Weekend Economists" Leif Ericson Weekend (and What's His Name, Too!) Oct. 9-11, 2009

[Demeter]

Well, it's another Friday! I think we get too many of them, and not enough Saturdays....

In 1964, the United States Congress authorized and requested the president to proclaim October 9 of each year as "Leif Erikson Day". That date was chosen for its connection to the first organized immigration from Norway to the United States (the ship Restauration, coming from Stavanger, Norway, arrived in New York Harbor on October 9, 1825), not for any event in the life of the explorer. The day is also an official observance of several U.S. states.

Leif (or as the Old Norse would Have it: Leifr Eiríksson (c. 970 – c. 1020) was a Norse<2> explorer who is currently regarded as the first European to land in North America (excluding Greenland) 492 years before Christopher Columbus.<3> According to the Sagas of Icelanders, he established a Norse settlement at Vinland, which has been tentatively identified with the L'Anse aux Meadows Norse site on the northern tip of the island of Newfoundland in Newfoundland and Labrador, Canada.

Early life

It is believed that Ericson was born about AD 970 in Iceland, the son of Erik the Red (Old Norse: Eiríkr inn rauði), a Norse explorer from Western Norway and outlaw and himself the son of an outlaw, Þorvaldr Ásvaldsson. Leif's mother was Thjodhild (Þjóðhildr).<4> Erik the Red founded two Norse colonies in Greenland, the Western Settlement and the Eastern Settlement, as he named them. In both Eiríks saga rauða and Landnáma, Ericson's father is said to have met and married Leif's mother Þjóðhildur in Iceland; no official site is known for Leif's birth.<5>

Leif Ericson had two brothers, Thorvald and Thorsteinn, and one half sister, Freydís. He married a woman named Thorgunna, and they had one son, Thorkell Leifsson.

There WILL be a test on this.

And of course there is the Other European, the Italian fellow who sailed for Ferdinand and Isabella of Spain, found the Carribean Islands, concluded he had landed in India, and forever messed up a continent, several nations, the European economy, and the course of history. You know, What's His Name?

Yes, the economy does fit in there--eventually. Spain's pillaging of the New World led to massive inflation, the Spanish Armada, and the English Empire. It's all connected, and it's all grist for our mills.

So grind out those interesting, gloomy or dark-humor posts, folks. We got a lot of gorund to cover, and it isn't a 3 day weekend....

[Demeter]

1. 6 PM and No Bank Closing Yet

The FDIC MIGHT be taking the weekend off, since they DO have a 3 day weekend, but we shall see...I have a pizza riding on this weekend, after all....

[DemReadingDU]

2. Maybe waiting to announce a big bank to process on the 3-day weekend?

:shrug:

[Bobbieo]

6. Another Columbus Day weekend and my Native Unity column is buzzing with

readers on a 2004 story entitled "Why Do We Celebrate Columbus Day?"

When are we going to celebrate Native American Day?

[Demeter]

35. Looks Like Sheila Gave Everybody the Weekend Off

No closings this weekend!

[Demeter]

45. Latest Tally: 112 Failed Banks, Credit Unions in 2009

http://www.bankinfosecurity.com/articles.php?art_id=1833

TWO CREDIT UNIONS CLOSED IN SEPTEMBER

http://www.bankinfosecurity.com/articles.php?art_id=1827

[Demeter]

46. Interactive Map: See Exactly Where Institutions Have Closed or Been Acquired

http://www.bankinfosecurity.com/articles.php?art_id=1681

[DemReadingDU]

54. Map includes failed credit unions too

First time I have seen a map include both failed banks and credit unions.

[BR_Parkway]

48. Maybe she's waiting for the checks to clear for the new fees to replenish

her accounts.

[DemReadingDU]

51. It's not for the lack of insolvent banks

Doubling up next weekend?

[DemReadingDU]

3. Bill Moyers tonight

A Moment of Truth with Bill Moyers, Marcy Kaptur, and Simon Johnson

Bill Moyers' show is always illuminating, but tonight's is one that no one should miss. When I spoke to Bill yesterday he described it as "a moment of truth-telling that could ignite the public's passion for Wall Street reforms that have been strangled in the crib by the big banks and their bought-and-paid-for politicians."

Below are two clips from the show and the transcript of an exchange Moyers has with Kaptur and Johnson about the special phone-a-friend relationship Tim Geithner has with the heads of Citigroup, J.P. Morgan, Goldman Sachs, and what it says about how the system works -- for Wall Street. And tune in to PBS tonight at 9:00 pm ET to watch.

click link for 2 short pre-view videos
http://www.huffingtonpost.com/arianna-huffington/a-moment-of-truth-with-bi_b_314797.html

[Demeter]

5. Sounds Like Trick or Treat This Weekend, Doesn't It?

Nobel Peace Prize, canceled leases, the revolt of the grassroots, shocking revelations, etc. Maybe a little less gloomy for us this time? Maybe earth-shattering things are happening, not just in the south Pacific!

[DemReadingDU]

32. It's a great program

Not sure if there are TV replays, but the video and transcript are posted on the website

http://www.pbs.org/moyers/journal/10092009/profile.html

[Demeter]

4. Few Bush-era energy leases are valid, report finds

NOW THERE'S A NON-SURPRISE!

Interior Secretary Ken Salazar says his agency will prevent further development on the problematic parcels on Utah's public land.

http://www.latimes.com/news/nationworld/nation/la-na-utah-leases9-2009oct09,0,580832.story

Reporting from Denver - Interior Secretary Ken Salazar said Thursday that only 17 of 77 oil and gas leases on Utah public lands that the Bush administration auctioned off in December were valid and that his agency would prevent development on the remaining parcels, at least in the near future.

Salazar spoke at a Washington news conference to announce the findings of a report he commissioned this year on the parcels, which became the subject of a fierce controversy during the waning days of George W. Bush's presidency.

Environmentalists contended that the auction of drilling rights on 100,000 acres of federal land in southeastern Utah were a last-minute giveaway to the energy industry. The environmentalists won a restraining order from a federal judge halting the sales.

Salazar revoked most of the leases upon entering office and said his staff would study which were appropriate. On Thursday, he said the review found that few were.

"There was a headlong rush to leasing in the prior administration," Salazar said. "There were areas that should not have been leased."

He said eight of the parcels should never be leased and the remainder could be leased someday after additional review and regulations. The problematic parcels included lands within view of Arches and Canyonlands national parks. One lease was directly on the Colorado River, in a cliff face above a popular campground.

The report, based on nine days of on-site investigation, found that people in the Bureau of Land Management's Utah office, which oversaw the sales, believed that energy concerns should override environmental or recreational ones.

"There is no such preference for the use of the land," Salazar said.

Energy groups said the findings continued a troubling trend -- a hesitancy in the Obama administration to foster American energy sources. Salazar has also reversed a Bush administration effort to open swathes of Western land to oil shale development.

"We wonder why the administration continues to undertake actions that limit economic development in the West, decrease energy security and make addressing climate change even more difficult," Kathleen Sgamma of the Independent Petroleum Assn. of Mountain States said in a statement.

Environmental groups hailed the report's findings but cautioned that even if the Obama administration wanted to rebid the 17 leases it found appropriate, it would need to follow procedures laid down by the federal judge.

"The report is a resounding rejection of the 'drill here, drill now' approach of the Bush administration," said Steve Bloch of the Southern Utah Wilderness Alliance.

[Demeter]

7. Letter from India: Pollution as Another Form of Poverty

http://www.nytimes.com/2009/10/09/world/asia/09iht-letter.html?_r=2


...India faces some of the most severe environmental challenges in the world. A government report published earlier this year estimates that 45 percent of the country’s geographic area suffers some form of land degradation; three million deaths a year are attributable to air pollution; and almost 70 percent of the nation’s surface water is contaminated.

According to the World Bank, environmental sustainability could represent the biggest obstacle to the nation’s development.

But the politics — and morality — of environmentalism in a country as poor as India are complicated. Indira Gandhi, a former prime minister, famously announced at the United Nations’ first environmental conference, in 1972, that “poverty is the biggest polluter.”

Those sentiments were echoed recently when Environment Minister Jairam Ramesh snubbed the U.S. secretary of state, Hillary Rodham Clinton, by telling her in public that India could not accept binding carbon emission targets because doing so would stunt the nation’s economic growth.

It’s a widely held view in a country where the global environmental movement has sometimes been seen as a form of colonialism — a Western attempt to slow India’s development, to deny the country the fruits of industrialization enjoyed by the developed world.

The United States, with under 5 percent of the world’s population, accounts for more than 20 percent of total carbon emissions. India, with more than 17 percent of the global population, accounts for just 5.3 percent of emissions. Why, people ask, should India pay a price for the West’s profligacy?

It’s a fair question; the American and European positions have a whiff of hypocrisy. Still, when I see what’s going on around me — when I see how the farms are drying up, how forests and the coastline are disappearing, when I smell the dioxins in my house — I can’t help but feel that it’s a form of hypocrisy we had better learn to live with.

If we sacrifice nature at the altar of material progress and global fairness, we risk, as Murugayian put it to me, losing a part of ourselves. Poverty is a serious problem. But pollution, I’ve come to believe, is itself a form of poverty.

[Demeter]

8. John Kasich Blaming Economic Meltdown on Britney Spears Instead of His Former Boss, Lehman

John Kasich Wins GOP Hypocrite of the Week for Blaming Economic Meltdown on Britney Spears Instead of His Former Boss, Lehman

http://blog.buzzflash.com/honors/231

Former Republican Congressman John Kasich has been really busy running for the Republican nomination to challenge Ted Strickland's spot as governor of Ohio in 2010. He's been so busy, in fact, that he seems to have forgotten who he is and how he got here. Or maybe it's just that he doesn't want to talk about it.

Of course, no one is too busy to take a quickie trip to the Strip. Kasich gave a paid speech at the Bellagio in Las Vegas before the Nevada Development Authority Wednesday, in which he identified virtually everyone but himself as the root of the country's financial crisis. He went back to the old standard enemies of WorldCom and Enron, even going so far as to blame the downturn on Britney Spears and Paris Hilton.

Come on, John; that is so last decade. Wall Street is everyone's favorite economic enemy now, remember?

Indeed, somehow Kasich even forgot all about Lehman Brothers, the firm that went down in flames and got the panic train rolling last September. Maybe that's because Kasich was the firm's managing director of investments from 2001 until the company collapsed?

While he worked at Lehman, Kasich's salary often topped $1 million, and he had a confidential contract as a commentator for FOX News after leaving Congress in 2000. And, as if a tie to the economic meltdown weren't enough, he's involved with the board of a medical device company and has received copious donations from the healthcare industry in the recent past.

No, no. I'm sure what is really driving this country into the ground is the lack of bipartisanship, honesty, integrity, blah, blah, blah, where's my check?

Clearly, it's our morals that are keeping us from succeeding as a country. Oh, and golden parachutes are also bad, according to Kasich's recent Vegas speech. So bad that he doesn't want to disclose how much money he got when he left Lehman.

Kasich apparently prefers to rant on about the core values of this great country and to promise that Ohioans won't have to pay income or estate taxes anymore once he's governor (so much the better for not disclosing one's net worth, eh, Johnny?). Of course, Kasich won't say how he'll replace the third of the budget Ohio will lose if he actually does eliminate these taxes. And Ohio will also magically get a better educational system. Another thing Kasich doesn't want to talk about is the state's budget deficit topping $3 billion. He told local reporters when they questioned his sketchy proposals that he'd rather talk about how this is all Strickland's fault.

After being so tight-lipped in Ohio, Kasich might be surprised his loose talk in Sin City made it back to the Midwest so quickly. But what is falsely blamed on others in Vegas does not stay in Vegas. And that's why John Kasich is BuzzFlash's GOP Hypocrite of the Week.

Remember our motto: So many Republican hypocrites, so little time.

[ozymandius]

9. Thirty-three TARP Recipients Miss Scheduled Dividend Payments

While we wait for the FDIC, from Rolfe Winkler at Reuters: TARP deadbeats

Thirty-three TARP recipients missed a scheduled dividend payment to taxpayers last month, according to the Treasury Department, including 18 banks that missed a payment for the first time.

...
The 33 banks that missed dividend payments in August have received $4.5 billion of TARP money. The biggest is CIT. Previously it paid $44 million of dividends, but with a bankruptcy filing looking likely, Treasury’s $2.3 billion investment seems headed toward zero.

http://www.calculatedriskblog.com/2009/10/thirty-three-tarp-recipients-miss.html

---

Jeebus! What a mess.

[Demeter]

12. More Detail

http://www.usatoday.com/money/industries/banking/2009-10-07-banks-tarp-dividends_N.htm?loc=interstitialskip

The number almost doubled from 19 in May when payments were last made, and also raised questions about Treasury's judgment in approving these banks as "healthy," a necessary step for them to get TARP funding.

"The banks are not paying their dividends because they are worried about preserving capital," says Eric Fitzwater, associate director of research at SNL Financial.

The Treasury Department says it cannot force an institution to pay dividends. "For some banks, it may be prudent to exercise their right not to pay dividends in a particular month, and we respect their right to do so," says Meg Reilly, a Treasury spokeswoman. "To draw any broader conclusions about the state of the banking sector from one month is highly premature and speculative."

However, a lot of smaller banks are already under stress. Weighed down by foreclosures and delinquencies, 98 banks have failed so far this year, vs. 25 for all of last year. Besides insurer American International Group and lender CIT Group, most of the other non-payers are smaller institutions that received $400 million or less in TARP funds.

Top Republican on the House Financial Services Committee, Rep. Spencer Bachus, R-Ala., says: "We must ensure taxpayers are repaid."

Some say Treasury might have been too hasty in approving some banks for TARP funds.

"Perhaps the Treasury made assumptions that were a little bit too rosy," says Walter Todd, who invests in banks at Greenwood Capital. "My question is also whether the Treasury is staffed adequately to handle this tremendous undertaking."

Treasury has given $365 billion to 700 institutions from TARP. AIG, to which the government has pledged $180 billion, has accumulated $1.6 billion in unpaid dividends. And CIT, which received $2.3 billion from TARP, said in a regulatory filing that it is restructuring its debt and seeking approval from bondholders for a pre-packaged bankruptcy. If that happened, it would wipe out the entire government investment.

[Demeter]

65. 34 Banks Miss TARP Dividends and Almost No One Notices

BUT OZY AND YVES DID!


http://www.nakedcapitalism.com/2009/10/34-banks-miss-tarp-dividends-and-almost-no-one-notices.html

I will confess I missed a post opportunity Thursday AM, when an alert reader sent a link to a USA Today story, “34 banks don’t pay their quarterly TARP dividends, ” but I decided to return to it precisely because it has gotten little attention:



Of the 34 miscreants, two are pretty large, namely AIG and CIT, But the next on the list is First Bancorp, which received a mere $400 million from the TARP. Probably more important than the number is the trend, since the number of institutions that skipped dividends nearly doubled. In a supposedly improving economy and with a steep yield curve (at least until very recently), things appear to be getting worse rather than better.

I didn’t post on this because I assumed the MSM would be all over it. So I am pretty surprised to see it has gotten very little coverage. The usual suspects (Bloomberg, Financial Times, Wall Street Journal, New York Times) were silent. Huffington Post linked to the USA Today story. Reuters featured it only via Rolfe Winkler, who had some useful commentary:

When stronger banks including Goldman Sachs, Morgan Stanley and American Express repurchased warrants at modest premiums after paying back TARP, most news reports suggested that taxpayers were profiting from the bailout. But those reports didn’t tell the whole story.

For one, they ignored adverse selection, the propensity for the best borrowers to exit the program first, leaving Treasury holding the poorest performing investments. According to the latest data from Treasury, 42 banks have paid back some or all of the cash they got from TARP’s Capital Purchase Program, $70.7 billion in total. But more than 600 banks remain in the CPP program. Together, they still owe $134 billion.

And this excludes other TARP bailout programs that are likely to cost billions. The automotive industry owes TARP $80 billion. And AIG owes TARP $69.8 billion. Much of that isn’t coming back.

It’s also myopic to view TARP in isolation. Take Citigroup. After converting its preferred equity investment to 7.7 billion common shares at $3.25, Treasury is showing a paper profit of $11 billion. Sounds great, right?

But Citigroup’s common equity would long ago have fallen to zero if other bailouts, in particular FDIC’s debt guarantee program, weren’t insulating shareholders from losses.

Citigroup is the only large bank still using the FDIC’s program. Two weeks ago, the bank sold another $5 billion worth of guaranteed debt, bringing its total issued under the program to $49.6 billion.

The bottom line is that the government still stands behind the banking sector. While the cost of this “no more Lehmans” policy may not be known for years, our experience with Fannie Mae and Freddie Mac tells us that such implicit guarantees ultimately prove very expensive. The fact that more banks are falling behind on dividend payments reminds us the tab is growing.

Is this mere oversight? Financial crisis fatigue? Nary a bad word will be said about the TARP? Hard to say….

[Tansy_Gold]

74. associate director of research WHERE?

Demeter, I just want to let you know that even though I haven't posted much lately, I do sincerely appreciate all you do to get the WEE postings up. AND I READ THEM.

This line just jumped out at me:

"The banks are not paying their dividends because they are worried about preserving capital," says Eric Fitzwater, associate director of research at SNL Financial.

Well, maybe it's not so bad. Al Franken was at SNL, too, and he hasn't turned out so bad. But I have to admit I get just a little nervous thinking that financial policy is being researched by SNL.


. . . . . .


What? That's SNL Financial??? I thought you said SNL is funny as hell.

Never mind.




Tansy Gold

[Demeter]

78. I Just Post Them, Tansy

Glad you can find anything humorous--and that you do read them!

I post until the depression gets personal, then stop.

[Demeter]

10. Bankruptcy Filings Spiking: Chapter 7 Booming, 8 Years of Credit Card Industry Lobbying and $100M

Bankruptcy Filings Spiking: Chapter 7 Booming and 8 Years of Credit Card Industry Lobbying and $100 Million in Fees.

http://www.mybudget360.com/bankruptcy-filings-spiking-chapter-7-booming-and-8-years-of-credit-card-industry-lobbying-and-100-million-in-fees/

There is probably no bigger sign of economic distress than bankruptcy. It can be in the form of a business unable to pay debt obligations or an individual simply unable to keep up with former obligations. Most people that file for bankruptcy are not in a good economic spot. In fact, if you want a better indicator of economic health bankruptcy filings are a good measure. It is interesting what passes for good news in today’s market. For example, Alcoa announced a profit for the third quarter. Good news right? Well if you look into the details the company has cut 18,000 jobs in the 12 months ending on June 30th and also planned on cutting an additional $2.4 billion in costs. In this economic crisis people need to look at the details before assuming something is just good news.

Bankruptcy data doesn’t hide this. Since new legislation went into law in 2005, bankruptcy has been harder to file. So the recent increase in filings makes it all the more troubling:



Since 2005 the rise in quarterly bankruptcy filings has been steady. This is indicative of the nature of the current deep recession. The average American is feeling the strain of the high unemployment rate and the country is combating a market that is not willing to hire (i.e., Alcoa cutting jobs). And recent bankruptcy filing data is showing the trend still moving up. The latest data that we have is for August and it showed 119,874 consumer bankruptcy filings and that is a jump of 24 percent from last year.

You would think that with the massive amount of capital in banks, that lending would be easier so that would mitigate filings in the short-term but banks are not lending to consumers. Early this week we saw the continuing contraction in consumer credit:



Now these data points are important because they show what is really happening on Main Street. Wall Street is being pumped up by easy credit provided by the U.S. Treasury and Federal Reserve but most Americans don’t pay their monthly bills because the S&P 500 went up 10 points. Bankruptcy is the ultimate sign of distress. That is, someone has reached the point of financially being unable to meet obligations. This isn’t like missing one bill payment. This is someone sitting and looking at all their obligations and throwing in the towel.

