Econ 2009

[Fusion_power]

I really like what this guy has to say. He is much closer to dealing with the real problem of the zombie banks than anyone else.

http://www.cnn.com/2009/POLITICS/01/...sis/index.html

(CNN) -- America's recession is moving into its second year, with the situation only worsening.

The hope that President Obama will be able to get us out of the mess is tempered by the reality that throwing hundreds of billions of dollars at the banks has failed to restore them to health, or even to resuscitate the flow of lending.

Every day brings further evidence that the losses are greater than had been expected and more and more money will be required.

The question is at last being raised: Perhaps the entire strategy is flawed? Perhaps what is needed is a fundamental rethinking. The Paulson-Bernanke-Geithner strategy was based on the realization that maintaining the flow of credit was essential for the economy. But it was also based on a failure to grasp some of the fundamental changes in our financial sector since the Great Depression, and even in the last two decades.

For a while, there was hope that simply lowering interest rates enough, flooding the economy with money, would suffice; but three quarters of a century ago, Keynes explained why, in a downturn such as this, monetary policy is likely to be ineffective. It is like pushing on a string.

Then there was the hope that if the government stood ready to help the banks with enough money -- and enough was a lot -- confidence would be restored, and with the restoration of confidence, asset prices would increase and lending would be restored.

Remarkably, Bush administration Treasury Secretary Henry Paulson and company simply didn't understand that the banks had made bad loans and engaged in reckless gambling. There had been a bubble, and the bubble had broken. No amount of talking would change these realities.

It soon became clear that just saying that we were ready to spend the money would not suffice. We actually had to get it into the banks. The question was how. At first, the architects of the bailout argued (with complete and utter confidence) that the best way to do this was buying the toxic assets (those in the financial market didn't like the pejorative term, so they used the term "troubled assets") -- the assets that no one in the private sector would touch with a 10-foot pole.

It should have been obvious that this could not be done in a quick way; it took a few weeks for this crushing reality to dawn on them. Besides, there was a fundamental problem: how to value the assets. And if we valued them correctly, it was clear that there would still be a big hole in banks' balance sheets, impeding their ability to lend.

Then came the idea of equity injection, without strings, so that as we poured money into the banks, they poured out money, to their executives in the form of bonuses, to their shareholders in the form of dividends.

Some of what they had left over they used to buy other banks -- to pursue strategic goals for which they could not have found private finance. The last thing in their mind was to restart lending.

The underlying problem is simple: Even in the heyday of finance, there was a huge gap between private rewards and social returns. The bank managers have taken home huge paychecks, even though, over the past five years, the net profits of many of the banks have (in total) been negative.

And the social returns have even been less -- the financial sector is supposed to allocate capital and manage risk, and it did neither well. Our economy is paying the price for these failures -- to the tune of hundreds of billions of dollars.

But this ever-present problem has now grown worse. In effect, the American taxpayers are the major provider of finance to the banks. In some cases, the value of our equity injection, guarantees, and other forms of assistance dwarf the value of the "private" sector's equity contribution; yet we have no voice in how the banks are run.

This helps us understand the reason why banks have not started to lend again. Put yourself in the position of a bank manager, trying to get through this mess. At this juncture, in spite of the massive government cash injections, he sees his equity dwindling. The banks -- who prided themselves on being risk managers -- finally, and a little too late -- seem to have recognized the risk that they have taken on in the past five years.

Leverage, or borrowing, gives big returns when things are going well, but when things turn sour, it is a recipe for disaster. It was not unusual for investment banks to "leverage" themselves by borrowing amounts equal to 25 or 30 times their equity.

At "just" 25 to 1 leverage, a 4 percent fall in the price of assets wipes out a bank's net worth -- and we have seen far more precipitous falls in asset prices. Putting another $20 billion in a bank with $2 trillion of assets will be wiped out with just a 1 percent fall in asset prices. What's the point?

It seems that some of our government officials have finally gotten around to doing some of this elementary arithmetic. So they have come up with another strategy: We'll "insure" the banks, i.e., take the downside risk off of them.

The problem is similar to that confronting the original "cash for trash" initiative: How do we determine the right price for the insurance? And almost surely, if we charge the right price, these institutions are bankrupt. They will need massive equity injections and insurance.

There is a slight variant version of this, much like the original Paulson proposal: Buy the bad assets, but this time, not on a one by one basis, but in large bundles. Again, the problem is -- how do we value the bundles of toxic waste we take off the banks? The suspicion is that the banks have a simple answer: Don't worry about the details. Just give us a big wad of cash.

