Good Layman's guide to the financial crisis [Archive] - Page 2

Ken White

03-04-2009, 07:54 PM

Ken...You're wrong here....
There is widespread evidence that the current financial crisis - while given much leeway by government - was caused by almost all the major credit providers and investment banks shoveling cheap credit out to door to people who could not and should not had access to it.I totally agree.

That's why I pointed out the three big problems of governmental action that allowed and even encouraged them to do that.
Wall St. is dead and the trust in government is also eroding even further. It is no surprise that there is a revolving door between Wall St. and high level governmental positons with the Treasury Dept., Mint, etc...similar to the revolving door between high ranking military officials and defense contractors.I agree with all that -- and I also know that people forget and forgive. I've been around long enough to see Wall Street get far more venom than it is getting now or is likely to in the future. I've also seen it bounce back and sell even more stock to even more people. I have no doubt that will again occur.

I've also seen government thoroughly distrusted and trashed before. Several times. Far worse than today; this government has carefully (and very wrongly in most respects) built itself up as a provider of funds and services to people who do not need those funds and services (that's called vote buying; if they targeted those in need, it would be good government, they don't -- so it isn't) thus it no longer gets nearly the vilification it once got when people knew it had screwed up -- as they do know this time.

That's one big reason Wall Street will not die.
There are very solid reasons why the market goes up and down. While human psychology has a very definitie role to play in the market, it's not nearly as nebulous as it seems. What is nebulous and for the most part horse#### is economic theory...mainly because most ignore the irrational nature of humans.I don't think I said it was nebulous -- I said no one really knew why it gyrated the way it does. Your suggestion about humans is the closest to being correct but that's impossible to predict ergo, the market gyrates and no one really knows why.

Economic theory does indeed have problems. Old Adam Smith got it pretty close to right 232 years ago and none of his nominal successors have done much to refine or disprove what he wrote.

This too will pass, as they say...

Ken White

03-04-2009, 07:57 PM

Sure they will, once everyone currently older than puberty is dead or feeble.Five to eight years, max.
Everyone's familiar with the Glass-Stegall Act (http://en.wikipedia.org/wiki/Glass-Steagall_Act). Passed in 1933, it was repealed in 1999. There were sound and solid reasons for the law.True. Uh, Who was SecTreas when that was repealed. Who signed the bill into law... :D

George L. Singleton

03-04-2009, 08:01 PM

...Shoveling credit out the door to poor people who shouldn't or didn't qualify for it...

This is an incomplete statement.

We also found our credit society at large giving credit to failed middle and upper income folks who didn't know, ever, how to manage their much larger incomes and estates.

So, some big income folks had equally lousy credit scores and profiles. As a real estate broker how many times have I been asked (and I refused every time) to "find a mortgage fix for Dr. so and so or lawyer so and so, whose income or cash flow is huge...but whose credit history is even bigger in terms of being BAD.

Ken White

03-04-2009, 08:30 PM

I've seen an amazing number of people with decent incomes who do not need to have much if any credit card debt but in fact have thousands of dollars worth of it. I have a neighbor -- in a pure middle class neighborhood -- who has an E550 and and a G-Wagen and his wife has a new Bimmer, the big one they made ugly last year.

Not bad for a P.A. whose wife does not work...

There's enough blame on this economic pratfall for a lot of folks -- and that worldwide, not just the old evil US. :wry:

Added: A correction -- My Wife, who of course does not gossip, informs me that the E-model has allegedly been returned to the dealer. In any event, it has not been seen lately.

selil

03-04-2009, 08:41 PM

There is widespread evidence that the current financial crisis - while given much leeway by government - was caused by almost all the major credit providers and investment banks shoveling cheap credit out to door to people who could not and should not had access to it.

I have to disagree with the idea that this financial crisis was caused simply by the wrong/poor people getting bad loans. That story just doesn't float. Yes people got credit that shouldn't have gotten credit. It was bankers and financial institutions who leveraged known bad debt 30 to 50 times original value and much more. When you knowingly leverage bad debt and then sell it as a "AAA" fund that is fraud.

I think this little conspiracy theorist essay may have more to do with how we got to where we are http://wallstreetwatch.org/soldoutreport.htm .

Schmedlap

03-04-2009, 08:57 PM

I think this financial crisis is a good thing.

Maybe after this mess more boards of directors, activist shareholders, and banks will pay more attention to the actual skills, knowledge, judgment, and experience of whom they hire to run their companies and handle their money, rather than just looking at where they graduated from or who they know.

I also think that this is a good reality check for many Americans who have been living beyond their means. I'm in law school with a bunch of spoiled brats who don't work, never have worked, but have their tuition and expenses paid by their parents and by the taxpayers, get spending money from mom and dad, and they still have credit card debt up to their eyeballs. So long as they're still finding lawful ways to go out drinking every single night and dropping $30 to $40 every evening on dinner, we're not at the bottom. When the credit card company cuts them off and then mom and dad cut them off, that will be my "buy" indicator for the market.

I want to see this country prosper, but my definition of prosper varies significantly from the measures reported on the news. If we're fat, rich, and happy, but the country is nothing but a monument to depravity and excess, then I don't see that as an accomplishment. Hopefully people take advantage of this economic downturn to re-evaluate their priorities, habits, and values.

Ken White

03-04-2009, 09:35 PM

Can't add to that.

bourbon

03-04-2009, 10:00 PM

I have to disagree with the idea that this financial crisis was caused simply by the wrong/poor people getting bad loans. That story just doesn't float. Yes people got credit that shouldn't have gotten credit. It was bankers and financial institutions who leveraged known bad debt 30 to 50 times original value and much more. When you knowingly leverage bad debt and then sell it as a "AAA" fund that is fraud.
I Agree, I also think what was done is much worse then just stamping bad debt AAA, though that is a key part of it. I fear that 'Bob O'Brien's Take On The Subprime Meltdown (http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/EntryID/732/Default.aspx) is on the mark. The implications if true are huge.

Ski

03-04-2009, 10:25 PM

My fault on this if it's reading as if bad loans to unqualified people is the cause.

The CDO/derivitive issue is the real cause of the problem - $65T worth of it, compounded with an $11T debt which we're trying to spend out way out of...despite being $11T in debt.

That's $76T of bad paper. Or 6 years of American GDP paid off. It's not going to get fixed by spending money we don't have. That much I know.

What I don't know is where the fall ends, or how to fix it.

selil

03-04-2009, 11:57 PM

The CDO/derivitive issue is the real cause of the problem - $65T worth of it, compounded with an $11T debt which we're trying to spend out way out of...despite being $11T in debt.

That's $76T of bad paper. Or 6 years of American GDP paid off. It's not going to get fixed by spending money we don't have. That much I know.

What I don't know is where the fall ends, or how to fix it.

Can't argue with that a bit. One of those green beanie's told me while I was visiting Benning one time. Adventurers jump out of airplanes, only idiots don't pull the cord. I've likely mauled the quote but we're falling and all anybody keeps doing is make us fall faster.

George L. Singleton

03-05-2009, 01:17 AM

Selil:

You are correct as to total process. But the action, initial, is what identifies the cause, bad loans to undeserving folks at all levels of income buying homes and other properties, then that led to dishonest [fradulent] securitizing of bad mortgages in bundles together with good mortgages. But step one had to be making, over and over, the bad mortgages to begin with. Yes, this then created leveraged or multiplier bad debt outcomes, but never 40 to 50 times, that is too high a multiplier. The textbook rule of thumb is a 5X money multiplier, which is bad enough.

Greed drives all this.

I have to disagree with the idea that this financial crisis was caused simply by the wrong/poor people getting bad loans. That story just doesn't float. Yes people got credit that shouldn't have gotten credit. It was bankers and financial institutions who leveraged known bad debt 30 to 50 times original value and much more. When you knowingly leverage bad debt and then sell it as a "AAA" fund that is fraud.

I think this little conspiracy theorist essay may have more to do with how we got to where we are http://wallstreetwatch.org/soldoutreport.htm .

Ken White

03-05-2009, 02:17 AM

...we're falling and all anybody keeps doing is make us fall faster.'stimulating.' :D

Surferbeetle

03-05-2009, 02:41 AM

The textbook rule of thumb is a 5X money multiplier, which is bad enough.

Greed drives all this.

George,

The attached wikipedia link (http://en.wikipedia.org/wiki/File:Leverage_Ratios.png) reflects 2007 leverage ratios in the low 30's for Bear Stearns (http://en.wikipedia.org/wiki/Bear_stearns), Merrill Lynch (http://en.wikipedia.org/wiki/Merrill_Lynch), and Morgan Stanley (http://en.wikipedia.org/wiki/Morgan_Stanley). Goldman Sachs (http://en.wikipedia.org/wiki/Goldman_Sachs) is depicted at 25 and Lehman Brothers (http://en.wikipedia.org/wiki/Lehman_Brothers) as approximately 29 and change. The data was reported as being gathered from company reports.

The WSJ has the following at the link (http://online.wsj.com/article/SB123569973557489481.html)

But Mr. Gramm makes no mention of deregulatory movement within the executive branch, most notably the 2004 decision by Securities and Exchange Commission leaders to exempt the nation's largest investment banks from existing net capital requirements, and Chairman Christopher Cox's subsequent reluctance to apply the SEC's oversight capabilities. It was after this that leverage ratios skyrocketed from a limit of 12 to 1 up to peaks of 30 to 1 or higher, as in the cases of Bear Stearns and Lehman Brothers.

In my younger days, before I joined up with the USG, I spent two years collecting bills (30 to 120 day buckets) for Citicorp. I learned many things about business and capitalism during that time and I do not recall a single one of our customers receiving a bailout :rolleyes:

Best,

Steve

Schmedlap

03-05-2009, 04:33 AM

I'm considering writing some deep-in-the-money puts (Jan 2011 $45) on GE and using the proceeds to purchase shares of Wal-Mart and Proctor & Gamble. Should this speculative endeavor not payoff, can I get a bailout?

ODB

03-05-2009, 05:12 AM

I'd join former Countrywide Mortgage execs....LINK (http://www.dailynews.com/breakingnews/ci_11831423)

So it may come as a surprise that a dozen former top Countrywide executives now stand to make millions from the home mortgage mess.

Stanford L. Kurland, Countrywide's former president, and his team have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.

Ski

03-05-2009, 12:15 PM

I don't have a link handy, but Lou Dobbs reported last night that Wall St. sent over $5B to lobbyists in DC over the last 15 years in order to get a slew of laws changed or rescinded. I think it ended up being 12 laws all together.

Greed, greed, and more greed.

And here's the result of that greed, so far:
http://www.nytimes.com/interactive/2009/03/03/us/20090303_LEONHARDT.html?hp

A very useful map - the official unemployment rates per county in the US, with the growth in unemployment over the last year as well.

slapout9

03-05-2009, 02:43 PM

Ken White

03-05-2009, 05:27 PM

I watched that last night. All those folks should be in GITMO since there will soon be plenty of space down there. It was not just criminal it was treason!what they legally if not ethically could do to help themselves make more money -- which is what their business was all about -- or the Politicians who can unfortunately legally if not ethically take that money and thus abrogate their Oath to the Constitution and thus indirectly to the nation and the American people.

I'd be inclined to put people who ignored their duty for money in jail before I would try to jail people who used money to make money -- the which was their nominal job...

Sergeant T

03-05-2009, 06:38 PM

There has grown up in the minds of certain groups in this country the notion that because a man or corporation has made a profit out of the public for a number of years, the government and the courts are charged with the duty of guaranteeing such profit in the future, even in the face of changing circumstances and contrary to public interest. This strange doctrine is not supported by statute or common law. Neither individuals nor corporations have any right to come into court and ask that the clock of history be stopped, or turned back. Robert Heinlein, Life-Line, 1939

bourbon

03-05-2009, 07:16 PM

Robert Heinlein, Life-Line, 1939
Yep, that's regulatory capture for ya.

Schmedlap

03-05-2009, 08:32 PM

... Wall St. sent over $5B to lobbyists in DC over the last 15 years in order to get a slew of laws changed or rescinded...

Fannie and Freddie were in on the action, too.

And according to the AP (http://ap.google.com/article/ALeqM5imQzxsHXOIyTZuzysbR2bCxwwwdgD939MUCG0), the highest lifetime contributions from those PACs? Why none other than the Speaker of the House, House Minority Leader, House Minority Whip, Senate Majority Leader, Chairman of Senate Banking, Housing and Urban Affairs Committee, and the Chairman of the House Financial Services Committee. This is the best government that money can buy.

The best suggestion that I've heard for conditions to be tied to TARP funds is for the banks to not be allowed to donate any money to political campaigns, not be allowed to spend money on lobbyists, and not be allowed to otherwise waste money on issue advocacy or other spending that is coordinated with or related to politics. I suspect that I've got a better chance of seeing Elvis and Jesus twice in the same day.

Surferbeetle

03-05-2009, 08:42 PM

I suspect that I've got a better chance of seeing Elvis and Jesus twice in the same day.

Just fell out of my chair laughing, bonked my head...is that you Elvis?

slapout9

03-06-2009, 01:20 AM

what they legally if not ethically could do to help themselves make more money -- which is what their business was all about -- or the Politicians who can unfortunately legally if not ethically take that money and thus abrogate their Oath to the Constitution and thus indirectly to the nation and the American people.

I'd be inclined to put people who ignored their duty for money in jail before I would try to jail people who used money to make money -- the which was their nominal job...

Ken,good question...so I would use the Huey Long method. Anybody that is a "Ten Millionaire" can keep it! Anybody above that is a suspect and most likely guilty. Can't have more than 10mil. and say you got it legally:wry:and if they did get it legally that is to much money for anyone person to say they earned it ethically:rolleyes: so pay a guilty tax of 90%:D:D

Ski

03-06-2009, 01:32 AM

Down is under 6600...another 4% loss today...almost don't even want to monitor the market any longer...don't see how GM, Chrysler, Citi, AiG and BoA are going to make it...why are we continuing to reinforce failure...

Sigh.

Schmedlap

03-06-2009, 03:38 AM

Here's one more reason why I think the financial "crisis" is a good thing.

From the Dec 14, 2008 NY Times: Bad Times Draw Bigger Crowds to Churches (http://www.nytimes.com/2008/12/14/nyregion/14churches.html)

I just hope that they sincerely embrace faith for the long haul, rather than seeking temporary comfort until the economy rebounds.

ODB

03-06-2009, 04:06 AM

Cycle of Democracy

From bondage to spiritual faith;
From spiritual faith to great courage;
From courage to liberty;
From liberty to abundance;
From abundance to selfishness;
From selfishness to complacency;
From complacency to apathy;
From apathy to dependency;
From dependency back again to bondage.

In his book "Democracy in America", Alexis DeTocqeville (circa 1848) had this to say: " A Democracy cannot exist as a permanent form of Government. It can only exist until the voters discover they can vote themselves largesse (a liberal gift) out of public treasury. From that moment on the majority always votes for the candidate promising the most benefits from the public treasury with the result that Democracy always collapses over a loose fiscal policy, always to be followed by a Dictatorship."

So which stage are we in?

selil

03-06-2009, 08:48 PM

Exiting selfishness to complacency, entering complacency to apathy. That is my vote.

Schmedlap

03-07-2009, 03:26 AM

I don't think that our country can be said to be at any point in that cycle because our country is too diverse, both culturally, which tends to coincide with geography, and socioeconomically. Some segments are in different stages at different times - and I don't think that they necessarily go through the stages in the order cited.

slapout9

03-07-2009, 04:45 AM

http://www.youtube.com/watch?v=VIMi7fBA6e4&feature=related

put some of that Bar-B-Que back on the table!

bourbon

03-07-2009, 07:59 PM

Some bailout transparency resources:

What Don't We Know About The Bailout? from openthegovernment.org (http://www.openthegovernment.org/article/articleview/354/1/115/?TopicID=)
Show Me the TARP Money from Pro Publica (http://www.propublica.org/special/show-me-the-tarp-money)
Project: The Financial Bailout from Subsidy Scope (http://subsidyscope.com/projects/bailout/)

(h/t: The Memory Hole (http://www.thememoryhole.org/2009/03/bailout-transparency/))
None of the good the stuff yet.

One more link, this graph of St. Louis Adjusted Monetary Base from the Federal Reserve Bank of St. Louis (http://research.stlouisfed.org/fred2/fredgraph?s[1][id]=AMBNS).

http://research.stlouisfed.org/fred2/data/AMBNS_Max_630_378.png

The link comes courtesy of the The eXiled with an alarmist or prophetic recommendation to "Buy A Wheelbarrow Soon, Because Weimar Germany-like Hyperinflation Is A-Comin’ ".

Surferbeetle

03-18-2009, 04:58 PM

Insight into the never-ending fight in the business world from Bloomberg, by Bob Ivry and Jody Shenn: GE Capital Loss Lurking in Moscow Loans, U.S. Cards (http://www.bloomberg.com/apps/news?pid=20601109&sid=alC1l0SA5YMM&refer=home)

GE Capital, the world’s largest non-bank finance company with consolidated assets of $637 billion, accounted for $8.6 billion, or 48 percent, of the Fairfield, Connecticut-based parent’s $18.1 billion profit from continuing operations last year. Chief Executive Officer Jeffrey Immelt has said he wants the division to contribute about 30 percent of annual profit.

Keith Sherin, GE’s chief financial officer, predicted in December that GE Capital would earn $5 billion this year, even after absorbing $10 billion of consumer-related losses, a view not shared by credit rating companies and analysts.

Schmedlap

03-19-2009, 12:56 AM

I still insist, if there were ever a time when small-time options traders like me were on a near equal footing with the long-time experienced pros, it is now. This is uncharted territory. Nobody has ever seen this much volatility for this long. Their experience doesn't count for nearly as much and their insider information doesn't appear to have done all that much for them lately. As for me and GE, I think I made my gamble at just the right time. :D

bourbon

03-19-2009, 06:54 PM

Naked Short Sales Hint Fraud in Bringing Down Lehman (http://www.bloomberg.com/apps/news?pid=20601087&sid=ak6rUKHA_JAw&refer=home), By Gary Matsumoto. Bloomberg, March 19, 2009.

As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the 2007 peak of 567,518 failed trades on July 30.

The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.

“We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.’”

SEC acknowledges it has screwed the pooch:
Practices Related to Naked Short Selling Complaints and Referrals (http://www.sec-oig.gov/Reports/AuditsInspections/2009/450.pdf). SEC-OIG Office of Audits, March 18, 2009. (PDF)

This is a fantastic video explaining how Bear Stearns and Lehman Brothers were brought down in a coordinated attack. It runs 24 minutes long: Hedge Funds and the Global Economic Meltdown (http://www.vimeo.com/3722293)

Schmedlap

03-19-2009, 10:20 PM

The populist charade on Capitol Hill today was interesting to watch, in much the same way as a car accident.

Senators and Congressmen who helped to perpetrate this mess are flat out lying, on the record, and grilling people who did nothing to create this mess but are trying to fix it. And the public is eating it up because their elected representatives are taking back money from, and yelling at, rich people. But remember, it's not class warfare and the politicians are just being good stewards of the taxpayer's purse. They are public watchdogs.:rolleyes:

I did a quick search of campaign contributions from AIG. It is quite interesting (http://www.opensecrets.org/pres08/search.php?cid=ALL&name=&employ=AIG&cycle=2008&state=&zip=&amt=b&sort=D&page=3). The contributions of the finance and insurance industry in general (http://www.opensecrets.org/politicians/contrib.php?cycle=2008&cid=N00000581)is quite interesting. So is this (http://www.opensecrets.org/cmteprofiles/profiles.php?cycle=2008&cmteid=S06&cmte=SBAN&congno=110&chamber=S&indus=F09). And this (http://www.opensecrets.org/cmteprofiles/profiles.php?cycle=2008&cmteid=S06&cmte=SBAN&congno=110&chamber=S&indus=F06). $280,000 in contributions from AIG to the Senate Finance Committee Chairman (http://www.bloomberg.com/apps/news?pid=washingtonstory&sid=aT_tMXRy2vDs). And a sweetheart deal from Countrywide to boot (http://online.wsj.com/article/SB123362399705441875.html).:cool:

The most shameless exchange of the day had to be between AIG CEO Edward Liddy and Represenative Stephen Lynch of Massachusetts. Liddy agreed to take over AIG in September 2008 and attempt to unravel the 2.7 trillion in garbage that it was tangled in (they've worked their way through 1 trillion of it, thus far). After accusing AIG and Liddy of missteps made by his predecessors, Liddy informed the Congressman that those missteps were not his and that he took offense to the accusations. Lynch interrupted (http://voices.washingtonpost.com/economy-watch/2009/03/aigs_liddy_we_ran_an_internal.html?hpid=topnews), saying, "Offense was intended. You take it rightfully, sir." It would be one thing to say, "my bad, I didn't mean you personally - after all it was not your fault." But to completely ignore it and fire back with that? Wow. Liddy is a far better man than I am. I would have resigned right then and there, told that Congressman to screw himself, and possibly reached across that bench and beat his face in. What a piece of crap. Typical of what inhabits the Congress. This is the best government that money can buy (http://www.opensecrets.org/overview/industries.php).

bourbon

03-19-2009, 10:46 PM

Liddy is Hank Paulson's guy. Paulson appointed him to head AIG last fall as Treasury Secretary, and Paulson appointed Liddy to the board of Goldman Sachs several years ago when Paulson was at Goldman. There is a back story to everything. Partisan bickering as usual.

Schmedlap

03-20-2009, 01:18 AM

jmm99

03-20-2009, 02:52 AM

what the hell do we care;
hail, hail, the gang's all here,
what the hell do we care now.

From Chi Trib (among ca. 2M other Googles), while all are distracted by AIG.

Federal Reserve targets loan rates with $1 trillion plan
Fed's $1 trillion spending plan intended to lower mortgage costs
By Maura Reynolds | Washington Bureau
March 19, 2009

WASHINGTON — The Federal Reserve escalated its war on the credit crisis Wednesday, announcing that it would spend more than $1 trillion in an aggressive effort to force down interest rates on mortgages as well as other business and consumer loans.

The move, which cheered the markets, is designed to keep money flowing through the economy's clogged credit arteries to foster recovery.

"They are trying to fire absolutely every weapon they can," said Nigel Gault, chief U.S. economist at IHS Global Insight, a Lexington, Mass.-based forecasting firm. "It improves the odds that we'll bottom out in the second half of the year."

David Jones, a former Fed economist and president of DMJ Advisors, a Denver-based consulting firm, said he expects the Fed actions to help lower conventional mortgage rates to near 4 percent from their current level of just below 5 percent. ....

