Econ 2009

[cheesehead]

Originally Posted by Fusion_power

Cheesehead,

You miss the point almost entirely.

You mean my point about your misattributions to Volcker of things he hasn't claimed/said/advocated? No, I didn't miss that. You did, but I'm willing to allow that perhaps that's because I didn't write clearly enough.

To what other point would you refer?

Do you mean one of your points about how:

MMFs are an issue,

MMFs are not primary to the market meltdown,

the "real elephant" is risk, or

that when a company takes on excessive levels of risk and does so with little heed to the possibility of major events, we wind up with AIG, Lehman, Citi, etc. ?

No, I didn't miss a single one of them. In fact, I agree with you on each of those. That's why I didn't comment on them other than in connection to your misattributions to Volcker of contrary views. AFAIK Volcker agrees with those points, too, which is why I complained that you were implying the opposite.

If the banks were stable in the way they are regulated, then we would not have Citi, BofA, etc. on the ropes.

Fine. AFAIK, Volcker hasn't disagreed with that, nor have I.

It is not a matter of regulating the MMF's the same as banks.

"It"? To which "it" do you refer?

If you're referring to Volcker's regulate-the-MMFs project, then yes, it is a matter of regulating the MMFs the same as banks. That's basically what he's proposing there. (And I hope you aren't thinking that implies he's satisfied with the current bank regulations.)

If by "it" you're referring to your own opinion about cures for our situation: fine, if you mean it is not only a matter of regulating the MMFs the same as banks. Then I'd agree and AFAIK Volcker would, too.

It is a matter of regulating RISK in the financial sphere including the BANKS and the MMF's and the investment/brokerage/insurance behemoths on wall street.

Assuming "it" refers to your own opinion about cures -- fine. I agree. I don't see Volcker disagreeing with that anywhere.

Show me how regulating the MMF's the same as banks would have prevented the fiscal meltdown?

Why should I? I've never held that opinion. AFAIK Volcker hasn't either.

There were multiple factors, so no single change might have been adequate anyway.

Volcker is right that there is a problem with regulation of the MMF's.

Thanks for that acknowledgement.

He would also be right if he said there is a problem with regulation of the Banks. And he would be right if he said there is a problem with regulation of the investment/brokerage/insurance segments too.

Fine. Fine. AFAIK he's never denied either of those. I suspect he would explicitly agree to each if you asked him.

[garo]

http://www.zerohedge.com/article/jud...sage-sec-bidet

And Mary thought she was going to get away easy...
After the SEC attempted a truly staggering feat of legal contrivance by blaming the Merrill bonus fiasco on "understood" arrangements and placing all the blame on counsel, where the trail would end because Bank of America would never waive attorney-client privileges, Rakoff shot back and told the SEC, in no uncertain terms, to not take him or the legal system for Wall Street's marionettes, a role the SEC is more than happy to play day in and day out.
In this sense, Rakoff's response to the SEC is a masterpiece, which, assuming the Judge is not voluntarily or otherwise silenced, could force Rakoff to rake the SEC over the coals of public humiliation and finally acknowledging its crony lap dog status for a group of wealthy Wall Street insiders who consistently have special status with Mary Schapiro and her henchmen.
Quoting from the order released earlier:

"In its August 24th submission, the SEC repeatedly reconfirms its central assertion that "Bank of America's [proxy] statement was materially false and misleading because it indicated to shareholders that Merrill [Lynch] would only make 'required' payments to its employees, such as salary and benefits, but would not pay discretionary year-end bonuses, [whereas] [i]n fact, Bank of Americas expressly had agreed to allow Merrill to pay up to $5.8 billion in discretionary year-end bonuses." Yet the same submission asserts that the SEC, despite its 2006 policy quoted above, decided not to bring charges against culpable individual offenders because all the company's witnesses "stated that they had relied entirely on counsel to decide what was or was not disclosed in the proxy statement." Further, the SEC asserts that it was unable to test this assertion because "Bank of America has not waived the attorney-client privilege [and] [a]s a result, the investigative record does not include any specific rationale as to why the disclosure schedule [revealing the bonuses] or it contents were not disclosed in the proxy statement."

