Econ 2009

[__HRB__]

Originally Posted by cheesehead

Here's an idea (my idea):...

Maybe you'll be lucky this time and finally get data that shows a net positive payoff, because the consensus based on *existing* data is that stimulus has a net negative payoff. But if you don't play the lottery, you can't win, right?

We can work out why government stimulus cannot work almost from first principles: there is no mechanism in place to remove inefficient bureaucratic activity, in the way bankruptcy removes inefficient economic activity. Without requiring a reboot of society, that is.

What kind of crisis would it take to make 'less governement' a solution for people like you?

[AES]

Yes, never let a crisis go to waste.

Everyone considers it a "win" when a new bureaucracy is formed. GWB created his fair share.

Bend over and take the stimulus from the government's package.

[cheesehead]

Originally Posted by __HRB__

What kind of crisis would it take to make 'less governement' a solution for people like you?

Depends on your definition of "people like you". Please state less vaguely what you mean.

[ewmayer]

U.S. Stocks Fluctuate as Bank of America's Gain Offset by Buffett Warning: U.S. stocks swung between gains and losses as Bank of America Corp.’s advance and oil’s rally to a two-month high were offset by Warren Buffett warning that the economy “has fallen off a cliff.”

My Comment: Warren`s bullish "I`m buying here" optimism of last Fall appears to have evaporated.


Japan Posts First Current-Account Deficit Since 1996 as Exports Collapse: Japan posted its first current- account deficit in 13 years in January after exports collapsed amid the global recession.

Companies from Toyota Motor Corp. to Sharp Corp. are cutting output and firing workers as overseas shipments slump at an unprecedented pace, pushing Japan toward its worst postwar recession. The global economy is likely to shrink for the first time since 1945 this year, the World Bank said today, forecasting that trade will drop by the most in 80 years.

“Other countries are in recession while Japan is in a depression,” said Chua Soon Hock, managing director of Asia Genesis Asset Management Pte, a Singapore-based hedge fund. “Japan is like an old man who developed pneumonia while other younger countries caught the flu.”

My Comment: The "old man" metaphor is apt, due to Japan`s rapidly graying population - the sheer lack of younger workers will make it extraordinarily difficult to revive their economy, which never really recovered from the collapse of their own real estate bubble 20 years ago.


Trichet Says Investors Are Underestimating Economic Stimulus, Sees Pickup: European Central Bank President Jean-Claude Trichet, who chaired a meeting of global central bankers today, said investors are underestimating the potential for a return to economic growth and that the world may be approaching a turning point.

“We have a number of elements suggesting that we’re approaching the moment where we’re having a pickup,” Trichet said today at a press conference in Basel, Switzerland, where he chaired the Global Economy Meeting at the Bank for International Settlements. “But we’re still at a level where the positives are not fully priced in.”

My Comment: Eh, which "positives" might those be now, J.C.? Like central bankers everywhere are wont to do, Mr. Trichet greatly overestimates the potential of central banks to be forces for good, as he does the (alleged) effects of "monetary easing", i.e. forced easing of credit, to help fix a problem caused by decades-long too-easy credit. Trichet`s press conference was a masterpiece of pusillanimous bureaucratic mumbo-jumbo, though, with content-free gems like these:

"We have a number of elements suggesting that we’re approaching the moment where we’re having a pickup..."
"We are identifying a number of elements in the global economy which are expansionary, first the decision of authorities taken and the price of oil..."
"We also trust as central banks with regards to monetary easing that this easing is also underestimated by the observers and market participants..."
"Most of the observers are projecting negative growth for the industrialized world, growth which would be very close to zero at a global level, and a pickup next year ... I wouldn’t say that central bankers would part from this analysis..."

That last one is just so deliciously bureaucratic-bullshit-ese ... he can`t even bring himself to say something as weakly affirmative as "I agree with this analysis" or even "most of my central-banker drinking buddies agree with this" - no, he "wouldn’t say that central bankers would part from this analysis", which is about as nichtssagend as one can possibly make a nothing-saying-statement-disguised-as-a-something-saying-statement.