This variant adds another twist of the kind of financial alchemy that got the country into the mess. Somehow, there is a notion that by moving the assets around, putting the bad assets in an aggregator bank run by the government, things will get better.

Is the rationale that the government is better at disposing of garbage, while the private sector is better at making loans? The record of our financial system in assessing credit worthiness -- evidenced not just by this bailout, but by the repeated bailouts over the past 25 years -- provides little convincing evidence.

But even were we to do all this -- with uncertain risks to our future national debt -- there is still no assurance of a resumption of lending. For the reality is we are in a recession, and risks are high in a recession. Having been burned once, many bankers are staying away from the fire.

Besides, many of the problems that afflict the financial sector are more pervasive. General Motors and GE both got into the finance business, and both showed that banks had no monopoly on bad risk management.

Many a bank may decide that the better strategy is a conservative one: Hoard one's cash, wait until things settle down, hope that you are among the few surviving banks and then start lending. Of course, if all the banks reason so, the recession will be longer and deeper than it otherwise would be.

What's the alternative? Sweden (and several other countries) have shown that there is an alternative -- the government takes over those banks that cannot assemble enough capital through private sources to survive without government assistance.

It is standard practice to shut down banks failing to meet basic requirements on capital, but we almost certainly have been too gentle in enforcing these requirements. (There has been too little transparency in this and every other aspect of government intervention in the financial system.)

To be sure, shareholders and bondholders will lose out, but their gains under the current regime come at the expense of taxpayers. In the good years, they were rewarded for their risk taking. Ownership cannot be a one-sided bet.

Of course, most of the employees will remain, and even much of the management. What then is the difference? The difference is that now, the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted.

There are several other marked advantages. One of the problems today is that the banks potentially owe large amounts to each other (through complicated derivatives). With government owning many of the banks, sorting through those obligations ("netting them out," in the jargon) will be far easier.

Inevitably, American taxpayers are going to pick up much of the tab for the banks' failures. The question facing us is, to what extent do we participate in the upside return?

Eventually, America's economy will recover. Eventually, our financial sector will be functioning -- and profitable -- once again, though hopefully, it will focus its attention more on doing what it is supposed to do. When things turn around, we can once again privatize the now-failed banks, and the returns we get can help write down the massive increase in the national debt that has been brought upon us by our financial markets.

We are moving in unchartered waters. No one can be sure what will work. But long-standing economic principles can help guide us. Incentives matter. The long-run fiscal position of the U.S. matters. And it is important to restart prudent lending as fast as possible.

Most of the ways currently being discussed for squaring this circle fail to do so. There is an alternative. We should begin to consider it.

As you can see, he does everything but call a zombie a zombie.

DarJones

[ewmayer]

Iceland's Coalition Splits, Prime Minister Seeks to Dissolve Government: Icelandic President Olafur Ragnar Grimsson accepted the break-up of the coalition government of Prime Minister Geir Haarde and asked the current Cabinet to stay in post until a new government is formed.

My Comment: I am 100% certain that Iceland's government will be far from the last to collapse as a result of the implosion of the global credit bubble and resulting financial crisis. Roughly half the EU countries are in dire straits already, and there are riots and a large-scale fraying of the social fabric in a significant number of those (e.g. Greece, Bulgaria and the Baltic states, just off the top of my head).


Housing Prices, Starts in U.S. Decline at Record Pace as Recession Deepens: U.S. builders broke ground in December on the fewest houses since record-keeping began as sales and credit dried up, signaling the real-estate slump will keep hurting economic growth.

Housing starts fell 16 percent last month to an annual rate of 550,000 that was less than forecast and the lowest since the government started compiling statistics in 1959, the Commerce Department said today in Washington. Building permits, an indicator of future projects, were also at a record low.

Builders, whose shares have lost 76 percent of their value over the last three years, are slashing prices to compete with a record number of foreclosed homes coming onto the market. Barack Obama’s advisers say the president will use up to $100 billion in financial-rescue funds to ease the mortgage crisis.

“Homebuilders have no choice,” said Ryan Sweet, an economist at Moody’s Economy.com Inc. in West Chester, Pennsylvania. “The market is bloated with excess supply and demand is weak. The pace of housing starts will remain depressed until 2011.” Economy.com projected starts would drop to a 580,000 pace.

The market's illogical rally: Despite a slew of layoff announcements, stocks were up Monday as investors focused more on a big merger and hopes that the worst may be over for banks.

NEW YORK (CNNMoney.com) -- It should have been an ugly morning for the markets.