At this point any lawyer readers can proceed to go ahead and vomit, because, indeed, this is the "defense" used by the SEC. Rakoff has a comparable reaction:

"This is puzzling. If the responsible officers of Bank of America, in sworn testimony to the SEC, all stated that "they relied entirely on counsel," this would seem to be either a flat waiver of privilege or, if privilege is maintained, then entitled to no weight whatever, since the statement cannot be tested. In asserting that no waiver occurred, the SEC cites just one case, John Does Co. v. United States[,] which, on first reading at least seems hardly to support such a broad assertion applicable to the fact here."

The SEC now has full permission to request a doubling of its near-$1 billion budget, as apparently the current money it has barely allows it to only afford the services of 3 year old chimpanzees with less than a month's experience with case law. Continuing with Rakoff's evisceration of the SEC's bidetesque approach to all things legal:

"If the SEC is right in this assertion, it would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel, and, if the company does not waive the privilege, the assertion will never be tested, and the culpability of both the corporate officer and the company counsel will remain beyond scrutiny."

And the punchline:

"This seems so at war with common sense that the Court will need to be shown more than a single, distinguishable case to be convinced that it is, indeed, the law. It also leaves open the question of whether, if it was actually the lawyers who made the decisions that resulted in a false proxy statement, they should be held legally responsible."

And how does BofA approach this whole problem: why claiming the world will end of course if it were to engage and clear its name. The tried and true approach of the gun against the temple of the financial system works with Obama: why should it not work with the SEC:

"Bank of America's position is that rather than puts its assertions of innocence to the test, it decided to spend $33 million of shareholders' money to settle the case "so that Bank of America would not face the unnecessary distraction of a protracted dispute with one of its principal regulators at a time when the financial industry continues to face difficult challenges stemming from uncertain and turbulent conditions."

But didn't Ken Lewis recently repeatedly state that everything is peachy again? Funny how the same world can be both black and white at the same time, depending on what suits the cause.
Luckily, the "end of the world approach" does not work with Rakoff, who concludes as follows:

"Whatever this chain of vague expressions may mean, if it is intended to suggest that Bank of America settled this case to curry favor with the SEC or to avoid retaliation by the SEC, the Court needs to know the specifics."

Zero Hedge fully hopes that the entire responsible executive committee of Bank of America face criminal prosecution for this SEC co-opted attempt to obfuscate and limit legal recourse in a case that is as simple as night and day. And, of course, that Judge Rakoff continues his pursuit of the SEC's complacency in seeking anything even vaguely resembling an equitable disposition for BAC's shareholders/taxpayers, with the end result being that the SEC should either dramatically change its entire modus operandi, be disbanded, or that the executives at the SEC responsible for this fiasco voluntarily step down before the wave of public anger turns against this blatant example of all that is wrong with the crony SEC-Wall Street machine.

[ewmayer]

By way of follow-on to garo's Our-Hero-Judge-Rakoff post above: With both the legislative and executive branches of government firmly in the pockets of Wall Street, it seems the occasional judge with guts is the common rabble's last (nonviolent) hope for any semblance of fair play:

Federal Reserve Loses Bloomberg FOIA Lawsuit, Sensitive Disclosures Forthcoming

Aug. 24 (Bloomberg) -- The Federal Reserve must make public reports about recipients of emergency loans from U.S. taxpayers under programs created to address the financial crisis, a federal judge ruled.

This is in relation to a lawsuit filed by Bloomberg LP against the Federal Reserve on November 7, 2008, in Southern District of New York (08-09595), in which Bloomberg sought material loan and collateral data in relation to emergency loans released by the Fed, and which were previously claimed to be non-FOIAble.

This is a large blow against the Fed and specifically against organizations using [Freedom Of Information Act] loopholes from providing critical information, particularly in cases involving trillions of taxpayer dollars bailing out huge, systematically and politically embedded financial organizations (which lately is pretty much all of them).

The beneficial outcome means that many more FOIA-based lawsuits against the Federal Reserve will now spring up, and with case law on their side, the outcomes of most will likely be on behalf of the plaintiffs. This could detour any short-circuit attempts by either Congress or Senate to prevent a Fed audit, as it may suddenly not be necessary, now that there is this alternative venue to get various pieces of information, previously not available to the general public.

My Comment: We can only hope said judges don`t end up feeling a sudden urge to recuse themselves and take early retirement, or driving their cars off of bridges into frozen rivers under mysterious circumstances, that sort of thing.