This should change Bourbon's chart - a few posts above - if I remember Econ 101. A few more trillion to go before the economy is "saved" by the "war on the credit crisis" ? - :confused:

----------------------
Response to Fed's move by Gary North, The FOMC's Plan to Buy $1.1+ Trillion of T-bonds, Mortgage Debt, and "Other Financial Assets (http://www.garynorth.com/public/4736.cfm)".

slapout9

03-20-2009, 02:09 PM

New article in this months Washington Quarterly by James K. Galbraith(worlds greatest living economist:wry:). He was a pro Obama supporter who thinks he has taken his eye off the ball. If he doesn't change quickly we are in for a long ruff ride.

http://www.washingtonmonthly.com/features/2009/0903.galbraith.html

bourbon

03-21-2009, 06:04 AM

I don't see what the backstory has to do with today's nonsense on Capitol Hill. A guy who was put in place to try to correct the mess is being grilled for the sins of his predecessors and his government and some know-nothing, do-nothing Congress Critter is the inquisitor. It's like a 5-year-old mouthing off to his teacher.
Maybe, but I don’t think so. Liddy brings baggage as a Goldman Sachs board member; he was not just put in his place from out of nowhere. Goldman had exposure to AIG; the bailout of AIG saves Goldman. This helps explain why the hell Goldman was at the AIG bailout meetings in September, witness Eliot Spitzer’s recent article. That's how the backstory has to do with that case of nonsense on Capitol Hill.

The Real AIG Scandal: It's not the bonuses. It's that AIG's counterparties are getting paid back in full (http://www.slate.com/id/2213942/), by Eliot Spitzer. Slate, March 17, 2009.

Good article by Matt Taibbi who actually did some digging, as opposed to most journalists, and reals activity by the Federal Reserve that dwarfs all this TARP stuff.

The Big Takeover (http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print), by Matt Taibbi. Rolling Stone, March 19, 2009.

If you look at the weekly H4 reports going back to the summer of 2007, you start to notice something alarming. At the start of the credit crunch, around August of that year, you see the Fed buying a few more Repos than usual — $33 billion or so. By November, as private-bank reserves were dwindling to alarmingly low levels, the Fed started injecting even more cash than usual into the economy: $48 billion. By late December, the number was up to $58 billion; by the following March, around the time of the Bear Stearns rescue, the Repo number had jumped to $77 billion. In the week of May 1st, 2008, the number was $115 billion — "out of control now," according to one congressional aide. For the rest of 2008, the numbers remained similarly in the stratosphere, the Fed pumping as much as $125 billion of these short-term loans into the economy — until suddenly, at the start of this year, the number drops to nothing. Zero.

The reason the number has dropped to nothing is that the Fed had simply stopped using relatively transparent devices like repurchase agreements to pump its money into the hands of private companies. By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive and with names you've never heard of. There is the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For good measure, there's also something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout recipients like Bear Stearns and AIG.

While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, all of these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments). Although this technically isn't taxpayer money, it still affects taxpayers directly, because the activities of the Fed impact the economy as a whole. And this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy.

Schmedlap

03-23-2009, 10:45 AM

Print Just stumbled across "But Enough About You... (http://www.slate.com/toolbar.aspx?action=print&id=2213740)" I think it's on the right track.

A few excerpts (the last two being the most notable, imo)...

The narcissists did it. Some commentators are fingering them as the culprits of the financial meltdown. A Bloomberg columnist blamed (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_ac69DqFutQ) the conceited for our financial troubles in a piece titled "Harvard Narcissists With MBAs Killed Wall Street." A Wall Street Journal op-ed (http://online.wsj.com/article/SB123517419077037281.html) on California's economy suggested that Gov. Schwarzenegger's desire for voter's love ("It's classic narcissism") helped cause the state's budget debacle...

A recent study titled "Leader Emergence: The Case of the Narcissistic Leader (http://psp.sagepub.com/cgi/content/abstract/34/12/1663)" describes how narcissists have skills and qualities—confidence, extraversion, a desire for power—that propel them into leadership roles but that when true narcissists are in charge, other aspects of their makeup—a feeling the rules don't apply to them, a need for constant stroking—can have "disastrous consequences."...

The leading theory about the development of NPD is that people get it the old-fashioned, Freudian way: Your parents give it to you... The authors of The Narcissism Epidemic say the drift toward hovering, boosterish parents who want to gratify their child's every impulse will churn out more narcissistically disordered people...

Management consultant Michael Maccoby studied narcissistic bosses for his book, The Productive Narcissist: The Promise and Peril of Visionary Leadership (http://www.amazon.com/gp/product/0767910230?ie=UTF8&tag=slatmaga-20&link_code=as3&camp=211189&creative=373489&creativeASIN=0767910230)... He says narcissists can be charismatic forces for change—because of their drive, vision, risk-taking, and even ruthlessness, many corporations turn to narcissists for salvation. But such people can become dangerous because their success fuels their already ample grandiosity and feeds the sense they got there by disdaining the normal rules... those working for or doing business with a narcissist have to be careful not be drawn into crossing legal and ethical lines... narcissistic bosses produce volatile results. Their boldness can lead to big short-term success but long-term disaster...

If the observers who say that part of our economic troubles result from a mass case of narcissism, from consumers who thought they should have the house of their dreams financed on bad debt to bankers who thought they deserved eight-figure bonuses for packaging that bad debt, then perhaps we are about to be cured. Twenge and Campbell point out that the 1920s was a narcissistic era whose economic collapse led to the Great Depression and the greatest generation. Perhaps it's time to dig out those Depression-era recipes for humble pie.

There's an epiphany: "those working for or doing business with a narcissist have to be careful not to be drawn into crossing legal and ethical lines." Wow. Should I also avoid pressing my face onto a hot frying pan? Mr. Obvious, please meet Mr. No-fricken-crap.

"If the observers who say that part of our economic troubles result from a mass case of narcissism... then perhaps we are about to be cured." - Damn right! That's why I don't regard it as a crisis. It is just a big mess that needs to unravel itself. We will emerge stronger because we will be forced to adapt new incentives that reinforce ethical behavior and we will get a reality check against decades of excess and fantasy.

Uboat509

03-23-2009, 11:52 AM

"If the observers who say that part of our economic troubles result from a mass case of narcissism... then perhaps we are about to be cured." - Damn right! That's why I don't regard it as a crisis. It is just a big mess that needs to unravel itself. We will emerge stronger because we will be forced to adapt new incentives that reinforce ethical behavior and we will get a reality check against decades of excess and fantasy.

I might be inclined to agree except that, in addition to narcissism, many Of the people involved in this crisis also have attention span and memory of a cocaine addicted labradoodle.

SFC W

jmm99

03-25-2009, 07:35 PM

Slap and other Jim Galbraith devotees: Galbraith I (http://finance.yahoo.com/tech-ticker/article/216311/Part-I-Geithner's-Plan-%22Extremely-Dangerous%22-Economist-Galbraith-Says?tickers=%5Egspc,%5Edji,c,bac,jpm,WFC) and Galbriath II (http://finance.yahoo.com/tech-ticker/article/216480/Part-II-Geithner-Obama-Kowtowing-to-%22Massively-Corrupted%22-Banks-Galbraith-Says?tickers=XLF,FAS,SKF,C,BAC,JPM,%5EDJI).

And Gary North - and Paul Krugman - agree with him (http://www.lewrockwell.com/north/north698.html).

When we get this sort of agreement from all over the political spectrum (as well as across a spectrum of economists, who normally do not agree), we have a very scary situation.

slapout9

03-25-2009, 10:15 PM

jmm99

03-26-2009, 01:15 AM

from Slap
did you hear that part where it will transfer bad debts from the banks to the taxpayers

and also Jim's comment that there is nothing to prevent the big banks from indirectly buying their own toxic assets.

The possible scheme runs like so:

1. Bank's toxic assets are auctioned - banks are made whole (as far as what assets are worth based on auction) or sustain a small loss. They avoid bankruptcy - bailout of AIG will insure some losses from the toxicity. See Matt Taibbi's article (http://www.rollingstone.com/politics/story/26793903/the_big_takeover/print) (cited above by Bourbon).

2. Toxic assets are bought by LLC X, which stands to either gain (if toxic assets are worth more than bid), or not to lose (taxpayers' guarantee).

3. LLC X is owned (if you go through enough entity layers) by big banks, or more likely their major shareholders.

Result: if toxic assets are really toxic, taxpayers pick up tab (banks paid once for junk). If not really so toxic, banks or their shareholders get paid twice or more.

Perhaps, this and other question marks caused a number of people to duck appointments at Treasury. We will just have to see, cuz all of this is going down the tracks like a freight train.

slapout9

03-26-2009, 02:02 AM

James Galbraith's father John talked about this as the main problem of Capitalism. There comes a point where large corporations no longer care about customers and business, all they care about is the establishment of a monopoly which drives them to do stupid things as far as business is concerned. This is not a Banking bailout plan it is a straight up Power plan by Big banks to force out small and Mid sized banks. To big to fail was the main reason that AT&T was forced to break up(by the Guvmint) and avoid a monopoly of the phone system. James K. Galbraith is one of the few people who have actually dealt with a real financial crisis. During the late 70's when the Guvmint decided to bail out New York he was on the ground and practically deigned the whole system....which worked out exactly as planned. Why Obama would pass up somebody like that as opposed to some "Kid" I don't know. Then again the plan is not to save banks but support a private Coup de Etat (caint spell frenchy stuff) of the banking system then he choose the right person. Sometimes a conspiracy is a conspiracy.:cool:

Schmedlap

03-26-2009, 02:40 AM

If there is a conspiracy to fork over taxpayer dollars to the banks, then buying banking stocks (C, BAC, GS, etc) is one way to get your money back.

jmm99

03-26-2009, 02:47 AM

with French (Coup de Etat is actually Coup d'État - d' is used before a vowel or "h" and linked to the word, État, which starts with a funny "E" - alt-144 on the numeric keyset - right side of keyboard). All kinds of alt- characters can be typed - but not on this editor - strange things happen. :(

You also do fine with the problem of big corporations (same with big government) which become too large to be managed. This has nothing to do with political philosophy. It has to do with reaching the point where economy of scale starts to run backwards.

Why not Jim Galbraith at Treasury ? Because he is on the wrong side of the fence from the Powers That Be.

PS: Schmed ... which is why the market has bounced the past two weeks (knew something inside was happening), especially in banking shares. We'll see if your theory works.

My major concern is the FV of dollar-denominated assets and income cuz I buy American.

----------------------------
Try attached .doc file for higher order characters. Works in most word processors. With this editor (at least from my computers), you have to cut & paste them.

Schmedlap

03-26-2009, 02:56 AM

PS: Schmed ... which is why the market has bounced the past two weeks (knew something inside was happening), especially in banking shares. We'll see if your theory works.
I think that is the real test to see if one really believes the conspiracy stuff or if one is just frustrated and venting. My father falls on the conspiracy theory side of things in this financial mess. My parents have always been frugal and responsible and they're in a good financial position, despite the crisis, despite being a truck driver (dad) and a factory worker (mom) all their lives. My challenge to him was: if you think that this mess is just something that fat cat bankers are going to use to swindle people out of their money, then hedge your losses by buying bank stocks. He's got the money, but I don't think that when it comes time to put the money down that he will believe his own ranting. It's just frustration that people are expressing, imo.

FWIW, regardless of whether there is a conspiracy, I do think bank stocks are a smart long term buy. Who thinks that BAC and C are going to be $5 a share in 5 years? Not me. But I do think it will be a roller coaster ride for the next year or two.

jmm99

03-26-2009, 03:13 AM

If future value of dollar assets and income become FUBAR (inflation), stocks will be one defense - assuming you are buying corps that consist of things that will appreciate. Perhaps GE or Ford would be something of a straddle into both the manufacturing and credit sectors. Now into both a very little bit; but with a reverse S&P fund for a hedge.

Despite the current bounce, I'd like to see a better slope before even thinking near bottom. Pretty much locked in for the next few months. Legal business in the small business planning area has been nearly non-existent for the last year - also commercial real estate, where almost everything is for sale with very few buyers. Situation (here to me locally) looks like the 1970s in more ways than one.

SethB

03-26-2009, 03:16 AM

Pursuit of capitalism (and it is a moving target) requires some regulation.

Microeconomics will introduce you to a number of assumptions upon which free market theories are based. Things like perfect competitiveness and perfect knowledge. To my mind, these attributes are not always natural to the system, but must be instilled by an active public and governmental regulation.

Pure capitalism would be anarchy, which is a system that naturally resolves itself, and not in a pretty way.

Amory Lovins:

Economies are supposed to serve human ends.. not the other way round. We forget at our peril that markets make a good servant, a bad master and a worse religion.

Surferbeetle

03-26-2009, 03:20 AM

From the Blog Macro Man (http://macro-man.blogspot.com/)

Elsewhere, the debate about the dollar's reserve currency status rages on. A UN panel (http://www.reuters.com/article/newsOne/idUSTRE52H2CY20090318) has suggested a move to a multilateral framework, though why the UN is opining on the matter is open for debate. Most likely because it's the only organization that will give a platform to some of the "experts" quoted in the story, who have made a career out of not udnerstanding the functioning of currency markets.

Still, you can't deny that many of the largest holders of FX reserves, including some of the worst of the serial piss-takers, are getting restless. China appears to be a Huey Lewis fan, as they've recently started playing "I Want A New Drug (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8fQnq6ozCqI)"* to fuel their FX reserve-buying habit. Now, Macro Man would argue that the current arrangement is useful, insofar as when the limits of economic rationality are pushed to extremes (like having $2 trillion of FX reserves), it provides a built-in disincentive to continue mercantilist behaviour.

Another consideration is that if a new FX reserve currency is going to be managed/arranged through the IMF, there should be some sort of quid pro quo. You know, like oversight of misaligned exchange rates. Such as when a country runs, oh, the largest trade surplus in the world, and offsets more than 100% of it with FX reserve accumulation, as China did in 2008.

When faced with an oversight condition, something tells Macro Man that PBOC will be serendaing the dollar with another Huey Lewis tune....."Stuck With You."

Schmedlap

03-26-2009, 03:24 AM

Nice resource for a history of the Fannie Mae abortion, in reverse chronological order: http://online.wsj.com/article/SB121599777668249845.html

selil

03-26-2009, 03:27 AM

If you want a good hedge against risk buy ammo. I'm only sort of kidding.

jmm99

03-26-2009, 03:47 AM

millions of people agree with you - as to firearms (http://www.freerepublic.com/focus/f-news/2202826/posts) and ammo (http://townhall.com/columnists/DougGiles/2009/03/08/gun_and_ammo_sales_are_shooting_through_the_roof_i _wonder_why). These two the first that Googled up.

Of course, I would not be indulging in purchases of that kind. As all know, I am a firm (nay, a fanatic) believer in total and absolute Gun Control - as illustrated in the attached .jpg.

slapout9

03-26-2009, 02:41 PM

Good interview with Tom Ferguson of Boston University. No conspiracy just bought and paid for and now it's time to produce. Only problem is the American people are going to end up with the green weenie.

http://therealnews.com/t/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=3486

jmm99

03-26-2009, 05:53 PM

JMM post 289
A few more trillion to go before the economy is "saved" by the "war on the credit crisis" ?

pretty much affirmative according to Prof. Ferguson; especially if what he calls the private-public partnership model does not work.

Japanese model (what he says the Obama administration is using) vs. the FDR model of the Great Depression (which he says should be used).

Schmedlap

03-26-2009, 07:31 PM

Some people criticized the Bush administration for not asking Americans to contribute or sacrifice in support of the war (GWOT, Long War, OCO - whatever we wish to call it). I think this administration is already failing that test in regard to the economy. A journalist asked the President about this in his press conference a few days ago and his response was that Americans are already sacrificing, in that they've been impacted by the economy. Sorry, but that's not a sacrifice.

"Oh crap, my home's value has dropped by 20%" is not a sacrifice. It's a circumstance.

Rather than sacrificing, we're indulging. By "we" I mean Americans, as we exert our actions through our elected representatives. Spending trillions of dollars on the same pork-barrel BS that we've always thrown away money on is not sacrifice. It is exploiting the circumstance. One would think that a party and a President who sweep into power with so much political capital and outright power (majority in both houses) could do a little better and act a little more responsibly than grasping for the same projects for their home districts that they've always pissed away our money on, but now doing so under the guise of "stimulus." We can't tighten our belts at all? We need $1 trillion deficits every year for the next decade? What a load of crap.

There is no call for people to sacrifice and, lacking any leadership to influence them do so, the vast majority of people will not. They're still in "what's in it for me" mode and "getting whatever I can get" mode. They've simply adapted to the circumstance by plundering and pillaging more energetically and with less shame than normal. What we are witnessing is akin to New Orleans after the flood. A mishap is bringing out the worst in too many people.

I still contend that this "crisis," in the long run, will be a good thing. In the long run, the great depression was a good thing. It gave way to the greatest generation. Eventually, people will be forced, as a result of this financial nutroll, to either correct their behavior or suffer. I am somewhat troubled that it will take longer than I originally thought. The governmental response, thus far, has only been a catalyst for the unethical, self-centered, greedy and incompetent mindsets that threw our economy into this tailspin. I fear that this will continue for quite a while before it gets so bad that it forces people to change.

slapout9

03-26-2009, 11:34 PM

1-Everybody Flips out at the word Trillion dollars now a days, but they forget how much our country and our Economy has grown between the FDR period and now. The Population of the country has just about doubled.

2-As for sacrificing for the Economic crisis. The Economic crisis was an intentional man made event ...it was not some type of natural disaster it was caused by somebody or somebodies personal greed nothing else and as soon as they give back all the Bar-B-Que they stole and as soon as they are in jail...then we can talk about sacrifice.

Schmedlap

03-27-2009, 01:09 AM

1-Everybody Flips out at the word Trillion dollars now a days, but they forget how much our country and our Economy has grown between the FDR period and now. The Population of the country has just about doubled.
Good point. To put the deficit in perspective, see here (http://gregmankiw.blogspot.com/2009/03/budget-deficit-as-percent-of-gdp.html).

2-As for sacrificing for the Economic crisis. The Economic crisis was an intentional man made event ...it was not some type of natural disaster it was caused by somebody or somebodies personal greed nothing else and as soon as they give back all the Bar-B-Que they stole and as soon as they are in jail...then we can talk about sacrifice.
Why? We can't fix the problem until we've doled out the punishment? You think the destroyed wealth was actually transferred somewhere and someone can just give it back? I agree that this was caused by greed and much of it was deliberate. But as for putting those people in jail, I think that there would be more people in jail than out of jail - assuming that the court system could even absorb the case load.

slapout9

03-27-2009, 02:33 AM

Schmedlap, there were about 700 people that were put in jail after the S&L fiasco of the 1980's and that had a very sobering effect at least for a while.

As for your second point their is some merit to it. Money is "part of a relative pricing system and an accounting store of value" much of what was lost in the market was not real wealth, it was the price component of money, something people are usually not aware of. There were a lot of people that new what was going on and made a lot of money off of illegal activities. They should give it back and go to jail.

If the FDIC had taken over the bad banks as they should have andhad a legal right to and had full access to all records it would become very apparent who made how much and when. However I would not hold my breath on this happening.

slapout9

03-27-2009, 02:58 AM

Schmedlap,The Economy and the national debt can be paid off tomorrow morning, IF the President and Congress had the guts to follow the Constitution. China just proposed this type of honesty money but most people missed the part where they said the new reserve currency should be one that is NOT debt based.

Here is a video that explains it. Don't believe anything in the video... research it yourself.... what the man says is absolutely true.:wry:

http://www.youtube.com/watch?v=WXbxECTmCUE&feature=PlayList&p=8D59CA5BF5D43558&playnext=1&playnext_from=PL&index=20

Schmedlap

03-27-2009, 05:52 AM

There were a lot of people that new what was going on and made a lot of money off of illegal activities. They should give it back and go to jail.
I agree. But I also believe there are too many to prosecute. 700 for S&L is nothing; I'd say we're looking at thousands, if not tens of thousands, who were engaging in a similarly culpable manner and tens of thousands more who lied and falsified paperwork. As for giving the money back, I doubt that many of them have it. Folks who took out NINJA loans have nothing to give back. People who made lots of money on MBS's saw those gains evaporate. Most of this wealth, as you point out, was just inflated market value.

Regardless, this financial "crisis" is the product of a depraved society. This is what happens when 300 million people think that they deserve everything that their heart desires right now and don't want to earn it. All of the talk about who is blame and what regulatory changes need to occur, etc, are bluster. This is what happens when society gets morally depantsed. An immoral people cannot be governed by laws - they just get inconvenienced by the laws. Making sure that this doesn't happen again requires a lot more than just prosecuting some of the innocent and changing some regs. It requires social change. Fair play and morality need to have their legitimacy restored. I don't see it happening until things get much worse.

slapout9

03-27-2009, 04:00 PM

Regardless, this financial "crisis" is the product of a depraved society. This is what happens when 300 million people think that they deserve everything that their heart desires right now and don't want to earn it. All of the talk about who is blame and what regulatory changes need to occur, etc, are bluster. This is what happens when society gets morally depantsed. An immoral people cannot be governed by laws - they just get inconvenienced by the laws. Making sure that this doesn't happen again requires a lot more than just prosecuting some of the innocent and changing some regs. It requires social change. Fair play and morality need to have their legitimacy restored. I don't see it happening until things get much worse.

Schmed, that is some Strategic stuff there....and agree 100%;)

bourbon

03-27-2009, 07:13 PM

I agree. But I also believe there are too many to prosecute. 700 for S&L is nothing; I'd say we're looking at thousands, if not tens of thousands, who were engaging in a similarly culpable manner and tens of thousands more who lied and falsified paperwork. As for giving the money back, I doubt that many of them have it. Folks who took out NINJA loans have nothing to give back. People who made lots of money on MBS's saw those gains evaporate. Most of this wealth, as you point out, was just inflated market value.
The people who lied or falsified paperwork, received ninja loans, or traded MBS are small game. Pawns, tools, etc. Sure they did things that were ethically wrong and/or illegal, but there is bigger game that needs to be bagged. These people may have seen their wealth evaporate; but others made money on it, a lot of money on it. If somebody legally does that (and it’s possible), fine. But it was intentionally inflated to collapse, like a bust out scheme. They make money on the way up, and even more money on the way down. Assets can then been purchased for pennies on the dollar, and wealth and power is further consolidated. This is massive fraud employing many acts and maneuvers that are illegal (ex. naked short selling, CDS and futures manipulation, disinformation campaigns, etc). This is not the first time this has happened in our country.

The networks that do these things, and the people that comprise them are identifiable and in many cases known. The small gamers are a lightning rod for public outrage, the fall guys. Does that make them excusable? No, but our efforts and outrage can be targeted better then at small fish, and society no matter how depraved it is or is not.

