proposals will stop short of Gordon Brown's demand for an outright ban on 100pc to 125pc mortgages although Treasury sources said that there was a "lot of concern" about such loans, which would be heavily controlled.
In February, the Prime Minister asked the FSA to consider a veto on zero-deposit mortgages as he called for a return to traditional banking values. But the regulator has decided against setting caps on loan-to-value or loan-to-income ratios. Instead, it wants lenders to ensure clients are more rigorously credit checked so they are not extended debt they cannot afford. The FSA's Mortgage Market Review, published tomorrow, will focus on the third of the market considered "higher risk". At the market peak, higher risk loans accounted for 45pc of all mortgage lending, according to the FSA. One source described the proposed reforms, which will be put out for industry consultation, as "more evolution than revolution".
Among the report's proposals, the financial regulator is expected to call for an end to self-certification mortgages and rule that responsibility for income verification be transferred from mortgage brokers to lenders. The moves are an effort to crack down on mortgage fraud, which has already cost lenders about £400bn due to borrowers lying about their earnings to secure a home loan. "It would be a mistake to effectively ban self-certification," said Ray Boulger, senior technical manager at mortgage broker John Charcol. "There would be real consumer detriment." He argued that certain self-certification mortgages – for example for those self-employed people who would struggle to obtain a mainstream mortgage but have sufficient earnings – were a perfectly valid part of the market, "providing they are appropriately priced".
Specialist non-bank lenders, which account for 17pc – or £200bn – of the UK's £1.2 trillion of mortgage debt and tend to be subsidiaries of investment banks, also face tougher regulations. Firms such as GMAC originated mortgages and sold them to banks and building societies. Those portfolios have been responsible for the worst of the industry's bad debts, with average arrears rate of more than 5pc. The FSA is expected to propose new rules to force such non-bank lenders, which are lightly regulated because they don't take deposits, to hold on to 5pc-10pc of the loans they originate.
Second charge and buy-to-let mortgages, neither of which are regulated by the FSA, are expected to be brought under its supervision. In addition, sub-prime, interest-only, and 125pc mortgages will all be subjected to closer scrutiny and higher capital requirements. There is some nervousness within the industry that the review will go too far: "We don't want to see over-regulation on products...a reduction in the flexibility of products, which would not be helpful to consumers," a spokesman from the Home Builders Federation said.
Major reform will be limited to the riskier end of the mortgage market because the regulator does not want to damage the vital first-time buyers' market. The average age of a first time buyer has already jumped from 25 to 34 in the past 12 years due to the near-trebling of house prices in the decade to 2007. One Treasury official, commenting on the huge slowdown in the mortgage market, said: "We want to get business back into some sort of normality, this is about making sure it is done on safe terms."
On average, according to the FSA, borrowers are taking out loans 3.2 times larger than their annual income to buy a house, compared with 2.5 times a decade ago and 1.6 times in 1978. Mortgage interest payments are eating up 18.5pc of monthly paycheques, against 11.5pc in 2002. Despite the UK housing market collapse, some lenders are still lending to people on a five times income basis. The review is expected to reiterate how vital the housing market is to the country's economic health. Net housing equity – the value of people's homes after mortgage debt – amounts to £2.4 trillion, even after a 20pc fall in prices. Mortgage debt, at £1.2 trillion, amounts to 85pc of the country's entire GDP, compared with 35pc in 1987.
At its peak the mortgage market was growing at breakneck speed. Net new lending hit £110bn in 2006 alone. Net lending is expected to be negative this year. The number of mortgage products available has collapsed from 15,000 to 1,500 in just two years, according to Fathom Consulting, and mortgage approvals are sharply down. However, new players, including Tesco Bank, are emerging. Despite a 16pc fall in house prices last year, according to Nationwide, prices have started rising again in recent months. Some, however, fear this will be a false dawn. The IMF estimates that UK lenders will have to write off £29bn from their £1 trillion mortgage books between 2007 and 2010 due to poor lending and the recession.
US State Revenue Falls Most Since 1963 on Incomes, Sales
U.S. state tax collections tumbled the most in almost half a century in the second quarter as the economic recession curbed levies on incomes and sales. The 16.6 percent plunge was the biggest since at least 1963, the Nelson A. Rockefeller Institute of Government said today. For the 12 months to June 30, the fiscal year for most states, revenue declined 8.2 percent, or $63 billion, about twice what states got from the $787 billion U.S. economic stimulus package, the institute said.
State revenue has dwindled for two straight quarters and continued to decline in July and August, the Albany-based research organization said. Budgets for the year that began July 1 already face $26 billion of deficits, the Washington, D.C.- based Center on Budget and Policy Priorities said Aug. 12, forcing state lawmakers to confront additional spending cuts. “We’re looking at a multiyear problem hitting essentially every state,” Robert Ward, the institute’s deputy director, told reporters. “It has happened during recessions before, but the depth of this decline is unprecedented in modern times.”
