Econ 2009

[__HRB__]

Originally Posted by R.D. Silverman

I have been saying this for a long time now; well before the bubble burst.

Theoretical analysis of this phenomenon dates back to the early 1970's.
See: http://en.wikipedia.org/wiki/Principal-agent_problem

Solutions always require understanding of incentives and competence in contract design. These are qualities publicly elected regulators don't (and cannot) possess, so they jump up-and-down and scream, exactly like the outraged chimpanzees that elected them.

[ewmayer]

Treasury Announces $1 Trillion Public-Private Plan to Buy Banks' Bad Debt: The U.S. Treasury announced a plan aimed at financing as much as $1 trillion in purchases of distressed assets to help a financial system that is “still working against recovery.”

The plan is aimed at financing as much as $1 trillion in purchases of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds. The Public-Private Investment Program will also rely on Federal Reserve financing and Federal Deposit Insurance Corp. debt guarantees, the Treasury said in a statement in Washington.

Barely two months after President Barack Obama took office, he and Treasury Secretary Timothy Geithner are staking much of the new administration’s economic credibility on the theory that removing the devalued loans and securities from banks’ balance sheets will help them start lending again and help resuscitate the economy.

The Standard & Poor’s 500 Stock Index rose 3.6 percent to 796.21 at 10:26 a.m. in New York, and the S&P 500 Financials Index jumped 8.6 percent. Yields on benchmark 10-year Treasury notes were down 1 basis point at 2.62 percent.

Because the program depends on private investors stepping up, it may be weeks or months before it’s clear whether the approach will work. “You will start to see this buying up the assets” shortly after private asset managers are chosen by May, Austan Goolsbee, a member of the White House Council of Economic Advisers, said in an interview with Bloomberg Television.

My Comment: Last week`s AIG follies on Capitol Hill can`t have private-equity folks overly positive on "partnering with the government" - godforbid they actually make money from this "partnership" ... but for today the markets are lovin` TurboTax Timmy`s (henceforth to be referred to simply as TTT) Most Excellent Plan. From today`s WSJ:

Mr. Geithner's three-pronged program, which will be unveiled Monday, envisions the creation of a series of public-private investments to soak up $500 billion, and maybe as much as $1 trillion, in troubled loans and securities at the heart of the financial crisis. [u]To encourage investors to buy those assets, the U.S. government will offer lucrative subsidies and shoulder much of the risk[u].

My Comment: So TTT has issues with taxpayers bearing "all" of the risk, but "much of the risk" (translation: "most or nearly all, depending on your definition"), that, he has has no problem with. And the "generous subsidies" we the taxpayers surely deserve for shouldering most of the risk ... when might those be forthcoming? Aside: How much do you want to bet that the "generous subsidies" end up utterly dwarfing the AIG bonuses that caused all the fuss of late? But back to the "much, most or nearly all?" issue - as the New York Times notes:

Although the details of the F.D.I.C. part were still being completed on Friday, it is expected that the government will provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.

Yves Smith of Naked Capitalism, as quoted by Mish, notes that TTT has a rather bizarre conception not only of "much" but also of the definition of "partner":

If this isn't Newspeak, I don't know what is. Since when is someone who puts 3% of total funds and gets 20% of the equity a "partner"?

But aside from the obvious and sadly predictable throwing-good-money-after-bad aspects of the plan, the key issue, the one Geithner notably did not mention, is this: For the banks that loaded up on the toxic assets in question to regain any semblance of solvency requires someone to pay significantly close to the banks` own fake near-par valuation of the securities. (Regular readers may recall that at one point last year Fed Chair Bernanke outright advocated the government paying "above market" for the toxic junk). Generous government bribe money aside, what private-capital firm in its right mind would pay anywhere near what the banks "think" the stuff is worth? As the Bloomberg piece thankfully goes on to point out:

Critics including Paul Krugman, a winner of the Nobel Prize for economics, advocate that the government take over banks loaded with devalued assets, remove their top management, and dispose of the toxic securities. Sweden adopted that approach in the 1990s. Krugman said in a New York Times opinion piece today that Geithner’s strategy won’t work because it “assumes that banks are fundamentally sound and that bankers know what they’re doing.”