This is a memo to the Secretary of the SEC from Roel Campos (http://www.sec.gov/comments/s7-30-08/s73008-108.pdf), a former SEC Commissioner. Has a nice collection of price v. failure to delivers in Q4 2008 for a number of financials.

II. Naked short selling will threaten TARP, taxpayers, and national goals to rescue the banking system.

Bank and insurance companies that are essential to the economy, including those receiving funds from Troubled Asset Relief Program (TARP), are at risk from naked short selling tactics, similar to those used against Bear Stearns and Lehman Brothers. 3 Past data suggests that TARP entities were also subjected to naked short selling and manipulative conduct, resulting in shareholder wealth destruction 4 In fact, the Commission moved to protect these entities by prohibiting short sales of these companies through an Emergency Order.5 As noted earlier, naked short selling has the potential to have a vast disproportionate impact to help drive down the share price of even the largest banks, destroying government efforts to invest taxpayer money into those companies. The damage to the TARP and the economic recovery are certainly additional urgent reasons why the Commission needs to amend Regulation SHO in the manner described below.

Schmedlap

03-27-2009, 08:28 PM

The networks that do these things, and the people that comprise them are identifiable and in many cases known.
If true, then I fully support outing them. And while I contend that there are too many to prosecute, I do think trying is worthwhile and prioritizing the most egregious offenders (and those who can testify against them) makes the most sense. I just don't think that this should be our main effort in going forward. That is backward looking.

The small gamers are a lightning rod for public outrage, the fall guys. Does that make them excusable? No, but our efforts and outrage can be targeted better then at small fish, and society no matter how depraved it is or is not.
I'm not really concerned about how we target our outrage. I'll leave it to those of you who are outraged to ponder that. I'm more concerned with the moral health of the country because none of this would have been possible in a country of people who care about right and wrong. If you've got a nation that is moral, for the most part, then a few well-placed and well-funded crooks such as those you've pointed out would not have been nearly as successful. In fact, I think that they would have had the whistle blown on them or perhaps known better to attempt anything in the first place. Instead, the small gamers realized that a big swindle was going down and pitched in to get a small piece of it. It's depravity on a society-wide scale. A moral nation would not be doling out NINJA loans, packaging garbage and selling it, rating garbage as AAA rated debt in spite of concerns that it is garbage, falsifying paperwork, lying, and so on.

I'm all for the guilty being punished. But I am far more concerned about the morality of the nation. That has a significantly greater impact upon the health of our nation than whether some crooks go to Club Fed after millions of dollars and several years of legal battles.

selil

03-28-2009, 08:02 AM

An in depth article.

The End of Excess: Is This Crisis Good for America? (http://www.time.com/time/nation/article/0,8599,1887728-1,00.html)

In the early 1980s, around the time Ronald Reagan became President and Wall Street's great modern bull market began, we started gambling (and winning!) and thinking magically. From 1980 to 2007, the median price of a new American home quadrupled. The Dow Jones industrial average climbed from 803 in the summer of 1982 to 14,165 in the fall of 2007. From the beginning of the '80s through 2007, the share of disposable income that each household spent servicing its mortgage and consumer debt increased 35%. Back in 1982, the average household saved 11% of its disposable income. By 2007 that number was less than 1%

I found the article to be a lot more balanced and explanatory of how we got to where we are than the pundit filled rantings of the left or right. The article is not short giving a substantive look at the cultural factors as well as some of the regulatory/political factors that led to the collapse.

SethB

03-28-2009, 09:31 AM

slapout9

03-28-2009, 05:08 PM

The original suburban home from the post-war era costs only $80,000, adjusted for inflation.

Not only have home values been going up, but houses have been getting better and more extravagant for some time, as well.

And that is a direct result of cheap credit. Sometimes too cheap.

SethB, I understand what you are saying but changes in building regulations had a lot to do with it to. Minimum square footage regulations were changed in many places to where people could not buy or build what they could afford but what they could get.

Also houses wear out just like everything else but in real estate the price does not go down as it does for every other product relative to wear and tear. These two structural problems had far more to do with it than cheap credit.

There is no such thing as cheap credit take a look at any compound interest amortization table and you will find there is nothing cheap about it:eek:

SethB

03-29-2009, 07:24 AM

The number that I presented was inflation adjusted.

Changes in building codes and styles reflect consumer preferences for larger, more complex structures.

And 6% is cheap, compared to historical rates...

Schmedlap

04-06-2009, 04:35 PM

Just saw this chart today, linked via an article at Barrons.com (http://online.barrons.com/article/SB123879923501888307.html)...

http://dshort.com/charts/bears/four-bears.gif

The chart is interesting, but I think the technical analysis folks would be wise to ignore any similarities between this market and any previous market. Changes in this market have been the result of reactions to government actions, followed by corrective pricing to securities after the initial euphoria or despair stemming from announcements of those government actions.

Ski

04-06-2009, 08:57 PM

Saw that one last week.

The markets are still overpriced by 15-20%. Gold is well below where it should be. In other words, there is major manipulation of the markets occuring yet again. The structural issues that caused the problems over the last decade have not been fixed, indeed, the "plan" to bring economic growth back into the world seems to be nothing more than a return to what worked for the West in the late 1990's and early 2000's.

I remain very skeptical of this entire drama. The only real implementation so far has been to print a bundle of money and monetize a segment of debt. Inflating our way out of debt is probably not going to work - I don't know of anytime that it has worked.

Ski

04-07-2009, 01:14 PM

selil

04-07-2009, 01:47 PM

Have seen this before but not from a publication with the clout of the Economist:
http://www.economist.com/surveys/displaystory.cfm?story_id=13356650&fsrc=rss
Basically states that wages in the US have been at the same level for the last 30 years.
Anyone want to parlay whether the US will be able to even maintain this standard of economic stability over the next 5 years?

If 30 years ago you had said that American wages would not grow and that standard of living would remain flat and decline in some regions you'd have been flayed as a pinko red commie anti-American anti-capitalist jerk. With 30 years of data it is hard to refute.

If you say that economic viability of America will get worse over the next 5 years you will be labeled similar to above.

I would ask when looking forward five years. What fundamental change has occurred that will result in a swing away from the continued rape of the middle class by financial elites (of either political party) and will change the course of events in a way that will result in a different outcome? Asked another way what incentive to financial elites is there to change the headlong rush into economic chaos and totalitarian capitalism?

The economic system of American design has been legislated continuously to foment and support a pyramid scheme. All savings, retirement funds, forms of savings for school, insurance, trust funds and much more are by legislation forced to be tied to the stock markets. There is almost no savings mechanism NOT tied to the stock market. Seven years ago there was a huge move to transition the social security fund into the stock market. The battle to block that was almost lost.

I will let the conspiracy theorists consider why it is that federal government retirements for civilians and military are one of the last bastions of saving not tied to the stock market and fully guaranteed by the government. Though I would note that the personal incentive for bureaucrats to change systems is substantially less when their future isn't tied up in their decisions.

Personally I think we'll bump along where we are. Heck the stock market could scream to the top but the validity of that gain will always be suspect. A market based on emotion rather than facts is baseless and untrustworthy.
The very system is suspect. High leverage positions on stocks should be illegal as a form of ponzi scheme. Stocks should be valued on real value like dividends and company current value.

The market isn't over valued, or under valued. To get some percentage would be an error. You can't divide by zero. The same will be true five years from now.

Stevely

04-07-2009, 02:30 PM

Sam, just note that the only retirements not tied to the stock market in the government are military; civil servants have had a 401(k) like scheme for quite some time now.

Ken White

04-07-2009, 03:31 PM

Civil service people hired after 1984 have the Federal Employees Retirement System (FERS) which is Social Security and a joint employee-Office of Personnel Management 401-K like 'thrift' plan which provides choices between several alternative mixes of stocks, bonds and interest bearing accounts, US and overseas. A modified form of that also applies to Congress today. FERS applies to virtually all of today's employees.

Military personnel today can also opt into the thrift programs in addition to their Retainer Pay -- and the military retirement payment is just that, Retainer Pay. It is not an annuity or a pension. All military retirees are subject to recall up to age 65. It is also deferred compensation -- IOW, we're going to pay you less than the market rate for your work today but if you do it long enough, we'll pay you later in a reduced amount.

The old Civil Service Retirement System (CSRS) for Pre-1984 hires who did not opt to switch to the new plan was a defined pension plan and, like Social Security (today; since Lyndon...) is funded out of / is part of Federal general revenue. Persons who receive CSRS annuities and are also entitled to full Social Security take a 50% cut in the SS payment. Most folks have a mix of small CSRS annuities and SS, a good many have to work at other jobs. The number of CSRS retirees dwindles daily.

As an aside, unless one is a very senior person, one finds that either Military or Civil Service retirement will provide a car or a small roof, food and little else. If one wants a bigger roof, or a roof and a car plus the food -- and wants anything else, one will seek employment to bolster the retired pay. The biggest benefit of both retirements is really medical care (and that keeps getting whittled away). Like everything else, there are pluses and minuses...

Surferbeetle

04-07-2009, 06:19 PM

From today's WSJ by Kris Maher: Homeward Rebound: Weathering the Storm With Kin (http://online.wsj.com/article/SB123905105150794313.html)

Families around the country are weathering out the recession by hunkering down with relatives and friends. It's not just a lower-income phenomena either. The homeward bound are former white-collar and blue-collar workers who believe they might have a better chance finding work in their hometown because they know more people, who, in turn, know still more people. But with jobs scarce, that doesn't always work, and rumors of jobs are just that. At home, though, they can at least get help with food, shelter and clothing.

"As Americans face tougher economic conditions, we'll likely see more of this," said Jim Toedtman, a vice president with AARP, which analyzed Census data. More adult children are living with their parents -- about 6.2 million in March 2008, the latest figures available -- up from 6.1 million the year before, continuing a gradual upward trend from 2000. The latest number doesn't include the most recent and most intense series of layoffs from the last three months, and is likely to be significantly higher now, says Mr. Toedtman.

Ski

04-07-2009, 06:46 PM

Heh.

When the middle class dies off in this country, that's when you will see the collapse of the system. It's already occuring, just a matter of time before the whole enchilada implodes.

What exactly does the remainder of the middle class actually do? JAN 09 was the first time in the history of the US that showed more governmental jobs than manufacturing jobs. We're a service based industry that is rapidly losing services to provide...kinda hard when the credit dries up and wages have stagnated for 30 years.

If the powers that be had a clue on what to do with the economic mess, they'd really start focusing on rebuiling the middle class. This, of course, would mean a redistribution of wealth from the upper class downward, but the rich have gotten much richer over the last 30 years.

And if they don't, you'll see more rioting, targetted attacks and even terrorist attacks against the upper class. This isn't a hard thing to figure out.

If you say that economic viability of America will get worse over the next 5 years you will be labeled similar to above.

I would ask when looking forward five years. What fundamental change has occurred that will result in a swing away from the continued rape of the middle class by financial elites (of either political party) and will change the course of events in a way that will result in a different outcome? Asked another way what incentive to financial elites is there to change the headlong rush into economic chaos and totalitarian capitalism?

The economic system of American design has been legislated continuously to foment and support a pyramid scheme. All savings, retirement funds, forms of savings for school, insurance, trust funds and much more are by legislation forced to be tied to the stock markets. There is almost no savings mechanism NOT tied to the stock market. Seven years ago there was a huge move to transition the social security fund into the stock market. The battle to block that was almost lost.

Ken White

04-07-2009, 06:55 PM

off and on since the 30s.
And if they don't, you'll see more rioting, targetted attacks and even terrorist attacks against the upper class. This isn't a hard thing to figure out.Long time Populist prediction. We'll see.

Stevely

04-07-2009, 07:56 PM

If the powers that be had a clue on what to do with the economic mess, they'd really start focusing on rebuiling the middle class. This, of course, would mean a redistribution of wealth from the upper class downward, but the rich have gotten much richer over the last 30 years.

They'd rather be billionaires in a country of paupers, than mere millionaires in a country with a healthy middle class. We default to thinking people that wealthy and connected take an interest in the stability and health of the society as a whole, but honestly it is getting harder and harder to see signs of any concern beyond maximizing self interest, regardless of the cost to the country.

Schmedlap

04-07-2009, 09:06 PM

The chart may show median income among men remaining "relatively" static. I have to wonder if that means anything because standard of living continually improves despite the gloom. Time-saving conveniences, variety of goods, novelty items, infant mortality, life expectancy, quality of health care available, etc, etc. And the safety net ensures a higher standard of living than most of the world's middle class.

Regarding the concern that we are a service-based economy, I think too many people regard this as a bad thing because when they think "service" they think "flipping burgers." College professors, many IT professionals, and private military contractors - just off the top of my head - are part of the service economy and so are other high-skill and/or high paying and/or highly credentialed lines of work. And we're pretty good at drawing people here to spend money on our services (for example, foreign students at our colleges/universities) and in enticing others to pay our people to travel abroad and provide services to them (for example, many oil-producing countries rely on our know-how to help them more efficiently extract their oil).

So manufacturing jobs are going to China and other countries? So what? That's because they're the ones with the less educated workforce that is willing to slave away in lousy working conditions, lower their life expectancies, and receive low pay, just to churn out cheap goods for us to buy while we focus on high-tech, innovative, and high-profit margin technologies and services. If we want to retain manufacturing jobs in this country, then we need to understand that Americans will demand that those manufacturing jobs be safer, cleaner, higher-paying, more environmentally friendly, and more expensive than our market is willing tolerate. Hello, price controls! Not going to happen, nor would it be a good thing if it did. China can have their manufacturing. I'm content to let them manufacture children's toys coated in lead paint and spoiled baby milk while we focus on building military hardware and networking equipment.

Ski

04-08-2009, 02:34 AM

Except for one minor issue - it gets exported to the US.

I'm content to let them manufacture children's toys coated in lead paint and spoiled baby milk while we focus on building military hardware and networking equipment.

Ski

04-08-2009, 02:35 AM

Different times, different population, an entire generation that knows nothing but good economic times.

I'd say current times have the most potential for this kind of stupidity to occur.

Hopefully it will pass.

off and on since the 30s.Long time Populist prediction. We'll see.

Ski

04-09-2009, 12:12 PM

Stevely

04-09-2009, 03:11 PM

Very interesting work done by a couple of PhD economists showing that the current economic trends are either tracking with the Great Depression, or are in fact even worse:

http://www.voxeu.org/index.php?q=node/3421

Tip o' the Porkpie to Fabius Maximus

Fabius Maximus runs a good blog. Not sure if it is small wars enough to make the SWJ blog watch, but every now and again he posts articles of interest to the community. The first reference to Col. MacGregor's "Refusing Battle" article I saw on his blog.

Jedburgh

04-23-2009, 02:06 PM

GSD-RC, 5 Mar 09: The Impact of Financial Crises on Conflict and Social Stability (http://www.humansecuritygateway.info/documents/GSDRC_ImpactFinancialCrisis_ConflictSocialStabilit y.pdf)

Query: Identify emerging analysis on the potential of the current global financial crisis to affect social stability, cohesion and exacerbate conflict and fragility, including lessons learned from previous regional and global economic crises.

Enquirer: AusAID

1. Overview
2. Empirical Research
3. Security Implications
4. Social Consequences
5. Migration
6. Blogs
7. Press Articles
8. Resources on the Impact of Economic Conditions on Political Stability
9. Further Resources
10. Additional Information

davidbfpo

04-24-2009, 05:18 PM

A rather lengthy article, by Simon Johnson, with many insights and very political. Interesting options available now, scary I'd say and are our / your politicians brave enough? Anyway the link is: http://www.theatlantic.com/doc/print/200905/imf-advice

davidbfpo

Ken White

04-24-2009, 05:46 PM

Good article. I'm an optimist but his bad scenario is the one I hope succeeds -- anything less and we'll all revert to business as usual because the Politicians, as he says, are aligned with the Bankers...

So, no, I doubt any Politicians are brave enough...

slapout9

04-25-2009, 04:10 AM

A rather lengthy article, with many insights and very political. Interesting options available now, scary I'd say and are our / your politicians brave enough? Anyway the link is: http://www.theatlantic.com/doc/print/200905/imf-advice

davidbfpo

Should be read by all.....scary stuff.

Majormarginal

04-25-2009, 06:44 AM

I read the Atlantic article. I found it scary and informative.

I read Goldberg's article in the next issue. also about finance. Not as informative.

bourbon

05-07-2009, 03:42 AM

(Video) Naked short selling - redefining systemic risk (http://www.deepcapture.com/naked-short-selling-redefining-systemic-risk/), by Judd Bagley. DeepCapture, 06 May 2009. (18 Minutes)

This is the newest video from Deep Capture Productions, examining the attack on Sedona Corp, and applying the insights gained from it to the broader market — including the possibility that the federal government has recently been spending billions of dollars to take the liability of accumulated failed trades off the books of broker-dealers.

Fantastic work. Sedona Corp (http://www.time.com/time/magazine/article/0,9171,1126706,00.html) was the victim of a private investment in public equities (PIPE) funding fraud; what makes this case important is that the fraud when exposed would lead to the collapse of Refco, which at the time (2005) was the fourth largest bankruptcy in American history.

Watcher In The Middle

05-07-2009, 04:42 AM

This whole Chrysler-Fiat deal where the bond holders are potentially going to take a hit is starting to have ramifications. Just hearing the corporate bond folks talking, and the waves from this will start small, but may not end up that way.

Have heard from several bond managers that they are doing immediate reviews on all their bond holdings, to see what portion of their holdings could reasonably be expected to be "at risk" in a similar type of situation to what is happening at Chrysler-Fiat. They are also applying the same type of "intensive review" to their tax exempt bond holdings, because if those went into receivership and the public entity issuing the bonds is also highly unionized, they're seriously concerned that they could get seriously screwed over, or at least have a portion of their bond investments tied up into knots for an extended period of time.

Anybody remember the lessons from Bear Stearns (Bear Stearns survived the first liquidity challenge, in the summer of 2007, when two of its hedge funds cratered after the subprime mortgage collapse), but couldn't survive the second one. It was a much different situation, but the overall problem ended up being a crisis in confidence. And the result is known.

The bond market managers that I know are getting very uneasy, and that's out of the ordinary. They look to be getting nervous, and when those folks get happy feet", watch out.

Hesitant to post this, but it's what I'm hearing and what I'm seeing....:(

Surferbeetle

05-07-2009, 02:33 PM

From today's Bloomberg article by Serena Saitto: Marchionne Picks Over U.S. Wreckage to Build European Car Group (http://www.bloomberg.com/apps/news?pid=20601087&sid=aVQRowxArpwU&refer=home)

May 7 (Bloomberg) -- Fiat SpA Chief Executive Officer Sergio Marchionne is setting out to build a pan-European car company from the rubble of the U.S. auto industry.

The car industry is in turmoil, and Marchionne, the 56-year-old deputy chairman of UBS AG, says he sees opportunity. He’s taking over Chrysler LLC after a U.S.-arranged bankruptcy and seeking to incorporate units owned by General Motors Corp., including three European brands, Opel, Vauxhall and Saab, and some Latin American operations.

The German press has been awash with rumors of forecasted cuts of up to 18,000 at Opel...

From the WSJ by JOHN D. STOLL and NORIHIKO SHIROUZU Detroit's Troubles Lure World of Bidders (http://online.wsj.com/article/SB124162175673192025.html#mod=article-outset-box)

davidbfpo

05-07-2009, 07:27 PM

A clear article on how we reached here and the failure of governments to regulate the bankers: http://online.wsj.com/article/SB124165301306893763.html?utm_source=newsletter&utm_medium=email&utm_campaign=rcp-today-newsletter

I only read this as his writings on other subjects are good IMHO.

davidbfpo

Ski

05-08-2009, 01:36 AM

Something to keep an eye on for the short (next three months) and medium terms (rest of the year):
http://www.nymex.com/RB_pre_agree.aspx

You've got a 20 cent rise in the wholesale costs of gasoline over the last month. Part of it is linked to the "summer peak" which may or may pan out due to demand.

Remember how bad the economy was getting when the gas prices hit $4 a gallon? With this fragile economy (there is no real explanation on why the market has skyrocketed...and I don't think these gains are here to stay for a number of reasons), the costs of gasoline rising to that level could really create some major problems.

As always, it's going to be interesting to see how this plays out.

bourbon

06-11-2009, 08:26 PM

What's Next For The US Economy, or What's Left of It? (http://www.thesanitycheck.com/BobsSanityCheckBlog/tabid/56/EntryID/781/Default.aspx), by 'Bob O'Brien'. The Sanity Check, June 11, 2009.

Remember that predatory interests don't really care whether economies or currencies get wrecked or not - they benefit mainly by massive volatility, in either direction, caused by their actions. They know the timing as they engineer the swings, thus are perfectly positioned to profit from everyone elses's loss.

An example of how the current calamity played out:

Michael Lewis on CNN's Fareed Zakaria GPS (http://www.cnn.com/video/#/video/us/2009/06/07/gps.michael.lewis.int.cnn), June 7, 2009. (Video)

"...one of the things that's odd about the current situation is that the people who created the problem are so powerful in deciding what the solution to the problem is going to be. There is a great tradition on Wall Street of making a fortune, creating a mess, and then making a fortune cleaning it up. But to do it on this scale is breathtaking to me.

And it is amazing to me the degree to which, say, Goldman Sachs is intertwined with the Treasury, and how they're -- there don't seem to be any independent voices in the thick of the decision-making. The decision-making is all being done by people who one way or another might expect to make a lot of money from Goldman Sachs in the future..."

How Traders Killed Value Investing: Want to know why GM stock is above zero? Look to hedge funds and short-term trading (http://investigatethesec.com/drupal-5.5/?q=node/891), by David Weidner. The Wall Street Journal, June 11, 2009.

The old notion that profitable companies with good growth prospects should have rising share prices -- and that failures like GM should be gone, or at least trading in the pennies -- is history.

Today, a hedge fund investing billions using a quantitative formula can stall a stock; a couple hedge funds aligned can turn a profitable company into a Dow laggard. Toss in a few short sellers and you have the great Wall Street collapse of September 2008.

It wasn't always this way. Before the machines and the shorts took over Wall Street, stocks were evaluated by an underlying company's prospects. Buy-and-hold investing ruled the day. Investors such as Warren Buffett and Bill Miller were the models.

Those fellows are a far cry from this generation's masters of the universe. Traders are in charge now. They rule the market. They dominate volume. That stock you bought because you thought the company was in good shape? It's a pawn in the hands of a computer model or some supertrader like Steven Cohen at SAC Capital Partners or Bridgewater Associates' Ray Dalio.