Lloyds Declines as British Government Takes Majority Stake, Insures Assets: Lloyds Banking Group Plc fell as much as 14 percent after the U.K.’s biggest mortgage lender ceded control to the government in return for state guarantees covering 260 billion pounds ($367 billion) of risky assets.

Prime Minister Gordon Brown’s government in October engineered Lloyds’ acquisition of HBOS Plc as it sought to prevent HBOS’s collapse. That saddled Lloyds with risky loans and investments that slashed profit and forced it to seek state guarantees. About 83 percent of the assets Lloyds insured came from HBOS, the company said in a statement.

My Comment: Sounds like the Brown-led UK government has been playing hot-potato with the insolvent banks, but in this game of hot potato, the longer you keep trying to toss it away, the hotter and more forcefully it returns to you.


Depression Dynamic Takes Hold as World Trade, Banking System Revisit 1930s: The U.S. economy’s vital signs may not confirm a diagnosis of depression. The symptoms increasingly point to one.

As in the Great Depression, world trade is collapsing, wealth is evaporating and the banking system is broken. Deflation is a growing threat as companies slash production, pay and prices. And leaders worldwide are having difficulty making headway in halting the self-perpetuating decline.

“We are tracking 1929-1930,” says Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley.

The result: This contraction may leave a lasting imprint on the economy and society, just as the Depression did. In the wake of the devastation of the 1930s, Americans swore off stocks, husbanded their own resources and looked to the government for help. Now, another generation might draw some of the same lessons from the deepest economic collapse of their lifetime.

“This is going to scar the collective psyche,” says Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. “People will become much more conservative in borrowing, lending and investing.”

There’s no official definition of what qualifies as a depression. In the 1930s, the unemployment rate rose to 25 percent and the economy shrank by more than a quarter.

No economist forecasts a return to the breadlines and shantytowns of that era, even as the economy gets closer to some of the metrics academics cite as constituting a depression, if not a “great” one.

Nobel Prize-winning economist Robert Barro defines a depression as a 10 percent fall in per-capita gross domestic product and consumption. The Harvard University professor sees roughly a 30 percent chance of that occurring now.

Billionaire Warren Buffett said today the economy “has fallen off a cliff” and is unlikely to turn around soon. The Berkshire Hathaway Inc. Chief Executive Officer also said, in an interview with the CNBC television network, that efforts to stimulate recovery may lead to inflation higher than the 1970s.

The economy contracted at a 6.2 percent annual rate in the last quarter of 2008 and will shrink at a 7 percent rate in the first three months of 2009, projects Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York.

Bradford DeLong, a former Treasury official who is now a professor at Berkeley, says a depression is a two-year period with unemployment at 10 percent or above. He says that’s possible, though not likely. The jobless rate rose to 8.1 percent in February, a 25-year high.

My Comment: "No economist forecasts a return to the breadlines and shantytowns of that era..." - Very few economists forecast the implosion of the largest credit bubble in history, either. While I think large-scale Hooverville-style homeless encampments like this one which has sprung up near the California state capitol may not be probable (at least in the nations with reasonably-well-developed social safety nets), the local newscasts have been showing lines at local soup kitchens that are getting quite long of late, and most of the local food banks are feeling the strain. Admittedly, most of the folks you see in the aforementioned queues do look substantially better-fed than they did in the 1930s.

Love this line from the above-linked Daily Mail article:

Authorities in Sacramento, where Governor Arnold Schwarzenegger has his office, admit the sight of families living in such poverty is not pretty. But faced with their own budget crisis and a £30billion deficit, they have had little choice but to consider making the tent city a permanent fixture. The city's mayor Kevin Johnson said: 'I can't say tent cities are the answer to the homeless population in Sacramento, but I think it's one of the many things that should be considered and looked at.'

