Econ 2009

[Uncwilly]

Originally Posted by Fusion_power

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.

He and his wife were being investigated for fruad regarding their jobs. This was not a case of being down-sized, let go, etc. They were being out and out fired, because of what they were supposed to have done.
http://abclocal.go.com/kabc/story?se...les&id=6627049

[ewmayer]

Today`s Wall Street Journal has an alarming article about the soaring default rate on "jumbo prime" mortgages - these are the kinds of loans which were typically made on bubble-priced homes in already-expensive housing markets like the SF Bay Area and San Diego, California. A default on one of these is proportionally more costly in terms of wiped-out equity compared to lower-priced properties, and the total sales volume in dollar terms dwarfs that of the subprime market sector:

Jumbo Mortgage Defaults Soar

Jumbo mortgages are now going south at an alarming rate, reports the Wall Street Journal, as affluent Americans face mounting layoffs and see their stock portfolios shrivel. Nearly 7% of prime jumbo loans—which average $750,000—were at least 90 days delinquent at the end of 2008, up from 2.6% a year earlier. That's three times the default rate of non-jumbo prime loans.

“There is more pain to come,” says an analyst, as banks and investors start feeling the fallout. Particularly hard hit will be JPMorgan, which loaded up on jumbo mortgages in 2007 and held on to them last year. "We were wrong," says CEO Jamie Dimon. "We obviously wish we hadn't done it."

My Comment: So much for the right-wing idiots who keep blathering about the mortgage crisis allegedly being caused by loans made under the Community Reinvestment Act. Not only is the default rate for CRA loans extremely low - similar to that of "gold standard" conforming prime loans - but every jumbo default probably equals roughly ten CRA loan defaults in terms of monetary impact.

Bad Bank - No Soup for You!

Looks like the Obama administration is looking to set up as (supersized) version of the Resolution Trust Corporation set up in the late 80s to absorb and dispose of the assets of institutions done in by the savings and loan crisis:

FDIC May Run `Bad Bank' in Obama Plan to Remove Toxic Assets, Spur Lending: The Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up as it tries to break the back of the credit crisis, two people familiar with the matter said.

U.S. Stocks Surge, Extend Global Rally on Bank-Bailout Plan; Yahoo Climbs: U.S. stocks rose, extending a global rally, as President Barack Obama prepared to set up a so-called bad bank to absorb toxic investments and Yahoo! Inc. and Germany’s SAP AG reported better-than-estimated earnings.

From the first Bloomberg article above:

FDIC Chairman Sheila Bair is pushing to run the operation, which would buy the toxic assets clogging banks’ balance sheets, one of the people said. Bair is arguing that her agency has expertise and could help finance the effort by issuing bonds guaranteed by the FDIC, a second person said. President Barack Obama’s team may announce the outlines of its financial-rescue plan as early as next week, an administration official said.

“It doesn’t make sense to give the authority to anybody else but the FDIC,” said John Douglas, a former general counsel at the agency who now is a partner in Atlanta at the law firm Paul, Hastings, Janofsky & Walker. “That’s what the FDIC does, it takes bad assets out of banks and manages and sells them.”

The bad-bank initiative may allow the government to rewrite some of the mortgages that underpin banks’ bad debt, in the hopes of stemming a crisis that has stripped more than 1.3 million Americans of their homes. Some lenders may be taken over by regulators and some management teams could be ousted as the government seeks to provide a shield to taxpayers.

My Comment: It beats simply throwing hundreds of billions at the banks with no strings attached, Hank-Paulson-style. But given the trillions of toxic assets on (and off) banks` balance this thing could mushroom into a monster, making the "orderly disposal" issue much more of a problem than it was with the RTC.

Boeing Slashes Workforce:

Boeing Will Eliminate 10,000 Jobs After Posting Loss on Recession, Strike: Boeing Co. said it plans to cut 10,000 jobs, or about 6 percent of its workforce, after a strike, program delays and a global recession contributed to a fourth- quarter loss.

Swell Day for Wells "How Far Will it Go" Fargo shares

Madoff Costs Wells Fargo $294 Million as Bank's Clients Can't Repay Loans: Wells Fargo & Co. wrote off $294 million because Bernard Madoff’s alleged Ponzi scheme wiped out some of its customers and left them unable to pay their loans, said Chief Financial Officer Howard Atkins.

Wells Fargo Has First Loss Since 2001; Shares Jump as Bank Keeps Dividend: Wells Fargo & Co., the second- biggest U.S. home lender, reported its first quarterly loss since 2001 after acquiring Wachovia Corp. The stock rose 19 percent in New York trading after the bank maintained its dividend and said it doesn’t need more federal aid.