Toyota, Biggest Beneficiary Of Cash For Clunkers To Cut Capacity By 10%

In a stark example of how it "should" be done, the recently terminated cash for clunkers subsidy for overleveraged US consumer to purchase Japanese cars, has allowed companies such as Toyota, Honda and Hyundai to push forward a significant amount of their sales, while relying less on the back end of their production curve. Indeed, as Detroit News recently reported, of the five major beneficiaries of Cash for Clunkers, 4 were Japanese cars, with Toyota representing 19.2% of all cars sold under the program. And now that they got their sales out of the door, they are winding down capacity.

So while Obama's ulterior motive to lever US consumers even more may or may not have worked (these are merely purchases that would have occurred eventually, and instead the US middle class will have more lease payments to look forward to in the interim), the practical reality of CfC has been a nice stimulus package to none other than Japan. This probably explains why they have not been screaming bloody WTO murder.

Hot on the heels of this, Toyota today announced it would be cutting global plant production by 10%. According to MarketWatch:

Toyota plans to cut its global capacity production by 10%, or by 1 million vehicles, as early as this fiscal year, Nikkei reported on its online edition Tuesday in a story dated for Wednesday. Production volume, which peaked at 9.5 million vehicles in 2007, is expected to fall to about 6.7 million vehicles in 2009, according to Nikkei. Toyota currently has a production capacity of 10 million vehicles a year.

In the meantime, bankrupt dinosaurs such as GM are ramping up production, precisely in a time when there will be increasingly less demand (absent another CfC program of course, and a couple extra billion that would have to be tacked on to the next bond sale).

My Comment: And of course that excess capacity GM et al are now building (or failing ti eliminate) will serve as justification for CFC 2.0. Meanwhile the type of "fake demand" government deficit-spending-paloozas such as CFC represent do nothing to help the long-term viability of the U.S. Auto industry, and in fact likely harm it, by pulling demand forward, allowing the automakers to defer the eventually-needed Great Downsizing the new non-debt-fueled U.S. consumer economy requires, and will make it even tougher to sell the "new lean & mean" U.S. car models, since any would-be buyers remaining after the CFC giveaway are going to expect huge subsidies, as well. The same robbing-Peter-to-pay-Paul effect is currently being seen in the housing market. Once the banks realize that is no magic bullet (and bank shareholders begin to insist on disclosure and disposal of nonperforming RE "assets") and have no choice but to begin dumping their massive "shadow" housing inventory onto the market, we will see whether the green-shooty "housing/mortgage-rates/buyer-incentives may never be this cheap/low/generous again" housing-market prop job finds some new way to reinvent itself.

But as any good Keynesian demand-puller-forwarder would say, why stop there? It is in that spirit that we offer cash for clunkers v1.5, coming soon to an appliance store near you:

Before heading home to face the anger at the now infamous health care "town halls," Congress rushed through an extension to what was then considered a popular program: Cash for Clunkers. Then, like much of the August break, Cash for Clunkers went sideways as critics picked apart the program's weaknesses, consumers stopped showing up with so many clunkers, and dealers started making noise about something as simple as when they might actually get the rebate money that the government promised.

So, what do you do when you have a poorly-conceived and ill-managed project winding down (Clunkers expires at 8 p.m. eastern on August 24)? Kick off another one, even more poorly thought out, and gloss it with an equally catchy name: Cash for Refrigerators. Beginning in the fall, consumers will have access - through existing state-level energy efficiency incentive programs - $300 million in stimulus funds made available as rebates for energy efficient appliances.

So far, so good. If a consumer is out buying an appliance to replace an existing or broken-down one, it is better that they choose an energy efficient model. But, what about special incentive program purchases? Who is the buyer and why are they buying?

The answer is that the most well-educated and most discerning consumers become aware of and make use of special rebate programs for energy efficient appliances. These are not impulse buyers. Some may actually be committed to greening their kitchen and just waiting for the right incentive push, but I doubt it. In other words, my perception is that most of the $300 million will go to middle-class households that already may have a relatively efficient refrigerator, like Clunkers, it won't get at the really dreadful stuff in use in the lowest income households.

Worse still, this program does not borrow one component from Clunkers that would actually have been effective: there is no requirement to take the old appliance offline. Odds are that many of the middle class households claiming the rebate will use the new appliance in the kitchen, and move the old one to the basement, the garage, or the back porch, where it will be pressed into service storing extra beer and the overflow from Costco.