Collections dropped in 49 states in the second quarter as sales and personal-income taxes slid for the third consecutive period, the institute said. Income tax was down 27.5 percent and sales tax fell down 9.5 percent, its study said. Both categories fell by the most in 45 years. “Many economists believe that the national recession has ended and that a tepid recovery is now underway,” Rockefeller analysts Lucy Dadayan and Donald J. Boyd wrote. “Unfortunately for states, an emerging economic recovery does not spell instant budget relief.”
Figures for July and August for 36 early-reporting states showed tax collections down 8 percent, the Rockefeller Institute said. At least 17 states have announced budget shortfalls since July, with “considerably more” expected, Boyd said. New York’s tax revenue from April 1 to Sept. 15 was $634.5 million below projections and $3.6 billion less than a year ago, Comptroller Thomas DiNapoli said yesterday. California reported last week that revenue trailed a forecast made less than three months earlier by $1.1 billion, or 5.3 percent.
States are anticipating more cuts to current-year budgets, already pared once to bring them into balance. Mississippi Governor Haley Barbour told managers on Oct. 13 to cut spending 5 percent because tax collections in the first three months of fiscal 2010 were 7.7 percent below estimates. Florida Governor Charlie Crist told department heads on Oct. 12 not to request more money for next year, when the state faces a $2.6 billion deficit. “It’s clear that when governors propose their budgets in January, the vast preponderance will be looking for more spending cuts and tax increases,” Boyd said.
The main driver for the second-quarter decline was lower income-tax collections, Boyd said on a conference call, “most likely due to lower capital gains from market declines in 2008 and the bursting real estate bubble.” Payroll-tax withholding fell 4 percent from a year earlier and estimated-tax payments made in the quarter fell 32 percent in the median state, he said. “Real wages take 13 to 17 quarters to recover from the end of a recession,” he said. “It will take several years for states to bring spending into line with incomes.”
The study’s retail-sales index showed an 11 percent decline since the start of the recession in December 2007, he said. The second quarter’s 9.5 percent decline in sales taxes followed an 8.3 percent decline in the first quarter, he said. Alaska’s tax income declined the most of any state, the study said, with an 86.5 percent drop because of lower oil prices. Vermont fared the best, with a 2.2 percent gain because of a one-time estate-tax settlement.
Local tax collections declined by 2.8 percent in the second quarter, the Rockefeller study said. That’s less severe than the state slowdown because municipalities rely more on property taxes, which rose “a surprising” 3.1 percent in the quarter, the report said.= Still, 88 percent of local finance officers said in a September poll by the National League of Cities that they’re less able to cover expenses than in the year before.
UK borrowing jumps as tax revenues slide
Government borrowing rose to £77.3bn in the first six months of the financial year, more than double the debt racked up in the same period last year, as tax revenues tumbled by 10 per cent. Public sector net borrowing rose by £14.8bn last month, slightly less than economists had expected, but still the biggest increase on record for September. The soaring deficit, which is set to reach a post-war high this year, has come as tax revenues have plunged in the recession, but government spending has risen, partly as a result of the costs of social welfare during the downturn.
Tax revenues in the first half of the financial year were down 10 per cent to £219.1bn from £244.2bn in the same period last year. But current government spending rose 4.8 per cent to £279bn from £266.3bn. The decline in revenues is slightly more than the Treasury predicted in the Budget, where it forecast an about 7 per cent fall over the year as a whole. But an upturn in the economy over the next few months may well deliver stronger revenues in the second half of the year. Spending has risen slightly less so far this year than the government expects for the year as a whole, but has been driven up by rising unemployment benefit payments.
In September, the net borrowing requirement was about £6bn higher than its level a year ago, slightly less than in recent months. Figures for earlier months were also revised down slightly. “These public finances numbers weren’t too bad,” said Neville Hill, economist at Credit Suisse. “With half the financial year now through, the government’s forecast for a borrowing requirement of £175bn in 2009-10 looks realistic and is consequently unlikely to be revised in next month’s pre-budget report.”
“While the September public finance data were not quite as bad as had been feared, they are still poor and do not in any way dilute the need for major long-term corrective fiscal action,” said Howard Archer, economist at IHS Global Insight. “Not only will major, extended public spending cuts have to occur to get the public finances back to a sustainable state, but it seems inevitable that these will have to be accompanied by serious tax hikes as well. “
Over the 12 months to September, net borrowing was £128.4bn compared with £47bn in the year to September 2008. Separately, provisional figures showed that the M4 money supply and bank lending both posting 0.7 per cent monthly rises. “On the face of it, this suggests that quantitative easing is now having more of an impact. But we don’t have the breakdown at this stage, so this growth might have been driven by the financial sector with little positive implications for the real economy,” said Capital Economics.
Irish house prices to fall 45% as debt spiral looms
Ireland is just halfway through its property slump and is likely to see house prices fall 45pc from peak to trough as austerity begins in earnest, according to a report by Fitch Ratings. "The poor state of public finances has left the government no room to use fiscal measures to support the economy," said the group. It expects the jobless rate to climb from 12.5pc this year to 15pc by 2011. "Tax rises, high unemployment, wage deflation, and property supply overhang" will weigh on the market for years to come, the reports says, meaning that property prices will fall back to the levels of 2000, reversing the entire boom of this decade.