The fourth-quarter net loss of $2.55 billion, or 79 cents a share, compares with profit of $1.36 billion, or 41 cents, a year earlier, the San Francisco-based company said today in a statement. Wachovia recorded a loss of $11.2 billion. Excluding one-time items, profit was 41 cents a share, beating the 33-cent average estimate of analysts surveyed by Bloomberg.

Wells Fargo averted the worst of the 2008 financial meltdown, enabling Chairman Richard Kovacevich and Chief Executive Officer John Stumpf to buy Wachovia for $12.7 billion. While the bank built reserves to deal with defaults on Wachovia’s $122 billion in option adjustable-rate mortgages, it didn’t cut its 34-cent dividend or ask for a second injection of U.S. capital like Bank of America Corp., which was saddled with greater-than-expected losses after buying Merrill Lynch & Co.

My Comment: Ah, the famous "excluding one-time charges..." ruse. Translation: "Excluding the stuff that lost us money, we made money". Expect many more "one-time charges" related to Wachovia`s toxic mortgage portfolio, as well as the defaults to come in WFC`s own (non-acquired) mortgage book. (Someone remind me to check in a couple months and see what Wells Fargo shares are doing then - currently up 25% for the day, to around $20.)


On the bright side, it`s apparently a good time to be a bankruptcy lawyer:

Bankruptcy Lawyers Seek $18.50 a Minute as Creditors' Recoveries Shrink: Lawyers at Kirkland & Ellis LLP, home to former Whitewater prosecutor Ken Starr, are asking as much as $1,110 an hour for bankruptcy work while creditors are recovering less of their loans through company restructurings.

[ewmayer]

The horrid earnings reports and mass layoffs keep coming:

Starbucks 1Q profit falls 69 percent: Coffee retailer to close 300 underperforming stores in addition to the 600 it already planned to close in the U.S., lay off 6,700 workers

Qualcomm Profit Falls 55% as Recession Curbs Demand for Mobile-Phone Chips: Qualcomm Inc., the world’s biggest maker of mobile-phone chips, reported a drop in first-quarter profit after the recession stifled demand and hurt its investments.

Allstate to Eliminate 1,000 Jobs After Posting First Annual Loss Since IPO: Allstate Corp., the largest publicly traded U.S. home and auto insurer, will cut 1,000 jobs after the falling value of investments caused the company’s first annual loss as a public firm. Shares dropped 11 percent in extended trading.

No More Saturday Mail Delivery?

Another sign things are getting really bad - The U.S. Postal Service may discontinue Saturday mail delivery (They don't say which day of the week, but Saturday seems most likely):

USPS may cut day of mail delivery: Economic downturn has caused a steep decline in mail volume, postmaster says.

The U.S. Postal Service may be forced to eliminate a day of mail service because the economic downturn has led to plummeting volume and revenue, the postmaster general said in Senate testimony Wednesday.

Postmaster General John E. Potter told a U.S. Senate subcommittee he wanted to eliminate the requirement to deliver mail six days a week to every address in America.

If the recession continues to hammer at USPS revenue, six-day delivery may not be possible, Potter said. Federal law has mandated the six-day schedule since 1983.

In fiscal 2008, total mail volume fell by more than 9 billion pieces - 4.5 % -compared to the previous year, Potter said. And the agency suffered a greater-than-expected net loss of $2.8 billion last year, he added.

USPS is "a vital economic engine in our national economy," Potter said, noting that USPS is the country's second-largest employer and the mail affects both jobs and commerce.

"The mail system is a nationwide logistics network second to none," Potter said. "Working to protect the viability of the mail will produce benefits that reach far beyond the boundaries of the Postal Service."

"We could experience a net loss of $6 billion or more this fiscal year," Potter told the subcommittee. That shortfall would exceed the Postal Service's credit limit under current law.

"We believe that legislative relief is necessary to preserve the nation's mail system," Potter said.

He also asked Congress to change the payment schedule for funding its retirees' health benefits.

The Postal Law of 2006 requires accelerated prepayment of future retiree health care costs. USPS "is the only public or private entity required to prepay health benefit premiums at these extremely high levels," Potter said.

[ewmayer]

Update: Looks like the day the USPS has in mind for cutting mail service is Tuesday, not Saturday as I surmised yesterday. That will likely be more palatable for residential customers (including working folks like me who only ever have time to get the post office on Saturdays), but I expect business customers will not be pleased.

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U.S. New-Home Sales Decline to Lowest Level on Record Amid Credit Freeze: Sales of new homes in the U.S. fell in December to the lowest level since reporting began in 1963, creating an unprecedented glut of unsold properties that casts doubt on any recovery in the industry this year.

Unadjusted for seasonal patterns, only 23,000 Americans bought new homes last month, with just 2,000 purchases in the Northeast region.