My Comment: Uncle Stupid subsidizing extra beer fridges (with the replacements nearly all manufactured in Asis) for middle-class households across the U.S. - This is great for power suppliers and beer companies, folks! Now you`ll have plenty of extra fridge space to store all that higher-priced beer which the hugely successful [url=http://money.cnn.com/2009/08/25/news/economy/consumer_confidence_august/index.htm]green-shoots economic propaganda campaign spurred you to buy, using your new, improved credit card with the 29.9% rate. Also note the name change: apparently as a result of ozone-layer-protective regulations on chlorinated fluorocarbons, the government folks decided that using the same "Cash for Clunkers" phrase to describe the analogous program for fridges was a bad idea due to the acronym "CFC". Hence "CFR", which violates no environmental treaties (as far as we know).

Today's "Market" Recap: [And I use the term "Market" very loosely]

Recently, huge amounts of high-frequency trading (which is likely sucking in hordes of daytrading 20something gambling addicts) in just 4 "garbage financial" stocks - Government-owned AIG, FNM, FRE and Zombified Citigroup - has been responsible for as much as 40% of NYSE daily volume ... I repeat, these 4 pure-gambling plays have represented NEARLY HALF of NYSE trading volume. Not a sign of a "recovering, healthy market". Check out the last half hour of today's action in AIG ... when the HFTs finally decide to switch into "take profits and sell" mode this puppy is gonna go down just as fast, and probably a lot farther:

[Fusion_power]

Ewmayer, one error. Mexico is the major refrigerator manufacturer today.

So the CFR program will be a huge boost for Mexico.

DarJones

[Fusion_power]

The news today includes this article about the FDIC's current funding status.
http://news.yahoo.com/s/nm/20090827/bs_nm/us_banks_fdic

WASHINGTON (Reuters) – Problem U.S. banks and thrifts on an official watchlist rose more than a third to 416 in the second quarter of 2009, as bad loans continued to bite, but regulators saw signs of stabilization in the industry.

The Federal Deposit Insurance Corp said on Thursday that the industry swung back to a $3.7 billion loss in the second quarter, after reporting a $7.6 billion profit in the first quarter, primarily due to costs associated with rising levels of bad loans and falling asset values.

"Banking industry performance is -- as always -- a lagging indicator," FDIC Chairman Sheila Bair said.

She said the source of the banking industry's problems had migrated from residential loans and complex mortgage-related assets to more conventional types of retail and commercial loans that have been hit hard by the recession.

But Bair pointed to a smaller quarterly increase in troubled loans and decreases in the volume of some delinquent loan categories, as a possible turning point in the quality of assets that have weighed heavily on banks' balance sheets.

"While challenges remain, evidence is building that the U.S. economy is starting to grow again," Bair said.

The combined assets of the 416 "problem" institutions rose to $299.8 billion from $220 billion at 305 banks in the prior quarter. Problem banks are troubled institutions whose regulatory rating has been downgraded due to issues related to liquidity, capital levels, or asset quality.

The agency's deposit insurance fund, that safeguards up to $250,000 per account at roughly 8,100 institutions, dipped 20 percent in the second quarter to $10.4 billion.

The drop in the fund was chiefly caused by an $11.6 billion boost in money the FDIC set aside for expected bank failures.

Regulators have closed 81 banks so far this year, compared with 25 last year, and three in 2007. "We expect the numbers of problem banks and failures will remain elevated, even as the economy begins to recover," said Bair.

LINE OF CREDIT

Despite the low insurance fund balance, Bair said the FDIC does not expect to have to tap its $500 billion line of credit with the U.S. Treasury Department "at this time."

She also said the FDIC had not yet decided whether to charge banks another special assessment to replenish the fund, but said the agency's board would meet toward the end of the third quarter to discuss the issue.

In May the FDIC voted to impose a $5.6 billion special fee the industry has to pay in the third quarter. It also gave itself the right to charge two more special fees in coming quarters.

Bill Fitzpatrick, an analyst at Optique Capital Management, said he expects the number of problem banks will keep rising.

"These are smaller institutions but they hold a lot of commercial real estate loans and that market will continue to deteriorate," Fitzpatrick said.

Keefe, Bruyette & Woods analyst Jefferson Harralson said construction loan losses related to residential real estate and development were depressing banks.

"These numbers were fairly expected, and I expect we'll continue to see losses in construction," Harralson said.

