Weekend Economists' "If We Had a Hammer" Edition, September 18-20, 2009

Sorry to be tardy, folks. The week caught up with me, and Mr. Sandman did his best to see that I catch up with myself.

And what a loss this week has brought us. A loss not in dollars, but sense.

Mary Travers, the woman who brought us through the 60's with some hope intact, has passed into history, leaving behind her a legacy to be honored: activism, art, and understanding. But let her music say it all:

http://www.youtube.com/watch?v=_UKvpONl3No



The group was created and managed by Albert Grossman, who sought to create a folk "supergroup" by bringing together "a tall blonde (Mary Travers), a funny guy (Paul Stookey), and a good-looking guy (Peter Yarrow)". He launched the group in 1961, booking them into The Bitter End, a coffee house and popular folk venue in New York City's Greenwich Village. They recorded their first album, Peter, Paul and Mary, the following year. It included "500 Miles", "Lemon Tree", and the Pete Seeger hit tunes "If I Had a Hammer" (subtitled "(The Hammer Song)") and "Where Have All the Flowers Gone?". The album was listed in the Billboard Magazine Top Ten for 10 months, including 7 weeks in the #1 position. It remained a main catalog seller for decades to come, eventually sold over two million copies - earning Double Platinum certification from the RIAA - in the United States alone.

http://en.wikipedia.org/wiki/Peter,_Paul_and_Mary

Rest in Peace, Mary. We will soldier on.

Federal and state regulators today closed Irwin Union Bank, F.S.B., Louisville, Kentucky, and Irwin Union Bank and Trust Company, Columbus, Indiana, respectively. The institutions are banking subsidiaries of Irwin Financial Corporation, Columbus, Indiana. The regulators immediately named the Federal Deposit Insurance Corporation (FDIC) as the receiver for the banks. To protect depositors, the FDIC entered into a purchase and assumption agreement with First Financial Bank, National Association, Hamilton, Ohio, to assume all of the deposits of the two banks.

Irwin Union Bank and Trust Company, Columbus, Indiana, was closed by the Indiana Department of Financial Institutions. As of August 31, 2009, it had total assets of $2.7 billion and total deposits of approximately $2.1 billion. Irwin Union Bank, F.S.B., Louisville, Kentucky, was closed by the Office of Thrift Supervision. As of August 31, 2009, it had total assets of $493 million and total deposits of approximately $441 million.

Irwin Union B&T Company and Irwin Union Bank, F.S.B. had 27 locations between them and will reopen during their normal business hours beginning Saturday as branches of First Financial Bank...

First Financial Bank will pay the FDIC a premium of one percent to assume all of the deposits of Irwin Union B&T Company and zero percent for those of Irwin Union Bank, F.S.B. In addition to assuming all of the deposits of the failed institutions, First Financial Bank agreed to purchase essentially all of their assets.

The FDIC and First Financial Bank entered into a loss-share transaction on approximately $2.5 billion of the assets of Irwin Union B&T Company and Irwin Union Bank, F.S.B. First Financial Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share arrangement is projected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers. For more information on loss-share transactions, please visit: http://www.fdic.gov/bank/individual/failed/lossshare/index.html...

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) for both institutions will be $850 million. First Financial Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's DIF compared to alternatives. The failure of the two institutions brings the nation's total number this year to 94. This was the first failure of the year in Indiana and Kentucky. The last FDIC-insured institutions closed in the respective states were The Rushville National Bank, Rushville, Indiana, on December 18, 1992, and Future Federal Savings Bank, Louisville, Kentucky, on August 30, 1991.

9/18/09 Lack of Tarp Has Some Community Banks Struggling
The Real 'Scarlet Letter' Was Not Receiving Tarp
By Robert Barba, American Banker

A year after the Troubled Asset Relief Program came along, a growing number of community banks the government spurned are on the brink of failure.

Consider Irwin Financial Corp., which has been lobbying unsuccessfully since spring for the Treasury Department to create a Tarp-for-strugglers option.

The $3.3 billion-asset company reported Wednesday that it has a regulatory order requiring its bank unit to boost capital dramatically and shed a third of its brokered deposits by the end of the month.

Irwin conceded that it has "no realistic prospect" of satisfying the order.

Though Jamie Dimon, JPMorgan Chase & Co.'s chief executive, famously compared having Tarp funds to wearing a scarlet letter, observers said companies unable to get government capital are the ones truly being scorned.

They cannot get capital elsewhere and, like Irwin, more are running out of options to save themselves.


"Intended or not, the Treasury identified who it sees as the long-term winners with Tarp. If you applied and didn't get it, you are not viewed as a long-term survivor," said Timothy Koch, professor of finance at the University of South Carolina and president of the Graduate School of Banking at the University of Colorado. "The regulators are really putting them behind the eight ball. They have to struggle to survive. At best, they might muddle their way through this."

Some question the strategy of allowing banks to fail, if Tarp would make them viable.


edit to add a couple more paragraphs:
In recent months many undercapitalized companies that had applied for Tarp gave up, including the $2.4 billion-asset Cascade Bancorp Inc. in Bend, Ore. Others have not publicly reported the status of their Tarp applications, among them the $18 billion-asset, privately held FBOP Corp. in Oak Park, Ill.

Eliot Stark, a managing director at the investment bank Capital Insight Partners Inc., said he expects that nearly all struggling banks have tried to get Tarp. "If you look at the banks with low capital ratios and some type of regulatory problem, you can pretty much assume they applied for Tarp and didn't get it," he said. "A small number may have not applied for a philosophical reason, but if you are really desperate and have no access to any other capital, why wouldn't you go after it?"

more...
http://www.bankinvestmentconsultant.com/news/lack-of-tarp-community-banks-2663934-1.html

And now the restrictions in place against the smaller, more local banks doom them to failure.

But hey, at least the Too Big To Fail Crowd can buy them up, if they so desire.

It looks more and more like what this new Administration is really about is handing the wealthiest most of the pickings of this society.

If you are uninsured, hey we'll force you to buy exorbitantly priced insurance.

If you are a regional bank manager, hey you better get money from somewhere so you can be approved and not gobbled up. Of course, you won't be lent that money, but at least we gave you the change to buy a half dozen mega lottery tickets before we sent the FDIC in after you!

But with nothin' to say!

Glad of the company. You could repost your piece about Mary Travers, if you like.

http://www.nakedcapitalism.com/2009/09/why-economists-rarely-saw-bad-things-about-the-fed.html


Silly me. Here I thought the main reason that the economics profession had not only missed the crisis, but for the most part, gave the Fed a free pass on its colossal policy errors, was that everyone drank the same Kool-Aid, theory-wise.

It turns out that the Fed is not someone to cross, at least if you are a young academic. From Huffington Post:

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found…

“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”

One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past.

http://www.nakedcapitalism.com/2009/09/guest-post-we-cant-break-up-the-giant-banks-can-we-yes-we-can.html

By George Washington of Washington’s Blog.

Top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion.

Even the Bank of International Settlements - the “Central Banks’ Central Bank” - has slammed too big to fail. As summarized by the Financial Times:

The report was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.

This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future.

In response, defenders of the too-big-to-fails make one or more of the following arguments:

(1) The government does not have the authority to break up the big boys

(2) To break up the banks, the government would have to nationalize them, which would be socialism

(3) The giant banks have now recovered and are no longer insolvent, so it would be counter-productive to break them up

(4) We need the giant banks to restore credit to the economy

None of these arguments are persuasive.

The Government Does Have Authority to Break Up the Big Boys

One of the world’s leading economic historians - Niall Ferguson - argues in a current article in Newsweek:

there should be a new “resolution authority” for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.

Indeed, even the FDIC mentions Continental Illinois in the same breadth as “too big to fail” banks.

And William K. Black - the senior regulator during the S&L crisis, and an Associate Professor of both Economics and Law at the University of Missouri - says that the Prompt Corrective Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.

Others argue that the PCA does not apply to bank holding companies, and so the government really does not have the power to break up the big boys (see this, for example; but compare this).

Whether or not the financial giants can be broken up using the PCA, no one can doubt that the government could find a way to break them up if it wanted.

FDR seized gold during the Great Depression under the Trading With The Enemies Act.

Geithner and Bernanke have been using one loophole and “creative” legal interpretation after another to rationalize their various multi-trillion dollar programs in the face of opposition from the public and Congress (see this, for example).

So don’t give me any of this “our hands are tied” malarkey. The Obama administration could break the “too bigs” up in a heartbeat if it wanted to, and then justify it after the fact using PCA or another legal argument.

Temporarily Nationalizing a Bank is Not Socialism

Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.

That may be true. But government regulators in the U.S., Sweden and other countries which have broken up insolvent banks say that the government only has to take over banks for around 6 months before breaking them up.

In contrast, the Bush and Obama administrations’ actions mean that the government is becoming the majority shareholder in the financial giants more or less permanently. That is - truly - socialism.

Breaking them up and selling off the parts to the highest bidder efficiently and in an orderly fashion would get us back to a semblance of free market capitalism much quicker.

The Giant Banks Have Not Recovered

The giant banks have still not put the toxic assets hidden in their SIVs back on their books.

The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.

The overhang of derivatives is still looming out there, and still dwarfs the size of the rest of the global economy. Credit default swaps still have not been tamed (see this).

Indeed, Nobel prize winning economist Joseph Stiglitz said today:

The U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”

Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”

While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to “creative accounting”, such as Goldman “skipping” December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.

Some very smart people say that the big banks - even after many billions in bailouts and other government help - have still not repaired their balance sheets. Reggie Middleton, Mish, Zero Hedge and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.

But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can’t prove they are solvent, they should be broken up.

We Don’t Need the Giant Banks

Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks’ current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition:

Growth for the nation’s smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under…

As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.

BusinessWeek noted in January:

As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners…

At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks…

Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. “Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks,” says Christine Barry, Aite’s research director. “They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers.”

And Fed Governor Daniel K. Tarullo said in June:

The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks…

For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.

Indeed, some very smart people say that the big banks aren’t really focusing as much on the lending business as smaller banks.

Specifically since Glass-Steagall was repealed in 1999, the giant banks have made much of their money in trading assets, securities, derivatives and other speculative bets, the banks’ own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.

Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still have trillions in bad derivatives gambling debts to pay off, and so they are only loaning to the biggest players and those who don’t really need credit in the first place. See this and this.

So we don’t really need these giant gamblers. We don’t really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.

The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:

The largest banks often don’t show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.

“They actually experience diseconomies of scale,” Narter wrote of the biggest banks. “There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size.”

And Governor Tarullo points out some of the benefits of small community banks over the giant banks:

Many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms. Their business model is based on an important economic explanation of the role of financial intermediaries–to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers.

A small, but growing, body of research suggests that the financial services provided by large banks are less-than-perfect substitutes for those provided by community banks.

It is simply not true that we need the mega-banks. In fact, as many top economists and financial analysts have said, the “too big to fails” are actually stifling competition from smaller lenders and credit unions, and dragging the entire economy down into a black hole.

http://baselinescenario.com/2009/09/10/lessons-learned-and-soon-forgotten/

One year after the collapse of Lehman, the controversial “rescue” of AIG, and the ensuing collapse of world financial markets there are two questions: what have we learned, and what good will it do us?

The second question is essential, because we have learned so much about the functioning of our financial system – and the three main lessons are all rather scary.

First, our financial system has become dangerous on a massive scale. We knew that the banks were playing games, e.g., with their so-called off-balance sheet activities, but we previously had no idea that these huge corporations were so badly run or so close to potential collapse.

Second, we also learned the hard way – after many revelations – that pervasive mismanagement in our financial system was not a series of random accidents. Rather it was the result of perverse incentives – bank executives felt competitive pressure to behave as they did and they were well-compensated on the basis of short-term performance. No one in the financial sector worries too much, if at all, about risks they create for society as a whole – despite the fact that these now prove to be enormous (i.e., jobs lost, incomes lowered, and fiscal subsidies provided).

Third, weak government regulation undoubtedly made financial mismanagement possible. But poorly designed regulations and weak enforcement of even the sensible rules were in turn not a “mistake”. This was the outcome of a political process through which regulators – and their superiors in the legislative and executive branches – were captured intellectually by the financial system. People with power really believed that what was good for Wall Street was great for the country.

But how much good does all this new knowledge now do for us? There is very little real reform underway or on the table. We can argue about whether this is due to lack of intestinal fortitude on the part of the administration or the continued overweening power of the financial system, but the facts on the ground are simple: our banks and their “financial innovation” have not been defanged.

In fact, they are becoming more dangerous. The “Greenspan put” has morphed into the “Bernanke put”, to use the jargon of financial markets, where “put” means the option to sell something at a fixed price (and therefore to limit your losses). The Greenspan version was always a bit vague, involving lower interest rates when a speculative bubble ran into trouble; the Bernanke version is huge, involving massive cheap credits of many kinds (as well as interest rates set essentially at zero).

Bernanke’s Federal Reserve has shown that, when the chips are down, it can save the financial system even in the face of unprecedented global panic. But this will now just encourage more reckless risk-taking going forward. In the absence of full re-regulation of the financial system, the Fed’s policies are asking for trouble.

Lou Jiwei, the chairman of China’s large sovereign wealth fund, summed up the view of big international financial players last week, “It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose.”

We have lived through a massive crisis – and learned how close we came to a Second Great Depression – yet nothing is now happening to prevent a repeat of something similar in the near future.

http://www.sltrib.com/business/ci_13308954

The state of Utah approved a $27.3 million incentive package Thursday for financial services firm Goldman Sachs, bringing the total amount the company stands to collect to $47.3 million.

The money, one of the larger incentive packages ever offered by the state, is in the form of a tax credit payable over the next 20 years.

The incentive money is based on the fact that the company has been expanding in Utah and plans to double its 500-member work force by the end of next year. The offer was approved by the Governor's Office of Economic Development board, made up of private-sector members of the business community.

Like other companies asking the state for taxpayer money, Goldman Sachs has told Utah officials that the firm might expand elsewhere if it wasn't given the incentive. Goldman Sachs, which was among a number of financial services firms that took billions in dollars in federal aid and repaid it, is one of the few banking companies in a position to expand.

Board members say that's one of the prime reasons they approved the deal, which is the third incentive for the company approved since 2001. "There's a risk they could expand elsewhere," said attorney Jerry Oldroyd.

Oldroyd also said the average salaries of the positions created by Goldman Sachs -- more than $80,000 annually including benefits -- also played a role in the board's decision. In the Salt Lake City regional office, Goldman Sachs employs a variety of workers, including technology and investment specialists.

Derek Miller, acting director of GOED, said the deal plays well into Gov. Gary Herbert's emphasis on aiding expansion for businesses that already operate in Utah or are based here.

In 2001, the state granted Goldman Sachs a $400,000 incentive package in recognition of it opening an office here, and another $20 million in 2007 to expand in the Salt Lake area. The company has received all of the original $400,000 incentive.

It has received $100,000 of the $20 million offered in 2007. The remainder will be combined with the $27.3 million approved Thursday and be paid out over two decades as the company operates in Utah and pays taxes. Goldman Sachs will receive a credit on its tax returns for a fraction of the incentive amount over that time period -- as long as it stays in Utah.

Even though the company will get a tax break, state officials said they expect to collect $157 million in new state tax revenue from Goldman Sachs over the 20-year period.

Herbert on Thursday praised the deal. "Utah's business-friendly environment, highly skilled workforce and unparalleled higher education system provide a premier foundation for the success of a company such as Goldman Sachs."

The company operates in the University of Utah's Research Park, but is looking for new, larger digs. One option, according several to real estate sources, is the new high-rise being built in downtown Salt Lake City at 222 S. Main St.

lesley@sltrib.com

http://www.bloomberg.com/apps/news?pid=20601039&sid=a2X3hNaWcbeg


Commentary by Michael Lewis

July 28 (Bloomberg) -- From the moment I left Yale and started working for Goldman Sachs, I’ve felt uneasy interacting with those who don’t.

It’s not that I think less of Goldman outsiders than I did while I remained among you. It’s just that I feel your envy, and know that nothing I can do or say will ever persuade you that I am no more than human.

Thus, like many of my colleagues, I have adopted a strategy of never leaving Goldman Sachs, apart from a few brief, spasmodic attempts to make what you outsiders call “love” or “the beast with two backs.” Goldman recognizes how important it is for its people to replicate themselves. We bill no performance fees for the service.

Today, the sheer volume of irresponsible media commentary has forced us to reconsider our public-relations strategy. With every uptick in our share price it’s grown clearer that we who are inside Goldman Sachs must open a dialogue with you who are not. Not for our benefit, but for yours.

America stands at a crossroads, and Goldman Sachs now owns both of them. In choosing which road to take, ordinary Americans must not be distracted by unproductive resentment toward the toll-takers. To that end we at Goldman Sachs would like to dispel several false and insidious rumors.

Rumor No. 1: “Goldman Sachs controls the U.S. government.”

Every time we hear the phrase “the United States of Goldman Sachs” we shake our heads in wonder. Every ninth-grader knows that the U.S. government consists of three branches. Goldman owns just one of these outright; the second we simply rent, and the third we have no interest in at all. (Note there isn’t a single former Goldman employee on the Supreme Court.)

What small interest we maintain in the U.S. government is, we feel, in the public interest. Our current financial crisis has its roots in a single easily identifiable source: the envy others felt toward Goldman Sachs.

The bozos at Merrill Lynch, the dimwits at Citigroup, the nimrods at Lehman Brothers, the louts at Bear Stearns, even that momentarily useful lunatic Joe Cassano at AIG -- all of these people took risks that no non-Goldman person should ever take, in a pathetic attempt to replicate Goldman’s financial returns.

For too long we have allowed others to emulate us. Now we are working productively with Treasury Secretary Tim Geithner and the Congress to ensure that we alone are allowed to take the sort of risks that might destroy the financial system.

Rumor No. 2: “When the U.S. government bailed out AIG, and paid off its gambling debts, it saved not AIG but Goldman Sachs.”

The charge isn’t merely insulting but ignorant. Less responsible journalists continue to bring up the $12.9 billion we received from AIG, as if that was some kind of big deal to us. But as our CFO David Viniar explained back in March, we were hedged. Our profits from AIG “rounded to zero.”

People who don’t work at Goldman Sachs, of course, find this implausible: How could $12.9 billion round to zero? Easy, but you just need to understand the mathematics.

Let’s assume AIG transferred $12,880,560,250.34 of taxpayer money to Goldman Sachs. A Goldman outsider, asked to round this number, might call it $12,880,560,250.00. That’s not how we look at it; at Goldman we always round to the nearest $50 billion, so anything less than $25 billion rounds to zero.

Think of it that way and you can see that $12,880,560,250.34 isn’t even close to not rounding to zero.

Rumor No. 3: “As the U.S. government will eat the losses if Goldman Sachs goes bust, Goldman Sachs shouldn’t be allowed to keep making these massive financial bets. At the very least the $11.4 billion Goldman Sachs already has set aside for employees in 2009 -- $386,429 a head, just for the first six months -- is unfair, as the U.S. taxpayer has borne so much of the risk of the wagers that generated the profits.”

Really, we don’t know where to begin with this one. It is wrong-headed in so many different ways!

Let’s begin with the idea that the taxpayer is running a bigger risk than we are. The billions he stands to lose are trivial; after all, they round to zero.

The real risk, when you think about it even for a minute, is the risk we take ourselves: that Goldman will cease to exist and we will cease to be Goldman employees. To flirt with such tragedy we obviously need to be paid.

Rumor No. 4: “Goldman employees all look alike.”

Several recent newspaper photos have revealed that a surprising number of Goldman Sachs workers are white, male and bald. That non-Goldman people glance at such photos and think “Holy crap, they even look alike!” just shows how deeply anti- Goldman bigotry runs in American life.

We at Goldman represent unique clusters of DNA; if we bear some faint surface resemblance to one another, and to creatures from the 24th century, it is only because our superior powers of reasoning lead us to hold in our minds exactly the same thoughts, at exactly the same time.

A shared disinterest in growing hair, for instance, isn’t a coincidence of nature but an expression of healthy like- mindedness.

“The world is a pool table,” our naked-headed CEO likes to tell us. “And all the people in it are either stripes or solids. You alone are the cue balls.”

Rumor No. 5: Goldman Sachs is “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Those words are of course taken from a recent issue of Rolling Stone magazine and they are transparently false.

For starters, the vampire squid doesn’t feed on human flesh. Ergo, no vampire squid would ever wrap itself around the face of humanity, except by accident. And nothing that happens at Goldman Sachs -- nothing that Goldman Sachs thinks, nothing that Goldman Sachs feels, nothing that Goldman Sachs does --ever happens by accident.

(Michael Lewis is a columnist for Bloomberg News and the author of “Liar’s Poker,” “Moneyball” and “The Blind Side,” soon to be a major motion picture. The opinions expressed are his own.)

http://rawstory.com/blog/2009/08/goldman-sachs-the-100-million-a-day-company/

Investment bank Goldman Sachs made $100 million or more trading on the stock market on each of 46 trading days in the second quarter on 2009. In all, the company made at least that much money on 71 percent of the days it was doing business.

And the company revealed Wednesday that the US government is investigating its controversial compensation practices, and, perhaps more importantly, its trading in derivatives -- the financial instruments widely blamed for last year's financial collapse.

According to a report at Bloomberg news service, Goldman's profits are an all-time record -- beating the previous record, 34 days of $100-million profits, set by Goldman in the previous quarter.

Goldman, a major beneficiary of last fall's bank bailouts, by some accounts now controls half of all the program trading (computer-based automatic trading) done on Wall Street.

The company and some affiliates “have received inquiries from various governmental agencies and self-regulatory organizations regarding credit-derivative instruments,” the firm said in a regulatory filing, as quoted by Bloomberg. “The firm is cooperating with the requests.”

The company is also facing questions from shareholders about how it rewards salaries and bonuses, Reuters reported Wednesday.

According to the regulatory filing, Goldman's board has received several letters from shareholders about compensation. It said the letters have included demands that the board investigate compensation in recent years, begin recouping so-called excessive compensation, and consider reforming pay practices.

The board is considering the letters, the filing said.

But the company's massive profits highlight an increasingly divergent economy: While the Wall Street banks recover and make huge profits, Main Street continues to suffer. According to the Los Angeles Times, consumer bankruptcies in July were 34 percent higher than they were the same month a year ago.

A classic measure of Americans' financial distress: U.S. consumer bankruptcy filings totaled 126,434 in July, the highest for any month since Congress rewrote bankruptcy laws in October 2005.

So far this year 802,000 consumer bankruptcies have been recorded, up 36% from the 589,000 in the first seven months of last year, institute data shows.

Sam Gerdano, executive director of the Institute, predicts that total personal bankruptcy filings will reach 1.4 million for 2009.

Also, Forbes magazine reported Wednesday that the unemployment numbers for July, which will be officially released on Friday, will show the US economy lost another 371,000 jobs last month. That's considerably fewer job losses than the 700,000-a-month pace seen at the end of last year and the beginning of this year, but it is still a far cry from anything resembling a recovery in the job market.

In all the US has lost 6.5 million jobs since the recession began in December, 2007.

-- Daniel Tencer

of Goldman Sachs workers are white, male and bald."

It's called the Big Lebowski syndrome.

What it must be like to be born before your time! To be financially-ruined simply because you missed by maybe a few decades, living at a time when your enterpreneurial skills would have made you a mogul at Goldman Sachs; maybe even coopted into the highest reaches of government, to sort out the mess you and your confreres made of the world's economy. Fate can be so cruel. And as for that slacker, Dude Lebowski...! Words fail me. A ne'er-do-well, if iver I saw one.

www.youtube.com/watch?v=8Cz4vcQKWfA&feature=related



When did our Representatives think it was ok to give these thieves even more of our money. It is happening on my watch and I am pissed!

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090908/REG/909089981/1094/INDaily01

A Tennessee rep formerly affiliated with AIG Financial Advisors Inc. spent time making voodoo dolls of his victims to ward off their damaging testimony, prosecutors said.

Barry R. Stokes last year pleaded guilty to multiple counts of embezzlement, as well as mail and wire fraud, and money laundering for stealing $19 million from some 35,000 victims nationwide, according to the U.S. Attorney's Office in Nashville, Tenn., from their 401(k), health savings, and dependent care accounts.

On Friday, Mr. Stokes, 52, was sentenced in U.S. District Court in Nashville to 12 years in prison after a hearing that presented evidence of his bizarre practices, according to reports in The Tennessean newspaper.