Home Depot, Caterpillar, Sprint Nextel, John Deere and ING all announced sizable job cuts. This is further proof that this recession is hitting all sectors of the economy and all areas of the globe. It is not good news.

But stocks didn't plunge Monday morning despite all this doom and gloom. In fact, the Dow gained more than 100 points in early trading while the S&P 500 and Nasdaq both shot up about 2%. Say wha?

The layoff news may have been tempered somewhat by the announcement that Pfizer was buying rival drugmaker Wyeth for about $68 billion.

The merger is the biggest in nearly three years and could usher in a wave of consolidation in the healthcare sector. It may also signal cash-rich companies in other industries to take advantage of fallen stock prices and make some purchases of their own.
Talkback: Are more job cuts and other bad economic news already priced into stocks?

"Even with all the negative news on the unemployment front, the Pfizer deal shows that companies are signaling there is some value in the market here," said Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, an investment research firm based in Shrewsbury, N.J.

Bank stocks, which have been hit hard so far this year due to fears of rising losses and nationalization speculation, also skyrocketed higher Monday morning.

It appears that investors may have been reassured by the news from beleaguered British bank Barclays (BCS), which said Monday morning that it posted a profit in 2008 despite massive writedowns and that it would not need new capital.

Shares of Barclays U.S.-listed stock surged nearly 60% and several large beaten down U.S. banks, such as Citigroup, Bank of America and Wells Fargo, all rallied as well.

Finally, two bits of economic data were released Monday morning - and each was better than expected. The Conference Board`s leading indicators rose 0.3% compared to the 0.2% drop economists were forecasting. Even more surprisingly, existing home sales rose 6.5% in December.

My Comment: How many times in the past year have we had short-lived rallies in the financials based on "hopes that the worst may be over for banks" and rallies in individual bank/brokerage shares based on the institution issuing a (similarly short-lived) "we anticipate no further writedowns or capital-raising will be required"? Anyone who believes that at this point is a delusional fool. The mega-drugmaker merger of Pfizer and Wyeth may be exciting news to the folks making money from financing the deal, but will likely lead to lots of layoffs. The uptick in home sales is nice to see, but nearly half of those sales were distress sales and I expect a similar fraction were to investors rather than private homebuyers, so is more reflective of a deeply distressed market and blood-in-the-water bargain-hunting rather than any kind of housing-market "recovery". (I use quotes because thew word "recovery" in the sense the realtors and most politicians use it when speaking of the U.S. housing market is a contradiction in terms - most of them are dreaming of a "recovery" to the overheated, overpriced, overleveraged, rampantly speculative bubble-market of 2006-2006 - that`s not a sustainable equilibrium, folks.)

Update: I see today's "HUGE BANK RALLY!!!" (at least for the above-named U.S. banks) was very short-lived indeed,and that the job cuts at Pfizer weren`t long in coming:

Bloody Monday: More than 50,000 jobs lost: Six companies announce massive job cuts in a scary start to the week.

NEW YORK (CNNMoney.com) -- The final week of January began with a bloodbath for the job market, as more than 50,000 more cuts were announced on Monday alone.

At least six companies from manufacturing and service industries announced cost-cutting initiatives that included slashing thousands of jobs.

...

Construction machinery manufacturer Caterpillar said Monday it will cut 20,000 jobs amid a "very challenging global business environment." The company had already planned to cut 15,000 workers since the fourth quarter of 2008, but added another 5,000, bringing the total to 20,000.

Sprint Nextel Corp. will cut a total of about 8,000 jobs by March 31, the company said in a release. The telecommunications company`s plan is to reduce internal and external labor costs by about $1.2 billion on an annual basis.

Home Depot, the world`s largest home improvement retailer, announced Monday it will eliminate its EXPO design center business and cut 7,000 associates, or approximately 2% of the company`s total workforce. The company blamed a lack of demand for big ticket design and decor projects.

Dutch financial group ING said Monday it will take a 2008 loss of $1.3 billion and cut 7,000 jobs. The company could not comment on where the cuts would take place. ING employs around 130,000 people across 50 countries.

Pfizer said in an earnings report it would cut 10% of its staff of 81,900 and close five of its manufacturing plants. The drugmaker recently announced that it was cutting up to 8% of its research staff, or up to 800 jobs. The company already cut 4,700 jobs in 2008.

My Comment: One wonders: for every announced job cut, how many unannounced ones (on average) are taking place? Despite the grim news on all fronts, economists continue to be eager to prove how clueless and truly "dismal science"-y they are:

[Robert Brusca, chief economist at Fact and Opinion Economics] said he agreed with many economists' predictions that the recession will end after the second quarter of 2009. Americans might feel the job market start to bounce back a bit sooner than expected, he said.