Geithner said today that his plan was the best of a limited number of options, including leaving the illiquid assets on banks’ balance sheets or having the government itself buy them all, shouldering all the risk.

‘Not Sweden’

“We are the United States of America, we are not Sweden,” the Treasury chief said.

My Comment: And that "we are different than Japan, Sweden, etc" (and the implied "we are better") attitude is perhaps the biggest problem at work here - Americans are getting a brutal lesson that they too are subject to fundamental economic rules, even if ridiculously accommodative lending policies for much of the past decade had the effect of obscuring that fact. No one - person or nation - can live beyond their means in perpetuity. Most individual Americans appear to have realized this (though perhaps not ny choice, but rather by a slashing of their credit limits), but the government is spending as if they were magically exempt from this. The problem with a fiat currency is that it allows the illusion to be sustained far too long.

[ewmayer]

N.Y. governor fires 8,900 state workers: Union refusal of cost-cutting concessions forced governor's hand, David Paterson's office says.

NEW YORK (CNNMoney.com) -- New York Governor David Paterson ordered 8,900 state layoffs after employee unions refused concessions.

In a time of "unprecedented fiscal emergency," New York state was "left with no other option" than a state workforce reduction of about 8,900 employees to achieve the savings it needed, according to a memo from the governor's office.

In October, Paterson reached out to state employee unions to reach cost-cutting concessions together, according to the memo from director of state operations Dennis Whalen.

The state looked into a number of ways to deal with the "record budget deficits" and called upon the unions to partner with the state to reduce costs in order to avoid large-scale layoffs, Whalen's memo said.

But the labor organizations representing the state employees rejected all of Paterson's options, the memo said.

My Comment: Apparently the unions thought Paterson was bluffing ... oops. As here in my home state of California, the various unions feeding from the public trough appear to think "shared sacrifice" means "shared among the taxpayers paying our salaries and cushy benefits." I say bully for governor Paterson.


Anybody else catch the AIG-related article in the recent issue of Rolling Stone? If not, check it out online:

The Big Takeover: The global economic crisis isn`t about money - it`s about power. How Wall Street insiders are using the bailout to stage a revolution

It`s over — we`re officially, royally fucked. no empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country`s heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That`s $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG`s 2008 losses).

So it`s time to admit it: We`re fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we`re still in denial — we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream.
...
The best way to understand the financial crisis is to understand the meltdown at AIG. AIG is what happens when short, bald managers of otherwise boring financial bureaucracies start seeing Brad Pitt in the mirror. This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders — people who wear seat belts and build houses on high ground — and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people`s money would make his dick bigger.

That guy — the Patient Zero of the global economic meltdown — was one Joseph Cassano, the head of a tiny, 400-person unit within the company called AIG Financial Products, or AIGFP. Cassano, a pudgy, balding Brooklyn College grad with beady eyes and way too much forehead, cut his teeth in the Eighties working for Mike Milken, the granddaddy of modern Wall Street debt alchemists. Milken, who pioneered the creative use of junk bonds, relied on messianic genius and a whole array of insider schemes to evade detection while wreaking financial disaster. Cassano, by contrast, was just a greedy little turd with a knack for selective accounting who ran his scam right out in the open, thanks to Washington`s deregulation of the Wall Street casino. "It`s all about the regulatory environment," says a government source involved with the AIG bailout. "These guys look for holes in the system, for ways they can do trades without government interference. Whatever is unregulated, all the action is going to pile into that."

[R.D. Silverman]

Originally Posted by ewmayer

<snip>

In the mode of J. Swift, allow me to make a modest proposal.

Everyone in the country whose investments have tanked as a result
of our current financial mess gets together. We file a class action
law suit against all of Wall Street, all of the senior executives at companies
whose reckless behavior caused our loss, the executives at the SEC for failing in their duties, etc. etc. We demand that these people 'make us whole'....

It would mean a nice fat fee for any group of lawyers willing to undertake
such a case; I am sure there is some group of whole-hearted goniffs
willing to sue on our behalf........

[R.D. Silverman]

Originally Posted by R.D. Silverman

In the mode of J. Swift, allow me to make a modest proposal.