Keep in mind that this new change comes in light of the 2005 tougher bankruptcy laws. That is why in the above, the chart shows a dramatic spike. What changed in 2005? A wide group of consumer advocates, legal scholars, and retired bankruptcy judges questioned the soundness of the legislation and recommended against it. The credit card industry lobbied hard. The contention was that bankruptcy was wrought with fraud. There wasn’t much data backing up that assertion but remember that in 2005 the good times were going on so hardly anyone was paying attention and the legislation was jammed through. The major changes included means testing but also shifting people into Chapter 13 instead of Chapter 7. The big difference here is with Chapter 13 people filing have to work out some kind of agreement to rework their obligations while in Chapter 7, current debts are paid from current assets. Of course this shifts the burden completely on the consumer instead of lenders actually spending the time to be more diligent. This worked perfectly in a mega housing bubble world. Take a look at Chapter 7 even in light of the tougher legislation:



The biggest proponents of the bill were the credit card industry. In fact, the credit card industry spent 8 years and $100 million in lobbying for this effort. If you look at the legislation, it actually enforces a means test by looking at your state median income. If you are at your state median income, you will not be able to qualify for Chapter 7 if you can pay 25 percent of the unsecured debt. What it does is that it allowed for credit card companies to give anyone and anything credit while shifting the burden to the states and consumers. Once things go bad as they are right now, credit is yanked from the system and now debtors are being forced to pay any penny they have to the credit card companies.

In the new legislation counseling is also required. Yet what about counseling for the credit card companies? The bill is a lobbyist dream and we are seeing the ramifications of this bill today. In fact, if it wasn’t for the bill we would be seeing tens of thousands more filing for Chapter 7 today but people are holding off because what use would it be to go into Chapter 13 and still need to pay off your debts?

What many of the credit card companies didn’t see however was the massive rise in unemployment. In fact, with 26 million unemployed and underemployed I’m sure many will be falling below the state median income test thus allowing people to file for Chapter 7 and liquidate. Unsecured debt like credit card loans are usually washed away in court hence the big lobbying by the credit card industry. So this is becoming a more likely option and as the chart shows above, more are opting for this. Take a look at brief breakdown of how this plays out:



Only in some bizarre universe is spiking bankruptcies, foreclosures, and unemployment some sign of a rebounding economy.

[Demeter]

44. Personal bankruptcies up 41 percent (OVER ONE YEAR)

http://www.msnbc.msn.com/id/33143632/ns/business-personal_finance/

...The American Bankruptcy Institute said it expects consumer bankruptcies to climb to more than 1.4 million this year....

[Demeter]

11. Fed Ratchets Up Warnings on Commercial Real Estate Debt

http://www.costar.com/News/Article.aspx?id=5F360267D837D816D8AC1AA2C5FE26F4


CRE Under Pressure Due to Sharp Erosion in Fundamentals, Grubb & Ellis Economist Bach Less Bearish on Sector Outlook

Two officials from the U.S. Federal Reserve issued strong signals this week that the central bank is very concerned over the banking industry's exposure to commercial real estate loans and considers it to be a major stumbling block to the road to economic recovery.

In a speech Monday assessing the state of the U.S. economic recovery, Federal Reserve Bank of New York President and CEO William Dudley said he expects that "more pain lies ahead" for the commercial real estate sector and for banks with heavy exposure to CRE loans.

"The commercial real estate sector is under particular pressure because the fundamentals of the sector have deteriorated sharply and because the sector is highly dependent upon bank lending," Dudley said in the speech at the Fordham Corporate Law Center in New York.

Unemployment remains much too high and "it seems the recovery will be less robust than desired," with "significant excess slack" in the economy, Dudley said. Also, in something of a departure from recent Fed pronouncements, Dudley said the economy faces "meaningful downside risks to inflation over the next year or two."

Additionally, on Wednesday, The Wall Street Journal reported that a Fed official told banking industry regulators in a Sept. 29 presentation that "banks will be slow to recognize the severity of the loss" from commercial real estate loans, "just as they were in residential."

The presentation by K.C. Conroy, an Atlanta Fed official who is reportedly part of the central bank's "rapid response" program to spread information about looming economic problem areas to federal and state bank examiners, indicated that slumping property values and rising vacancy rates have exceeded those seen in the early 1990s recession and CRE losses would reach about 45% next year. Further, a WSJ analysis of regulatory filings found that banks with heavy exposure to CRE loans set aside just 38 cents in reserves during the second quarter for every $1 in bad loans -- a sharp decline from $1.58 in reserves for every $1 in bad loans from the beginning of 2007.

Grubb & Ellis Chief Economist Robert Bach told CoStar that, although he's far from optimistic about the market, he doesn't share the Fed's high level of pessimism, either.

"One reason I'm not as pessimistic is that I don't think that it's comparable to the residential crisis," Bach said. "Banks will have to declare more losses, but is it the type of crisis that will re-threaten the global financial architecture? I don't think so."

Bach notes that about $3.4 trillion in commercial mortgage loans are outstanding -- about one-third of the $10-$11 trillion in outstanding residential mortgages. A lot of the CRE loans losses will be concentrated in regional banks, and the FDIC has a time-tested procedure for shutting down, stabilizing and reopening such institutions with "a minimum of drama."

When the residential and subprime asset-backed securities market crumbled more than two years ago, the collapse threatened the major "too big to fail" institutions and caught everyone by surprise, sending the Treasury, the Fed and the world's other central banks scrambling for a plan to deal with the emergency, Bach said.

"Now, we know what to do. It's not going to be pleasant, it will be slogging through more losses" for two or three more years, he said.

In his remarks Monday, Dudley noted that financial markets are performing better and the economy is now recovering, if not at the rate regulators would like. He cited three forces restraining the pace of the recovery. Household net worth hasn't yet recovered from the housing price decline. Second, the fiscal stimulus that is currently providing support to economic activity is temporary rather than permanent and will abate over the next year.

Third, and perhaps most importantly, bank credit losses lag the business cycle and are still climbing, and the banking system has still not fully recovered. While banks’ access to the capital markets has sharply improved, institutions are still capital constrained and hesitant to expand their lending. Most significantly, significant classes of borrowers -- namely commercial real estate and small business -- are almost wholly dependent on the banking sector for funds that are not easily forthcoming, Dudley said.

Dudley said two main problems plague CRE fundamentals. First, capitalization rates had climbed sharply during the boom. At the peak, cap rates for prime properties were in the range of 5%. Today, the average cap rate appears to have risen to about 8%. Second, income generated by commercial property has generally been falling, Dudley noted. As the recession has pushed up the jobless rate, office demand has declined, and as the recession has led to a reduction in discretionary travel, hotel occupancy rates and room prices have declined. Retail sales have weakened, reducing demand for prime retail property.

Dudley said the decline in valuations has created a significant amount of rollover risk when loans and mortgages mature and need to be refinanced. The slump in valuations pushes up loan-to-value ratios, making lenders wary about extending new credit -- even in the case when these loans are performing on a cash-flow basis, the New York Fed president noted.

[Demeter]

13. Treasuries Fall After Weaker-Than-Average Demand at Bond Sale

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoRzFRtXIRdA

Treasuries declined, with 30 year bonds falling the most in two weeks after the government’s $12 billion auction of the debt drew weaker- than-average demand.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.37, compared with 2.92 at the September auction and an average of 2.42 at the last 10 auctions. The 30-year bond yield touched 3.89 percent on Oct. 2, the lowest level since April.

“The auction was very tepid,” said Tom di Galoma, head of fixed-income rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “The auction shows that the market can sell off when levels are overpriced. This can be a disappointment in these reopened issues.”

The 30-year bond yield rose eight basis points to 4.08 percent at 4:04 p.m. in New York, according to BGCantor Market Data. The 4.5 percent security due August 2039 fell 1 13/32, or $14.06 per $1,000 face amount, to 107 5/32.

The securities sold today drew a yield of 4.009 percent, more than the 3.994 forecast by six of the Federal Reserve’s 18 primary dealers in a Bloomberg News survey. The previous sale of 30-year debt on Sept. 10 drew a yield of 4.238 percent. Its bid- to-cover was the highest since November 2007.

Stocks Versus Bonds

An investor class that includes foreign central banks bought 34.5 percent of the notes, compared with 46.5 percent at the last auction and an average of 45.36 percent at the past five auctions.

“We continue to see a lot of cash that was on the sidelines during the volatility in the markets being redeployed,” said Richard Bryant, senior vice president in fixed income at in New York at MF Global Inc. “Given the relative returns of other asset classes, Treasuries at these yield levels are not unattractive.”

The U.S. sold $7 billion in 10-year Treasury Inflation Protected Securities on Oct. 5, $39 billion in three-year notes the following day and $20 billion in 10-year notes yesterday as President Barack Obama borrows record amounts to spur economic growth.

“The bond market is telling you the recovery is weak and it will take a long time,” said Ray Remy, head of fixed income in New York at Daiwa Securities America Inc., one of 18 primary dealers that trade directly with the Federal Reserve. “It is concerned about the jobless picture. Stocks are saying earnings are in good shape. I don’t know which will win.”

The Standard & Poor’s 500 Index rose 0.9 percent, its fourth straight day of gains.

Real Yields

Thirty-year bonds yielded 3.96 percent, or 3.09 percentage points more than two-year government securities, before the sale, compared with an average of about 1.27 percentage points over the past five years.

“People are throwing in the towel and moving out the yield curve to capture some yield,” said Arthur Bass, a managing director of derivatives in New York at the brokerage Newedge USA LLC. “The market’s been rallying no matter what.”

Bonds are still attractive compared with similar securities in Europe and Japan when measured by real yields, said David Ader, head of U.S. government bond strategy in Stamford, Connecticut, at CRT Capital Group LLC, in an interview with Bloomberg Radio.

Long bonds “look rich but the buying we are seeing there may not be based on them being rich or cheap, but relatively speaking it looks better than everything else,” Ader said. Thirty-year bonds yield 3.85 percent in Germany and 3.97 percent in the U.K.

Central Bank Rates

The real yield, or the difference between rates on government securities and inflation, for 30-year bonds is 5.47 percentage points today, compared with an average of 3.17 percentage points over the past 20 years.

Policy makers around the world have reduced rates to record lows, including coordinated cuts by six central banks a year ago, to stabilize economies following a squeeze on credit that led to the collapse of Lehman Brothers Holdings Inc.

The European Central Bank left interest rates at a record low to nurture an economic recovery that is being threatened by the appreciation of the euro. ECB officials meeting in Venice today kept the benchmark rate at 1 percent, as predicted by all 53 economists in a Bloomberg News survey. Separately, the Bank of England held its key rate at 0.5 percent.

The ECB, led by President Jean-Claude Trichet, won’t raise rates before the third quarter of 2010, another survey shows.

Futures on the Chicago Board of Trade show a 57 percent chance the Fed will refrain from raising its target rate for overnight lending between banks by April, compared with 64 percent odds a month earlier. The Fed cut its benchmark rate to a range of zero to 0.25 percent at the end of 2008.

Dollar’s Decline

Fed Bank of Richmond President Jeffrey Lacker said the risk that the U.S. economy will slide back into recession has declined without disappearing entirely.

“That risk has diminished quite substantially since several months ago,” Lacker told reporters today in Washington. “It’s not entirely zero.”

Credit-market yields indicate the central bank is having some success. The London interbank offered rate, or Libor, for three-month dollar loans stayed at 0.284 percent for a sixth day, down from 4.52 percent a year ago.

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14. I Apologize for the Typing Errors In Advance, Folks

There's a reason why I got a D in typing in high school. Can't play piano, either.

I've also been imbibing apple cider, which is good for what ails you, until you overdo it.

Due to my disinclination to move while the damp and arthritis make a mockery of life, it's taking a while to post. I was not prepared, today, for today. There are years like that.

The weather is supposed to turn sunny tomorrow--we will see.

[Demeter]

15. California Hotel Foreclosures Triple in Travel Slump

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5nTehuUgKfQ

Hotel foreclosures in California more than tripled in the first nine months of this year as business travelers and vacationers cut spending.

Foreclosures including the 400-room St. Regis Monarch Beach resort in Dana Point climbed to 47 in January through September from 15 a year earlier. Properties in default more than quadrupled to 259, Irvine, California-based Atlas Hospitality Group said in a statement. Atlas specializes in selling hotels. The survey didn’t include states other than California.

Declining occupancy rates and a dearth of credit for refinancing loans obtained during the U.S. real estate boom are squeezing the travel industry. Loans secured by more than 1,500 hotels with a total outstanding balance of $24.5 billion may be in danger of default, according to Realpoint LLC, a credit rating company that tracks the performance of securities tied to mortgages on commercial property.

“Urban areas are dependent on a mix of business, convention and leisure travel,” said Robert Mandelbaum, research director for PKF Hospitality Research in Atlanta. “There’s been a tremendous decline in business and convention travel.”

Lodging owners are struggling after adding rooms and properties from 2004 to 2007, when financing was easy to come by because banks could bundle loans into commercial mortgage-backed securities and sell them on to investors. About $83.4 billion in hotel-backed securities were issued in those years, according to Realpoint.

Trouble in L.A.

“We see higher default numbers in L.A. County and San Diego County because of the sheer volume of hotels,” Alan Reay, president of Atlas Hospitality, said in a telephone interview. “A lot of new product has been added in those counties.”

More than 70 percent of troubled California hotel loans originated between 2005 and 2007, Reay said. Nearly 2,500 of the state’s hotels were financed or refinanced during those years, accounting for about 25 percent of the entire supply, he said.

Occupancy in the top 25 U.S. travel markets fell to 61 percent in the first eight months of the year from 69 percent a year earlier, according to Smith Travel Research in Hendersonville, Tennessee.

Riverside, California, outside of Los Angeles, had nine hotels in foreclosure through September. San Bernardino was home to six and Los Angeles had five, Atlas said.

Another 28 Los Angeles hotels were in default, according to Atlas. Occupancy there dropped to 65 percent in January through August from 75 percent a year earlier, according to Smith Travel.

“Los Angeles is a gateway city,” Mandelbaum said in a telephone interview. “Prior to 2009, we were enjoying the influx from foreign travelers. That also has tapered off due to this global economic decline.”

San Diego had 26 hotels in default and San Bernardino had 23, Atlas said.

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16. Study Exposes How Taxpayers Are Subsidizing Bank of America, Citigroup, Wells Fargo and Other Large

A Hidden $34 Billion Bank Subsidy? Study Exposes How Taxpayers Are Subsidizing Bank of America, Citigroup, Wells Fargo and Other Large Banks


One of the key terms to come out of the nation’s economic meltdown has been “too big to fail.” The government has funneled billions of dollars to large financial firms by arguing that their collapse would deal an irreparable blow to economic recovery. A new study has calculated the tab of the “too big to fail” approach, and it amounts to a far larger taxpayer-funded subsidy than previously thought. The Center for Economic and Policy Research says the bailout has allowed “too big to fail” banks to pay significantly lower interest rates than those paid by smaller banks. According to one estimate, that’s meant a subsidy for the nation’s eighteen largest bank holding companies of $34.1 billion a year. That amount represents nearly half these companies’ combined annual profits. We speak to the study’s author, Dean Baker.

SEE VIDEO ARTICLE AT LINK!

[Tansy_Gold]

83. No link???? n/t

[Demeter]

85. oops / this is what I found via google

http://www.nytimes.com/2009/10/04/business/economy/04gret.html

http://www.democracynow.org/2009/10/6/a_hidden_34_billion_bank_subsidy

The second one has the video.

Sorry about that, chief.

[Demeter]

17. China calls time on dollar hegemony

http://www.telegraph.co.uk/finance/china-business/6266790/China-calls-time-on-dollar-hegemony.html#

You can date the end of dollar hegemony from China's decision last month to sell its first batch of sovereign bonds in Chinese yuan to foreigners.

Beijing does not need to raise money abroad since it has $2 trillion (£1.26 trillion) in reserves. The sole purpose is to prepare the way for the emergence of the yuan as a full-fledged global currency.

"It's the tolling of the bell," said Michael Power from Investec Asset Management. "We are only beginning to grasp the enormity and historical significance of what has happened."

It is this shift in China and other parts of rising Asia and Latin America that threatens dollar domination, not the pricing of oil contracts. The markets were rattled yesterday by reports – since denied – that China, France, Japan, Russia, and Gulf states were plotting to replace the Greenback as the currency for commodity sales, but it makes little difference whether crude is sold in dollars, euros, or Venetian Ducats.

What matters is where OPEC oil producers and rising export powers choose to invest their surpluses. If they cease to rotate this wealth into US Treasuries, mortgage bonds, and other US assets, the dollar must weaken over time.

"Everybody in the world is massively overweight the US dollar," said David Bloom, currency chief at HSBC. "As they invest a little here and little there in other currencies, or gold, it slowly erodes the dollar. It is like sterling after World War One. Everybody can see it's happening."

"In the US they have near zero rates, external deficits, and public debt sky-rocketing to 100pc of GDP, and on top of that they are printing money. It is the perfect storm for the dollar," he said.

"The dollar rallied last year because we had a global liquidity crisis, but we think the rules have changed and that it will be very different this time " he said.

The self-correcting mechanism in the global currency system has been jammed until now because China and other Asian powers have been holding down their currencies to promote exports. The Gulf oil states are mostly pegged to the dollar, for different reasons.

This strategy has become untenable. It is causing them to import a US monetary policy that is too loose for their economies and likely to fuel unstable bubbles as the global economy recovers.

Lorenzo Bini Smaghi, a board member of the European Central Bank, said China for one needs to bite bullet. "I think the best way is that China starts adopting its own monetary policy and detach itself from the Fed's policy."

Beijing has been schizophrenic, grumbling about the eroding value of its estimated $1.6 trillion of reserves held in dollar assets while at the same time perpetuating the structure that causes them to accumulate US assets in the first place – that is to say, by refusing to let the yuan rise at any more than a glacial pace.

For all its talk, China bought a further $25bn of US Treasuries in June and $25bn in July. The weak yuan has helped to keep China's factories open – and to preserve social order – during the economic crisis, though exports were still down 23pc in August. But this policy is on borrowed time. Reformers in Beijing are already orchestrating a profound shift in China's economy from export reliance (38pc of GDP) to domestic demand, and they know that keeping the dollar peg too long will ultimately cause them to lose export edge anyway – via the more damaging route of inflation.

For the time being, Europe is bearing the full brunt of Asia's currency policy. The dollar peg has caused the yuan to slide against the euro, even as China's trade surplus with the EU grows. It reached €169bn (£156bn) last year. This is starting to provoke protectionist rumblings in Europe, where unemployment is nearing double digits.

ECB governor Guy Quaden said patience is running thin. "The problem is not the exchange rate of the dollar against the euro, but rather the relationship between the dollar and certain Asian currencies, to mention one, the Chinese Yuan. I say no more."

France's finance minister Christine Lagarde said at the G7 meeting that the euro had been pushed too high. "We need a rebalancing so that one currency doesn't take the flak for the others."

Clearly this is more than a dollar problem. It is a mismatch between the old guard – US, Europe, Japan – and the new powers that require stronger currencies to reflect their dynamism and growing wealth. The longer this goes on, the more havoc it will cause to the global economy.

The new order may look like the 1920s, with four or five global currencies as regional anchors – the yuan, rupee, euro, real – and the dollar first among equals but not hegemon. The US will be better for it.

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18. “Dollar’s Demise Will Be Felt Worldwide”

http://www.informationclearinghouse.info/article23665.htm

If the dollar collapses, it would spell economic disaster not just for the United States, but for the world, says Gerald Celente, director of the Trade Research Institute.

“It is more than just the demise of the dollar – this is going to be felt worldwide. There’s a major financial crisis ahead. The United States, the world’s superpower, is failing on its most basic level,” Celente told RT.

And the reason for the future demise of the American currency, Celente says, is the disproportionate financial system:

“We can’t print money out of thin air, backed by nothing and producing practically nothing.”

The researcher believes the crisis of the dollar is irreversible, since America is losing its gold – the value of its currency.