"These recessions are like geometry," Brusca said. "It looks like we`ll have a V-shaped cycle, in that we`re going into this with very sharp losses. This intense-phase recession will probably recover fairly quickly, with the job market coming out it at the same angle it came in."

In the short term, the economy and the job market are in trouble, Brusca said. But "it doesn`t look like the bottom is falling out of the economy," he said.

And there`s a silver lining to the gloomy clouds over America`s economy.

"The good news is it`s so bad right now that we will have a definite, noticeable recovery when it comes," Brusca said. "We`re getting a lot of adjustment out of the way early."

My Comment: Recessions may indeed "be like geometry", but apparently most economists' knowledge of recessionary geometry is limited to the V-shaped curve the past few recessions have had. So basically, the very same group of folks who excuse their mispredictions with pithy phrases like "past performance no guarantee of future results" once again fails to heed its own advice. Anyway, the predictions by "most economists" that the current recession will prove to be V-shaped are based on nothing more than this kind of "duh - that`s what the last few looked like" mystic chart-ology, because all reasonable measures of economic fundamentals and the utter lack of success of "the usual" government anti-recession interventions tell us that this ain`t your run-of-the-mill recession here. And if what has happened in the past 12 months doesn`t strike Mr. Brusca and his fellow "econ-o-misseds" as "the bottom falling out", I sure don`t want to see what would. So the "silver lining" boils down to "Once you've plunged halfway into the abyss, you have less far to fall than you did to start with"? Oh-kay - that doesn't make the landing any softer, if I understand my physics correctly. (I know, how dare I interject a gratuitous and completely-uncalled-for reference to a real science into an economic discussion. I apologize unreservedly for my shocking lack of couth.) And there are many more letters in the alphabet - even the specialized recessionary one - than V ... consider "U", for instance, or even "L".


Today's Econo-smackdown: Mike "The Other **** Pacific Fund" Shedlock takes Peter Schiff to task:

Peter Schiff Was Wrong

Schiff's Investment Thesis

* US Dollar Will Go To Zero (Hyperinflation).
* Decoupling (The rest of the world would be immune to a US slowdown.
* Buy foreign equities and commodities and hold them with no exit strategy.

12 Ways Schiff Was Wrong in 2008

* Wrong about hyperinflation
* Wrong about the dollar
* Wrong about commodities except for gold
* Wrong about foreign currencies except for the Yen
* Wrong about foreign equities
* Wrong in timing
* Wrong in risk management
* Wrong in buy and hold thesis
* Wrong on decoupling
* Wrong on China
* Wrong on US treasuries
* Wrong on interest rates, both foreign and domestic

That's a lot of things to be wrong about, especially given all the "Peter Schiff Was Right" videos floating around everywhere. The one thing he was right about was the collapse of US equities and no part of his investment strategy sought to make a gain from that prediction.

My Comment: Ouch. Full article is worth a read, not so much for the clash-of-the-huge-egos "I was right and Schiff was wrong but he gets all the YouTube airtime, dammit" posturing but because of all the macroeconomic background mixed in there.

[cheesehead]

http://www.nytimes.com/2009/01/25/bu...my/25view.html

(probably requires registration at nytimes.com)

"Economic View - Six Errors on the Path to the Financial Crisis"

Originally Posted by ALAN S. BLINDER

WHAT’S a nice economy like ours doing in a place like this? As the country descends into what is likely to be its worst postwar recession, Americans are distressed, bewildered and asking serious questions: Didn’t we learn how to avoid such catastrophes decades ago? Has American-style capitalism failed us so badly that it needs a radical overhaul?

The answers, I believe, are yes and no. Our capitalist system did not condemn us to this fate. Instead, it was largely a series of avoidable — yes, avoidable — human errors. Recognizing and understanding these errors will help us fix the system so that it doesn’t malfunction so badly again. And we can do so without ending capitalism as we know it.

My list of errors has six whoppers, in chronologically order. I omit mistakes that became clear only in hindsight, limiting myself to those where prominent voices advocated a different course at the time. Had these six choices been different, I believe the inevitable bursting of the housing bubble would have caused far less harm.

WILD DERIVATIVES In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission, sought to extend its regulatory reach into the derivatives world, top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission squelched the idea. While her specific plan may not have been ideal, does anyone doubt that the financial turmoil would have been less severe if derivatives trading had acquired a zookeeper a decade ago?