The warning comes days after Brian Lenihan, Ireland's finance minister, admitted that the country was on the brink of a debt compound spiral that risks a further doubling of public debt to €160bn (£146bn) by 2013. "We need to stabilise our national debt, we need to reduce borrowing, otherwise we are on the road to ruin," he said. Ministers have taken a 10pc pay cut to set an example. Mr Lenihan said there would soon be "substantial reductions" in all top officials' pay.
The government has stepped up its rhetoric over recent days, telling unions that the International Monetary Fund would take matters in hand with swingeing cuts of 30pc to 40pc unless Ireland put its own house in order.
Goodbody Stockbrokers said on Monday that Ireland's private sector debt will reach 225pc of GDP this year, up from 86pc a decade ago. Combined public and private debt will soon top 300pc of GDP, greatly impeding recovery.
Price deflation reached 6.5pc September, steeper than during the Great Depression, raising concerns that Ireland is now in a classic debt deflation trap as described by the US economist Irving Fisher. The average Irish household already faces negative equity of €43,000. Further property falls would leave large numbers of people with crippling debts The deflation trend has alarmed the Irish central bank, though there is little that the authorities can do.
House prices have dropped 24pc since peaking in late 2006, but at 7.5 times the average income, they have not yet returned to sustainable levels. Fitch expects the ratio to revert to 5.5 over time. In past cycles this rebalancing was achieved through wage inflation, but deflation puts the burden of adjustment on house prices instead. While the European Central Bank has cut interest rates to 1pc, the full benefits have yet filter through to Irish households. Fitch said interbank lending rates have risen substantially, "reflecting market concerns over the creditworthiness of Irish banks and the Irish Sovereign".
The agency said the scale of house price declines has raised "particular concern" about arrears on sub-prime debt and it is reviewing all Irish residential mortgage bonds that it rates. The Celtic Tiger is clearly in deep crisis. Even so, it is the only EU country to eke out a small rise in exports this year. Its chemical, medical, and software shipments have held up well, despite Dell's decision to decamp to Poland. Ireland has great flexibility but it faces a Sisyphean task as long as the euro keeps rising. Appreciation against sterling and the dollar over the past three months has alone wiped out more than a year of gains in labour competitiveness. How much can a country do?
Countdown to the next crisis is already under way
by Wolfgang Münchau
We did not need to wait until the Dow Jones Industrial Average hit 10,000. It has been clear for some time that global equity markets are bubbling again. On the surface, this looks like 2003 and 2004 when the previous housing, credit, commodity and equity bubbles started to inflate, helped by low nominal interest rates and a lack of inflation. There is one big difference, though. This bubble will burst sooner.
So how do we know this is a bubble? My two favourite metrics of stock market valuation are Cape, which stands for the cyclically adjusted price/earnings ratio, and Q. Cape was invented by Robert Shiller, professor of economics and finance at Yale University. It measures the 10-year moving average of the inflation-adjusted p/e ratio. Q is a metric of market capitalisation divided by net worth. Andrew Smithers* has collected the data on Q, a concept invented by the economist James Tobin.
Cape and Q measure different things. Yet they both tend to agree on relative market mispricing most of the time. In mid-September both measures concluded that the US stock market was overvalued by some 35 to 40 per cent. The markets have since gone up a lot more than the moving average of earnings. You can do the maths. The single reason for this renewed bubble is the extremely low level of nominal interest rates, which has induced people to move into all kinds of risky assets. Even house prices are rising again. They never fell to the levels consistent with long-term price-to-rent and price-to-income ratios, which are reliable metrics of the property markets’ relative under- or over-valuation.
But unlike five years ago, central banks now have the dual role of targeting monetary and financial stability. As has been pointed out time and again, those two objectives can easily come into conflict. In Europe, for example, the European Central Bank would under normal circumstances already have started to raise interest rates. The reason it sits tight is to prevent damage to Europe’s chronically under-capitalised banking system, which still depends on the ECB for life support. The same is true, more or less, elsewhere.
Now, I agree there is no prospect of a significant rise in inflation over the next 12 months, but the chances rise significantly after 2010. Once perceptions of rising inflation return, central banks might be forced to switch towards a much more aggressive monetary policy relatively quickly – much quicker than during the previous cycle. A short inflationary boom could be followed by another recession, another banking crisis, and perhaps deflation. We should not see inflation and deflation as opposite scenarios, but as sequential ones. We could be in for a period of extreme price instability, in both directions, as central banks lose control.
This is exactly what the economist Hyman Minsky predicted in his financial instability hypothesis.** He postulated that a world with a large financial sector and an excessive emphasis on the production of investment goods creates instability both in terms of output and prices. While, according to Minsky, these are the deep causes of instability, the mechanism through which instability comes about is the way governments and central banks respond to crises. The state has potent means to end a recession, but the policies it uses give rise to the next phase of instability.