Economists had forecast new home sales would drop to a 397,000 pace, according to the median forecast in a Bloomberg survey of 70 economists. Estimates ranged from 345,000 to 412,000. Commerce revised the November sales pace down to 388,000 from the 407,000 rate previously reported.

My Comment: "Economists - Wrong and Wronger"


Ford Burns $5.5 Billion in Cash, Taps Revolving Loan After Worst Loss Ever: Ford Motor Co., the only U.S. automaker shunning federal loans, burned $5.5 billion in cash in the fourth quarter and said it will tap a revolving credit line after the worst annual performance in its 105-year history.

The second-biggest U.S. automaker posted a full-year loss of $14.6 billion, eclipsing 2006’s record of $12.6 billion. Cash in Ford’s automotive business fell to $13.4 billion, the company said today in a statement.

“These losses are not sustainable,” Sean Egan, president of bond ratings firm Egan-Jones Ratings Co., said in a Bloomberg Television interview. “Even if they draw down their lines and the money from the government, it begs the question of whether or not the overall situation is going to improve.”

My Comment: I don`t believe for one second that Ford isn`t going to need a major government bailout before end of this year. Our federal government seems to have lost all restraint when it comes to throwing (borrowed) money at the problem, but "throwing money at the undeserving" is nothing new in Washington, D.C.:


Hidden Bonuses Enrich Government Contractors as Taxpayers Pay $100 Billion: U.S. Senator Kit Bond shifted in his chair at a 2005 congressional hearing, poised with a question on national security. He turned to Treasury Secretary John Snow, who was seated at a witness table.

Was Snow sure, asked Bond, a Missouri Republican, that a Treasury Department computer on order for $8.9 million would help detect terrorist money laundering?

“Yes, absolutely,” Snow said.

A year later, in July 2006, the U.S. Treasury Department abandoned the project. The computer didn’t work. The department had spent $14.7 million -- a 65 percent increase above the original budget -- for nothing.

There was a final ignominy: Under the terms of the contract, Electronic Data Systems Corp., the vendor, collected a bonus of $638,126.

As the federal government’s $700 billion bailout of banks sputters, there’s an object lesson for the new administration of President Barack Obama: Federal departments, including Treasury itself, routinely squander tens of billions of dollars a year in taxpayer money as they farm out public business to private corporations.

Obama, like presidents before him, said during his bid for the White House that he wanted to curtail waste in government. With contracting, he faces a mismanaged system that accounts for almost 40 cents of every federal dollar spent outside of mandatory obligations such as Social Security and Medicare.

When compared with all federal contracting, just a fraction of U.S. spending waste comes from so-called earmarks, which elected officials often criticize as the unnecessary pet projects of politicians.

The “Bridge to Nowhere” in Alaska, for example, had a price tag of $398 million. By contrast, the government spent $368.4 billion on all contracts in 2008, and Republican Oklahoma Senator Tom Coburn estimates that about $100 billion of that was wasted.

Citigroup Guarantees Test Obama Pledge to Tell Public More on Bailout Risk: U.S. government guarantees on securities totaling $419 billion for bank bailouts provide an early test of President Barack Obama’s pledge to be open with taxpayers about what they have at risk in the credit crisis.

Bloomberg News asked the Treasury Department Jan. 26 to disclose what securities it backed over the past two months in a second round of actions to prop up Bank of America Corp. and Citigroup Inc. Department spokeswoman Stephanie Cutter said Jan. 27 she would seek an answer. None had been provided by the close of business yesterday.

As Congress debates an $875 billion economic stimulus bill, the guarantees represent a less publicized commitment. The public’s stake has grown along with assurances tying the Treasury to the fate of corporate loans and securities backed by home mortgages, car loans and credit card debt.

“Guarantees are only meaningful if there’s a real chance that someone will have to pay out for them,” said Representative Alan Grayson, a Florida Democrat and a member of the House Financial Services committee that is reviewing the bailouts. “The conception that guarantees cost nothing is a misconception.”

Obama promised a new era of government openness as he took office last week, issuing a statement telling agencies “to adopt a presumption in favor of disclosure” in responding to requests under the Freedom of Information Act. Treasury Secretary Timothy Geithner and Lawrence Summers, head of the National Economic Council, said they would emphasize accountability and transparency in using the second half of a $700 billion bank bailout fund.

Late yesterday, Geithner’s office put hundreds of pages about the fund on the department’s Web site. They did not include documents describing the guaranteed assets.

My Comment: This issue of disclosure will provide a very useful "OK, you`ve talked the talk..." test for the Obama administration.

[ewmayer]

Continuing jobless claims set record: Americans living on unemployment checks at highest level since tracking started in 1967. New filings rise to 588,000.