At a pre-sentencing hearing last week, prosecutors also said that Mr. Stokes paid a psychic with a credit card to give him readings while in jail, according to The Tennessean.

He also wrote a letter to the psychic saying that he was lighting candles and throwing salt over his shoulder to keep critics and creditors at bay, according to the report.

Mr. Stokes was registered with AIG Financial Advisors from October 2005 to September 2006, at which point his fraud was discovered and he was fired, according to brokerage records on file with the states where he was licensed to do business.

AIG Financial Advisors was renamed SagePoint Financial Inc. earlier this year, months after its parent, American International Group Inc. collapsed in the credit crisis and got an $85 billion bailout from the federal government.

From October 2001 to 2005, Mr. Stokes was licensed with Spelman & Co. Inc., another independent broker-dealer owned by AIG that was merged with AIG Financial Advisors.

According to his brokerage records, Mr. Stokes was hired by Spelman & Co. after he had been let go by two other broker-dealers, with one firm stating Mr. Stokes in 2000 failed to cooperate with an internal investigation.

His firm, 1Point Solutions, was an employee benefits administration company based in Dickson, Tenn.

Evelyn Curran, an AIG spokeswoman, said the company declined to comment about the matter.

Oh, I hope so!

However, I think it's indicative of the up-is-down world our financial entities have created that -- quote -- From October 2001 to 2005, Mr. Stokes was licensed with Spelman & Co. Inc., another independent broker-dealer owned by AIG that was merged with AIG Financial Advisors.

How can one be an "independent broker-dealer" and be OWNED BY someone else????????????

This don't make no sense no how.

But then, little does these days.



Tansy Gold

http://www.nytimes.com/2009/07/31/business/31aig.html?ref=business


By MARY WILLIAMS WALSH

The dozens of insurance companies that make up the American International Group show signs of considerable weakness even after their corporate parent got the biggest bailout in history, a review of state regulatory filings shows.

Over time, the weaknesses could mean trouble for A.I.G.’s policyholders, and they raise difficult questions for regulators, who normally step in when an insurer gets into trouble. State commissioners are supposed to keep insurers from writing new policies if there is any doubt that they can cover their claims. But in A.I.G.’s case, regulators are eager for the insurers to keep writing new business, because they see it as the best hope of paying back taxpayers.

In the months since A.I.G. received its $182 billion rescue from the Treasury and the Federal Reserve, state insurance regulators have said repeatedly that its core insurance operations were sound — that the financial disaster was caused primarily by a small unit that dealt in exotic derivatives.

But state regulatory filings offer a different picture. They show that A.I.G.’s individual insurance companies have been doing an unusual volume of business with each other for many years — investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good. Insurance examiners working for the states have occasionally flagged these activities, to little effect.

More ominously, many of A.I.G.’s insurance companies have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella.

Echoing state regulators’ statements, the company said the interdependency of its businesses posed no problem and strongly disputed that any units had obligations they could not pay.

“There is absolutely no concern about the capital in these companies,” said Rob Schimek, the chief financial officer of A.I.G.’s property and casualty insurance business. The company authorized him to speak about these issues.

Nothing is wrong with spreading risks to other companies, a practice known as reinsurance, when it is carried out with unrelated, solvent companies. It can also be acceptable in small amounts between related companies. But A.I.G.’s companies have reinsured each other to such a large extent, experts say, that now billions of dollars worth of risks may have ended up at related companies that lack the means to cover them.

“An organization like this one relies on constant, ever-growing premium volume, so it can cover and pay for the deficits,” said W. O. Myrick, a retired chief insurance examiner for Louisiana.

If A.I.G.’s incoming premiums shrink, he warned, “the whole thing’s going to collapse in on itself.”

Mr. Myrick has not fully examined all the A.I.G. subsidiaries but said his own recent review of many state filings raised serious concerns, particularly about the use of reinsurance to “bounce things around inside the holding company group.”

“That is a method used by holding companies to falsify the liabilities,” he said.

A.I.G.’s premiums have, in fact, been declining in important lines. Its ratings have fallen, and customers tend to steer clear of lower-rated insurers. To woo them back, A.I.G. has in some cases lowered its prices, competitors say. A.I.G. executives insist they would rather lose a customer than drive down prices dangerously.

A.I.G. has also pledged a share of its life insurance premiums to the Fed, to pay back about $8 billion. Details have not been provided, but consumer advocates say it is not clear how the life companies will pay future claims if their premiums are diverted.

“Eventually, there’s going to be a battle between the policyholders and the feds,” said Thomas D. Gober, a former insurance examiner who now has his own forensic accounting firm that specializes in insurance fraud. “The Fed is going to say, ‘We want our money back,’ but the law says, ‘Policyholders come first.’ It’s going to be ugly.”

Mr. Gober is a consultant for a lawsuit on behalf of A.I.G. policyholders, filed in California Superior Court in Los Angeles. The lawsuit seeks a court order requiring all A.I.G. subsidiaries doing business in California to put enough money to cover their obligations into a secure account controlled by the state treasurer.

The goal is to keep money from being moved out of California or used to finance A.I.G.’s other activities, said Maria C. Severson, a lawyer for the plaintiffs. The lawsuit also seeks to bar A.I.G. companies from soliciting new business without full disclosure of their financial condition.

The condition of A.I.G.’s individual companies is hard to see in the parent company’s filings with the Securities and Exchange Commission. Those filings simply tally all the individual subsidiaries’ financial information.

The companies’ weaknesses emerge in their filings with state insurance regulators — particularly when several are reviewed together. But that appears not to happen often, because there are so many. A.I.G. has more than 4,000 units in more than 100 countries.

Responsibility for A.I.G.’s 71 American insurance companies is spread among 19 state insurance commissions, which do not conduct examinations simultaneously.

As a result, Mr. Myrick said, a conglomerate like A.I.G. “can keep moving assets around to clean up one company” at a time, when examiners were looking. He said that it would take a coordinated, multistate examination of all the insurance companies to catch this.

Mr. Schimek, speaking for the insurance companies, said that in 2005, a team of examiners had at least considered A.I.G.’s property and casualty businesses as a group.

“It was a thorough examination,” he said. “I have absolutely no concern about the integrity of the financial information that’s been filed under my watch.”

State regulators confirmed that they believed the A.I.G. subsidiaries under their authority were solvent. Mike Moriarty, deputy insurance superintendent for New York State, said that while A.I.G. subsidiaries did not report all their reinsured obligations on their balances sheets, state regulators could “follow the trail of liabilities” and make sure they did not get lost in the holding company.

Obligations “can’t be hidden from state insurance regulators,” Mr. Moriarty said.

One A.I.G. subsidiary, the National Union Fire Insurance Company of Pittsburgh, shows what can happen by heavily relying on affiliates. Its most recent regulatory filing in Pennsylvania said it had more than enough money to pay its obligations.

But at the end of 2008, more than a third of National Union’s portfolio was invested in the stock of other A.I.G. companies, which are not publicly traded. National Union might not be able to sell all of these shares, and it is not clear what it could get for them. Many states bar insurers from investing that heavily in related companies.

Meanwhile, National Union has $42.1 billion in obligations looming off its balance sheet. These have been transferred to 56 other A.I.G. companies, through reinsurance. National Union will have to pay any of these claims and then collect from its relatives.

But it is not clear that the affiliates could pay promptly. National Union’s biggest reinsurance partner is American Home Assurance, an A.I.G. subsidiary that has taken $23.1 billion of obligations off National Union’s hands. In a New York filing, American Home reports total assets of $26.3 billion, but part of that consists of assets that cannot be used to pay claims, like furniture. It too includes a number of investments in other A.I.G. companies.

In addition, American Home has “unconditionally” guaranteed the obligations of 16 other A.I.G. subsidiaries, bringing the total it might have to pay to $140.6 billion.

Normally, when an insurance company weakens, regulators in its home state will first measure its capital. They may demand a weak company rebuild its capital, and if it fails, eventually bar it from selling new policies.

Like New York regulators, Pennsylvania regulators say they do not see a problem. “The insurance companies remain strong and are probably the most valuable assets within the A.I.G. structure,” said Joel Ario, Pennsylvania’s insurance commissioner. “To the best we know it, we think the companies are sound.”

But policyholder advocates said they feared state regulators were deferring to the wishes of the Fed and Treasury, to use the insurance operations to pay back the taxpayers.

“The insurance commissioners, for whatever reason, are letting them do this,” Mr. Myrick said. “I’d be jumping out of my shoes.”

SOUNDS LIKE A PONZI TO ME

This is the very definitiobn of a Ponzi scheme --

“An organization like this one relies on constant, ever-growing premium volume, so it can cover and pay for the deficits,” said W. O. Myrick, a retired chief insurance examiner for Louisiana.

If A.I.G.’s incoming premiums shrink, he warned, “the whole thing’s going to collapse in on itself.”



EXCUSE ME??????????????


We definitely need an outrage smiley for DU.

:banghead: and :grr: and :nuke: just don't get it.


Although in this case I think :banghead: comes closest.




TG

http://www.nytimes.com/2009/07/31/business/31insure.html?_r=1&ref=business



Next to a Chinese restaurant in Burlington, Vt., lurks a quiet guardian of Wall Street — an obscure insurance company that is supposed to protect big-money investors in the event of a catastrophic failure of a major brokerage firm.

A failure, for instance, like the one that brought down Lehman Brothers nearly 11 months ago. Now, after years in the shadows, the insurer, the Customer Asset Protection Company, could finally be put to the test, and questions are starting to swirl.

The worry is that the company, which has never paid out a claim, might be unable to cope with the Lehman bankruptcy.

If it were overwhelmed by claims, the banks and brokerage companies that own Capco, as it is known, could end up owing billions of dollars.

Capco representatives dismiss such concerns, but state insurance regulators are keeping an eye on the company. Officials at the New York State Insurance Department are concerned about the company’s ability to withstand the Lehman bankruptcy, the largest in history.

By some industry estimates reviewed by the insurance department, Capco could face nearly $11 billion in claims but has only about $150 million with which to meet them. The state is examining whether the company sold policies without the means to cover them, according to a person with direct knowledge of the inquiry who had signed confidentiality agreements.

The issue has even reached Washington, where a member of the Senate Finance Committee, Robert Menendez, has sounded an alarm. Mr. Menendez, Democrat of New Jersey, wrote the Treasury secretary, Timothy F. Geithner, in June to express his concern.

“It has become clear that this entity is thinly capitalized,” Mr. Menendez wrote in the letter. Capco, he said, potentially posed “systemic risk.” Capco was created in 2003 by Lehman and 13 other banks and brokerage companies as a kind of marketing tool. The pitch was that while Capco would not insure customers against investment losses, it would compensate them if the firms failed. Capco promises to provide virtually unlimited coverage above the $500,000 offered by the Securities Investors Protection Corporation and its equivalent in Britain.

Capco is virtually unknown even in financial circles, but it is being thrust into the spotlight by the events at Lehman. Creditors and former customers are battling over who will get what and when from the fallen bank, including more than $32 billion of assets that have been tied up in Lehman’s London prime brokerage unit. Untangling the mess could take years. Some former Lehman clients, which include big hedge funds, are looking to Capco for answers — and money.

Dewey & LeBoeuf, the law firm that represents Capco, said in a statement that Capco had no current policies outstanding and was “preserving all assets to address claims that might arise out of the insolvency of Lehman Brothers Inc. and Lehman Brothers International (Europe).”

The law firm called worries about Capco’s potential exposure to Lehman “speculation.”

Capco, which is private, is something of a financial mystery. Its members include Wall Street giants like Morgan Stanley and Goldman Sachs, banks like JPMorgan Chase and Wells Fargo, smaller brokerage firms like Robert W. Baird & Company and Edward Jones, and Fidelity, the mutual fund giant. Capco was initially registered in New York but later moved to Vermont, where state law enables it to operate without disclosing much about its finances.

Capco’s owners referred questions about the company’s liability to Dewey & LeBoeuf. Since it stopped writing policies on Feb. 16, most of Capco’s owners have purchased account protection for their clients through private insurance companies like Lloyd’s of London. Pershing, a unit of Bank of New York Mellon, told clients in a December notice that their Capco insurance would expire and that the firm had a new policy with Lloyd’s to “provide our customers and their investors with extra comfort that their assets are safe.”

It’s unclear who actually serves as the current president of Capco, and the company’s main phone number connects to a recording that tells callers they’ve reached a “nonworking number at Morgan Stanley.” A unit of Marsh & McLennan, the giant insurance services company, is listed as Capco’s administrator, but no contact information is listed on Capco’s Web site. The unit is based in the same Burlington building as Capco.

Brokerage companies used to buy account protection insurance from large insurance companies like Travelers and the American International Group. But in 2003, those insurance companies stopped offering such policies, saying it was impossible to calculate their liability. Enter Capco.

The Capco members played up their coverage when pitching their brokerage services to clients, especially large hedge fund customers who could lose billions of dollars if a firm went under. Although Capco’s finances were never disclosed publicly, the company was initially a given high rating by Standard & Poor’s.

That rating, however, was cut to junk status last December, and the ratings were withdrawn altogether in February. In its report, S.& P. said it was concerned about potential claims from customers of Lehman’s London unit, which “could create a liability for Capco that exceeds the insurer’s resources.” Charles Schwab, UBS and Merrill Lynch never opted for Capco, arguing that the arrangement seemed risky. Schwab requested the company’s financial statements from the insurance department through a Freedom of Information Act request in 2004, but was told the books were confidential.

The New York State Insurance Department later told Capco’s members that the company would eventually have to release the information. Before that happened, however, Capco relocated to Vermont, a haven for so-called captive insurance companies, whose owners are the ones buying the policies.

“Right away, the whole Capco thing just did not pass the smell test,” said Robert Meave, an outside consultant for Schwab at the time, who evaluated the insurance company. “Schwab was not about to go to their clients and tell them we’re providing account protection and, oh by the way, they were owners of the insurance company.”

Firms who sought coverage elsewhere, mainly through Lloyd’s of London, could buy only up to $150 million of insurance per account and a maximum of $600 million for the entire firm. As a result, some customers moved their money to firms that offered Capco coverage.

“Let’s face it, none of us could have foreseen an event like Lehman, but we didn’t feel the capitalization of Capco as it seemed to be forming was going to be adequate in the extremely unlikely event that something happened,” Mr. Meave said.

Owners of the assets tied up in Lehman’s London unit, including pension funds and university endowments, believe they may have claims against Capco if all of their money is not returned by Lehman’s liquidator.

If Capco can’t pay out the claims and files for bankruptcy, several customers said they would bring lawsuits against the other brokerage houses.

“The bottom line is, this insurance should have never been sold to clients, and it just shows how Wall Street again miscalculated the risks involved with one of their own going under,” said an adviser working on the Lehman bankruptcy who was not authorized to speak for the company.

http://online.wsj.com/article/SB124897332666294327.html

WASHINGTON -- Fannie Mae and Freddie Mac are unlikely to repay the government in full for all the capital it has pumped into the companies, according to their regulator.

"My view is that some assets in the senior preferred will have to be left behind as they come out of conservatorship," Federal Housing Finance Agency Director James B. Lockhart said Thursday in response to a question at a panel discussion in Washington. "That will mean that some of the losses will never be repaid."

The Treasury has agreed to pump $200 billion into each company in order to keep them solvent. In exchange, the government receives senior preferred stock that pays a 10% dividend. So far, it has injected $85 billion in total into the companies, but Lockhart said that figure was likely to rise in the coming months.

Fannie and Freddie together own or guarantee $5.4 trillion in mortgages. When the housing market soured in 2007, mortgage defaults ate through the companies' thin cushions of capital, prompting fears they would collapse. The government seized them in September, putting them under the conservatorship of their regulator.

FHFA on Thursday unveiled several new regulations concerning the mortgage giants and the 12 Federal Home Loan Banks. The regulator also announced conclusions from three studies it was required to conduct by a 2008 housing law.

One of the studies found that Fannie and Freddie have been using fees they collect for guaranteeing less risky single-family mortgages to subsidize the fees for backing riskier loans.

As a result, borrowers with 15-year fixed-rate mortgages and adjustable-rate mortgages were subsidizing borrowers with 30-year fixed-rate mortgages, which are more risky for the mortgage giants to guarantee.

"The riskiest loans were not fully charged for the additional expected costs associated with them," Federal Housing Finance Agency Chief Economist Patrick Lawler said at the panel discussion.

In another study, FHFA concluded that it should consider allowing the home loan banks to securitize the mortgages they obtain from member banks as collateral for advances. However, the banks should only undertake this new line of business after the government has resolved what it will do with Fannie and Freddie.

A final study concluded that the bulk of mortgage collateral underpinning home loan bank advances conformed to guidance issued by bank regulators on non-traditional mortgages.

FHFA issued a new rule to expand the home loan banks' ability to funnel their affordable housing funds toward helping strapped homeowners refinance under government programs.

The banks will now be able to plow the funds into refinancing activities under targeted government refinance programs, including the Obama administration's effort to help underwater homeowners take advantage of lower mortgage rates. Currently, borrowers qualified to refinance under the federal Hope for Homeowners program are the only ones able to access such aid.

The funds, which come from assessments on the home loan banks, may be used to assist homeowners to pay down principal or to offset closing costs for the refinanced loan. The new rule takes effect immediately.

FHFA also announced a proposed regulation to expand the board of the Office of Finance, which issues and services debt for the home loan banks. The regulator wants the board to consist of all 12 bank presidents and three to five independent directors.

And it finalized previously announced affordable housing goals for Fannie and Freddie for 2009. The regulator cited the turmoil in the mortgage market to explain why it notched down the goals from 2008.

Mr. Lockhart said Fannie and Freddie would likely see their reserves continue to decline next year, but could return to strong profits in two to three years. But he cautioned that the companies' thin capital and huge exposure to the mortgage market make it unlikely they will be able to repay the government in full.

"The book is so large that it is hard to see that they could actually repay all that," he said.

Mr. Lockhart said Fannie and Freddie aren't likely to burn through all $400 billion of government capital available under their agreement with the government. He cited stress tests that showed the total draws would remain below that level.

Write to Jessica Holzer at jessica.holzer@dowjones.com

http://www.nakedcapitalism.com/2009/08/government-taken-in-dealings-with-wall.html

We’ve grumbled at points during the process of throwing various lifelines out to the financial sector, that media has tended to focus unduly on the TARP (no doubt encouraged by the powers that be who are eagerly pushing “the banks are fine” line) at the expense of the vast net of additional subsidies. The ones garnering least attention are the various backdoor measures, in which it is hard to tally what the real costs are.

The famed PPIP, which is largely stillborn, was an effort to disguise the level of support. No one would see how much above current market prices the trades under PPIP were (recall they HAD to be above market prices, otherwise there would be no reason for all the incentives to bidders; the banks could just unload the paper).

Another subsidy is the government (we count the Fed as the government these days; it’s acting as an arm of the Treasury) dealing with Wall Street on lousy terms. Wall Street’s gain is the taxpayers’ loss (Willem Buiter argue the Fed will ultimately need to be recapitalized rather than taking the inflationary step of printing to cover its losses). Remember all those quantitative easing purchases of MBS? Of course, we have to remember it’s not QE, the Fed likes to claims it’s something different, but let’s dispense with those niceties now. The Fed is apparently taking crappy prices on its big programs.

The question is whether the poor terms are by design (as in another subsidy) or ineptitude?

First from the Financial Times:

Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.

“You can make big money trading with the government,” said an executive at one leading investment management firm. “The government is a huge buyer and seller and Wall Street has all the pricing power.”

A former official of the US Treasury and the Fed said the situation had reached the point that “everyone games them. Their transparency hurts them. Everyone picks their pocket.”

The central bank’s approach to securities purchases was defended by William Dudley, president of the New York Fed, which is responsible for market operations. “We believe that opting for transparency is a greater good,” he said. “If we didn’t have transparency, we’d be criticised on other grounds.”

However, another official familiar with the matter said the central bank “has heard that dealers load up on securities to sell to the Fed. There is concern, but policy goals override other considerations.”

Barney Frank, chairman of the House financial services committee, said the potential profiteering may be part of the price for stabilising the financial system.

“You can’t rescue the credit system without benefiting some of the people in it.” Still, Mr Frank said Congress would be watching. “We don’t want the Fed to drive the hardest possible bargain, but we don’t want them to get ripped off.”….

Larry Fink, chief executive of money manager BlackRock, has described Wall Street’s trading profits as “luxurious”, reflecting the banks’ ability to take advantage of diminished competition.

“Bid-offer spreads have remained unusually wide, notwithstanding the normalisation of financial markets,” said Mohamed El-Erian, chief executive of fund manager Pimco in Newport Beach, California.

A separate but related sighting from Roger Ehrenberg, who makes a point that few commentators have stressed: the “paying the TARP back” meme, which is somehow treated as a sign of government success, is in fact an abject failure. The TARP support was badly underpriced. And he doesn’t mean the dickering over the warrants, either.

From Ehrenberg:

What we have is a return to business-as-usual. Except it’s worse than that. The US taxpayer has been systematically looted out of hundreds of billions of dollars, yet the press is focused on Andy Hall and his $100 million payday. Whether this is too much pay for Mr. Hall misses the big picture. Yes, the Wall Street pay model is messed up, and I recently provided an alternative approach. But how about the fact that Goldman Sachs is posting record earnings and will invariably be preparing to pay record bonuses, not nine months after the firm was in mortal danger? Whether anyone will admit it or not, without the AIG (read: Wall Street and European bank) bail-out and the FDIC issuance guarantees, neither Goldman nor any other bulge bracket firm lacking stable base of core deposits would be alive and breathing today.

Goldman is a great firm with a stellar culture, and in most circumstances it’s risk management and funding practices have been second to none. Except when the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid assets funded with extremely short-dated liabilities….In exchange for giving the firm life (TARP, FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension) got some warrants on $10 billion of TARP capital injected into the firm. While JP Morgan Chase CEO Jamie Dimon prefers to poke a stick in the eye of the Treasury, seeking to negotiate down the payment to buy back the TARP warrants, Lloyd Blankfein smartly paid the full $1.1 billion requested. He looked like a hero for doing so, a true US patriot repaying the US Government in full for its lifeline, thanking the US taxpayer in the process. $1.1 billion… $1.1 billion…Hmm…something doesn’t seem right. You know why it doesn’t seem right? BECAUSE THE US TREASURY MIS-PRICED THE FREAKING OPTION.

There is not a Wall Street derivatives trader on the planet that would have done the US Government deal on an arms-length basis. Nothing remotely close. Goldman’s equity could have done a digital, dis-continuous move towards zero if it couldn’t finance its balance sheet overnight. Remember Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution, was facing a crisis of confidence that pervaded the market. Lenders weren’t discriminating back in November 2008. If you didn’t have term credit, you certainly weren’t getting any new lines or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let’s just say that it is a tad north of $1.1 billion in premium. And the $10 billion TARP figure? It’s a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing that the US Government won’t let you go down under any circumstances. $1.1 billion in option premium? How about 20x that, perhaps more. But no, this is not the way it went down….

Where we are left today, dear taxpayer, is a lot poorer. Unless you are a major shareholder and/or bonusable employee of Goldman Sachs. Brains, ingenuity and value creation should be rewarded in all fields, Wall Street included. But when value created is the direct result of the risks borne by others for your benefit, the sharing of benefits needs to be re-allocated. This has not and apparently will not be done, and we, dear taxpayer, are the worse for it. Further, such a crisis could have provided the opportunity and the impetus for a re-look at capital markets risks, getting CDS users to support a central credit derivatives exchange and revised capital rules to incentivize better gap management. The banks lobby like hell against these changes, because it cuts into their fees, notwithstanding the systemic benefits such changes could have on the global financial markets. Banks now lobbying with US taxpayer dollars against changes that could protect the US taxpayer from more harm in the future. Something is terribly wrong with this picture, yet all anyone wants to talk about are executives getting paid too much. It’s called missing the forest for the trees, and it is a fixture of both those trying to sell newspapers (get clicks) and run our Government, and it pisses me off.

http://tpmcafe.talkingpointsmemo.com/talk/blogs/robert_reich/2009/07/goldman-and-jpmorgan----the-tw.php


Besides Goldman Sachs, the Street's other surviving behemoth is JPMorgan. Today it posted second-quarter earnings up a stunning 36 percent from the first quarter, to $2.7 billion.

The resurgence of JPMorgan and Goldman Sachs gives both banks more financial clout than any other players on the Street -- allowing both firms to lure talent from everywhere else on the Street with multi-million pay packages, giving both firms enough economic power to charge clients whopping fees, and bestowing on both firms even more political heft in Washington.