Minsky made that observation on the basis of data mostly from the 1970s and early 1980s, but his theory describes very well what has been happening to the global economy ever since, especially in the past decade. The world has witnessed a proliferation of financial bubbles and extreme economic instability that cannot be explained by any of the established macroeconomic models. Minsky is about all we have. His policy conclusions are disturbing, especially if contrasted with what is actually happening. In their crisis response, world leaders have focused on bonuses and other irrelevant side-issues. But they have failed to address the financial sector’s overall size. So if Minsky is right, instability should continue and get worse.
Our present situation can give rise to two scenarios – or some combination of the two. The first is that central banks start exiting at some point in 2010, triggering another fall in the prices of risky assets. In the UK, for example, any return to a normal monetary policy will almost inevitably imply another fall in the housing market, which is currently propped up by ultra-cheap mortgages. Alternatively, central banks might prioritise financial stability over price stability and keep the monetary floodgates open for as long as possible. This, I believe, would cause the mother of all financial market crises – a bond market crash – to be followed by depression and deflation.
In other words, there is danger no matter how the central banks react. Successful monetary policy could be like walking along a perilous ridge, on either side of which lies a precipice of instability. For all we know, there may not be a safe way down.
Marching Toward Zombieland
by James Howard Kunstler
When sober-minded individuals begin to regard an enterprise within a nation as "an enemy of the people" you can bet that some serious blood is going to flow. This is now essentially the situation for the Goldman Sachs company, which last week announced third-quarter earnings of over $3 billion largely derived from converting zero percent loans from taxpayers into zero risk profits off of anything paying more than zero percent in interest, revenue, or dividends.
The "people" across this big country may not have a clue how any of this is done, and there may be much to fault them on from the care-and-feeding of their own bodies to the content of their dreams, but you can't argue with the fact that they are heavily armed to an extreme. And although it may be hard to measure with precision, one might venture to state that they are increasingly pissed off. How else explain popular entertainments like "Zombieland?"
The political part of what has to date appeared to be an economic problem is resolving into a crisis of authority and legitimacy. When those in charge of a nation's livelihood prove to be comprehensively false and dishonest, the economic automatically turns political. Nobody believes the bankers anymore, of course, and nobody believes the interlocutors of the bankers - the Federal Reserve chairman, the Secretary of the Treasury, the heads of the SEC and a dozen other regulatory bodies - and increasingly the charming figure in the White House cannot be believed on these issues of the nation's livelihood.
The questions lately revolve around whether the nation is destroying itself by inflation or deflation - by the willful destruction of the value of our currency to evade the repayment of debt, or by the hapless destruction of households, companies, and governments by default and bankruptcy. It's a fire-or-ice debate. Either way the nation is going down as a viable enterprise. The fiction that we can return to a Crate-and-Barrel credit card orgy has sustained the false of heart and mind for some months now, but even that pleasant reverie will come to an end as the foreclosures mount. Only remember, men living in their cars who have lost nearly everything else will still have guns.
All these tensions beat a path into the holiday season when emotions run high, when blessings are counted and sorrows taste most bitter. So the big question now floating above the sheer data of Goldman Sachs profit announcement is: what kind of year-end bonuses will they dare to pay their executives and minions, and how will the "people" react? It seems to me that conditions are ripening for a bloodbath. The kind of heinous acts that we have feared emanating from foreign "evildoers" since the awful stunt of 9/11/01 are now most likely to come from among our own "people" - a few pounds of Semtex in the lobby of Goldman Sachs's New York headquarters... a few men with market-grade small arms converted to full-automatic outside on the Wall Street sidewalk one evening at holiday time when the suits are leaving work for the day.... It won't take much.
President Obama had better strike first. He's about the only figure left in the whole termite mound who has a shred of even potential credibility left because he still has the power to act. He can instruct the people who work for the executive branch to "claw back" any and all ill-gotten bank bonuses; he can direct the Justice Department to investigate everything from the uses of federal bailouts to grand-scale accounting fraud; he can fire people in high places who have failed to act and lost legitimacy. If he doesn't do these things soon than he's finished, too. In the wake of such a failure things will get fractal fast.
The sense that Wall Street has pulled off a coup d'etat and taken over the machinery of the United States is the most powerful meme out there now, and its power is growing in magnitude every day among all classes of Americans. I can't say how much it reflects reality. Even if it is a result of sheer happenstance - the tragic evolution of an industrial economy into a financial finagling economy - the citizens will still experience it as a stealing of their future. Whatever else one might say about American culture, it is keenly attuned to a sense of heroes and villains. We take great pride in our ability to blow away the bad guys. And life imitates art, as Oscar Wilde observed. If a zombie virus is on the loose in America, the first infections showed up in the zombie banks, among the zombie bankers. Watch out, Lloyd Blankfein! Woody is on his way....
Welcome To Sopranoland
by Dan Weintraub
What would motivate our liberal-minded, middle-class-embracing, health-care-reforming President to give lip-service to increasingly stringent regulation and oversight of our financial system whilst simultaeously turning a purposeful blind eye to all of the fraud and graft that continues to "grow" and sustain that very system?