SEE VIDEO AT LINK

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21. A Financial Revolution with Profound Political Implications

http://www.independent.co.uk/opinion/commentators/fisk/robert-fisk-a-financial-revolution-with-profound-political-implications-1798712.html

Such large financial movements will have major political effects in the Middle East

By Robert Fisk

October 07, 2009 "The Independent" -- The plan to de-dollarise the oil market, discussed both in public and in secret for at least two years and widely denied yesterday by the usual suspects – Saudi Arabia being, as expected, the first among them – reflects a growing resentment in the Middle East, Europe and in China at America's decades-long political as well as economic world dominance.

Nowhere has this more symbolic importance than in the Middle East, where the United Arab Emirates alone holds $900bn (£566bn) of dollar reserves and where Saudi Arabia has been quietly co-ordinating its defence, armaments and oil policies with the Russians since 2007.

This does not indicate a trade war with America – not yet – but Arab Gulf regimes have been growing increasingly restive at their economic as well as political dependence on Washington for many years. Of the $7.2 trillion in international reserves, $2.1trn is held by Arab countries – China holds about $2.3trn – and the nations interested in moving away from dollar-trading in oil are believed to hold over 80 per cent of international dollar reserves.

Saudi Arabia's denials of any such ambitions were regarded by Arab bankers as a normal part of Gulf politics. The Saudis, of course, managed to deny that Iraq had invaded Kuwait in 1990 – even when Saddam Hussein's legions stood along the Saudi frontier, until the US broadcast the news of Iraq's aggression to the world.

Saudi bankers are well aware that in nine years' time – the current timeframe for a transition away from the dollar in oil trading to Japanese and Chinese currencies, the euro, gold and a possible new Gulf currency – China will have doubled its national income to $10trn (assuming a growth rate of 7 per cent), at which point the US might hold no more than 20 per cent of the world's gross income.

Such massive financial movements, encouraged by the de-dollarisation of oil, will have enormous political effects in the Middle East, especially if economic superpower rivalry between America and China comes to dominate the Arab world. Will American economic support for Israel remain as loyal in nine years' time if China and the Arabs are setting the pace in global financial markets? Indeed – perhaps with this in mind – some Israeli financiers have been expressing interest over the past two years in non-dollar Arab bank investments. Whenever a change of this magnitude takes place over a number of years, it has to be commenced in secrecy.

Nor can it be denied that the very project to take oil trading away from the dollar market has deep political roots. The collapse of the Soviet Union has allowed the US to dominate the Middle East more than any other world region, and the Arabs – who can no longer contemplate an oil boycott of the kind they imposed on the West after the 1973 Middle East war – are still anxious to prove that they can flex their economic power to bring about change.

Saudi Arabia's pan-Arab offer to recognise Israel and its security in return for an Israeli withdrawal from occupied Arab land is not – according to the Saudis themselves – indefinite. If they are ignored or rebuffed, then they can search for other allies through new financial institutions to force a new Middle East peace. China will be happy to help.

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26. Dollar Hysteria By Mike Whitney

http://www.informationclearinghouse.info/article23647.htm

October 06, 2009 "Information Clearing House" -- - Robert Fisk has set off a firestorm with his unsettling narrative which appeared in Tuesday's UK Independent titled, "The Demise of the Dollar". The article went viral overnight spreading to every musty corner of the Internet and sending gold skyrocketing to $1,026 per oz. Now every doomsday website in cyber-world has headlined Fisk's "Shocker" and the blogs are clogged with the frenzied commentary of bunker-dwelling survivalists and goldbugs who're certain that the world as we know it is about to end.

(Fisk's article IS POSTED ABOVE)


Reports of the dollar's demise are greatly exaggerated. The dollar may fall, but it won't crash. And, in the short-term, it's bound to strengthen as the equities market reenters the earth's gravitational field after a 6 month ride through outer-space. The relationship between falling stocks and a stronger buck is well established and, when the market corrects, the dollar will bounce back once again. Bet on it. So why all the talk about Middle Eastern men huddled in "secret meetings" stroking their beards while plotting against the empire?


Yes, the dollar will fall, (eventually) but not for the reasons that most people think. It's true that the surge in deficit spending has foreign dollar-holders worried. But they're more concerned about the Fed's quantitative easing (QE) program which adds to the money supply by purchasing mortgage-backed securities and US Treasuries. Bernanke is simply printing money and pouring it into the financial system to keep rigamortis from setting in. Naturally, the Fed has had to quantify exactly how much money it intends to "create from thin air" to placate its creditors. And, it has. (The program is scheduled to end by the beginning of 2010) That said, China and Japan are still buying US Treasuries, which indicates they have not yet "jumped ship".

The real reason the dollar will lose its favored role as the world's reserve currency is because US markets, which until recently provided up to 25 percent of global demand, are in sharp decline. Export-dependent nations--like Japan, China, Germany, South Korea--already see the handwriting on the wall. The US consumer is buried under a mountain of debt, which means that his spending-spree won't resume anytime soon. On top of that, unemployment is soaring, personal wealth is falling, savings are rising, and Washington's anti-labor bias assures that wages will continue to stagnate for the foreseeable future. Thus, the American middle class will no longer be the driving force behind global consumption/demand that it was before the crisis. Once consumers are less able to buy new Toyota Prius's or load up on the latest China-made widgets at Walmart, there will be less incentive for foreign governments and central banks to stockpile greenbacks or trade exclusively in dollars.

Here's a clip from the Globe and Mail cited on Washington's Blog:

"A UBS Investment Research report says that while it would be wrong to write off the U.S. dollar as the global reserve currency, its roughly 90-year iron grip on that position is loosening. “The use of the U.S. dollar as an international reserve currency is in decline,” said UBS economist Paul Donovan.

“The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error – or considerable fiscal strain – is likely to cause the dollar to lose reserve currency status entirely.”

The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world’s central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice.

“The private sector’s use of reserves is more important than official, central bank reserves – anything up to 20 times the significance, depending on interpretation,” Mr. Donovan said. “There is evidence that the move away from the dollar as a private-sector reserve currency has been accelerating since 2000.”

As private industry veers away from the dollar, governments, investors and central banks will follow. The soft tyranny of dollar dominance will erode and parity between currencies and governments will grow. This will be create better opportunities for consensus on issues of mutual interest. One nation will no longer be able to dictate international policy.

So-called "dollar hegemony" has added greatly to the gross imbalance of power in the world today. It has put global decision-making in the hands of a handful of Washington warlords whose narrow vision never extends beyond the material interests of themselves and their constituents. As the dollar weakens and consumer demand declines, the United States will be forced to curtail its wars and adjust its behavior to conform to international standards. Either that, or be banished into the political wilderness.

So, what exactly is the downside?

Superpower status rests on the flimsy foundation of the dollar, and the dollar is beginning to crack. Fisk is right; big changes are on the way. Only not just yet.

[Demeter]

27. UN Calls For New Reserve Currency

http://www.breitbart.com/article.php?id=CNG.e272eaa74dccc30f21c6ff7638b0f37b.461&show_article=1

October 06, 2009 "Breitbart" -- The United Nations called on Tuesday for a new global reserve currency to end dollar supremacy which has allowed the United States the "privilege" of building a huge trade deficit.

"Important progress in managing imbalances can be made by reducing the reserve currency country?s 'privilege' to run external deficits in order to provide international liquidity," UN undersecretary-general for economic and social affairs, Sha Zukang, said.

Speaking at the annual meetings of the International Monetary Fund and World Bank in Istanbul, he said: "It is timely to emphasise that such a system also creates a more equitable method of sharing the seigniorage derived from providing global liquidity."

He said: "Greater use of a truly global reserve currency, such as the IMF?s special drawing rights (SDRs), enables the seigniorage gained to be deployed for development purposes," he said.

The SDRs are the asset used in IMF transactions and are based on a basket of four currencies -- the dollar, euro, yen and pound -- which is calculated daily.

China had called in March for a new dominant world reserve currency instead of the dollar, in a system within the framework of the Washington-based IMF.

[Demeter]

42. What Not Being Able To Buy Oil In Dollars Means By Ian Welsh

http://crooksandliars.com/ian-welsh/what-dollar-going-oil-means


October 09, 2009 "Crooks and Liars" -- The big news this week on the financial front was the Independent’s claim that Gulf Arabs and France, Japan, Russia and Japan were planning to move from buying oil in dollars to buying it in a basket of currencies, including gold and a new universal currency shared by the Gulf nations.

Buying oil in dollars is one of the foundations of the dollar’s role as the world’s primary reserve currency. Because the the dollar is the world’s primary reserve currency Americans have been able to borrow money for significantly less than other countries are able to. This has both made America more prosperous, and through the perverse incentives of cheap money, helped lead to the high indebtedness of American citizens and the financial crisis.

In addition, buying oil in dollars is one of the things which allowed strong dollar policies to drive the price of oil down. Making dollars extremely scarce in the 80’s and nineties was one key factor leading to a price per barrel under $20. Oil prices started their rise upwards after Greenspan’s Federal Reserve let loose the money spigot in the Asian crisis and the Long Term Capital fiasco. Greenspan essentially never took his foot off the pedal from that point onwards, and oil prices soared, until last year at one point they were over $150/barrel.

So one consequence of going off the dollar is that a major benefit of the strong dollar play is taken off the table, and the US loses its ability to control the price of oil. Since at this time, contrary to what the Feds are saying, a strong dollar play isn’t in the cards (the US needs to borrow way too much money) that’s not a big deal in the short run—in the long run it is.

But buying oil in dollars isn’t the only thing that underpins the dollar as the world’s reserve currency and to understand what buying oil in something other than dollars would mean we need to understand what else makes, or perhaps more accurately, made, the dollar so important.

Technological Revolutions:

Remember the internet boom of the nineties? Remember the way that money flooded in from the rest of the world to buy up internet stocks? Sure, most of them turned out to be worthless, but some didn’t. When the US was the nation most likely to create the next technological revolution you needed dollars so that when it occurred you could buy in on the ground floor. Whether microcomputers in the 80’s or the internet in the 90’s, odds were that America was going to create the next big tech. So foreigners needed to be in the dollar.

At this point the US is the undisputed leader in almost nothing except military tech. As expected, US dominance of the arms sales market continues to increase, but the US can’t live on weapon sales alone. In most other fields, including telecom, the internet, large chunks of biotech, renewable energy, ground transportation and so on the US now lags other modern economies. THANK YOU, RONALD REAGAN AND THE GOP

The structure of the US economy, with a few large oligopolistic firms dominating the market in key fields needn’t necessarily mean no technological advances, after all Japan and Korea certainly have high concentrations of large firms, but US firms such as the telecom giants essentially don’t engage in research, don’t believe in upgrading infrastructure more than they have to and are rent seeking corporations—they provide an inferior product to a captive audience (as with insurance companies) knowing that Americans have no other options. If they fail, they expect the US government to bail them out with huge subsidies.

This structure means that the US, is unlikely to be the home of the next great technological revolution. The next tech reveolution could happen in the US, with the right policies, but the Obama administration has not engaged in those policies, instead spending trillions on propping up failed business models.

Consumers of Last and Main Resort:

For decades now Americans have bought a ton of consumer goods, from cars to electronics to clothes. As time went by, more and more of these goods were bought from foreign countries, and more and more of it was bought on credit. America and Americans have been the engine of development for Japan, the Asian Tigers, and most recently, China. China, Japan and Korea, in particular, used mercantalist policies—that is to say they generally used trade barriers to protect their internal economy and subsidies to help their exports. China’s main trade barrier and subsidy is its massive interventions to keep the Yuan cheap against the dollar, an intervention which has amounted to as much as 10% of China’s GDP.

That intervention has left China with a huge number of dollars denominated assets. In effect the Chinese loaned America the money to consume Chinese goods, which simultaneously made American manufactured goods uncompetitive which meant that manufacturing employment in American dropped like a rock while new factories opened in China rather than the US. In exchange for the money they loaned America, China industrialized. Even if they don’t get most of the money back (and they won’t) it was a good deal for them. As for Americans, well, Americans were able to live above their means—those who didn’t lose their jobs, anyway.

Many countries export a lot to the US. While US consumers have pulled back significantly, they still consume a lot. There is, as yet, no replacement for the US consumer. China and other countries may wish there was, but there isn’t.

The American Security Product:

One of the main reasons other countries were willing to, in effect subsidize the US, for decades, is that it provided the common security product—against the Soviets, then against real rogue nations, and always against pirates.

In particular, America’s navy is as large as the next 13 navies combined. The US was responsible for keeping the world’s shipping lines open, and it was the core of the NATO hammer when a problem needed to be dealt with (for example, Serbia in the late nineties.)

But lately the US hasn’t been delivering the product in a way that the rest of the world appreciates. Most of “old” Europe (ie. the countries with money and power) opposed it. So did most of Asia. So did America’s allies in the Middle East. Once in Iraq, the US couldn’t be defunded for fear of Iraq splintering, but now that it’s clear the US is leaving anyway, the possibility exists.

And then there’s the Somali pirates. Because most of the US navy was occupied with the wars in Afghanistan, Pakistan and Iraq, the Somali pirates got completely out of hand and the US Navy didn’t do anything about it for a long long time. When the issue was finally dealt with, the US navy was only one of a number of navies doing so. The US let it get out of control, and then wasn’t key to fighting it.

Now that the US no longer protects very well against the Soviets, rogue nations or pirates, and now that joint naval operations are how the Somali pirates are being dealt with, the rest of the world is wondering whether it’s worth paying for a US military which doesn’t do what they want it to do. Only the Afghan war, which has elite support in Europe (though not popular) makes some think that perhaps the US is worth keeping on as the world’s policeman.

Buying Key Technologies Required Dollars:

Yet another reason folks wanted to have lots of dollars and access to dollars was that you needed dollars to buy certain goods. For decades the only good commercial jet liners were Americans. Key computer technologies needed to be bought in dollars. Intellectual property needed to be bought in dollars. The best military technology had to be (and still has to be) bought in dollars. And so on. The US wasn’t just home to the next technological revolution, it was home to all the good things you wanted to buy and which you couldn’t buy in your currency.

This is, with a few exceptions, no longer true. The Europeans and Japanese can sell you most high end capital goods. There is no real difference between Airbus and Boeing products (though both are essentially 30 year old technology). The Chinese can and will sell you middle and low end goods for less than America. You don’t need dollars to buy most of what you need and want, and if something comes up really worth buying (say General Motors) well, if you’re someone who really wants it, like the Chinese, you just won’t be allowed to buy it anyway. (The Chinese would have loved to buy GM.)

A Safe Haven For Money and For You:

For decades, if you wanted a safe place to put your money and put it to work, the US was probably the best. It was the most stable, it was impossible it could be conquered even if there was a World War III, it was the largest and could absorb the most money. Likewise, if things went really bad in your country, it was a great place to flee to.

The financial crisis put the wisdom of placing your money in the US in question. Bush era immigration and travel policies, not rescinded by the Obama administration, put the utility of the US as a safe haven in question as well. And yet, to an extent, the US retains at least the first role, because there is simply no other country available. Europe did not avoid the financial crisis, China doesn’t allow that much investment in the country and is an unsafe place to put money, and so on. So the US retains some safe haven appeal. At the same time, however, foreign elites have become far more uneasy about the idea and want a different option. And for themselves, they’d rather vacation, have their second homes and educate their children in Europe.

And at last, back to oil:

Of course, the final and in some ways most important reason for the dollar’s reserve currency status is that oil was sold in dollars. This is a result of a decades long understanding between the key Gulf States, Saudi Arabia and America that the US both underwrote their security and could knock them over any time it wanted. In exchange for America’s security umbrella and help in maintaining their regimes, oil was priced in dollars. When they became rich in the 70s, their money flooded primarily through US banks.

Indeed, in prior years, every time an OPEC nation talked about going off the dollar as the currency for buying oil, rumor has it that the Saudis were the ones to spike the move.

Oil is the most important commodity in the world. Ultimately all economies are underpinned by oil. Oil is also the most important military resource. With oil your army can move and fight. Without it, it can’t. In many ways WWII was fought for oil and with oil, and the powers with the oil defeated those which didn’t have it.

Which brings us back to the US military product. As long as oil is priced in dollars, the US military can always function at full capacity, because if push comes to shove, the US can always just print more dollars.

If oil is not priced in dollars, then certain US access to oil is removed—both for the military and for the civilian population. Sure, the US can still print more dollars, but if oil isn’t priced in dollars, well, print too much and you may get inflation, even hyperinflation. And if the oilarchies don’t approve of a particular military action, well, they can make it much more expensive.

Are the Dollar’s Days as Reserve Currency Over?

No. They aren’t. But they are numbered. They aren’t over because other nations still need the US consumer. Until the Chinese manage to create a domestic consumer society, both they and other countries can’t cut themselves lose from the US consumer. What they will do, and what they are doing, is trying to manage how much the US borrows and to take away the US ability control the world’s money supply. They will still have to keep the US propped up for the time being, because in so doing they are propping up themselves. And remember always that Chinese citizens aren’t like Americans. Take their jobs or their land or their hope and they get violent—very violent. They have, do and will fight both the police and the military. China’s elites know that if they don’t keep economic growth coming, their heads could literally wind up rolling.

In addition, while no one is happy with the US security product, the fact is that no one can really replace it. The European military is not strong enough, and their navy does not have the projection ability. Likewise with the Chinese military, who in any aren’t trusted half as much as the Europeans, though their moral flexibility is appreciated by many regimes, who still understand you don’t invite China to station large number of troops in your country if you have half a brain.

Likewise, there is simply no replacement for the US as a haven of last resort. China’s currency and investment controls make it unsuitable. Europe managed its financial affairs no better than the US over the last decade, although they seem to have learned the regulatory lessons marginally better than the US. If you need a place to store your money, and put it to work, the US may not look good, but neither does anyone else who is large enough to absorb large amounts of money.

The key break point, the end of the dollar hegemony, will come when the Chinese are able to move to a consumer economy. At that point, the Chinese will no longer need America as consumers, and they will let the Yuan float. The devastation this will wreck on the US economy is hard to overstate. Standards of living will crash. In the long run, being forced to live within its means, and no longer having to compete against massively subsidized foreign goods may turn out to be good for the US, but that won’t make you feel better as your effective income collapses or you lose your job.

This is probably two economic cycles out. We’re talking 12 to 16 years. So there’s time yet. Probably.

So what does oil not being priced in dollars mean to me now?

Less money for everything. The US will not be able to afford as large a stimulus as it should have. It will mean borrowing costs higher than they would otherwise have been and more restricted credit (sure, theoretical interest rates may be low, but can you get a loan at those rates?) Oil prices, and gas prices will be more volatile for the US than they were before, which is saying something.

And other countries will get more oil, relatively speaking. Which means they will get more growth. They will receive more investment from the oilarchies, and the US will receive less. Relatively speaking the US economy will not be as good as it was. This is a marginal effect, but marginal effects add up.

This is, in short, not good news. You won’t be able to say “I lost my job because oil isn’t priced in dollars” but it will be true for some people. Lower wages, more restricted credit, and more restricted government policy will be the price paid for the massive incompetence which lead to this moment.

And yet this does have a silver lining. Both for other countries who deserve to be able to pay in their own currencies and for America and Americans, who need to learn to live within their means, to emphasize production again rather than consumption and who need to wean off of oil as much as possible in any case.

But it will hurt.

[Demeter]

66. Asian Countries Intervene to Prop Up Greenback (Dollar Bind Edition)

http://www.nakedcapitalism.com/2009/10/asian-countries-intervene-to-prop-up-greenback-dollar-bind-edition.html

An unannounced but evidently coordinated effort to arrest or at least slow the fall of the dollar is underway. The Financial Times indicated that Asian central banks were aggressive dollar buyers on Thursday, but the information came via currency traders rather than an official pronouncement. Thailand, Malaysia and Taiwan made substantial purchases; Hong Kong and Singapore also intervened today. The action may also have a secondary objective of rejiggering their currency values versus China’s, since China repegged the renminbi against the dollar.

However, these efforts were seen by traders as merely an attempt to control the fall in the dollar rather than halt it. And other markets responded to the dollar weakness. Oil prices rose nearly $3 today, gold hit a new high in dollar terms, and copper and tin spiked upward. The dollar is strengthening overnight on Bernanke’s empty promise that the central bank will raise rates when the economy recovers.