Economy: Sharpest decline in 26 years: Economic activity shrank by 3.8% in last three months of 2008, according to the government's gross domestic product report.

Hit by tight credit and soaring job losses, Americans slammed the brakes on spending in the quarter.

Consumer spending fell at a 3.5% annual rate, which was the seventh biggest drop on record. Spending on big-ticket durable goods plunged at a 22% pace, the largest decline since 1987. Consumer spending accounts for more than two-thirds of overall economic activity.

But it wasn't just consumers pulling back. Fixed investment in equipment and software, taken as an indication of business spending, plunged at an annual 28% rate. That's the biggest drop in 50 years.

Healthy export demand helped to lift U.S. economic growth earlier in 2008, but that strength vanished in the fourth quarter, as exports fell at nearly a 20% annual rate, the sharpest decline since 1974. That set off more concerns about the slowdown in the global economy.

"I don't want to say we were counting on the global economy to bail us out. But if it turns into a big drag, we've got more of a problem," said Gus Faucher, director of macroeconomics for Moody's Economy.com.

More warning signs

Faucher and other economists noted that the biggest surprise in the report was the sharp growth in business inventories.

Economists say that was false growth brought about by businesses being unable to sell the goods they had on hand. Excluding the growth in inventories, GDP would have fallen by 5.1%

"When the economy is dropping fast it is hard for firms with plummeting sales to halt inventory accumulation," said Robert Brusca of FAO Economics.

TARP Return to Date: -1065% | Ritholz v Geithner

Barry Ritholz comments on Tim Geithner`s new job and The Moral Hazard of the "Bad Bank" Proposal:

I’ve been closely following the various (new & improved!) bailout plans for the big banks — from the modified TARP to the recapitalizations to the “bad bank” plan.

I’ve noticed something I find a bit disturbing about our new Treasury Secretary: He has not yet fully come to terms with his new job, role — and boss. Granted, he’s been in the job for only two days. But given the extraordinary circumstances the financial sector and the economy is in, it is important for the Treasury Secretary to get up to speed as soon as possible.

Consider this statement from Geithner, who said that Treasury is considering a “range of options” for its financial rescue plan, with the goal of preserving the private banking system. “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

No! Defending these idiots was your old gig. In the new job, you no longer work for the cretins responsible for bringing down the global economy. Please stop rationalizing their behavior, and preserving the status quo!

Yesterday’s 13% surge in bank stocks is a clue as to what an obscene taxpayer giveaway this “bad bank” plan is — its free money for the firms that caused the problems, many of whom still have the same incompetent management in place that caused the problem. Purging toxic assets from bank balance sheets, without punishing the management, shareholders and creditors of these institutions for their horrific judgment will only encourage more of the same in the future. Its moral hazard writ large.

My Comment: and the estimated rate of return on the government`s "investment" of taxpayer money to prop up the banks via ex-Treasury-head Paulson's TARP (which has indeed lived up to its name of "Troubled Asset Relief Program" - but with "Troubled" describing the state of the program better than that of the problems it was intended to address) ain`t looking so good, either.


Amazon.com Provides a Rare Bright Spot in a Dismal Retail Landscape:

Amazon.com Profit Rises After Discounts Lure Holiday Shoppers; Shares Gain: Amazon.com Inc., the world’s largest Internet retailer, posted an 8.7 percent rise in fourth-quarter profit after promotions and discounts lured consumers to its Web site. Sales beat estimates, sending the shares up 9.4 percent.

Internet retailers slashed prices over the holidays to lure budget-minded shoppers reeling from the recession. Amazon.com will probably keep discounting goods this year, at the expense of profit, as it tries to fuel sales and ward off competition, Tim Boyd, an analyst at Broadpoint AmTech, said in a report.

“Amazon has a tough decision to make in 2009,” Boyd said. “Will it attempt to grow its top line come hell or high water, or will it instead try to preserve its gross margin? It cannot do both.”

My Comment: I used to rag on Amazon back in the early 2000s, when they were expanding at a breakneck clip, attempting to sell everything from books to furniture and even cars, and seemed to have no clear plan to actually turn profitable. I must say, they seem to really have gotten the model right since then - partly because they're no longer trying to sell everything from books to furniture and even cars. ;)


JPMorgan: Greatest Systemic Risk lies in Money Market Funds:

JPMorgan's Staley Says Money-Market Funds Pose `Greatest Systemic Risk': James “Jes” Staley, head of JPMorgan Chase & Co.’s investment unit, said the $4 trillion money-market fund industry is the “greatest systemic risk” to the financial system that hasn’t been adequately addressed.

JPMorgan Asset Management oversees about $500 billion of money-market funds, Staley said. The funds aren’t allowed to set aside capital to protect for investment losses, leaving no “margin for error” against a potential collapse, he said.