The FDIC's second quarter briefing came a day after the agency approved new rules on private equity investment in troubled banks, softening an initial proposal that critics had warned could scare away badly needed capital.

The FDIC reported on Thursday that more than one out of four U.S. banks was unprofitable during the second quarter.

The industry set aside more money to cover costs associated with deteriorating loans, with reserves for loan losses increasing 8.6 percent to $66.9 billion in the second quarter.

However, the industry did show some improvement. Net interest margins, or a bank's cost of funding, improved at a majority of institutions.

Overall capital levels also improved. The industry reported that on average, the leverage capital ratio increased during the quarter to 8.25 percent from 8.02 percent.

Now while I agree with most of the article, I do NOT agree with the statement that the FDIC will not have to tap the treasury for additional funds. The numbers don't lie. They have $10 billion left on account, will collect $5.6 billion this quarter and potentially another $12 billion over the next six months. The projected losses from failed banks stack up at $30 billion even under an optimistic outlook.

DarJones

[ewmayer]

Yessirree, another crazy session around the AIG roulette table today. Yesterday – especially the last 20 minutes (see my post above with rocket-launcher-shaped price chart - was a good day for the folks who bet on black (not that there was insider-trading going on there between 3:40 and 4pm, mind you – we know the SEC does not allow such things to go on, right?).

Today was an even better short squeeze, especially for the "lucky guessers" and perspicacious "smart money" types who bought into the close yesterday, after having it suddenly dawn on them (with near-perfect simultaneity at 3:40 Eastern time) that new AIG CEO Robert "Baghdad Bob" Benmosche is doing a fabulous job of recapitalizing that $100 billion needed to (partially) repay Uncle Stupid - all from his vacation villa on the Dalmatian coast, no less - of course stiffing Uncle Stupid on the "hefty dividend" Uncle thought he was getting on his preferred-shares-amounting-to-80%-of-the-company saved quite a bit of money now, didn`t it?

[ewmayer]

Greater Than One in Four FDIC Insured Institutions are Unprofitable; Bank Problem List at 15 Year High: In spite of mammoth injections of cash by the Fed, huge efforts by banks to raise capital, a Fed swap-o-rama of biblical proportions, monetary printing by the Fed, and capital injections from the Treasury, and a massive 50% stock market rally, noncurrent loan growth still outpaces reserve growth.


Moron of the Week: We bestow a second award this busy week to economics Nobelist, "I never saw a deficit-spending package I didn`t like, except the ones that were too small for my taste" Überkeynesian and NYT opiner Paul Krugman:

Till Debt Does Its Part

So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform.

The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.

The only real reason for concern is political. The United States can deal with its debts if politicians of both parties are, in the end, willing to show at least a bit of maturity. Need I say more?

My Comment: Typical Keynesian Klown ... why worry about "long-term sustainable economics" when you can focus on the "here and now", which translates to "lurching from one Keynesian-inspired bubble/bust crisis to the next". And yes, you *do* need to say more, Mr. Krugman: Namely that the odds of the pandering re-election-fixated pols in DC ever having the collective will to *voluntarily* take the painful budgetary and tax measures needed to shrink the deficit without accounting tricks are ZERO.

By Krugman`s reasoning, running perpetual and ever-bigger deficits is the way to "grow" an economy. How`s that working for us, I wonder? Oh yeah ... a series of ever-bigger bubble-and-bust cycles and inexorable rise in consumer and government debt culminating in what may still turn into Great Depression 2 and an inevitable debt crisis. But it gets better - Krugman, in tried and true ("true" being the new "false") fashion boldly goes on to claim that not only is Keynesian-Klown-Konomics good for getting economies out of the very same crises that KKK inevitably causes in serial fashion, but that (on behalf of all the Keynesian money-printers and deficit-spenders) "WE SAVED THE WORLD":

Consider what would have happened if the U.S. government and its counterparts around the world had tried to balance their budgets as they did in the early 1930s. It’s a scary thought. If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression.

As I said, deficits saved the world.