To move a security, they don't need to own it. They can have a short position. They can put an order to sell 1 million shares in a dark pool, those anonymous marketplaces that operate outside the walls of the exchanges. They can own options or futures contracts. Buy enough GM puts and watch the price begin to fall under the pressure.

Schmedlap

06-12-2009, 02:53 AM

Fareed Zakaria's show, though I disagree with him on almost everything, is one of the few TV shows that I watch on a fairly regular basis. He has great guests and asks decent questions. I saw that interview with Michael Lewis and what I found most amazing was simply the lousy leadership displayed on Wall Street. Candor seemed to be scorned. What he recounted was a "make it happen" attitude that was unconcerned with reality. Reminds me of some of the most linear-thinking commanders whom I had the misfortune of serving under.

I came across some good visuals at Business Insider (http://www.businessinsider.com/) that help to make sense of the data underlying the mortgage industry collapse. This graph below shows where the loans came from.

http://www.businessinsider.com/%7E%7E/f?id=4a1ea4db14b9b9c9000c9cb1

The final graph, below, suggests that we are only one-third to half of the way to a solution (in dollar terms; in terms of time, it may be a lot longer). The first four bars are loss estimates. The company named below the chart is the company that made the estimate (not the company holding those bad debts). The two bars on the right are the write-downs and capital raised as of the April/May timeframe.

http://static.10gen.com/www.businessinsider.com/%7E%7E/f?id=4a1eb15e14b9b9c9000c9ff3

Click through the entire presentation at the blog here (http://www.businessinsider.com/mortgagemeltdown/chart4-1). Really good summary with lots of visuals. The big surprise, for me, was to see how much of the losses are in commercial real estate loans ($700 billion).

Ski

06-12-2009, 11:41 AM

Oil prices are continuing to rise as well. Natural gas is really taking off especially when you start looking at the 4-5 month futures.

I just have this feeling we are looking at another house of cards here with the current run up in the stock market. The U6 numbers are over 15% now.

Watcher In The Middle

06-18-2009, 05:07 AM

And tiny little Amherst Holdings of Austin, TX did just that....

Amherst Holdings Throws an Unwelcome Curveball at Wall Street Banks

Amherst Holdings, a small Austin-based brokerage house, executed a CDS (Credit Default Swap) trade that ended up losing big banks, including JP Morgan Chase and Bank of America, tens of millions of dollars. Now, the big banks are trying to cry foul. The Wall Street Journal has the story:

Believing the securities would become worthless, traders at J.P. Morgan bought credit-default swaps over the past year from Amherst, according to people familiar with the matter. Credit-default swaps act like insurance, paying off the buyer if securities are hit by losses. Other banks including RBS Securities, which is the U.S. investment-banking arm of Royal Bank of Scotland, and BofA also bought swaps on the securities from different trading partners.

The banks had to pay up for the protection, similar to a person buying insurance on a beach house just before a hurricane. They paid as much as 80 to 90 cents for every dollar of insurance, the going rate last fall according to dealer quotes, expecting to receive a dollar back when the securities became worthless over the coming months.
Link to the full story (http://www.businesspundit.com/amherst-holdings-throws-an-unwelcome-curveball-at-wall-street-banks/)

Here's another link to the WSJ analysis of this deal (http://blogs.wsj.com/deals/2009/06/11/deconstructing-that-daring-amherst-trade/)

Looks like once again, we have a case where the "Masters of the Universe" aren't quite some masterful....

slapout9

06-23-2009, 11:51 PM

We are in bad shape:D:D

http://www.youtube.com/watch?v=6JPcimrnXGA&feature=popular

Surferbeetle

06-24-2009, 02:16 PM

...and their reporting from the financial fallout shelter :D

In the meantime from today's WSJ by Gina Chon Big Oil Ready for Big Gamble in Iraq (http://online.wsj.com/article/SB124579553986643975.html)

BAGHDAD -- Next week, Iraqi officials plan a welcome-back party for Big Oil.

The government intends to auction off oil contracts to foreign companies for the first time since Iraq nationalized its oil industry more than three decades ago. If all goes according to plan in the first round, foreign oil companies will move in to help Iraq revive production at six developed fields that have suffered from years of war and neglect.

Mr. Shahristani's oil deals are crucial to this war-torn country's economy. Iraq is thought to have one of the world's largest supplies of crude oil, with 115 billion barrels in proven reserves. But foreign know-how is key to its plans to boost oil output to four million barrels a day within four to five years, from 2.4 million barrels currently.

Despite security risks, Western oil companies are clamoring to get in. Iraq is still relatively unexplored, offering big companies a potentially easy-to-tap source of growth. Some are touting Iraq as the most important opening of petroleum fields since the discovery in 2000 of the giant Kashagan field in the Caspian Sea.

Some 120 companies expressed interest in bidding for the contracts at the June 29 and 30 auction, according to the oil ministry. Thirty-five companies qualified to bid, including Exxon Mobil Corp., Royal Dutch Shell PLC, Italy's Eni SpA, Russia's Lukoil and China Petroleum & Chemical Corp., or Sinopec. The six oil fields at stake are believed to hold reserves of more than 43 billion barrels. Foreigners won't get the most prized piece of the action -- ownership stakes in the reserves -- but will be paid fees for ramping up output.

Schmedlap

06-24-2009, 03:23 PM

Looks like once again, we have a case where the "Masters of the Universe" aren't quite some masterful....
Living in DC will make one cynical. I just moved back here temporarily. I live in an apartment building that is very expensive, yet I was surprised to discover how many people living here are undergrads. A few weeks ago, many of them graduated. I overheard no fewer than 10 of them mentioning that "my dad got me job" or "my uncle got me a job" or something similar. Many of them are going to work for investment banks (who knew banks were hiring new talent?). I have no idea what useful skills or knowledge these kids have amassed from 4 years of living in DC, having their bills paid by their parents, driving a BMW supplied by mommy and daddy, getting their credit card bills paid by someone else, and enjoying a lifestyle that most people cannot attain until they've established themselves in a career (dead serious - they all hire maids to clean up after them after their 4-times per week beer pong parties). But they are the future of the banking industry, apparently. I hope their finance courses were stellar, because I don't think they picked up many useful life lessons.

slapout9

06-24-2009, 07:58 PM

Living in DC will make one cynical. I just moved back here temporarily. I live in an apartment building that is very expensive, yet I was surprised to discover how many people living here are undergrads. A few weeks ago, many of them graduated. I overheard no fewer than 10 of them mentioning that "my dad got me job" or "my uncle got me a job" or something similar. Many of them are going to work for investment banks (who knew banks were hiring new talent?). I have no idea what useful skills or knowledge these kids have amassed from 4 years of living in DC, having their bills paid by their parents, driving a BMW supplied by mommy and daddy, getting their credit card bills paid by someone else, and enjoying a lifestyle that most people cannot attain until they've established themselves in a career (dead serious - they all hire maids to clean up after them after their 4-times per week beer pong parties). But they are the future of the banking industry, apparently. I hope their finance courses were stellar, because I don't think they picked up many useful life lessons.

That's because nothing has chnaged or will change until the Fed is brought under control. Pay special attention to the Allan Greenspan interview. Enjoy!

http://therealnews.com/t/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=3920&updaterx=2009-06-24+12%3A25%3A28

bourbon

06-25-2009, 01:48 AM

Michael Milken, 60,000 Deaths, and the Story of Dendreon, by Mark Mitchell. Deep Capture.

What follows is part 1 of a 15-part series. The remaining installments will appear on Deep Capture over the next several weeks, after which point the story will be published in its entirety. It is a story about the travails of just one small company, but it describes market machinations that have affected hundreds of other companies, and it contains a larger message for anyone concerned about the “deep capture” of our nation’s media and regulatory bodies.

Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 1 of 15) (http://www.deepcapture.com/michael-milken-60000-deaths-and-the-story-of-dendreon-chapter-1-of-15/). 18 June 2009 by Mark Mitchell.

The attack on a company called Dendreon raises questions about Michael Milken, his "philanthropy" and his hedge fund friends. Chapter 1 of 15

Michael Milken, 60,000 Deaths, and the Story of Dendreon (http://www.deepcapture.com/michael-milken-60000-deaths-and-the-story-of-dendreon-chapter-2-of-15/) (Chapter 2 of 15). 21 June 2009 by Mark Mitchell.

A brutal attack on Dendreon, a company with a promising treatment for prostate cancer, raises questions about the integrity of our financial markets. Meanwhile, we ponder the work of seven colorful hedge fund managers and a famous criminal named Michael Milken.

Michael Milken, 60,000 Deaths, and the Story of Dendreon (Chapter 3 of 15) (http://www.deepcapture.com/michael-milken-60000-deaths-and-the-story-of-dendreon-chapter-3-of-15/). 24 June 2009 by Mark Mitchell.

It's time to learn the identities of the seven hedge funds that bet big against Dendreon. We'll start with a firm that's been in the news a bit lately...

Schmedlap

06-25-2009, 03:38 AM

That's because nothing has chnaged or will change until the Fed is brought under control. Pay special attention to the Allan Greenspan interview.
I don't think the Fed can set policies that ban nepotism or bad parenting.

On a Fed-related note, Business Week says that Ben is doing the right thing (or at least not doing the wrong thing).
Why the Fed Isn't Igniting Inflation (http://www.businessweek.com/magazine/content/09_26/b4137020225264.htm?chan=rss_topStories_ssi_5) (if it looks like a blank screen, you may have to scroll down - their website is acting screwy).

Surferbeetle

06-25-2009, 03:44 AM

But they are the future of the banking industry, apparently. I hope their finance courses were stellar, because I don't think they picked up many useful life lessons.

Infographic from the Economist....Banks' profits Red and black ink (http://www.economist.com/daily/chartgallery/displayStory.cfm?story_id=13894438&source=features_box_main)

THE balance sheets of many banks took a pounding last year. Royal Bank of Scotland, which received a government bail-out of $3 billion, posted the largest loss of $59.3 billion, according to an annual review of the world's leading banks by The Banker magazine. Citigroup and Wells Fargo also fell into the red by over $45 billion. But all three are still counted among the 12 biggest banks in the world by tier-one capital, albeit at a lower rank than in 2007. Not all was doom and gloom. ICBC turned a $21.3 billion profit, one of four Chinese banks to make the top ten. HSBC and Barclays, British banks that showed better risk management than RBS, also saw a decent profit.

slapout9

06-25-2009, 03:46 AM

I don't think the Fed can set policies that ban nepotism or bad parenting.

On a Fed-related note, Business Week says that Ben is doing the right thing (or at least not doing the wrong thing).
Why the Fed Isn't Igniting Inflation (http://www.businessweek.com/magazine/content/09_26/b4137020225264.htm?chan=rss_topStories_ssi_5) (if it looks like a blank screen, you may have to scroll down - their website is acting screwy).

Duh...."it is hard to reduce your debt when you are unemployed" I cain't believe he actually said that in an interview:D:D it's hopeless:D

Agree nothing they can do about nepotism...they don't have any parents....which makes them?

davidbfpo

06-25-2009, 12:41 PM

In the City of London law firms have postponed for a year new entrants, an odd move when they are so busy - divorce cases have rocketed. Two reasons clients leaving for new places (some to get jobs and others avoid tax) and wives with expensive tastes suddenly been told to cut spending.

Anecdotal from an observer of the city.

davidbfpo

slapout9

06-25-2009, 04:02 PM

James Galbraith on Population Centric Economics Policy. Also explains how banking works since the wallstreet Tali-Banksters can not figure it out:D

http://www.levy.org/vdoc.aspx?docid=1129

bourbon

06-26-2009, 03:33 PM

The Great American Bubble Machine: From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they're about to do it again (http://zerohedge.blogspot.com/2009/06/goldman-sachs-engineering-every-major.html), by Matt Taibbi. Rolling Stone, July 9, 2009.

If you want to understand how we got into this financial crisis, you have to first understand where all the money went - and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long - including last year's strange and seemingly inexplicable spike in the price of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed. But Goldman wasn't one of them.

Taibbi's March article The Big Takeover (http://www.rollingstone.com/politics/story/26793903/the_big_takeover) was killer, and he does not disappoint with this one. He rightly nails Goldman for last years massive run up in oil prices and offers warning of an emerging racket under cap-and-trade.

And here's the real punch line. After playing an intimate role in four historic bubble catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ, after pawning off thousands of toxic mortgages on pensioners and cities, after helping to drive the price of gas up to $4 a gallon and to push 100 million people around the world into hunger, after securing tens of billions of taxpayer dollars through a series of bailouts overseen by its former CEO, what did Goldman Sachs give back to the people of the United States in 2008?

Fourteen million dollars.

That is what the firm paid in taxes in 2008, an effective tax rate of exactly one, read it, one percent. The bank paid out $10 billion in compensation and benefits that same year and made a profit of more than $2 billion - yet it paid the Treasury less than a third of what it forked over to CEO Lloyd Blankfein, who made $42.9 million last year.

How is this possible? According to Goldman's annual report, the low taxes are due in large part to changes in the bank's "geographic earnings mix." In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates. Thanks to our completely hosed corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions upfront on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to zero out its taxes. A GAO report, in fact, found that between 1998 and 2005, roughly two-thirds of all corporations operating in the U.S. paid no taxes at all.

Well, you might say, who cares? If cap-and-trade succeeds, won't we all be saved from the catastrophe of global warming? Maybe - but cap-and-trade, as envisioned by Goldman, is really just a carbon tax structured so that private interests collect the revenues. Instead of simply imposing a fixed government levy on carbon pollution and forcing unclean energy producers to pay for the mess they make, cap-and trade will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax-collection scheme. This is worse than the bailout: It allows the bank to seize taxpayer money before it's even collected.

"If it's going to be a tax, I would prefer that Washington set the tax and collect it," says Michael Masters, the hedge fund director who spoke out against oil-futures speculation. "But we're saying that Wall Street can set the tax, and Wall Street can collect the tax. That's the last thing in the world I want. It's just asinine."

slapout9

06-26-2009, 11:46 PM

Thanks bourbon, those are two great articles, and every American should read them.

Latest Video of James Galbraith about the bank deals.

http://wallstreetpit.com/4463-james-galbraith-banks-can-hardly-lose

Surferbeetle

07-19-2009, 01:22 AM

From Harvard Business Review by Niall Ferguson (http://en.wikipedia.org/wiki/Niall_Ferguson), The Descent of Finance (http://hbr.harvardbusiness.org/2009/07/the-descent-of-finance/es)

What if the current recession turns out to be like the Great Depression of 1929–1933? Four years from now, the United States might find itself with a still-shrinking economy, half as many banks as in 2009, a third as many hedge funds, and retail banking resembling a public utility. The federal debt could be at $20 trillion, the top income tax rate at 45%, and the S&P 500 at 418. Ferguson, a professor at Harvard University and Harvard Business School, imagines that to be the worst-case scenario. The Breakdown, as Ferguson calls it, would alter the international economic order, too, with China’s GDP rising to half that of the U.S. by 2013 and the IMF’s Special Drawing Rights replacing the dollar as the international reserve currency.

Ferguson analyzes the roots of the crisis as well as the measures taken by the Obama administration to tackle it. He goes on to describe the impact on the global economy and points out that the slowdown is hurting other nations more than the U.S., thereby building a powerful case for a somewhat more sanguine view of America’s future. In a better-case 2013, he posits, the Federal Reserve’s policies have produced neither inflation nor deflation. A remarkable number of new banks have appeared, the top income tax rate is 35%, and the S&P 500 stands at 976. Because the world has become more dangerous as well as poorer, everyone looks to the United States to continue acting as a global policeman—and the greenback is still the world’s currency of choice.

tequila

09-09-2009, 07:49 PM

Can't wait for the next bailout (http://www.nytimes.com/2009/09/06/business/06insurance.html?_r=1&partner=rss&emc=rss&pagewanted=print)...

After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy “life settlements,” life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to “securitize” these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return — though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated ...

Risk appetite has returned. The securitization mafia is still around, and that's not always a bad thing, but that early construction of an "assembly line" ready to turn these out in industrial fashion mentioned in the article can only bring back bad memories.

Surferbeetle

09-14-2009, 12:32 AM

From the Economist: Wall Street's new shape, Rearranging the towers of gold (http://www.economist.com/opinion/displayStory.cfm?story_id=14401276&source=hptextfeature)

Wall Street has staged a surprisingly strong recovery from its meltdown a year ago. But it will not return to business as usual

The most dramatic is likely to be a toughening of capital-adequacy standards, endorsed recently by G20 finance ministers and a group of central bankers and supervisors that oversees the Basel capital rules (see article). The new rules could be ready for adoption by the end of next year. The Basel Committee has already proposed higher capital charges for complex trading and exotic securitisations.

Capital will also be the method of choice to rein in firms big enough to rock the system. American officials are reluctant to go nuclear and break them up, not least because the task of splitting them into pieces small enough to pose no danger would be horribly messy. Instead banks will probably face a sliding scale, with minimum capital ratios rising as they get bigger or embrace more risk. They will also be expected to prepare “living wills”, setting out how they could be liquidated in the event of failure.

“There’s a real risk we end up so laden with capital that we can’t waddle and fart at the same time,” says a Wall Street grandee. Scrutiny from supervisors, increased after Lehman, will remain heavy. Goldman Sachs has no fewer than 40 Fed staffers breathing down the necks of its traders and risk-modellers.

Surferbeetle

09-23-2009, 02:21 AM

From today's WSJ By DAMIAN PALETTA and ALESSANDRA GALLONI Europe, U.S. Spar On Cure for Banks (http://online.wsj.com/article/SB125366282157932323.html#mod=WSJ_hpp_MIDDLTopStor ies)

Leaders from the Group of 20 industrial and developing nations, (http://en.wikipedia.org/wiki/G-20_major_economies) who will discuss the issue this week in Pittsburgh, all agree that banks should hold more capital as a cushion against future losses. But fault lines are quickly emerging about the details, with the Europeans complaining that the U.S.'s proposals will put their banks at a disadvantage.

Many bankers and regulators say the financial crisis has exposed big holes in the most recent international deal on capital, known as Basel II, after the Swiss city where many negotiations were held. These rules were supposed to bring U.S. and European banks closer together by measuring capital against assets weighted according to how risky they are.

Basel II relied on assessments by credit-rating firms, many of which were discredited by the crisis. It also allowed banks to judge their own assets, which led to many misjudgments of the value of mortgages, mortgage-backed securities, and exotic financial products.

In the years it took to negotiate the accords, U.S. and foreign dignitaries struggled to reach a consensus, with German officials at one point threatening to walk out, and U.S. regulators unable to agree on their own unified stance.

The U.S. now wants to increase capital requirements for the largest banks in a way that makes the overall measure of capital less sensitive to risk. European officials say that's not fair -- in part because of differences in accounting standards. Some bank balance sheets appear up to twice the size under European accounting rules than they would under U.S. standards.

European banks are also structured differently. Many are cooperatives or have shareholders such as municipalities that can't raise funds in the same way as institutional shareholders in the U.S.

One possible compromise, according to two European officials familiar with the matter, is an FSB proposal that would have European banks report U.S.-style capital levels to their local regulators. But that wouldn't be binding. Another possible compromise would create higher capital requirements for banks that are big or particularly intertwined with other financial institutions around the world, the officials said.

bourbon

10-15-2009, 06:21 PM

Wall Street's Naked Swindle: A scheme to flood the market with counterfeit stocks helped kill Bear Stearns and Lehman Brothers — and the feds have yet to bust the culprits (http://www.rollingstone.com/politics/story/30481512/wall_streets_naked_swindle), by Matt Taibbi. Rolling Stone, Oct 14, 2009.

The SEC's halfhearted oversight didn't go unnoticed by the market. Six months after Bear was eaten by predators, virtually the same scenario repeated itself in the case of Lehman Brothers — another top-five investment bank that in September 2008 was vaporized in an obvious case of market manipulation. From there, the financial crisis was on, and the global economy went into full-blown crater mode.

Like all the great merchants of the bubble economy, Bear and Lehman were leveraged to the hilt and vulnerable to collapse. Many of the methods that outsiders used to knock them over were mostly legal: Credit markers were pulled, rumors were spread through the media, and legitimate short-sellers pressured the stock price down. But when Bear and Lehman made their final leap off the cliff of history, both undeniably got a push — especially in the form of a flat-out counterfeiting scheme called naked short-selling.

davidbfpo

10-28-2009, 11:14 PM

An odd place to find such a reformist agenda, the UK's Daily Telegraph has an article on the changes the UK eceonomy needs: http://www.telegraph.co.uk/finance/comment/jeremy-warner/6441328/Britain-isnt-working.-Heres-10-ways-to-help-restore-growth.html?utm_source=Telegraph.co.uk&utm_medium=TD_gdp&utm_campaign=editorial2810

Maybe some of the ten point plan will resonate across the Atlantic?

davidbfpo

Schmedlap

10-28-2009, 11:23 PM

bourbon

10-29-2009, 01:37 AM

That's legal (or mostly legal)? I thought people had gone to jail for that - usually related to sending out junk emails that hype up a stock and then immediately selling it after the hype results in the stock price being inflated.

Schmed, some of that stuff is probably legal, enforcement is also a joke.

I have been told the hedge funds and other miscreants doing these manipulations have a dedicated fax line to their people at the cable financial new channels to spread these rumors. Email records can be subpoenaed but there is no record of the content of a fax.

You are right; a lot of this stuff is from the pump-and-dump schemes of the 1990’s. In a pump and dump manipulation however the company is usually BS and the owners are in on it. In a naked short selling manipulation the owners do not have to be in on it, and the company can be promising and in good health. The company can be destroyed for profit, or the stock manipulated for hostile a take over.

Naked short selling reared its ugly head in microcap markets in the 90’s. The penny stock shenanigans of the 1990’s evolved into the tactics that would ultimately take down Bear Sterns and Lehman brothers.

Dayuhan

10-29-2009, 12:26 PM

You can't destroy a company by naked short selling. This has been going on a long time, it's nothing new and it's not nearly as huge a deal as the rather breathless article cited makes it out to be. Short selling is a gamble; if the company loses value you make money, if it doesn't you have to cover your short and you can get whacked. Manipulating a company's value though rumour works with small illiquid companies with small floats; it's very hard to generate enough buy/sell action to move the price of a large company, especially one with major institutional ownership. The 1.7 mil short referred to is not a major deal by Wall Street standards and nowhere nearly enough to have an impact on Companies this size. The short sellers made money because the Companies were in trouble, but the Companies weren't in trouble because of the short sellers. They were in trouble because of their own bad decisions.

If you see a Company that's in major trouble hit with a barrage of short selling, it can mean there's an insider trade involved: maybe inside the Company, or its accounting firm, or in the industry... these secrets don't stay secret. It can also just mean that someone saw it coming a little before the rest.