“If you’re running a money-fund and all of a sudden you think there may be a slight run or a problem in the credit markets you have to liquefy your portfolio as fast as you possibly can,” he said. “Your margin of error is zero because there’s no shock absorber or capital insurance protecting that.”

Staley said money-market funds, not banks, were responsible for the collapse of Lehman Brothers Holdings Inc. and the near bankruptcy of Bear Stearns Cos. last year. He said the funds, which typically hold highly rated, short-term debt instruments, were forced to pull their money from the firms when they saw signs of trouble.

My Comment: This is very interesting and somewhat counterintuitive to those who preach that excessive leverage and the proliferation of exotic financial instruments (derivatives, credit-default swpas, etc) are the biggest source of systemic finanical risk. Money funds don`t seem to have the leverage issues, but note that in the past decade many started investing in riskier (often leveraged) financial instruments by way of chasing yield. That was what brought down the granddady of MMFs, the Reserve Primary Fund, late last year. Coupled with zero "redemption cushion" (such as hedge funds enjoy), it`s a toxic recipe.


A "Short Course" in Depressionary Patriotism

Saw this pithy sentiment on a Yahoo! Finance message board:

All the whiners who have lost their shirts over the past year come on here when they get their evanescent rallies to taunt [-snip-] holders and other market shorts that we're "BETTING AGAINST AMERICA" or "HOPING AMERICA FAILS".

Have the politicians and the banksters who are looting the public treasury as we speak really been this successful in convincing the average American that the pigs in Washington and the greedy banksters are equivalent to, or represent, America?

I am not betting against the hard-working American citizen working to put food on the table or fund his kids' education...or the successful, entrepreneurial company struggling to stay afloat on its own risk-management and ability to supply a good or service that people want.

But I AM betting against the pigs in Washington handing out our tax dollars or printing greenbacks on overdrive (effectively stealing from us by way of inflation) to failing businesses, while stuffing the bailout bills full of perks and pork to better their own political careers. All these pieces of scum should be subjected to the guillotine, save for handful of Congressmen, including Ron Paul, who have been honestly and seeking to stop this theft from the American taxpayer.

The longer the Eight Little Piggies (read: Bush, Obama, Bernanke, Paulson, Geithner, Barnie Frank, Chris Dodd, and Nancy Pelosi) keep propping this market up like a ventriloquist's dummy, the longer we're mired in this mess and the harder we fall.

For God's sakes, Piggies, get the @#$% out of the markets so the worm-infested apples can be shaken out of the tree and capitulation--and then recovery--can finally occur!

[ewmayer]

Saw this interesting piece on Nouriel Roubini`s RGE Monitor website today:

In a very interesting piece, Alex Pollock argues that historically under sufficient threat, crisis and pressure, a clear default on Treasury bonds did occur. He cites 1933 when the United States quite clearly and overtly defaulted on its debt. This was an intentional repudiation of its obligations, supported by a resolution of Congress and later upheld by the Supreme Court. Read: "Was There Ever a Default on U.S. Treasury Debt?"

From the linked article (which may require a subscription to the RGE Monitor site - being a subscriber I can't tell if non-subscribers can view the page):

Was There Ever a Default on U.S. Treasury Debt?

Alex Pollock | Jan 23, 2009

As the bailouts in the current bust inexorably mount, financed in rapidly increasing U.S. government debt, one might wonder whether a default on Treasury debt is imaginable. In the course of history, did the U.S. ever default on its debt?

Well, yes: The United States quite clearly and overtly defaulted on its debt as an expediency in 1933, the first year of Franklin Roosevelt's presidency. This was an intentional repudiation of its obligations, supported by a resolution of Congress and later upheld by the Supreme Court. Granted, the circumstances were somewhat different in those days, since government finance still had a real tie to gold. In particular, U.S. bonds, including those issued to finance the American participation in the First World War, provided the holders of the bonds with an unambiguous promise that the U.S. government would give them the option to be repaid in gold coin. Nobody doubted the clarity of this "gold clause" provision or the intent of both the debtor, the U.S. Treasury, and the creditors, the bond buyers, that the bondholders be protected against the depreciation of paper currency by the government. Unfortunately for the bondholders, when President Roosevelt and the Congress decided that it was a good idea to depreciate the currency in the economic crisis of the time, they also decided not to honor their unambiguous obligation to pay in gold. On June 5, 1933, Congress passed a "Joint Resolution to Assure Uniform Value to the Coins and Currencies of the United States," of which two key points were as follows:

• "Provisions of obligations which purport to give the obligee a right to require payment in gold obstruct the power of the Congress."
• "Every provision contained in or made with respect to any obligation which purports to give the obligee a right to require payment is gold is declared to be against public policy."