SKY-HIGH LEVERAGE The second error came in 2004, when the S.E.C. let securities firms raise their leverage sharply. Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a company. Had leverage stayed at 12 to 1, these firms wouldn’t have grown as big or been as fragile.

A SUBPRIME SURGE The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common.

Why wasn’t this insanity stopped? There are two answers, and each holds a lesson. One is that bank regulators were asleep at the switch. Entranced by laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich, then a Fed governor, who saw the problem brewing years before the fall.

The other answer is that many of the worst subprime mortgages originated outside the banking system, beyond the reach of any federal regulator. That regulatory hole needs to be plugged.

FIDDLING ON FORECLOSURES The government’s continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago — and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms.

Yet the Treasury and Congress fiddled while homes burned. Why? Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles. Sadly, the problem should now be much smaller than it is.

LETTING LEHMAN GO The next whopper came in September, when Lehman Brothers, unlike Bear Stearns before it, was allowed to fail. Perhaps it was a case of misjudgment by officials who deemed Lehman neither too big nor too entangled — with other financial institutions — to fail. Or perhaps they wanted to make an offering to the moral-hazard gods. Regardless, everything fell apart after Lehman.

People in the market often say they can make money under any set of rules, as long as they know what they are. Coming just six months after Bear’s rescue, the Lehman decision tossed the presumed rule book out the window. If Bear was too big to fail, how could Lehman, at twice its size, not be? If Bear was too entangled to fail, why was Lehman not?

After Lehman went over the cliff, no financial institution seemed safe. So lending froze, and the economy sank like a stone. It was a colossal error, and many people said so at the time.

TARP’S DETOUR The final major error is mismanagement of the Troubled Asset Relief Program, the $700 billion bailout fund. As I wrote here last month, decisions of Henry M. Paulson Jr., the former Treasury secretary, about using the TARP’s first $350 billion were an inconsistent mess. Instead of pursuing the TARP’s intended purposes, he used most of the funds to inject capital into banks — which he did poorly.

To illustrate what might have been, consider Fed programs to buy commercial paper and mortgage-backed securities. These facilities do roughly what TARP was supposed to do: buy troubled assets. And they have breathed some life into those moribund markets. The lesson for the new Treasury secretary is clear: use TARP money to buy troubled assets and to mitigate foreclosures.

Six fateful decisions — all made the wrong way. Imagine what the world would be like now if the housing bubble burst but those six things were different: if derivatives were traded on organized exchanges, if leverage were far lower, if subprime lending were smaller and done responsibly, if strong actions to limit foreclosures were taken right away, if Lehman were not allowed to fail, and if the TARP funds were used as directed.

All of this was possible. And if history had gone that way, I believe that the financial world and the economy would look far less grim than they do today.

For this litany of errors, many people in authority owe millions of Americans an apology. Richard A. Clarke, former national security adviser, set a good example when he told the commission investigating the 9/11 attacks that he wanted victims’ families “to know why we failed and what I think we need to do to ensure that nothing like that ever happens again.” I’m waiting for similar words from our financial leaders, both public and private.

Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians.

[cheesehead]

BTW, regarding the failure of the first $350 billion TARP funds to produce results, and banks' not reporting what they did with the money:

I recently read an article pointing out that there are minimum capital requirements for banks (banks are required to have a net asset value exceeding a certain percentage of their outstanding loans), and that the sudden failure of Lehman Brothers brought lending to a standstill not just because of lenders' fears of not being repaid, but also because major banks suddenly found themselves below the minimum capital requirements and thus were legally barred from extending further credit, whether they wanted to or not. As I recall, the article explained that, at least in some cases, the TARP funds simply brought those banks' net asset values back up to the minimums so that they weren't in violation of their charters, but did not necessarily provide enough extra to allow them to actually make any significant amount of new loans.

I don't recall what the article said about how much of the TARP funds was used for that purpose. And, of course, that does not invalidate complaints about use of the funds for executive bonuses and mergers instead of loans.

I'm not sure that "minimum capital requirement" was the exact phrase used, and I can't find the bookmark I thought I had saved for that article. Can anyone help find it?

[ewmayer]

Blinder's points are well-taken, but notice how carefully he (a former Fed governor) avoids directly mentioning the malfeasance on the part of the Fed in connection with the original blowing of the housing bubble - that would get him a lifetime disinvitation to cocktail parties at the Greenspans.