Making $34 Million at Merrill Means Never Again as Bonuses Meet Subpoenas: Andrea Orcel’s reported $33.8 million compensation for 2008, a year when his employer, Merrill Lynch & Co., had net losses of $27 billion, doesn’t come without a price.

Orcel, 45, Merrill’s top investment banker, has been subpoenaed to testify by New York State Attorney General Andrew Cuomo, who’s looking into the firm’s decision to pay $3.6 billion in bonuses to 700 employees just before it was swallowed by Charlotte, North Carolina-based Bank of America Corp. on Jan. 1. Orcel’s compensation at Bank of America, where he now heads international corporate and investment banking, probably will be capped as a result of new legislation. And it’s unlikely a rival firm would match his pay.

“Nobody can get paid $34 million in this environment,” said Charles Geisst, author of “Wall Street: A History” and a finance professor at Manhattan College in New York. “We are at a crucial juncture, where that sort of thing goes out the window.”

My Comment: Hey, I`d have no problem with someone making beaucoup bucks if he actually made a proportionally large amount of money for his firm and their clients...

Last year, Orcel advised Royal Bank of Scotland Group Plc on its $19 billion acquisition of Dutch Bank ABN Amro Holding NV, which was completed in April. Royal Bank of Scotland, once the second-biggest U.K. bank by market value, is now controlled by the government after reporting the biggest loss in the country’s history.

My Comment: Whoops - how about you give us back that bonus check?


And on a it-would-be-even-funnier-if-the-stakes-weren`t-so-incredibly-high note, courtesy of the jokemeisters at CNBC (a wholly-owned subsidiary of General Electric), we have Famous Last Words Revisited.

[ewmayer]

On the heels of the news that Bernie Madoff is apparently close to "making a deal" with the SEC, nice article from Counterpunch.org on the law firm he has engaged, which apparently specializes in keeping Madoff-style Ponzi schemes from ever going to trial, and in the cited case, in fact keeping the Ponzi going with the blessing of the SEC:

Madoff Looks to Sorkin, the Ponzi Saver

Growing questions are being asked by legal scholars and Wall Street veterans over the background role that Bernard Madoff’s attorney, Ira Lee Sorkin, played in 1992 that may have resulted in Madoff looting investors for an additional 16 years. That question now takes on heightened urgency as Sorkin negotiates a plea deal for Madoff that would avoid the antiseptic sunshine of an open courtroom trial.

The 1992 episode was troubling enough but a search of court records shows Sorkin and his former law firm of 20 years, Squadron Ellenoff, were targets of more serious charges in one of the largest Ponzi schemes of the 1990s, Towers Financial Corporation, run by Ponzi mastermind Steven Hoffenberg.

... in 1988, six years before Hoffenberg was finally arrested and hundreds of millions of dollars more would be stolen, the SEC appears to have been close to uncovering the Ponzi scheme. But into the fray stepped Ira Sorkin and his law firm, Squadron Ellenoff, to work out a deal with the SEC.

It is clear to us that this Sorkin fellow has a specialty: keeping semi-official-looting Ponzi schemes from ever being truly "busted" open by regulators.

And now he's about to do it (again) for Madoff.

You really gotta give them some credit for the sheer gall:

In 1992, the SEC filed a suit against Avellino & Bienes charging them with selling $440 million of unregistered securities to 3200 investors. Although the SEC knew the money had gone to Madoff, their complaint referred only to an unnamed broker. The SEC said at the time they felt they were looking at a Ponzi scheme.

Then in steps Ira Sorkin, still at Squadron Ellenoff, and in the precise move made in the Towers Financial matter, offers to return all the money. Except the money wasn’t all returned. Behind the scenes, clients were simply allowed to sign agreements directly with Madoff and continue receiving those steady, stellar returns of 13 to 20 per cent according to lawyers representing defrauded clients. The SEC was somehow persuaded to drop the case in exchange for an agreement that Avellino & Bienes would shut down their firm and pay a fine.