Where are the antitrusters when we need them? Alternatively, why isn't the government charging Goldman and JPMorgan a large insurance fee for classifying both firms as "too big to fail" and therefore automatically bailed out if the risks they take turn sour? Instead, we've ended up with two giants that now have most of the casino to themselves, are playing with poker chips backed by taxpayers, and have a big say in what the rules of the game are to be.

When JP Morgan repaid its federal bailout of $25 billion last month it was, like Goldman, freed from stricter government oversight. The freedom has also allowed JP, like Goldman, to take tougher and more vocal stands in Washington against proposed financial regulations they dislike.

JP is mounting a furious lobbying campaign against regulations that would funnel derivatives trading through exchanges where regulators can monitor them, and thereby crimp JP's profits. Now the Street's biggest derivatives player, JP has generated billions helping clients navigate these contracts and assuming counter-party risk in such transactions. Its derivatives contracts were valued at roughly $81 trillion at the end of the first quarter, representing 40 percent of the derivatives held by all banks, according to the Office of the Comptroller of the Currency. JP has played down its potential risk exposure from these derivatives contracts, of course, but anyone who's been paying attention over the last ten months knows that unregulated derivatives have been at the center of the storm.


The tumult on the Street has also given both firms extraordinary market power. That's where much of the current profits are coming from. JP used the crisis to snap up Bear Stearns in March and Washington Mutual last fall, with the amiable assistance of the FDIC. The deals have boosted JP's dominance in retail banking and prime brokerage, enabling it to charge its corporate clients heftier fees for lending and other financial services, and to corner more of the market in fixed-income and equities. JP also bolstered its earnings by helping other financial companies raise capital following the stress test results in May.

Antitrust law was designed to prevent just this sort of market power and political heft. The Justice Department or the Federal Trade Commission should investigate the new-found dominance of Goldman and JP -- and, if warranted, break them up. Alternatively, Congress should impose a surtax on the newly-exclusive group of Wall Street firms, most notably Goldman and JPMorgan, which are now backed by implicit government bailout insurance guaranteeing that, should they get into trouble, taxpayers will keep them afloat. The surtax would approximate the economic benefit to these firms of such government largesse, which I'd estimate to be at least 50 percent of their profits from here on.

Where are the antitrusters when we need them? Alternatively, why isn't the government charging Goldman and JPMorgan a large insurance fee for classifying both firms as "too big to fail" and therefore automatically bailed out if the risks they take turn sour? Instead, we've ended up with two giants that now have most of the casino to themselves, are playing with poker chips backed by taxpayers, and have a big say in what the rules of the game are to be.

When JP Morgan repaid its federal bailout of $25 billion last month it was, like Goldman, freed from stricter government oversight. The freedom has also allowed JP, like Goldman, to take tougher and more vocal stands in Washington against proposed financial regulations they dislike.

JP is mounting a furious lobbying campaign against regulations that would funnel derivatives trading through exchanges where regulators can monitor them, and thereby crimp JP's profits. Now the Street's biggest derivatives player, JP has generated billions helping clients navigate these contracts and assuming counter-party risk in such transactions. Its derivatives contracts were valued at roughly $81 trillion at the end of the first quarter, representing 40 percent of the derivatives held by all banks, according to the Office of the Comptroller of the Currency. JP has played down its potential risk exposure from these derivatives contracts, of course, but anyone who's been paying attention over the last ten months knows that unregulated derivatives have been at the center of the storm.

The tumult on the Street has also given both firms extraordinary market power. That's where much of the current profits are coming from. JP used the crisis to snap up Bear Stearns in March and Washington Mutual last fall, with the amiable assistance of the Treasury. The deals have boosted JP's dominance in retail banking and prime brokerage, enabling it to charge its corporate clients heftier fees for lending and other financial services, and to corner more of the market in fixed-income and equities. JP also bolstered its earnings by helping other financial companies raise capital following the stress test results in May.

Antitrust law was designed to prevent just this sort of market power and political heft. The Justice Department or the Federal Trade Commission should investigate the new-found dominance of Goldman and JP -- and, if warranted, break them up. Alternatively, Congress should impose a surtax on the newly-exclusive group of Wall Street firms, most notably Goldman and JPMorgan, which are now backed by implicit government bailout insurance guaranteeing that, should they get into trouble, taxpayers will keep them afloat. The surtax would approximate the economic benefit to these firms of such government largesse, which I'd estimate to be at least 50 percent of their profits from here on.

http://www.informationclearinghouse.info/article23500.htm


September 15, 2009 "Information Clearing House" -- "Lehman's fate was sealed not in the boardroom of that gaudy Manhattan headquarters. It was sealed downtown, in the gloomy gray building of the New York Federal Reserve, the Wall Street branch of the U.S. central bank." Stephen Foley, U.K. Independent

Stephen Foley is on to something. Lehman Bros. didn't die of natural causes; it was drawn-and-quartered by high-ranking officials at the US Treasury and the Federal Reserve. Most of the rubbish presently appearing in the media, ignores this glaring fact. Lehman was a planned demolition (most likely) concocted by ex-Goldman Sachs CEO Henry Paulson, who wanted to create a financial 9-11 to scare Congress into complying with his demands for $700 billion in emergency funding (TARP) for underwater US banking behemoths. The whole incident wreaks of conflict of interest, corruption, and blackmail.

The media has played a critical role in peddling the official "Who could have known what would happen" version of events. It's all part of cynical cover-up. Bernanke and Paulson were fully-aware that they playing with fire, but they chose to proceed anyway, using the mushrooming crisis to achieve their own narrow objectives. When things began to spin out of control--credit markets froze, interbank lending slowed to a crawl, and stock markets plunged--the Fed and Treasury persisted anyway, demanding their $700 billion pound of flesh before they'd do what was needed to stop the bleeding. It was all avoidable.

Lehman had potential buyers, including Barclays, who probably would have made the purchase if Bernanke and Paulson had merely provided guarantees for some of their trading positions. Instead, Treasury and the Fed balked, thrusting the knife deeper into Lehman's ribs. They claimed they didn't have legal authority for such guarantees. Its a lie. The Fed has provided $12.8 trillion in loans and other commitments to keep the financial system operating without congressional approval or any explicit authorization under the terms of its charter. The Fed never considered the limits of its "legal authority" when it bailed-out AIG or organized the acquisition of Bear Stearns by JP Morgan pushing $30 billion in future liabilities onto the public's balance sheet. The Fed's excuses don't square with the facts.

Here's how economist Dean Baker recounts what transpired last September 15:

"Last September, when he (Bernanke) was telling Congress that the economy would collapse if it did not approve the $700 billion TARP bailout, he warned that the commercial paper market was shutting down.

This was hugely important because most major companies rely on selling commercial paper to meet their payrolls and pay other routine bills. If they could not sell commercial paper, then millions of people would soon be laid off and the economy would literally collapse.

What Mr. Bernanke apparently forgot to tell Congress back then is that the Fed has the authority to directly buy commercial paper from financial and non-financial companies. In other words, the Fed has the power to prevent the sort of economic collapse that Bernanke warned would happen if Congress did not quickly approve the TARP. In fact, Bernanke announced that the Fed would create a special lending facility to buy commercial paper the weekend after Congress voted to approve the TARP." ("Bernanke's bad Money", Dean Baker, Counterpunch)

The reason Bernanke did not underwrite the commercial paper market was, if he had, he wouldn't have been able to blackmail congress. He needed the rising anxiety from the crisis to achieve his goals.

Here's a clip from an editorial in the New York Times (admitting most of what has already been stated) that tries to put a positive spin on the Fed's behavior:

"Mr. Nocera says that almost everyone he’s ever spoken to in Hank Paulson’s old Treasury Department agrees that without the immediate panic caused by the Lehman default, the government would never have agreed to make the loans needed to save A.I.G., a company it knew very little about. In effect, the Lehman bankruptcy caused the government to panic, which in turn caused it to save the firm it really had to save to prevent catastrophe. In retrospect, if you had to choose one firm to throw under the bus to save everyone else, you would choose Lehman.....it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live. ("Lehman Had to Die So Global Finance Could Live", Sept 14, 2009, New York Times)

So, according to the muddled logic of the NY Times, everything worked out for the best so there's no need to hold anyone accountable. (Tell that to the 7 million people who have lost their jobs since the beginning of the meltdown) This latest bit of spin is pure cover-your-ass journalism, an attempt to rewrite history and absolve the guilty parties. The fact is, Paulson and Bernanke deliberately created the crisis in order to jam their widely-reviled TARP policy down the public's throat. The Times thinks the public should be grateful for that because, otherwise, the crooked insurance giant, AIG, would not have been bailed out and Goldman Sachs and other Wall Street heavies would not have been paid off. This tells us everything we need to know about the Gray Lady's true loyalties.

The reason panic spread through the markets after Lehman filed for bankruptcy, was because the Reserve Primary Fund, which had lent Lehman $785 million (and recieved short-term notes called commercial paper) couldn't keep up with the rapid pace of withdrawals from worried clients. The sudden erosion of trust triggered a run on the money markets. Here's an excerpt from a Bloomberg article, "Sleep-At-Night-Money Lost in Lehman Lesson Missing $63 Billion":

"On Tuesday, Sept. 16, the run on Reserve Primary continued. Between the time of Lehman’s Chapter 11 announcement and 3 p.m. on Tuesday, investors asked for $39.9 billion, more than half of the fund’s assets, according to Crane Data.

Reserve’s trustees instructed employees to sell the Lehman debt, according to the SEC.

They couldn’t find a buyer.

At 4 p.m., the trustees determined that the $785 million investment was worth nothing. With all the withdrawals from the fund, the value of a single share dipped to 97 cents.

Legg Mason, Janus Capital Group Inc., Northern Trust Corp., Evergreen and Bank of America Corp.’s Columbia Management investment unit were all able to inject cash into their funds to shore up losses or buy assets from them. Putnam closed its Prime Money Market Fund on Sept. 18 and later sold its assets to Pittsburgh-based Federated Investors.

At least 20 money fund managers were forced to seek financial support or sell holdings to maintain their $1 net asset value, according to documents on the SEC Web Site.

When news that Reserve Primary broke the buck hit the wires at 5:04 p.m. that Tuesday, the race was on" (Bloomberg)

This is what a run on the shadow banking system looks like. Bernanke and Paulson pinpointed the trouble in the commercial paper market and used it to put more pressure on Congress to approve their bailout bill.

Bloomberg again: "It was commercial paper and the $3.6 trillion money market industry that traded the notes that came close to sinking the global economy -- not a breakdown in credit-default swaps or bank-to-bank lending....

Like ice-nine, the fictitious substance in Kurt Vonnegut Jr.'s 1963 novel “Cat’s Cradle,” a single seed of which could harden all the world’s water, commercial paper was the crystallizing force that froze credit markets, choking off the ability of companies and banks to borrow money and pay bills." (Sleep-At-Night-Money Lost in Lehman Lesson Missing $63 Billion, Bob Ivry, Mark Pittman and Christine Harper, Bloomberg News)

Bernanke could have fixed the problem in an instant. All he needed to do was provide explicit government guarantees on money markets and commercial paper. That would have ended the bank-run pronto. But he chose not to. He chose to wait until Congress capitulated so he could net $700 billion for his banking buddies.

According to the UK Telegraph:

"On Thursday night, the Treasury went literally down on his knees before Nancy Pelosi, speaker of the House of Representatives, begging her to agree taxpayer money to bail out the financial system. Bernanke, a scholar of the financial panic that caused the Great Depression, told fearful lawmakers there wouldn't be a banking system in place by Monday morning if they didn't act. Paulson talked openly about planning for martial law, about how to feed the American people if banking and commerce collapsed."

Pathetic. Paulson is a charlatan and Bernanke is just as bad. Despite their dire warnings, on Monday morning, the banking system was still in tact, just as it was a full month later when the first TARP funds were handed out to the big banks. It was all a hoax. The problem wasn't the banks toxic assets at all, but the commercial paper and money markets. The Fed and Treasury knew that they could count on Congress's abysmal ignorance of anything financial; and they weren't disappointed. On October 3, 2008, Congress passed the Financial Rescue Plan (TARP) Paulson's fear-mongering had triumphed.

Here's a quick look at the Lehman chronology:

On Sept 15, 2008, Lehman Bros filed for bankruptcy sending the Dow plummeting 504 points.

On Sept 17, the Dow falls 449 points in reaction to AIG bailout.

On Sept 29, the Dow tumbles 777 points after House votes "No" on TARP.

On Oct 3, the House passes Financial Rescue Plan (TARP) The Dow falls 818 points.

On Oct 7, the Fed creates the Commercial Paper Funding Facility to backstop the commercial paper market. Two weeks later, Bernanke announces the Money Market Investor Funding Facility to make loans of longer maturities.

These are the two facilities which relieved the tension in the markets, not the TARP funds. It's clear that Bernanke knew exactly how to fix the problem, because he did so as soon as the TARP was passed. Here's economist Dean Baker in The American Prospect:

"Bernanke was working with Paulson and the Bush administration to promote a climate of panic. This climate was necessary in order to push Congress to hastily pass the TARP without serious restrictions on executive compensation, dividends, or measures that would ensure a fair return for the public's investment.

Bernanke did not start buying commercial paper until after the TARP was approved by Congress because he did not want to take the pressure off, thereby leading Congress to believe that it had time to develop a better rescue package. ("Did Ben Bernanke Pull the TARP Over Eyes?", Dean Baker, The American Prospect)

The American people have been ripped off by industry reps working the policy-levers from inside the government. That's the real lesson of the Lehman bankruptcy. Happy anniversary.

http://www.ft.com/cms/s/0/a32aca9e-a403-11de-9fed-00144feabdc0.html

Citigroup is looking to spin off a controversial oil trading unit where the star trader could collect $100m in pay this year, according to Vikram Pandit, the chief executive.

Mr Pandit indicated that Citi wanted to reduce its ownership in the unit, called Phibro, and get it to manage money from outside investors.
EDITOR’S CHOICE
FT Alphaville: Pandit and the $100m man - Sep-18
Banks face restrictions on bonuses - Sep-15
Citigroup poaches top China investment banker - Sep-17

At present Phibro, which is run by Andrew Hall, trades with Citi’s capital...

LOOK OUT BELOW! PIGEON DROPPINGS!

http://econblogreview.blogspot.com/2009/09/doctorx-comments-on-presidents.html

The President has addressed Congress and the American people on health care reform; click HERE for the text of his speech. Also, you may click to see the Republican response (given by a heart surgeon).

One thought I have is on the following quote from the speech:

The only thing this plan would eliminate is the hundreds of billions of dollars in waste and fraud, as well as unwarranted subsidies in Medicare that go to insurance companies – subsidies that do everything to pad their profits and nothing to improve your care. And we will also create an independent commission of doctors and medical experts charged with identifying more waste in the years ahead.

Fraud and waste are not easy to eliminate, and "waste" is not even easy to define. These should be addressed ASAP and need not be part of sweeping health care reform. Medicare's famously low overhead administrative costs are part and parcel of not requiring pre-approval for tests or alleged surgeries, thus allowing fraud to exist on a significant scale. In my part of the country, Miami, Medicare fraud is a major industry. Eliminating it would put a lot of people on the dole!

So far as reducing subsidies to managed care companies: go for it! But once again, legislation on that issue could already have passed Congress. Despite being thwarted on broad healthcare reform, President Clinton moved successfully against Medicare HMOs, saving the taxpayer muchos dineros. Medicare HMOs are parasitic creatures, as are essentially all HMOs. If they are really so efficient, let them prove it by asking for no subsidy.

Regarding "preventive care": This term is often misused. A mammogram is a form of cancer screening; an abnormal mammogram is not designed to prevent cancer but rather to catch it early. In any case, I believe that early detection of cancer, diabetes, high blood pressure, etc., is a very good thing; but I also believe that it is expensive. Long ago, it was taught that long-term treatment of mild high blood pressure added but one year to a person's expected life span. Is this a good thing? Yes. Does it cost more money than it saves? Presumably, yes. I do not believe that the President has been accurately advised when he insists that preventive care is, say, revenue-neutral. I for one would much rather see my government have spent money on preventive health care than huge sums saving stockholders and bondholders of giant financial conglomerates from losses, but you can't always get what you want, and the good things that this President wants to do for the uninsured simply cost money. One reason for skepticism of his plan in certain quarters is the recollection that Medicare was supposed to cost small potatoes when it was created. Whoops!

Whether it's a social program or a war in the Middle East, people remember who promised wrongly at the outset, no matter whether or not the promise was made in good faith.

Now to the main event. Believe it or not, there are more important health care fish to fry than fiddling with insurance plans. Here goes:

The single most important thing that the Administration can do right now in the field of health is to create, support and enhance programs to combat the obesity and overweight problem in this country. The next most important thing is to stamp out cigarette smoking. Perhaps the President will lead the way in that regard. Mr. Obama should use the bully pulpit to aggressively promote health habits that will actually prevent heart disease, smoking-related cancer and lung disease, and the like. If he wants to really get with the DoctoRx program, the President will promote vegetarianism (or modified forms thereof) as part of a program both to achieve/maintain good health and to promote environmental greenness.

None of these initiatives requires a 4-year waiting period. There are numerous specific things that can be done by executive order, legislatively, and rhetorically to fight the good fight to get the pot bellies off Americans, prevent children from growing big bellies, and make cigarettes obsolete.

Those are just some initial goals. What about even tougher laws against drunk driving? What about persuading Hollywood to present getting drunk as unfunny and worse? Etc. and so on.

Where all sides in this debate have missed the main point is that a large portion of the ills that American flesh is now heir to are preventable by life-style improvements that cost both the individuals and the taxpayer less than nothing, but rather pay for themselves financially many times over. Can this unhealthy society change?

Yes. It. Can.

But. It's. Not. Easy.

Fitness first.

http://www.ritholtz.com/blog/2009/09/finance-reform-vs-health-care-reform/

I believe the brain trust behind the Obama White House has made a huge tactical error.

As Rahm Emmanuel likes to say, one should “never waste a crisis” — and the White House has done just that.

There was a narrow window to effect a full regulatory reform of Wall Street, the Banking Industry and other causes of the collapse. Instead, the White House tacked in a different direction, pursuing health care reform.

This was an enormous miscalculation.

I’m not sure who to blame, but the leading suspects (in order) are Larry Summers, Rahm Emmanuel, Tim Geithner, and (perhaps) David Axelrod. Instead of a populist clean up of The Street (ala Eliot Spitzer circa 2,000), Obama advisors allowed a smoldering resentment to take hold and build amongst the electorate. The massive taxpayer wealth transfer to inept, corrupt, incompetent bankers has created huge resentment amongst the populace — regardless of political affiliation.

There was widespread popular support for a full reform of finance. What the White House should have pursued was: 1) Reinstatement of Glass Steagall; 2) Repeal the Commodity Futures Modernization Act; 3) Overturning SEC Bear Stearn exemption allowing 5 biggest firms to leverage up far beyond 12 to one; 4) Regulating the non bank sub-prime lenders; 5) Continuing high risk trades to be compensated regardless of profitibility; 6) Mandating (and enforcing) lending standards, etc.

All of this could have been accomplished in the first 6 months of the Obama administration. The consumer protection stuff could have been tossed in as well, though it was not the cause of the collapse.

What we got instead, was the usual lobbying efforts by the finance industry. They own Congress, lock stock and barrel, and they throttled Financial Reform. It did not help that the Obama economic team is filled with defenders of the Status Quo — primarily Summers, but it appears Geithner also — the dynamic duo that fiddled while the economy burned.

Such dithering can be fatal to an administration.

This was a colossal blunder. Passing reform legislation successfully would have fulfilled the campaign promise of “Change;” it would have created legislative momentum. It could have provided a healthy outlet for the Tea Party anger and the raucous Town Hall meetings. It might have even led to a “throw the Bums out” attitude in the mid-term elections, forcing the most radical de-regulators from office.

Also wasted: The enormous anti-Bush attitude throughout the country that swept team Obama into office. He should have been “Hooverized,” and O should have tapped into that same wave to force the greatest set of Wall Street and Banking regulatory reforms seen since the 1930s.

Instead, we have a White House that appears adrift, and the most importantly, may very well have missed the best chance to clean up Wall Street in five generations.

Never waste a crisis, indeed . . .

Last fall, in my town and elsewhere, unions and progressives were holding "Bail Out Main Street" rallies over the Bankster Bail-Out. They were ignored in our local rag of a paper, and probably elsewhere too. That "populist anger" was OURS - and supported by the vast majority of Americans, from what I read? It all went to waste - the wingnuts seized the high ground for purposes as far removed from ours as they could possibly be - and THEY get news if three of them peer out of their basements for the Black Helicopters at the same time.

I know this isn't the place for purely political chat, but two articles linked over at Commondreams spell it out for me. One compares Obama to a "motivational speaker" (ouch!) and they other asks why the hell the Democrats can't govern when the Country clearly handed them a mandate repudiating the "Reagan Revolution" and its deadly successors in Commander Codpiece's Mal-Administration

(I am just catching up on the week's reading - have been away). For anyone interested:

http://www.commondreams.org/view/2009/09/17-6
"The Baucus Debacle: So Democrats Can Win an Election But Can They Govern?
Why Democrats Have to Stop Trying to Woo Republican Lawmakers
by Mitchell Bard"

and
http://www.commondreams.org/view/2009/09/17
"Once Again The Animals Were Conscious of A Vague Uneasiness
by Christopher Cooper"

(I have not read it since high school, but that must be a quote from Animal Farm?

After all, the study is called Economics-Political Science over at Columbia, in London, and points elsewhere..

When I use to work retail the intercom would play songs all day long, and so many of them were the good ones like Peter Paul and Mary. Those songs kept me company during long days of work.

Thank you for your songs

http://www.youtube.com/watch?v=HIshbtQ6LqA

http://themessthatgreenspanmade.blogspot.com/2009/09/tale-of-two-inflations.html

For some time now, the disparity between price increases for imported goods and price increases for domestic goods and services has been of great interest to me and, after working through all of the applicable Labor Department data on this subject, it quickly becomes clear that there is an interesting story to tell here about two very different types of U.S. inflation in recent years - domestic inflation and imported inflation....


CLICK ON THE LINK FOR THIS VERY INTERESTING ANALYSIS, COMPLETE WITH CHART PORN TO DELIGHT THE NERDIEST

http://www.nakedcapitalism.com/2009/08/geithner-bullies-financial-regulators.html

The Wall Street Journal reports that Timothy Geithner tongue-lashed Federal financial services regulators over their bucking the Obama Administration initiative for the Fed to become The One Regulator to Rule Them All. This comes on the heels of Congressional testimony which showed rather clearly that the key actors were not singing from the same hymnal.

This display of pique seems badly misdirected. I doubt that the show of disarray will make much difference in the outcome. Congress is engaged in a turf war against the Fed, justifiably unhappy with the Fed acting, as Willem Buiter put it, as quasi fiscal agent, effectively circumventing Congress’ control over budgetary purse-strings via stretching the TARP through various off-balance-sheet vehicles (from the Treasury standpoint). If Lyndon Johnson were still Senate majority leader, you’d have had a Constitutional crisis before things would have gotten this far. Congress was far more zealous about protecting its sphere of influence, but successive Presidents have managed to cut it down to size.

The question is whether Congress continues in its opposition. Given the trouble Obama is having with his big agenda item, health care, and the considerable unhappiness in Congress, and even to a degree in the electorate, over the Fed taking on tasks that legitimately call for more accountability, which the Fed refuses to entertain, it remains to be seen whether Congress will blink. I wouldn’t bet on it.

Obama seems unable to recognize he has pinned the fate of his presidency on two people, Geithner and Summers, who are part of the problem. The stillborn PPIP was a terrible idea. Paulson had two efforts on variants of the “buy toxic assets” idea and failed. The stress tests were a farce. The Potemkin reform plan puts more regulatory authority in the Fed, which was far and away, of all the regulators, least interested in supervision.

The only thing that the Treasury and Fed have succeeded in doing is cheerleading to get stock prices up so that banks could raise equity at not-hugely-dilutive prices. I spoke to a hedge fund manager yesterday who sees this rally as driven by technical and relative performance concerns, not supported by fundamentals. He is also not the first I have heard speculate that the media boosterism, particularly from sources not known for that sort of thing, like Bloomberg, suggests that official pressure has been applied to keep financial news upbeat. He thinks the markets, not just the bond market via Fed intervention, but even equity markets, are being used to try to goose the economy.