I don't personally think much of Tabibi's stuff; he's an axe-grinding ideologue and his articles are so full of holes that I couldn't even begin (and wouldn't even bother) to start pointing them out. Rolling Stone can be entertaining but I wouldn't call it a terribly enlightening source for financial commentary.

One thing that fascinates me about this entire economic cycle (and alas, I do know something about it) is the ease with which the whole "greedy Wall Street sank the economy" narrative has been sold to the public. Not that Wall Street had no responsibility, but the political class has used that narrative to very effectively sidestep any kind of accountability for the enormous role that administrations of both parties played in the evolution of the crisis... and the main street investment community should be taking a fair bit of responsibility as well.

Scapegoats are as useful as ever...

Schmed, some of that stuff is probably legal, enforcement is also a joke.

I have been told the hedge funds and other miscreants doing these manipulations have a dedicated fax line to their people at the cable financial new channels to spread these rumors. Email records can be subpoenaed but there is no record of the content of a fax.

You are right; a lot of this stuff is from the pump-and-dump schemes of the 1990’s. In a pump and dump manipulation however the company is usually BS and the owners are in on it. In a naked short selling manipulation the owners do not have to be in on it, and the company can be promising and in good health. The company can be destroyed for profit, or the stock manipulated for hostile a take over.

Naked short selling reared its ugly head in microcap markets in the 90’s. The penny stock shenanigans of the 1990’s evolved into the tactics that would ultimately take down Bear Sterns and Lehman brothers.

bourbon

10-29-2009, 02:04 PM

Short selling is a gamble; if the company loses value you make money, if it doesn't you have to cover your short and you can get whacked.
You are confusing naked short selling with regular short selling, which is like confusing sexual harassment with sex. Naked short sales are not covered, that’s the point – they are thus ‘naked’. Because they are not covered and thus "fail to deliver", it creates counterfeit or ‘phantom’ shares that are injected into the system increasing supply and depressing share price.

The 1.7 mil short referred to is not a major deal by Wall Street standards and nowhere nearly enough to have an impact on Companies this size.
The fact that it was $1.7 million in options is not suspicious. Its that it was such an absurd bet - that Bear Stearns would lose half its value in 9 days.

Bringing Down Bear Began as $1.7 Million of Options (http://www.bloomberg.com/apps/news?pid=20601109&refer=exclusive&sid=aGmG_eOp5TjE), by Gary Matsumoto. Bloomberg.com, August 11, 2008.

Dayuhan

11-03-2009, 12:30 PM

I think you may be falling a bit for the old naked short hype routine. It's become a bit standard in times of economic stress; there was a veritable Grecian chorus of it during the tech crash in 2000-2001. CEOs of failed companies always want to blame the failure on short sellers, and there are always a bunch of investors and financial journalists (the ones who were supposed to see it coming and didn't) who want to buy in to the story.

At the end of the day, though, it's a scapegoat: short sellers are not lions bringing down big game, they are jackals prowling for the sick and dying. They don't "bring down" healthy companies, and their presence is a sign, not a cause. The "phantom shares" do appear, but only for the duration of the failure to deliver, generally brief, and the quantity is rarely sufficient to have any significant impact on the share price. The buyer has to either borrow the shares or close the position fairly quickly. If the company is fundamentally healthy any depression in the share price is likely to bring in buyers and the result will be no more than a momentary blip.

In this case it does look like an insider trade is a real possibility: it's illegal but it happens. It might look like an absurd bet from the outside, but if you knew the company had been papering over the cracks for a long time, the glue was coming loose, and the weakness was about to become clear it was a very sensible bet. It looks like somebody knew, but that somebody was not the cause of the collapse, they just saw it coming and made money out of it. Bear Stearns and Lehman didn't collapse because of short selling, they collapsed because of a long series of bad decisions and excessively risky investments. Of course the people who made those decisions would rather point the finger at someone else, much like every day trader who ever lost his shirt playing penny stocks claims to be the victim of the evil market makers.

Trying to blame the recent recession on manipulations by some conspiratorial cabal only distracts attention from where it is desperately needed: on the long series of bad decisions - by Government, by the financial industry, and by large numbers of ordinary investors - that drove the pattern that produced the recession. It didn't happen overnight - this recession was firmly rooted in the collective psychosis of the late 90s equity bubble - and conspiracy theories will not aid in understanding it or in preventing similar upheavals in the future.

One thing that gets far too little attention, for example, is Government's consistent refusal to engage in countercyclic intervention during upward cycles and consistent over-intervention during downward cycles.

tequila

11-03-2009, 05:23 PM

The mother of all carry trade faces an inevitable bust (http://www.ft.com/cms/s/0/9a5b3216-c70b-11de-bb6f-00144feab49a.html)- Nouriel Roubini, FT.

Since March there has been a massive rally in all sorts of risky assets – equities (http://www.ft.com/cms/s/0/2250a484-100b-11de-a8ae-0000779fd2ac.html), oil, energy and commodity prices – a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply (http://www.ft.com/indepth/dollar-under-pressure), while government bond yields have gently increased but stayed low and stable.

...

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March.

People’s sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade – you short the dollar to buy any global risky assets.
Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight – witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae (http://markets.ft.com/tearsheets/performance.asp?s=us:FNM)) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets – the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles ...

Dayuhan

11-04-2009, 09:42 PM

It's quite amazing that with all the "we can't let this happen again" talk, we keep walking down the same road. Government responded to the 2000/2001 recession by dropping interest rates too low and keeping them there for too long, fueling a new wave of speculation. Now we're doing the same thing. The problem is that Government focuses on regulation aimed at the last crisis, which does nothing to avert the next, and ignores the need for incentive management on the macro level. Trying to use regulations to suppress risk-taking in a cheap money environment is a waste of time, you can't regulate against an overwhelming incentive. It's like keeping gas cheap and then trying to force people not to use it. Cheap gas gets burned, cheap (or free) money gets risked.

Again, over-intervention during down cycles, under-intervention during up cycles...

Ski

11-14-2009, 01:36 PM

slapout9

11-14-2009, 03:40 PM

Just because the stock market is over 10,000 again does not mean the recession is over. The stock market is a global system for one thing, not a national system.

The delusion continues.

Agree, the whole Stock market is delusional, it is about making money with paper as opposed to making products and services for an economy.

davidbfpo

11-22-2009, 03:32 PM

An article on an emerging European bank giant, Banco Santander of Spain and within the chairman explains their success:
‘If you don’t fully understand an instrument, don’t buy it,’ he told an awards ceremony last year, parodying Rudyard Kipling. ‘If you would not buy a specific product for yourself, don’t try to sell it. If you do not know your customers very well, don’t lend them any money. If you do these three things, you will be a better banker, my son.

See:http://www.spectator.co.uk/business/5530558/santander-the-bank-that-escaped-the-credit-crunch.thtml

Dayuhan

11-23-2009, 12:15 AM

I was listening to the BBC News last evening when I heard quite a remarkable claim.

The newsreader claimed that the recession in America is over with!

U-3 unemployment is up to 10.2%, and it's going to as high as 13% before it levels out. U-6 unemployment, which is a much better indicator of true unemployment, is up to 17.5%.

Just because the stock market is over 10,000 again does not mean the recession is over. The stock market is a global system for one thing, not a national system.

The delusion continues.

They are using a conventional definition of recession: two or more consecutive quarters of declining GDP. By this definition a recession is held to have ended when positive GDP growth resumes. It's not based on the stock market, it's based on GDP growth.

Of course resumption of GDP growthe doesn't necessarily mean all is well with the economy. Unemployment will lag well behind, and really addressing employment issues will require some significant changes. We desperately need to resolve the huge and growing disconnection between the output of American education and the needs of the American economy. It would also be useful to finally accept that Americans, individually and collectively, need to compete to prevail in the global economy.

Ken White

11-23-2009, 12:31 AM

...We desperately need to resolve the huge and growing disconnection between the output of American education and the needs of the American economy.Even politicians with some common sense and basic honesty would help. :mad:
It would also be useful to finally accept that Americans, individually and collectively, need to compete to prevail in the global economy.That too... :o

Ski

11-23-2009, 12:48 AM

Heard some very disturbing things about the economy over the weekend from a reliable source in the upper echelons of the financial world:

Gold to hit $2000 - by summer of 2010
Oil to hit $130 a barrel - by summer of 2010
Unemployment in the US may hit 15% (U3) before stabilizing - end of 2010

My point about the stock market was due to the mouthbreather serving as a newsreader commenting about how the US stock market was over 10,000 and she used it as a reason why the US was out of the recession.

There are going to be some significant change to the defition of recession before it actually ends. GDP doesn't mean #### when 20% of your population isn't working.

Schmedlap

11-23-2009, 01:19 AM

Top graph: Dollar versus trade weighted basket of currencies, over the past year. (Source: St. Louis Federal Reserve)
Bottom graph: Dow Jones Industrials Average, over the past year (Source: Yahoo! Finance)

http://farm3.static.flickr.com/2543/4126709432_df533092fa_m.jpg

Almost a mirror image.

Dayuhan

11-23-2009, 10:28 AM

Heard some very disturbing things about the economy over the weekend from a reliable source in the upper echelons of the financial world:

Gold to hit $2000 - by summer of 2010
Oil to hit $130 a barrel - by summer of 2010
Unemployment in the US may hit 15% (U3) before stabilizing - end of 2010

I'd be careful about listening to anyone who claims to know what gold, oil, or any other commodity will cost 9 months from now. There are a lot of variables in the picture and nobody really knows. Barring a significant supply disruption, oil at $130 would suggest a pretty robust recovery, as demand would have to notch up considerably to support that kind of price, and demand increases with economic activity. That kind of recovery would not be likely to drive the price of gold to $2000.

Not impossible, but it doesn't seem the likeliest scenario.

Ski

11-23-2009, 08:48 PM

Considering the source - an economist working for one of the largest banks in the world who has a track record of predictive success...take it or leave it, doesn't matter to me.

As for oil, the price can go higher due to demand outside the United States, which is possible.

As far as I'm concerned, there are no more "likely" scenarios to be played out within macroeconomics and the economy. The "changes" that have been applied after the last collapse have only reinforced the same system...there have been no structural reforms.

Caveat emptor as usual.

Ski

11-23-2009, 09:13 PM

http://www.telegraph.co.uk/finance/economics/6599281/Societe-Generale-tells-clients-how-to-prepare-for-global-collapse.html

Very interesting story here. Hits a lot of the core issues of why this economy is nowhere near healthy - private debt becoming public debt, inflation, junk bonds, etc...

Societe General is the 11th largest bank in the world.

Dayuhan

11-29-2009, 11:37 PM

You might want to ask your economist exactly why he expects oil prices to respond to a renewed crisis in a manner opposite from what experience and common sense would suggest. It's worth noting that the SG worst case scenario report that you link to sees oil dropping to $50 a barrel in a renewed crisis.

Hits a lot of the core issues of why this economy is nowhere near healthy - private debt becoming public debt, inflation, junk bonds

Interesting how we see what we are conditioned to see. The article cites deflation as a threat, not inflation; junk bonds are mentioned only as a symptom (junk bond yields dropping in the event of the worst case scenario), not a cause.

This is a worst case scenario, not a forecast. many of the big financial houses are doing this now, they put out 3 forecasts instead of one, best case, worst case, median. It's basically an ass-covering maneuver, no matter what happens it will be within the forecast range. Focusing entirely on the worst case scenarios gives as distorted a view as focusing on the best case scenarios would.

There's a tendency these days to confuse the financial services industry and the financial system with the economy; it's neither honest nor useful. Financial issues, debt particularly, are certainly matters of concern but they are not at the core of what troubles the US economy. The core issue to me is American competitiveness, or the lack thereof.

Schmedlap

11-30-2009, 02:18 AM

Dayuhan

11-30-2009, 04:43 AM

My eyebrows are raised at the striking correlation of weakening dollar and rising stock market prices (reposted below for convenience). This would seem logical if the weaker dollar were spurring exports, but it's not.

http://farm3.static.flickr.com/2543/4126709432_df533092fa_m.jpg

I'm not sure there's any direct relationship beteen the sliding dollar and the rising equity markets at this point. It could be argued that a cheaper dollar makes it cheap for foreign investors to put money into US equities, but that would tend to push the dollar up.

I'd say the falling dollar runs back to 2 basic causes: very low interest rates make dollar holdings unattractive, and rapid increases in emerging market indices make it attractive to borrow cheap dollars and invest them in non-dollar markets that seem to offer higher returns, a dangerous practice but not an unusual one.

Stock markets are up in a lot of places, partly because there's a lot of cheap money around and partly because of an anticipated economic recovery: stock markets tend to respond more to expectations than actual conditions. I personally think stock markets have outrun fundamentals and are walking on pretty thin ice - and that many emerging markets are moving into bubble territory - but I'm by nature suspicious of such things.

It's always hard to base a conclusion on the relationship between two data points - in this case the dollar and US stock markets - simply because there are so many other factors out there that influence both.

Ski

12-17-2009, 01:23 PM

Moody's has put out a rather disturbing report:

http://www.telegraph.co.uk/finance/economics/6819470/Moodys-warns-of-social-unrest-as-sovereign-debt-spirals.html

tequila

12-17-2009, 01:37 PM

If only they'd been so pessimistic when rating SPVs.

Schmedlap

01-04-2010, 03:28 AM

Looking for good background material regarding the financial crisis, with specific emphasis on the following...

- Decision-making process for repealing provisions of Glass-Steagals and the hindsight analysis
- Rationale for eliminating the uptick rule and the hindsight analysis
- Impact of foreign investment on housing bubble (would it have happened without it?)
- How AIG got so deep into credit default swaps
- The role of Fannie Mae in the increase of subprime lending
- Changes or proposed changes for corporate governance, leverage requirements, and other legislative responses made or proposed

Non-controversial articles that lay out the facts as most would agree on them are ideal - at least to start off. I'm not looking for "inside accounts," such as books that detail the minute-by-minute deals that resulted in Bear Stearns being purchased or Lehman Brothers failing. Big picture, policy-maker perspective is ideal, preferably stuff worthy of inclusion in a bibliography.

Any takers? The only book on my list, for the moment, is the one by Barth (http://www.amazon.com/Rise-Fall-Mortgage-Credit-Markets/dp/0470477245)(it looked good when I flipped through it at B&N, but the $60 price tag was a bit steep for a book that I wasn't sure I would regret buying - I now see it for half that at amazon - and, yes, I will "tweak the surge (http://smallwarsjournal.com/blog/2009/12/tweak-the-surge/)"). There seems to be dozens of books that are similar, but each seems to have an ideological agenda to lay blame, rather than hashing out what happened.

MikeF

01-04-2010, 03:41 AM

slapout9

01-04-2010, 04:43 AM

Surferbeetle

01-04-2010, 05:08 AM

Looking for good background material regarding the financial crisis, with specific emphasis on the following...

There seems to be dozens of books that are similar, but each seems to have an ideological agenda to lay blame, rather than hashing out what happened.

The Economist, Jan 22nd 2009, A special report on the future of finance , The uneven contest (http://www.economist.com/surveys/displaystory.cfm?story_id=E1_TNJVSSTS)

It helps that the intellectual fashion has been for deregulation and free markets. Politicians such as Phil Gramm, formerly a senator from Texas, sponsored the repeal of the Glass-Steagall act, a Depression-era separation of investment and retail banking. That move has since come under attack as the sort of “market fundamentalist” project that caused the bubble. However, the supporters of the repeal argue that it was really a first step towards modernising a system which had outgrown Glass-Steagall. The original act described the world in categories that no longer fitted the industry it was supposed to regulate. The problem was not so much deregulation but regulation’s failure to evolve with the so-called “shadow banking system”.

This is a nexus of private-equity and hedge funds, money-market funds and auction-rate securities, non-banks such as GE Capital and new securities such as CDOs and credit-default swaps. It was erected over decades, partly on useful innovations and the desire for higher returns and partly as a way to avoid the cost of regulation. On the eve of the crash, more capital was flowing through it than through the conventional banks. Now that it has imploded, the banks cannot fill the hole.

To see the system at work, look at auction-rate securities, a sort of long-term debt invented in the 1980s. The innovation was to set the interest rate in an auction, typically every seven, 28 or 35 days, giving lenders the chance to sell out each time. In theory, this offered the best of both worlds. Borrowers got long-term debt at near short-term interest rates. Lenders got almost instant access to their cash at a higher yield. At its peak the market was worth some $330 billion.

Regulators are not the impartial, omniscient judges that legislation so often presumes. How could they be? In banks even senior managers have often lacked the timely and detailed information they needed to rein in their own traders. Regulators would struggle to do any better. They live in the financial markets. Many of them come to see the world in the same terms as their charges do. Rather than cast doubt on their own judgment by announcing that a long-held practice has ended in humiliation, regulators are tempted to hang on just a little bit longer.

If something needs rescuing, it is a sign that it needs regulating. By that test, an awful lot needs to be rethought after this past year. The rescues of banks, insurers and mortgage lenders have also left some cleaning up to do. It seems harsh to criticise decisions improvised under pressure over a series of autumn weekends, but the authorities were inconsistent. The rescue of Bear Stearns wiped out the common shareholders. The rescue of Fannie Mae and Freddie Mac junked both the common shares and the preferred shares (which rank above them in a bankruptcy). With Lehman Brothers, everyone lost their money. When AIG was saved, only the common shareholders suffered. But the bail-out of Washington Mutual hit both shareholders and senior-debt holders.

Any rescue is a balance. The immediate aim, to support the system, suggests an indiscriminate bail-out. Even punishing shareholders is counterproductive, because that makes raising capital harder just when capital is what the financial system needs most. On the other hand, capitalism requires the possibility of failure. Investors must pay for their mistakes.

The authorities’ inconsistency left everyone guessing about whom they would rescue and how. It spread uncertainty among potential lenders and hope among petitioners. If you had been about to buy senior bank debt, it meant that you would think twice. If, like the car industry, you wanted a soft loan, you were encouraged to press your case.

After the rescues, the state is now the biggest owner of bank shares in many economies. Some governments may be tempted to direct their banks’ lending, especially if the credit markets are not working. And forced mergers and rescues have created some banks that are unambiguously too big to fail. The market will break some of these apart, as at Citigroup. But regulators need to re-establish the idea that intervention is based on rules. The best way to do that is through re-regulation.

Schmedlap

01-04-2010, 06:49 PM

Thanks. Anyone read the Barth (http://www.amazon.com/Rise-Fall-Mortgage-Credit-Markets/dp/0470477245) book? Just curious how useful it is before I pony up $40 for a tome as thick as the NYC phone book.

tequila

01-04-2010, 07:12 PM

Some decent background stuff:

Fool's Gold (http://www.amazon.com/Fools-Gold-Corrupted-Unleashed-Catastrophe/dp/141659857X/ref=sr_1_1?ie=UTF8&s=books&qid=1262631928&sr=8-1)by Gillian Tett. Tett gives a great background on the origins of CDO and CDS, and how CDO originated as an instrument of both regulatory arbitrage and a way to actually reduce systemic risk. Instead it became a way to leverage oneself to previously unthought of levels while infecting the entire system with systemic risk.

Tett is superb at explaining complex credit instruments and their effects in layman's terms. Her focus is on leverage and the big banks --- no real focus on the retail end of subprime. To my mind this puts the emphasis where it belongs. Subprime and the real estate bubble itself would never have been a system-threatening problem if not for the way the shadow financial system leveraged itself into bailout country.

selil

01-05-2010, 12:12 AM

Nassim Taleb, Black Swans for an (easy) understanding of the math. Then every issue of the economist in the last 10 years (I'm not kidding). Then sit back and thing about it. Everybody is trying to equate this depression to the "Great Depression" even when all the economic indicators are MUCH worse. You also need the 1970s through late 1990s education in economic indicator abuse by the US and International organizations. After 1974 fuel crisis they started really messing with the numbers but Clinton made it high art. Bush just followed the script. As such comparisons are hard and that means you need to look for the changing patterns. The real estate debacle has good roots in the 1980s Japanese bubble which led to their lost decade. Lots of good literature on that too.

slapout9

01-05-2010, 12:21 AM

Yes it does. Link Below.

http://themoneymasters.wordpress.com/2009/12/28/rep-alan-grayson-has-the-federal-reserve-ever-tried-to-manipulate-the-stock-market/

Schmedlap

01-05-2010, 12:27 AM

Everybody is trying to equate this depression to the "Great Depression" even when all the economic indicators are MUCH worse.

That seems a bit alarmist to me. Let's concede that the indicators are genuinely worse. Part of the reason for the depth and slowness of recovery of the depression were poor responses by the Fed (see Friedman and Schwarz). But we've learned from that. So, even if it is worse, our response can make it less painful. Thus far, that seems to be the case. No Hoovervilles in my neck of the woods. Out here, the "poor" are still driving cars, watching TV, and about one Ho-Ho (http://www.hostesscakes.com/hohos.asp) away from type-2 diabetes.

slapout9

01-05-2010, 04:44 PM

Latest from William Engdahl on Economics and A'stan and Yemen.

http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=4680

slapout9

01-05-2010, 07:04 PM

The Still Report #9 on fixing the monetary system. You can also review the previous 8 reports at the link below.

http://www.youtube.com/watch?v=PDZioD9QfAA&feature=sub

Surferbeetle

01-08-2010, 08:49 PM

From the 8 Jan 2010 Bloomberg Pimco’s Gross Says Economy Too Fragile for Fed Exit (Update1) (http://www.bloomberg.com/apps/news?pid=20601087&sid=aCTlDwXoEwB4&pos=4) By Kathleen Hays and Cordell Eddings

Bill Gross (http://en.wikipedia.org/wiki/William_H._Gross), who runs the world’s biggest mutual fund at Pacific Investment Management Co., said the U.S. economy is too fragile for the Federal Reserve to back away from its stimulus measures.

“Four percent of the viable workforce has given up and dropped out,” Gross said in Bloomberg Radio interview. “To think the economy can snap back in the face of that is a bit of a stretch.”

U.S. employers eliminated 85,000 jobs in December after a revised addition of 4,000 in the previous month, the Labor Department said today. The median estimate of 76 economists in a Bloomberg News survey was for no change in nonfarm payrolls. The unemployment rate held at 10 percent. The underemployment rate, which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking, rose to 17.3 percent in December from 17.2 percent.