"Purport"? "Against public policy"? Interesting rhetoric. In plain terms, the Congress was repudiating the government's obligations. So the bondholders got only depreciated paper money. The resulting lawsuits ended up in the Supreme Court, which upheld the ability of the government to refuse to pay in gold by a vote of 5-4. The Supreme Court gold clause opinions of 1935 make instructive reading. The majority opinion, written by Chief Justice Hughes, includes these thoughts:

• "The question before the Court is one of power, not policy."
• "Contracts, however express, cannot fetter the constitutional authority of the Congress."

Justice McReynolds, writing on behalf of the four dissenting justices, left no doubt about their view:

• "The enactments here challenged will bring about the confiscation of property rights and repudiation of national obligations."
• "The holder of one of these certificates was owner of an express promise by the United States to deliver gold coin of the weight and fineness established."
• "Congress really has inaugurated a plan primarily designed to destroy private obligations, repudiate national debts, and drive into the Treasury all gold within the country in exchange for inconvertible promises to pay, of much less value."
• "Loss of reputation for honorable dealing will bring us unending humiliation." The clearest summation of the judicial outcome was in the concurring opinion of Justice Stone, as a member of the majority:
• "While the government's refusal to make the stipulated payment is a measure taken in the exercise of that power, this does not disguise the fact that its action is to that extent a repudiation."
• "As much as I deplore this refusal to fulfill the solemn promise of bonds of the United States, I cannot escape the conclusion, announced for the Court, that the government, through exercise of its sovereign power, has rendered itself immune from liability."

So five of the nine justices explicitly stated that the obligations of the United States had been repudiated. There can be no doubt that the candid conclusion of this highly interesting chapter of our national financial history is that, under sufficient threat, crisis and pressure, a clear default on Treasury bonds did occur. About 250 years ago, in a celebrated essay, "Of Public Credit," David Hume wrote: "Contracting debt will almost infallibly be abused in every government. It would scarcely be more imprudent to give a prodigal son a credit in every banker's shop in London, than to empower a statesman to draw bills upon posterity." Hume would have looked down from philosophical Valhalla in 1933-35 and seen his views confirmed. What, one wonders, would he be thinking now?

My Comment: Of course all this talk of "payment in gold" and "national obligations" is so very old-fashioned and quaint ... nowadays all we have is easily-manipulable, endlessly creatable paper currency, and as long as we can continue to convince the foreign governments holding trillions of dollars of our IOUs (i.e. treasury bonds) that they'd better keep buying 'em as fast as we can print 'em because a failure of the T-bill market would cause the value of their existing bond holdings to plunge, we can finance as much national profligacy as we like. It`s nothing less than the biggest financial protection racket in world history.

[cheesehead]

Originally Posted by ewmayer

"Was There Ever a Default on U.S. Treasury Debt?"

From the linked article (which may require a subscription to the RGE Monitor site - being a subscriber I can't tell if non-subscribers can view the page):

Apparently not subscription-only; I can view it and the comments following it.

How much does anyone want to bet that Republicans will (a) attack Democrats' $1 trillion raising of the US national debt if the stimulus doesn't (apparently, anyway, in their view) work, but (b) refuse to take any responsibility for the part played by their own party's $8 trillion contribution to that debt since 1980?

[ewmayer]

MC Hammer`s pain scores in Super Bowl ad: NBC reaps more than $200 million in ad revenue, but most Super Bowl viewers aren`t feeling so rich.

NEW YORK (CNNMoney.com) -- It`s a telling sign of the times that one of the most popular commercials in last Sunday`s Super Bowl was from an online pawn shop.

The ad for Cash4Gold, where rapper MC Hammer is reduced to selling his bling as pitchman Ed McMahon cashes in his gold toilet, won the top spot in the Kellogg Super Bowl Advertising Review.

Tim Calkins, a marketing professor for the review, which is run by Northwestern University`s Kellogg School of Management, said this was "almost the most astonishing development on Super Bowl."

"It`s a very sad reflection of where we are in the economy right now: Sell us your precious items and we`ll melt them down into cash," said Calkins.

But it didn`t feel like a recession for NBC, the game broadcaster, which walked away with $206 million in advertising revenue, a record take. The network charged an average of $3 million for a 30-second spot, an all-time high, and it had no trouble selling out in spite of the fact that the game`s rating were 6% down from last year.