And if that fails and we have another downdraft, what successes will Geithner be able to point to? The canard of the banks repaying the TARP, when as Roger Ehrenberg points out, the warrants were massively underpriced? The only one is the goosing the markets exercise, and if that ends badly, it calls a lot else into question.

From the Wall Street Journal:

Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation….

Mr. Geithner told the regulators Friday that “enough is enough,” said one person familiar with the meeting. Mr. Geithner said regulators had been given a chance to air their concerns, but that it was time to stop, this person said.

Among those gathered in the Treasury conference room were Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Mary Schapiro and Federal Deposit Insurance Corp. Chairman Sheila Bair.

Friday’s roughly hourlong meeting was described as unusual, not only because of Mr. Geithner’s repeated use of obscenities, but because of the aggressive posture he took with officials from federal agencies generally considered independent of the White House. Mr. Geithner reminded attendees that the administration and Congress set policy, not the regulatory agencies.

Mr. Geithner, without singling out officials, raised concerns about regulators who questioned the wisdom of giving the Federal Reserve more power to oversee the financial system. Ms. Schapiro and Ms. Bair, among others, have argued that more authority should be shared among a council of regulators..

The government’s proposal would empower the government to take over and break up large financial companies, merge two bank regulators, and toughen oversight of mortgages, among other things.

Administration officials say they aren’t worried about the overhaul’s prospects, adding that there is consensus on key aspects, including the regulating of over-the-counter derivatives. Treasury officials say they expected a big debate over the complex legislation. The first piece, which addresses executive pay, passed the House Friday.

“The industry is already back to their pre-meltdown bonuses,” said White House Chief of Staff Rahm Emanuel. “We need to make sure we don’t slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform.”

Neal Wolin, Treasury’s deputy secretary, said Mr. Geithner told regulators “they have the prerogative to express their views, but he wanted to make sure that, since everyone had agreed on the importance of achieving reform this year, everyone stayed focused on that goal.”…

The administration has pushed for Congress to complete the overhaul by the end of the year. House Financial Services Committee Chairman Barney Frank (D., Mass.) and Senate Banking Committee Chairman Christopher Dodd (D., Conn.) have both said that remains the goal.

Both men, however, have suggested the overhaul could change from Treasury’s proposal. Sen. Dodd favors giving extra powers to an oversight council rather than the Fed. Mr. Frank said Monday lawmakers were still working on a way to “make sure you have a sufficient broad base of participation and input” and “to make sure you have effective authority.”

He said the flap several months ago over the Federal Reserve’s role in allowing American International Group Inc. to pay large bonuses to employees “damaged the Federal Reserve politically.”

The top Republicans on these committees, Sen. Richard Shelby (R., Ala.) and Rep. Spencer Bachus (R., Ala.), have also expressed skepticism over ceding too much power to the Fed.

“A rush to judgment where they basically throw these things together without any consensus is going to be a disaster,” Rep. Bachus said.

THESE DAYS, ONLY THE CRIMINALS HAVE HAMMERS....

NOTE: GFC STANDS FOR GLOBAL FINANCIAL CRISIS



http://www.nakedcapitalism.com/2009/08/guest-post-breaking-news-gfc-was-not.html

Satyajit Das, of Traders, Guns & Money fame, is keeping tabs on what he calls GFC plot lines, or what one might also call The Search For The Guilty.

The latest caught in the dragnet is…economists! But Das thinks some of the books still miss key issues.

From Das:

Just when I had finally worked out that the GFC had been caused by beer swilling, cocaine snorting, lap dancing club habitues who were irresistible to the opposite sex, I find I was wrong! It seems that the GFC was the work of economists who wish that they were beer swilling, cocaine snorting, lap dancing club habitues irresistible to the opposite sex.
This quartet of books focuses on the political economy of the GFC.

Andrew Gamble, Professor of Politics at Cambridge, in The Spectre at the Feast (2009; Palgrave MacMillan), provides a succinct overview of the economic background to the GFC. Gamble traces the shift in economic thinking and policy from Keynes/ Hayek through to the Friedman/Chicago School and its impact of the global economy. Gamble also assesses some of the current policies designed to restore the economy to health. A lively and eminently readable text provides the reader with a guide to how the present crisis is merely another chapter in the progression of the “dismal science” and familiar cycles driven by “animal spirits”.

Restoring Financial Stability: How to Repair a Failed System (2009; John Wiley) is a collection of readings lightly edited by Viral Acharya and Matthew Richardson on the GFC. Organised around seven loose themes (causes; financial institutions; governance; derivatives; role of the Fed; the bailout; international coordination), the 18 policy papers of varying quality propose ambitious ‘market based’ solutions to the problems revealed by recent events.

Fifty years ago, C.P. Snow, in his “Two Cultures” lecture, identified the divide between literary and scientific intellectuals. Restoring Financial Stability reveals a similar divide between theoretical economics and market practitioners. The tired nostrums that are put forward rehash age-old proposals for more capital, increased transparency and ‘better’ regulation that have failed repeatedly in the past.

Many of the problems in financial markets revealed by the GFC relate to the detailed plumbing and interconnectedness of financial markets. Some of the essays show a fundamental lack of understanding of critical micro-structure issues of how financial markets operate that detract from the proposed solutions. As Yogi Berra once remarked: “In theory there is no difference between theory and practice but in practice there is.”

Richard Khoo’s The Holy Grail of Macroeconomics: Lesson from Japan’s Great Recession (2009; John Wiley) and the Gary Saxonhouse and Robert Stern edited Japan’s Lost Decade: Origins, Consequences and Prospects for Recovery (2004; Blackwell Publishing) provide fascinating insights into the problems of Japan that, despite protestations from Western officials, have striking similarities with the GFC. It seems that we are all in danger of turning Japanese.

Originally published in 2008 and now updated, Khoo argues that there are two phases in an economy – the “yang” ordinary phase when the private sector maximises profits and the “yin” post-bubble phase when the private sector moves to reduce debt and repair balance sheets. Khoo’s interesting thesis is that conventional economic policy may not work in the yin phase. This essential insight is crucial in understanding the evolution of a post-GFC world and the impact of aggressive government policy actions and their eventual withdrawal.

Japan’s Lost Decade, published earlier, provides a series of short perspectives on the collapse of equity and real estate markets bubbles and their relationship to Japan’s persistent economic problems. Both books provide insights into the effect of price shocks, deflationary pressure and the failure of policies in Japan that hold important lessons for everybody in the aftermath of the GFC.

The GFC poses important challenges in our understanding of economic processes and policy options. The economy may simply be too complex and unstable to be controlled by simplistic government intervention. There may be inevitable boom-bust cycles that cannot be easily eliminated, as a whole generation of economist assumed. As Keynes observed “the difficulty lies not so much in developing new ideas as in escaping from old ones”.

http://mortgageservicingnews.com/plus/inside_take/?story_id=118

As the mortgage and banking industries debate whether the PPIP program will work and whether a similar effort over at the FDIC will ever see the light of day, Wells Fargo & Co. recently (and quietly) sold a $600 million portfolio of mostly nonperforming subprime loans. Or so we're told.

Late last week a source close to the transaction identified Arch Bay Capital of Irvine, Calif., as the winning bidder on the portfolio whose loans were originally funded by two midsized subprime wholesalers: Accredited Home Loans and NovaStar Financial.

Arch Bay co-founder Steven Davis declined to comment on the purported sale to his firm, referring calls to his partner Shawn Miller who serves as Arch Bay's CEO. Mr. Davis didn't deny that the sale took place but he wouldn't confirm it either. Mr. Miller could not be reached for comment.

Meanwhile, one question the sale raises is this: How exactly did the publicly traded Wells wind up with so many crummy nonprime loans from these once high flying firms? Answer: I don't know and Wells isn't talking. A company spokesman said the bank's corporate policy is to not discuss its loan auctions.

Where am I going with all this? Perhaps one reason the PPIP (Public-Private Investment Program) and the Federal Deposit Insurance Corp.'s 'Legacy Loan' sale initiative (involving whole loans, presumably residential and commercial mortgages) hasn't caught fire is 'sunshine,' that is, the concept of disclosure. If bankers and investment bankers use these government programs that means all the messy details of their crappy investments might see the light of day, which could anger shareholders - and maybe even board members who might lean toward being "activists."

The nice thing about the private nonperforming loan market is that none of these messy details have to see the light of day, including the price paid. One banker told me that the 35 cents on the dollar that Arch Bay reportedly paid was twice what some hedge fund bidders were offering.

No matter how you do the math, Wells is going to take a nice hit on the sale, if it hasn't done so already. Will the public ever get wind of the NPL sale price (outside this column)? That's hard to say. The Securities and Exchange Commission requires that publicly traded companies disclose "material events" in their 10-Qs and Ks but when you have a mega bank the likes of Wells, a $600 million loan auction might garner a sentence in the next earnings report, at best.

Perhaps, the PPIP program will indeed take off. Someday. And maybe it won't. Just keep in mind that Wall Street and the banking industry have plenty of dirty subprime laundry they may not want aired. Private sales (by publicly traded banks) will guarantee that the details of those deals stay private. To borrow a marketing phrase from the Nevada's gaming industry: What happens in the (private) NPL market, stays in the NPL market.

Paul Muolo can be emailed at: Paul.Muolo@SourceMedia.com.

http://tauntermedia.com/2009/07/28/unconscionable-math/

The House hearings on rescission – the retroactive cancellation of individual health insurance policies – were over a month ago, but after its initial run through Daily Kos it seems to have waited a bit before popping up on Baseline and Slate. James Kwak at Baseline described the practice as rare, affecting only 0.5% of the population. The faint light bulb above my head began to flicker: could that be true…that’s not rare – that is amazingly common.

It is. In fact, from Don Hamm’s (CEO of Assurant) prepared testimony, with the company logo nicely on the front of it in the original:

Rescission is rare. It affects less than one-half of one percent of people we cover. Yet, it is one of many protections supporting the affordability and viability of individual health insurance in the United States under our current system.

What tangled webs we weave…

To understand why 0.5% of the people Assurant covers is a lot of people – a jarring, terrifying, probably criminal lot – you need to understand a little bit of math. You need to understand just enough math to understand what Don and his legal team are not telling you. You need to understand conditional probability. And the folks at Assurant are counting on the fact that you don’t.

A typical job interview question for aspiring finance folks is the Monty Hall Question. As typically phrased, you go on a game show and are asked to pick one of three doors. Behind two of the doors are goats. Behind one is a shiny new car. You pick a door. The host ceremoniously opens a door that you did not pick, and behind it is a goat. He turns to you while the audience giggles at the goat. Do you want to change your pick?

As I have pointed out on the Idea Locker comments, this typical phrasing is a bit unfair. If you haven’t seen the show, you might think the choice of what door the host opened was random, unrelated to the door you picked. Since there is no correlation, you don’t see why you should change your pick. If someone asked you to call the third of three coin tosses in a row, you wouldn’t change your pick if the first two were heads, would you?

But the nuance of the game is that the door is not random. The door that is opened will always meet two conditions:

* It is not the door you picked originally (or else what would be the point of carrying on)
* It is not the door with the car (that would certainly bring things to a close)

You had a 1/3 chance of being right in your initial pick. That means there was a 2/3 chance the car was behind “not your pick”. Well, if you change your pick now, you cover the entire “not your pick” set – you have seen one of the two doors, know that it’s empty, and now have the payoff from the other. You should change your pick.

Here’s the health care nuance (2005 HHS report based on 2002 data):

Bar graph shows percent of total expenditure by percent of population: Top 1% (greater than or equal to $35,543), 22%; Top 5% (greater than or equal to $11,487), 49%; Top 10% (greater than or equal to $6,444), 64%; Top 20% (greater than or equal to $3,219), 80%; Top 50% (greater than or equal to $664), 97%; Bottom 50% (less than $664), 3%.

Half of the insured population uses virtually no health care at all. The 80th percentile uses only $3,000 (2002 dollars, adjust a bit up for today). You have to hit the 95th percentile to get anywhere interesting, and even there you have only $11,487 in costs. It’s the 99th percentile, the people with over $35,000 of medical costs, who represent fully 22% of the entire nation’s medical costs. These people have chronic, expensive conditions. They are, to use a technical term, sick.

An individual adult insurance plan is roughly $7,000 (varies dramatically by age and somewhat by sex and location).

It should be fairly clear that the people who do not file insurance claims do not face rescission. The insurance companies will happily deposit their checks. Indeed, even for someone in the 95th percentile, it doesn’t make a lot of sense for the insurance company to take the nuclear option of blowing up the policy. $11,487 in claims is less than two years’ premium; less than one if the individual has family coverage in the $12,000 price range. But that top one percent, the folks responsible for more than $35,000 of costs – sometimes far, far more – well there, ladies and gentlemen, is where the money comes in. Once an insurance company knows that Sally has breast cancer, it has already seen the goat; it knows it wants nothing to do with Sally.

If the top 5% is the absolute largest population for whom rescission would make sense, the probability of having your policy cancelled given that you have filed a claim is fully 10% (0.5% rescission/5.0% of the population). If you take the LA Times estimate that $300mm was saved by abrogating 20,000 policies in California ($15,000/policy), you are somewhere in the 15% zone, depending on the convexity of the top section of population. If, as I suspect, rescission is targeted toward the truly bankrupting cases – the top 1%, the folks with over $35,000 of annual claims who could never be profitable for the carrier – then the probability of having your policy torn up given a massively expensive condition is pushing 50%. One in two. You have three times better odds playing Russian Roulette.

People lie on their insurance forms, of course, and that is a serious problem. But let’s not forget that the very nature of the forms is designed to create inaccuracies, and it doesn’t matter in the slightest how minor the error may be once the company comes looking to get out of its policy. Back to Don Hamm:

I mentioned a story in my comment on the Baseline article, and it’s a favorite of mine, so I’ll repeat it here: Years ago I was walking a casino floor with a casino executive. It was an incredibly detailed tour, and we got to talking about pretty much everything that came to mind about crowds and gaming. Now, a clever observer might notice that even the tolerant people of Nevada will not allow alcohol in vending machines – wouldn’t want the little ones to be able to get a Bud Light without a human being verifying their ID. But there we were in the middle of acres of blinking lights, with absolutely no one making sure that underage kids weren’t walking up to a slot machine. Indeed, they don’t card for the table games.

The executive told me you are free to play if you are underage, you just aren’t free to win. You can sit down and pump your money into the slots, and if you look presentable you can drop some chips on blackjack or craps. However, if you should happen to start winning, the pit boss or security team will come over and check your ID. The house edge is 100%.

Conditional probability is tough for the human brain. We tend to think of things as either completely correlated (once the market tanked, McCain had to lose) or completely uncorrelated (coin tosses). To a certain extent, we make the calculations in everyday speech: when someone says that pancreatic cancer is exceptionally lethal, he doesn’t mean that it is likely to kill an enormous number of people; he means it will kill an enormous percentage of the people who contract pancreatic cancer. Get a bit more tangential and even very smart people with Nobel Prizes miss things; one of the reasons Long Term Capital Management melted down was that once they started sustaining heavy losses, people bet against LTCM’s other holdings – LTCM itself was the correlation. Low frequency, high severity events are also difficult for us to process – look at how much we invest fighting air piracy versus the sacrifices we are unwilling to make on drunk driving or domestic firearm violence.

Put them together and the guys with the actuaries working for them have a nearly insurmountable advantage. I tend to think of traditional banking and traditional insurance as mirror images: when you take out a mortgage, you get a lump sum and make a series of payments; when you get life insurance, you make a series of payments and get a lump sum. Health insurance is somewhat similar to life insurance, except the payout happens sometime during the payment stream instead of at the end.

When a person intentionally defaults on consumer credit, he is called a “ruthless defaulter” and the system, to the extent that it operates with any sort of efficiency, is designed to try to flush him out of the credit market in the future. Society can tolerate taking the risk of inadvertent defaults – the people who through some sort of misfortune are unable to make good their promised payments. The folks who do it on purpose…do it enough and the FBI might step in.

The insurance industry has a bit of a historical difference, in that pretty much everything in health insurance is similar to a liar loan. I tell the company if I have been sick, just like stating an income on a mortgage application. For a host of administrative and medical privacy reasons, the insurance industry has not historically wanted a comprehensive inventory of medical records before taking a client. Few people could probably deliver such a record even with the best of intentions. There is a problem with liar loans, and it was well described by Tanta (Calculated Risk’s late writing partner) here:

Well, with Number 1 , it’s “clearly” the borrower’s fault. He or she lied, and we can pursue a deficiency judgment or other measures with a clear conscience, because we were defrauded here. We can show the examiners and auditors how it’s just not our fault. The big bonus, if it’s a brokered or correspondent loan, is that we can put it back to someone else, even if we actually made the underwriting determination. No rep and warranty relief from fraud, you know.

It is in the health insurer’s interest to have application fraud, not only because it saves time and expense on the front end, but also because it lets them get out of any policy that isn’t going well for them. If the health insurer had to verify the information – if, in essence the insurance company had to behave as an accredited investor with adequate expertise to make a decision without reliance – it wouldn’t have the opportunity to bail out. It would catch more genuine liars, but many of these liars would have turned out to be healthy, profitable customers, and what the carrier really wants is a population devoid of expensive claims, not devoid of liars.

Years ago, the shameful business was the tobacco industry. There was a certain roguish charm to them; they had great ads and were fun outgoing people, and of course they made a product that if used as directed would kill you.

Say this for the tobacco folks: they printed the dangers right there on the pack. Few people who took up smoking after World War II did so with ignorance of the health consequences. Society wants tobacco, it might as well be produced in clean factories and wrapped in cellophane as opposed to sold on street corners. I hope we legalize marijuana and let Altria and RJR make joints and put the Mexican cartels out of business.

No, the health insurance companies sneak around. They have nice facades, they speak in the bureaucratic language of statistics few understand, and they make the eminently reasonable argument that they just need to protect themselves. They promise great coverage, and when many years later it comes time to pay out and the petitioner is sick and unable to function, sorry, wish we could do better, but there was an error and rules are rules. We’re keeping the premiums. It’s actually far more like this guy:

Bernard%20Madoff%20large.jpg

Bernie Madoff made people promises, and people believed them, because was it really possible that the former chairman of the NASD was running a scam? Come on. But he was, and his reputation was no more a shield to the defrauded than the huge balance sheets of the health insurance companies mean an individual claimant is going to get covered. The minute he began transferring money from one account to another and then raising external capital to try to square the numbers, he knew exactly where this was going. The insurance companies know too; they just know well enough to avoid outrunning the law.

I don’t know if this case is going to be the lever the Democrats need to get meaningful healthcare reform. The Democrats don’t even seem to be able to line up on the same side, which is probably a necessary precursor to getting something passed. The Taunter Drug Plan for lower prescription drug costs doesn’t seem to have taken the Internet by storm, so I give this post low odds of breaking through. But I will make this simple point in the hope some speechwriter pressed for a deadline picks it up: if a bank manager went to half of his highest net worth clients and said “sorry, you misspelled your address when you opened your account, I’m confiscating your balance,” he would be lucky to get himself assigned to minimum security.

FOR ACCOMPANYING VIDEO ILLUSTRATIONS, SEE LINK!

http://alephblog.com/2009/08/15/ten-unsolved-problems-in-the-global-economy/



There are many celebrating the recovery as if it were already here. This is a brief post to outline my main remaining concerns for recovery of the global economy.

1) China is overstimulating its economy, and forcing its banks to make bad loans. This pushes up commodity prices, and makes it look like China is growing, but little of the investments made are truly needed by the rest of the global economy.

2) Western European banks have lent too much to Eastern European nations in Euros. The Eastern Europeans can’t afford it, and widespread defaults are a possibility.

3) The average maturity of bonds held by foreign investors in US Treasuries is falling. Runs on currencies happen when countries can no longer roll over their debts easily, which is facilitated by having a lot of debt to refinance at once.

4) On a mark-to-market basis, market values for commercial real estate have fallen dramatically. Neither REIT stocks nor carrying values for loans on the books of banks reflect this yet. Many banks are insolvent at market-clearing prices for commercial real estate.

5) We still have yet to feel the effects from pay-option ARMs resetting and recasting. Most of the pain in residential housing is done, but on the high end, there is still more pain to come, and the pay-option ARMs will reinforce that.

6) The rally in corporate debt and loans was too early and fast. Conditions are not back to normal for creditworthiness. There should be a pullback in corporate credit.

7) We had global overbuilding is cyclical sectors 2002-2007. We overshot the demand for large boats as an example. We overdeveloped energy supplies (that will be short-lived), metals, and other commodities. It will take a while to grow into the extra capacity.

8 ) The US consumer is still over-levered. It will be a while before he can resume his profligate ways, assuming a new frugality does not overcome the US. (Not likely by historical standards.)

9) The Federal Reserve will have a hard time removing their nonstandard policy accommodation.

10) We still have the pensions/retiree healthcare crisis in front of us globally.

That’s all. To my readers, if you can think of large unsolved problems in the global economy, forward them on to me here in the comments. If I agree, I will incorporate them in future articles.

http://businomics.typepad.com/businomics_blog/2009/08/the-recession-isnt-over-yet-as-of-last-week.html


One good indicator of the recession being over is the end of job losses. It's not a perfect measure, but if you only have room in your brain for one measure, then this is it. And July was still of a month of decline. I've been tempted to proclaim the recession over for the last few weeks. It's getting real close, but I couldn't quite pull the trigger. Now I think I'll wait another month until we get August data. But it looks very likely that, when all is said and done, July or August will turn out to be the very bottom of the recession. (But note that the economy turning up is not the same as the economy recovering all lost ground. That's still a year away once we reach bottom.)

http://businomics.typepad.com/.a/6a00d8341cd0c953ef0120a52b2eb6970c-pi

Yesterday in Nashville (I was there speaking to the Commercial Finance Association) I heard an interesting presentation by Gary Green of Morgan Keenan, who made a strong case that stocks are headed up. One quote he cited stuck with me: J.P. Morgan said,

"Any man who is a bear on the future of this country will go broke."

http://economistsview.typepad.com/timduy/2009/08/never-underestimate-the-power-of-money-especially-lots-of-money-coming-on-top-of-a-cyclical-recovery-that-is-almost-textbo.html



Never underestimate the power of money. Especially lots of money coming on top of a cyclical recovery that is almost textbook at least as far as the timing is concerned. To be sure, you can question the sustainability of the recovery, the breadth or health of the recovery, the nature of job growth. I have questioned all repeatedly and fail to see that the conditions that have dominated the US economic story for the past 25 years - primarily, a continued reliance on consumer spending to propel growth - can continue in the face of massive household debt burdens and stiffer (or, more accurately, realistic underwriting conditions). But regardless of these concerns, evidence is clearly pointing to a shift in economic conditions for the better. Moreover, I suspect it will take at least two more quarters at a minimum - and maybe closer to two more years - before the more pessimistic or optimistic visions of the future will come into clear view. Until then, it seems likely the appetite for risk will continue to climb, and all the liquidity - liquidity fueled by new guarantees that massive financial institutions are too big too fail - has to go somewhere.



Which is to say that no matter how pessimistic you are in the medium and longer term, you need to recognize the potential for massive moves in markets as risk taking perpetuates more risk taking. And as long as that risk taking flows in directions that do not fundamentally change the US jobs and, by extension, wage picture, it is difficult to imagine the Federal Reserve will do anything but let the party role on.



The second quarter GDP report (Jim Hamilton and Menzie Chinn at Econbrowser discuss the details) confirmed what was already well known - the pace of deterioration slowed markedly, setting the stage for a growth rebound in the second half of this year. The game now is upping near term growth forecasts accordingly - not a fool's errand at all, considering the inventory correction is running its course and new residential construction is mostly likely at the bottom (seriously, we were never moving to an economy where zero houses would be built). Moreover, as Calculate Risk reports, it looks like we hit the bottom of car sales, with no small boost being provided by the Cash for Clunkers program. Say what you like about the economic wisdom of this program or its potential to magnify a double-dip by borrowing from future growth, it will goose the third quarter numbers and advance the pace of inventory correction in the auto industry. And, let's be honest, buying new cars is a whole bunch more fun than just writing massive checks to keep the industry afloat.



The July ISM manufacturing report only adds to the cyclical rebound story. The headline number is flirting with the all important 50 mark, while the new orders component surged into expansion territory. Production, export, and import components all gained. Even the employment reading rose higher, although it continues to signal ongoing job declines. All in all, a report that is predicting recovery in a time frame consistent with the deep cyclical plunges of late last year.