The weakening U.S. fiscal outlook may continue to push Treasury yields up faster than German bunds (http://www.bloomberg.com/apps/news?pid=20601100&sid=a67HVKoTooUA), Gross said. Projected increases in Treasury borrowing contrast with the fiscal outlook in Germany where a constitutional amendment has mandated a balanced budget for the country by 2016.

selil

01-09-2010, 12:23 AM

The Still Report #9 on fixing the monetary system. You can also review the previous 8 reports at the link below.

http://www.youtube.com/watch?v=PDZioD9QfAA&feature=sub

Is he for real? He seems to tickle my BS! bone.. Yet I don't know enough to refute him just go .. huh? His arguments seem like strawmen.

slapout9

01-09-2010, 03:47 AM

Is he for real? He seems to tickle my BS! bone.. Yet I don't know enough to refute him just go .. huh? His arguments seem like strawmen.

Real and accurate however he is a long time reporter and admits that. Milton Friedman gave full support to his concept, actually Franklin's and Lincoln's.

Here is a link to his partner (Paul Carrmack) who is a lawyer and gives more details about the plan and the Milton Friedman endordement and Ron Paul also.

http://www.themoneymasters.com/

Dayuhan

01-19-2010, 02:10 AM

Is he for real? He seems to tickle my BS! bone.. Yet I don't know enough to refute him just go .. huh? His arguments seem like strawmen.

I'd say your BS bone is functioning rather well. Good example of the Michael Moore technique, though. Cherrypick a bunch of factoids that support whatever point you want to make, ignore whatever facts don't, slam your chosen bits together, announce a conclusion, declare gravely that every fact you cite is verifiably true, and you can convince people, especially if you're preaching to the choir.

Conspiracy theories play to the "us vs them" instinct, one of the most deeply implanted reflexes of the human race, and that's why their effective. "Them" may be the bankers, the Jews, the Commies, Wall Street, The Corporations, The Aliens, The Vatican, etc and ad nauseam, but as long as it lets us point the finger somebody will buy the theory.

We've seen a block of financial history stretching back to the collective psychosis of the late 90s stock frenzy unwind, and it hasn't been pretty. One of the most fascinating aspects of the unwinding, for me, has been the success that politicians of both parties have had at diverting attention from their own rather appalling oversights and mistakes to the financial industry. Certainly Wall Street makes an admirable scapegoat and deserves a share of the blame, but short-sighted actions and policies coming from Washington were at the heart of the chaos. Oddly, much of the problem came from Democrats acting like Republicans and Republicans acting like Democrats... but I suppose that sort of thing is to be expected.

Ken White

01-19-2010, 02:24 AM

The above makes for two great Posts in one night. Well done.

Dayuhan

01-19-2010, 04:27 AM

Thanks... I'd like to say that a month or so away from the forum was about recharging batteries or something like that, but in reality it was just holiday frenzy followed by post-holiday lethargy. Hope to be around a bit more...

slapout9

01-22-2010, 01:31 AM

Bill Still radio interview.

http://theeagle939.com/secret-of-oz-on-the-drive-with-gary-nolan/

Ski

01-22-2010, 12:55 PM

All true, but I'd add the two systems reinforce themselves as you see Wall St tycoons move into important positions within the Fed and vice versa. Add in the campaign donations - and Wall St firms are #1 in donations to political campaigns - and the system starts getting real inbred.

And it's going to get much worse now that the Supreme Court has overturned a century old decision that placed caps on corporate donations:
http://www.latimes.com/news/nation-and-world/la-na-campaign-finance22-2010jan22,0,850920.story

We're really going down the road of no return here. Corporations can now effectively buy their politician of choice.

We've seen a block of financial history stretching back to the collective psychosis of the late 90s stock frenzy unwind, and it hasn't been pretty. One of the most fascinating aspects of the unwinding, for me, has been the success that politicians of both parties have had at diverting attention from their own rather appalling oversights and mistakes to the financial industry. Certainly Wall Street makes an admirable scapegoat and deserves a share of the blame, but short-sighted actions and policies coming from Washington were at the heart of the chaos. Oddly, much of the problem came from Democrats acting like Republicans and Republicans acting like Democrats... but I suppose that sort of thing is to be expected.

slapout9

01-22-2010, 02:11 PM

And it's going to get much worse now that the Supreme Court has overturned a century old decision that placed caps on corporate donations:
http://www.latimes.com/news/nation-and-world/la-na-campaign-finance22-2010jan22,0,850920.story

We're really going down the road of no return here. Corporations can now effectively buy their politician of choice.

Yes, they have indirectly bestowed a right to vote on an organzation instead of Human Beings (Citizens).

tequila

01-22-2010, 05:54 PM

Interesting to see how foreign corporations are affected by this ruling. If China Investment Corporation or Gazprom's U.S. subsidiary decided to start funding candidates or campaigns, what exactly would stop them under this ruling?

Watcher In The Middle

01-22-2010, 06:23 PM

Originally posted by Ski:

And it's going to get much worse now that the Supreme Court has overturned a century old decision that placed caps on corporate donations:
http://www.latimes.com/news/nation-a...0,850920.story

We're really going down the road of no return here. Corporations can now effectively buy their politician of choice.

Not sure I'd necessarily agree with that. Taking a contrarian viewpoint on this issue. Just a few points to consider:

1) These days, it needs to be more about disclosure than placing contribution caps. You place caps, all you do is incentivize the current players to find new & more creative ways around the System, as far as contribution caps go. Make then disclose EVERYTHING on the Internet within seven (7) calendar days, or $1k a day fine per non-disclosed contribution retroactive to the contribution date. That would put an end to all the nonsense real quick.

2) Issue you might want to consider is that the judges just decided that this whole approach of political contribution caps was an ongoing trap with the real potential for never-ending litigation. This may be a case of the SCOTUS simply sending the pols a message of "Try a different approach - we're done with this one". Can't blame them for trying to reduce their future workload.

3) Third, most pols are "A" type personalities. They are not into being controlled, certainly not by contributors (seen that effect up close and personal, more than once). And these days in particular, if you are bought and owned by "Big Anything" (Business, Labor, etc.), you are probably going to be in a world of hurt politically, because the message being received out there right from pols up for election/reelection is "You are subject to being replaced", if not outright "You're Fired!". And being an elected pol who is 'owned' by "Big Anything" looks to be a firing offense. There's a whole lot of very "cold angry" voters out there.

4) I can see why the newsies (main line old school media) are all upset over this SCOTUS decision. It doesn't do anything positive for them, but it can certainly energize the new media (Internet, the blogs, www.opensecrets.org, etc.) competition, which is already beating them (old line MSM) like a rented mule.

I look at this as "Change" - and we all know the magnificent effectiveness of these campaign contribution 'caps' to date - so let's try some "change" in the disclosure area. If the pols go out & screw it up worse, well, just a few more of then to toss out of office.:cool:

Watcher In The Middle

01-22-2010, 06:33 PM

Originally posted by Tequila:

Interesting to see how foreign corporations are affected by this ruling. If China Investment Corporation or Gazprom's U.S. subsidiary decided to start funding candidates or campaigns, what exactly would stop them under this ruling?

That's part of the problem - they're not being stopped now. It's been illegal, but that hasn't stopped them at all - they use use all sorts of loopholes, such as US branches, employees, 'bundlers' of contributions, etc., etc. There's an entire cottage industry of people who spend their entire life figuring out ways around the campaign contribution 'caps'.

It's the political version of the old "Federal Income Tax Shelter" business.:mad:

Answer: Make pol's/wannabe pol's disclose EVERYTHING (any type of contribution of any sort from anybody) on an extremely timely basis (7 days preferred) on the Internet.

"Complexity is Easy, Simplicity is Hard".

tequila

01-22-2010, 07:28 PM

It's been illegal, but that hasn't stopped them at all - they use use all sorts of loopholes, such as US branches, employees, 'bundlers' of contributions, etc., etc. There's an entire cottage industry of people who spend their entire life figuring out ways around the campaign contribution 'caps'.

Except now it's not even illegal. You can't stop them at all, no? Not even with bureaucratic legal cutouts? They can fund all the ads they want.

This is not about contributions to candidates. This is about running ads. For instance, Goldman Sachs can now run all the ads it wants against whatever candidate it wants. Before they had to form PACs or whatever, which were limited themselves, but now that doesn't matter, and they can spend whatever they wish.

Sounds more like an excellent tool of intimidation, rather than outright bribery.

http://www.nytimes.com/2010/01/22/us/politics/22donate.html?hp=&pagewanted=print

The Supreme Court (http://topics.nytimes.com/top/reference/timestopics/organizations/s/supreme_court/index.html?inline=nyt-org) has handed lobbyists a new weapon. A lobbyist can now tell any elected official: if you vote wrong, my company, labor union or interest group will spend unlimited sums explicitly advertising against your re-election.

“We have got a million we can spend advertising for you or against you — whichever one you want,’ ” a lobbyist can tell lawmakers, said Lawrence M. Noble, a lawyer at Skadden Arps in Washington and former general counsel of the Federal Election Commission (http://topics.nytimes.com/top/reference/timestopics/organizations/f/federal_election_commission/index.html?inline=nyt-org).

...

Thursday’s decision, in Citizens United vs. the Federal Election Commission (http://www.supremecourtus.gov/opinions/09pdf/08-205.pdf), “is going to flip the existing campaign order on its head,” said Benjamin L. Ginsberg, a Republican campaign lawyer at the law-and-lobbying firm Patton Boggs who has represented both candidates and outside groups, including Swift Boat Veterans for Truth (http://topics.nytimes.com/top/reference/timestopics/organizations/s/swift_boat_veterans_for_truth/index.html?inline=nyt-org), a group formed to oppose Senator John Kerry (http://topics.nytimes.com/top/reference/timestopics/people/k/john_kerry/index.html?inline=nyt-per)’s 2004 presidential campaign.

“It will put on steroids the trend that outside groups are increasingly dominating campaigns,” Mr. Ginsberg said. “Candidates lose control of their message. Some of these guys lose control of their whole personalities.”

“Parties will sort of shrink in the relative importance of things,” he added, “and outside groups will take over more of the functions — advertising support, get out the vote — that parties do now.”
In practice, major publicly held corporations like Microsoft or General Electric are unlikely to spend large sums money on campaign commercials, for fear of alienating investors, customers and other public officials.

Instead, wealthy individuals and companies might contribute to trade associations, groups like the Chamber of Commerce or the National Rifle Association, or other third parties that could run commercials.

Previously, Mr. Noble of Skadden Arps said, his firm had advised companies to be wary about giving money to groups that might run so-called advocacy commercials, because such activity could trigger disclosure requirements that would identify the corporate financers.

“It could be traced back to you,” he said. “That is no longer a concern.”

Ken White

01-22-2010, 08:01 PM

Quoted:“Parties will sort of shrink in the relative importance of things...”

and

“It could be traced back to you,” he said. “That is no longer a concern.”

The first is great news -- the Parties are the far more significant problem. The second is true only in the legal sense -- that factor will affect the way the market treats the Company or organization. The American body politic, collectively, is a lot smarter than the media and the so-called educated elite -- and the Politicians -- think they are.

The upshot is that things will change but not much and as much or more for the better as for worse. Consider also that the Federal Government treats Corporations as citizens in a great many respects. (LINK - .pdf; Scroll down to Section I) (http://www.google.com/url?sa=t&source=web&ct=res&cd=10&ved=0CFYQFjAJ&url=http%3A%2F%2Fcaselaw.findlaw.com%2Fdata2%2Fcir cs%2Fdc%2F081165p.pdf&ei=fQJaS-SNHYK4Nta4pY8P&usg=AFQjCNFxfMOmv_fD1-MHtrn1uAPNM1wYmA&sig2=aQImi__gi8thAwx8eKQNBQ).

tequila

01-22-2010, 08:30 PM

The second is true only in the legal sense -- that factor will affect the way the market treats the Company or organization. The American body politic, collectively, is a lot smarter than the media and the so-called educated elite -- and the Politicians -- think they are.

Please explain what you mean by this. Somehow I don't think the average American voter has telepathy that will allow him to suss out which front organization gets funding from what source. That doesn't happen now and shooting the disclosure rules in the kneecaps will not help them do so in the future.

Watcher In The Middle

01-22-2010, 10:26 PM

Originally posted by Tequila:

This is not about contributions to candidates. This is about running ads. For instance, Goldman Sachs can now run all the ads it wants against whatever candidate it wants. Before they had to form PACs or whatever, which were limited themselves, but now that doesn't matter, and they can spend whatever they wish.

Sounds more like an excellent tool of intimidation, rather than outright bribery.

In politics, depends upon what your defination is of "contribution" is. If it's a $1 mil advocacy ad campaign that I as the candidate don't have to fund, that's one really nice "contribution" in practice.

It may not legally be classed as a "contribution", but it sure barks like one.

The bigger point to me is that this ruling really has the potential to simplify the process instead of making compliance with campaign finance rules even more mind numbingly complex.

Re: The PAC limits. They just went out and formed more PAC's, 527's and all the others.

About PAC's (http://en.wikipedia.org/wiki/Political_action_committee)

About 527 Organizations (http://en.wikipedia.org/wiki/527_Organization)

I'm just looking for more transparency from everybody involved, and this SCOTUS ruling didn't hurt that at all.

Can one result of this ruling provide an excellent tool of intimidation? Yes, but truthfully, the intimidation tool has always been there, it just wasn't quite as obvious - see the 527 Organizations listed above.

Worked very well at the primary level, not so well in a general election.

Watcher In The Middle

01-22-2010, 10:42 PM

Originally posted by Ken White:

The second is true only in the legal sense -- that factor will affect the way the market treats the Company or organization. The American body politic, collectively, is a lot smarter than the media and the so-called educated elite -- and the Politicians -- think they are.

Agreed. These days in particular, once the voters/potential voters get even a whiff of a potential campaign to manipulate their vote by an "outside entity", they'll turn and you've (if you are running the advocacy campaign) just lost them, and there doesn't seen to be any evidence out there (to date, at least) of anybody getting them back.

Btw, just as an aside, if I wanted to kill off anybody's chances at getting elected to a congressional office in this election cycle, I'd have some of the big advocacy groups from the 2006/2008 election cycles run big style ad campaigns for them - likely be the Kiss of Death.

Ken White

01-23-2010, 01:10 AM

Please explain what you mean by this. Somehow I don't think the average American voter has telepathy that will allow him to suss out which front organization gets funding from what source...Essentially proves my point. ;)

No telepathy to it; they just look up from their navels -- or LiLo's -- or the BBQ Grill on occasion to see what's going on and they can spot BS from a mile away. I've watched 'em do it and gotten a lot of laughs over many years watching it happen. See Massachusets, 19 Jan 10...:D

See also Watcher in the Middle below. See NJ, VAS and others earlier. I'll bet you laugh at or deride the Tea Party folks; the Media certainly has. Missed that boat, they did.
That doesn't happen now...Of course it happens now. Why do you think John Kerry got beaten? Why did McCain get beaten? How did Obama win -- and now what's happening to Obama. The great unwashed may get scammed but they figure it put fairly quickly and will repay you for chicanery...
...and shooting the disclosure rules in the kneecaps will not help them do so in the future.Disagree, it will make some differences but most will be offset by increased money in the process.

Newt Gingrich is a twit IMO and doesn't need to be elected to any office but he's right in that elections are grossly underfunded -- that deliberately by Congress in an effort to protect incumbents. They'll be the losers -- and should be. The Republicans think that the Corporations will outspend the Unions and thus the Democrats will be discomfited. They're right but the Unions will work harder and offset that advantage.

Again see Watcher in the Middle. The decision will change techniques but will have little effect on results. :cool:

slapout9

01-23-2010, 03:52 AM

The Republicans think that the Corporations will outspend the Unions and thus the Democrats will be discomfited. They're right but the Unions will work harder and offset that advantage.

Don't know if they can Ken. Corporations have a lot deeper pockets and there are a lot more of them then Unions. Playing field is not even close to being level in that respect.

Ken White

01-23-2010, 04:53 AM

Unions will. I won't even start on the pernicious influence and abilities of the NEA and AFT...

The big hurt on this will be on incumbents -- as it should be. The McCain-Feingold incumbent protection bill was a bad bill and a poor scam on the unwary. The Court should have knocked it down long ago.

This is whole deal hilarious IMO not least because the Congress will go berserk to craft a new law to restore their protection and the hypocritical NYT slams the decision -- but doesn't mention that they, a corporaton had no muzzle at all... :rolleyes:

This is a long way from the Thread topic, "Financial Crisis." ;)

Ski

01-23-2010, 01:11 PM

There's a clear linkage to the financial crises, Ken. We're talking about multi-billion dollar corporations here and now they have additional powers to influence the political process even more than they have been.

I have a gut feeling that a number of second and third order effects that no one anticipated are going to arise from this decision. Some will be beneficial, some will not.

In one sense, I guess this good because it does introduce an additional amount of transparency to the donation process. But on the other hand, there was enough concern over this kind of donation policy a century ago that the Supreme Court had to get involved and make it illegal.

tequila

01-23-2010, 01:38 PM

Newt Gingrich is a twit IMO and doesn't need to be elected to any office but he's right in that elections are grossly underfunded -- that deliberately by Congress in an effort to protect incumbents. They'll be the losers -- and should be. The Republicans think that the Corporations will outspend the Unions and thus the Democrats will be discomfited. They're right but the Unions will work harder and offset that advantage.

Well, Ken, you are probably the only person I know who has ever said that the problem with our elections is that there isn't nearly enough money in it.

I'd like to hear exactly how unlimited donations from both foreign and domestic private interests is going to help our democracy or our institutions.

I agree with Ski that the result decision has an enormous amount to do with financial crises. One of the largest problems revealed by the current crisis was the degree of institutional and regulatory capture by private interests. This decision will only further accelerate the process.

slapout9

01-23-2010, 02:43 PM

Didn't Marx say you can't separate politics from economics? He was a lousy politician but he was actually a pretty good economist.

Schmedlap

01-23-2010, 04:37 PM

I'm guessing that if Goldman Sachs were not permitted to donate to campaigns that they still would have found a way to get the money that they had tied up in CDS's through AIG (even though they shorted AIG stock as a hedge to protect themselves from that loss). There's more to our broken system of cronyism than just campaign contributions. Griping about campaign contributions is like griping about executive pay. It's just one cockroach in an infested house.

Ken White

01-23-2010, 08:06 PM

"Griping about campaign contributions is like griping about executive pay. It's just one cockroach in an infested house."The financial crisis owes much more to simple human greed, political connivance and venality than it does to regulatory or statutory failure induced by campaign financing irregularities. The laws overturned for example long pre-date the crisis and yet it occurred...

“The problem isn’t too little money in political campaigns, but not enough.” Newt Gingrich on campaign reform. (LINK, 12th item) (http://rackjite.com/web/newt_gingrich.htm). As I said, Newt's a twit but he did say that among a few (very few) other smart things and I agree with him. So do a lot of other folks but I'm not going to waste time Googling them. Tequila, Ski and probably Slap do not agree. This guy (LINK) (http://www.cnn.com/2009/POLITICS/06/09/zelizer.endless.campaign/) does not agrees; he advocate public financing, yet another way to enhance State control and protect incumbents. Sounds like a trip to European style 'Social Democracy' to me. Sorry, to that I'm strongly opposed -- but then I'm a Dinosaur. I grew up before the US government got as big as it now is -- or as abysmally stupid as it now is. I can even rmember when the Senate was respected. :wry:

The bad news for those that would like such a social democratic nation is that while it will probably happen eventually, there are enough folks in the US who agree with me that it is not a good thing to deter it for a good many years. Slap and I'll probably both be gone and the rest of you will be old and gray -- if you're still around when that bottom is reached.

Yes, there is a tenuous relationship between this and the financial crisis but check this LINK (http://en.wikipedia.org/wiki/Campaign_finance_in_the_United_States#Corporate_an d_Union_Activity) and you'll see that the 'limitations' in place prior to the decision were (a) miniscule and (b) hypocritical as the media had carte blanch and the corporations could fund said media though 'grants.' As Ski said:
I have a gut feeling that a number of second and third order effects that no one anticipated are going to arise from this decision. Some will be beneficial, some will not.

In one sense, I guess this good because it does introduce an additional amount of transparency to the donation process. But on the other hand, there was enough concern over this kind of donation policy a century ago that the Supreme Court had to get involved and make it illegal.The issue is really one of freedom of speech. Many politicians believe that that freedom is vastly over rated, particularly those of a leftist persuasion and mostly when it attacks them or the State. I happen to disagree. So did the folks who wrote the Constitution.

What that earlier Supreme Court did was rein in excessive and rampant capitalistic overkill by (in typical US fashion) by overreacting and swinging the pendulum too far in the opposite direction. We cannot enact sensible laws because the two year term means that Congroids MUST be seen to do something... No matter how wrong or dumb it might be. So we overreact in each direction and only rarely hit equilibrium.

What this Supreme Court did was overturn an excessively restrictive and poorly written law that was designed to protect incumbents and a poor earlier decision designed to enhance State power. IOW, they whittled away some of a competing branch's capability to enhance their own power, possibly at the Judicial branch's expense. Little natural tension there. Congress will almost certainly respond with a narrower and hopefully better law that restores the equilibrium.

That's the way the system is supposed to work.

slapout9

01-24-2010, 04:20 AM

Slap and I'll probably both be gone and the rest of you will be old and gray -- if you're still around when that bottom is reached.

The Young un's will have to figure it out:wry:

Ken White

01-24-2010, 05:23 AM

and good luck to 'em, I say. :eek:

Saw this earlier (LINK) (http://www.gallup.com/poll/125333/Public-Agrees-Court-Campaign-Money-Free-Speech.aspx). I'm not much of a believer in polls, the public is pretty fickle on some things but I think this one has some interesting figures, particularly where it's broken down by party or ideological leaning...:wry:

I think that probably means that most agree it's free speech but many also agree on some limits for 'groups' The issue will be the type of limits which likely means Congress will have to back off their stupid incumbent protection scams -- that is a really good thing...

Like I said, the body politic collectively generally gets it right and aren't nearly as dumb as many really wish to believe... :cool:

Ski

01-26-2010, 02:23 PM

The lost decade - job growth during the last decade was stagnant.

http://www.washingtonpost.com/wp-dyn/content/article/2010/01/01/AR2010010101196.html?hpid=topnews

slapout9

01-26-2010, 03:19 PM

Is Ben Bernanke the greatest Financial Criminal of All Time? Lets find out.
Link to No Audit-No Bernanke. Transparency is critical for Democracies to survive and we have had very little of it recently. It is our money.......who got it and what did they do with it? The answer will be ugly but we need to know.

http://themoneymasters.wordpress.com/

Ski

02-09-2010, 10:19 PM

Couple of bad news stories, unfortunately:

Social Security is running out of cash:
http://finance.yahoo.com/focus-retirement/article/108747/next-in-line-for-a-bailout-social-security?mod=fidelity-readytoretire

Unemployment insurance is skyrocketing and businesses are getting hard:
http://money.cnn.com/2010/02/09/news/economy/unemployment_taxes/index.htm?section=money_topstories&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_topstories+%28Top +Stories%29&utm_content=My+Yahoo

bourbon

03-10-2010, 10:25 PM

bourbon

03-10-2010, 10:36 PM

Video: Harry Markopolos (http://www.thedailyshow.com/watch/mon-march-8-2010/harry-markopolos), The Daily Show - Comedy Central, March 8, 2010.