My Comment: Useful as those cash-4-gold-style services are for turning one`s jewelry into quick cash, the scam potential here strikes me as massive: you`re basically sending them your jewelry and trusting them to be honest about the weight and carat numbers. Sure, you could preweigh your bling using a jeweler`s scale and carefully document the carat-age of the various items, but what percentage of customers do you think actually do that? And the few who do and then complain to cash4gold (or similar outfit) that the weight stated by the melter-downer was lower than they recorded, you just say "sorry - our bad" and make up the difference. I`m not saying that`s actually what`s happening, just that it would be incredibly easy (and tempting) to do. Just like Whole Foods consistently overcharges me - about every second time I`m there. Interestingly, I`ve never known them to *undercharge* me. But being just one customer, I`m not in a position to establish a "pattern of overcharging" - best i can do without becoming a full-time consumer advocate is to carefully check my bill and complain when I get overcharged.


China's Manufacturing Shrinks for 6th Month as Exports Slide, Survey Shows: China’s manufacturing contracted for a sixth month in January as the global recession sent growth sliding in Asia’s export-driven economies.

Feb. 2 (Bloomberg) -- South Korean exports tumbled by a record in January and Chinese manufacturing contracted as the global recession sent growth sliding in export-driven economies across Asia.

South Korea’s shipments fell 32.8 percent from a year earlier, the Ministry of Knowledge Economy said. Manufacturing in China shrank for a sixth month, the CLSA China Purchasing Managers’ Index showed.

Plunging export demand is dragging down economies across Asia and the Pacific, where Japan and Hong Kong are already in recessions and Taiwan, South Korea and Australia are getting closer. South Korean steelmaker Posco will extend production cuts and Rio Tinto Group, the biggest iron-ore miner in Australia, may sell shares to raise cash after commodity prices plummeted.

“Things are getting worse as the global recession spills over to China and other emerging economies,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul.

Japan’s factory output slumped by a record in December from November, the government said last week, and Australia’s manufacturing contracted for an eighth month in January, a report showed today. Australia faces a “collapse in government revenues,” according to Prime Minister Kevin Rudd, as the global and domestic economies slow.

The MSCI Asia-Pacific Index fell 2.1 percent as of 4:10 p.m. in Tokyo, extending its decline to 9 percent this year.

Worst on Record

South Korea’s shipments fell by the most since figures were first compiled in 1957, and at almost twice the pace of December’s decline. The trade report is among the region’s first economic releases for January.

“An outright recession is inevitable,” said Kwon Young Sun, an economist at Nomura International Ltd. in Hong Kong. “This is an early indicator for the region, and the drop suggests exports in Asia won’t be good.”

The Chinese purchasing managers’ index rose to a seasonally adjusted 42.2 from 41.2 in December, CLSA Asia-Pacific Markets said today. A reading below 50 shows a contraction.

The Chinese economy will “likely get much worse before getting better,” said Wang Qing, Hong Kong-based chief China economist at Morgan Stanley.

Chinese manufacturers shed jobs last month at the fastest pace since the index began in 2004, the CLSA survey showed.

About 20 million migrant workers have lost their jobs because of the nation’s economic slowdown, Chen Xiwen, a senior rural planning official said at a briefing in Beijing today.

My Comment: But, as the China permaBulls like to say, never let some ugly facts get in the way of a comforting delusion:


China's World-Beating Stocks Keep BlackRock, Barclays Bullish on Economy: The world’s largest money managers say China’s steepest monthly stock gain in more than a year shows the fastest-growing major economy will avert a recession.

“China is going to do what it has to do to keep the economy humming,” Koesterich, the San Francisco-based head of investment strategy at Barclays Global Investors, said in a Bloomberg Television interview Jan. 26. “They can enjoy faster growth than the rest of the world in 2009 and in 2010 as well.”

...

“The Chinese have a pretty strong pro-growth agenda at the moment and they tend to do whatever it takes to stabilize the growth slowdown,” said Urwin, the head of asset allocation at BlackRock in London.

My Comment: So the Chinese government can just wave its magic "whatever it takes" wand and miraculously get broke western consumers to restart their decade-long cheap-stuff-buying binge, thus reviving the Asian export economy? What planet are you guys living on?

[ewmayer]

On a more-upbeat note, CNN/Money has a nice piece today titled 6 companies born during downturns - my personal favorite is the one on IBM:

Company: IBM
Ticker: IBM
Industry: Computer
Founded during: The Long Depression, 1873-1896

Aptly named, this era comprised a series of unfortunate events. The Vienna Stock Exchange fell. The Coinage Act of 1873 demonetized silver, pushing investors away from making long-term loans. U.S. banks collapsed twice, causing the Panic of 1873 and the Panic of 1893.

But three startups - the Tabulating Machine Company, the International Time Recording Company and the Computing Scale Corporation - developed technologies during this 23-year period that were in demand despite the sour economy. A time clock for recording workers' hours, for example, was needed as industrial production at the end of the century surged. Also, a tabulating machine was vital during the immigration wave, to tally up the expanding population. These three companies merged in 1911 as the Computing-Tabulating-Recording Company, which changed its name to IBM several years later.