On a more somber note, labor market weakness continues to weigh on paychecks, a phenomenon confirmed by the employment cost index for the second quarter. Wages and salaries for private workers climbed a scant 0.2%. To be sure, this raises concerns about the durability of consumer spending going forward, especially when combined with fears of a jobless recovery. Indeed, I have argued that most if not all of the jobs in the manufacturing sector simply are not coming back. My suspicion is that firms will use the recession to expand overseas supply chains wherever possible. Moreover, firms will not be in a rush to hire back without a clear resurgence of growth, which seems unlikely to occur given precarious household debt burdens.



Now comes the tricky part - what does the evolving economic dynamic imply for financial markets? I am increasingly of the mind that although a jobless recovery will be a dreary fate for the American people, it offers the best outcome for financial markets for one simple reason: The jobless recovery offers the greatest probability that the Fed remains on the sidelines. The jobless recovery is what keeps the Fed goose laying the golden eggs.



True, one should be cautious about reading too much into near-term market action. Macro man puts it succinctly:

The problem that some so-called perma-bears have is is recognizing the temporary importance of such asset flow, and how far it can push asset prices. By the same token, the problem that some of the flow-of-funds, risk-on crowd have is is failing to recognize that buying something just because other people do is nothing more than an exercise in greater fool theory. And while the market may well be a voting machine in the short run, as Benjamin Graham observed it is a weighing machine in the long run.

With the Armageddon trade off the table, market participants need to move the mass of money provided by the Fed somewhere, and it is showing up in all the predictable places. US equities, commodities, oil, and foreign exchange. Indeed, without the Fed threatening to raise rates, there is no rush to exit Treasuries, which could explain the failure of the ten year bond to retake the 4% mark even as equities sure higher.



To be sure, these trades might collapse under their own weight, but the probability of finding a self-sustaining move, like the US housing boom earlier this decade, is higher the longer the Fed keeps rates at a rock bottom level. And the farther that money flows from the US the better for financial market participants; too much money close to home would raise the prospect of stronger growth and tighter monetary policy. Andy Xie (hat tip to Big Picture) believes he has found one such place in China:

Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate.

When will that bubble burst? Possibly 2012, after the Fed can no longer keep interest rates low:

It is not too hard to understand when the bubble would burst. When the dollar becomes strong again, liquidity could leave China sufficiently to pop the bubble. What’s occurring in China now is no different from what happened in other emerging markets before. Weak dollar always led to bubbles in emerging economies that were hot at the time. When the dollar turns around, the bubbles inevitably burst.



It is difficult to tell when the dollar will turn around. The dollar went into a bear market in 1985 after the Plaza Accord and bottomed ten years later in 1995. It then went into a bull market for seven years. The current dollar bear market began in 2002. The dollar index (‘DXY’) has lost about 35% value since. If the last bear market is of useful guidance, the current one could last until 2012. But, there is no guarantee. The IT revolution began the last dollar bull market. The odds are that another technological revolution is needed for the dollar to enter a sustainable bull market.



However, monetary policy could start a short but powerful bull market for the dollar. In the early 1980s Paul Volker, the Fed Chairman then, increased interest rate to double digit rate to contain inflation. The dollar rallied very hard afterwards. Latin American crisis had a lot to do with that.



The current situation resembles then. Like in the 1970s the Fed is denying the inflation risk due to its loose monetary policy. The longer the Fed waits, the higher the inflation will peak. When inflation starts to accelerate, it would cause panic in financial markets. To calm the markets, the Fed has to tighten aggressively, probably excessively, which would lead to a massive dollar rally. This would be the worst possible situation: a strong dollar and a weak US economy. China’s asset markets and the economy would almost surely go into a hard landing.

Bottom Line: Incoming data continue to confirm the cyclical turn in the US economy. But that cyclical turn is supported by a massive amount of government intervention, in and of itself a testament to the fragility of the recovery. The Fed will be in no rush to withdraw that liquidity - especially if a jobless recovery emerges. Indeed, it is easy to tell a story where the Fed holds rates near zero into 2011. That also means the Fed will not rock any boats. Thus, the jobless recovery is almost a dream come true for those trades dependent on easy Fed policy - which seem to be virtually all trades at the moment. Although there has been talk of the Fed acting preemptively to curtail bubbles, I am skeptical that any such action would be taken with US unemployment staring at double-digits. And there certainly would be no rush to react if low US interest rates fueled bubbles outside US borders; that, after all, would be the responsibility of foreign policymakers.

Ode to the middle class....

www.youtube.com/watch?v=NQZI0fZOQng

http://www.econbrowser.com/archives/2009/08/employment_hour.html

MORE EXQUISITE CHART PORN

http://www.nakedcapitalism.com/2009/08/europe-recovers-as-us-lags.html

It was conventional wisdom in the US and UK financial press that Europe was dong a hopelessly bad job of responding to the economic downturn, that it needed to do vastly more in the way of fiscal stimulus, that it was consigning its citizens to continued recession, and the Te Germans in particular were to blame for their conservatism re emergency fiscal measures. German readers begged to differ, pointing out the Germany (and the rest of Europe) has large automatic stabilizers (very generous unemployment insurance, for instance), making discretionary fiscal spending less necessary.

I was traveling along the Danube and Rhine in June, and saw far fewer signs of distress (like vacant retail stores) then I see is TARP-supported Manhattan. I thought this was merely sample bias, the vagaries of being in tourist areas (albeit before tourist season was in full swing) and discounted my impressions.

Turns out my sample may not have been so unrepresentative. The Wall Street Journal reports that Europe appears on the cusp of a bona fide recovery, with France and Germany both showing decent second quarter growth, while the US is trying to pretend that “things are getting worse less quickly” is tantamount to recovery.

Now are any of the Euro bashers about to give the EU authorities some credit? I doubt it.

And this disparity, if it persists, points to a much deeper issue. The US chose to deregulate across a wide range of activities and let the devil take the hindmost. Europe cares more about institutional frameworks and collective outcomes. US commentators regularly describe Europe a sclerotic. But if the EU winds up delivering better growth, what justification do we have for a system that seems best at redistributing income to teh top>

From the Wall Street Journal:

Germany and France have escaped from recession surprisingly quickly, outpacing the U.S. in returning to growth thanks in part to government stimulus efforts and consumer spending.

Germany, Europe’s biggest economy, grew at an annualized pace of 1.3% in the second quarter, while France, the region’s second-biggest economy, expanded at an annualized rate of 1.4%. Both countries recorded contractions for the previous four quarters, and bounced back earlier than other advanced economies including the U.S. and the U.K.

The news that Europe’s economic engine is rebounding suggests the region is joining the recovery under way in China and increasingly elsewhere in Asia, exemplified by India’s announcement Wednesday that industrial production in June rose nearly 8% from a year earlier.

That contrasts with uneven consumer spending in the U.S., where retail sales unexpectedly fell 0.1% in July, as American households are hurting from job losses, a weak housing market and tight credit…

The return to modest growth in Germany and France meant that GDP in the 16-nation euro currency zone fell at an annualized rate of 0.4% in the second quarter — a big improvement on the euro zone’s 9.7% pace of contraction in the first quarter.

Doubts persist about sustaining the recovery in Europe’s economic heartland next year. Stimulus measures, including programs to scrap old cars for more fuel-efficient ones will expire, while European banks continue to pare lending as they try to digest losses from the financial crisis and rebuild capital..

the former taunted in a Morgan Stanley report, as late as 2007, as the Sick Man of Europe; and Germany, so denominated by the UK's gutter, neoconservative press, a mere decade ago.

If the ancestors of these risible knaves of one or other or both of our respective Establishments had not been responsible for two world wars within the space of little more than 20 years, and countless others, you'd laugh like a drain at the exposure of their crass imbecility. But it's no laughing matter, of course.

http://www.zerohedge.com/article/elizabeth-warren-we-have-real-problem-coming


Elizabeth Warren, head of the Congressional Oversight Panel, which yesterday released quite a sobering report on the true state of the banking industry, explains what is really going on with the increasingly irrelevant balance sheets of the bailout banks (all of them). Once again underscores what a farce the stress test was, the complicity of the accountants in making the transparency initiative a sham, and why the banks are still as underwater as they ever were. Compliments of Shanky's Tech Blog.

VIDEO INTERVIEW AT LINK

http://www.boston.com/bostonglobe/ideas/articles/2009/09/13/why_capitalism_fails/?page=full

The man who saw the meltdown coming had another troubling insight: it will happen again


September 14, 2009 "Boston Globe" -- Since the global financial system started unraveling in dramatic fashion two years ago, distinguished economists have suffered a crisis of their own. Ivy League professors who had trumpeted the dawn of a new era of stability have scrambled to explain how, exactly, the worst financial crisis since the Great Depression had ambushed their entire profession.

Amid the hand-wringing and the self-flagellation, a few more cerebral commentators started to speak about the arrival of a "Minsky moment," and a growing number of insiders began to warn of a coming "Minsky meltdown."

"Minsky" was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through. A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy.

In recent months Minsky's star has only risen. Nobel Prize-winning economists talk about incorporating his insights, and copies of his books are back in print and selling well. He's gone from being a nearly forgotten figure to a key player in the debate over how to fix the financial system.

But if Minsky was as right as he seems to have been, the news is not exactly encouraging. He believed in capitalism, but also believed it had almost a genetic weakness. Modern finance, he

argued, was far from the stabilizing force that mainstream economics portrayed: rather, it was a system that created the illusion of stability while simultaneously creating the conditions for an inevitable and dramatic collapse.

In other words, the one person who foresaw the crisis also believed that our whole financial system contains the seeds of its own destruction. "Instability," he wrote, "is an inherent and inescapable flaw of capitalism."

Minsky's vision might have been dark, but he was not a fatalist; he believed it was possible to craft policies that could blunt the collateral damage caused by financial crises. But with a growing number of economists eager to declare the recession over, and the crisis itself apparently behind us, these policies may prove as discomforting as the theories that prompted them in the first place. Indeed, as economists re-embrace Minsky's prophetic insights, it is far from clear that they're ready to reckon with the full implications of what he saw.

In an ideal world, a profession dedicated to the study of capitalism would be as freewheeling and innovative as its ostensible subject. But economics has often been subject to powerful orthodoxies, and never more so than when Minsky arrived on the scene.

That orthodoxy, born in the years after World War II, was known as the neoclassical synthesis. The older belief in a self-regulating, self-stabilizing free market had selectively absorbed a few insights from John Maynard Keynes, the great economist of the 1930s who wrote extensively of the ways that capitalism might fail to maintain full employment. Most economists still believed that free-market capitalism was a fundamentally stable basis for an economy, though thanks to Keynes, some now acknowledged that government might under certain circumstances play a role in keeping the economy - and employment - on an even keel.

Economists like Paul Samuelson became the public face of the new establishment; he and others at a handful of top universities became deeply influential in Washington. In theory, Minsky could have been an academic star in this new establishment: Like Samuelson, he earned his doctorate in economics at Harvard University, where he studied with legendary Austrian economist Joseph Schumpeter, as well as future Nobel laureate Wassily Leontief.

But Minsky was cut from different cloth than many of the other big names. The descendent of immigrants from Minsk, in modern-day Belarus, Minsky was a red-diaper baby, the son of Menshevik socialists. While most economists spent the 1950s and 1960s toiling over mathematical models, Minsky pursued research on poverty, hardly the hottest subfield of economics. With long, wild, white hair, Minsky was closer to the counterculture than to mainstream economics. He was, recalls the economist L. Randall Wray, a former student, a "character."

So while his colleagues from graduate school went on to win Nobel prizes and rise to the top of academia, Minsky languished. He drifted from Brown to Berkeley and eventually to Washington University. Indeed, many economists weren't even aware of his work. One assessment of Minsky published in 1997 simply noted that his "work has not had a major influence in the macroeconomic discussions of the last thirty years."

Yet he was busy. In addition to poverty, Minsky began to delve into the field of finance, which despite its seeming importance had no place in the theories formulated by Samuelson and others. He also began to ask a simple, if disturbing question: "Can ‘it' happen again?" - where "it" was, like Harry Potter's nemesis Voldemort, the thing that could not be named: the Great Depression.

In his writings, Minsky looked to his intellectual hero, Keynes, arguably the greatest economist of the 20th century. But where most economists drew a single, simplistic lesson from Keynes - that government could step in and micromanage the economy, smooth out the business cycle, and keep things on an even keel - Minsky had no interest in what he and a handful of other dissident economists came to call "bastard Keynesianism."

Instead, Minsky drew his own, far darker, lessons from Keynes's landmark writings, which dealt not only with the problem of unemployment, but with money and banking. Although Keynes had never stated this explicitly, Minsky argued that Keynes's collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.

This insight bore the stamp of his advisor Joseph Schumpeter, the noted Austrian economist now famous for documenting capitalism's ceaseless process of "creative destruction." But Minsky spent more time thinking about destruction than creation. In doing so, he formulated an intriguing theory: not only was capitalism prone to collapse, he argued, it was precisely its periods of economic stability that would set the stage for monumental crises.

Minsky called his idea the "Financial Instability Hypothesis." In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, "Success breeds a disregard of the possibility of failure."

As people forget that failure is a possibility, a "euphoric economy" eventually develops, fueled by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called "Ponzi borrowers," those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment - what was later dubbed the "Minsky moment" - would create an environment deeply inhospitable to all borrowers. The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the "real" economy that depended on the now-collapsing financial system.

From the 1960s onward, Minsky elaborated on this hypothesis. At the time he believed that this shift was already underway: postwar stability, financial innovation, and the receding memory of the Great Depression were gradually setting the stage for a crisis of epic proportions. Most of what he had to say fell on deaf ears. The 1960s were an era of solid growth, and although the economic stagnation of the 1970s was a blow to mainstream neo-Keynesian economics, it did not send policymakers scurrying to Minsky. Instead, a new free market fundamentalism took root: government was the problem, not the solution.

Moreover, the new dogma coincided with a remarkable era of stability. The period from the late 1980s onward has been dubbed the "Great Moderation," a time of shallow recessions and great resilience among most major industrial economies. Things had never been more stable. The likelihood that "it" could happen again now seemed laughable.

Yet throughout this period, the financial system - not the economy, but finance as an industry - was growing by leaps and bounds. Minsky spent the last years of his life, in the early 1990s, warning of the dangers of securitization and other forms of financial innovation, but few economists listened. Nor did they pay attention to consumers' and companies' growing dependence on debt, and the growing use of leverage within the financial system.

By the end of the 20th century, the financial system that Minsky had warned about had materialized, complete with speculative borrowers, Ponzi borrowers, and precious few of the conservative borrowers who were the bedrock of a truly stable economy. Over decades, we really had forgotten the meaning of risk. When storied financial firms started to fall, sending shockwaves through the "real" economy, his predictions started to look a lot like a road map.

"This wasn't a Minsky moment," explains Randall Wray. "It was a Minsky half-century."

Minsky is now all the rage. A year ago, an influential Financial Times columnist confided to readers that rereading Minsky's 1986 "masterpiece" - "Stabilizing an Unstable Economy" - "helped clear my mind on this crisis." Others joined the chorus. Earlier this year, two economic heavyweights - Paul Krugman and Brad DeLong - both tipped their hats to him in public forums. Indeed, the Nobel Prize-winning Krugman titled one of the Robbins lectures at the London School of Economics "The Night They Re-read Minsky."

Today most economists, it's safe to say, are probably reading Minsky for the first time, trying to fit his unconventional insights into the theoretical scaffolding of their profession. If Minsky were alive today, he would no doubt applaud this belated acknowledgment, even if it has come at a terrible cost. As he once wryly observed, "There is nothing wrong with macroeconomics that another depression cure."

But does Minsky's work offer us any practical help? If capitalism is inherently self-destructive and unstable - never mind that it produces inequality and unemployment, as Keynes had observed - now what?

After spending his life warning of the perils of the complacency that comes with stability - and having it fall on deaf ears - Minsky was understandably pessimistic about the ability to short-circuit the tragic cycle of boom and bust. But he did believe that much could be done to ameliorate the damage.

To prevent the Minsky moment from becoming a national calamity, part of his solution (which was shared with other economists) was to have the Federal Reserve - what he liked to call the "Big Bank" - step into the breach and act as a lender of last resort to firms under siege. By throwing lines of liquidity to foundering firms, the Federal Reserve could break the cycle and stabilize the financial system. It failed to do so during the Great Depression, when it stood by and let a banking crisis spiral out of control. This time, under the leadership of Ben Bernanke - like Minsky, a scholar of the Depression - it took a very different approach, becoming a lender of last resort to everything from hedge funds to investment banks to money market funds.

Minsky's other solution, however, was considerably more radical and less palatable politically. The preferred mainstream tactic for pulling the economy out of a crisis was - and is - based on the Keynesian notion of "priming the pump" by sending money that will employ lots of high-skilled, unionized labor - by building a new high-speed train line, for example.

Minsky, however, argued for a "bubble-up" approach, sending money to the poor and unskilled first. The government - or what he liked to call "Big Government" - should become the "employer of last resort," he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else's wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.

While economists may be acknowledging some of Minsky's points on financial instability, it's safe to say that even liberal policymakers are still a long way from thinking about such an expanded role for the American government. If nothing else, an expensive full-employment program would veer far too close to socialism for the comfort of politicians. For his part, Wray thinks that the critics are apt to misunderstand Minsky. "He saw these ideas as perfectly consistent with capitalism," says Wray. "They would make capitalism better."

But not perfect. Indeed, if there's anything to be drawn from Minsky's collected work, it's that perfection, like stability and equilibrium, are mirages. Minsky did not share his profession's quaint belief that everything could be reduced to a tidy model, or a pat theory. His was a kind of existential economics: capitalism, like life itself, is difficult, even tragic. "There is no simple answer to the problems of our capitalism," wrote Minsky. "There is no solution that can be transformed into a catchy phrase and carried on banners."

It's a sentiment that may limit the extent to which Minsky becomes part of any new orthodoxy. But that's probably how he would have preferred it, believes liberal economist James Galbraith. "I think he would resist being domesticated," says Galbraith. "He spent his career in professional isolation."

Stephen Mihm is a history professor at the University of Georgia and author of "A Nation of Counterfeiters" (Harvard, 2007).

http://www.thenation.com/doc/20090803/greider/print


The financial crisis has propelled the Federal Reserve into an excruciating political dilemma. The Fed is at the zenith of its influence, using its extraordinary powers to rescue the economy. Yet the extreme irregularity of its behavior is producing a legitimacy crisis for the central bank. The remote technocrats at the Fed who decide money and credit policy for the nation are deliberately opaque and little understood by most Americans. For the first time in generations, they are now threatened with popular rebellion.

During the past year, the Fed has flooded the streets with money--distributing trillions of dollars to banks, financial markets and commercial interests--in an attempt to revive the credit system and get the economy growing again. As a result, the awesome authority of this cloistered institution is visible to many ordinary Americans for the first time. People and politicians are shocked and confused, and also angered, by what they see. They are beginning to ask some hard questions for which Federal Reserve governors do not have satisfactory answers.

Where did the central bank get all the money it is handing out? Basically, the Fed printed it, out of thin air. That is what central banks do. Who told the Fed governors they could do this? Nobody, really--not Congress or the president. The Federal Reserve Board, alone among government agencies, does not submit its budgets to Congress for authorization and appropriation. It raises its own money, sets its own priorities.

Representative Wright Patman, the Texas populist who was a scourge of central bankers, once described the Federal Reserve as "a pretty queer duck." Congress created the Fed in 1913 with the presumption that it would be "independent" from the rest of government, aloof from regular politics and deliberately shielded from the hot breath of voters or the grasping appetites of private interests--with one powerful exception: the bankers.

The Fed was designed as a unique hybrid in which government would share its powers with the private banking industry. Bankers collaborate closely on Fed policy. Banks are the "shareholders" who ostensibly own the twelve regional Federal Reserve banks. Bankers sit on the boards of directors, proposing interest-rate changes for Fed governors in Washington to decide. Bankers also have a special advisory council that meets privately with governors to critique monetary policy and management of the economy. Sometimes, the Fed pretends to be a private organization. Other times, it admits to being part of the government.

The antiquated quality of this institution is reflected in the map of the Fed's twelve regional banks. Five of them are located in the Midwest (better known today as the industrial Rust Belt). Missouri has two Federal Reserve banks (St. Louis and Kansas City), while the entire West Coast has only one (located in San Francisco, not Los Angeles or Seattle). Virginia has one; Florida does not. Among its functions, the Federal Reserve directly regulates the largest banks, but it also looks out for their well-being--providing regular liquidity loans for those caught short and bailing out endangered banks it deems "too big to fail." Critics look askance at these peculiar arrangements and see "conspiracy." But it's not really secret. This duck was created by an act of Congress. The Fed's favoritism toward bankers is embedded in its DNA.

This awkward reality explains the dilemma facing the Fed. It cannot stand too much visibility, nor can it easily explain or justify its peculiar status. The Federal Reserve is the black hole of our democracy--the crucial contradiction that keeps the people and their representatives from having any voice in these most important public policies. That's why the central bankers have always operated in secrecy, avoiding public controversy and inevitable accusations of special deal-making. The current crisis has blown the central bank's cover. Many in Congress are alarmed, demanding greater transparency. More than 250 House members are seeking an independent audit of Fed accounts. House Speaker Nancy Pelosi observed that the Fed seems to be poaching on Congressional functions--handing out public money without the bother of public decision-making.

"Many of us were...if not surprised, taken aback, when the Fed had $80 billion to invest in AIG just out of the blue," Pelosi said. "All of a sudden, we wake up one morning and AIG was receiving $80 billion from the Fed. So of course we're saying, Where is this money coming from? 'Oh, we have it. And not only that, we have more.'" So who needs Congress? Pelosi sounded guileless, but she knows very well where the Fed gets its money. She was slyly tweaking the central bankers on their vulnerability.

Fed chair Ben Bernanke responded with the usual aloofness. An audit, he insisted, would amount to "a takeover of monetary policy by the Congress." He did not appear to recognize how arrogant that sounded. Congress created the Fed, but it must not look too deeply into the Fed's private business. The mystique intimidates many politicians. The Fed's power depends crucially upon the people not knowing exactly what it does.

Basically, what the central bank is trying to do with its aggressive distribution of trillions is avoid repeating the great mistake the Fed made after the 1929 stock market crash. The central bankers responded hesitantly then and allowed the money supply to collapse, which led to the ultimate catastrophe of full-blown monetary deflation and created the Great Depression. Bernanke has not yet won this struggle against falling prices and production--deflationary symptoms remain visible around the world--but he has not lost either. He might get more public sympathy if Fed officials explained this dilemma in plain English. Instead, they are shielding people from understanding the full dimensions of our predicament.

President Obama inadvertently made the political problem worse for the Fed in June, when he proposed to make the central bank the supercop to guard against "systemic risk" and decide the terms for regulating the largest commercial banks and some heavyweight industrial corporations engaged in finance. The House Financial Services Committee intends to draft the legislation quickly, but many members want to learn more first. Obama's proposal gives the central bank even greater power, including broad power to pick winners and losers in the private economy and behind closed doors. Yet Obama did not propose any changes in the Fed's privileged status. Instead, he asked Fed governors to consider the matter. But perhaps it is the Federal Reserve that needs to be reformed.

A few months back, I ran into a retired Fed official who had been a good source twenty years ago when I was writing my book about the central bank, Secrets of the Temple: How the Federal Reserve Runs the Country. He is a Fed loyalist and did not leak damaging secrets. But he helped me understand how the supposedly nonpolitical Fed does its politics, behind the veil of disinterested expertise. When we met recently, he said the central bank is already making preparations to celebrate its approaching centennial. Some of us, I responded, have a different idea for 2013.

"We think that would be a good time to dismantle the temple," I playfully told my old friend. "Democratize the Fed. Or tear it down. Create something new in its place that's accountable to the public."

The Fed man did not react well to my teasing. He got a stricken look. His voice tightened. Please, he pleaded, do not go down that road. The Fed has made mistakes, he agreed, but the country needs its central bank. His nervous reaction told me this venerable institution is feeling insecure about its future.

Six reasons why granting the Fed even more power is a really bad idea:

FINISH THIS AR THE LINK!

http://www.financialarmageddon.com/2009/08/not-too-hard.html

In a 2001 study, "What Makes a Revolution," Robert MacCulloch, an economics professor at the Business School of London's Imperial College, employed a data set derived from surveys of revolutionary support across a quarter-million randomly sampled individuals to conclude, as many historians and political scientists have already acknowledged, that more people favor revolt when inequality is high and their net incomes are low."