The dollar’s weakness exposes a series of dilemmas and a lack of obvious remedies. Normally, a country experiencing a financial crisis takes measures to depreciate its currency so it can use an export boom to help pull itself out of its economic mess. However, Paul Krugman, among others, have pointed out that trade has collapsed, so even if one were to break glass and trash currency, it isn’t as effective a solution as it would normally be. And even if that approach might work, with so many countries affected by the crisis, it’s too easy for currency depreciation to lead to beggar-thy-neighbor competitive devaulations.

Although the US keeps mouthing its “strong dollar” assurances, many observers believe that the Obama Administration is content to let the dollar slide because the resulting inflation will help erode the value of debt and more robust exports will help growth. But that seems a trifle optimistic. First, some economists, such as Jim Hamilton, argue that it was the commodity price runup of early 2008 that pushed over-indebted consumers over the edge. Commodities inflation, when it inures to the benefit of foreign producers, is not a boon to the US. Second, the US has ceded a lot of manufacturing industries. How long would the dollar have to stay weak for the US to repatriate significant amount of, say, furniture and shoe fabrication? These are two industries where some incumbents insist the US could remained competitive in high-end and even some mid-level manufacturing (offshoring was driven not just by cost savings but also by a desire to please Wall Street analysts). It takes time to establish operations and hire and train staff. No one is going to make investments like that unless they are confident the dollar will remain comparatively weak.

Third, rising inflation is not a panacea. While it reduces the value of debt currently outstanding, it also makes it costly to sell new debt (unless the borrower is convinced inflation will rise even higher). Even if the principal will be paid back in depreciating dollars, the cost of debt service rises with higher interest. And having lived through the inflation-ridden bond markets of the early 1980s, no one wanted to be borrowing then. Reasonable credit quality companies were facing 15+% coupons.

Even before we get to anything resembling that level of interest rate, the Fed and Treasury have a big bind. Higher domestic inflation means higher interest rates. Higher interest rates mean higher mortgage rates. That kills housing. Higher interest rates also means all those private equity owned companies that are stuffed up to their eyeballs in debt and need to refi between now and 2013 find it more costly. Many will not survive higher debt service. Big bankruptcies and related job losses are not too good for economic recovery. The Treasury has also gotten addicted to super low interest rates (and if my correspondents are correct and the average maturity of Treasury debt has shortened, the US is more exposed to interest rate increases than it might otherwise be). In other words, even a modest increase in rates could have a much nastier economic impact than conventional wisdom assumes.

And we have another possibility. At the G20, the US started to take up the “we want to be an exporter when we grow up” theme. Ahem, so who is going to be the net consumer if the US gives up that role? Now I will be the first to concede that having a world where more countries had robust consumer sectors and were less export dependent would be a much better arrangement, but getting there is at least a 10 year, probably more like a 20 year transition. Yet the powers that be here are acting as if the US can beef up its exports and get to a net neutral or a net exporter position much sooner. So was that unannounced Asian intervention benign, or was it a bit of a warning shot, that the rest of the world reluctantly accepts that the dollar probably needs to be cheaper, but will only let that go so far?

[Demeter]

19. Prophets of doom see new bubbles

http://www.independent.co.uk/news/business/news/prophets-of-doom-see-new-bubbles-1798263.html


Two of the world's most influential investment gurus warned yesterday that financial markets were turning into "bubbles".

Nouriel Roubini, a New York University Professor nicknamed "Dr Doom", said: "Markets have gone up too much, too soon, too fast... In the short run we need monetary and fiscal stimulus to avoid another tipping point and to avoid deflation, but now this easy money has already started to create asset bubbles in equities, commodities, credit and emerging markets." Mr Roubini was joined by George Soros, who said the American recovery would be "very slow" because consumers were "overdebted" and the banks were "basically bankrupt".

The warnings undermined good news about UK business sentiment in the service sector, which comprises 70 per cent of the British economy, where confidence is back to pre-crisis levels. Yesterday, the Chartered Institute for Purchasing and Supply said sentiment had improved last month at its fastest rate for two years, boosting hopes the UK will emerge from recession this quarter.

[Demeter]

20. The 'Real' Economy Is Dying: Q4 'Going to Be a Bloodbath,' Whalen Says

http://finance.yahoo.com/tech-ticker/article/348944/The-%22Real%22-Economy-Is-Dying-Q4-%22Going-to-Be-a-Bloodbath%22-Whalen-Says?tickers=XLF,SKF,FAS,FAZ,MS,GS,HCBK

By Aaron Task

October 06, 2009 -- -- Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One.

But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market's robust rally.

"Why is liquidity going into the financial sector? It's because the real economy is dying everyone is fleeing into the stocks and bonds because they're liquid at the moment," Whalen says. "That's not a good sign."

The banking sector's assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. "The real economy is shrinking because of a lack of credit." MORE AT LINK AND VIDEO

[Demeter]

25. There Is No Recovery: Peter Schiff On Fast Money

http://www.informationclearinghouse.info/article23650.htm

VIDEO INTERVIEW AT LINK

[Tansy_Gold]

84. What does he consider the "real" economy?

"Everyone" isn't fleeing into stocks and bonds, unless the "everyone" he's talking about is in the investor class.

Reading the article it seems to me that he's talking about the "real" markets, which aren't real anyway.

And is it really a lack of credit that's strangling the manufacturing sector? Or is it the mountain of debt they're already carrying, combined with the lust for profits that has taken too many operations into cheap-labor locales?

Or am I just totally ignorant?




Totally


Tansy Gold

[Demeter]

86. Nobody has studied the real economy since Marx

and I don't mean Groucho. They don't have the model, vocabulary, or background for it. That's your grandpa's economics!

[Demeter]

22. U.S. Apartment Vacancies Hit 23-Year High of 7.8%

http://www.bloomberg.com/apps/news?pid=20601103&sid=arslYEazGY30


AND Actual rents paid by tenants, known as effective rents, declined 2.7 percent from a year earlier, the New York-based property research firm said in a report today. Asking rents, or what landlords sought, fell 1.8 percent from a year earlier.

Job losses and falling wages are shrinking the pool of potential tenants...

[Demeter]

23. Pelosi Says New Tax Is 'On The Table'

http://thehill.com/blogs/blog-briefing-room/news/61783-pelosi-says-new-tax-is-on-the-table

A new value added tax (VAT) is "on the table" to help the U.S. address is fiscal liabilities, House Speaker Nancy Pelosi (D-Calif.) said Monday night.

Pelosi, appearing on PBS's "The Charlie Rose Show" asserted that "it's fair to look at" the VAT as part of an overhaul of the nation's tax code.

"I would say put everything on the table and subject it to the scrutiny that it deserves," Pelosi told Rose when asked if the value-added tax has any appeal to her.

The VAT levies a tax on manufacturers at each stages of production on the amount of value an additional producer adds to a product...

I HAVE AN IDEA: EITHER THE REPO MAN COMES AND PULLS THAT TABLE AWAY FROM NANCY, OR WE BUY AXES AND CHOP IT TO SPLINTERS. SOME PEOPLE SHOULDN'T BE ALLOWED TO HAVE TABLES!

[Demeter]

24. Dow Will Fall To 6,300 By Year End: Portfolio Manager

http://www.informationclearinghouse.info/article23654.htm

October 06, 2009 "CNBC" -- With the prospect of higher unemployment hanging over the markets, some experts expect a correction. So are they right? Michael Cuggino, president and portfolio manager at Permanent Portfolio Funds, and John Lekas, CEO and portfolio manager at Leader Capital, shared their insights. (See their recommendations, below.)

“I think we go below the double dip,” Lekas told CNBC. “By year-end, we drop below 6,300 on the Dow and by 2011, we’re at 4,200.”



Lekas said although Monday's ISM services index was “neutral,” the unemployment number was at 785,000 last month and that number is expected to worsen.

“So 26 to 27 million people who are out of work isn’t going to help the economy,” he said. “And until that number gets better, we will not see a recovery.”

Lekas told investors to sell equities, buy short-term fixed income, stay with high quality names and stay safe.

In the meantime, Cuggino said although there are risk factors and uncertainty in the markets, earnings are going to continue to improve.

“There’s also a tremendous amount of liquidity out there that will be used to prime economic growth going forward,” he said.

Cuggino recommended sticking with equities—“especially U.S. multinationals who take advantage of worldwide growth.” He also likes the financial services, biotechnology, pharmaceuticals and technology sectors.


VIDEO REPORT AT LINK

[Demeter]

28. Marx and Lenin Revisited By Paul Craig Roberts

http://www.informationclearinghouse.info/article23643.htm

“Capital is dead labor, which, vampire-like, lives only by sucking living labor, and lives the more, the more labor it sucks.” Karl Marx

October 06, 2009 "Information Clearing House" --- If Karl Marx and V. I. Lenin were alive today, they would be leading contenders for the Nobel Prize in economics.

Marx predicted the growing misery of working people, and Lenin foresaw the subordination of the production of goods to financial capital’s accumulation of profits based on the purchase and sale of paper instruments. Their predictions are far superior to the “risk models” for which the Nobel Prize has been given and are closer to the money than the predictions of Federal Reserve chairmen, US Treasury secretaries, and Nobel economists, such as Paul Krugman, who believe that more credit and more debt are the solution to the economic crisis.

In this first decade of the 21st century there has been no increase in the real incomes of working Americans. There has been a sharp decline in their wealth. In the 21st century Americans have suffered two major stock market crashes and the destruction of their real estate wealth.

Some studies have concluded that the real incomes of Americans, except for the financial oligarchy of the super rich, are less today than in the 1980s and even the 1970s. I have not examined these studies of family income to determine whether they are biased by the rise in divorce and percentage of single parent households. However, for the last decade it is clear that real take-home pay has declined.

The main cause of this decline is the offshoring of US high value-added jobs. Both manufacturing jobs and professional services, such as software engineering and information technology work, have been relocated in countries with large and cheap labor forces.

The wipeout of middle class jobs was disguised by the growth in consumer debt. As Americans’ incomes ceased to grow, consumer debt expanded to take the place of income growth and to keep consumer demand rising. Unlike rises in consumer incomes due to productivity growth, there is a limit to debt expansion. When that limit is reached, the economy ceases to grow.

The immiseration of working people has not resulted from worsening crises of over-production of goods and services, but from financial capital’s power to force the relocation of production for domestic markets to foreign shores. Wall Street’s pressures, including pressures from takeovers, forced American manufacturing firms to “increase shareholders’ earnings.” This was done by substituting cheap foreign labor for American labor.

Corporations offshored or outsourced abroad their manufacturing output, thus divorcing American incomes from the production of the goods that they consume. The next step in the process took advantage of the high speed Internet to move professional service jobs, such as engineering, abroad. The third step was to replace the remains of the domestic work force with foreigners brought in at one-third the salary on H-1B, L-1, and other work visas.

This process by which financial capital destroyed the job prospects of Americans was covered up by “free market” economists, who received grants from offshoring firms in exchange for propaganda that Americans would benefit from a “New Economy” based on financial services, and by shills in the education business, who justified work visas for foreigners on the basis of the lie that America produces a shortage of engineers and scientists.

In Marx’s day, religion was the opiate of the masses. Today the media is. Let’s look at media reporting that facilitates the financial oligarchy’s ability to delude the people.

The financial oligarchy is hyping a recovery while American unemployment and home foreclosures are rising. The hype owes its credibility to the high positions from which it comes, to the problems in payroll jobs reporting that overstate employment, and to disposal into the memory hole of any American unemployed for more than one year.

On October 2 statistician John Williams of shadowstats.com reported that the Bureau of Labor Statistics has announced a preliminary estimate of its annual benchmark revision of 2009 employment. The BLS has found that employment in 2009 has been overstated by about one million jobs. John Williams believes the overstatement is two million jobs. He reports that “the birth-death model currently adds net gain of about 900,00 jobs per year to payroll employment reporting.”

The non-farm payroll number is always the headline report. However, Williams believes that the household survey of unemployment is statistically sounder than the payroll survey. The BLS has never been able to reconcile the difference in the numbers in the two employment surveys. Last Friday, the headline payroll number of lost jobs was 263,000 for the month of September. However the household survey number was 785,000 lost jobs in the month of September.

The headline unemployment rate of 9.8% is a bare bones measure that greatly understates unemployment. Government reporting agencies know this and report another unemployment number, known as U-6. This measure of US unemployment stands at 17% in September 2009.

When the long-term discouraged workers are added back into the total unemployed, the unemployment rate in September 2009 stands at 21.4%.

The unemployment of American citizens could actually be even higher. When Microsoft or some other firm replaces several thousand US workers with foreigners on H-1B visas, Microsoft does not report a decline in payroll employment. Nevertheless, several thousand Americans are now without jobs. Multiply this by the number of US firms that are relying on “body shops” to replace their US work force with cheap foreign labor year after year, and the result is hundreds of thousands of unreported unemployed Americans.

Obviously, with more than one-fifth of the American work force unemployed and the remainder buried in mortgage and credit card debt, economic recovery is not in the picture.

What is happening is that the hundreds of billions of dollars in TARP money given to the large banks and the trillions of dollars that have been added to the Federal Reserve’s balance sheet have been funneled into the stock market, producing another bubble, and into the acquisition of smaller banks by banks “too large to fail.” The result is more financial concentration.

The expansion in debt that underlies this bubble has further eroded the US dollar’s credibility as reserve currency. When the dollar starts to go, panicked policy-makers will raise interest rates in order to protect the US Treasury’s borrowing capability. When the interest rates rise, what little remains of the US economy will tank.

If the government cannot borrow, it will print money to pay its bills. Hyperinflation will hit the American population. Massive unemployment and massive inflation will inflict upon the American people misery that not even Marx and Lenin could envisage.

Meanwhile America’s economists continue to pretend that they are dealing with a normal postwar recession that merely requires an expansion of money and credit to restore economic growth.

[Demeter]

29. THE POINTY-HAIRED BOSS ADDRESSES SALARY INEQUITIES

http://dilbert.com/dyn_file/str_strip/69993/gif/strip.print/


This is getting way too gloomy again. Take a break, get some sleep, and we'll pick it up in the morning.

Depression is realizing that you haven't emptied out July's emails yet...

[Tansy_Gold]

34. July 2007, that is.

Actually, mine only go back to August 2007, which is when I switched to yahoo. . . . .

I've been pretty good lately, though. I'm keeping the balance below 3000 and the unreads below 600, but I have this compulsion to read just about everything. . . . .


Tansy Gold, OCDer


PS -- once again, remind me to stay out of GD and GD-P.

[CatholicEdHead]

30. Finding a Job Now Toughest Since Recession Began

CNBC's Friday Night News Dump

http://www.cnbc.com/id/33245027
Published: Friday, 9 Oct 2009 | 7:22 PM ET
By: AP

The number of job seekers competing for each opening has reached the highest point since the recession began, according to government data released Friday.

The employment crisis is expected to worsen as companies stay reluctant to hire. Many economists expect a jobless recovery, putting pressure on President Barack Obama and congressional Democrats to stimulate job creation.
Unemployment

There are about 6.3 unemployed workers competing, on average, for each job opening, a Labor Department report shows.

That's the most since the department began tracking job openings nine years ago, and up from only 1.7 workers when the recession began in December 2007.

[Lucky Luciano]

31. Three day weekend for you i guess!

Stock markets are open monday....but bond markets are closed. I am subject to the whims of stocks though!

[DemReadingDU]

33. Fiore - Crashiversary

another good one!

http://www.markfiore.com/political/crashiversary

[Demeter]

36. 400,000 jobless out of luck

A move in Congress to extend benefits for the unemployed has been slowed as lawmakers debate who should qualify.

http://money.cnn.com/2009/10/08/news/economy/extending_unemployment_benefits/?postversion=2009100819


NEW YORK (CNNMoney.com) -- As thousands of jobless Americans lose their weekly unemployment checks every day, Congress is still debating who should qualify for a benefits extension.

Two weeks after the House passed an extension, Senate Democrats Thursday introduced a bill to lengthen unemployment insurance by up to 14 weeks in all states. Those living in states with unemployment levels greater than 8.5% would receive an additional six weeks.

The proposal would be funded by extending the longstanding federal unemployment tax levied on employers through June 30, 2011.

"This agreement recognizes the need to extend unemployment benefits for workers in every state whose unemployment benefits have run out or will do so in the next several weeks," said Senate Majority Leader Harry Reid, D-Nev.

The Senate proposal differs significantly from the House measure, which lengthens benefits by 13 weeks only for those in high-unemployment states. The House bill would extend the tax through next year.

Senate Republicans, who have expressed general support for extending benefits, blocked the Senate from quickly passing on Thursday.

"I have no doubt that the appropriate time we'll be able to work out some kind of agreement," said Sen. Jon Kyl, R-Ariz. "But our side is going to need some time to look at it."

That pushes consideration of the bill into next week.

If the measure makes it through the Senate, it must then be reconciled with the House version.

As Congress debates the measure, 400,000 people ran out of benefits in September and another 208,000 are set to lose them this month, according to the National Employment Law Project. Some 1.4 million people will stop receiving checks by year's end if Congress doesn't act, according to the employment law project.

The chorus calling for a benefits extension grew louder after the government reported on Friday that unemployment hit a 26-year high of 9.8% in September. Employers shed a higher-than-expected 263,000 jobs last month.

The "employment report is a marching order for Congress to pass unemployment benefit extensions to all states, quickly," Christine Owens, executive director of the National Employment Law Project, said last week. "With six unemployed workers seeking jobs for every available opening out there, the path to recovery remains steep."

[Demeter]

37. F.H.A. Problems Raising Concern of Policy Makers

http://www.nytimes.com/2009/10/09/business/09fha.html?_r=2

A year after Fannie Mae and Freddie Mac teetered, industry executives and Washington policy makers are worrying that another government mortgage giant could be the next housing domino.

Problems at the Federal Housing Administration, which guarantees mortgages with low down payments, are becoming so acute that some experts warn the agency might need a federal bailout.

Running questions about the F.H.A.’s future — underscored by interviews with policy makers, analysts and home buyers — came to the fore on Thursday on Capitol Hill. In testimony before a House subcommittee, the F.H.A. commissioner, David H. Stevens, assured lawmakers that his agency would not need a bailout and that it was managing its risks.

But he acknowledged that some 20 percent of F.H.A. loans insured last year — and as many as 24 percent of those from 2007 — faced serious problems including foreclosure, offering a preview of a forthcoming audit of the agency’s finances.

“Let me simply state at the outset that based on current projections, absent any catastrophic home price decline, F.H.A. will not need to ask Congress and the American taxpayer for extraordinary assistance — we will not need a bailout,” Mr. Stevens said in his testimony.

But to its critics, the F.H.A. looks like another Fannie Mae. The hearings on Thursday came on the same day that the federal agency charged with overseeing Fannie Mae and Freddie Mac provided a somber assessment of those giants’ health. In the year since the government stepped in to rescue them, the companies have taken $96 billion from the Treasury, and may need more.

Since the bottom fell out of the mortgage market, the F.H.A. has assumed a crucial role in the nation’s housing market. Created in 1934 to help lower-income and first-time buyers purchase homes, the agency now insures roughly 5.4 million single-family home mortgages, with a combined value of $675 billion.

In addition, these loans are bundled into mortgage-backed securities and guaranteed through the Government National Mortgage Association, known as Ginnie Mae. That means the taxpayer is responsible for paying investors who own Ginnie Mae bonds when F.H.A.-backed mortgages hit trouble.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” Edward Pinto, a former Fannie Mae executive, said in testimony prepared for the hearing. Mr. Pinto, who was the chief credit officer from 1987 to 1989 for Fannie Mae, went further than most housing analysts and predicted that F.H.A. losses would more than wipe out the agency’s $30 billion of cash reserves.

The issue has polarized Congress. Republicans, who led efforts to rein in Fannie Mae and Freddie Mac before those companies ran into trouble, are now seeking to bridle the F.H.A. Many Democrats insist the F.H.A. is playing a vital role in the housing market, which is only just starting to stabilize.