That's right -- when the SEC figured it was a Ponzi scheme (to the benefit of Madoff), they allowed a settlement to be implemented that resulted in Madoff keeping the capital... and paying returns out from the Ponzi scheme.

In other words, the SEC (at Sorkin's direction) abetted the continuance of the Ponzi scheme, by buying off the clients with *guaranteed* returns from the same Ponzi scheme.

That's "regulation" for ya, made in America!

[ewmayer]

Moody's unveils most-likely-to-default list: Credit rater publishes list of 283 companies that are in danger of defaulting on their debt payments.

My Comment: Given the sterling nature of their ratings of, say, mortgage-backed securities, I find this an extremely reassuring development. :ironyⁿ:


Despite the BIG MEGAHUGE POWERFUL FINANCIALS-FUELED-BUT-REALLY-BROAD-BASED-SUPER-DUPER-RALLY!!! on Wall Street today (triggered by Citigroup announcing fake "net earnings" for the first months of 2009), there`s plenty more crap comin` down the ol` pike for the beleaguered banks:

Banks' future woes in one word: plastic: Major banks have been hit hard by bad mortgages. Now, fears are growing that troubled financial institutions are going to have another consumer headache to deal with: credit card defaults.

Credit card delinquencies hit index record: For the second month in a row, a record number of U.S. consumers were late on their payments, according to Fitch.

[AES]

Originally Posted by ewmayer

On the heels of the news that Bernie Madoff is apparently close to "making a deal" with the SEC, nice article from Counterpunch.org on the law firm he has engaged, which apparently specializes in keeping Madoff-style Ponzi schemes from ever going to trial, and in the cited case, in fact keeping the Ponzi going with the blessing of the SEC:

Madoff Looks to Sorkin, the Ponzi Saver

I believe Madoff's deal will entail his family avoiding becoming long pork. He's going away.

http://dealbook.blogs.nytimes.com/20...ilty-to-fraud/

Mr. Madoff faces 11 felony charges, including securities fraud, investment adviser fraud, mail fraud, wire fraud, three counts of money laundering, false statements, perjury, false filings with the Securities and Exchange Commission and theft from an employee benefit plan. Under federal sentencing guidelines, the counts carry a maximum sentence of 150 years in prison. He must also forfeit the proceeds of the crimes.

Mr. Madoff will plead guilty without receiving a plea deal from prosecutors. “There is no plea agreement with the defendant,” a federal prosecutor, Marc O. Litt, told the judge.

[AES]

Originally Posted by ewmayer

Credit card delinquencies hit index record: For the second month in a row, a record number of U.S. consumers were late on their payments, according to Fitch.

There's also the credit line contraction that's happening concurrently. I received a letter from Citi explaining that since x of my line of credit has never been used, the new maximum line of credit is y. I have never missed a payment on this account and the principle payoff occurs quarterly.

It's not a credit card account, but my guess is that lines of credit are shrinking everywhere.

Any thoughts on the repercussions this will carry?

[cheesehead]

Originally Posted by ewmayer

Despite the BIG MEGAHUGE POWERFUL FINANCIALS-FUELED-BUT-REALLY-BROAD-BASED-SUPER-DUPER-RALLY!!! on Wall Street today (triggered by Citigroup announcing fake "net earnings" for the first months of 2009), there`s plenty more crap comin` down the ol` pike for the beleaguered banks:

Banks' future woes in one word: plastic: Major banks have been hit hard by bad mortgages. Now, fears are growing that troubled financial institutions are going to have another consumer headache to deal with: credit card defaults.

Credit card delinquencies hit index record: For the second month in a row, a record number of U.S. consumers were late on their payments, according to Fitch.

Are you hinting to us that the "BIG MEGAHUGE POWERFUL FINANCIALS-FUELED-BUT-REALLY-BROAD-BASED-SUPER-DUPER-RALLY!!! on Wall Street today" was a bear-market rally, not an after-establishing-the-bottom genuine bull rally? That the Forrest-Gumpers ("500 is as 500 does") are not yet disproven?