The answer is simple. It's because without the fraud---without the likes of Goldman Sachs and JP Morgan Chase having a totally unfettered ability to turn a profit regardless of issues of legality or morality---the economy crashes. We have entered a period in our history in which the material existence of a recognizable United States of America is predicated upon the banking sector having the ultimate freedom to make trillions of dollars in fraudulent profits---profits skimmed off of the top of risk free (and thus illegal) gambling operations and funded by tens of trillions in consumer and governmental leverage and promises of massive bailouts should the bets fail. Profits by hook and by crook. Profits not based upon the creation of productive capital, but based upon the perpetuation of myriad Ponzi and pyramid schemes.
It is time to call us what we really are: No longer a Democratic Republic, but a political and economic syndicate whose 4-5% per annum growth is based upon the fraud and theft and lies and grift promulgated by Wall Street and promoted by Pennsylvania Avenue.
Welcome my friends to Sopranoland!!
It's pretty straightforward stuff. Regulation and oversight circumscribe the banking sectors ability to make their hundreds of billions, right? That's why real oversight of OTC products like Credit Default Swaps will NEVER occur. That's why on the one hand our President waxes eloquent about the need for the banking industry to face new and real oversight, while on the other hand his administration does NOTHING to actually enforce such "beliefs". In fact his administration (And lest you forget, I'm a Liberal Democrat. I voted for him!) does the opposite: it finds ways to promote the "profitability" of the very industry that trashed our economy while in the same moment putting forward, to the public, words of justice and righteousness.
Real regulation? An end to fraud??? Forget about it.
You see, if our leaders REALLY believed in true reform of the financial industry, they wouldn't create obstacles to the imposition of such reforms. Why aren't banks being forced to put all of their assets on the books? Why are the banks allowed to value their assets NOT to the marketplace but to pure fantasy? Why are OTC products like CDS still being traded when it is those very unregulated OTC products that precipitated, to a great extent, the coming of this economic crisis? Why is there opposition to auditing the Federal Reserve when it is the Federal Reserve who---through its "open market" operations---has dished out trillions of dollars in tax-payer monies in an effort to save the very banks that have brought the nation to its fiscal knees? Why is the FHA helping to originate mortgages that, like their subprime cousins, lack any reasonable expectations with regard to upfront capital requirmements for incipient homeowners??
Why??? Because pulling the plug on the fraud and on the pyramid-scheme structure that defines our economy would mean pretty much immediate 30% contraction in GDP and subsequent economic depression. It IS that simple.
The United States of America should be renamed [Tony] Sopranoland. Our big house in the suburbs (subsidized by decades of false economic growth) has been purchased with the profits skimmed from running numbers and selling heroin and pimping whores and strong-arming local businesses. If we "went straight", we'd lose our suburban home and our fancy cars and our fine wines. Either we protect the syndicate (and keep our big houses and fancy cars and fine wines) at all costs, or we "get honest"---and contract.
Hmmmmmmmmmmmm. Lemme guess which path our leaders will choose.
Lloyds short-selling doubles as traders predict share collapse
Short-selling in Lloyds Banking Group doubled last week in a sign that traders and hedge funds expect shares in the 43.5pc state-owned bank to collapse when it launches a £25bn fund-raising in order to escape the Government's asset protection scheme. Stock-lending, a key indicator of short-selling, doubled to 3.5pc of Lloyds' total share capital in just four days last week, according to Data Explorers, as concern mounts about the bank's ability to raise £25bn through a combination of debt for equity swaps, assets sales and a rights issue of up to £11bn.
The Financial Services Authority (FSA) and the Government are understood to have expressed grave concern that Lloyds may not be able to raise enough cash to extradite itself from the scheme. The Treasury and the FSA were last night holding emergency talks about an escape plan, which has yet to be given the green light by either body. If Lloyds fails to raise enough money to escape the APS it will be hit by £15.7bn in fees to the Government. If it does manage to leave the APS it will be forced to dispose of a lot of its assets in order to comply with new rules on state aid currently being finalised by Brussels.
The European Commission wants Lloyds to off-load some of its business in order to compensate for the support it has received from the Government. Lloyds accounts for almost a third of all current accounts in the UK and it is thought that the EU wants to see this number drop. Shares in Lloyds closed at 95.6p on Friday.
Imports dive at ports of Los Angeles and Long Beach
In another sign of how deep the global recession has become, the ports of Los Angeles and Long Beach on Friday reported their worst combined import statistics for September in nine years. September is often the busiest month at the nation's biggest port complex, making it one of the best barometers of the health of the economy and international trade.
The port of Los Angeles received 309,078 containers packed with imported goods in September, representing a decline of 16% from the same month last year and 27% from September 2006, L.A.'s best month ever for imports. Long Beach received 224,924 import containers in September, a drop of 19% from a year earlier and 32% from September 2007, the port's best September ever. For the first nine months of the year, imports, exports and empty containers through the port of Los Angeles were down 16% at just under 5 million containers while the Long Beach port saw a decline of nearly 25% at just under 3.7 million containers, compared with the same period last year.