In fact, we would be better off if governments were willing to run even larger deficits over the next year or two. The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy

My Comment: Again notice the complete focus on knee-jerk here-and-now thinking and artificially stimulating "demand" by way of government giveaway programs. Now, encouraging consumers to spend a bit of their savings on things they actually can AFFORD AND USE is OK, but the problem in modern day America is that (largely as a result of decades of debt-is-good peddling by folks who think as Krugman does, and the banks all too willing to profit in their wake) the average consumer no longer *has* any savings to speak of, and "stimulating" them to do things like trade in a perfectly fine older car which is actually PAID OFF for a shiny new one which "puts them $4000 less deep in debt than it otherwise would have" - while causing the domestic carmakers to misallocate even more capital by ramping up production when they should be winding it down and building a sustainable-without-government-subsidy business - are the height of lunacy. Krugman would have us believe that our only choices are to wait until the crisis comes, and then "either spend our way out of it or save our way into a depressionary contraction." Uh, if we actually practiced sound fiscal discipline (at the personal and governmental level) and lived within our means consistently, borrowing only when genuinely necessary (said prudent borrowing being encouraged by reasonably high interest rates and low inflation - the kind which also encourage people to put aside some money for a rainy day and for their retirement), we NEVER WOULD HAVE GOTTEN OURSELVES INTO THIS COLOSSAL MESS TO BEGIN WITH. In other words, Krugman and his ilk are now peddling desperate remedies for a sickness they caused - how unbelievably ironic.

But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $9 trillion is a huge sum, we also have a huge economy, which means that things aren’t as scary as you might think.

My Comment: That`s right ... and without the fraudulent accounting tricks you and fellow bubble-heads so like to use to disguise the long-term effects of your inflationist free-spending policies, our current debt-to-GDP ratio is the U.S. is already well north of 100%, and that's not counting the $50 TRILLION OF UNFUNDED LIABILITIES you clowns` free-spending ways have layered on top of the Social Security "Trust Fund". (Which, BTW, is little more than a huge pile of IOUs from the Treasury.) And "it’s important to have some perspective" is nothing but Keynesian code for "we can always inflate our way of it later".


Whoops, sorry, I see we in fact a third MotWee this week:

A market that healed itself: When the secondary market froze, small business loans dried up. But in the last few months, the market has come back to life - with little government aid.

Praytell, which part of our green-shooty "market" fits the phrase "surviving and thriving without a massive prop job from Uncle Stupid?"

Not the banking system.
Not real estate.
Not the auto industry.
Not the credit markets.
Not the treasury-debt "auctions"
Not heavy industry.
Not construction.
Not commercial real estate.

What the above article (which focuses on small business) fails to mention is that "ragingly successful recovery" of SB lending is occurring only due to 2 things: (1) Interest-rate spreads kept artificially low by government backstop and guarantees, and (2) "Bullish optimism" on the part of debt speculators due to the raging "new bull market" of the last 6 months - which is the biggest government (with media and I-bank assist) prop job of all. So where is all the ACTUAL JOB CREATION which one would expect to accompany this wonderful news? Oh yeah, interesting thing there ... it`s NONEXISTENT.

[ewmayer]

Toyota Will Shut California NUMMI Plant in First Closure: Toyota Motor Corp. will shut an assembly plant for the first time in its 72-year history after the failure of a joint venture with General Motors Corp.

New United Motor Manufacturing Inc. in Fremont, California, will end production of Corolla cars and Tacoma pickups in March 2010, Toyota said in a statement. GM in June said it would end assembly of Pontiac Vibes at the plant, known as Nummi, and quit the venture as part of its bankruptcy reorganization.

A collapse in U.S. auto sales to the lowest level since 1976 has left Toyota, the world’s largest automaker, struggling to keep North American plants running at capacity. Closing the San Francisco Bay area plant, where Toyota President Akio Toyoda spent two years, compounds economic woes in California, suffering from an 11.9 percent unemployment rate.

“Toyota urgently needs to cut capacity as car demand isn’t going to return to its peak anytime soon,” said Yuuki Sakurai, chief executive officer of Fukoku Capital Management Inc. in Tokyo, which manages about 800 billion yen ($8.5 billion) in assets. “Nummi is unionized and expensive to operate. It’s a good decision.”

‘Devastating News’

Nummi employs 5,400 people, including 4,550 United Auto Workers union positions. More than 1,000 suppliers work with the factory, which has annual payroll and benefits of $523 million, according to a plant publication. Possible severance packages for the workers have not been decided on, according to Toyota spokesman Yuta Kaga. Nummi, set up as a joint venture, will decide whether to keep or shut the plant.