[cheesehead]

Originally Posted by AES

It's not a credit card account, but my guess is that lines of credit are shrinking everywhere.

Oh yes, your experience is being reported by many others, too.

Any thoughts on the repercussions this will carry?

Well, it does reduce banks' exposure to potential future defaults -- just as actually refusing a loan application does. Makes sense in each individual case. Too bad it isn't a positive indicator for recovery because it isn't what the world needs now to encourage that. (Nor does it keep the overly-generous-credit-line-granting horses from having already left the barns of banks who overlent.)

[ewmayer]

Originally Posted by cheesehead

Are you hinting to us that the "BIG MEGAHUGE POWERFUL FINANCIALS-FUELED-BUT-REALLY-BROAD-BASED-SUPER-DUPER-RALLY!!! on Wall Street today" was a bear-market rally, not an after-establishing-the-bottom genuine bull rally?

Indeed, that's what my money's on - both figuratively and literally.

--------------------------

Four states' unemployment rates above 10%: Michigan, South Carolina, Rhode Island and California lead U.S. jobless rates, government says.


Fortune.com | GM has more troubles than you think: Bad cost-cutting ideas, poor efficiency and lousy cars - it's going to take a lot more than the Volt to save General Motors.

World News:

China's Investment Surges 26.5% on Stimulus; Exports Decline by a Record: China’s investment spending surged as the nation poured money into roads, railways and power grids to counter a plunge in exports, which a separate report showed fell by a record in February.

My Comment: It is to be hoped that China will reap the benefots of this spate of make-work infrastructure spending in the future ... but I fear much of it is going to be of the bridges-to-nowhere variety Japan squandered so much of its reserves on in an effort to pull itself out its housing-bubble-induced recession in the late 80s and 90s.

German Manufacturing Orders Fall Most Since Reunification as Exports Slump: German manufacturing orders collapsed in January as the global recession smothered exports.

Orders plunged 38 percent from a year earlier, the biggest drop since data for a reunified Germany started in 1991, the Economy Ministry in Berlin said today. From December they fell 8 percent, four times as much as economists expected and extending their worst decline on record.

“The annual slump is absolutely catastrophic,” said Alexander Koch, an economist at UniCredit MIB in Munich. “The extent of declines is terrifying.”

Russia's One-Company Towns Suffer as Demand Plummets, Workers Grow Restive: Alexander Skachkov, waiting to sign up for unemployment benefits in Zlatoust in Russia’s Ural Mountains, laughed as he recalled a November newspaper interview with a local official.


Markets and Investing:

A market bear says it’s time to return to stocks

The stock market’s huge bounce yesterday was its best performance in months. But by now, you know that a one-day rally isn’t something to hang your hat on in a bear market. Even with Tuesday’s surge, the Dow is off more than 50% since it peaked in October 2007.

Here is something to think about, however. This month, Jeremy Grantham, chief investment strategist at GMO, who has long been bearish on stocks, wrote that now is not the time to sit on the sidelines. He argues that the fair value for the S&P 500 is 900. After yesterday’s close, the blue-chip index sits at 720. “Global equities are even cheaper,” he says.

My Comment: You go right ahead and load up, Jeremy, and make sure to come back to us in a year and let us know how that worked out for you. I`ve seen other credible estimates that say fair value for the S&P 500 is 450 ... given that housing prices, the ultimate driver of this downturn, still have a ways to fall before they get back to long-term Case-Shiller norms (and nothing says they can`t overcorrect), and the recession is looking quite likely to turn into a lengthy U-shaped or even L-shaped one, I think I'll hold off, thank you very much. (Or more proactively, short the bear-market rallies we are bound get along the way, inspired in part by bullish analysts or "reformed bears" like Grantham and "market oracles" like Buffett proclaiming "now is the time to buy").