As dismal as those figures are for the two ports, which rank first and second in the U.S. in container volume and together rank fifth in the world, a greater worry goes beyond the immediate and substantial loss of local trade-related jobs: Some of the ports' most important tenants were so poorly positioned for the downturn that they might sink completely in a sea of billions of dollars of red ink, experts say. "Without a doubt, the Southern California ports should be worried," said Neil Dekker, an analyst at Drewry Shipping Consultants in London who produces container industry forecasts. "Companies will go bust; freight rates may take years to recover."
The outlook could hardly be more ominous, said John Husing, an independent analyst with Economics and Politics Inc. in Redlands who follows the effects of global trade on the Inland Empire. Seeing nothing but smooth sailing ahead for the globalization that has reshaped international trade, the world's shipping lines committed themselves years into the future to orders for new container ships that have as much as 69% more cargo carrying capacity than the vessels that were the world's largest in 2004, Husing said.
He described it as "the worst recession in modern times hitting an industry that was geared for the opposite of what they are facing." Through the first half of 2009, each of the world's 17 biggest shipping lines were in the red, according to Paris-based AXS-Alphaliner, which maintains online databases for shipping industry professionals
Denmark-based APM-Maersk had losses of $540 million. Cosco Container Lines of China lost $671 million. Hapag-Lloyd, Germany's biggest container line, lost $680 million. NYK of Japan posted net losses of $694 million, AXS-Alphaliner research shows. Jan Tiedemann, a shipping analyst with AXS-Alphaliner, said the companies were dealing with less cargo, lower freight rates for the cargo that remains, contractual obligations for new ships they don't need and the inability to rid themselves of older vessels quickly enough by scrapping them to reduce overcapacity.
"No one in the industry is making money," Tiedemann said. Dekker of Drewry Shipping Consultants said shipping lines had been able to increase their freight rates for handling a 40-foot container from less than $900 during the summer to $1,450 in September, but he added that "last September, they would have been able to charge $2,000 for the same container, so they are not even back to breaking even yet."
As landlords, seaports have been responding to their tenants in ways that would make a financially struggling apartment dweller green with envy. Kathryn McDermott, deputy executive director of business development for the Port of Los Angeles, said there was a 10% discount on the rate that customers normally had to pay to move containers through the port. She added that the port's Infrastructure Cargo Fee had been postponed indefinitely "until we are sure that we need it."
"We have had customers ask us for help and we have looked very carefully at what we can do," said McDermott, who said the reductions amounted to about $20 million in relief. "The majority of them said that we really needed to look at our discretionary cargo, business that could go through other ports. These changes are aimed at trying to protect that cargo."
The Port of Long Beach has taken similar steps, spokesman Art Wong said. Tenants have not asked for full-scale renegotiation of leases, he said, in part because of new requirements they might face, such as environmental restrictions. "The thing about a long-term lease is that you are protected from new requirements. Reopening them is a big roll of the dice," Wong said.
If there is a silver lining for Southern California, it's that the trade from Asia to the West Coast is expected to recover faster than other trade routes, according to IHS Global Insight, a business research firm in Lexington, Mass. IHS Global Insight also said retailers that had been looking to diversify their warehouse and distribution networks to rely less on Southern California had delayed those plans because of the recession and stayed put.
Paul Bingham, managing director of global commerce and trade for IHS Global Insight, said his firm predicted a 10.1% growth rate next year over 2009 levels in international trade, but he added that the figure masked a great deal of weakness. Part of what will make 2010's international trade figures a double-digit improvement over 2009 will be rebuilding inventories for warehouses, not direct sales. "It will sound like a booming market in 2010, but it will come after a year in which trade fell by 20%," Bingham said. "There will be a recovery, but not at the trade rates we were accustomed to in 2006 and 2007.
Reviving the Local Economy with Publicly Owned Banks
by Ellen Brown
The credit crunch is getting worse on Main Street, despite a Wall Street bailout now in the trillions of dollars. The Federal Reserve’s charts show that “base money” is rapidly expanding—meaning coins, paper money, and commercial banks’ reserves with the central bank. But the money isn’t getting where it needs to go to stimulate economic growth: into the bank accounts of American businesses and consumers. The Fed has been pumping out money to the banks, and their reserves have been growing at unprecedented rates, but the money supply in the real economy has been declining.
According to Ambrose Evans-Pritchard, writing last month in the UK Telegraph, U.S. bank credit and M3 (the broadest measure of the money supply) contracted over the summer at rates comparable to the onset of the Great Depression. In the summer quarter, U.S. bank loans fell at an annual pace of almost 14 percent. “There has been nothing like this in the USA since the 1930s,” said Professor Tim Congdon of International Monetary Research. “The rapid destruction of money balances is madness.”
Chartered banks are allowed to create credit on their books equal to many times their deposit base, but lately they haven’t been doing it. In more normal times, one dollar in base money has been fanned by the banks into $8.50 in loans. Today, one dollar in base money produces only one dollar in loans. Although the Fed has been frantically pushing cash into the banks, it can’t make them lend to consumers. This is not because the banks are trying to be difficult. If they had prudent loans on which to turn a profit and the capital base to do it, they no doubt would. But their books have been choked with toxic assets, destroying their capital positions; and the “shadow lenders” who once took subprime loans off their books have gotten wise to the scam and gone away. Bankers who know the endangered state of their own books don’t trust each other, so money is tight all around. And the Fed has already dropped interest rates as low as they can go, so it has no more leverage with which to entice borrowers.