“F.H.A. has stepped into the void left by the private market,” Representative Maxine Waters, Democrat from California, said at the hearing. “Let’s be clear; without F.H.A., there would be no mortgage market right now.”

That was the case for Bernadine Shimon. Like many Americans, Ms. Shimon has recently been through some rough times. She lost a house to foreclosure, declared bankruptcy, got divorced and is now a single mother, teaching high school English in a Denver suburb.

She wanted a house but no lender would touch her. The Federal Housing Administration was more obliging. With the F.H.A. insuring her mortgage, Ms. Shimon was able to buy a $134,000 fixer-upper in August.

“The government gave me another chance,” she said.

The government is giving as many people as it possibly can the chance to buy a house or, if they are in financial difficulty, refinance it. The F.H.A. is insuring about 6,000 loans a day, four times the amount in 2006. Its portfolio is growing so fast that even F.H.A. backers express amazement.

For decades it was an article of faith that helping people of limited means like Ms. Shimon get a house was good for the new owner, good for the neighborhood and good for American capitalism. Then came the housing bust, which demonstrated that when lenders allowed people to buy houses they ultimately could not afford, it hurt the parties — while putting the economy itself in a tailspin.

In the aftermath of the crash, there is wide divergence on how easy, or how hard, it should be to become a homeowner. Skittish lenders are asking for 20 percent down, which few prospective borrowers have to spare. As a result, private lending has dwindled.

The government has stepped into the breach, facilitating loans with down payments as low as 3.5 percent and offering other incentives to stabilize the market. Real estate agents in some hard-hit areas say every single one of their clients is using the F.H.A.

“They’re counting their pennies, scraping up that 3.5 percent,” Bonni Malone of Prudential Americana in Las Vegas said. “Mostly they’re buying foreclosed homes from banks, although I had one client who bought from a guy that was dying. It’s turning around the market.”

While the government’s actions have helped avert full-scale economic disaster, there is growing concern that it might have doled out its favors with too generous a hand.

Many of the loans the F.H.A. insured in 2007 and last year are now turning delinquent, agency officials acknowledge. The loans made in those two years are performing “far worse” than newer loans, dragging down the whole portfolio, Mr. Stevens of the F.H.A. said in an interview.

The number of F.H.A. mortgage holders in default is 410,916, up 76 percent from a year ago, when 232,864 were in default, according to agency data.

Despite the agency’s attempt to outrun its fate by insuring ever-larger amounts of new loans to such borrowers as Ms. Shimon — the current rate is over a billion dollars a day — 7.77 percent of the portfolio is in default, up from 5.6 percent a year ago.

Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

The troubled loans are nevertheless weighing on the agency’s capital reserve fund, which has fallen to below its Congressionally mandated minimum of 2 percent, from over 6 percent two years ago.

.....................
As the number of loans has soared, random quality control checks have decreased sharply, F.H.A. staff members say. Mr. Donohue, the inspector general, cited numerous examples of organized fraud in testimony to Congress earlier this year.

“They need to stop taking bad loans in the door,” he said in an interview. “They’re taking on all this volume, they have to have very active underwriting standards.”

[Demeter]

38. Watchdog: Obama's mortgage relief efforts aren't good enough

http://www.mcclatchydc.com/227/story/76829.html

The Obama administration's efforts to force the modifications of distressed mortgages, while laudable, is likely to fall far short because the foreclosure crisis has grown and threatens to dwarf government efforts to relieve it, a special congressional watchdog panel warned in a report released Friday.

The Congressional Oversight Panel, created to monitor how taxpayer bailout dollars are being spent, warned that the administration's Home Affordable Modification Program, or HAMP, announced in February, seems sure to prove ineffective.

"Foreclosures continue every day as Treasury ramps up the program, with foreclosure starts outpacing new HAMP trial modifications at a rate of more than 2 to 1," the report said.

From July 2007 through the end of August, 1.8 million homes were lost to foreclosure and 5.2 million more foreclosures were started, the report said. The HAMP program seeks to prevent between 3 million and 4 million foreclosures; on Thursday, the Treasury Department announced that its initial goal of having 500,000 trial mortgage modifications started by Nov. 1 had been met.

The congressional panel wasn't critical of those efforts; it simply said that they'll be swamped by changes in the housing market. The economic crisis, with an unemployment rate of 9.8 percent and rising, is pushing many more prime mortgages, those given to the most creditworthy borrowers, into default.

On top of that, a new class of exotic mortgages called pay option adjustable-rate mortgages and interest-only mortgages are due to reset to higher variable rates. These exotic loans were usually given to richer borrowers on fancy homes worth far less today than the value of the underlying mortgages. These mortgages are often too high-priced to qualify for government modification programs.

"It simply isn't clear that the programs in place will do enough to tame the crisis and have a significant impact on the broader economy," Elizabeth Warren, a Harvard professor who heads the panel, said in the report. "It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now."

Foreclosures also may rise to levels far beyond what HAMP anticipated because a growing number of homes are termed "underwater," or worth less than the balance due on their mortgages.

"Today, one-third of mortgages are underwater, and if housing prices continue to drop, some experts estimate that one half of all mortgages will exceed the value of the homes they secure," the report said. "Negative equity increases the likelihood that when these homeowners encounter other financial problems or life events cause them to move, they may walk away from their homes and their over-sized mortgages."

Much will depend on whether home prices have bottomed, as some economists think is happening now. Housing prices have shown small but steady improvements in most markets since March, according to Standard & Poor's Case-Shiller index.

Low long-term interest rates and the government's first-time homebuyer's tax credit have helped stabilize prices, Patrick Newport, an economist with IHS Global Insight, told Congress on Thursday. Home prices, adjusted for inflation, rose by 33 percent from 2000 to 2006. Today, prices are only about 13 percent above their average value in 2000, a sign that a brutal correction has taken place.

[Demeter]

70. FHFA's DeMarco Speaks - Ouch!

http://brucekrasting.blogspot.com/2009/10/fhfas-demarco-speaks.html

FHFA’s Acting Director Edward DeMarco provided written testimony to the Senate today. I would give his presentation a B+. There is little room for optimism in this story. Mr. DeMarco did not gloss that fact over. A few snips from that speech:

-From July 2007 through the first half of 2009—combined losses at Fannie Mae and Freddie Mac totaled $165 billion. In the first half of 2009, Fannie Mae and Freddie Mac together reported net losses of $47 billion.

-Since the establishment of the conservatorships, the combined losses at the two Enterprises depleted all their capital and required them to draw $96 billion. The combined support from the federal government exceeds $1 trillion.

-The short-term outlook for the Enterprises remains troubled and likely will require additional draws under the Senior Preferred Stock Purchase Agreements.

That’s funny; I thought things were going so well. From the WSJ 8/8/2009:

HEADLINE: FREDDIE TURNS PROFIT, BUT ISSUES CAUTION


Some random comments on credit conditions:

-Among subprime adjustable-rate mortgages, nearly 40 percent are seriously delinquent.

We really ought to string someone up over this number. A 40% default rate is not bad judgment. It is a crime. It is what kicked us over the top.

-We remain concerned and recognize the risk associated with increasing numbers of seriously delinquent loans and higher forecasted foreclosures. In particular, we are concerned with the continued increase in serious delinquency rates, even among prime mortgages.

Read this to mean, “The next shoe to drop will be prime mortgages.” It was always perceived that prime mortgages were money good. They are not.

On the issue of REO (real estate owned from repo/default)

- Currently the Enterprises are managing a real estate owned (REO) inventory of almost 100,000 properties, a number expected to grow.

The government can’t sell this crap. If they did, it would just tank the RE market and cause more Prime defaults. Uncle Sam is going into the rental business big time. But that does not look too promising either. Some sobering thoughts on that market:

-As of mid- year 2009, rental vacancy rates hit their highest level since the U.S. Census Bureau began tracking vacancy rates in the 1950s.

That does not sound like a plus for CRE either.

There are obvious problems at the FHLB’s. Do these words trouble you?

-The most important financial development among the FHLBanks in 2009 is the deterioration of the PLS portfolios held by the FHLBanks.

How big a problem is this? Big. I smell bailout. The question that must be asked and answered is, “Why were the FHLBs buying private label mortgages? What were the rules on that? Someone made out big on the sale of those securities.

-Total retained earnings were $6 billion, but negative accumulated other comprehensive income (AOCI) exceeded retained earnings at the six FHLBanks with the greatest PLS exposure.

A good number of people were paid a fair amount of money to come up with the term AOCI. What would be a better description of "Negative Accumulated Other Comprehensive Income"? The word "loss"comes to mind.

You have to give DeMarco some credit for the following. The accountants may be lying but he is not:

-The decline in the carrying value reflects impairment charges of almost $8.2 billion, however, a change in accounting rules resulted in only $953 million charged against income.

On the issue of interest rate risk management at Fannie and Freddie DeMarco gives a ‘tell’.

-The Enterprises’ investments in mortgage assets expose them to market risk. Given the uncertainties in the marketplace, managing market risk continues to be a challenge.

There was a spike in interest rates earlier this year. At that time someone did very big amounts of ‘duration’ trades. I believed then that it was the Agencies puking it out at the bottom of the market. I think Demarco confirmed it. Look for big derivative losses in the third and fourth Q’s for both F/F.

On the complicated issue of mortgage insurance (PMI) comes this from DeMarco:

-The Enterprises will refinance those mortgages (ones in default) without requiring additional private mortgage insurance. If there already is mortgage insurance on the existing mortgage, that coverage will carry forward to the new mortgage.

This is a flat out subsidy for the PMI providers. When a loan goes into default and a loss is realized the insurance that is there should cover a significant portion of the loss. By rolling the loans the loss is avoided, and so is the necessity to pay up on the claim. This is keeping the PMI folks alive and well. One of the larger players in this space is AIG. We wouldn’t want to do anything that would hurt them would we?

The following warmed my heart. Finally someone is owing up to how we got into this mess:

-The markets relied upon an implicit government guarantee of Enterprise securities.

Who created and sold the lie that the US Government was behind $5.3 trillion in dodgy MBS paper? It was a few dozen politicians, folks at Treasury, the entire mortgage industry, most of Wall Street and everyone at Fannie and Freddie.

Finally, a confirmation from DeMarco that there is a plan coming. Of interest is that the timetable seems to have been accelerated. This was supposed to be a March 2010 issue. The Director suggests it may be here in time for Santa. I can’t wait.

-I know the Administration has committed to addressing (the GSE’s) in the coming months.

[Tansy_Gold]

87. I'm still looking for explanations, as in "Where's that $96 billion going"?

FHFA, formerly Freddie and Fannie, is expected to "draw" $96 billion. What for?

My understanding -- which could be totally wrong -- is that it works this way:

Mr. & Ms. Buyer find a house they like and can maybe sort of afford. They don't qualify for a "regular" mortgage but they can get one from ????someone???? as long as it's FHFA "guaranteed." Does this mean that the Buyers are paying ????someone???? every month, and then if they suddenly stop paying, FHFA steps in and pays ????someone???? on their behalf?

If that's true, then what happens in the case of default? ????someone???? forecloses on the house and takes possession of it? What if they are lucky enough to sell it? Do they then repay FHFA out of the proceeds?

And what about the "bundled MBS" bullshit? Who sold that? ????someone???? sold it and pocketed the proceeds and then FHFA guarantees the income to the MBS owner?

Who buys the MBS and what are they worth? There is, after all, a reasonably accurate value for these MBSes. The loans have principal amounts and interest rates, so their value can be calculated. It's not an imaginary number. Even if they're all bundled together and sliced into tranches, they have a theoretical top valuation: principal plus interest minus -0- defaults. They're never going to be worth MORE than this, correct?

But all that value is going to take time to come in. 15 years, 20 years, 30 years. So the MBSes are sold at something LESS than their face value in order to turn the cash flow around. Is that correct? Who in their right mind -- don't answer that -- would pay more than they're worth? So people have to be paying less than the face value.

I can understand the banks or original mortgagors' selling the loans. If they lend out $1,000,000 and expect to get back 1,750,000 over the life of the loan (hypothetical, round numbers), they can sell it for $1.025MM and still make a "profit." That buyer can sell for $1.075MM and make a profit. And so un, up to the $1.75MM. At that point there's no more profit to be made.

But suppose you bumdle a bunch of these mortgages together and tranch off an MBS that has a lifetime final value of $1.75MM and it gets sold over and over and over to where the final price is $1.50MM. And then half the loans in that MBS go into default just three years after being made. Someone somewhere along the line has collected PART of the P&I on those loans; they aren't 100% default. And they don't have a current value of the full $1.50MM because some of that interest hasn't been earned yet.

Is ALL OF THIS taken into consideration when calculating that $96BN???? And again, who does it go to?

Or is that part of the big magical mystery show that is the government-guaranteed housing "bidness"?


Just wonderin'



Just


Tansy Gold

[DemReadingDU]

88. Somehow, I think those loans end up being owned by the government

which is us, the taxpayers.

I haven't quite figured out how it's being done, but that's my guess. There's some kind of swap that the taxpayers get the bad/defaulted loans in a swap for the good stuff being printed by the Treasury which goes to the banksters.

[Demeter]

90. The Fed Reserve Is Buying a Lot of Them

I think they bought all of China's, to keep our landlord happy....and now they are paying hedge funds to "buy" them, which is obscene.

[Demeter]

89. When It's Illegal, or Violates Natural Law, They Just Make Shit Up

and sell it as shinola.

We can't even get basic information, let alone the why and wherefores out of the banksters. Serious investigation and prosecution and regulation MUST start very soon. Or we could just sink into 4th world, banana republic obscurity.

[Tansy_Gold]

93. Best answer all day: "They just make shit up."

Hey, works for me!

[Demeter]

69. FHA: Next Bailout?

http://www.nakedcapitalism.com/2009/10/fha-next-bailout.html

...What is wrong with this? The FHA has ALWAYS been in the low down payment business! It has long offered loans requiring only 3% down, long before “subprime” was part of the lexicon. Historically, FHA loans did not show default rates materially worse than prime loans. That experience has been replicated by not for profit lenders in low income neighborhoods.

In fact, when subprime became a big business (the post 2000 incarnation; there were subprime mortgages in the 1990s, but those were mainly for manufactured housing), it first took share from FHA and then expanded the market. And the big difference from how the FHA once did business versus its subprime competitors was…..the FHA screened loans on an individual basis. The process was time consuming and somewhat intrusive. Private lenders were faster, easier, and (lo and behold) less stringent.

My objection is that the article implies that low down payment loans are a bad idea. They aren’t necessarily. Low down payment loans can be a viable business, but lenders need to screen borrowers much more carefully than when they have a much bigger loss cushion.

And using low down payment loans as a way to prop up the housing market IS a bad idea. The fact that the FHA is cranking so many loans through more or less the same administrative platform is strong evidence that its lending standards have gone out the window.

[Demeter]

39. 10,000 apply for 90 factory jobs

http://www.courier-journal.com/article/20091008/NEWS01/910080326/GE++10+000+applications+for+90+factory+jobs

In the latest sign of weakness in Louisville-area employment, about 10,000 people applied over three days for 90 jobs building washing machines at General Electric for about $27,000 per year and hefty benefits.

The jobs dangle medical, eye care, prescription and dental benefit packages, as well as pension, disability, tuition assistance and more, said GE spokeswoman Kim Freeman. And despite the recession, no union workers have been laid off from Appliance Park since the company negotiated lower wages with workers in 2005...

[Demeter]

49. The Eternal Depression by Bill Bonner

http://dailyreckoning.com/the-eternal-depression/

...Yesterday, we were calculating how long it would take to get the jobless number back down to '90s levels...that is, around 5%. There are now about 131 million jobs in the United States...and about 15 million people who would like a job but can't find one. Meanwhile, population growth adds about 1.5 million new workers every year. That means the economy has to grow at 1% (in real terms) just to stay even with population growth. Currently, the economy is going in the wrong direction - backwards. It's losing jobs...maybe 3 million this year...and maybe another 2 million or so before it finally stabilizes (who knows?)...for a total of 20 million jobs down (about 13% unemployment) by the time unemployment bottoms out.

Let's suppose, by some miracle, the economy turns around...and begins growing at 3% per year. That should be about 3 million new jobs per year. Half of those, remember, are just to keep up with population growth. So the other half - 1.5 million - gradually reduce unemployment. Now, let's get out the calculator...20 million divided by 1.5 million equals a little more than 13. By these numbers you can expect full employment again in 2022!

But what if the economy doesn't grow at 3% per year? Ooooh...that's the problem, isn't it? All the feds - and practically all other economists too - are projecting a return to normal. They expect a 'recovery.' But what if there never is a recovery?

Heck, yesterday, the central bank of Australia said it was so sure that everything was going well it raised its key lending rate by 25 basis points.

"Canberra says risk of serious retraction over," The Financial Times reports.

But they get a lot of sunshine down under. Possibly, the heads of the Reserve Bank of Australia got a little too much of it yesterday. Australia is also a supplier of natural resources to China; possibly, the sun burnt bankers failed to notice that China is a bubble.

Or maybe they failed to notice that China's biggest customer is broke.

Right under The Financial Times' article about Australia is the following headline:

"No sign of credit revival for US households."

"The latest data from the Federal Reserve show consumer credit declined at an annual rate of 10.4% in July - the fastest rate since the crisis began two years ago."

Yes, dear reader, Americans are shedding debt. They are cutting back. They are saving.

Another headline in The Financial Times tells us, "Holiday sales set to fall."

Hold on. Who makes all that junk that Americans buy for Christmas? And how can China buy more raw materials from Australia when it is selling fewer finished products to Americans?

Perhaps China is focusing more sales on the domestic market; we don't doubt it. But you don't refocus the world's second or third largest economy in 12 months. It takes years. And you don't get this kind of rebirth without some kind of suffering. The big, old oak tree has to fall down before the sapling can take its place. And when the oak falls - it makes one helluva mess.

[Demeter]

50. Eternal Depression Part 2

Meanwhile, President Obama is adding more gin to the party punch. He says he's considering ways to create more jobs without a new stimulus program. Among the schemes under consideration is a $3,000 new job tax credit.

Hey, why not! They had such great success with the Clunker tax credit...and with the first time house buyer tax credit. Of course, when you pay people to do things, you can't be too surprised that they do them. And then, you can't be too surprised when they stop doing them after you stop paying them. Thus, when the Clunkers program conked out in August car buyers stopped buying. And when the new house purchase tax credit expires in November, don't be surprised if house sales collapse too. So, if the feds are going to pay people to hire other people, they better be prepared to do it for a long time.

Which brings us back to our calculations. How long will it be before this economy can walk without the feds clutching both arms? A few months ago, we wondered how long it would take consumers to put their finances back in order. Five years? Ten years? There are so many assumptions required that the numbers barely make sense. Still, if you think the total debt burden is headed back to under 200% of GDP, where it was for most of the last century, that would require the elimination of debt equal to about 160% of GDP...or more than $20 trillion worth. How do you eliminate debt? Well, some of it simply disappears...through defaults, foreclosures and bankruptcies. The rest is paid off. How? By saving. Now, imagine that the United States could put an amount equal to 15% of GDP to work paying down its debts. That's savings and capital formation of all types - corporate as well as individual. It ignores government, which is going in the other direction. At 15% of GDP per year, paying America's private debt down to under 2 times annual output is still about a 7-year project.

So, prepare for a long dry spell. In the best of cases, the American public has to stay on the frugality wagon for 7 to 13 years.

And in the worst of cases? Oh, well...that's a different matter. The aforementioned US government is desperate to short-circuit the process of balance sheet repair. It is propping up the old tree every way it can. Thus, the whole period of adjustment may take much, much longer than it should. Instead of coming down with a crash, the limbs fall off one at a time. At this rate, the whole process could take nearly forever.