Everyone in the country whose investments have tanked as a result
of our current financial mess gets together. We file a class action
law suit against all of Wall Street, all of the senior executives at companies
whose reckless behavior caused our loss, the executives at the SEC for failing in their duties, etc. etc. We demand that these people 'make us whole'....

It would mean a nice fat fee for any group of lawyers willing to undertake
such a case; I am sure there is some group of whole-hearted goniffs
willing to sue on our behalf........

Even easier!!! Let's demand that Congress pass a law requiring that
all stock prices be returned to their value on (say) Dec 1, 2007.....

Of course, it would have to require that prices remain at that level
for some specified time. Otherwise, the mass reaction would be to
sell, sell, sell, immediately and prices would immediately drop back to
what they are now....

[xilman]

Originally Posted by R.D. Silverman

Even easier!!! Let's demand that Congress pass a law requiring that
all stock prices be returned to their value on (say) Dec 1, 2007.....

Of course, it would have to require that prices remain at that level
for some specified time. Otherwise, the mass reaction would be to
sell, sell, sell, immediately and prices would immediately drop back to
what they are now....

Dead easy, and the prices wouldn't drop at all.

The Fed prints dollars and uses them to buy any stock that the stock holders wish to sell. The US government, in effect, buys the corporations with money it creates for itself.

It's been tried many times before in history.


Paul

[ewmayer]

Stocks in U.S. Drop as Treasury Auction Draws Higher Yield Than Forecast: [i]U.S. stocks retreated, erasing an earlier rally, after higher-than-forecast yields in a Treasury auction of five-year notes spurred concern government attempts to lower interest rates will fail amid record sales of bonds.[/url]

Treasury notes declined after the auction of $34 billion in five-year notes drew a yield of 1.849 percent and as a U.K. government debt auction failed. The last time the U.K. was unable to attract enough investors was in 2002 when it tried to sell 30-year inflation-protected bonds. The U.K.’s FTSE 100 Index slipped 0.3 percent, trailing a 0.3 percent advance in the Dow Jones Stoxx 600, Europe’s regional benchmark index.

Benchmark stock indexes rallied earlier as unexpected growth in durable-goods orders and new-home sales spurred speculation the economy is stabilizing.

My Comment: Forget about the daily market bulls-v-bears and statistics-misuse-to-paint-a-rosy-picture bullshit here - the real interesting stuff is in the bond auctions part of the story. If there were a major govt bond auction failure for the US or UK, the phrase "And just when you thought things couldn't get much worse..." would instantly come into play. PBS Frontline last night had a special on the U.S. national debt - at the end of the program they showed the operations rooms (whose precise location is kept secret - likely an underground bunker) where the U.S. debt auctions occur, and mentioned just how much is at stake there. One "not filled" there and the wheels of government could begin to grind to a halt in a very short time span. Now let`s turn to the UK, which is similarly (relative to GDP) indebted as the U.S., but lacks the luxury that comes with owning the "reserve currency of world commerce" brand:

From the Bloomberg article on the UK Bond auction failure:

Brown’s government aims to sell a record 146.4 billion pounds of debt this fiscal year and as much as 147.9 billion pounds in 2010 as he tries to pull Europe’s second-largest economy out of its worst recession since 1980. The prime minister’s plan drew criticism yesterday when Bank of England Governor Mervyn King said the government should be “cautious” about spending and deficits.

“This is a warning signal investors are sending to the government,” said Neil Mackinnon, chief economist at hedge fund ECU Group Plc in London, who helps manage about $1 billion in assets and is a former U.K. Treasury official. “Investors are giving the thumbs down to the gilt market.”

...

“This sinks Brown below the waterline,” said Bill Jones, professor of politics at Liverpool Hope University. Brown’s “whole strategy is based on borrowing and now he can’t get anyone to buy his gilts. This means the prospect of going cap in hand to the IMF hovers increasingly into view.”

...

Today’s auction result belies the “underlying strength” of the gilt market, Brown’s spokesman Tom Hoskin told reporters at a regular briefing in London.

My Comment: My dear Mr. Paid-Liar Hoskin, you have it completely backwards - today`s auction failure belies your repeated lies about the alleged strength of the market for UK government debt.