Toyota’s announcement “is devastating news for thousands of workers in California,” said UAW President Ron Gettelfinger. “They deserve better than to be abandoned by this company.”

Toyota will shift production of Tacoma pickups to San Antonio and move Corollas to its factory in Ontario, Canada. The carmaker said it would consider hiring Nummi workers at other factories.

“Toyota will not be able to give priority to Nummi workers though,” Toyota Executive Vice President Atsushi Niimi said on a conference call with reporters.

Toyota’s sales in the U.S., its largest source of revenue, fell 38 percent in the first half, following a 15 percent decline last year. Toyota had a record 436.9 billion yen loss in the fiscal year that ended in March, its first in six decades, and forecasts an even bigger 450 billion yen loss in the current business year.

“By closing the plant and moving production to other factories, Toyota’s utilization rate in North America will improve,” said Masatoshi Nishimoto, an analyst at auto consulting company CSM Worldwide in Tokyo.

Nummi has the capacity to make 420,000 cars and pickups each year. It only made money in 1992, the result of California’s taxes and labor and pollution rules, as well as the plant’s UAW contracts, according to an estimate by Credit Suisse Group AG analyst.

[Note that the last sentence above would better read as "...as a result of California’s high taxes and labor and pollution rules, as well as the plant’s UAW contracts, the plant only made money in 1992..."]

My Comment: UAW head Gettelfinger conveniently neglects to mention that - much as in Detroit and elsewhere - the UAW essentially doomed their workers to this fate by pricing themselves out of the market - and California`s sky-high tax rates didn`t help, either. A less-forgiving owner than Toyota would have shuttered the plant 15 years ago, or taken one look at the cost of doing business with the UAW and never even embarked on such a venture. While I feel bad for the NUMMI workers and their families, they need to face the reality that a person with a high-school-equivalency degree can no lnger expect to command a six-figure salary and benefits package in the modern global economy. No one - except in UAW leaders` opium pipe dreams - has the *right* to earn a high wage at a job if there are plenty of folks willing to do the same job for far less, assuming the playing field is a level one. (E.g. the cheaper-wage folks aren't so because of currency manipulation or subsidies from their government, as is the case in China, for example.)

The San Jose Mercury News has an article about the plant closure in today's edition, too - they estimate 30,000 - 50,000 total jobs will disappear in CA as a result of the plant closure, e.g. among the 1000 in-state suppliers to the plant and "second order" effects from ex-NUMMI workers cutting their spending.


Presenting The Liquidity Bubble: Ask anybody to chart the trajectory of the S&P500 over the past 10 years and you will get this chart:

http://www.zerohedge.com/sites/defau...e%201996_0.jpg

And while the tech boom of the late 1990's was driven by some very real secular shifts caused by unique technological innovation which, aside from the exuberance associated with some of the dot com names, brought a marked benefit to the global economy, how does one explain the subsequent ramp up as the credit bubble was being inflated and subsequently imploded?

Simple - it was all liquidity driven.

The best way to visualize it is to take the SPX and to divide it by the sum of domestic reserves and foreign custodial holdings (a topic discussed on Zero Hedge previously here). The result is that represented on this relative basis, the underlying market did absolutely nothing for the duration of the entire credit bubble. This should come as no surprise to anyone who has been following the theme of the Fed's balance sheet expansion and why the market has been ramping up markedly even, or specifically because of, the Fed's balance sheet growing over the past decade and recently hitting unprecedented levels in the $2 trillion+ range. One can play with the denominator and add other money aggregates such as MZM, but the result would not change materially.

And the scariest part of the chart is the tail end: even with the unleashed dam of liquidity, the market still has a massive retracement ahead of it before it can recover the adjusted losses it has suffered since the last credit bubble. Ironically a 50% run up in the S&P has not been enough to offset on an apples-to-apples basis the unprecedented liquidity efforts let lose by Chairman Ben.

The bottom line is that when viewed from the perspective of liquidity fueling the market, the S&P 500 has never been in a worse situation. And alas, as the Fed's balance sheet climbs to $4 trillion +, absent a multi-year parabolic rise in stocks, liquidity will increasingly lose its power to sustain markets to historical overbloated levels. But Ben Bernanke will go down in flames, and take down America with him, trying to disprove this hypothesis.

My Comment: Sports celebrities are honored by way of "bobble-head" dolls ... For Greenspan and Bernanke maybe we could gte "bubble-heads".