There’s no way to know if Grantham is correct. Even he is unsure of when stocks will hit bottom. Grantham, for example, shifted cash into stocks back in October, well before the market hit fresh lows this year. But he also didn’t bet everything at once. “We made one very large reinvestment move in October…and we have a schedule for further moves contingent on future market declines,” he says.

My Comment: A.k.a. the "why lose your shirt all at once when you can lose it one large swatch at a time?" investing strategy.


Citigroup, Bank of America Bondholders May Be Next to Share Bailout Pain: Citigroup Inc. and Bank of America Corp.’s bond prices are sliding on concern that owners of debt issued by U.S. financial firms will be forced to swallow losses if the industry needs another bailout.

U.S. bank debt has lost 7.8 percent and yields have jumped to record levels compared with benchmark rates in the past month, even after taxpayers committed more than $11.6 trillion to prop up financial firms. With shareholders almost wiped out at banks like Citigroup and lawmakers resisting more rescues, holders may be asked to swap bonds for new debt that offers reduced interest rates or lower face values, analysts said.

“The bond market is getting more scared every day,” said Gary Austin of PDR Advisors in Charlotte, North Carolina, who manages $450 million in fixed-income securities. “At some time, the government is going to say enough is enough, the only way we will give you more cash is if the bondholders have to be hit.”

My Comment: Nowhere is it written that bondholders should be made whole at taxpayer expense ... but perhaps one reason the government has been so reluctant to even hint at bondholders getting a haircut is that foreign governments (especially China) own huge amounts of such bonds. There was a reason Hillary Clinton jumped through hoops to take human rights issues off the table during her recent visit to Beijing - if we want the Chinese govt to continue to dutifully buy U.S. treasury debt and help fund our record spate of bailout/stimulus-related deficit spending, we can`t afford to piss off the top brass in Beijing. Hence all the kowtowing by Hillary.


Fed Interest-Rate Policy Didn't Cause U.S. Housing Bubble, Greenspan Says: The U.S. Federal Reserve’s “easy money” policies during the first part of this decade didn’t cause the housing bubble, former Chairman Alan Greenspan wrote in the Wall Street Journal.

A surge in growth in China and other emerging markets led to an excess of savings that pushed global long-term interest rates down between early 2000 and 2005, Greenspan wrote in an article. That caused mortgage rates and the benchmark Fed-funds rate to diverge after moving “in lockstep” from 1971 to 2002, he said.

The article is part of the former Fed chief’s defense against charges in books such as “Greenspan’s Bubbles” by William A. Fleckenstein that his policy of keeping rates too low for too long inflated the housing bubble. The collapse in the U.S. subprime-mortgage market led to about $1.2 trillion in writedowns and the bankruptcy of Lehman Brothers Holdings Inc.

“Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have prevented the housing bubble,” Greenspan said.

My Comment: Poor "maestro", trying desperately to shore up his shot credibility, by peddling his only-half-the-story "savings glut" hypothesis. Of course the Fed couldn`t have prevented the housing bubble (which Greenspan refused to acknowledge even existed until very recently) in 2004-2005, because by then the cows had long left the barn. But the Fed certainly could have prevented the housing bubble by not ratcheting interest rates near 0 in 2002-2002, in a desperate, misguided attempt to bail the economy out from the effects of the previous Fed-fueled bubble, the DotCom one, made worse by the aftereffects of 9/11. In order to avoid paying the piper for the earlier bubble, Greenspan et al blew an even bigger, much-nastier one. And Greenspan is on record touting the wonderful benefits of "alternative mortgage products" which allow many more Americans (especially the ones lacking the wherewithal to buy a house) to "experience the joys of home ownership", "home ownership" of course being a euphemism for "debt slavery". Lastly, the Greenspan-led Fed studiously ignored the explosion in predatory and subprime lending accompanying all the "financially innovative" new mortgage products. I repeat: What a complete and utter douchebag is our Mr. Greenspan.