So let me clarify one of Blinder's oh-so-carefully-phrased-to-avoid-directly-implicating-the-Maestro sentences: Just who were these shadowy, feckless "bank regulators" who so callously ignored the warnings of the Fed governor Edward Gramlich? Well, the chief among them was none other than Gramlich's boss, Alan Greenspan. See how easy that was? Unless you have your "Fed Blinders" on, that is.

[R.D. Silverman]

Originally Posted by ewmayer

Blinder's points are well-taken, but notice how carefully he (a former Fed governor) avoids directly mentioning the malfeasance on the part of the Fed in connection with the original blowing of the housing bubble - that would get him a lifetime disinvitation to cocktail parties at the Greenspans.

So let me clarify one of Blinder's oh-so-carefully-phrased-to-avoid-directly-implicating-the-Maestro sentences: Just who were these shadowy, feckless "bank regulators" who so callously ignored the warnings of the Fed governor Edward Gramlich? Well, the chief among them was none other than Gramlich's boss, Alan Greenspan. See how easy that was? Unless you have your "Fed Blinders" on, that is.

He also avoids one of my pet peeves:

The way salaries and bonuses were paid to employees of financial
companies strongly encouraged the very risky behavior of those
companies. It made decision makers look good in the very short term;
they got very large bonuses, and they took on a disastrous amount
of risk. Because, after all, once they got their large bonus, the future
was someone else's problem.

[Uncwilly]

I just heard that frequently in a recessive economy, the layoffs actually peak during the recovery phase. About 6-9 months into the recovery (like the recession, not determined until later) the maximum number of layoffs happen.

[Fusion_power]

Newtonian Economics:

For every desperate economic action, there is an equally desperate economic reaction.

Don't know where this came from, but seems apropos. Watch for kneejerk reactions from governments around the world.

Uncwilly, I would not in any way shape or fashion imagine that the current layoff mania is associated with a 'recovery'. The signs on this one say it will be the great granddaddy of all recessions. !929 to 1936 by comparison with today will look like a firecracker next to a stick of dynamite.

DarJones

[ewmayer]

Denninger | It`s Always Best To Lie To the Public

British-style "honest government":

"Britain was just three hours away from going bust last year after a secret run on the banks, one of Gordon Brown`s Ministers has revealed.

City Minister Paul Myners disclosed that on Friday, October 10, the country was `very close` to a complete banking collapse after `major depositors` attempted to withdraw their money en masse.

The Mail on Sunday has been told that the Treasury was preparing for the banks to shut their doors to all customers, terminate electronic transfers and even block hole-in-the-wall cash withdrawals. "

And later on....

"But 60-year-old Lord Myners was accused last night of being `completely irresponsible` for admitting the scale of the crisis while the recession was still deepening and major institutions such as Barclays remain under intense pressure. "

Absolutely.

Not only should one lie when in government but one should keep lying as long as is humanly possible.

My Comment: To quote the eminent philosopher and onetime member of the classic hardcore punk band Black Flag, Lord Viscount Henry Rollins:

Liar

I don't know why I feel the need to lie and cause you so much pain
maybe it's something inside, maybe it's something I can't explain
'cause all I do is mess you up and lie to you
I'm a liar, ooh, I'm a liar
but if you'll give me another chance I swear I'll never lie to you again
'cause now I see the destructive power of a lie,
they're stronger than truth
I can't believe I ever hurt you, I swear I will never lie to you again
please, just give me more chance, I'll never lie to you again, no,
I swear, I will never tell a lie, I will neer tell a lie, no, no
Ha Ha Ha Ha Ha Ha Ha Ha Ha! Sucker! Sucker! Sucker!

I am a liar, yeah, I am a liar, yeah, I am a liar
I lie you, I feel good, I am a liar, yeah
I lie, ooh, I lie, yeah, I lie
I'm a liar, I lie, I like it, I feel good, I like it, and again
I like it again and I'll keep lying ... I promise

Things in the UK are looking so dire that the government is considering paying companies to go to a three-day work week as an alternative to mass unemployment. This begs the question: Where does the government get the money to pay for such a scheme? See my note of last week about the return of "stealth money printing" in the UK - that may have something to do with it.


Ukraine on the Brink of Financial Ruin:

Ukraine Stares Into Economic-Political `Abyss' After Russia Gas Agreement: For Europeans, last week’s resumption of Russian natural gas shipments ended a two-week energy dispute. For Ukraine, it may have ended any hope of weathering the global financial crisis.


Do the Funky Ponzi, Everyone! - One could say Mr. Cosmo`s clients were left "with mouth agape":

Cosmo Accused of $370 Million Scheme, Losing $80 Million on Futures Trades: Nicholas Cosmo, founder of Agape World Inc. in Hauppauge, New York, was charged with defrauding 1,500 investors of more than $370 million, U.S. authorities said.