My Comment: It`s a niggle, but before they officially switched to a KFC-style acronymized company name, they were sometimes referred to by their full name, as the [url=http://en.wikipedia.org/wiki/IBM]International Business Machines Corporation[/i]. Another interesting nugget - especially for compute geeks like those who frequent this forum - is that the aforementioned Tabulating Machine Company was founded by none other than computing pioneer Herman Hollerith, inventor of the punched card which revolutionized the U.s. census, about whom Wikipedia writes:
Other than his inventions, Hollerith "was said to cherish three things: his German heritage, his privacy and his cat Bismarck."

The cat, of course, had the full name "Klaus von Bismarck".

(Luckily for me, tomatoes are out of season around here just now).


California delays $3.5B in payments: Golden State won't be able to meet its obligations to taxpayers, vendors and others until a budget deal is reached.

NEW YORK (CNNMoney.com) -- Running short of cash, California has started delaying $3.5 billion in payments to taxpayers, contractors, counties and social service agencies.

With the governor and state lawmakers locking horns on resolving California's budget crunch, the controller Monday halted checks covering these obligations so the state could continue funding its school system and making its debt payments.

The delay will inflict more pain on the already sorry condition of the Golden State, which is facing a $40 billion budget gap. People won't have tax refund money to spend, businesses won't get paid for their services and agencies won't have funds to help the needy until the budget situation is addressed.

Nearly $2 billion in personal state income tax refunds are being held up, according to state estimates. Last year, some two million Californians received refunds in February.

"People are going to be hurt starting today," said Garin Casaleggio, a spokesman for Controller John Chiang.

Also on hold are $515 million in payments to the state's vendors and $280 million to help people with developmental disabilities. Other public assistance agencies will be left waiting for hundreds of millions of dollars.

Gov. Arnold Schwarzenegger and legislative leaders are behind closed doors trying to hammer out a solution to the state's budget crisis, which also includes a $15 billion budget deficit for 2008-2009 and a projected $25 billion gap for 2009-2010. The governor has proposed draconian spending cuts in virtually every department, as well as hefty tax increases, to close the widest deficit in its history.

My Comment: Oh lordy, this is promising to get very ugly. Think Iceland-style mass protests.

[only_human]

Originally Posted by ewmayer

MC Hammer`s pain scores in Super Bowl ad: NBC reaps more than $200 million in ad revenue, but most Super Bowl viewers aren`t feeling so rich.

My Comment: Useful as those cash-4-gold-style services are for turning one`s jewelry into quick cash, the scam potential here strikes me as massive: you`re basically sending them your jewelry and trusting them to be honest about the weight and carat numbers. Sure, you could preweigh your bling using a jeweler`s scale and carefully document the carat-age of the various items, but what percentage of customers do you think actually do that? And the few who do and then complain to cash4gold (or similar outfit) that the weight stated by the melter-downer was lower than they recorded, you just say "sorry - our bad" and make up the difference. I`m not saying that`s actually what`s happening, just that it would be incredibly easy (and tempting) to do.

In addition to these concerns, this commercial prompts additional negative associations of bad economy and hardship very much in keeping with the topic of this thread since one of the commercial's two personalities, Ed McMahon, recently almost lost his house due to foreclosure and was saved by the personal intervention of Donald Trump: Donald Trump to buy Ed McMahon's house - Los Angeles Times

August 14, 2008

It’s “The Donald” to the rescue.

Mega-developer and TV personality Donald Trump has agreed to buy Ed McMahon’s Beverly Hills house for an undisclosed amount and allow McMahon to continue living in it. Details of the deal are still being ironed out, but Trump’s interest is regarded as an act of benevolence.

“I don’t know the man, but I grew up watching him on TV,” Trump said in an exclusive interview with The Times.

McMahon, 85, was facing foreclosure within two weeks on his Beverly Hills home of 18 years. The aging television icon, who was Johnny Carson’s sidekick for three decades, defaulted on $4.8 million in mortgage loans with Countrywide Financial Corp. He said in interviews that he was unable to work because of a neck injury that occurred about 18 months ago.

[cheesehead]

"ABC News: Iceland's Warning to the World

After Economic Collapse Island Nation Experiencing Political Unrest And Protest"

http://abcnews.go.com/International/story?id=6784835

Originally Posted by Ralf Hoppe

First came the financial crisis, then the uproar: Iceland is the first European country to suffer the full effects of the global financial crisis. Is this a taste of what's in store for the rest of the world?

. . .

Recently, she says, the wrath of the people was so great that the crowd was on the verge of storming the Althing, dragging out the government, and hanging them from the huge Christmas tree. The tree is no longer there.

"Some of the demonstrators torched it," she says. "That was quite a fire."

. . .