As the private sector eliminates debt, for example, the feds add it. The deficits are scheduled - by the Congressional Budget Office - to be monstrous, but controllable. Cash for clunkers, cash for houses, cash for jobs - it adds up. But the CBO projections are based on very optimistic assumptions, in which the economy 'recovers' quickly and grows strongly. They do not take into account the real nature of the slump. It is not a pause...it is a permanent change. The Obama administration cannot, ultimately, prevent change. But it can slow down the process so much that the depression begins to seem eternal.

[Demeter]

52. On the Losing Side of a Credit Battle by Bill Bonner

http://dailyreckoning.com/on-the-losing-side-of-a-credit-battle/


There have been 7.2 million jobs lost since recession began. Many of these jobs were Bubble Age jobs. Millions of people, for example, earned their money in 'housing.' They were putting up houses in the sand states...or building granite countertops...or selling, flipping, financing the houses. Those jobs are gone forever. Never again in our lifetimes are we likely to see such an explosion in the housing industry. Sure, people will still build houses...and do all the other work involved in the traditional housing industry. But it will be only a fraction of the industry it was in the 2002-2007 period.

There were also all the jobs involved in selling things to people who didn't need them and couldn't afford them. Labor was needed at every step of the way - manufacturing (perhaps in China), shipping, stocking, retailing, fixing, and financing the stuff.

And don't forget all that mall space...and all the trucks...and all the other things that supported the over-consumption of the Bubble Age.

And now the Bubble Age is over. It will not come back, no matter how much cash and credit the feds pump into the system. (Not that they can't make things worse...in a BIGGER bubble...but that is not yet in sight.)

In The Wall Street Journal yesterday was an item about Las Vegas. The casinos are folding up their expansion plans, says the WSJ.

But the big news yesterday was that the service industries are growing again...at least that's what the latest figures show. This news so delighted investors that they bid up Dow stocks 112 points. Oil rose above $70. Gold posted a $13 gain.

Don't get too excited about that rise in the service sector. Everything bounces...even dead jobs. Dead jobs bounce; they still don't get up. After months of decline, it may be true that the service industries have had a rebound, but don't expect them to begin recovering the stamina and strength of the bubble years. A few more people may have gotten jobs serving drinks in Detroit's bars last month, but it is not likely to turn into a durable recovery of the job market,

In the 1990s, the US economy added 2.15 million new jobs every year. It needed to add at least 1.5 million or so just to remain at full employment - that is, with about 5% of the workforce unemployed at any time.

To put that number in perspective, this year the economy as LOST 2.5 million jobs, just in the last six months. Those jobs aren't coming back. As we keep saying, this is a depression. It is a major correction, in which the economy needs to find new jobs...because it can't continue to do what it has been doing.

New jobs are typically created by new businesses - small businesses that are growing. Big businesses already have all the market share they're going to get. They also typically have all the employees they need. Then, when hard times come, they discover that they don't need all that they have, so they cut back.

Job cuts from large businesses is what you expect in a recession. But this time it is different. This time, big businesses have let people go by the million. But small business has not been hiring them either. So not only is unemployment growing...the trend shows no signs of coming to an end.

Economists are reconciled to high unemployment levels for a long time. The head of the IMF says unemployment might peak out in 8 to 12 months. Even if that were true, it will be a very long time before the job market recovers. Just do the math.

We'll keep it simple. The economy needs, say, 1.5 million new jobs per year. Instead, over the last two years, it lost 7.5 million. Now, it has to stop losing jobs...let's just say that happens a year from now. By then, the total of jobs lost may be near 10 million. Plus, there are the new jobs it needed - but never got - over that 3 year period. That's another 4.5 million. So, the total will be about 14.5 million jobs down. Then, let us say, because we are in a generous and optimistic mood, that the economy then begins creating jobs again...at the rate it did during the '90s. What ho! After five years, that still leaves the economy more than 10 million jobs short, doesn't it?

In order to get back to full employment, the economy has to surprise us on the upside. It has not merely to return to the growth levels of the '90s...it has to surpass them. It needs to grow so fast it creates 3 million jobs per year. And even then, it would take nearly 10 years to get back to full employment.

In the typical post-war recession, jobs are lost...then they are recovered when the economy gets on its feet again. But this happened in the credit expansion of the '45-'07 period. Each recession was just a pause, when the economy was catching its breath. Then, it was off again...in the same direction - up the mountain of credit.

This time, it's not a typical post-war recession. It's something different. Now, we've reached the peak. We're coming down the other side...wheee! Look out below!

Now we don't need all those people building houses, stocking the shelves and selling things. We don't need such a big financial industry either. Now, people want to get rid of credit, not get more.

And the businesses that were goosed up in the credit bubble are now deflating fast. They're not just taking a break. They're lining up the jobs and shooting them in the back of the head. Those jobs are gone. (See below...)

In a 'normal' recession, jobs reappear because the economy continues in the same direction. In a depression, it changes course. Debts are paid off. Spending goes down, more or less permanently. The economy actually contracts...until consumer debt is once again down at an acceptable level...or a new model for growth can be found.

The Wall Street Journal mentions a statistician who was making $100,000 a year. He too is a victim of depression. His job has been outsourced to India. Businesses, with less revenue coming in the door, must cut costs in whatever way they can. Labor is the single biggest item on most firms' ledgers. They will reduce it however they can. And once the change is made, there is little chance that the job will come back.

It is a little like a battle. In an attack, troops often get separated. They are 'lost' - for a while. Then, the winning side is able to recover its missing troops as it advances. But the losing side gives up its troops forever. They are stuck behind enemy lines and cannot rejoin their units.

We are now on the losing side of a credit battle. Having gained so much ground, and so many jobs, in the advance, the United States is now giving them up.

"I expect over the next several months, mainstream pundits and forecasters will start worrying about tepid hiring, even as the pace of job losses slows," Strategic Short Report's Dan Amoss chimes in. "As we 'lap' the 2009 corporate cost cutting by early 2010, and top lines fail to rebound, earnings estimates will have to come back down. I'm amazed at how many sell-side analysts are modeling V-shaped recoveries in 2010 earnings. Most stock prices are disconnected from reality."

And here is a story we foretold years ago. Private equity was mostly a fraud, we said. Sharp operators bought companies for more than they were worth, loaded them with debt, collected huge fees, and then sold them back to the public or to other private equity firms. Come the revolution, we mused, these deals would go bad.

Well, the revolution has come. The deals have gone bad. The New York Times reports:

"Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company - the seventh time it has been sold in a little more than two decades - all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.

"For many of the company's investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company's downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees - more than one-quarter of the work force - laid off last year.

"But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company's fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

"Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years."

[bread_and_roses]

79. damn it to hell, we need JOBS, not tax credits for "creating jobs"

what the hell is wrong up there? Just put people to work - pay the people, to do real things - like fix the bridges and teach pre-school and staff full-day year round child care centers for working people and retrofit housing for energy efficiency and deliver health care and and and. There's no lack of real work to be done. Give businesses tax credits for creating jobs? So they can pay even less of their fair share? So the upper 1% can have more more more? Our IDAs and "Development Zones" (here in NY called "Empire Zones") do such a GREAT job of creating living wage jobs with all that public booty, right? (NOT! - they barely create any jobs at all and when they do they are as likely as not to be low-wage, no-benefit jobs). Give tax credits so more people can sit on phones calling their neighbors to collect over-due bills?

Surely this has to be one of the markers of a failed society - there is work to be done, there are people able and willing to do it, and it, and instead our "representatives" shovel more and more of the public wealth into the pockets of a parasitical, rapacious, deadly class of profiteering vampires.

Ozymandius - Shelly
I met a traveller from an antique land
Who said: "Two vast and trunkless legs of stone
Stand in the desert . . . Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them, and the heart that fed:
And on the pedestal these words appear:
'My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!'
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away

The Second Coming - Yeats
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.

[Demeter]

81. You Are Preaching to the Choir

Because if the govt. gave real money to real people, that would be "Socialism"!

When it gives it away to the banksters and AIG, it's called "Saving the Economy". Get it?

[bread_and_roses]

82. I know....:(

But I thank WE for the opportunity to vent a bit...when I start quoting "Ozymandius" and "The Second Coming" I'm feeling real grim...that little rant may keep me from descending to Matthew Arnold's "Dover Beach."

[Demeter]

40. The Uneducated American By Paul Krugman

http://www.nytimes.com/2009/10/09/opinion/09krugman.html?ref=opinion

If you had to explain America’s economic success with one word, that word would be “education.” In the 19th century, America led the way in universal basic education. Then, as other nations followed suit, the “high school revolution” of the early 20th century took us to a whole new level. And in the years after World War II, America established a commanding position in higher education.

But that was then. The rise of American education was, overwhelmingly, the rise of public education — and for the past 30 years our political scene has been dominated by the view that any and all government spending is a waste of taxpayer dollars. Education, as one of the largest components of public spending, has inevitably suffered.

Until now, the results of educational neglect have been gradual — a slow-motion erosion of America’s relative position. But things are about to get much worse, as the economic crisis — its effects exacerbated by the penny-wise, pound-foolish behavior that passes for “fiscal responsibility” in Washington — deals a severe blow to education across the board.

About that erosion: there has been a flurry of reporting recently about threats to the dominance of America’s elite universities. What hasn’t been reported to the same extent, at least as far as I’ve seen, is our relative decline in more mundane measures. America, which used to take the lead in educating its young, has been gradually falling behind other advanced countries.

Most people, I suspect, still have in their minds an image of America as the great land of college education, unique in the extent to which higher learning is offered to the population at large. That image used to correspond to reality. But these days young Americans are considerably less likely than young people in many other countries to graduate from college. In fact, we have a college graduation rate that’s slightly below the average across all advanced economies.

Even without the effects of the current crisis, there would be every reason to expect us to fall further in these rankings, if only because we make it so hard for those with limited financial means to stay in school. In America, with its weak social safety net and limited student aid, students are far more likely than their counterparts in, say, France to hold part-time jobs while still attending classes. Not surprisingly, given the financial pressures, young Americans are also less likely to stay in school and more likely to become full-time workers instead.

But the crisis has placed huge additional stress on our creaking educational system.

According to the Bureau of Labor Statistics, the United States economy lost 273,000 jobs last month. Of those lost jobs, 29,000 were in state and local education, bringing the total losses in that category over the past five months to 143,000. That may not sound like much, but education is one of those areas that should, and normally does, keep growing even during a recession. Markets may be troubled, but that’s no reason to stop teaching our children. Yet that’s exactly what we’re doing.

There’s no mystery about what’s going on: education is mainly the responsibility of state and local governments, which are in dire fiscal straits. Adequate federal aid could have made a big difference. But while some aid has been provided, it has made up only a fraction of the shortfall. In part, that’s because back in February centrist senators insisted on stripping much of that aid from the American Recovery and Reinvestment Act, a k a the stimulus bill.

As a result, education is on the chopping block. And laid-off teachers are only part of the story. Even more important is the way that we’re shutting off opportunities.

For example, the Chronicle of Higher Education recently reported on the plight of California’s community college students. For generations, talented students from less affluent families have used those colleges as a stepping stone to the state’s public universities. But in the face of the state’s budget crisis those universities have been forced to slam the door on this year’s potential transfer students. One result, almost surely, will be lifetime damage to many students’ prospects — and a large, gratuitous waste of human potential.

So what should be done?

First of all, Congress needs to undo the sins of February, and approve another big round of aid to state governments. We don’t have to call it a stimulus, but it would be a very effective way to create or save thousands of jobs. And it would, at the same time, be an investment in our future.

Beyond that, we need to wake up and realize that one of the keys to our nation’s historic success is now a wasting asset. Education made America great; neglect of education can reverse the process.

[Demeter]

41. The Securitization Boondoggle By Mike Whitney

http://www.informationclearinghouse.info/article23682.htm

October 09, 2009 "Information Clearing House" --- The relentless financialization of the economy has resulted in a hybrid-system of credit expansion which depends on pools of loans sliced-and-diced into tranches and sold into the secondary market to yield-seeking investors. The process is called securitization and it lies at the heart of the current financial crisis. Securitization markets have grown exponentially over the last decade as foreign capital has flooded Wall Street due to the ballooning current account deficit. A significant amount of the money ended up in complex debt-instruments like mortgage-backed securities (MBS) and asset-backed securities (ABS) which provided trillions in funding for consumer and business loans. Securitization imploded after two Bear Stearns hedge funds defaulted in July 2007 and the secondary market collapsed. Now the Federal Reserve and the Treasury are working furiously to restore securitization, a system they feel is crucial to any meaningful recovery.

But is that really a wise decision? After all, if the system failed in a normal market downturn, it's likely to fail in the future, too. Is Fed chair Ben Bernanke ready to risk another financial meltdown just to restore the process? The Fed shouldn't commit any more resources to securitization (over $1 trillion already) until the process is thoroughly examined by a team of experts. Otherwise, it's just good money after bad.

Here's Baseline Scenario's James Kwak digging a bit deeper into the securitization flap:

"The boom in securitization was based on investors’ willingness to believe what investment banks and credit rating agencies said about these securities. Buying a mortgage-backed security is making a loan. Ordinarily you don’t loan money to someone without proving to yourself that he is going to pay you back...

The securitization bubble happened because investors were willing to outsource that decision to other people — banks and credit rating agencies — who had different incentives from them." (Baseline Scenario)

Investors are no longer willing to trust the ratings agencies or rush back into opaque world of structured finance. The reason the securitization boycott continues, is not because of "investor panic" as Fed chair Ben Bernanke likes to say, but because people have made a sensible judgment about the quality of the product itself. It stinks. That said, how will the economy recover if the main engine for credit production is not repaired? That's the problem.

Here's an excerpt from the New York Times article "Paralysis in Debt Markets Deepens Credit Drought":

"The continued disarray in debt-securitization markets, which in recent years were the source of roughly 60 percent of all credit in the United States, is making loans scarce and threatening to slow the economic recovery. Many of these markets are operating only because the government is propping them up.

Enormous swaths of this so-called shadow banking system remain paralyzed. Depending on the type of loan, certain securitization markets have fallen 40 to 100 percent.

A once-thriving private market in securities backed by home mortgages has collapsed, from $744 billion in 2005, at the peak of the housing boom, to $8 billion during the first half of this year.

The market for securities backed by commercial real estate loans is in worse shape. No new securities of this type have been issued in two years." ("Paralysis in Debt Markets Deepens Credit Drought" Jenny Anderson, New York Times)

Securitization could be fixed with rigorous regulation and oversight. Loans would have to be standardized, loan applicants would have to prove that they are creditworthy, and the banks would have to hold a greater percentage of the loan on their books. But financial industry lobbyists are fighting the changes tooth-and-nail. That's because securitization allows the banks to increase profits on miniscule amounts of capital. That's the real story behind the public relations myth of "lowering the cost of capital, disaggregating risk, and making credit available to more people." It's all about money, big money.

Securitization also creates incentives for fraud, because the banks only interest is originating and selling loans, not making sure that borrowers can repay their debt. The goal is quantity not quality. In fact, this process continues today, as the banks continue to originate garbage mortgages through off-balance sheet operations which are underwritten by the FHA. A whole new regime of toxic loans are being cranked out just to maintain the appearance of activity in the housing market. The subprime phenom is ongoing, albeit under a different name.

So why did the banks switch from the tried-and-true method of lending money to creditworthy applicants to become "loan originators"? Isn't there good money to be made in issuing loans and keeping them on the books?

Yes, there is. Lots of money. But not as much money as packaging junk-paper that has no capital-backing and then dumping it on credulous investors. That's where the real money is. Unfortunately, the massive build-up of credit without sufficient capital support generates monstrous bubbles which have dire consequences for the entire economy.

And do we really need securitization? Nobel economist Paul Krugman doesn't think so:

"The banks don’t need to sell securitized debt to make loans — they could start lending out of all those excess reserves they currently hold. Or to put it differently, by the numbers there’s no obvious reason we shouldn’t be seeking a return to traditional banking, with banks making and holding loans, as the way to restart credit markets. Yet the assumption at the Fed seems to be that this isn’t an option — that the only way to go is back to the securitized debt market of the years just before the crisis."

There's only two ways to fix the present system; either regulate the shadow banking system and every financial institution that trades in securitized assets, or ban securitization altogether and return to the traditional model of banking. Regrettably, the Fed is pursuing a third option, which is to pour more money down a rathole trying to rebuild a system that just blew up. It's madness.

[Demeter]

43. Good War vs. Great Society By JOHN FEFFER

http://www.informationclearinghouse.info/article23684.htm

October 09, 2009 "FPIF" -- The Vietnam War ruined everything. It not only destroyed Vietnam and killed a huge number of its inhabitants. It not only killed so many American soldiers and destroyed the futures of so many veterans. It not only spread into Cambodia and Laos and wrecked those countries for generations.

The Vietnam War also killed the Great Society. President Lyndon Johnson, with a large Democratic majority in Congress after the 1964 elections, enacted sweeping reforms in education, health care, and transportation, along with landmark civil rights legislation. But the pressure of spending on the Vietnam War — the guns vs. butter debate of the 1960s — eventually brought this last, great program of genuine American liberalism to a halt and scuttled the hopes of its architect for a second presidential term....

AND THE AUTHOR THINKS HISTORY IS ABOUT TO REPEAT, AGAIN

[Demeter]

47. World Bank could 'run out of money' within 12 months

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/6255816/World-Bank-could-run-out-of-money-within-12-months.html

The Bank, whose job it is to support low-income countries, has had to hand out so much cash in the wake of the financial crisis that it faces a shortfall in what it can spare for new projects within 12 months.

“By the middle of next year we will face serious constraints,” said its president Robert Zoellick, as he launched a major campaign to persuade rich nations to pour more money into the Washington-based institution...

...Mr Zoellick, speaking at the opening of the IMF and World Bank annual meetings in Istanbul, said the Bank needed a capital increase of $3bn-$5bn, though others suspect the eventual need could be higher still.

He said he hoped that its shareholders, including the UK and other leading nations, would decide on resources before its spring meeting next April.

The money would be shared between the International Bank for Reconstruction and Development – the key part of the bank, which lends to poor nations – and the International Financial Corporation (IFC), which lends to companies. ..

[Demeter]

53. The Gold Rush of 2009

"A rumor, based on conspiracy, wrapped up in presumption... that's all it takes to get markets moving these days," writes Ian Mathias in today's issue of The 5. "And it's why your gold investments just hit a historic high:



Gold Spot Price

"A global consortium of European, Middle Eastern and Asian nations are plotting to stop using the US dollar to trade oil, says the UK's The Independent.

"The paper - which has captured the attention of essentially every financial news outlet - claims that 'Gulf Arabs are planning - along with China, Russia, Japan and France - to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council (GCC), including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.'

"Quite a mouthful, eh? According to The Independent's 'Gulf Arab and Chinese banking sources,' secret meetings between all these nations are already well underway and a potential transition out of the dollar is viable 'within nine years.'

"Of course every government mentioned has dismissed the report, but some damage has already been done. The dollar index sank almost a point to 76.2, just above its yearly low. And gold, as we illustrated above, found a new record high. But, is this story for real?

"'At first sight, such a move looks highly unlikely,' says Peter Cooper, one of our contacts in the UAE, who also just happened to be giving a city-wide tour of Dubai to Addison Wiggin and Chris Mayer today. 'The Gulf Arab countries are staunch allies of the United States and dependent on the US for military protection in their volatile region... It is far more likely that such rumors, if they are true, are more a question of policy makers mulling over policy options.'

"'These rumors are especially interesting,' adds Addison, 'because they presuppose a unified position among GCC nations. Independently of this story, we learned yesterday at a press conference hosted by Standard Chartered bank of England that these countries don't necessarily agree with one another.

"'The Saudis, Kuwaitis, Qataris and Emeratis have been trying to create a Euro-style unified currency in the Gulf region. But they can't agree on who would be the leading party, how the currency would be weighted, or even what to call it. It's a huge assumption that the GCC could get this currency off the ground in the near future...an even bigger presumption that these nations could agree on a strategy for replacing the dollar pricing of oil.