The Fed may have played all its cards, but state and local governments still hold a few aces. Some local politicians are looking into the feasibility of opening their own publicly-owned banks, providing them with their own credit machines. A new publicly owned bank would have a clean set of books, untainted by the Wall Street addiction to gambling in complex derivatives; and its profits would go back to the local government and community, rather than being siphoned off in exorbitant salaries, bonuses, and dividends. A publicly-owned bank could funnel credit where it is needed most, directly into the local economy.
One legislator who is considering a publicly-owned bank is Bruno Barreiro, County Commissioner for Miami-Dade County in Florida. In a September 23 article titled “Capital Sources: Recession Steers Banks Away from Business as Usual”, The Daily Business Review reported that Miami-Dade is planning to conduct a feasibility study proposing alternatives for becoming its own depository. Said the journal:“Barreiro notes that throughout the year, a portion of the county’s $7.5 billion operating budget is deposited with outside financial institutions in return for an interest rate. However, he feels that given the instability of many banks, the county might be better off going into such a business on its own.”
Brian Bandell, writing in The South Florida Business Journal on September 11, reported that Barreiro is concerned that bank accounts are insured by the FDIC for only up to $250,000. The county often has over $50 million in a single account. If the county were to open its own depository institution, it could safeguard against these losses. However, said Bandell, Barreiro is not proposing to allow the institution to make loans. Rather, the state’s money would be invested conservatively in Treasury bonds. The problem with that approach, said Miami banking analyst Kenneth Thomas, is that it would be a challenge to get good interest rates for the county’s deposits without making loans. “There’s a reason most other municipalities aren’t doing it,” he said.
In stopping short of making loans, the county could be missing a major business opportunity. The average interest rate on U.S. government bonds is currently 3.35 percent. If the funds in Miami-Dade’s operating budget were deposited in the county’s own bank, the money could serve as a reserve fund to support at least nine times that sum in loans. Assuming an average interest rate of 5 percent on these loans, the county could increase its revenues by over 1,000 percent (earning 45 percent interest instead of 3.35 percent). [A fuller explanation and references are available here.]
Economist Farid Khavari, a Democratic candidate for governor of Florida in 2010, is proposing a Bank of the State of Florida (BSF) that would take full advantage of the potential of a bank charter. It would not only act as a depository for the state’s funds but would actually make loans to Floridians at much lower interest rates than they are getting now. Among other benefits, the BSF could open up frozen credit markets, save homeowners many thousands of dollars in payments, produce major revenues for the state, and allow the state’s own debts to be refinanced at much lower rates. All those benefits are possible, says Khavari, because of the “fractional reserve” banking system used by all banks when they make loans. As he explained in a July 29 article in Reuters:“Using the fractional reserve regulations that govern all banks, we can earn billions per year for Florida’s treasury, while saving thousands of dollars per year for Florida homeowners…For $100 in deposits, a bank can create $900 in new money by making loans. So, the BSF can pay 6% for CDs, and make mortgage loans at 2 percent. For $6 per year in interest paid out, the BSF can earn $18 by lending $900 at 2 percent for mortgages. “The BSF can be started at no cost to taxpayers, and will be a permanent engine driving Florida’s economy. We can refinance state and local projects at 3 percent, saving taxpayers billions and balancing state and local budgets without higher taxes.”
The state would earn $15,000 per $100,000 of mortgage, at a cost of about $1,700; the homeowner would save $88,000 in interest and pay for the home 15 years sooner. “Our bank will save people about seven years of their pay over the course of 30 years, just on interest costs,” Khavari said. “We should work to support ourselves and our families, not the banks…What we have now…makes everyone work for a few greedy fat cats.”
This sort of healthy public competition for the private banking monopoly has earlier precedents, going back to the colony of Pennsylvania in Benjamin Franklin’s day. Before Pennsylvania founded its own bank, the province was having difficulty attracting settlers, because there was a shortage of money with which to conduct trade. The settlers could get credit only by borrowing from British bankers at a hefty 8% interest, and even those loans were hard to come by. The provincial government then got the bright idea of printing its own paper money and lending it to the farmers at 5% interest. When credit became cheaper and more freely available, the local economy flourished.
The only state that owns its own bank today is North Dakota. North Dakota is also one of only two states (along with Montana) on track to meet their budgets by 2010. It currently has the lowest unemployment rate in the country and the largest budget surplus it has ever had, tallying in at $1.3 billion. Why this cold and isolated farming state should be doing so well when other states are teetering on bankruptcy has been the subject of several TV commentaries, including a spoof by Conan O’Brien on NBC’s Tonight Show, which attributed it to theft from tourists by local farmers. But North Dakota’s real secret seems to be that it has escaped the Wall Street credit debacle. The state has generated its own credit through its own publicly-owned bank for nearly a century.