What is truly ironic about massive-debtor nations like the U.S. and UK finally beginning to reap the harvest of their decades-long profligacy is this: If some banana republic in (say) South America or Africa gets itself into debtor`s prison, as it were, the typical remedy (assuming it wants to continue to be able to engage in world commerce) is for it to go "cap in hand" to the IMF, which usually will put together some kind of fiscal aid package, but with major strings attached, in the form of "austerity measures". Now U.S. president Obama has called for "shared sacrifice" on the part of Americans as a way out of the crisis, but all we've had to date is the U.S. government playing shell games with the debt (e.g. the Fed stepping in to buy treasury debt) and a commitment to shared sacrifice on the part of ... the future generations unlucky enough enough to follow ours. That's "austerity", American style - drive the Hummer 5% less, stuff your face at home instead of eating out, and godforbid anyone would actually dare to ask you to start *paying* for all those government entitlement programs (and grossly oversized military, and unconscionably wasteful national health care 'system', &c.) you've come to believe are your natural-born right. Well, guess what? It seems our banana harvest of late has been of "subprime quality", and if we stop being able to fob off our excesses on some foreign-sucker-who-thinks-we`re-actually-gonna-pay-him-back-someday bondholders, it`s game over.


Lost HOPE: Program saves just one home: HOPE for Homeowners has been a failure. But Congress thinks some tweaks will revive it.

If HOPE for Homeowners, the foreclosure-prevention plan passed last summer, was a soft drink, it would be New Coke. If it was an automobile, it would be an Edsel. A movie? Howard the Duck.

In the five months since it has been in effect, HOPE has helped exactly one homeowner to avoid foreclosure. This despite Congress having made $300 billion available to back these loans and estimating that the program would benefit as many as 400,000 families.

"As it stands now, we've only gotten 752 applications," said Federal Housing Authority spokesman Brian Sullivan. "And only insured one loan. Needless to say, the program isn't working terribly well."

My Comment: Hey, maybe with another couple hundred billions in backing, they could double the number of homeowners helped by the program.

[__HRB__]

Originally Posted by xilman

Dead easy <snip>

Which gives me an idea...

Why don't we have the military simply shoot everybody who has suffered a loss. It would only be a one-time thing, so according to our administration, that's perfectly OK then, since the military can always stop shooting people once the economy has recovered.

The government can create jobs by hiring people to dig graves, thereby speeding up economic recovery. Maybe after the recovery, we'd have to subsidize shooting people just a little to save some of those jobs. But this is a small price to pay, if you just think of the children of all those suddenly unemployed grave-diggers!

But wait! It gets even better: the less people, the lower the CO2-emissions! So, this would revive the economy AND fight global warming!

Win-win!

If we start by shooting people that have suffered the largest absolute losses (i.e. rich people), this policy will have full backing by Joe Biden, who as we all know, isn't rich. Then when the Republicans take over in 4 years, we'll finally be able to get rid of poverty (i.e. black people), by calling poverty "has-been-rich" and booby-trapping Harlem with M18A1 Claymores. Maybe some clerical errors can be made so that the same thing happens in San-Fransico (homosexuals!).

Full disclaimer: I have a PhD in grave digging, long positions on shovels, funeral decorations and protest-sign manufacturers, but am delta-neutral through shorts in the birthday-cake manufacturing sector and Hallmark, inc.

[only_human]

FBI director says financial fraud cases are limiting ability to fight other crime [jurist.law.pitt.edu/paperchase]
Fiscal Year 2007: 120 agents investigating mortgage fraud cases
Fiscal Year 2008: 180 agents investigating mortgage fraud cases
Currently: over 250 agents are assigned to mortgage fraud and related cases

"In FY 2009 there have already been 28,873 mortgage fraud Suspicious Activity
Reports (SARs) filed, which is on pace to nearly double the total in FY 2008."

"Last month, the FBI announced [JURIST report] that it was looking at shifting a number of agents from national security and counter terrorism activities to investigations involving financial fraud."

[ewmayer]

GDP: Worst in 26 years: The nation's gross domestic product declined by 6.3% in the fourth quarter -- the biggest drop since 1982.