"'Of course, it's possible - stranger things have happened. But at this point, it's a long shot. And it's no strange wonder that the rumor floated on the first day of the IMF meeting in Turkey today. The main subject under discussion at the meeting will be viable alternatives for the trillions in dollar reserves held by the Gulf States and BRIC nations...'"

[Demeter]

55. The Truth About The Economy Video Interview Marc Faber and Nouriel Roubini.

http://www.informationclearinghouse.info/article23620.htm

[Demeter]

56. New Accounting Rules May Undermine Consumer Lending

http://www.nakedcapitalism.com/2009/10/new-accounting-rules-may-undermine-consumer-lending.html

Repeat after me: the credit crisis was the result of too much cheap and easy lending. Ergo, any return to healthier practices means more expensive and less readily available debt.

The problem is that the powers that be don’t quite grasp the implications, or to the extent they do, are still trying to have their cake and eat it too. They want a sounder banking system (or so they say, but with the banksters in charge, this is likely all talk). But heavens no, we cannot restrict credit, bad thing will happen, like a recession/depression, cheaper assets, and fewer campaign contributions.

The reality is that there is no nice, painless way out of the mess, as our high and rising unemployment rate attests. And how the new FASB rules 166 and 167, due to become effective next year, come into play, will tell alot about our tolerance for pain in the interest in getting the financial system on a more solid footing.

The reason I particularly cynical is what transpired with FAS 157. That rule went into effect at the end of 2007 (I believe November 2007 so that securities firms with November fiscal years would comply). It gave us Level 1, 2, and 3 assets, and required companies to disclose which fell in which valuation bucket. The higher the number, the fuzzier the basis for the price used. Level 1 assets were in actively traded markets where prices could be readily observed (think stocks and foreign exchange). Level 3, often described as “mark to make believe” was based on “unobservable inputs”. An accompanying rule required companies to put assets in the lowest numbered category, meaning most concrete valuation bucket, possible. In other words, no calling an asset Level 3 and valuing it as you damned well pleased when there was a more objective way of deriving a price.

So what happened? Bear Stearns crisis, FAS 157 is relaxed, banks can put assets in whatever category they choose. And what did we see? Huge increases in Level 3 assets, with banks contending markets had become illiquid and they therefore could not price a lot of stuff on their balance sheet.

If you believe all the increases in Level 3 assets were due to difficulty in getting prices or market inputs, I have a bridge I’d like to sell you.

These new FASB rules will require consolidation of QSPE, which is “qualified special purpose entities.” Off balance sheet entities were targeted to be killed as a result of Enron, but the financial services industry howled, since real estate securitizations and credit card conduits were off balance sheet vehicles. The compromise was QSPE, with the idea that a truly arm’s length entity like a real estate securitization, with no recourse to the parent if the vehicle go tin trouble, should be OK. Of course, that created a second set of messes, that assets, like subprime loans, which were not suitable for the “Q” treatment (accountants like to say “not Q-able”) were nevertheless put in these very sort of entities (this is one of the many reasons we are having difficulty with mortgage mods: these vehicles and the related arrangements were designed to be pretty passive once they were set up). But that is another topic.

The new FAS rules will eliminate the QSPE, which will have the effect of requiring banks to consolidate their off balance sheet vehicles. This makes perfect sense with credit cards, which are arguably not arm’s length (banks have in the past and are now intervening to rescue credit card trusts that have gotten in trouble. If they let one flounder, they would have a great deal of difficulty doing future deals). Consolidating these vehicles will reveal the banks to be even more thinly capitalized than they appear to be now. While investors in theory ought to understand the extent of bank off balance sheet exposures, in practice, few do. This change is likely to affect investor psychology and will probably lead lead banks to be far more stringent in extending credit. (An aside: I am surprised at mortgage securitizations being included. Banks have not acted to shore these up, and I can see a strong case for not consolidating them).

And that is why I expect this rule to be gutted shortly after launch, if it even gets that far. From Reuters:

The Federal Reserve’s program to revive the markets for U.S. securitized debt may be disrupted and credit to consumers choked off if planned accounting changes are implemented in 2010.

New rules by the Financial Accounting Standard Board, in the form of FAS 166 and 167, will force banks to put securitized debt back on balance sheets and retain continued exposure to the risks related to transferred financial assets, by eliminating the concept of a “qualifying special-purpose entity.”

The amount of capital available for making new loans to consumers for credit cards and mortgages may be restricted as a result.

“There are potentially huge consequences of the FASB changes. There are concerns over whether bank balance sheets will be stretched to the breaking point because of the amounts recorded on balance sheets,” said John Arnholz, partner at law firm Bingham McCutchen…..

“If you get off-balance sheet treatment, that provides a more efficient use of your balance sheet and has been the foundation of the structured finance market. Bringing it back on balance sheet would have an impact on all your various financial ratios,” said Mike Kagawa, portfolio manager at Payden & Rygel.

The American Securitization Forum recently asked U.S. bank regulatory agencies for a six-month moratorium relating to any changes in bank regulatory capital requirements resulting from the implementation of FASB’s 166 and 167…

The role that securitization has assumed in providing both consumers and businesses with credit is striking with currently over $12 trillion of outstanding securitized assets, including mortgage-backed securities, asset-backed securities and asset-backed commercial paper, the ASF said.

Industry experts said the accounting changes threaten to setback the huge strides made by the Fed’s emergency loan program, the Term Asset-Backed Securites Loan Facility, known as TALF, launched earlier this year.

Through the program, the Fed was able to bolster consumer lending and reopen the securitization market for consumer ABS, nearly shutdown by a deep credit crisis in 2008. The program also drove the high costs of funding dramatically lower.

However, issuance under the program may suffer a sharp setback if banks retrench from making new consumer loans amid capital constraints created by heavier debt loads and new accounting and administration costs. The increased costs to banks are likely to filter down to the consumer in the form of higher borrowing costs, as well….

William Bemis, portfolio manager at Aviva Investors said he expects asset back securities issuance to decline as a result of the new rules.

“Credit card issuance will decline going forward, primarily because the debt will be going on balance sheet now. The attractiveness of being able to get financing and remove assets off balance sheet will be less now,” said Bemis.

While banks may still opt to lend, some may not meet the ratings criteria under TALF, which requires top ratings from credit agencies, as they carry heftier debt loads.

“This could really stifle issuance under the program because you need two ‘AAA’ ratings to issue under TALF. The accounting rules have the potential to reduce lenders’ access to TALF, which the Fed has devoted $1 billion in funds to,” said another industry source.

Meanwhile, as the deadline looms closer, market participants are expecting the Federal Deposit Insurance Corp. to weigh in with further clarification on off-balance sheet rules for securitizations.

“People are getting discouraged because the clock is ticking and this is going to help dry up money that would be available for consumer lending. The Fed knows how important it is to keep credit flowing but it seem that’s not getting through to the FDIC.” said the industry source.

[Demeter]

58. “The ‘Democratization of Credit’ Is Over”

http://www.nakedcapitalism.com/2009/10/the-democratization-of-credit-is-over.html


The Wall Street Journal story, “The ‘Democratization of Credit’ Is Over — Now It’s Payback Time,” is a solid piece of reporting on how credit that was once offered liberally to lower income consumers has now left a very big hangover. It’s worse than with other income strata for an obvious reason, namely, low income consumers are almost by definition budget stressed, so adding debt to the mix has high odds of leading to a bad outcome (save when used prudently as a short-term bridge, or for a long-term investment, and even then only when conservative cash flow projections confirm the debt service is manageable).

I wish the story had more on how this looked from the lenders’ side, as in what their margins and default assumptions were, but even with the focus on borrowers, the article is revealing. It focuses on Karen King, who admits that, at $36,000 in debt, she had too much of a good time and is now paying for it, literally and figuratively.

But the story glosses over two issues. Of her $36,000 owed, $26,000 is student loans:

Her biggest chunk of debt, $26,000, stems from student loans to pay for her two-year associate’s degree from a community college — loans now in the hands of collectors. The remaining $10,000 or so includes old credit-card balances, debt to a store that rents furniture, utility bills and back taxes. Another obligation is $400 a month she contributes to the rent on her grandfather’s two-bedroom apartment, where her mother, uncle and sister also live.

The story dwells on the lifestyle she had (dining out 2-3 times a week, going to movies) that presumably was a big contributor to the $10,000 she now owes, but skips past the $26,000. Ms. King worked in a shoe store and now drives a tour bus for $13 an hour plus tips. Did that associate degree do her any good in the job market? And I have to wonder if the student debt, which she was not doubt told was sensible (”an investment in your future”) desensitized her to taking on more debt. I admittedly came of age in the era before education inflation kicked in, but my mother recently found one of the old bills from college. I made some crude assumptions and compounded forward the Harvard tuition, room and board forward, and it came a bit over $20,000 a year in current dollars. Ms. King no doubt overspent, but a more important contributor to her current mess is that she threw away a lot of money on a useless degree.

The second interesting bit is she has decided not to declare bankruptcy, the reason apparently being that her impaired credit record has led her to be turned down for jobs. Her debt management decisions are driven by the impact on that scorecard:

When a utility to which she owed $300 offered to settle for less, Ms. King says, she declined, because she was told an overdue bill takes longer to come off a person’s credit report when it is settled for a partial payment.

She rejected any idea of a bankruptcy filing for the same reason. “It takes forever to come off” the credit report, she says.

Before the way to punish debtors was to send them to debtors prison. Now it appears to be to restrict their access to work. Perverse, but effective.

[Demeter]

57. El-Erian Reiterates Skeptical Views As Stocks Grind Higher (And More Bulls v. Bears)

http://www.nakedcapitalism.com/2009/10/el-erian-reiterates-skeptical-views-as-stocks-grind-higher.html


Bloomberg reports that former Harvard Fund Management CEO, now Pimco CEO Mohammed El-Erian does not buy the idea that US is returning to normal any time soon. El-Erian in particular took issue with some of Larry Summers’ sunnier prognostications:

El-Erian likened Summers’s view of the economy to a three- stage rocket attempting to escape Earth’s gravity to reach space, with government spending programs marking the first boost to economic growth, inventory reductions the second, and consumer demand the final booster stage.

Summers “has this concept of ‘escape velocity,’” El-Erian said at a meeting of financial market professionals in Toronto today. “We don’t have enough to achieve escape velocity.”

El-Erian, who co-heads the world’s largest bond fund manager with Bill Gross, has said the U.S. is facing a sustained period of annual growth of about 2 percent where credit and jobs are less plentiful than in the past, a scenario he called the “new normal.”…

El-Erian’s ideas about a “new normal” have been shared by Lawrence Fink, chief executive officer of New York-based asset manager BlackRock Inc. BlackRock will become the world’s largest manager of bond funds when it completes the purchase of Barclays Global Investors this year.

The “new normal” includes a higher level of government intervention in the economy, with new rules requiring higher capital levels for businesses and stricter reporting requirements, El-Erian said. That will drive up business costs, he said.

El-Erian’s take is wildly upbeat compared to the October 5 report from David Rosenberg, former North American economist for Merrill, now safely ensconced in his native Canada at Gluskin Sheff. Rosenberg is admittedly has a dour outlook, but he also reads the data very closely and with a well honed sense of historical patterns. Some snippets (hat tip reader Scott, no online source):

Nonfarm payrolls in the U.S. slid 263,000 in September, but the details were even more sombre. The Household Survey showed a massive 785,000 plunge in September, and employment on this score has now slid by 1.2 million in the past two months….the Household survey leads the cycle and typically bottoms and peaks before the Payroll survey do…. never before has a recession ended with civilian employment declining this much (on average, it goes down around 70,000 or almost negligible the month the recession ends)….

There were absolutely no redeeming features in the data. The private nonfarm diffusion index sank to 31.9 in September from 34.9 in August (the manufacturing diffusion index fell to 22.9 from 28.3 in August) which means that for every company adding to their staff loads, more than two are cutting back. The labour force contracted by 571,000 and has plunged now by 1.1 million since May. That again is a sign of the labour market seizing up, which is very disturbing when you consider all the government efforts to stem the tide last quarter – from housing subsidies, to cash-for-clunkers, to mortgage modifications…

It is so difficult now to find a job that a record 36% of the ranks of those unemployed have been searching with futility now for at least six months. In “normal” recessions since 1950, this ratio peaked at just over 20%…..the chances that we see a 13% peak unemployment rate this cycle is far from a ludicrous proposition at this point; and just in time for the mid-term elections.

Yves here. I have been arguing unemployment would peak at over 11%, simply based on Reinhart/Rogoff’s norms for severe financial crises (some of those countries had better responses than ours, and none were faced with a synchronized global downturn, so relying on precedent here would seem to be optimistic). Back to Rosenberg:

The share of the unemployed who are not on layoff is at record 54.3% as of September. In prior recessions, this ratio would barely pierce the 40% mark. In number terms, we are talking about 8.5 million Americans who have lost their job due to permanent shutdowns, a figure that is double what you typically see at the peak of the recession….I think there is a nontrivial chance we see zero percent real GDP growth in Q4 (consensus is around 3%)….

the employment/population ratio (the “employment rate”) has fallen to a quarter-century low of 58.8%; it peaked at 63.4% in 2007. To get back to a cycle high, we need to create more than 10 million jobs. Before that happens, deflationary pressures are going to trump whatever inflationary risks arise from the Fed, Congress and the White House.

The last time the ratio was this low was back in December 1983. Back then, household debt per capita was $9,900; today it is six times larger at $58,000. At the margin, one has to wonder what is going to be paid for first. The debt-service payments coming out of the paycheck are looking increasingly vulnerable. Default rates are extremely likely to worsen for the foreseeable future; groceries will not be sacrificed; however, credit will.

This is all sobering stuff. Rosenberg issued an equally downbeat piece later in the week that commented on valuations (again via Scott). Key factoids:

On an operating (“scrubbed”) basis, the trailing P/E multiple on the S&P 500 has expanded a massive 10 points from the March lows, to stand at 27.6x.

While we will not belabour the point, when all the write-downs are included, the trailing P/E on “reported” earnings just widened to its highest levels in recorded history of nearly 140x, which is three times the levels prevailing during the height of the tech bubble….

Bullish analysts like to dismiss the actual earnings because they are “depressed” and include too many writeoffs, which, of course, will never occur again.

The consensus is usually overly-optimistic, which is why so many analysts love to do their analysis on “forward” earnings since the market almost always looks “attractively priced” on that basis. The reality is that the forward P/E multiple is now at 16.2x after bottoming at 11.7x at the market lows. The multiple has not been this high since February 2005 when the economic expansion was already nearly four-years old! Today’s stock market, on this basis, is now being priced as if we are late in the cycle — forget this mid-cycle valuation stuff.

Reader Dwight pointed to an outbreak of bearish calls today on CNBC:

Risk of Double Dip, Investor ‘Bloodbath‘ (from Carl Icahn)

Dollar Fall Can ‘Destabilize Markets’ Like 2008 (Art Cashin of UBS)

Dow Will Fall to 6,300 by Year End (John Lekas of Leader Capital)

Of course, one could cynically note that this equal opportunity programming started on a Friday afternoon before a long weekend.

Jesse, generally of the downbeat persuasion based on fundamentals, but not afraid of a tactical long, points out that mutual funds are now heavily invested: Mutual Funds Are at Cash Levels Not Seen Since the 2007 Market Top.
But Barry Ritholtz argues in “The Most Hated Rally in Wall Street History,” that the fact that so many are skeptical means the equity rally has further to go.

Just remember: for mere mortals and pros, market timing is rarely a winning strategy.

TO LINK TO REFERRED ARTICLES, CLICK ON LINK AT TOP

[Demeter]

59. Why One Bubble Burst Deserves Another

http://english.caijing.com.cn/2009-09-28/110267252.html

By Andy Xie, guest economist to Caijing and a board member of Rosetta Stone Advisors Ltd.

(Caijing Magazine) Lehman Brothers collapsed one year ago. The U.S. government refused a bailout and warned other financial institutions to be careful. The government felt other institutions had already severed their dealings with Lehman's investment network, and that a collapse could be walled in.

Little did the government realize that the whole financial system was one giant Lehman. The securities firm borrowed short-term money to punt in risky and illiquid assets. The debt market supported the financial sector, believing the government would bail out everyone in a crisis. But when Lehman was allowed to collapse, the market's faith was shaken.

The debt market refused to roll over financing for financial institutions. Of course, financial institutions couldn't unload assets to pay off debts. The whole financial system started teetering. Eventually, governments and central banks were forced to bail out everyone with direct lending or guarantees.

The Lehman collapse strategy backfired. Governments were forced to make implicit guarantees explicit. Ever since, no one has dared argue about letting a major financial institution go bankrupt. The debt market is supporting financial institutions again only because they are confident in government guarantees. The government lost in the Lehman saga, and Wall Street won.

So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars -- probably more than US$ 10 trillion when we get the final tally -- to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.

First, let's look at the most basic objective of deleveraging the financial sector. Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 -- about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding.

Second, financial institutions are operating as before. Institutions led in reporting profit gains in the first half 2009 during a period of global economic contraction. When corporate earnings expand in a shrinking economy, redistribution plays a role. Most of these strong earnings came from trading income, which is really all about getting in and out of financial markets at the right time. With assets backed up by US$ 16.5 trillion in debt, a 1 percent asset appreciation would lead to US$ 16.5 billion in profits. Considering how much financial markets rose in the first half, strong profits were easy to imagine.

Trading gains are a form of income redistribution. In the best scenario, smart traders buy assets ahead of others because they see a stronger economy ahead. Such redistribution comes from giving a bigger share of the future growth to those who are willing to take risk ahead of others. Past experience, however, demonstrates that most trading profits involve redistributions from many to a few in zero-sum bubbles. The trick is to get the credulous masses to join the bubble game at high prices. When the bubble bursts, even though asset prices may be the same as they were at the beginning, most people lose money to the few. What's occurring now is another bubble that is again redistributing income from the masses to the few.

[Demeter]

60. Ben Bernanke... only you could be so bold

http://accruedint.blogspot.com/2009/10/ben-bernanke-only-you-could-be-so-bold.html

I'm going to give you series of number pairs. Don't worry about what they are, I don't want you to bring any biases into this. Just consider the pattern.

* 2, 4
* 4, 6.5
* 1, 2
* 4, 6.5
* 6.5, 30
* 1, 2
* 6.5, 30
* 2, 4
* 4, 6.5
* 6.5, 30
* 4, 6.5
* 1, 2
* 6.5, 30
* 2, 4
* 4, 6.5
* 1, 2
* 6.5, 30
* 4, 6.5

Is there an exact pattern? If so, I don't see it. But we do see three obvious facts. First there is a discrete set of possible number pairs. Second, each of the pairs seem to show up with fair regularity. Third, the pairs never repeat twice in a row.

So if you had to guess, which pair would you expect next? 2, 4 right? Just because its the pair that hasn't appeared for the longest.

Alright, new topic.

Fannie Mae issues "benchmark" bonds each month, or at least they plan to do so. These are large, non-callable issues of at least $3 billion. At one time, that might have included anything from 2, 3, 5, 10 or 30-year maturities, although I don't believe they've done anything longer than 5-years in a while. Regardless, we knew Fannie would be announcing a benchmark issue on October 7th for several months. Here is a release dating to March which shows 10/7 as a benchmark issue date. For what its worth, it took me 13 seconds to find proof that Fannie was planning to issue on 10/7 for months.

Now let's bring this home. The "pattern" above is the maturity ranges the Fed has been buying as part of its Agency buy-back program since June. Remember these buybacks are every Thursday. Have been for months. Everyone knows what day the buyback happens, we just don't know exactly what the maturity range will be. But if you look at the pattern above, anyone with a 3rd grade education could guess that 2-4 was a very strong candidate. And by the way, the Fed basically offers to buy back any benchmark bond within that maturity band. So it would have been unusual for the Fed not to include the newly issued Fannie 2-year benchmark.

If the Fed is going to buy agency bonds every Thursday, then it was destined for months that the Fed would be doing a buyback the day after Fannie did their benchmark issuance. In fact, as long as Fannie is going to issue benchmark bonds once a month and the Fed is going to do buybacks once a week, it was inevitable that one of the buybacks would happen right around a new issuance. This isn't a conspiracy, its simple math.