The Bank of North Dakota (BND) was founded in 1919, when a political party called the Non Partisan League succeeded in uniting farmers suffering from an earlier credit crisis. The BND’s website states that the bank was originally formed to create additional competition in the credit industry, while providing a local source of capital for state investment and development. The BND avoids opposition from other banks by partnering with them in loan projects. According to the bank’s website:“The primary deposit base of the BND is the State of North Dakota. All state funds and funds of state institutions are deposited with the bank as required by law…Use of the banks’ earnings are at the discretion of the state legislature. As an agent of the state it can make subsidized loans to spur development…[It] underwrites municipal bonds for all of the political units in the state, and has been one of the leading banks in the nation in the number of student loans issued. The bank also serves as the state’s ‘Mini Fed’…As a result of the banks’ services, it enjoys widespread support among the public and the independent banking community.”
Bringing the Model Current
The private banking system is in systemic failure, and the public is waking up to the fact. We have been fleeced by Wall Street; banks are not providing loans; and our savings are no longer secure. The publicly owned Bank of North Dakota has provided an alternative model that has worked remarkably well for nearly a century. The BND has been around for so long, however, that skeptics can write off the state’s remarkable success to other factors. A modern-day public bank that quickly turned its flagging local economy around could set a precedent that was irrefutable. If Florida were to establish a successful public banking model, it could blaze a trail out of the economic wilderness for local governments everywhere.
The Rich Have Stolen the Economy
by Paul Craig Roberts
Bloomberg reports that Treasury Secretary Timothy Geithner’s closest aides earned millions of dollars a year working for Goldman Sachs, Citigroup and other Wall Street firms. Bloomberg adds that none of these aides faced Senate confirmation. Yet, they are overseeing the handout of hundreds of billions of dollars of taxpayer funds to their former employers. The gifts of billions of dollars of taxpayers’ money provided the banks with an abundance of low cost capital that has boosted the banks’ profits, while the taxpayers who provided the capital are increasingly unemployed and homeless.
JPMorgan Chase announced that it has earned $3.6 billion in the third quarter of this year. Goldman Sachs has made so much money during this year of economic crisis that enormous bonuses are in the works. The London Evening Standard reports that Goldman Sachs’ “5,500 London staff can look forward to record average payouts of around 500,000 pounds ($800,000) each. Senior executives will get bonuses of several million pounds each with the highest paid as much as 10 million pounds ($16 million).“ In the event the banksters can’t figure out how to enjoy the riches, the Financial Times is offering a new magazine--”How To Spend It.”
New York City’s retailers are praying for some of it, suffering a 15.3 per cent vacancy rate on Fifth Avenue. Statistician John Williams (shadowstats.com) reports that retail sales adjusted for inflation have declined to the level of 10 years ago: “Virtually 10 years worth of real retail sales growth has been destroyed in the still unfolding depression.” Meanwhile, occupants of New York City’s homeless shelters have reached the all time high of 39,000, 16,000 of whom are children.
New York City government is so overwhelmed that it is paying $90 per night per apartment to rent unsold new apartments for the homeless. Desperate, the city government is offering one-way free airline tickets to the homeless if they will leave the city. It is charging rent to shelter residents who have jobs. A single mother earning $800 per month is paying $336 in shelter rent. Long-term unemployment has become a serious problem across the country, doubling the unemployment rate from the reported 10 per cent to 20 per cent. Now hundreds of thousands more Americans are beginning to run out of extended unemployment benefits. High unemployment has made 2009 a banner year for military recruitment.
A record number of Americans, more than one in nine, are on food stamps. Mortgage delinquencies are rising as home prices fall. According to Jay Brinkmann of the Mortgage Bankers Association, job losses have spread the problem from subprime loans to prime fixed-rate loans. At the Wise, Virginia, fairgrounds, 2,000 people waited in lines for free dental and health care. While the US speeds plans for the ultimate bunker buster bomb and President Obama prepares to send another 45,000 troops into Afghanistan, 44,789 Americans die every year from lack of medical treatment. National Guardsmen say they would rather face the Taliban than the US economy.
Little wonder. In the midst of the worst unemployment since the Great Depression, US corporations continue to offshore jobs and to replace their remaining US employees with lower paid foreigners on work visas. The offshoring of jobs, the bailout of rich banksters, and war deficits are destroying the value of the US dollar. Since last spring the US dollar has been rapidly losing value. The currency of the hegemonic superpower has declined 14 per cent against the Botswana pula, 22 per cent against Brazil’s real, and 11 per cent against the Russian ruble. Once the dollar loses its reserve currency status, the US will be unable to pay for its imports or to finance its government budget deficits.
Offshoring has made Americans heavily dependent on imports, and the dollar’s loss of purchasing power will further erode American incomes. As the Federal Reserve is forced to monetize Treasury debt issues, domestic inflation will break out. Except for the banksters and the offshoring CEOs, there is no source of consumer demand to drive the US economy. The political system is unresponsive to the American people. It is monopolized by a few powerful interest groups that control campaign contributions. Interest groups have exercised their power to monopolize the economy for the benefit of themselves, the American people be damned.