Given that, it's not hard to draw some troubling conclusions from the research paper highlighted in the following Huffington Post report, "Income Inequality Is At An All-Time High: Study":

CONTINUE AT LINK

www.youtube.com/watch?v=Tjy2HCdV6BA&feature=PlayList&p=30051CDD479C29D4&playnext=1&playnext_from=PL&index=40

http://baselinescenario.com/2009/08/07/how-to-blow-a-bubble/


The Baseline Scenario


Matt Taibbi has rightly directed our attention towards the talent, organization, and power that together produce damaging (for us) yet profitable (for a few) bubbles. Most of Taibbi’s best points are about market microstructure – not the technological variety usually studied in mainstream finance, but more the politics of how you construct a multi-billion dollar opportunity so that you can get in, pull others after you, and then get out before it all collapses. (This is also, by the way, how things work in Pakistan.)

In addition, of course, all good bubble-blowing needs ideology. Someone needs to persuade policymakers and the investing public that we are looking at a change in fundamentals, rather than an unsustainable and dangerous surge in the price of some assets.

It used to be that the Federal Reserve was the bubble-maker-in-chief. In the Big Housing Boom/Bust, Alan Greenspan was ably assisted by Ben Bernanke – culminating in the latter’s argument to cut interest rates to zero in August 2003 and to state that interest rates would be held low for “a considerable period”. (David Wessel’s new book is very good on this period and the Bernanke-Greenspan relationship.)

Now it seems the ideological initiative may be shifting towards Goldman Sachs.

As Bloomberg reported on August 5th, “Goldman economists, led by Jan Hatzius in New York, now see a 3 percent increase in gross domestic product at an annual rate in the last six months of this year, versus a previous estimate of 1 percent. The new projections were included in a research note e-mailed to clients.”

Goldman’s public thinking, of course, has been that we face such slow growth that interest rates should be kept low indefinitely. There is, in their view, no risk of inflation – and no such thing as potentially new bubbles (e.g., in emerging markets). The adjustment process will go well, as long as monetary policy stays very loose – it’s back to Bernanke’s 2003 line of thinking.

This line of reasoning has been very influential – reinforcing Bernanke’s commitment not to tighten monetary policy in the foreseeable future and fitting in very much with the Summers model of crisis recovery. Just a couple of weeks ago, in his July 14 report, Jan Hatzius argued, “further stimulus remains appropriate” and “the appropriate debate is not whether fiscal and monetary expansion is appropriate in principle but whether it has been sufficiently aggressive.” I don’t know if he has revised this line in the light of the big upward revision in his growth forecast or whether he is still saying, “Ultimately, we do expect further stimulus, but it may take significant disappointments in the economic data and the financial markets before policymakers move further in this direction.”

Much faster growth than expected is, of course, in today’s context a good thing. But it also brings complications. If you keep monetary policy this loose for much longer, you will feed bubbles. And if you encourage even looser monetary and fiscal policy, there will be a costly reckoning not too far down the road.

Monetary policy orthodoxy under Greenspan did not care about bubbles in the least. Now we (led by Greenspan) have massively damaged our financial system, our real economy, and our job prospects, this view is under revision.

Of course, in principle you should tighten regulation around lending but, just like 2003-2007, who is really going to do that: the US, China, the G20? On this point, all our economic leadership is letting us down – although they are getting a powerful assist from people like Goldman (and Citi and JP Morgan and almost everyone else on Wall Street.)

Next time, our big banks will take another massive hit – quite possibly bigger than what we saw in 2008. Goldman and its insiders are ready for this. Are you?

She's doing well. They want to send her home with a GI tube in her. I asked them if they were crazy, if they really wanted her to rip it out, which she will, the minute my back is turned. We'll see what happens next.

I did some research on gallbladder disease...it looks strongly genetic, and tied to estrogen levels. My dad says his grandmother died of a perforated gallbladder, the Kid is a throwback, and strongly resembles that branch of the family, but Sis and I agree we'd like independent confirmation. Dad has a dodgy memory...I was very young when Babcia died, I only remember the funeral..

And I'm very glad not to have another to attend!

Relax and have a brewsky! Glad your daughter is doing well.

:toast:

and despite it all, you posted some meaty material, esp, the Minsky Minute. That one kept me awake. And Elizabeth Warren on Morning Joe. She typifies the attitude I see on SWT. She isn't partisean because it's all about the economy and she just reports the facts and what we need to do if she is asked. No ugliness about it.

Glad to hear y'all have weathered the storm!

Gall Bladder, eh? Well, at least that's no longer a worry.

Here it is... Mid-September already. Wow!

It went down to 42F and maybe lower....there's been no warming up during the day past 68F, either. I think it's going to be a long winter.

Not quite ready for the heat... yet. This summer has been a Venus style pooling melted lead kind of summer here and it's such a relief to feel a cool breeze, I'm going to enjoy it for awhile.

http://news.yahoo.com/s/nm/20090918/bs_nm/us_chrysler_press_5

DETROIT (Reuters) – One of the best-known auto industry executives in the world has fallen on hard times.

Jim Press, who briefly ran Toyota Motor Corp.'s U.S. operations and spent 37 years with the Japanese automaker before joining Chrysler as one of its three top executives in 2007, is facing claims of more than $1.35 million for unpaid federal taxes and a personal loan.

The 62-year-old auto executive, who told the New York Times last year he wore a single string on one wrist as a reminder that material wealth is not the most important thing, may be one of the highest profile victims of Detroit's collapse.

Press blamed the elimination of bonuses at Chrysler for his failure to pay back the personal loan.

Chrysler went into a U.S. government-financed bankruptcy earlier this year in a deal that gave management control to Italy's Fiat SpA.

The distressed state of the Detroit area housing market, which has been hit hard by the U.S. housing bust and the auto industry's troubles, may be adding to his problems.

Press, known to be an avid swimmer, and his wife, Suwichada Busamrong Press, purchased a multimillion-dollar, 6,900-square-foot luxury home in the Detroit suburb of Birmingham in June 2008, taking out a $2.2 million mortgage with ING Bank, records show.

The couple, who have put the six-bedroom mansion up for sale at $3.15 million, now face a tax lien against the property for just over $947,000 related to unpaid income taxes for 2007, according to a filing in late August.

Press has also been sued by a California credit union for failing to repay $406,000 on a loan dating back to his time at Toyota, court records show.

"No comment," Press said in an email to Reuters. "Thank you for your interest."

The lawsuit and tax lien against Press were first reported by The Detroit News on Friday.

BONUS REQUEST DENIED

Press was the only member of Chrysler's senior leadership team to remain with the company after it completed a fast-track bankruptcy backed by $10 billion in federal funding in June.

His immediate future at Chrysler is unclear. Two people briefed on the matter said in late August that Press had conveyed plans to leave Chrysler by November.

Documents filed with an Oakland County court and the county register of deeds appear to show how Chrysler's deepening financial problems corresponded with a liquidity crunch for one of its most visible and highly regarded executives.

Late last year, with credit markets in a tailspin and Chrysler seeking a federal bailout, Press was forced to plead with a credit union for forbearance on a personal loan.

That loan totaled over $800,000, and he missed repayments in November 2008 and in February this year totaling more than $400,000.

"Due to the turmoil in the automobile industry and uncertainty surrounding our ownership, my request for bonus payment was denied," Press said in a letter to the Western Federal Credit Union that was included as an exhibit in a lawsuit against him.

"I am not able to make the November and February payments due to the elimination of bonuses which was just announced by my company," Press said in his letter.

Press told the credit union, which took on the unsecured personal loan when it bought Toyota Federal Credit Union, that he had tried to obtain loans at his two current banks and sought to refinance his house without success.

"I am attempting to arrange for a loan against my future bonus with my employer which would allow me to pay this loan off," Press said then.

The lawsuit was filed June 30 in Oakland County Circuit Court.

"We are simply pursuing our contractual rights to collect on a loan that was made to Mr. Press some time ago for which other collection efforts have been exhausted," Western Federal said in a statement.

No one answered the door on Friday at the mansion in Birmingham, Michigan, and it appeared to be empty, as was the circular driveway, which was flanked by pink and white flowers. The lawn was well-tended. A statue of a dog sat on the porch.

'WHAT'S IMPORTANT IN LIFE'

Press said he wanted to restore an American icon when he joined Chrysler, but his term at the No. 3 U.S. automaker corresponded with deepening financial problems, stalled product development efforts and a controversial decision to slash Chrysler dealerships.

During his career at Toyota, Press became the first non-Japanese person elected to Toyota's board of directors. The Kansas native was known for a soft-spoken manner that seemed a perfect match for the self-effacing style of corporate Japan.

At Chrysler, however, Press ran into criticism from the automaker's struggling dealers for what many saw as an attempt to get them to take on more inventory than they could afford just on the cusp of the automaker's bankruptcy.

Divorced with four grown children, Press married his Thai-born wife in 2006 just as his career at Toyota was winding down.

In last year's interview with the New York Times, Press said, in reference to the string on his wrist: "This is actually from my wife's grandfather. It reminds you that in life, you just need enough to get along. What's important in life isn't what you have, but how you live."

http://news.yahoo.com/s/nm/20090919/pl_nm/us_financial_bailout_1

WASHINGTON (Reuters) – A majority of Republicans in the U.S. Senate on Friday called on the Obama administration to let the authority to tap a $700 billion financial bailout fund expire at the end of the year as scheduled.

In a letter to U.S. Treasury Secretary Timothy Geithner, 39 of the Senate's 40 Republicans and one Democrat said an extension of the Troubled Asset Relief Program (TARP) was not necessary.

"While we understand that our economy is still recovering, we believe it can function without added TARP funding," the letter said. "Additionally, the cost to the taxpayer if TARP authority was extended could be substantial."

Geithner last week told a congressionally appointed panel overseeing the bailout fund that no decision had been made on whether to seek approval to extend the bailout program past its scheduled expiry at the end of the year.

Congress approved the $700 billion fund in October last year as the financial crisis deepened after the collapse of investment bank Lehman Brothers.

The fund has been used to strengthen the capital positions of hundreds of banks, to prop up insurer American International Group and U.S. automakers, and to encourage mortgage servicers to modify loans for homeowners facing foreclosure.

The aggressive rescue efforts have deepened the U.S. government's involvement in the financial sector and made taxpayers major shareholders in some of the nation's largest financial institutions.

"This direct investment certainly was not the intention of Congress in passing this legislation," the lawmakers said, pointing out that Congress specifically rejected legislation to provide federal funds to aid car manufacturers.

The Senators said the unused funds and any TARP repayments should go toward reducing the federal debt.

Under the law, the authority would expire on December 31, unless Geithner submits a written certification to Congress providing a justification for why an extension is needed.

http://news.yahoo.com/s/nm/20090918/bs_nm/us_usa_fed_compensation_8



WASHINGTON (Reuters) – The Federal Reserve plans new rules on bank pay to curb the type of excessive risk-taking that sparked the global financial crisis and triggered international demands for action.

Public outrage at the stratospheric compensation of some bankers has boiled up to the level of the Group of 20 nations, whose leaders meet next week in Pittsburgh.

The United States, under pressure to act on pay at the G20 from France and Germany, has already said it aims to curb the culture of excessive risk-taking at the root of the crisis.

A Fed source said on Friday that guidelines would be proposed in the next few weeks and would apply to any employee able to take risks that could imperil an institution, not just the executives who have been the main target of popular ire.

The rules will be aimed at all firms the Fed regulates and be enforceable under its existing powers, said the source, who requested anonymity. The Fed oversees more than 5,000 bank holding companies and over 800 smaller state-chartered banks.

Massive losses inflicted by risky subprime mortgage bets destroyed some of the oldest names in U.S. finance and intensified a recession that has cost millions of jobs, putting both the banks and the regulators under scrutiny.

The Financial Stability Board, which answers to the G20 and will issue guidelines at the September 24-25 summit, said on Tuesday that poorly capitalized banks should not be allowed to pay large bonuses.

MULTIPLE TRACKS

The Obama administration has already appointed a "pay czar" to oversee executive compensation at firms getting taxpayer aid, and has indicated it will take further steps.

"Properly designed compensation practices constitute an important measure in ensuring safety and soundness in our system," White House adviser Lawrence Summers said on Friday.

Industry officials said many financial firms had already reined in pay practices and warned a heavy-handed approach by the Fed could be harmful.

"What we're worried about is if they place undue restrictions on the sales people because that could weaken the company itself," said Scott Talbott, senior vice president for government affairs for the Financial Services Roundtable, the industry's lobbying group.

Some analysts said Washington was bowing to populist pressure. "I think that talking about curbing Wall Street pay is emotional and not rational," said Tom Sowanick, co-president and chief investment officer of Omnivest Group LLC.

The Fed's proposal would take a two-pronged approach. A top tier of the largest banks, numbering around 24, would get particularly close scrutiny, while all other lenders under the Fed's supervision would receive less-intensive treatment.

Larger firms would also be subject to a review that would compare their practices against rivals, and would be required to submit their pay policies to the Fed for its approval.

This would put the burden on the big firms to modify existing compensation practices, while leaving them with flexibility to customize compensation to best fit their needs.

Practices at smaller banks would be reviewed as part of existing regular bank exams, the Fed source said.

PLACING THE FOCUS ON THE LONG RUN

Goldman Sachs, which set aside $11.3 billion in the first half of the year toward employee bonuses but which has also spoken out against excessive pay at firms that lost money, said excessive risk-taking should not be rewarded.

"We think it entirely appropriate that people are rewarded for performance, but compensation should correlate directly with the performance of the firm," said Goldman Sachs spokesman Lucas van Praag.

The Fed board has yet to vote on the proposal, but the timeline for the guidelines should advance in weeks, not months, the source said.

The proposed rules would then face a period of public comment before they could be made final. But the Fed plans to launch the review process for the large firms as soon as the proposal goes out, the source said.

The guidelines would not apply a one-size-fits-all prescription to cap pay at any specific level, the source added. Rather, the guiding principle would be to aim for a longer view of profits that squeezes out risk-taking that might lead just to short-term gains.

Officials are also discussing the possibility of "clawing back" compensation when it later becomes apparent excessive risks were taken.

It plans to outline ways to defer pay, for example by using restricted shares that take longer to vest, which would give bank management more time to judge if the revenues from a particular activity really lived up to expectations.

It will also point out the ability to weigh compensation according to the riskiness of the activity involved, as some already do to internally allocate capital.

(Additional reporting by Karey Wutkowski in Washington and Jennifer Ablan and Steve Eder in New York; Editing by James Dalgleish)

http://dailyreckoning.com/the-post-crash-party-continues/


This week, the big story was once again coming from the gold market. Mid-week, the yellow metal hit $1020 - but the rally was not of the usual variety. Generally, investors flock to gold when the dollar is weak and inflationary fears run high. But as we all know, inflation is not a problem right now - despite the Fed's best efforts.

No, this rally had another factor pushing it: our friends in the Far East. The Chinese have been quite vocal with their concern over the US dollar and have increased their official gold reserve holdings by 75% in the spring. Smart move.


....
Should you buy along with the Chinese? Should you compete with the Chinese for each ounce of gold that comes on the market?

Good question. Unfortunately, we don't have a good answer. So let's try a different question: Is gold going up or down?

The answer to that is simpler: gold is going up...then down...then up again. It is going up because the feds - including the feds in China - are encouraging speculation. Then, it is going down when the next phase of the bear market reasserts itself and the speculators run for cover. Then, it is going back up...much farther and faster...when the Fed becomes desperate and finally throw caution - and dollars - to the wind. We're confident this last stage will arrive. Our hesitation is that it will take much longer than we expect. Gold may rise in a deflation...but it soars in a period of inflation. That period could be a long way off....

MUCH MORE RUMINATION AT LINK

http://dailyreckoning.com/the-government-based-economy-2/

I really got a laugh out of the report from Bloomberg that the Democratic Party of Japan (known in the parlance as DP) won an historic victory in the recent elections, coming to power for the first time in decades with “a pledge to support households battered by two decades of economic stagnation”, whatever that is supposed to mean, but which is, upon even casual inspection, Standard Political Crapola (SPC).

The interesting part is that the new prime minister, a guy named Hatoyama, said “he’ll avoid more bond sales, so new spending will depend on his success in shrinking the bureaucracy and public works programs”, which is so laughably, ludicrously impossible, especially in such a corrupt, lopsided economy that it makes me, a stupid American who really doesn’t know what in the hell he is talking about, who lives thousands of miles away, in another country and hemisphere, turn up his nose at the sheer stink coming from that idea! Phew!

Of course, this valuable piece of Righteous Mogambo Scorn (RMS) is because it is obviously, obviously too, too late for that.

It is too late, just like it is too late here in the USA, and just like it is too late almost everywhere else, too, where years and years of increasing government spending and control means that government IS the economy, and shrinking the size of government obviously shrinks the economy! Hahahaha! Oops!

So, to the Japanese, I say, “Hahaha! Too late for that, you dumb Japanese chumps! Now you are going to pay a huge penalty for being such morons with your fiat money, and then especially involving the idiot Americans and their fiat money!”

Anyway, crude and rude xenophobic insults and senseless bigotry aside, an example of this is that, here in America, the birthplace of sheer stupidity in central banking (by which I mean the disastrous Federal Reserve), our economic performance as a result of the same kind of constant stimulus is that non-farm payrolls have been falling and are now about back to where they were in 2000, meaning absolutely zero (non-farm payroll) growth for 9 years!

A lot more people seeking the same number of jobs is pretty bad, especially when the number of people is still rising while the number of jobs is actually still falling! Yikes!

Meanwhile, however, the government has spent its time growing bigger and bigger, like a huge, cancerous, oozing lump that is growing on your neck and already people are being repulsed by both the sight and the smell of it, and now there are 6% more people on “government payrolls” than there were in 2001, which is only the tip of the iceberg.

And, as if to add insult to injury, they all make more money than you! Hahaha! For the first time in history, the average pay of a government employee is higher than the average wage of non-government employees! And when you add in their generous benefit packages, they make a lot more, and they are not going to take it kindly that you want them to suffer losses in pay and employment like us average morons out here.

So that is One More Big Reason (OMBR) why the government will keep borrowing more and more and spending more and more, which is why the Federal Reserve must create more and more money and credit, which expands the money supply more and more, which makes prices go up more and more, sometimes in bubbles, which must, and always do, bust back to their intrinsic value.

And such government and banking insanity as we are seeing today is the One Big Reason (OBR) – perhaps THE One Big Reason (TOBR) – why you must buy gold, silver and oil, apart from it being, you know, so easy that you squeal with girlish delight, “Whee! This investing stuff is easy!”

http://dailyreckoning.com/an-appetite-for-risk/

The world is awash in credit and debt. What I mean is, credit had been extended to anything with a shadow. Almost every Tom, Dick and Harry participated in it. From the central banks around the world to the man in the street, everyone has done exactly the same thing: finance whatever needs to be bought.

And when we ran out of money, no problem! There was more where that came from. In one sense we couldn’t spend money fast enough. As soon as it was gone, there was more suddenly available. So we just finance the house again, take out some equity (which always rises) and do one of two things – Pay off credit cards (so we can load more debt on them) or just spend the cash on things a home improvement (that is no longer reflected in the price of the home) or a vacation.

Remember how MasterCard taught us that those memories were priceless? Hope you got some good ones… because you “done bought something you can’t eat,” as one of my teachers used to say.

At a time when we are drowning in debt, we are also out of money.

When a debtor is out of money, he has no ability to repay. And when a creditor has borrowers who are out of money, the creditor has no income. No earnings. No power to make better loans.

So how are banks in America posting “profits”? How did Citigroup, Bank of America, AIG and Wells Fargo jump 400% in stock price? Are they worth 400% more? Are their earnings up 400%? And where in the world did all this money come from?

These companies were just bankrupt… yet found a way to get back above water. And not just above water – they are making moon-shots!

Their share price should be zero (or less, if possible!). How are they worth so much more now?

As I have written before, mark-to-market accounting rules were repealed in favor of a fictitious slight of hand. Banks no longer have to list their distressed assets at the fire sale price they should be worth. Instead they get to record their value as the price they bought them, or what they believe they will be worth in the future.

In other words, it’s like me refinancing my house, but doing my own appraisal and assigning it whatever value suits me. I want cash out? Just pad the value of the house. I can’t afford a higher payment? No worries, I just pad my reported income. Two years down the road I can’t afford my payments anymore? Easy, just follow the same refinancing procedure all over again.

But my family and I would only have one toxic asset to deal with. The banks have them coming out the wazoo!

They are still in possession of the faulty loans and derivatives that caused this entire mess in the first place. Nothing has changed – except the accounting!

The banks always counted on that. This time, however, they are the ones left holding the bag. What are they going to do with all this JUNK? How can they unload it without attracting suspicion? How can they clean up their books without the short sellers making a profit off their downfall? They can’t. It’s a Catch-22.

But the real problem is that the US banking system would come crashing down in a minute if this were known and understood by the general public. The banks know it. The Fed knows it. I suspect that there are some congress people who know it.

But here’s where the rubber meets the road. Government engineered a bailout. They wanted the banks to lend to Joe Consumer. But the banks didn’t. And frankly, Joe Consumer didn’t want it. He was too busy trying to figure out how he was going to repay all the money he had already borrowed against his house. Especially with the boss breathing down his neck, threatening job terminations if he wasn’t more productive than some cheap labor in India.

So the banks were sitting on a good deal of the money from the Fed in order to protect them from future losses. Some of them have even paid it back. But the truth is, from an accounting standpoint, they don’t need it anymore. From an accounting standpoint, their mortgages and derivatives are all valued at a big fat surplus. Why keep federal money? Why incur interest charges when “all is well”?

If they can show a profit from an accounting standpoint… and if they can repay their bailout money (plus interest)… and if they can still service the customer at the drive-in window or the teller counter, what’s the big deal? What am I crying about?

It’s all because those toxicities still exist. And they all have to be accounted for, whether the government says so or not.

We should have learned, or have been reminded of, one of the greatest lessons in the world from convicted felon Bernie Madoff: “Be sure your sin will find you out.”

Even the greatest engineered schemes on the planet come undone at some point. No Ponzi scheme can continue forever. But if you are very bright (as Madoff was), you can keep the game going for a long, long time.

But what if you’re not brilliant? After all, I doubt the government is as smart as Billionaire Bernie. Luckily, if that’s the right word, the government has another way to keep the game going, using one thing it has that Madoff didn’t.

Cash.

Gobs and gobs of it.

The government’s massive wad of cash is what keeps the game going. And foreign investors lending us money. And millions of pensioners happy as long as they receive their check on the first of the month. And the multitudes of purchased votes that are blissfully sitting on the dole.

But it’s not just the United States. Every country in the world is in the same pickle – because every developed nation believed they could successfully manipulate the game. The problem now is that the governments are running out of money. The United States has been broke for a long time, of course, but it could still trade on the value of its good name… and it did. Other nations are not so lucky.

The United States still possesses the reserve currency status; other nations aren’t so lucky. We still boast the largest GDP; other nations are not so lucky. I’m pretty sure we still have higher tax receipts, and more room to raise taxes than other nations. But somehow, I can’t bring myself to call that lucky…

But as it is an “option,” I have to think that whatever smarts our government does have, someone will eventually realize it. Good Lord, deliver us.

I do not honestly think that anyone can seriously contest us in the role of reserve currency, no matter how many times China rattles the saber.

Twenty years ago, China couldn’t even feed its own people or keep them employed. Now it is boasting a 7% annual growth rate. Despite the massaging that may be done to the numbers before they are released, we can already see that a country growing solely on stimulus cannot grow very long. The weaknesses in China’s underbelly are already becoming apparent. She is an export economy. And people are not buying.

She cannot save the world, whatever her strength might be.

There is another round of destruction coming. The banks will have to come clean. If you thought the residential crunch was stunning, wait till you see what’s coming on the commercial front. It will be a tsunami of epic proportions. Banks are not lending now, and the chances of business expansion are lower than at any time in recent history. No one will be buying excess of anything except maybe food and precious metals, so businesses will not continue to post profits. Without profits you can’t service the loans you have, and rolling them over will be out of the question. The day is coming… don’t let it catch you by surprise.

But until that day arrives, we must deal with what we have.