So at best, you can argue that Fannie choose to do a 2-year issue hoping that would be what the Fed was going to buy back. Or I suppose you could argue that the Fed told Fannie Mae which set of securities they were buying back. Gave them a heads up. Still you have to wonder of what great advantage such a heads up would be. Looking back at the pattern, if the Fed didn't buy 2-year agency bonds this week, certainly it would be next week. Wall Street would know that.

So let's remember the three inescapable conclusions here. As long as the Fed is going to be buying Agency debentures in already established pattern, and as long as Fannie Mae is going to be doing monthly issuance of benchmark securities, it was bound to happen that issuance and buyback would occur in very close proximity. Wall Street has been aware of both the timing of the buyback and the timing of Fannie's new issue for months.

So why do I bring this up? Because of this post at Zero Hedge. Basically saying that the Fed's decision to buy the newly issued Fannie bond was "blatant" monetization. The author claims to be "dumbfounded" that the fed would be so bold. The Imperial Senate will not sit still for this!

I don't have a problem with claims that the Fed is conducting de facto monetization through its QE efforts. I don't agree. I think Quantitative Easing is a legitimate monetary policy tool. But I readily admit that the distance between QE and monetization is no more than three meters wide. I think the Fed is still on the correct side of that line, but it is a perfectly legitimate and important public policy debate. I'm open minded to the possibility that the Fed could cross that line at some point. I welcome rational and objective discussion aimed at convincing me and others that the line has already been crossed.

To be fair, I don't read Zero Hedge, so I am loathe to generalize about the opinions held on that site. However its obvious that the author is of the opinion that the Fed has crossed the line. Fine. Let's hear the case. But instead, Zero Hedge tries to link this particular buy back with debt monetization, when I've clearly shown above that this particular buy back doesn't indicate anything either way. Zero Hedge is presenting non-evidence as evidence.

So one of two things must be going on. Either Zero Hedge is ignorant of all the above facts, or he's intentionally ignoring the facts to make his argument more sensationalist.

And that's is what is so incredibly frustrating. We can't have rational debate in America any more. No one wants to coldly and objectively discuss facts. Reasonable minds can differ. I've looked at the factual evidence, used my economic training and my bond trading experience and concluded that what the Fed is doing doesn't amount to monetization. Someone else could look at the same evidence and come to a different conclusion. Wouldn't it be nice if the blogosphere was full of people explaining their point of view using objective facts in the spirit of reasoned debate?

But that doesn't happen, because that doesn't generate hits. To generate hits you need to be sensationalist. Everything has to be a conspiracy or a pending disaster. And no one gives a gundar's ear about credibility. So why should a blogger bother checking facts? Why bother asking a bond trader about how these agency buy backs work, just to make sure your first read of the situation is correct? No. Better to just run with the piece assuming conspiracy because your readers will assume credibility. As of this writing, Zero Hedge's post on the agency buyback has generated over 2,000 hits. A quick Google search reveals at least 13 websites linking to the Zero Hedge piece. At a glance all are supportive of Zero Hedge's position. No one questions anything.

And that's a summary of just about every debate here in America. Both sides feel the need to sensationalize their argument, facts be damned. So the debate devolves into an argument about facts rather than a debate on the merits of an argument. The left says x millions of Americans don't have health insurance. The right says no! Its more like a much smaller y millions. And around and around we go throwing out massaged number after massaged number, never actually getting to discuss the real issue of whether government should be providing health care.

Let me be very clear. Even if you the Fed was trying to monetize the Federal debt, this particular agency buy back shouldn't strengthen that view. The Fed is conducting its agency buy back program the same way it always has. Fannie Mae is conducting its debt issuance the same way it always has. No matter what your view, this is a non-event. Don't write me a bunch of e-mails saying that I don't get it. I understand the monetization argument. I really do. This particular fact has nothing to do with anything.

By presenting this non-evidence as evidence, Zero Hedge is only succeeding in being inflammatory. He's riling up people who already feel a certain way. That kind of thing makes any hope of a rational debate fade. There are those that hail the internet as this sort of modern day salon. Where any voice can be heard, creating a Renaissance of intelligent thought. Sadly I think its just the opposite.

[DemReadingDU]

73. that was interesting

I have enough brainwork trying to do sudoko puzzles

[Demeter]

61. Lying Is Wrong

http://www.creditslips.org/creditslips/2009/10/lying-is-wrong-.html

You might think that we all caught the lesson that lying is wrong somewhere between Sunday School and warnings that Santa only brings presents to good boys and girls. But an Ohio federal court recently caught a debt buyer making a a load of lies--under oath, no less. The opinion in Midland Funding v. Brent shows the underbelly of debt collection and just how far such high-volume, routinized, computerized processes have strayed from the idealized litigation model of truth-telling.

The case began when a debt buyer purchased defaulted credit card debt and filed suit against a consumer. The debt buyer's law firm used the debt buyer's "You've Got Claims" system (really, that is its name) to request an affidavit from the debt buyer to file in support of the collection case. Where do such affidavits come from? According to later testimony of the debt buyer's employee who signs 200 to 400 affidavits per day, "they just come from the printer" (again, I'm not making this up.) The court couldn't square that answer with the first paragraph of the affidavit in which the employee attests that "I make the statements herein based upon my personal knowledge." The court goes on to describe the affiant's lack of knowledge of nearly all the facts in the affidavit, noting that the affiant did not retain the attorney, was not familiar with the account, did not know the last time a payment was made, did not know if the consumer was a minor or mentally incapacitated, and did not know the outstanding balance. As an additional disability, the affidavit wasn't actually signed in the presence of a notary, making it improperly sworn. The court ruled that the use of the false, deceptive and misleading affidavit in the debt collection suit was a violation of the Fair Debt Collection Practices Act.

The law in Midland is boring. It is wrong to lie to a court, and it is wrong to lie in a debt collection. The action here is that there actually was an action. Some consumer went to the effort to put a debt buyer's affidavit to the test, leading to the conclusion that the process for generating such affidavits was sorely lacking. How many debt buyers, or default mortgage servicers, also have employees who get their affidavits "from the printer?" Or who have "personal knowledge" of consumers they have never met and of accounts they have never reviewed? Or who send affidavits "off to be notarized?" If the processes used here are typical of the industry, there could be a lot of liars out of luck.

[Demeter]

62. U.S. states suffer "unbelievable" revenue shortages

http://news.yahoo.com/s/nm/20091009/pl_nm/us_usa_state_budgets

I HAVE TO THINK ONLY PEOPLE IN DEEPEST DENIAL WOULD FIND IT UNBELIEVABLE

[Demeter]

63. I Posted Yves Smith's Take on the Nobel Peace Prize

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x488002

and it's getting brutally bashed by the True Believers. If you are of the skeptical persuasion, and want to give it some love (also known as a rec), I would be grateful.

Something about the Kingdom of the Blind, and One Born Every Minute, keeps rolling through my head...is this the latest bubble in the US political economy?

[Demeter]

64. Is the consumer really deleveraging?

http://www.nakedcapitalism.com/2009/10/is-the-consumer-really-deleveraging.html

Submitted by Edward Harrison of Credit Writedowns

Why is everyone saying consumer credit is falling? It’s not. But, everywhere I look, everybody is saying it is.

I would like to be true to the data and not just take the government’s seasonally-adjusted numbers at face value.

Judge for yourself. Here’s the data:

This is what everyone is focused on – the seasonally-adjusted data. The part in red shows consumer credit down $12 billion.

GO TO LINK TO SEE REALLY TINY TABLE, AND CLICK ON IT TO BE ABLE TO ACTUALLY READ IT

But, what about the actual unadjusted data?

YOU KNOW THE DRILL, SEE PREVIOUS EDITORIAL NOTE

What do you know, it’s up $7 billion. It is indeed down $4 billion for revolving credit as banks are cutting credit card limits. But, non-revolving credit is up over $11 billion. It was decreasing and is down 4.4% year-on-year (see the section highlighted in green above), but that ended this month.

Yes, I too believed that consumers were poised to begin deleveraging, but with stocks up 60%, interest rates at record lows, and house price declines stalled, why would you do that?

Conclusion: consumer credit is increasing, not decreasing. I wish people would actually look at the data.

The question you should be asking is not whether consumer credit is increasing, but whether it will continue to do so after August and cash for clunkers.

And I did a full review of the asset-based economy during economic turns yesterday. All indications are that the consumer is not deleveraging as I would have anticipated...

[Demeter]

67. The FDIC is Not Buying What Citi is Selling

http://www.nakedcapitalism.com/2009/10/the-fdic-is-not-buying-what-citi-is-selling.html

This news item verges on funny.

Readers may have taken note of the fact that Citigroup was ordered by the FDIC to conduct a review of management. The floundering bank hired Egon Zehnder. The New York Times indicated that the resulting report was awfully favorable, given that the bank is one of the biggest messes in the international financial arena. If management is not to blame, then who is?

The management review, requested by federal regulators after months of turmoil, gave Citigroup’s senior executives good marks over all and took a satisfactory view of the leadership of Vikram S. Pandit, the chief executive, said the person and others with knowledge of the situation. Still, the report took a harsher stance on some of Mr. Pandit’s top deputies.

As we remarked yesterday, “Stress tests redux. If this is the conclusion, clearly there is something wrong with the scorecard.”
It’s pretty obvious what happened here. Egon Zehnder is a search firm. Search firms have recently gotten into the very curious business of doing senior management assessments in recent years. No one would deem it logical to engage a mergers and acquisitions banker to evaluate how well a business was performing, yet we have people with similarly narrow competence making broad judgments that are beyond their expertise, their claims to the contrary. But this shamanism is well accepted in boardrooms these days, since having outside parties vet decisions is yet another way to shed responsibility.

So how does this look from the Egon Zehnder end? Follow the money. Citi is a big meal ticket. The FDIC, who asked for this review, is in no way, shape, or form the client. The purpose of this exercise is to deliver a credible sounding report without annoying Citi so Zehnder can use this entree to deepen its relationship and win search mandates, or at least more management reviews.

The problem is that a report that would not ruffle Citi was unlikely to be seen as credible by anyone with an operating brain cell, including the FDIC. From today’s Wall Street Journal:

Some officials at the agency have expressed doubts about the rigor of the report, which was based partly on interviews of Citigroup executives who were asked to rate the effectiveness of their colleagues, these people said. While the findings still are being reviewed, the skeptical reaction could cause the FDIC to give the report little weight during the next regulatory assessment of the New York firm’s management….

The report awarded strong overall marks to Citigroup’s management team and to Chief Executive Vikram Pandit in particular….

The FDIC began sifting through the findings this week.

People familiar with the situation said the FDIC signed off on Citigroup’s selection of Egon Zehnder to conduct the management review….

Now, though, some FDIC officials are skeptical of the findings. One person close to the agency described the outside report as “a total whitewashing.” Some agency officials also are having second thoughts about the qualifications of Egon Zehnder, which largely runs executive searches for clients.

[Demeter]

68. Told You So (Again): Bank Lending Posted by AllentownJake, crossposted here

http://market-ticker.denninger.net/archives/1501-Told-You-So-Again-Bank-Lending.html


Time for one of these....

According to weekly figures provided by the Federal Reserve, total loans at commercial banks have fallen at a 19% annual rate over the past three months, while loans to businesses have dropped at a 28% annualized pace.

Gee, I wonder why? Here's what the Fed's spew has been:

Despite more than a trillion dollars from the Fed and from the Troubled Asset Relief Program, "the banking system has still not fully recovered," New York Fed President Bill Dudley said in a speech this week.

The real problem is that banks continue to hide bad paper, encouraged in their outrageous and indeed I'd argue fraudulent accounting by the government and Fed. By refusing to account for losses (such as blown real estate loans) they not only lock up inventory that should be sold off at the market price to a willing buyer (thereby deploying it productively) they also lock up credit capacity and raise everyone else's cost of credit in an outrageous cross-subsidization of blown loans with performing ones.

The solution today is the same as it was in 2007 and 2008, as I have written about repeatedly:

Force all institutions to recognize their marks. If this results in insolvency, so be it. Close those banks, including the really big ones, and sell off their assets into the market at whatever price they will bring.

The existing and sound regional and local banks, along with the credit unions, will step in to fill this gap. They will profit, the cost of credit for legitimate, sound borrowers will come down, the monopoly of big banks will be broken and while you're at it lock up those who cooked the books for violations of Sarbanes-Oxley.

But no! Both Congress and The Fed are more interested in protecting the guilty than resolving the problem and allowing the economy to recover. They have been bought and paid for, and continue to spout the lie that in playing "extend and pretend" we can somehow manage to paper over all the bad debt without assigning anyone the loss and the economy will recover like nothing ever happened.

Santa Claus only exists in fairy tales folks.

[Demeter]

71. Britain snatches the financial crown from the US

http://business.timesonline.co.uk/tol/business/economics/article6866989.ece

Britain has toppled the United States as the world’s leading financial centre, according to the latest league table from the World Economic Forum (WEF), but the gloss was tarnished as the UK scored worse than Nigeria, Panama and Bangladesh for financial stability.

Britain was elevated from second to first place, while the US dropped to third place in the overall rankings, with both countries scoring less well than last year, as the financial crisis exposed their frailties.

Australia rose nine rungs to second place, while Singapore and Hong Kong also did well, rising to fourth and fifth respectively. France and Germany were both relegated out of the top ten.

The UK was buoyed by the relative strength of its banking and non-banking activities, such as insurance, said the forum, which each year gives scores to countries according to factors, policies and institutions that lead to effective financial intermediation — matching savers with borrowers — and deep and broad access to capital.

Britain’s comparative success came despite a poor score for financial stability, one of seven categories of performance on which countries were assessed. For financial stability, the forum identified as problems worries about exchange rate stability, the frequency of banking crises, the manageability of private and government debt and the vulnerability to property bubbles. It ranked Britain 37th out of 55 nations in this category.

This left the UK trailing a string of countries often regarded as economically volatile, including Thailand, Brazil and Poland. Norway, Switzerland and Hong Kong took the three top places for financial stability.

The long dominance of the UK and US at the top of the tables was now in doubt, the forum said. Kevin Steinberg, chief operating officer of the forum, said: “The UK and US may still show leadership in the rankings, but their significant drops in score show increasing weakness and imply their leadership may be in jeopardy.”

Britain’s performance in financial stability was described as “very poor” by the WEF, where it was ranked 44th out of 55 for currency stability, 45th for banking system stability, 40th for the manageability of private debts and 39th for the manageability of government debt.

The WEF, best known for its annual gathering of business and political leaders in Davos, also said that Britain needed to improve its institutional environment, ranking a mediocre 28th for supervisory power and 25th for public trust of politicians. Taxation, where Britain ranked 20th, was also seen as an area of weakness.

Financial development is regarded as crucial for wider economic growth and greater welfare and prosperity. But the forum also pointed out that countries experiencing occasional financial crises still achieved higher overall economic growth than those with more stable financial conditions.

The City of London and Wall Street have been rivals for the crown of top financial centre for years, with some arguing that London had started to overtake New York just before the crisis, only to see glory recede as some American investment banks were seen retreating from London back to New York.

Country by country 2009 (2008)

United Kingdom 1 (2)

Australia 2 (11)

United States 3 (1)

Singapore 4 (10)

Hong Kong 5 (8)

Canada 6 (5)

Switzerland 7 (7)

The Netherlands 8 (9)

Japan 9 (4)

Denmark 10 (n/a)

Source: World Economic Forum

[Demeter]

72. There's No End of Interesting Data and Commentary, But Reality Calls

See you sometime after supper, or Sunday, at least. Keep them coming, folks!

I apologize for the lack of musical interlude--if you've ever heard Scandinavian drinking songs (and I have, even though I can't drink spirits) you will know they are nothing worth posting....

[DemReadingDU]

75. Satyajit Das: Dr. Jekyll and Mr. Hyde Finance

9/28/09 Satyajit Das: Dr. Jekyll and Mr. Hyde Finance

About one year ago, AIG was brought to the brink of bankruptcy as a result its exposure under credit default swaps (“CDS”) (a form of credit insurance). Asset backed securities and Collateralised Debt Obligations (“CDOs”), which lived up to its cheery nickname Chernobyl Death Obligation, brought the financial system to the edge of collapse.

Volatile equity and currency markets caused problems with exotic option “accumulators” (known to traders as “I-will-kill-you-later”). Numerous investors and corporations are bunkered down with their lawyers hoping to litigate their way out of significant losses on “hedges” pleading familiar defenses – “I did not understand the risks” or “I was misled about the risks by the bank”.

If you assumed that these events meant that wild beast of derivatives would be tamed, then you would be wrong. History tells us that there will be cosmetic changes to the functioning of the market but business as usual will resume in the not too distant future. Problems with derivative problems of portfolio insurance in 1987 and Long Term Capital Management (“LTCM”) in 1998 did not lead to fundamental changes in the operation of derivatives markets.
.
.
Warren Buffet once described bankers in the following terms: “Wall Street never voluntarily abandons a highly profitable field. Years ago… a fellow down on Wall Street…was talking about the evils of drugs…he ranted on for 15 or 20 minutes to a small crowd…then…he said: “Do you have any questions?” One bright investment banking type said to him: “yeah, who makes the needles?

Derivatives and debt are the needles of finance and bankers will continue to supply them to all the Dr. Jekyll’s and Mr. Hyde’s alike for the foreseeable future as long as there is a buck to be made in the trade.

more...
http://www.wilmott.com/blogs/satyajitdas/index.cfm/2009/9/28

[DemReadingDU]

76. Satyajit Das: Still The Masters of the Universe

10/4/09 Satyajit Das: Still The Masters of the Universe

Tom Wolfe writing in Bonfire of the Vanities created the term – ‘Masters of the Universe’: “He considered himself part of the new era and the new breed, a Wall Street egalitarian, a Master of the Universe, who was only a respecter of performance.” Wall Street bond trader Sherman McCoy, the original Master of the Universe, came to personify the avariciousness and self-aggrandisement of financiers.

Human history is a sequence of “ations” – civilisation, industrialisation, urbanisation, globalisation interspersed with actual or threatened “annihilation”. The most recent “ation” is “financialisation” - the conversion of everything into monetary form (also known as another “ation” – “monetisation”).

New paper economies emerged directly from the demise of the gold standard that removed restrictions on the ability to create money, especially debt. Finance inexorably displaced industry with trading and speculation becoming major activities as financial engineering replaced real engineering. In an earlier age, Heinrich Heine, the German poet, too had identified the change: “Money is the God of our time….” The rise of financiers is intimately linked to this financialisation of the global economy.

Financial innovations such as securitisation (the packaging up and sale of loans) and derivatives (effectively risk insurance) enabled banks to extend more credit. Banks could literally by increasing throughput, making more loans and selling them off to eager investors, magically increase returns to their investors. Bankers had invented a ‘money machine’.
.
.
The “finance government complex” (dubbed “Government Sachs” by its critics) and financiers have proved exquisite masters of the game of privatisation of profits and socialisation of losses. Many countries now practice Chinese socialism with Western characteristics.

A year after the collapse of Lehman, the near collapse of AIG and the grande mal seizure in financial markets, the Masters of the Universe are still firmly in charge. As Giuseppe di Lampedusa, author of The Leopard knew: “everything must change so that everything can stay the same.”

more...
http://www.wilmott.com/blogs/satyajitdas/index.cfm/2009/10/4

[Demeter]

77. Two excellent posts!

[Demeter]

80. It's Sunday, and I'll Be Doing a Social Butterfly Until after dinner

but I do hope to get a few more cogent articles in before bedtime...that doesn't mean you can't post whatever you've found, of course! See you around 6 or 7 or so!

[Demeter]

91. The Social Butterfly Overflew Her Wings

I ended up falling asleep in somebody's living room at 3:30. Never could burn the candle at both ends...

Hope you all have a good and safe week, and we'll gather around the campfire again come Friday!

[DemReadingDU]

92. You deserved the rest

Thanks for the weekend thread!