Schmedlap

03-10-2010, 11:40 PM

Couple of bad news stories, unfortunately:

Social Security is running out of cash...

That's news??:confused:

slapout9

03-11-2010, 12:24 AM

Latest and one of the most important articles by James K. Galbraith on why Public Debt is good and how it is impossible for a Government to run out of money:) Exposes a lot of myths about money and how it drives economic benefit.

http://www.thenation.com/doc/20100322/galbraith

Ski

03-11-2010, 03:27 AM

The rate of depletion is far faster than expected.

There have been a number of very interesting stories in the economic world over the last few months...I've been ass deep in schoolwork at SAMS and have only been able to screw around on the Net late in the evening for brief periods.

The EU is having major problems - specifically with the PIGS - that's Portugal, Ireland, Greece and Spain..which will ripple effects across the world.

The unemployment numbers are still going up in the US, the rate is slowing down.

The DJIA is way higher than it should be...where is the money coming from?

That's news??:confused:

slapout9

03-11-2010, 04:25 AM

The DJIA is way higher than it should be...where is the money coming from?

The Bailout money. Lending is down to it's lowest level since the Depression because Big Banks (Brokerage Houses) can make more money swapping stocks than investing in the Real Economy, part of the original reason the Glass-Stegall act was created during the Depression.

Schmedlap

03-11-2010, 04:45 PM

The DJIA is way higher than it should be...where is the money coming from?

If that is what you think, then you should be shorting the market (I wrote a bunch of covered calls yesterday :D). But, as for where the money is coming from - it's coming from those areas of the economy that are perceived to be greater risks than the stock market. People fear inflation and interest-rate risk, so they're running to equities.

slapout9

03-11-2010, 06:16 PM

Schemd, it is to soon for inflation, the immediate threat is still deflation, after that will come the inflation and I agree with you it will come. The immediate goal of the Kleptocracy is to consolidate Banking power. The latest FDIC report shows more banks are in the red zone than ever before and since they cant face the public rage of another bailout......Big Banks will buy small and medium banks again concentrating power more than ever. It is already starting to happen. Pay attention to SunTrust......I grew up with and went to school with alot of those folks;). What you are seeing happen was being talked about all the way back in the Reagan years. Just took them a little longer than planned.

http://www.marketwatch.com/story/banks-rally-on-ma-speculation-2010-03-10

Schmedlap

03-11-2010, 06:33 PM

I think that's a poor explanation.

Who regulates derivatives? Who regulates futures? Okay, now who regulates securities that are derivatives and futures (futures options, for example)? There's a turf war there. Why? One Congressional committee oversees the CFTC. Another committee oversees the SEC. The former committee gets campaign contributions from agricultural firms and other commodities traders. The latter committee gets campaign contributions from bankers. Arguably, the CFTC and SEC two could perform better oversight if they merged or broke off portions of their bodies and formed a separate commission that focused on hybrid securities. But if the first course is pursued then then one committee loses some large donors. If the other course is pursued the both committees will fight for oversight of the new commission. As Barney Frank put it, in a surprisingly candid moment, "it is not politically feasible." And there it is.

Then there are insurance companies that are regulated at the state level. They like being regulated at the state level because they have developed patronage networks and relationships with state legislators. They don't want those long-cultivated relationships severed to be regulated at the federal level (there are also legitimate reasons to oppose it, but those are secondary).

Never attribute to a grand conspiracy what can be explained by politicians commandeering the legislative process to entrench themselves in power.

I agree that the banking "industry" strongly desires fewer rules and less responsibility so that it can continue to receive what is, in effect, a free government insurance policy for the downsides to its trading. But, again, this is a relatively simple fix on paper that will not be fixed because the legislators can't get past their own self-interests.

Steve the Planner

03-11-2010, 07:10 PM

Ken White

03-11-2010, 11:07 PM

"Assuming the project basket was wisely selected (not too much of the required pork)..." :D

Fuchs

03-11-2010, 11:29 PM

Slap:

Why public debt is good?

Last night, I was at a Board of Education meeting, and the subject was public debt.

Montgomery County Maryland figured out that they could make big strides on their school construction backlog by borrowing more money to get cheap contracts now (30% below three years ago, with all energy factors included).

Assuming the project basket was wisely selected (not too much of the required pork), the taxpayers, and jobs should do well.

Who but government could do this?

Steve

There's one problem: Politicians are humans.

Sure, you can calculate that it's economically and fiscally superior to accept some debt now, invest and pay back with the fruits of the project.

Politicians are great in at the "add debt thing". They're not o great at the "invest" thing. Finally, it's the exception of the rule if a politicians does the "pay back" thing by himself, without being forced to do it.

Good intentions - human imperfection - poor result.

Besides; the U.S. is a deficit country (state, federal public debt & consumer debt). That is not sustainable. A "balance" attitude is necessary or else all you'll get is a bit make-up that covers the real problems till the next, bigger crash.

The financial crisis with all its disgusting stories is just a symptom, after all.

jmm99

03-12-2010, 04:45 AM

this one:

from Fuchs
Besides; the U.S. is a deficit country (state, federal public debt & consumer debt). That is not sustainable. A "balance" attitude is necessary or else all you'll get is a bit make-up that covers the real problems till the next, bigger crash.

Hopefully (neither plan nor stategy), the "next, bigger crash" will not occur; but I expect exactly that to happen.

The example used by Steve is more likely to occur at the local level (municipal) with effective governance based on personal fiscal responsibility. Even at the local level, there are vast differences between municipalities (those who feed at the trough and those that don't). From a larger view (Fuchs as to Federal, state and national consumer debt), those fiscally-responsible munis will not affect that picture to any significant extent.

Regards

Mike

Xenophon67

03-15-2010, 12:26 AM

......but were afraid to ask.

Absolutely comprehensive economics videos. I believe his analysis to be objective with the purpose being to educate.

Khan Academy: http://www.khanacademy.org/ (http://www.khanacademy.org)

Also RAND Organization (http://www.rand.org/pubs/online/) produces some outstanding publications. (Ignore the price/add to cart and go to the pdf download)

TristanAbbey

03-16-2010, 10:34 PM

Fuchs

03-16-2010, 11:03 PM

You should look at trade balances instead.

Finance is 99.9999999% illusion and 0.0000001% paper.

Dayuhan

03-16-2010, 11:59 PM

Do you folks think there's a need for a layman's guide to global finance, written with an eye towards a security/defense audience? Could cover things like the potential impact of a shift in global reserve currency, impact of oil volatility, touch upon sovereign wealth funds, things like that...

It would probably useful, as 90% or more of what's written for the layman on the subject is agenda-driven nonsense. Of course many who read on the topic seem primarily interested in hearing what they want to hear, so the agenda-driven stuff often makes them happy.

slapout9

03-17-2010, 04:50 AM

Bill Still was down my way recently:)so here is the Still report#12 on the Economy.

http://www.youtube.com/watch?v=QYIhc3GyANI&feature=sub

selil

03-17-2010, 01:06 PM

Besides; the U.S. is a deficit country (state, federal public debt & consumer debt). That is not sustainable. A "balance" attitude is necessary or else all you'll get is a bit make-up that covers the real problems till the next, bigger crash.

One quibble. States by law (1 exception) are not allowed to run a deficit. States are required to balance their budgets (http://www.ncsl.org/issuesresearch/budgettax/statebalancedbudgetrequirements/tabid/12660/default.aspx)and even scope spending quarterly based on realized tax revenues. There is also a difference between a deficit and debt. A deficit is when you spend more money than you take in. Debt is when you owe on some asset. Consumer debt isn't necessarily bad some forms are actually good (when used for realized goods or balanced by real property value). A deficit is usually a political football depending on where you allegiances lie. A deficit can be a moral issue, or an economics issue with flavors of each blending between the two.

tequila

04-16-2010, 07:07 PM

Goldman Sachs Sued by SEC for Fraud Tied to CDOs (http://www.bloomberg.com/apps/news?pid=20601087&sid=aJnzv8MC0s7k)

Goldman Sachs Group Inc. (http://www.bloomberg.com/apps/quote?ticker=GS%3AUS) was sued by U.S. regulators for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression. The firm’s shares tumbled as much as 16 percent and financial stocks slumped.

Goldman Sachs created and sold CDOs tied to subprime mortgages in early 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them, the Securities and Exchange Commission said in a statement today. Billionaire John Paulson (http://search.bloomberg.com/search?q=John%0APaulson&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1)’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing. The SEC also sued Fabrice Tourre (http://search.bloomberg.com/search?q=Fabrice+Tourre&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), a Goldman Sachs vice president who helped create the CDOs.

“The product was new and complex but the deception and conflicts are old and simple,” SEC Enforcement Director Robert Khuzami (http://search.bloomberg.com/search?q=Robert%0AKhuzami&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.” ...

Decent backgrounder (http://www.mcclatchydc.com/goldman/)from McClatchy.

Just a civil case, so no perp walks anytime soon, but it's nice to see at least someone being brought to book for their willingness to blow up investors (and the entire U.S. financial system in the end) at will.

Just to pimp this great Propublica piece (http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble)one more time, the parties involved (Paulson & Co and Goldman) were doing a variation of the Magnetar trade - creating a CDO designed to fail, selling the CDO to investors, and buying CDS insurance to profit from its failure. Paulson as the driving force, with Goldman as enabler and marketer to the investors. Goldman is being sued by the SEC for essentially hiding information/lying to investors.

AdamG

05-12-2010, 08:13 PM

Related -

Will the great recession lead to World War IV?
Global stagnation strengthens the nationalist right everywhere, potentially leading to a whole new kind of cold war

http://www.salon.com/news/opinion/feature/2010/05/11/great_recession_world_war_iv/index.html

Uboat509

05-14-2010, 01:39 PM

A friend of mine sent me this (http://www.spiegel.de/international/europe/0,1518,692666,00.html). I am not usually a der Spiegel fan but I thought that this was a very balanced article and well written, not to mention scary.

Schmedlap

05-15-2010, 01:44 PM

[/URL]Just to pimp this great [URL="http://www.propublica.org/feature/all-the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble"]Propublica piece (http://www.bloomberg.com/apps/news?pid=20601087&sid=aJnzv8MC0s7k)one more time, the parties involved (Paulson & Co and Goldman) were doing a variation of the Magnetar trade - creating a CDO designed to fail, selling the CDO to investors, and buying CDS insurance to profit from its failure. Paulson as the driving force, with Goldman as enabler and marketer to the investors. Goldman is being sued by the SEC for essentially hiding information/lying to investors.

I haven't read through any of the documents on this yet. But my first impression is: "isn't this what a market maker does?" When dealing with sophisticated investors, generally you don't need to spend lots of time worrying about whether that investor has made a reasonable assessment of risk exposure - it's assumed that they're capable of doing it themselves, hence the characterization of "sophisticated investor." I guess I don't understand why this is an issue.

That's not a defense of Goldman, but just an initial reaction. Am I overlooking something?

Watcher In The Middle

05-18-2010, 05:41 AM

Originally posted by Schmedlap:

I haven't read through any of the documents on this yet. But my first impression is: "isn't this what a market maker does?" When dealing with sophisticated investors, generally you don't need to spend lots of time worrying about whether that investor has made a reasonable assessment of risk exposure - it's assumed that they're capable of doing it themselves, hence the characterization of "sophisticated investor." I guess I don't understand why this is an issue.

That's not a defense of Goldman, but just an initial reaction. Am I overlooking something?

I'd say you are probably technically correct, except the original intent of a "market maker" as I understand it was that a "market maker" was not only to 'make a market' in a number of stocks (or commodities, etc.), but also to stabilize the market when imbalances occurred. Except it looks like GS & their fellow Wall Street trader types decided that it was immensely more profitable to "game" the market, by creating built-in "imbalances", so the other party would profit at the expenses of the sheep being sheared and gutted. The only problem they had is they (GS) lost money because they couldn't offload the slop fast enough, and had to hold onto part of the position, and it tanked on them.

After all, the best road to making a sure profit is a sure thing. And it looks like this particular game was rigged from the start.

Having spent time in the recent past making regular daylong visits (once a week) to a Federal court building located downtown in a very large jurisdiction for almost a 2 year (22 months) period, I can tell you that these folks better be hitting their knees praying every single night (and morning) that the DOJ doesn't take this type of case in front of a federal GJ as part of a criminal investigation, because IMO, it's going to be even money (at worst) that indictments would get handed down.

Particularly if they (as witnesses) responded to GJ member's questions the way they responded to the Senators questions. Splitting hairs isn't the smart move in that type of environment.

That's not to say they would be convicted - that's not the responsibility of a Grand Jury. But if you are a big financial firm, those indictments would be the kiss of death.

IMO, it isn't over - not by a long shot.

Surferbeetle

05-18-2010, 07:43 AM

From the NYT, The Euro’s Lost Promise (http://www.nytimes.com/2010/05/18/opinion/18marsh.html?pagewanted=1&partner=rss&emc=rss), By DAVID MARSH
Published: May 17, 2010

The underlying story of how 16 diverse European currencies were fused into the euro combines the contorted fortunes of two powerful German politicians who sought to tame Europe’s past and shape its future, along with a French president who wished to fasten economic shackles around the might of a reunified Germany. Ultimately, too, it is the story of how the Old Continent struggled to break free from the uncertain political and economic embrace of the United States.

The pivotal moment in the formation of Europe’s monetary union came in December 1991 at a meeting in Maastricht in the southern Netherlands. Two years after the fall of the Berlin Wall, European leaders set a political path toward a Europe-wide currency — a holy grail that had been pursued since the Roman Empire. The new money would complete the European program of liberalized cross-border trade, promote the old dream of political unity, rival the dollar as an international reserve currency and — the most complicated objective — prevent an enlarged Germany’s domination of Europe by bringing its currency under European control. The mighty Deutsche mark needed to be cast into the furnace of European unity and forged into the euro.

Yet even as it predicted the trouble, Germany failed to anticipate that the countries running a trade surplus would inevitably need to finance the southern states’ shortfalls. The five most heavily indebted euro members owe German banks an estimated 700 billion euros (nearly $900 billion), and these German surpluses, once regarded abroad as a symbol of great strength, have emerged as a dangerous source of vulnerability. Most sickeningly for the Germans, the indebted nations are likely to say that their debts need to be reduced or restructured in the name of European solidarity.

A German revolt against the attenuated independence of the European Central Bank appears likely, and could jeopardize parliamentary approval for the rescue package. The Germans feel mistreated by a monetary system that makes them pay for others’ largely self-inflicted misfortunes.

And the trouble is far from over. The austerity programs for errant southern states ordained by European governments and the International Monetary Fund are likely to lead to severe unemployment and civil unrest. Some southern euro members may choose to return to their former currencies — or they may be asked to do so by other states.

tequila

05-18-2010, 01:09 PM

I haven't read through any of the documents on this yet. But my first impression is: "isn't this what a market maker does?" When dealing with sophisticated investors, generally you don't need to spend lots of time worrying about whether that investor has made a reasonable assessment of risk exposure - it's assumed that they're capable of doing it themselves, hence the characterization of "sophisticated investor." I guess I don't understand why this is an issue.

That's not a defense of Goldman, but just an initial reaction. Am I overlooking something?

A couple of things.

GS was not just out there posting market prices and collecting the tolls on a liquid market, like vanilla bonds or stocks. GS created Abacus, helped stuff it (knowingly) with synthetics that referenced crap securities, and pushed it to investors without advising them that it designed Abacus at the request of John Paulson specifically so that it would fail and fail badly.

There was no "market" in Abacus to make. GS had a time bomb it wanted to sell because it thought it would make money from the explosion, and it hid information in order to sell it.

Schmedlap

05-18-2010, 02:00 PM

I'm not one to assume Goldman is not underhanded and unethical, but I am very hesitant to accept that they were so stupid as to do something this big if it breached such a fundamental issue as materiality. If I can be humored in my role of devil's advocate one more time...

GS created Abacus, helped stuff it (knowingly) with synthetics that referenced crap securities...

But aren't sophisticated investors assumed to know the risks inherent in this? Aren't they expected to recognize extremely high risk (or crap)?

... and pushed it to investors...
What does that mean? Somehow forced it upon them? Lied about what synthetics were in the CDO?

... without advising them that it designed Abacus at the request of John Paulson...
Not identifying Paulson by name seems like a normal - or at least reasonable - business practice. It seems fairly obvious that there was one or more counterparty to the trade. Or am I assuming wrongly?

...specifically so that it would fail and fail badly.
This seems to be the most problematic assertion. How certain can one be that an investment is going to fail? And even if you can be 99% certain, aren't there always going to be investors in a raging bull market willing to take the bet anyway, either in search of high risk or in search of a hedge against other bets they've made on that sector of the market going in another direction?

There was no "market" in Abacus to make. GS had a time bomb it wanted to sell because it thought it would make money from the explosion, and it hid information in order to sell it.
If the investors know what the CDO was composed of, then I don't see how the assertion of hiding information can survive. "Here's a product and here is what is in it" - a sophisticated investor should be able to weigh the risk of that without knowing, "oh, by the way, John Paulson (or Warren Buffett or George Soros or the old lady down the street) is on the other end of this deal."

tequila

05-18-2010, 06:05 PM

But aren't sophisticated investors assumed to know the risks inherent in this? Aren't they expected to recognize extremely high risk (or crap)?

Sadly many institutional investors are not really all that sophisticated and often take the legal minimum amount of due diligence. For some the AAA rating slapped on the upper tranches of Abacus and other CDOs by ratings agencies paid for by the banks is enough.

What does that mean? Somehow forced it upon them? Lied about what synthetics were in the CDO?

Sold it to them through a combination of ratings agency gaming/corruption, old fashioned salesmanship, and purposely making the CDO and its prospectus radically complex. Obfuscation through complexity is part of the plan --- it allows GS to pose as a knowledgeable adder of value rather than a snake oil salesman, allowing for higher fees and simultaneously lulling the investor into a false sense of security. As a Bankers Trust salesperson once said about the clients: "First you lure them into the water, then you #### 'em."

Not identifying Paulson by name seems like a normal - or at least reasonable - business practice. It seems fairly obvious that there was one or more counterparty to the trade. Or am I assuming wrongly?

Incorrect. What went on here is that Goldman helped ACA, the CDO manager, form an entity called Abacus which then issued securities. Goldman employed ACA to help manage Abacus and underwrote Abacus' securities, which formed the CDO and were then sold to investors. Paulson technically was on the buy side just like the investors --- he was an investor, the guy who bought the highest-risk tranches. Except Paulson and Goldman both knew that Abacus' securities were never meant to pay off in full but rather chosen instead to go bust.

This seems to be the most problematic assertion. How certain can one be that an investment is going to fail? And even if you can be 99% certain, aren't there always going to be investors in a raging bull market willing to take the bet anyway, either in search of high risk or in search of a hedge against other bets they've made on that sector of the market going in another direction?

Certainty is never there, but investors who bought the upper levels of these CDOs were not looking for wild gambles. The super-senior and senior tranche buyers were often limited by law from buying anything not rated AA+ or higher.

Now why the upper tranches of Abacus CDOs were rated highly is another story, one for the ratings agencies to answer, but a large part of this is also due to gaming by the banks. The ratings agencies published their risk assessment models for CDOs to show how transparent they were --- this allowed quant guys on CDO desks to design tranches that would rate highly in the model as opposed to reality. Also a lot of guys on these desks were former ratings agency employees, and a lot of ratings agency employees hoped to move onto trading desks at big banks, so a certain amount of insider knowledge and collusion is present as well. This is not a particularly large community.

If the investors know what the CDO was composed of, then I don't see how the assertion of hiding information can survive. "Here's a product and here is what is in it" - a sophisticated investor should be able to weigh the risk of that without knowing, "oh, by the way, John Paulson (or Warren Buffett or George Soros or the old lady down the street) is on the other end of this deal."

GS took advantage of its pose as a neutral underwriter of Abacus' securities in order to act as an agent for another client, John Paulson. It should have disclosed that it was not a neutral underwriter, but rather acting for Paulson in setting up Abacus.

Felix Salmon has the Abacus prospectus here (http://blogs.reuters.com/felix-salmon/2010/04/23/the-abacus-prospectus/), you can peruse for yourself.

bourbon

06-16-2010, 04:29 PM

SEC 'Revolving Door' Under Review (http://online.wsj.com/article/SB10001424052748703280004575309061471494980.html), by Mcginty. The Wall Street Journal, 16 June 2010.

A Senate panel asked the Securities and Exchange Commission's inspector general to review the agency's "revolving door," which shuttles many SEC staffers into jobs with the companies they once regulated.

In a letter sent Monday, Sen. Charles Grassley (R., Iowa), the ranking minority member on the Senate Finance Committee, asked David Kotz, the inspector general, to review the recent departure of a top official in the SEC's Division of Trading and Markets who took a job with a prominent high-frequency trading firm.

That move coincided with a continuing SEC examination of how high-speed, computer-driven trading in stocks and other securities is affecting markets.

Schmedlap

06-16-2010, 05:42 PM

Bourbon,

What do you think about that issue? My understanding is that the SEC doesn't pay enough to compete. But doing time at the SEC is a good stepping stone to the regulated companies because the regulated entities like having someone familiar with decision making within the regulatory agency or (depending on how cynical you are) they like having someone who can network with the regulatory agency to influence decisions. The regulator worker bees thus like to start out at the lower-paying SEC with the intent of moving on to the regulated entities. Thus, the revolving-door.

The problem from my fairly uninformed perspective is that if the SEC et al are going to compete with the private sector then the expenses of the SEC et al are going to balloon quickly and the pendulum is going to swing too far away from regulatory coziness/capture toward regulated entities and regulatory agencies wholly unfamiliar with one another.

What do you think of the idea that has been floated of - to put it simplistically - permitting people to trade on insider information? Rather than continuing with this regulatory framework that seeks to root out insiders (often unsuccessfully), why not amend the securities laws/rules to exploit the new speed with which information flows by permitting insider trading and let the more perfect information be priced into assets? It seems like it would help to reign in costs and free up cash to pay more competitive wages to the fewer regulators who would remain.