Fugitive Fund Manager Nadel Is Arrested in Florida on U.S. Fraud Charges: Florida hedge-fund adviser Arthur Nadel was arrested in Florida by the Federal Bureau of Investigation and has been charged with securities fraud.

But getting away from the small fry and back to the real big-time crooks (at least the ones not currently or recently working for the Federal Reserve or Treasury - strictly private-sector crookery here):

Cuomo Subpoenas Thain Over Bonuses Paid Before Merrill Lynch's Takeover: New York Attorney General Andrew Cuomo subpoenaed former Merrill Lynch & Co. head John Thain and Bank of America Corp. Chief Administrative Officer J. Steele Alphin to testify about executive bonuses paid by Merrill just before its takeover by Bank of America.

Madoff Enablers Who Say They Were Duped Winked at Suspected Front-Running: For Swiss banker Werner Wolfer, the memory of his first encounter with one of Bernard Madoff’s emissaries nine years ago is as clear as the waters of Lake Geneva.

To hear Patrick Littaye talk, the Wall Street money manager could walk on those waters. “It was like a religion,” Wolfer, 57, says of the promise of steady returns, which would be echoed by other acolytes. “These people firmly believed in the story.”

Littaye, 69, was co-founder of New York-based Access International Advisors LLC, one of more than a dozen feeder funds that acted as middlemen between investors and Madoff. Wolfer visited Littaye at his office near the Champs Elysees in Paris in 2000, after becoming chief investment officer at Banque Marcuard Cook & Co. in Geneva, to learn more about how Madoff made his money.

Banque Marcuard, a private bank catering to the wealthy and now part of Swiss lender St. Galler Kantonalbank, had invested about $50 million of its clients’ money directly with Madoff in the mid-1990s on Littaye’s recommendation.

Banque Marcuard made money with Madoff along with its clients. They paid fees based on the profits Madoff reported, which averaged a net of 11 percent a year. There was never a losing year, regardless of whether markets went up or down. The proof was in the trading statements sent to clients every month.

‘It All Looked So Good’

“It all looked so good,” says Wolfer, who has a master’s degree in economics from the University of St. Gallen.

The truth turned out to be something else -- and far more complex than a criminal masterminding a $50 billion Ponzi scheme that bilked investors from Palm Beach to Paris, as Madoff allegedly confessed to doing on Dec. 11.

If the 70-year-old money manager was running a con, then his marketers like Access International, wittingly or not, were part of the scam.

The purported mission of such feeder funds was to vet hedge funds for wealthy clients. Instead, the line between victim and perpetrator was blurred. Middlemen like Littaye funneled billions of dollars to Madoff, even, in some cases, when they suspected he was engaged in questionable trading practices. In return, they reaped hundreds of millions of dollars in client fees.

AmEx Earnings Plunge:

American Express earnings plunge 79%: Credit Card Giant reports a steep decline in earnings in the latest quarter, citing slower consumer spending and rising delinquencies.

Kenneth Chenault, AmEx`s chairman and chief officer, cited a 10% decline in overall cardmember spending as well as a rising number of late payments for the company`s latest performance.

"Our fourth quarter results reflect an operating environment that was among the harshest we have seen in decades," Chenault said in a statement.

Looking ahead to 2009, Chenault warned of soft spending by its cardholders, and added that he expected delinquencies and uncollectible card balances would continue to climb.

American Express investors cheered the news though. The stock, which finished 5% lower Monday, gained over 3% in after-hours trading.

My Comment: Regarding the after-hours pop, see the "delusional fools" comment in my post above.

[ewmayer]

Treasury: $386M to healthy banks: The government bolsters viable local banks with cash infusions designed to boost lending.

My Comment: Since when do "healthy" banks need cash infusions in order to remain viable? More importantly, does this mean John-Thain-it`s-good-to-be-the-King-style $35,000 office commodes for the bank CEOs? The high-end gilt-handled commode fetish seems to be a way for Wall Street CEOs to say to the world: "My royal flush beats your hand, you lot of mangy peasants."


Little secrets of `out-of-business` sales: Do `closeout` sales mean the lowest prices? Not always. And where did all that extra merchandise come from?

They`re seen as either big-time bargains or big-time scams. What really goes on at a "going-out-of-business" sale is something in between, according to experts.

"Consumers think this is the time for bargains. That`s not true," said George Whalin, president and CEO of Retail Management Consultants.