The economic problems have obviously not ended with the fourth quarter report. Economists surveyed by the National Association for Business Economics forecast a 5% rate of decline in the first quarter, which ends Tuesday, followed by a 1.7% drop in the second quarter.

Still, Bernard Baumohl, executive director of The Economic Outlook Group, said that some recent economic readings on housing and retail sales that have come in better than expected in the last couple of weeks suggest that the recession may be approaching a bottom.

My Comment: Oh, puhleeze ... the "better than expected" February new-home sales were nothing but a flagrant misrepresentation of statistics, neglecting not only that "4.7 percent (±18.3%)" equates to "statistically insignificant due to large error" but also (if you optimistically assume that the +4.7% at least has the sign of the underlying true datum right) that February is typically better than January, March is typically better than February, etc. It`s called "seasonality". Year-over-year February sales, the more-meaningful point of comparison, were horrendous, and a massive percentage of the sales that were going on were foreclosure/bank-owned/distress sales. The only bright spot in that is that it confirms that some semblance of free-market sanity is returning to the housing market, in the sense that once prices drop to a multiple of income which is not a double-digit number (as was common during the height of the bubble), there are buyers to be found - but they`re (sensibly) wary of paying too much, and actually have to have a *job*, proof of income, and some money for a down payment. The can-you-fog-a-mirror mortgage-eligibility tests are alas a thing of the past now.


Geithner Says U.S. Needs `New Rules of Game' to Avert Another Bank Crisis: U.S. Treasury Secretary Timothy Geithner said regulation of the U.S. financial system needs a broad overhaul to heal a crippling lack of confidence caused by the credit crisis.

Translation: "Give me, Benny B and our Big-Finance-insider buddies even more unchecked power to loot the system and enrich the few."


EU Risks Paralysis as Czech Government Collapse Snarls Lisbon Treaty Bid: The collapse of the Czech government threatened a new setback for the European Union’s stalled governing treaty, distracting the bloc’s leadership just as President Barack Obama presses for bolder European steps to confront the recession.

Topolanek, set to host Obama in Prague next week, raised further questions about his management of EU affairs by yesterday accusing the new U.S. administration of deficit spending and protectionism that will put the U.S. on a “road to hell.”

My Comment: Another government falls as a result of the financial crisis ... the quote I use above is an interesting subtext to the Story. Topolanek may be a bit of a blustery nut, but I have to say I am sympathetic to his and Czech president Klaus` warnings about the dangers of the unchecked growth of the EU transnational bureacracy, and the larger EU countries talking a good game about pan-Europeanism as long as times were good, but then screwing the fledgling economies by way of protectionist measures as soon as la merde hit le fan.


Brown `Terribly Fragile' After First Failed Bond Auction in Seven Years: The first failed British bond auction in more than seven years leaves Prime Minister Gordon Brown’s reputation for economic competence even more tarnished as he battles recession and a rising tide of voter anger.

Brown, who had the backing of 30 percent of the electorate in a ComRes Ltd. poll last week, must now cope with what amounts to a vote of no confidence by investors in his ability to end the recession. Bank of England Governor Mervyn King, his ally for much of the past decade, warned a day earlier that there’s no more money for further spending.

“The notion that Brown is leading us to the promised land is laughable,” said Ruth Lea, economic adviser to the Arbuthnot Banking Group Plc in Solihull, England. “He cannot get to grips with how other people see this country now, as the sick man of Europe.”

Chancellor of the Exchequer Alistair Darling brushed aside concerns about the gilt auction, noting that a sale of bonds today was fully covered.

“You always have to be careful about reading too much into one particular auction,” Darling said in response to a question in Parliament in London today.

My Comment: Rather like avoiding reading too much into a single data point on home sales (as noted above), eh?

[garo]

Originally Posted by ewmayer

and the larger EU countries talking a good game about pan-Europeanism as long as times were good, but then screwing the fledgling economies by way of protectionist measures as soon as la merde hit le fan.

Any evidence for that? It is nigh on impossible to have protectionism within the EU - notwithstanding all the British jobs for British workers rhetoric - and all the Germans have done by way of screwing the smaller countries is telling them we won't bail you out.