Regards,

Bill Jenkins
for The Daily Reckoning

by Andrew Gavin Marshall

Global Research, July 21, 2009

Introduction

Humanity is on the verge of entering into the most tumultuous period in our history. The prospects of a global depression, the likes of which have never been seen before; a truly global war, on a scale never before imagined; and societal collapse, for which nations of the world are building totalitarian police states to control populations; are increasing by the day. The major global trend forecasters are sounding the alarms on economic depression, war, a return to fascism and a total reorganization of society. Through crisis, we are seeing the reorganization of the global political economy, and the transformation of capitalism into a totalitarian capitalist world government. Capitalism has never stayed the same through its history; it has always changed and will continue to do so. Its changes are explained and analyzed through political-economic theory, both mainstream theory and critical. The changes are undertaken over years, decades and centuries. The next phase of capitalism is one in which the world moves to a state-controlled economic system, much like China, of totalitarian capitalism.

The global political economy itself is being reorganized into a world government body, consisting of one center of global power where the socio-political-economic power of the world is centralized in one institution. This is not a conspiracy theory; it is a reality. Nor is this a subject confined to the realm of “internet conspiracy theorists,” but in fact, the concept of world government originates and evolves throughout the history of capitalism and the global political economy. Mainstream and critical political-economic theory has addressed the concept of world government for centuries.

The notion of a world government has such a long history, as the forces driving the world into such a structure intertwine with the history of the modern global political economy itself. The purpose of this report is to examine the history of the global political economy in taking steps toward forming a world government, in both theory and practice.

How did we get here and where are we going?

more

http://worldnewstrust.com/news/3722-global-power-and-global-government-part-1-evolution-and-revolution-of-the-central-banking-system-andrew-gavin-marshall

Global Debt Comparison - a running total, increasing by the second

Place your cursor over a country to find the debt details
Color-coded too. Countries in black, have the most debt :(
http://buttonwood.economist.com/content/gdc



Article
9/17/09 Economist clock is ticking as global public debt rises by the second
Online guide keeps a running total of the current global public debt – updating every few seconds – and provides projections of how it will grow

With the world's governments now owing a collective $35tn (£21tn) and counting, the Economist has devised an innovative way of getting to grips with the eye-wateringly high mountain of public debt.

Called the Global Public Debt Clock, the online guide keeps a running total of the current global public debt – updating every few seconds.

There is also an interactive map that allows users see which countries are particularly laden with debt – America, the UK, most of continental Europe – and which are less dependent on borrowing to balance the books – India, China, much of Africa.

The clock also includes 10 years of historical data, plus projections of how the debt will grow in 2010 and 2011. At the time of writing, the projected figure for 2011 was nudging $45tn – and rising.

more...
http://www.guardian.co.uk/business/2009/sep/17/economist-global-debt-clock

9/18/09
168: The Fix Is In

Yes, airline prices are always the same no matter which airline you call; in Presidential elections you always feel like you're choosing between the lesser of two evils; and it doesn't really make your hair any cleaner if you do the final part of the instructions "shampoo, rinse, repeat." There are all sorts of situations in which we suspect the fix is in, but we almost never find out for certain. On today's show, for once, we find out. The whole program is devoted to one story, in which we go inside the back rooms of one multinational corporation and hear the intricate workings—recorded on tape—of how they put the fix in.

We hear from Kurt Eichenwald, whose book The Informant is about the price fixing conspiracy at the food company ADM, Archer Daniels Midland, and the executive who cooperated with the FBI in recording over 250 hours of secret video and audio tapes, probably the most remarkable videotapes ever made of an American company in the middle of a criminal act.

Prologue.
Host Ira Glass speaks with two people who believe they've uncovered behind-the-scenes conspiracies but can't be sure. Attorney Andy Hail has sued the two biggest supermarkets in Chicago (Dominick's and Jewel) because they charge a dollar more for milk than stores around the country, and because their prices seem to change simulateously, as if orchestrated. Cindi Canary from the Illinois Campaign for Political Reform tells the story of an Illinois law that seems to mostly benefit one man—the man who made sure it made it though the legislature. (8 minutes)

Act One.

We hear the first part of our story about Archer Daniels Midland and FBI informant Mark Whitacre. In this half, Whitacre inadvertantly ends up a cooperating witness—and turns himself into one of the best cooperating witnesses in the history of U.S. law enforcement, gathering evidence with an adeptness few have matched. (25 minutes)

Act Two.

Our story about ADM and Mark Whitacre continues. The FBI finds out that their star cooperating witness Mark Whitacre has been lying to them for three years about some rather serious matters. (22 minutes)

Song: "Lost in the Supermarket," The Clash


Listen to the full episode, appx 1 hour
http://www.thislife.org/Radio_Episode.aspx?episode=168

Note: originally aired 9/15/2000

9/16/09 Damon And Soderbergh Team Up And Inform

After working together on the films Ocean's 11, 12 and 13, actor Matt Damon and director Steven Soderbergh teamed up again on the new film The Informant!, a dark comedy about a rising corporate executive at Archer Daniels Midland who blows the whistle on price fixing.

Damon stars as Mark Whitacre, a not-always-reliable whistleblower who is intoxicated by the idea of being a corporate spy — even though he sometimes unknowingly bungles the job. The actor says the role was a definite shift from some of the more debonair characters he has played in the past.

"It was a lot of fun. It was the opposite of doing the Bourne movies," Damon tells Terry Gross.

Based on a true story, the film was adapted from Kurt Eichenwald's nonfiction book, also called The Informant. But unlike the book, which is a straightforward piece of investigative journalism, the film takes a lighter, more ironic tone.

Soderbergh says the shift in tone was a deliberate choice:

"When the book reached us in 2001, I'd recently finished Erin Brockovich, and Michael Mann's The Insider had come out in 1999. I think our sense was we needed to do something different, that just taking the standard approach wasn't really going to be exciting or fresh," he says.

Soderbergh decided to make the film as a black comedy — a choice that ultimately affected the way Damon prepared for the role. For one thing, he decided not to meet Whitacre, the man he plays in The Informant!

listen to Fresh Air program...
http://www.npr.org/templates/story/story.php?storyId=112859307

Always looking for good cinema.

/www.youtube.com/watch?v=Tjy2HCdV6BA&feature=PlayList&p=30051CDD479C29D4&playnext=1&playnext_from=PL&index=40

http://www.nytimes.com/2009/09/17/business/economy/17industrial.html?_r=2&partner=rss&emc=rss



SALT LAKE CITY — Generations ago, industrialists and financiers extracted fortunes from the copper and gold mines dug into the canyons near here. Now, their modern-day counterparts are resisting a government proposal that could shut down what has become another gold mine of sorts.

Utah is the nation’s unlikely capital of industrial banks — niche institutions that primarily make loans to businesses. Corporations like Goldman Sachs, Target and General Electric have been attracted to the state to set up such institutions. While they have brought billions of dollars in deposits, thousands of jobs and millions in charitable donations to Salt Lake City, the banks have also drawn fire from Washington.

The Obama administration argues that the banks pose a threat to the economy because their parent companies can engage in risky practices but are often exempt from routine scrutiny by the Federal Reserve. Treasury officials want to require the corporate owners of the nation’s 41 industrial banks to accept more rigorous regulation or be forced to sell or shut them down.

“The president’s regulatory reform plan is not about fighting the last crisis, but trying to avoid the next one,” said Michael S. Barr, assistant Treasury secretary for financial institutions. “If we preserve known loopholes in consolidated oversight, then we will just be inviting the next Bear Stearns or A.I.G.”

But the banks are fighting back. “We are talking about survival here,” said Louise P. Kelly, president of EnerBankUSA in Salt Lake City.

Defending the institutions as safe and profitable, she and others have mounted a campaign to not only block the administration’s plan, but to expand the number of such banks. The industry is deploying lobbyists, jawboning lawmakers, doling out campaign contributions and trying to persuade Treasury and banking officials.

So far, they appear to be winning some concessions. Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, and Barney Frank, the chairman of the House Financial Services Committee, have both said they would favor allowing owners of existing industrial banks to maintain their banking operations.

“They told me that divestiture would be very disruptive, and I agreed,” Mr. Frank, Democrat of Massachusetts, said in an interview, referring to Jeffrey R. Immelt, the chief executive at General Electric, and other G.E. executives who met with him in July. “It is not a matter of them wreaking havoc.”

Treasury Secretary Timothy F. Geithner and other officials are pressing ahead with their proposal to require the institutions to submit to Federal Reserve oversight, part of a sweeping package of regulatory reforms. But the battle over the banks, expected to intensify now that Congress is back in session, demonstrates how difficult enacting tougher regulation can be.

A Lobbying Battleground

The nation’s industrial banks hold $130 billion, only about 1 percent of federally insured bank deposits. They trace their history to the early 1900s when small lending houses sprang up to offer loans to factory workers who otherwise could not get credit. Today, the banks — almost all are in Utah, Nevada and California — do all manner of lending.

Unlike commercial banks, though, all but the smallest industrial banks are barred from offering checking accounts, so most have no retail branches. And they are not supervised by the Federal Reserve nor are their parent companies required to set aside capital reserves that could be used if a bank gets into trouble.

While no industrial bank has failed in the last year, Capmark Bank sustained losses that are forcing it to curtail operations. The F.D.I.C. recently ordered another, Advanta Bank Corporation, to stop taking new customers because it was in peril.

Utah became a haven for industrial banks in the last decade, relaxing laws to lure them there after Congress prohibited them in states that did not already have them. Companies like BMW and Pitney Bowes, and major investment banks, including Lehman Brothers, Morgan Stanley and Merrill Lynch, soon set up shop. Assets at such banks in Utah skyrocketed from $3 billion in 1995 to $243 billion last year, although the numbers have since dropped to $106 billion, largely as a result of a rush to convert to commercial bank status to qualify for government bailout money.

In Salt Lake City, the banks have been a welcome presence. They created an estimated 15,000 jobs at the banks and related service companies, and their executives have sprinkled money around to everything from the Utah Symphony Orchestra to housing for the poor.

The Obama administration plan, though, presents a double threat to the state. If the Treasury department prevails in insisting on Federal Reserve oversight for industrial banks, there is no reason for those owned by national financial services companies to be headquartered in Utah. And terminating the industrial bank charter, along with other new requirements, could force manufacturing giants like G.E. to sell their financial arms because of federal prohibitions against commercial companies operating banks.

Indeed, perhaps no company has more at stake in the debate than G.E., which operates its $10 billion industrial bank, GE Capital Financial, at the foot of the Wasatch Mountains, 15 miles south of downtown Salt Lake City.

Located in a new office complex, it hardly seems like a bank at all: it has no branches, no A.T.M.’s and hardly any walk-in customers. But it lends to businesses across the nation. It has financed loans to more than 5,000 fast-food restaurants, helped equip about 4,000 dentists’ offices and allowed small businesses to buy tens of thousands of forklifts, delivery vans and other equipment.

“This is boring — forklifts, grills at Burger King,” said Russell Wilkerson, a G.E. executive who was visiting his company’s Utah offices last month. “It is middle-market America.”

Those loans may be boring, but they have proven to be lucrative. G.E.’s industrial bank ranked as the nation’s 46th most profitable bank earlier this year.

If General Electric had to sell off GE Capital — the large financial unit of which the industrial bank is a subsidiary — it would cost shareholders $40 billion in lost market capitalization, or 22 percent of current market capitalization, according to an estimate by a Goldman Sachs analyst, because of higher taxes, lower net income and higher capital overall requirements. “It is first unnecessary because it did not contribute to the crisis, and second it would be disruptive to the economy and lending,” Brackett B. Denniston, G.E.’s general counsel, said in an interview.

Like other industrial banks here, G.E.’s is regulated by Utah’s Department of Financial Institutions, as well as the F.D.I.C. State officials resent any suggestion that they are lax in their oversight.

“We have proven there is a way to manage these institutions,” said Darryle P. Rude, Utah’s chief industrial bank supervisor. “So why would you want to eliminate a system that has not been a threat?”

Encouraging Risk

But critics tick off a list of complaints about the banks, including assertions that owning them gives their corporate parents an unfair advantage and encourages risky practices.

Companies that own industrial banks can finance lending operations more cheaply than their competitors by relying on federally insured deposits at their banks, instead of going to the more costly bond market, said Matthew Anderson, a consultant who studies bank industry earnings.

In addition, he and others point out, state regulators and the F.D.I.C. do not have the same powers as the Federal Reserve to demand changes in risky business practices by parent companies that might indirectly threaten their industrial banks.

Treasury officials have not blamed industrial banks for a role in the financial crisis, but they do argue that the regulatory loophole permitted abusive actions by some of their parent companies that fed the problems.

“This is not about picking on anyone, but they contributed to risk in the system,” said a Treasury official, who spoke on condition of anonymity because he was not authorized to comment on the issue.

A few industry observers go further in their complaints. Some companies intentionally chose an industrial bank charter — where they could raise money through brokered C.D.’s, investor funds in cash accounts and funds from business clients — so that they could take riskier bets and have higher leverage in their other business units, argued Raj Date, who leads a nonprofit industry research group, Cambridge Winter.

He said that parent companies of eight of what had been the top 12 Utah industrial banks filed for bankruptcy protection or received large allotments of federal bailout funds or other federal financial support in the last year. Those companies — including Merrill Lynch, GMAC, Morgan Stanley and CIT — consumed $70 billion, according to Mr. Date’s analysis. (Those institutions have all closed their industrial banks, in most cases a condition of accepting the money.)

“The United States of America has lost billions of dollars based on inadequate regulation,” said James A. Leach, a former Republican congressman from Iowa and longtime critic of industrial banks. “Once you set up an exception like the industrial bank charter, the smart and the big are not dumb. They will exploit it. And that is just what they did.”

Executives at industrial banks, including those operated by Harley Davidson, Toyota, Pitney Bowes and G.E., reject criticism they were a factor in the financial crisis, a position shared by Ms. Bair, the F.D.I.C. chairwoman.

The bankers said that many financial institutions without industrial banks also turned to the federal government for a bailout. They added that industrial banks have nearly twice the capital reserves of a typical commercial bank.

“For the last ten years the industrial banks have been the strongest, best capitalized, most profitable, least likely to fail banks in the country,” said George Sutton, a former Utah bank regulator who has helped set up several industrial banks.

Campaign Contributions

The de facto headquarters for the industry’s lobbyists is a small office building a few blocks from the Utah capitol, where Douglas S. Foxley and Frank R. Pignanelli are based. The partners, one a Democrat and the other a Republican, have tried to persuade skeptics in Washington that the industrial banks are part of the solution to the economic crisis, not a cause.

They have appealed to Utah’s Congressional delegation, the home state delegations of the banks’ parent companies, and Congressional and committee leaders. The banks’ parent companies have made campaign contributions to some lawmakers.

For example, G.E., which has a variety of issues before Congress having to do with its role as a defense contractor, manufacturer and financial powerhouse, made $500,000 in donations to legislators since January, including the Senate majority leader, Harry Reid, Democrat of Nevada; Senator Christopher Dodd, Democrat of Connecticut, the chairman of the Senate Banking committee, and Senator Bob Bennett, Republican of Utah.

“What it comes down to is a lot of blocking and tackling,” said Mr. Foxley, the lobbyist. “We have to stop this.”

This article has been revised to reflect the following correction:

Correction: September 19, 2009
An article on Thursday about government attempts to regulate industrial banks, which are institutions that lend money primarily to businesses, incorrectly described financial results and their impact at Marlin Business Bank of Salt Lake City. Marlin Business Bank did not report losses that would force it to make cutbacks.

"Mission Statement: Forage during daylight. Hide at night."

:rofl:

http://dailyreckoning.com/an-ordinary-end-to-a-post-crash-bounce/


Quoting David Rosenberg:

"The incoming economic data in both the US and Canada have improved and for the most part bettering expectations. The dilemma is that market pricing has moved far beyond the fundamentals. Despite the temptation to jump into a 'liquidity-induced' rally...they cannot be sustained without a durable organic economic expansion. The problem is that the global economy in general, and the US economy in particular, is operating on so much medication that it is difficult to conduct an appropriate examination of the patient at the current time. All we know is that the markets seem to have very rapidly now priced in three years worth of recovery.

"The S&P 500 is now up more than 60% from the lows, which is truly amazing and kudos to those who called it. But the question is whether the fundamentals will ever catch up to this level of valuation - usually after a 60% rally, we are fully entrenched in the next business cycle. Never before have we seen the stock market rise so much off a low over such a short time period, and usually at this state, the economy has already created over one million new jobs - during this extremely flashy move, the US has shed 2.5 million jobs (as many as were lost in the entire 2001 recession)."

The markets rise. The economy sinks. It is not sinking as fast as it was. But it is still going down. Month after month, the number of people without jobs increases. Even Paul Krugman says that unemployment won't reach its peak until 2011.

And house prices? Hard to tell what is going on. As Rosenberg puts it, this patient is so hyped up on drugs it's not possible to make a diagnosis. Still, he doesn't look good. There are millions of mortgages that still haven't been tested. Interest only...Alt A...commercial...even prime mortgages. They are facing reset...and refinancing...with collateral prices down 20-30-40%. How can you refinance when you are underwater?

Let's look at the basics. We had a nice thing going. From 1945-2007, consumer spending and credit increased. As long as lenders were willing to lend...and consumers were willing to go further into debt...the economy expanded.

Towards the end, it got a little crazy. And then it blew up.

As predicted, the feds rushed in to save the situation. But they only have one trick - adding more cash and credit. That works every time...until it stops working. And it stopped working in 2008.

Banks don't want to lend against falling house prices. And consumers don't want to borrow when their incomes are going down.

Ergo...the end of consumer credit expansion. Get over it.

But the feds keep at it. And with their help, the markets have bounced up. Of course, a bounce is one of the most reliable features of a market economy. A 50% bounce in the Dow - roughly equal to the bounce after '29 - would take the index to 10,300. We're not there yet.

So, there's nothing unusual or unexpected about this situation. The markets have done what they were supposed to do. The feds have done what they're supposed to do.

So what next?

Ah...dear reader...if only we knew the answer to that question...

Here we are in uncharted territory...terra incognito...

Never before has there been an international monetary system based purely on paper. And never before has it been run by people who believe they can force the market to do their bidding. They are convinced that they can avoid the Japan situation - where the economy dragged along for twenty years - by adding more cash and credit. Bernanke said he would drop it from helicopters if necessary.

Just one problem.... Bernanke can inflate...but only until the Chinese tell him to stop. When China pulls the plug on the bond market, the party comes to an end. That's why the helicopters are still on the ground. And it's why they will only take off when the situation becomes desperate.

In the meantime, we await the ordinary...that is, an ordinary end to a post-crash bounce. That will come with another crash. And another. And another. Until stocks finally hit bottom...and bubble-era delusions are finally all crushed out.



And now for some more news from The 5 Min. Forecast:

"The demise of the credit card crisis has been greatly exaggerated," writes Ian Mathias in today's 5 Minute Forecast. "Here's one for those recovery cheerleaders:

"Bank of America and Citigroup - which comprise 35% of the entire credit card industry - announced this week that customers are defaulting on their credit cards at the highest rates since the recession began. Bank of America's charge-off rate registered a whopping 14.5% in August. In other words, for every $7 in credit card debt on BoA's books, they expect $1 to be lost.

"Other mega-banks and creditors like JP Morgan, Discover, Amex and Capital One revealed similar August numbers. It's an extra-harsh dose of reality for the Street, which enjoyed improving credit default rates this summer, especially in July. We're a bit less surprised... Nearly every measure of loan losses at US banks is still soaring into record territory:



US Loan Defaults



And back to Bill with some more thoughts:

Taxes are going up. Governments have gotten themselves in a new trap. Well...several traps.

When you intervene in a place like Iraq, it is like a bad marriage. The first few nights are fun. But soon you're looking for a graceful way to get out. Trouble is, there isn't any easy way out. So you stick with it. Time goes by. And the costs mount up. Before you know it, the cost for the Iraqi adventure is more than $1 trillion...and then it goes to $2 trillion.

Now, the feds have intervened in the economy too. And, likewise, they are trapped. By pumping in trillions of dollars - not just in America, but also in Britain and China (which have both intervened even more forcefully) - they have made it look like things are okay. They have kept zombie companies alive. The big banks haven't had to own up to their own mistakes. Companies haven't had to cut back quite as much as they would have.

As our friend Nassim Taleb puts it, the financial system "still has the same disease."

But it's being kept alive with massive doses of very expensive medicine - provided by the feds.

So what are they going to do now? They claim to have prevented catastrophe. They say they've engineered a recovery. And yet, if they let up on the drugs...the patient dies.

They're trapped...they'll have to keep pumping in money for years...until the money runs out.



Naturally, the feds want to raise as much money as they can. So, like bank robbers, they go where the money is - to the "rich."

Steve Sjuggerud tells us what has happened back at home...in Maryland.

"The state of Maryland couldn't balance its budget last year. So the state decided the right way to raise tax dollars was to fleece the millionaires... Maryland state politicians created a 'millionaire' tax bracket.

"Maryland Governor Martin O'Malley of course expected tax receipts to go up. He said Maryland's 3,000 millionaires were 'willing to pay their fair share.' The Baltimore Sun said the rich would 'grin and bear it.'

"But the opposite happened...

"Instead of 3,000 Maryland millionaires filing taxes in April 2009, only 2,000 did. According to The Wall Street Journal: 'Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year - even at higher rates.'

"A friend of mine lives here in Florida. He is not an American citizen. He pays US taxes while he lives here. But under the threat of higher national income taxes, he is contemplating giving up his green card and moving elsewhere.

"When Maryland's governor raises taxes, Maryland residents leave and government income goes down.

"When the nation's President raises income taxes, foreigners like my friend leave and government income goes down.

"Unfortunately, YOU CAN'T LEAVE.

"Wait a minute. This is America, land of the free, right?

"Not so fast... The US government will track US citizens everywhere to get tax money. If you leave to work in another country, you still pay US income taxes. America and North Korea are the only countries that tax you on your worldwide income.

"If it gets bad enough, you can just give up your citizenship, right? Nope, you can't do that either. At least, you can't do it without paying a potentially massive 'exit tax.'

"The exit tax acts like an estate tax. If you want to give up your citizenship, you have to give up nearly half your wealth above a certain level. The Economist magazine calls it 'America's Berlin Wall.' Nice, eh?

"Want some more nice? Once you're gone, you're not legally allowed to come back and visit family and friends. Yes, if the government decides you have renounced citizenship for tax purposes, a federal law prohibits you from entering the country ever again. (You can look up the rule under 8 USC 1182(a)(10)(E).)

"You can escape states with oppressive taxes. But 'escaping' the US - the land of the free - is much more difficult. And you can bet it won't get any easier as the government needs more and more of your income to pay its bills."

http://dailyreckoning.com/all-that-glitters/


Of all the many miseries that man faces on his journey from cradle to grave, few of them can be eased by enlightened central banking. And a credit contraction is not one of them. Japan proved it. After the Japanese market collapsed in 1990, public officials went to work with their characteristic energy and incompetence. They lowered the cost of borrowing to nearly zero. But did consumers take up the money and add to the demand for bread and bicycles? No. They didn't want to borrow. They wanted to save. They had speculated during the previous bubble years and lost money. Then, with retirement approaching, a penny saved was worth even more to them than a penny earned. They saved more than ever...and the consumer economy sank.

The Japanese persisted. They lent so freely that the yen became the 'funding currency' for a worldwide boom. Prices rose all over the planet - except in Japan itself. The land of the rising sun couldn't seem to get up in the morning. Property investors lost money. Stock market investors lost money. Japanese consumers sewed their pockets shut.

And now that the dollar is the world's 'hot money' the world's surviving gold bugs see their moment of rapture fast approaching. Gold is not an investment category. It is no investment at all. Instead, it is more like a religion or a political position. True believers stick with it through thick and thin. When gold goes up, they are insufferable. When it goes down, they are unrepentant.
"No monetary system lasts forever. This one – an impromptu experiment, at best; premeditated larceny at worst – has already lasted longer than most marriages."

The price of gold peaked out in real terms in 1979 at over $2,000 in today's money. Briefly, an ounce of gold was so loved - and stocks so despised - that you could buy all the stocks in the Dow index for just a single ounce of gold. But then, the gold martyrs suffered a terrible persecution - nearly two decades years of steadily falling prices. Not just in real, inflation adjusted terms, but in absolute terms. By the end of the period, it took 43 ounces of gold to buy the Dow stocks, and gold bugs were gathering in small groups praying for salvation and awaiting the end of time. It seemed as though the cult might be extinguished; few were still alive. Fewer were still solvent. Of those, even fewer were still sane. But then, like Christians huddled clandestinely in an unheated Soviet apartment, the wall fell. Gold began a comeback.