Thousands of retail stores are expected to disappear in 2009. But most big chains don`t run those out-of-business sales themselves - Linens `N Things, Whitehall Jewelers and, most recently, Circuit City, all hired liquidation firms to handle the process for them.

The liquidator buys the merchant`s inventory and sets final clearance sales. They guarantee the store`s creditors a payment upfront, and need to sell enough merchandise to recoup money for themselves.

"Would I love to offer a 60% discount and be out in two weeks? Yes. But it`s not likely," said Jim Schaye, CEO of Hudson Capital Partners LLC, one of four firms managing the liquidation of electronic retailer Circuit City.

My Comment: The reason it`s unlikely is that Mr. Schaye and his fellow liqudators-for-hire would much rather mislead consumers into *believing* they are getting something like a 60% discount while in reality offering soemthing like 10% or no discount at all (see below), or sell used products and stuff left over from one of their previous liquidation sales under the rubric of their current one, or engage in any number of other shady business practices designed - not suprisingly - for the express purpose of maximizing revenues extraction. This would not be in any way objectionable if the scale of dubious practices liquidators are legally allowed to engage in were not so large:

He said he and the other liquidators needed a "fairly sizeable" recovery in order to help Circuit City repay its creditors.

"We want to make sure everything is fairly priced," he said. "Do we get it right every time? No."

Because the liquidators don`t want to lose money, it`s not uncommon for clearance sales to begin at 10% to 30% off for the first few weeks, with deeper discounts staggered over the period closer to the end of the closeout sale.

However, Whalin said liquidators sometimes set those discounts based on manufacturers` prices - which can be 10% to 15% higher - rather than the price at the store when it closed.

Consequently, he said, consumers could end up paying more than they would have just before the "out-of-business sales" signs went up.

"This isn`t necessarily right. It`s almost a scam and there`s nothing illegal about it," said Marshal Cohen, chief retail analyst with NPD Group. "Buying at a liquidation really is caveat emptor."

Cohen`s suggestion to consumers: "You`ll get the absolute best prices a week before [a retailer`s] liquidation sale start." Assuming you can get to the liquidating store ahead of the sale.

Andy Gumaer, CEO of Great America Corp., which also is handling Circuit City`s liquidation, said his company is setting discounts off the store`s price prior to liquidation. He said he would honor prices in Circuit City`s final sales circular.

Liquidators looking to make a few extra bucks sometimes sneak in goods that aren`t part of the merchant`s original inventory and add it to the mix, according to Whalin.

"This happens frequently in furniture liquidation sales," he said.

Hudson Capital`s Schaye, who was involved in closing out Mervyns and Linens `N Things stores, said he`s aware of stores that added merchandise, but that he personally "doesn`t like the practice."

Cohen said liquidators also go all out to make products less identifiable as "refurbished" or "previously opened."

"Just be aware of that because most liquidation sales are final," Cohen said.

One thing common to liquidation sales is that the discounts grow as the liquidators near the deadline for closing the stores.

"Anyone who has looked at liquidation sales knows that they are staggered over time," said Edgar Dworksy, a consumer advocate and editor of Consumerworld.org. "This isn`t new."

He advised consumers to do their research. "Is a 10% discount at Circuit City better than anything else out there? Don`t buy if it`s not because you have zero percent return rights [in a liquidation]," he warned.

In general, Dworsky cautioned that he wouldn`t "put anything past liquidators" when it comes to "playing a game with pricing."

[Fusion_power]

We tend to lose sight of the human element in this megarecession. I am currently working for a company that declared bankruptcy. This means my retirement fund has been decimated, my 401k is seriously down, and my prospects for still having a job a year from now are dismal. This is not an encouraging situation given that I have worked for Nortel for 28 years. Still, I am not at all badly situated at present compared to the man in California who killed his 5 kids, his wife, and himself apparently because both he and his wife had lost their jobs. I won't go into the mental illness aspects of that, just suffice to say that the number of economic suicides is bound to rise.

The one thing I can see because of my gardening hobby is that more people will have gardens this year than at any time in recent history. Seed sales are booming for retailers. My plant sales are steady and increasing daily. From a certain perspective, I could almost make a living selling plants.

One of the healthiest things we can do is to plant something and help it grow. Numerous studies have shown that people who garden are happier on average than people who don't. I might argue that fishermen are happier still, but for now, gardeners are definitely on a positive track.

Each of us has the ability to encourage people who are down because of the economy. It doesn't matter if it is someone facing foreclosure on their house or just someone with a 401k that is in the toilet. The important thing is to listen and do what we can for people who need help.

DarJones