Thoughts?

bourbon

06-17-2010, 01:32 AM

or (depending on how cynical you are) they like having someone who can network with the regulatory agency to influence decisions.
Not cynical enough. It has gotten so bad that some of these officials are abdicating their duties during their time in government service for the prospect of a fat payday down the road. The old play-along to get-along. The SEC just recently settled (http://www.nytimes.com/2010/05/28/business/28pequot.html) an embarrassing case in which SEC officials engaged in such disgraceful activity (http://www.deepcapture.com/email-illuminates-%E2%80%9Cdeep-capture%E2%80%9D-of-the-sec/).

Senator Grassley knows all about this stuff, he oversaw the joint staff report by the Senate Finance and Judiciary Committees into the Pequot matter (PDF (http://finance.senate.gov/library/prints/download/?id=f9d94204-7602-49f7-8bab-cb932c05310e): "The Firing of an SEC Attorney and the Investigation of Pequot Capital Management", caution: 24mb file). My guess, as this latest incident suggests, is that these are not isolated incidents.

I will get back to your broader question. I apologize for being so literal about this matter, but it just makes my blood boil.

slapout9

09-11-2010, 03:26 AM

Latest from James Galbraith on President Obama's Plan B for the economy.

http://growth.newamerica.net/publications/policy/thoughts_on_a_plan_b

Fuchs

09-11-2010, 12:34 PM

One quibble. States by law (1 exception) are not allowed to run a deficit. States are required to balance their budgets (http://www.ncsl.org/issuesresearch/budgettax/statebalancedbudgetrequirements/tabid/12660/default.aspx)and even scope spending quarterly based on realized tax revenues. There is also a difference between a deficit and debt. A deficit is when you spend more money than you take in. Debt is when you owe on some asset. Consumer debt isn't necessarily bad some forms are actually good (when used for realized goods or balanced by real property value). A deficit is usually a political football depending on where you allegiances lie. A deficit can be a moral issue, or an economics issue with flavors of each blending between the two.

Well, I studied economics with emphasis on national economics for five years, so I'm well aware of the difference between deficit and debt.
To point at debt equals pointing at a history of deficits.

Consumer debt is not good - it's not good at all at the macroeconomic level.
For every loaned buck spent by a consumer another consumer spends one buck less - either on consumption or on investment.

I know and understand that it's part of U.S. mythology that consumer spending drives the economy, but that's really not science. The economy grows because of investments larger than deprecations, workforce growth and technological progress.
More consumption can ceteris paribus at most improve production capacity usage (%) - a short-term influence.

The U.S. does not need a return to wild consumption; it needs a return to the times when it saved enough to at least sustain its industrial output without a trade balance deficit. Consumption could easily drop by a fourth at the very same time of industrial recovery.

Guess how the Germans developed their industry out of the late 40's bottom - I can tell you that story is not about wild consumption. It's about reckless austereness, savings and investments till the national capital stock closed in with the right capital stock for the nation's potential (population, skills, technology).

Dayuhan

09-11-2010, 01:20 PM

The U.S. does not need a return to wild consumption; it needs a return to the times when it saved enough to at least sustain its industrial output without a trade balance deficit. Consumption could easily drop by a fourth at the very same time of industrial recovery.

How can you have an industrial recovery while consumption falls? What do you propose to do with that increasing industrial output?

You can't look realistically at the US trade deficit without looking at artificially inflated value of the dollar that prevailed during the half century or so after WW2. These distortions tend to have an impact.

In any event it is easy to issue declarations about what the US needs or does not need to do. Developing policies to move a nation in such a direction is a good deal more difficult. Economies don't move by executive fiat.

slapout9

09-11-2010, 02:10 PM

Link to rebuilding Baltimore and our country in general from the Real News. Has some good backround music to:)

http://www.youtube.com/watch?v=GR7EdmQvMFY

Fuchs

09-11-2010, 02:23 PM

How can you have an industrial recovery while consumption falls? What do you propose to do with that increasing industrial output?

You can't look realistically at the US trade deficit without looking at artificially inflated value of the dollar that prevailed during the half century or so after WW2. These distortions tend to have an impact.

In any event it is easy to issue declarations about what the US needs or does not need to do. Developing policies to move a nation in such a direction is a good deal more difficult. Economies don't move by executive fiat.

Investment in industrial capital stock. Paying back debt with trade balance deficit.

The deficit stands, excuses don't help. A weaker dollar would make imports more expensive (thus less) and exports cheaper (thus more).
The end effect is a move towards balance and sustainability, but it also means LESS CONSUMPTION (less goods flow in, more goods leave = less to be consumed inside). Again, no cure for the illness can be built primarily on higher domestic consumption.

The problem is huge and structural. It would probably take two decades of determined policy to defeat the problem.
A necessary ingredient of any such policy is to destroy the myths that contributed to the problem; such as the "more consumption solves our economic problems" nonsense.
Equally important is to understand the role of actual investment (not what the business elite thinks is investment; financial deals, mergers & acquisitions...). You need a higher savings rate (=less consumption) to afford more investment in additional or improved industrial capacity (and infrastructure). That will lead to the production capacity that's necessary to actually justify and sustain the actual goods consumption.

A proper understanding of the importance of macroeconomic investment includes a proper understanding of the role of for example the military expenditures as unproductive state consumption. The large military doesn't help the economy; it bleeds it dry and corrupts some industries. Have a look at the extremely crappy shipyard sector. It's a joke.

The same applies to the cancerous financial sector, the overly expensive intelligence community and many, many other significant distractions from industrial performance.

Modern Western societies are rip-off societies. Groups attempt to rip off all other groups, some succeed spectacularly and others don't. The rich people and the financial sector as well as certain lobby groups (such as farmers) tend to do spectacularly well.

This ripping off is a deviation from an optimal, functioning society. It pushes our societies into unsustainability (erodes the middle class and industry) and needs to be countered.
The U.S. and UK were especially lax on the financial sector and cultivated it as a giant leech instead, misunderstanding its size for a sign of prosperity.

Germany is different; our financial industry leadership is by comparison not very powerful despite the questionable behaviour of the current government with Deutsche Bank CEO Ackermann.
Our industry - especially the middle-sized companies (SME) - is very influential, and the share of industry at the GDP is by half greater than in the U.S.. The result is a huge trade balance surplus instead of deficit (this imbalance was roughly doubled by the Euro currency which is undervalued for us).

tequila

09-11-2010, 02:45 PM

Note: both German and Japanese industrial models are entirely based on the existence of trade surpluses with the rest of the world - they depend on our consumption to drive their own prosperity. A German preaching the moral deficit of overconsumption to the American is a bit like a drug dealer preaching to the addict about the moral efficacy of just saying no. Martin (http://www.ft.com/cms/s/0/195dfa18-bab2-11df-b73d-00144feab49a.html)Wolf has been on fire (http://www.ft.com/cms/s/0/cd01f69e-3134-11df-8e6f-00144feabdc0.html) about this for awhile - sorry Fuchs, but German sanctimony on this point is a bit rich.

Surplus countries insist on continuing just as before. But they refuse to accept that their reliance on export surpluses must rebound upon themselves, once their customers go broke. Indeed, that is just what is happening. Meanwhile, countries that ran huge external deficits in the past can cut the massive fiscal deficits that result from post-bubble deleveraging by their private sectors only via a big surge in their net exports. If surplus countries fail to offset that shift, through expansion in aggregate demand, the world is inevitably caught in a “beggar-my-neighbour” battle: everybody seeks desperately to foist excess supplies on to their trading partners. That was a big part of the catastrophe of the 1930s, too.

slapout9

09-11-2010, 03:14 PM

Fuchs

09-11-2010, 03:23 PM

You're patently wrong about German exports depending on U.S. consumption because said German-U.S. exports are too small.

On the other hand; sure, a large trade balance surplus is just as stupid (albeit not as dangerous for yourself) as a large trade balance deficit. The German public needs to get rid of a package of its own myths and legacies as well. These necessities are very different than the U.S. necessities, though.

Now let's think for a while why some produce surpluses and others produce deficits. The problem is called competitiveness.
Exchange rates are only a part of this competitiveness. Germany did not cheer the "post-industrial services economy" for a generation. It still cheers its SMEs and their competitiveness. In fact, we underwent a series of painful industrial competitiveness-increasing reforms while we produced major trade balance surpluses. Our education system is trimmed for a huge output of skilled industrial labour and university graduate engineers.
We aren't on a shopping spree, but on a savings & industrial production fixation.

In the end, the reduction of imbalances in world trade will be painful for countries like U.S., UK, Greece, Italy and look very much like a phase of great wealth to countries like Germany, Japan, PR China (because balancing a trade balance surplus means to increase domestic consumption).

You had your consumption party, it's over. The U.S. may pretend that a return to its old ways is possible, but that will only provoke the inevitable next and extremely painful crisis that finally dispels the deficit & consumption myth because it will wreck the remaining U.S. industry beyond denial.

The population of the USA PRODUCED ABOUT 18.25 % LESS GOODS THAN IT CONSUMED AND INVESTED in 2008 (and this counts the service balance surplus as "goods produced" to be fair).
The monthly trade balance deficit was crunched to half in the crisis and is already recovering almost to the pre-crisis level.

Dayuhan

09-12-2010, 01:42 AM

Herr Fuchs…

I asked:

How can you have an industrial recovery while consumption falls? What do you propose to do with that increasing industrial output?

And you replied:

Investment in industrial capital stock. Paying back debt with trade balance deficit.

I think this reveals a certain lack of comprehension about how business – not economics, but business – functions. Investment in capital stock doesn’t happen because some beady-eyed economic policy gnome decides that it ought to happen. It doesn’t happen because a government decides that investment in capital stock is desirable. It doesn’t happen because society decides to applaud investment in capital stock. It happens because individuals or companies with the capacity to invest determine that an opportunity for profitable investment exists. Decreasing consumption does not present an opportunity for profitable investment, because you don’t profit from your investment unless somebody somewhere buys the products or services that you invest in producing.

There is no choice between consumption and production because you can’t have one without the other. If production exceeds consumption, inventories rise. When inventories rise to a certain point, factory orders cease and production stops. Factories don’t produce goods because society esteems production, they produce goods because they have orders for goods… from consumers, or from people who believe they can sell the goods to consumers.

Our industry - especially the middle-sized companies (SME) - is very influential, and the share of industry at the GDP is by half greater than in the U.S.. The result is a huge trade balance surplus instead of deficit (this imbalance was roughly doubled by the Euro currency which is undervalued for us).

Confusion of cause and effect. German industry isn’t strong because SMEs are influential, SMEs are influential because German industry is strong. As you point out, this strength is supported by a favorable currency environment. The US economy didn’t assume its current shape because of policy decisions, it assumed it because an artificially overvalued currency created a long term disincentive to domestic production of goods.

You're patently wrong about German exports depending on U.S. consumption because said German-U.S. exports are too small.

Exports depend on foreign consumption. Part of this is the US, part is other places… but if German consumption is constant, German production cannot increase unless overall consumption increases or German goods take market share from other producers in other markets (meaning production somewhere else has to be reduced).

Exchange rates are only a part of this competitiveness. Germany did not cheer the "post-industrial services economy" for a generation. It still cheers its SMEs and their competitiveness. In fact, we underwent a series of painful industrial competitiveness-increasing reforms while we produced major trade balance surpluses. Our education system is trimmed for a huge output of skilled industrial labour and university graduate engineers.

Again, you confuse causes and effects. People don’t invest because they want to be cheered, they invest to make money. Societies will cheer whatever gets results, which is conditioned by the macroeconomic incentive environment. If your currency exchange rate favors export production, export production will succeed and people will cheer it. If your exchange rate environment penalizes exports and subsidizes imports, domestic production will falter, it will not attract investment, and nobody will cheer.

The problem for the US has been that because the dollar is a global currency, both produced and consumed outside the influence of US policy, the ability of policy to influence monetary factors is severely constrained.

I think you drastically overestimate the ability of policy to control economic factors, and the ability of government in a democratic society to develop policies that may not be found congenial by the voting public. It’s terribly easy to make pompous declarations about what the Americans or Germans or Chinese or anyone else should or must do. Influencing them to do it is rather more complicated.

Fuchs

09-12-2010, 10:14 AM

Herr Fuchs…

I asked:

And you replied:

I think this reveals a certain lack of comprehension about how business – not economics, but business – functions. Investment in capital stock doesn’t happen because some beady-eyed economic policy gnome decides that it ought to happen. It doesn’t happen because a government decides that investment in capital stock is desirable. It doesn’t happen because society decides to applaud investment in capital stock. It happens because individuals or companies with the capacity to invest determine that an opportunity for profitable investment exists. Decreasing consumption does not present an opportunity for profitable investment, because you don’t profit from your investment unless somebody somewhere buys the products or services that you invest in producing.

Answer I

There is no choice between consumption and production because you can’t have one without the other. If production exceeds consumption, inventories rise. When inventories rise to a certain point, factory orders cease and production stops. Factories don’t produce goods because society esteems production, they produce goods because they have orders for goods… from consumers, or from people who believe they can sell the goods to consumers.

Answer II

Confusion of cause and effect. German industry isn’t strong because SMEs are influential, SMEs are influential because German industry is strong. As you point out, this strength is supported by a favorable currency environment. The US economy didn’t assume its current shape because of policy decisions, it assumed it because an artificially overvalued currency created a long term disincentive to domestic production of goods.

Answer III

Exports depend on foreign consumption. Part of this is the US, part is other places… but if German consumption is constant, German production cannot increase unless overall consumption increases or German goods take market share from other producers in other markets (meaning production somewhere else has to be reduced).

Answer IV

Again, you confuse causes and effects. People don’t invest because they want to be cheered, they invest to make money. Societies will cheer whatever gets results, which is conditioned by the macroeconomic incentive environment.

Answer V

If your currency exchange rate favors export production, export production will succeed and people will cheer it. If your exchange rate environment penalizes exports and subsidizes imports, domestic production will falter, it will not attract investment, and nobody will cheer.

The problem for the US has been that because the dollar is a global currency, both produced and consumed outside the influence of US policy, the ability of policy to influence monetary factors is severely constrained.

Answer VI

I think you drastically overestimate the ability of policy to control economic factors, and the ability of government in a democratic society to develop policies that may not be found congenial by the voting public. It’s terribly easy to make pompous declarations about what the Americans or Germans or Chinese or anyone else should or must do. Influencing them to do it is rather more complicated.

Answer VII

Answer I:
I don't misunderstand anything here. You think of a closed economy, I think of an open economy. The closed economy is the model for beginners.

The U.S. has a trade balance deficit that exceeds a sixth of its industrial production. It could easily have four huge growth years with frozen domestic consumption without even getting rid of its trade balance deficit.

The "consumption drives the economy" myth is extremely powerful, especially in combination with cognitive dissonance. People can be exposed to the fact that the U.S. industry has gone downhill for three decades and still believe in U.S. ways of developing the industry. Amazing.

Answer II:

You completely ignore investment and export. Production output moves on hold, into consumption, into investment or into export.

You forgot half of the channels, and the result is no understanding a tall.

Answer III:

You overestimate the influence on exchange rates. It's not an excuse and explanation for everything. The simple fact that all countries still export even at unfavourable exchange rates hints at the complexity.
I as a German economist are well-entitled to claim to know better about the importance of the German SMEs. Most research about them was never published in another language than German. These either very old family businesses or 1950's origin companies are way more efficient and at the same time much more long-term oriented than the big corporations. They are superior and the backbone of the German industry. We didn't allow them to be ruined by larger corporations or banks.

Answer IV:

Now you're looking too much on the national level. Export is also a business thing, and individual businesses can very well gain additional market shares and turnover on markets with "constant" consumption.
Your point is therefore completely wrong.

Answer V:

"People" rarely invest at all. Companies do most investments. "People" consume and save.

And "people" don't just save because they want to make money - that's just one explanation. Much is being saved as a precaution against risks, much is being saved for buying a house, life insurances, buying a car, pensions and in some countries even things such as being able to afford university for children.

Answer VI:

You do again use exchange rates as a simple explanation / excuse. It's not the only problem.

You're also wrong about the "attract investment" thing. For one, many if not most direct investments are for marketing purposes. Trade balance deficit countries therefore experience much foreign investment. The U.S. does experience much foreign investment. The problem is that the savings rate of the U.S. is close to zero and therefore the U.S. itself does not contribute to substantial domestic net investment.

Answer VII:

Competent politicians with guts can influence the economy very much. Disunity of top politicians can lead to political impotence, but the state itself is extremely powerful. It's the ultimate power in regard to the economy - the politicians merely need to decide to use that power. Those politicians who claim that the state cannot set the direction for the economy are incompetent or liars or both.
The U.S. could pull itself out of the mess in two decades, maybe even just one if the policy is very unusual.
There are thousands of levers to be used, and new instruments can be introduced. The laughable trajectory and result of the health care debate shows the real problem, and probably explains why you don't believe that policy can change much: The U.S. political elite and the political system is dysfunctional.

The same is true in Greece, Italy, Iceland, Poland and several Eastern European states.
The German political elite is dysfunctional as well, but only so if you have above average expectations.

Dayuhan

09-13-2010, 10:05 PM

The U.S. has a trade balance deficit that exceeds a sixth of its industrial production. It could easily have four huge growth years with frozen domestic consumption

This is really an extraordinarily bizarre statement. How is the US supposed to “easily” have four huge growth years with frozen domestic consumption? Where are all the products of this industrial production supposed to go?

Of course I know about open systems, everyone does. I also know, as does anyone paying attention, that in this case it doesn’t make any difference at all. There are only three things that can happen to the goods you propose to produce. Either they are sold domestically, or they aren’t sold at all, or they are exported.

If we assume frozen domestic consumption, the only way increased domestic output will be sold domestically is to take market share from other locally produced goods or to take market share from imported goods. The latter is an attractive option on paper, but barring self-destructive protectionism it isn’t likely to happen in the real world, unless the US suddenly discovers some miraculous and hitherto unknown competitive advantage.

Not selling product isn’t an option: the factory won’t have revenue and will be unable to cover its costs.

But of course it’s an open system, and we can export… if you’re an ivory-tower economist with no connection to real world constraints. Realistically, who is going to buy the stuff? For the US to export its way into “four huge growth years with frozen domestic consumption” there would have to be either an extraordinary increase in global consumption or US goods will have to seize market share from somebody else’s goods. Again, this would require US goods to US to suddenly discover some miraculous and hitherto unknown competitive advantage.

The export “solution” doesn’t exist, outside the realm of theory. Individual businesses will be able to find or create niches and increase market share. Other individual businesses will lose. On a larger scale, driving up US exports to the level you’re discussing is simply not going to happen. If US goods were export-competitive this situation wouldn’t exist in the first place. Classic example of the old economist joke… “assume a can opener”. You might get a competitive US export economy if you could drop the dollar another 30% and wait a couple of decades for previous distortion to unwind… but the US doesn’t even have an effective way to control the value of the dollar, which has become a global currency and is not fully responsive to US policy.

At the end of the day you can talk all you want about investing in capital plant and boosting industrial output, but you can neither compel nor persuade companies to invest in capital plant that aims to produce goods that the investors don’t believe they can sell.

Then of course you get into policies designed to increase competitiveness… but these take time, and most of the ones recommended offer a whole range of side effects and potential unintended consequences, many of them unpleasant.

You overestimate the influence on exchange rates. It's not an excuse and explanation for everything. The simple fact that all countries still export even at unfavourable exchange rates hints at the complexity.

What other country has to cope with having its currency used as the medium of international trade, completely divorcing demand for currency from domestic economic conditions or domestic policy? What other currency has had to cope with 40 years or so of being the world’s default medium for investment? There hasn’t been a currency as radically overvalued as the dollar since the British Pound of the late imperial era… and the US doesn’t have an empire to shove its goods on.

These distortions can be managed up to a point, beyond which the impact becomes overwhelming and they start to control the direction an economy takes. Why do you think the Chinese are so determined to suppress the value of their currency? Because it matters. It may not be the ony factor, but it’s the herd of elephants in the drawing room.

The U.S. could pull itself out of the mess in two decades, maybe even just one if the policy is very unusual. There are thousands of levers to be used, and new instruments can be introduced.

Possibly you should consider revealing them. We wait with bated breath.

slapout9

09-13-2010, 11:47 PM

Possibly you should consider revealing them. We wait with bated breath.

I would like to see some of this new stuff myself.

Entropy

09-14-2010, 03:03 AM

Fuchs,

At the risk of piling on here, you're not making much sense. Germany's economy depends on exports. If those export markets dried up (for whatever reason) you would be screwed no matter how much you invested. One might say Germany is in a worse position than we are since Germany's population is contracting which means there isn't much room for domestic growth.

slapout9

09-21-2010, 08:09 PM

Interview of the naked capitalist on the max keiser show. Slide the bar over to around the 15 minute mark to fing her interview. Really good stuff in the interview. Brings out good points about how there are NO truly private companies. I doubt she has ever read Karl Marx on economics but what she is talking about and maybe not realizing it, is that Marx said long ago that you cannot separate politics from economics... the 2 are intertwined.

http://www.nakedcapitalism.com/2010/09/appearance-on-max-keiser-show.html

Ken White

09-21-2010, 09:08 PM

in the broadest sense. Thus morality as seen by many and politics as practiced by an equal or greater number will always include economic aspects and concerns. Everything does. Even warfare -- to include well beyond my favorite "'economy of force' and 'flexibility' will almost always defeat Mass." (Note the 'almost' -- that's allowing for the invisible foot / the penalty of the tragedy of the commons, squared...:D)

I think the Pharoahs figured that out before Karl and Fred (LINK) (http://homepage.mac.com/a.good.ladd/cwg/xxii.jpg) got around to it and that link proves that Karl's guesses weren't always correct... :wry:

Tha's life... :cool:

slapout9

09-21-2010, 10:59 PM

bourbon

02-18-2011, 05:51 AM

Why Isn't Wall Street in Jail?: Financial crooks brought down the world's economy — but the feds are doing more to protect them than to prosecute them (http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216?print=true), by Matt Taibbi. Rolling Stone, March 3, 2011.

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What's more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even "one dollar" just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick "The Gorilla" Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. "If the allegations in these settlements are true," says Jed Rakoff, a federal judge in the Southern District of New York, "it's management buying its way off cheap, from the pockets of their victims."

To understand the significance of this, one has to think carefully about the efficacy of fines as a punishment for a defendant pool that includes the richest people on earth — people who simply get their companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. "You put Lloyd Blankfein in pound-me-in-the-a** prison for one six-month term, and all this bulls**t would stop, all over Wall Street," says a former congressional aide. "That's all it would take. Just once."

But that hasn't happened. Because the entire system set up to monitor and regulate Wall Street is f***ed up.

Just ask the people who tried to do the right thing.

Unfortunately, I believe the problem is actually worse than he describes; which, if you read the article, is hard to fathom. He doesn’t get into the public corruption issue, which is lingering in the background here.