A Little Friday Levity:

The Onion | Nation's Unemployment Outlook Improves Drastically After Fifth Beer: Joblessness was not the only domestic problem that began to appear eminently solvable after the rapid downing of five beers. Also substantially improved were projections for the housing crisis, the affordability of health care, getting hot wings later, and being able to drive home just fine.

See, when former Fed chairman Alan “Mr. Bubble” Greenspan famously downplayed the growing speculative bubble in real estate as “a bit of froth in some local markets” several years back, perhaps that was not the only kind of froth at play there. (But he strikes me as more of a wine snob).

[ewmayer]

...encapsulated in a single picture.

Lehman Brothers

... up 200% Today - Penny Stock News rates it a "Strong Buy and Long-Term Hold".

[davar55]

Originally Posted by ewmayer

...former Fed chairman Alan “Mr. Bubble” Greenspan

Ernst, may I ask in civil terms why do you vilify Alan Greenspan so much?
It's one thing to make jokes at the man's expense, but to seemingly
consider him the main cause of the economic downturn? Perhaps his
leadership prevented an even worse result. Or do you dislike his old
Ayn Rand / Ideal Capitalism / Gold Standard / Anti-Monopoly /
Anti- Big Government Views? Or perhaps you think he reneged on them?
Whichever, I'd like to know your reasons.

[ewmayer]

Originally Posted by davar55

Ernst, may I ask in civil terms why do you vilify Alan Greenspan so much?

You'll have to read through this thread (and more saliently, its predecessor, the global financial crisis thread) for all the specifics, but briefly, I vilify Alan Greenspan because he is the chief architect of the 2 largest speculative asset bubbles (dotcom and Real Estate) since the one which led to the Great Depression. Not only did his misguided loose-credit-is-the-engine-of-economic-growth policies feed two huge boom and bust cycles which caused immense misallocations of capital (of both the human and financial variety) and lead to an unprecedented (and highly corrosive) "financialization" of the U.S. economy - that is, replacing genuinely productive economic activity with what amounts to money-changing and Ponzi finance - but he completely neglected his charge as Fed Chair to be the overseer of nationwide lending standards and practices. He went so far in the other direction that he was actively promoting "alternative" mortgage products which would help "every American achieve the dream of home ownership", and considered it as the Fed's charge to PROP UP THE EQUITY MARKETS - a trend his acolyte, Ben Bernanke has not only continued, but expanded to an unprecedented degree.

I could wax at length, but here is some required reading for you:

Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve: by Bill Fleckenstein of MSNBC Contrarian Chronicles fame

Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy: You can read Barry "live" every day at his blog

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

And speaking of bubble-mania: A startling (in its forthrightness - the facts are pretty clear without official confirmation) confession from China, which is emulating Greenspan in its bubble-blowing:

Head Of China Sovereign Wealth Fund Openly Admits Asset Bubble Addressed By Creation Of More Bubbles

BEIJING (Reuters) - China Investment Corp is investing as much overseas each month this year as it did in all of 2008, Lou Jiwei, the chairman of the $298 billion sovereign wealth fund, said on Saturday.

CIC is counting on handsome returns this year and might one day ask the government to hand it more of the country's record hoard of foreign reserves to manage, Lou, a former vice finance minister, said.

The fund invested just $4.8 billion outside China last year as it kept its powder dry during the global financial crisis, when asset prices tumbled. It held fully 87.4 percent of its overseas investments in cash or cash equivalents.

Now that markets are recovering, CIC is constructing a broad-based portfolio, Lou told reporters on the sidelines of a forum organized by the Washington-based Brookings Institution and the Chinese Economists 50 Forum, a Beijing think-tank.

CIC posted a negative 2.1 percent return on its global investment portfolio last year as the value of stakes such as those in Wall Street bank Morgan Stanley (MS.N) and private equity giant Blackstone Group (BX.N) slumped.

But Lou said 2009 was shaping up better.

"It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we're just taking advantage of that. So we can't lose," he said.

My Comment: Note to Mr. Lou: Yeah, the whole address-one-bubble-by-blowing-another-one thing? We tried that here in the U.S. a couple years back ... it didn`t turn out well. Just a friendly heads-up ... I must admit it`s rather sad when we hear this sort of occasional (and probably inadvertent) truth-telling from a Communist Party official rather than the paid liars in our own "democratic" government.