What inspires this little reflection, apart from a night of heavy drinking, is the price movement. At the beginning of the week, gold closed comfortably above the $1,000 an ounce mark. Then, on Wednesday morning...it shot up. The end of the world has been delayed, perhaps indefinitely. And yet, gold - an option on financial chaos - trades as if it were coming next week.

What gives? Here on the back page we keep an eye on the yellow metal. Not because we expect the end of the world. Still, you never know; maybe the gold bugs are onto something. No monetary system lasts forever. This one - an impromptu experiment, at best; premeditated larceny at worst - has already lasted longer than most marriages. The bust-up, when it comes, threatens to be nasty and expensive.

The easiest story to sell in the current marketplace is the inflation story. In an effort to revive the go-go economy of the bubble era, the feds are adding to the money supply. They will continue doing so until inflation rates go up. They make no effort to hide it. They have as much as warned the world: prepare to be robbed. According to the popular story line, the gold market now anticipates inflation. Investors should too. We have told this story ourselves; we still believe it. But today, we caution readers: there may be a plot twist.

The problem with inflation is that there is none. Consumer prices are falling in China, Europe and America. And if we look harder, we find out why. The feds are pumping the money supply as hard as they can. David Rosenberg reports that the monetary base rose at a 141% annual rate over the past four weeks. But the money fails to reach the real economy. The money supply figures that relate to actual cash in people's hands - M1, M2, and MZM - are shrinking, at -28%, -4.9% and - 6.2% respectively. Why? Because the banks don't lend and consumers don't borrow.

In short, the feds' money goes into cool bank vaults and hot speculative trades. When it tries to find its way to the consumer, it gets lost. As Rosenberg explains it, the transmission mechanism has broken down. We live in a bust economy, not a boom one. In a bust, consumers cannot borrow. They have nothing to borrow against. Both their wages and their assets are going down. Who would lend to them under those conditions? Not a bank that almost went broke itself 12 months ago.

And even if consumers had access to credit, they wouldn't take it. Consumers too, almost went broke a few months ago. Instead of saving money during the boom years, they spent it...or gambled with it. Then, when the bust came in '08, they realized that they were 10 years closer to retirement with little money saved. Now they have to make up for that lost decade, by cutting spending and saving as much money as they can.

Still, gold speculators think they've got God on their side. They march into the coliseum confident that the feds will inflate consumer prices and cause the price of gold to soar. Maybe gold will rise. If so, it will be thanks to speculators and Chinese central bankers, not consumer price inflation. The smart money is still on the lions.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

http://www.ft.com/cms/s/0/8db378aa-a2a0-11de-ae7e-00144feabdc0.html

The Irish state will pay €54bn to take over bank debt worth €77bn to cleanse the sector’s toxic assets and encourage renewed lending to businesses, Brian Lenihan, the finance minister, said on Wednesday.

Opening the second reading on the bill establishing the National Asset Management Agency, Mr Lenihan said the so-called bad bank “would ensure we avoid the Japanese outcome of zombie banks that are just ticking over and not making a vibrant contribution to economic growth”.

Under the plan Nama will issue the banks with bonds and subordinated debt to the value of €54bn ($79bn, £48bn) to take over distressed bank loans.

Mr Lenihan said the market value of these loans was about €47bn, representing a 50 per cent fall in property prices since the peak in 2007. Nama was paying an average 30 per cent discount to the original value of the loans on the banks’ books, and “strikes a balance between reflecting the long-term potential of these assets while minimising any potential risk that Nama will make a loss”.

He warned “the evidence from property busts in other countries shows that the longer the bankers and the borrowers are allowed to deny the reality of the losses they face, the greater the ultimate cost to the taxpayer and the greater damage to the economy”.

Mr Lenihan sought to highlight the social role that Nama could play in future, indicating government agencies might be given “first option on disposals” of the properties of which the agency takes possession. He pointed out: “These bodies have sometimes been held to ransom and have had to pay inflated prices for projects such as school extensions and playgrounds.”

Richard Bruton, finance spokesman for the conservative opposition Fine Gael party, said: “If we get this wrong we will undoubtedly prolong the recession and increase . . . jobs lost.”.....Much of the criticism of the plan centres on concerns the state is overpaying the banks for the loans.


WELL! STRONG MEDICINE! IS IT ANY WONDER THAT EUROPE WILL COME OUT OF THIS LONG BEFORE THE US? THEY HAVE NO DELUSIONS AND NO WISHFUL THINKING, JUST DEALING WITH REALITY.

http://www.ft.com/cms/s/0/6e17059c-a2ab-11de-ae7e-00144feabdc0.html

Up to 25m people in high-income countries will have lost their jobs by the end of next year as the recession pushes the unemployment rate towards a record 10 per cent, the Organisation for Economic Co-operation and Development forecast on Wednesday.

The Paris-based OECD said that, while recent signs of economic recovery might mean unemployment peaked earlier and at a slightly lower level than its forecast, governments must intervene “quickly and decisively” to prevent the sharp rise turning into long-term joblessness.

A woman in Germany looks for job openings

A woman in Germany looks for job openings
EDITOR’S CHOICE
UK jobless rises to highest since 1995 - Sep-16
Recession likely over in US, says Bernanke - Sep-16
Graduates top pay scale, says OECD - Sep-08

Its annual employment outlook underlines fears that a recovery without jobs might be in prospect, even if the return to economic growth seen in some countries in the third quarter is sustained.

“Most OECD countries are already facing a jobs crisis. This is likely to get worse before it gets better,” said Stefano Scarpetta, the report’s lead author and head of the organisation’s employment division.

The OECD said 15m jobs were lost between the end of 2007 and July this year and 10m more could go by the end of next year in the 30-nation area if the recovery failed to gain momentum. A total increase of that magnitude would be equivalent to the population of a country larger than Australia.

In 2007 the unemployment rate in the OECD hit a 25-year low of 5.6 per cent, but it rose to a postwar high of 8.5 per cent this July. The US, Spain and Ireland, where the banking crisis has been accompanied by a housing market collapse, have been worst hit. The rise in unemployment has been slower in European economies such as Germany and Italy.

Joblessness in the UK, which has reached 7.9 per cent of the workforce, would continue to rise and remain at a high level next year, the OECD said.

The downturn was destroying more jobs than other recessions since the early 1970s, it said but fiscal stimulus packages might save between 3.2m and 5.5m jobs next year.

Unemployment ratesThe report suggested that while Ireland, Japan, Spain and the US might have already seen most of their likely job losses, in countries such as France, Germany and Italy the largest part of the increase might be yet to come.

As many as 21 countries have sought to save jobs by introducing or expanding short-time working schemes such as the German Kurzarbeit, which involves about 1.5m workers. But the OECD warned that such schemes must be focused on companies where demand was only temporarily depressed, otherwise they could hamper the recovery by putting a brake on the required reallocation of workers from declining to expanding companies.

“History says that jobs lag the recovery and the deeper and faster the jobs were lost, the more it lags,” Angel Gurría, OECD secretary-general, told a news conference in Paris. “Employment is the bottom line in the current crisis. We cannot claim victory simply because we see indicators of a recovery picking up and we should not just assume that growth will take care of this.”

The report said governments must urgently adapt their labour market and social policies to prevent people falling into the trap of long-term unemployment. Measures should be focused on helping young people, who have been hardest hit by the crisis, to reduce the risk of producing a “lost generation”.

Social safety nets should be reinforced to avoid jobless people falling into poverty, the OECD said. It also urged an increase in spending on active labour market policies, such as job search assistance and training, to help the unemployed back to work. Spending on these policies has increased in many countries but has not kept pace with the scale of job losses.

http://www.ft.com/cms/s/0/2443b87a-a2ce-11de-ae7e-00144feabdc0.html

Barclays has unveiled a plan to sell more than $12bn of risky credit assets to a company it has created to try to reduce the risk of further writedowns.

Protium Finance, a partnership of so-far undisclosed investors , will buy the securities using a $12.6bn loan extended by the bank. Protium will be managed by Stephen King, the head of mortgage trading at Barclays, and Michael Keeley, a member of the Barclay’s Capital management committee.

Mr King and Mr Keeley are to leave their positions at the bank.

The assets include $8.2bn of structured credit securities insured by monolines, $2.3bn of residential mortgage-backed bonds and $1.8bn of unpackaged mortgages...



SO, EVERYBODY'S CLEANING UP THE BALANCE SHEETS, EXCEPT US....

http://www.ft.com/cms/s/0/56b8afa8-a3ba-11de-9fed-00144feabdc0.html

“Curious” and “largely cosmetic” were two of the opinions offered by analysts on Thursday as they sought to explain Barclays’ decision to sell more than $12.3bn (£7.5bn) of risky credit assets to a new company.

Barclays loaned the new company, Protium, the money to buy the assets, thus replacing the volatility caused by owning risky assets with regular cash flows from interest payments.

The crucial question is whether the merits of protecting against further problems with the assets outweigh the amount of upside being handed to the new fund.

The decision to shift $8.2bn of structured credit securities insured by monolines, as well as $2.3bn of residential mortgage-backed bonds and $1.8bn of unpackaged mortgages, will certainly help Barclays to reduce risks.

“Why are Barclays doing this? We suspect there’s an increasing concern on monolines,” said analysts from Credit Suisse.

But other commentators worry that after sticking with these riskier assets during the downturn, Barclays is in effect giving away too much of the future upside now that the markets are starting to recover.

“Both views can’t be true,” said one person with knowledge of the situation. “People don’t have a clear way to see the value of these assets – that is the root of it. Barclays will be able to give their shareholders stability and predictability of earnings and cash flow.”

IF THE WORLD'S GREATEST CYNICAL PIRATES CAN'T UNDERSTAND WHY, IT MUST BE A GOOD THING, NO? AS IN SMART, ETHICAL, AND RESPECTFUL OF THE PUBLIC...

http://www.ft.com/cms/s/0/56f3fe16-a33b-11de-ba74-00144feabdc0.html

Citigroup has poached one of Bank of America Merrill Lynch’s top China investment bankers to strengthen its links with the country’s fast-growing private sector companies.

Rodney Tsang is to join Citi as co-head of China investment banking after nearly three years at Merrill Lynch, according to an internal memo sent to staff on Thursday.

His departure is a loss to Merrill’s firepower in China and follows that of several other key staff who quit the US bank earlier this year following its takeover by Bank of America.

Citi has strong links with China’s state-owned enterprises and has secured a number of mandates to advise on big IPOs...

AS IF ANYONE WOULD GIVE THEM ANOTHER NICKEL, AFTER THEIR LAST PUBLIC OFFERING, WHICH DUMPED TOXIC WASTE ON THEIR "INVESTORS". POOPY NEEDS SOME CASH? WHATEVER FOR? BLACKWATER, OR STEALING THE NEXT ELECTION?

http://www.ft.com/cms/s/0/f52f0912-a305-11de-ba74-00144feabdc0.html

SOMEHOW, I THINK AND HOPE THE "GREATER FOOL" MECHANISM IS PERMANENTLY BROKEN...

http://www.ft.com/cms/s/0/9586ffce-a3b4-11de-9fed-00144feabdc0.html

I'VE LONG SUSPECTED HONG KONG OF BEING THE WORLD'S LONGEST-RUNNING BUBBLE, AND DUBAI IS JUST A WANNABE....

http://www.wsws.org/articles/2009/sep2009/pove-s11.shtml

Summary of where we are right now.

http://www.wftv.com/money/20959051/detail.html

...Phil Angelides, appointed this year by Democrats to lead the 10-member Financial Crisis Inquiry Commission, said the group will examine the conduct of top officials at such firms as Lehman Brothers, Citigroup, AIG and Bear Stearns, as well as mortgage buyers Freddie Mac and Fannie Mae.

Angelides said he plans to release much of the panel's findings ahead of its December 2010 deadline in the hopes of informing congressional debate on the issue.

Democratic leaders have promised to complete by the end of this year legislation that would tighten federal regulations on banks and extend oversight to other institutions that influence financial markets...

...The commission held its first public meeting Thursday, four months after being established as part of a mortgage fraud bill passed by Congress. With a budget of $5 million and the power to subpoena records, the commission will be the first independent accounting of what caused the nation's financial meltdown.

Angelides promised a nonpartisan investigation, although the committee faces dueling ideologies among its members. Republican Bill Thomas, the former GOP chairman of the House Ways and Means Committee who is serving as the panel's vice chair, said regulation shouldn't exist if it only gives the public a false security.

"Who was watching the watchers? Why weren't we able to detect (the crisis)?" Thomas asked....

http://www.yesmagazine.org/blogs/david-korten/blog-who-really-crashed-the-economy

...Wall Street’s greatest fear is that the public might demand Congress and the president shut down the casino. Any issue that shifts attention away from Wall Street and pins the blame for job loss and mortgage foreclosures on President Obama works in its favor.

The right wing media campaign would have us believe that President Obama, not Wall Street, is the nation’s #1 problem. He’s a socialist. He’s an irresponsible spender. He isn’t really patriotic (remember, he didn’t wear a flag pin). America’s lost jobs and the mortgage foreclosures are his doing. Never mind that he was still living in Chicago working as a civil rights lawyer and then an Illinois state senator while Wall Street was putting together the high-risk financial instruments that ultimately brought down the economy.

Every controversy that gains media attention, including such peripheral issues as President Obama’s talk to students and a green jobs advisor who once signed a controversial petition, helps to push Wall Street off the front page and distract the White House, congress, and the public from the real issue....

http://www.youtube.com/watch?v=JhaEc_4zuFI&feature=player_embedded

Gerald Celente - the most trusted name in trends - sits down for an exclusive interview with RT's Anastasia Churkina to talk about what the future holds for America during and after the Great Recession, gives advice to Obama, and forecasts the unexpected.

http://www.bloomberg.com/apps/news?pid=20601208&sid=afX0BWHToC1g

Sept. 18 (Bloomberg) -- The U.S. Secret Service is examining more than $100 billion of U.S. government bonds confiscated in northern Italy in August, just two months after $134 billion of allegedly fake securities were seized in a nearby town.

The Secret Service is analyzing whether the bonds taken in August may be counterfeit, said a spokeswoman for the U.S. embassy in Rome. Italy’s financial police in Varese, north of Milan, arrested two individuals carrying the securities in a briefcase, according to a person involved in the case.

The two men currently are in custody as prosecutors in the town of Busto Arsizio carry out their investigation, the person said. The seized notes include securities with face values of $500 million and $1 billion, Italian daily MF reported today, without saying where it got the information.

“There must be a well-organized group behind these alleged crimes,” Fabio Polimeni, a Milan lawyer specializing in counterfeiting cases, said.

Italian authorities seized U.S. treasuries on June 4 with a face value of more than $134 billion from two Japanese travelers attempting to cross into Switzerland. The two men later disappeared and the case is still under investigation. The U.S. government bonds found in the false bottom of a suitcase carried by the men were fake, a U.S. Treasury spokesman said June 18.

“As financial markets become more sophisticated, creative and bigger, we can expect criminal activity to go with it and it’s happening everywhere,” Livia Oglio, a Milan lawyer, said. “The amount seized is phenomenal.”

Since the beginning of the year the police at border stations in Italy have seized 1.7 million euros of genuine money and bonds, and have confiscated more than 100 million euros of bonds that have been determined to be false, according to an Italian finance police statement in July.

The two from Japan that were carrying fake bonds were simply released :wtf:

http://www.informationclearinghouse.info/article23533.htm

September 18, 2009 "Information Clearing House" -- I really don’t know what to say anymore, about a country in which proposing a new and better version of corporate-plunder masquerading as national healthcare gets you burned in effigy for being a socialist stooge by gun-toting angry mobs.

I really don’t know what to say anymore, about a country in which the same people who hate you for being a socialist simultaneously hate you for being a fascist.

I really don’t know what to say anymore, about a country in which angry mobs of supposed anti-socialist demonstrators scream at their congressional representatives to “keep your government hands off my Medicare”.

I really don’t know what to say anymore, about a country in which claims that the government is going to start killing off seniors are taken seriously by tens of millions of people.

I really don’t know what to say anymore, about a country in which people are all worked up about government czars, but sat silently while the Bush administration destroyed the Bill of Rights and used a thousand signing statements to write Congress out of the Constitution.

I really don’t know what to say anymore, about a country in which deficits have all of a sudden become the source of enormous anger among people who said nothing about them previously, as the tax cuts for the wealthy, off-budget wars based on lies, and unfunded prescription drug Big Pharma giveaway transmogrified the biggest surplus in American history into the biggest deficit ever.

I really don’t know what to say anymore, about a country in which politicians can rant incessantly about other peoples’ sexual morality, get caught screwing prostitutes, and then still be reelected to the highest ranks of government by trashing the president.

I could go on and on, but what would be the point? The positions of so many Americans on so many policy questions are truly inane – yes, for sure. I wish that was all that concerned me. But it all goes so much deeper than that.

The entire premise of a self-ruling democracy rests on some reasonable degree of rationality and some reasonable degree of an ability to discriminate between real information and falsehoods. Today’s American democracy seems to lack these qualities in increasingly abundant amounts.
And yet it goes deeper than that still. The entire premise of a society – any society, democracy or not – is that it possesses a certain degree of shared community, a ‘we-ness’ that transcends narrower tribalisms and self-interest in critical ways and at critical moments. That too has unraveled of late. Think of the nice white men with shotguns blocking the exit from flooded New Orleans during the worst moments of Hurricane Katrina.

Looking at America today, it all feels so very past tense to me.

In some very profound ways, this is not the place nor the time you’d expect the implosion of an established democracy and society. To be an American is to be a member of the richest and most powerful nation on Earth. If they’re not whining so much in Botswana these days, who the hell are we to?

On the other hand, though, it makes a lot of sense. The moment correlates precisely with the peaking of the empire several decades ago, now further exacerbated as the deep wells of remedial pillaging – our credit cards, our mortgages, our children, a rising Chinese middle class, brown people everywhere, the environment – have disappeared entirely, with nothing but despair and moral dessication left in their place. Moreover, the folks most aggrieved and most estranged from their senses of late are precisely the people who were bought off of their sanity at every turn with the latest form of bigotry du jour, used to assuage their ever-diminishing sense of relative social status. Over and over again, the people I see on my television screen acting absolutely and incoherently stupid in their senseless rage seem to be little more than fat, white, Southern, sixty-something racist good ol’ boys.

Well past their sell-by dates, they’ve of course gotten tremendous help cranking it up again. That’s no surprise. I’m not sure these crackers are smart enough to even be stupid without coaching. As Lyndon Johnson used to say: “Couldn’t pour piss out of a boot if the instructions were written on the heel”. Lucky for them, those marching orders come from a host of politicians and media whores who, in an even moderately just world, would receive a wee taste of Abu Ghraib in repayment for the reckless destructiveness they’ve fomented upon the always precarious edifice of liberal democracy. There’s special place in Hell reserved for these shouters of “Fire!” in crowded theaters, these bloodsucking bottom-feeders, especially since they are being paid so handsomely for their faithful service as prolocutors for predators.

I doubt anyone has ever reminded us of this ongoing danger more eloquently than did the famous American diplomat, George Kennan, when he wrote: “The counsels of impatience and hatred can always be supported by the crudest and cheapest symbols; for the counsels of moderation, the reasons are often intricate, rather than emotional, and difficult to explain. And so the chauvinists of all times and places go their appointed way: plucking the easy fruits, reaping the little triumphs of the day at the expense of someone else tomorrow, deluging in noise and filth anyone who gets in their way, dancing their reckless dance on the prospects for human progress, drawing the shadow of a great doubt over the validity of democratic institutions. And until peoples learn to spot the fanning of mass emotions and the sowing of bitterness, suspicion, and intolerance as crimes in themselves – as perhaps the greatest disservice that can be done to the cause of popular government – this sort of thing will continue to occur.”

Hear, hear. Sorry to say it, George, but you’re lucky to have died when you did. It’s only gotten so much worse in just the last few years.

And while the O’Reillys and the Reagans of our time have joined forces to turn “the counsels of impatience and hatred” into an entire political party and more, they are, of course, mere conscious tools of the Big Green Greed that ultimately drives the system. They know they are prostitutes, but the money’s good. And so is the fame and adulation – no small thing for these sorry critters. Look at the Becks and Limbaughs and Gingriches of this country. Were there ever people in this world with so much self-esteem ground to be made up from the transparent ostracization of their younger days? Were there ever individuals so obviously motivated by retribution against everyone who treated them like the jerks they were in their formative years? Was there ever a walking warning sign more brightly flashing about the costs to society of youthful bullying? I’m sorry Glenn, I’m sorry Rush, I’m sorry Newt. I know when you were younger you were pudgy fast-talking smart-ass petulant pricks who made up in wedgies from bigger guys what you never got in attention from attractive women. But isn’t about time you stopped taking it out on America? I’m sorry you got your ass kicked on a weekly basis, but I didn’t do it.

Though I’m thinking about it now.

It takes a willful act of ignorance (something we see a lot of these days) not to perceive the United States as the latest in history’s falling empires. Like Rome, the true contribution of its sometimes great ideas has ultimately been substantially buried under the rubble of its ill-fated decision to greedily grasp the nettle of empire. Unlike Rome, this puppy is taking decades, rather than centuries, to collapse.

Empires come and go, of course. Rising and falling is what they do. It’s their job in life. What is truly frightening to contemplate, however, is what happens when an empire falls in the era when technological capacity absolutely dwarfs political maturity? And what happens if that occurs not just anywhere, but in arguably the most immature, self-serving and self-indulgent of developed societies on the planet?

The only model we have for this so far is the Soviet implosion of two decades ago, though even that is only a partial representation, since the Soviet bear was no match for the American boor in piggishness. Even so, that history does not bode so well, outward appearances notwithstanding. We should all collectively be walking on eggshells thinking about the tens of thousands of strategic and smaller tactical nuclear warheads that may or may not be accounted for. Nor is the renascent and rather irredentist new Russia necessarily a pretty picture either, a fact that may become increasingly relevant in the coming decades. Still, all this noted, the Russian imperial collapse has to be said to have been relatively uneventful, closer to the post-war British and French experiences than to any cataclysmic end of days scenario.

I wish I could be so sanguine about the implosion of the American empire. In one sense, it was probably a good thing for the Russians to go through this experience with only a fake democracy and repressed civil liberties in place, and some serious if undemocratic quasi-dictators running the show. It might have saved the country from the worst elements seizing control. I don’t much care for the product of American democracy and political discourse as things now stand. Imagine how it might all turn out under real duress, with the Glenn Becks and Rush Limbaughs further egging on both the angry rabble on the ground and the Sarah Palins in the political sphere.

I’m tired of overused Nazi references these days, but the most salient analogy has to be to 1930s Weimar Germany. The economy is broken, the political system is broken, the public is struggling, angry and full of nationalistic rage at their country’s failure to possess all the riches and glory it and they deserve. And so say bombastic demagogues, backed by a small army of street thugs, and offering both a scapegoat and a solution. Given a democratic election in which voters can choose between a dynamic, assured and energetic salvation figure, on the one hand, and an enervated, inept and passionately passionless status quo government, on the other, it’s not hard to figure what will happen. And what did.

Above all, what is wrong with this country (and what therefore inevitably becomes the world’s problem too – just ask the people of Iraq), is not so much the vicious thugs who would just as soon vacuum it free of any piece of wealth they can get into their hands as take their next breath. Nor is it the existentially petrified Confederate Crackers for Jesus who find that hate and violence is a pretty decent emollient to mitigate for the moment their otherwise completely debilitating fears.

That stuff always happens, though admittedly not often quite like this.

What’s really wrong is the near total absence of prominent political figures willing to sacrifice much of anything to protect their country from these depredations.

It’s been so long now that I’ve forgotten for sure, but didn’t they used to call that patriotism?

David Michael Green is a professor of political science at Hofstra University in New York. He is delighted to receive readers' reactions to his articles (dmg@regressiveantidote.net), but regrets that time constraints do not always allow him to respond. More of his work can be found at his website, www.regressiveantidote.net.

I was watching 60 Minutes, and now the Emmys are on. There are all these shows and actors and actresses that I have never seen. Well, I do remember the host, Doogie Houser, lol.

Back to reading, thanks for the weekend articles, hope your daughter is doing well.

I think I'm all posted out. It's not that there isn't more, it's that I haven't the heart to burden you all with more.

the Kid is doing well...I hope to interrogate the doctors tomorrow.

Tonight, I get to SLEEP! No more NYTimes! Woo-hoo! Watch me have insomnia. Well with the Kid in the hospital, I can clean house at 4 AM if I can't sleep without disturbing anyone except the cats...and, god knows, it needs it!