Econ 2009

[R.D. Silverman]

Originally Posted by ewmayer

<snip>

It may be fun being a genuine salmon-and-berry-eating bear, but being a metaphorical one is very tough. I think I have an idea of how the mythical Cassandra must have felt.

Speaking of prophets, here is some more gloom and doom showing
up the "recession is over" bullsh*t artists:


Unemployment problems are worse than meet the eye
Douglas McIntyre
Sep 27th 2009 at 8:30AM filed under: Economy
More

There are a lot of people out of work, which is the norm during a recession. There are almost no jobs available, which is a bit unusual during a recovery.

According to the The New York Times, a look at Labor Department statistics for the month of July revealed that "only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed." That's a six to one ratio -- the largest since they've tracked this stat. The immediate effect of the situation is obvious, but the longer term effects may not be. People will clearly be looking for work for a longer period than in previous recessions and the unemployment rate is almost certain to go over 10 percent, and may stay there for several quarters.

The stress that this problem will put on the federal, state, and local governments around the country will be immense. The first consequence of this major imbalance between jobs and the jobless is that federal and state governments will be providing an unemployment social safety net that they really cannot afford. Congress has already voted to extend unemployment benefits, further straining federal financial resources. But, many people who are out of work will run out of benefits early next year, further undermining consumer spending.

The other issue for government at all levels is that tax receipts will continue to stagnate at lower-then-expected levels, at least when compared to the federal Budget. IRS receipts may actually continue to drop, driving the deficit higher.

The recession may be over, but it may not be over for long.

Douglas A. McIntyre is an editor at 24/7 Wal St.

[ewmayer]

Really busy at work today, but I see Bob has my back - here's the NYT article about the dire jobs-to-seekers ratio,

U.S. Job Seekers Exceed Openings by Record Ratio

Despite signs that the economy has resumed growing, unemployed Americans now confront a job market that is bleaker than ever in the current recession, and employment prospects are still getting worse.

Job seekers now outnumber openings six to one, the worst ratio since the government began tracking open positions in 2000. According to the Labor Department’s latest numbers, from July, only 2.4 million full-time permanent jobs were open, with 14.5 million people officially unemployed.

And even though the pace of layoffs is slowing, many companies remain anxious about growth prospects in the months ahead, making them reluctant to add to their payrolls.

“There’s too much uncertainty out there,” said Thomas A. Kochan, a labor economist at M.I.T.’s Sloan School of Management. “There’s not going to be an upsurge in job openings for quite a while, not until employers feel confident the economy is really growing.”

The dearth of jobs reflects the caution of many American businesses when no one knows what will emerge to propel the economy. With unemployment at 9.7 percent nationwide, the shortage of paychecks is both a cause and an effect of weak hiring.

My Comment: That last point, "no one knows what will emerge to propel the economy", is the telling one - I`ve yet to see any of the now-bullish "most economists" address that issue, which can also be phrased as "In an economy 70% based on the consumer, with broad measures of un-and-underemployment approaching 20% and most consumers who still have jobs concerned about them and fated to spend years trying to get themselves out from under the mountain of debt accumulated in the past decade of reckless excess, what will the organic drivers of consumption and jobs growth be?" In resaponse to that question one typically hears crickets chirping or pathetic attempts to change the subject with statistical bromides like "the deeper the recession, the bigger the bounce".

G20 Summary: No reform, just a cosmetic patch for a discredited, flawed regime

'The ultimate result of shielding men from the effects of folly,' said the Victorian philosopher Herbert Spencer, 'is to fill the world with fools'.

These words sprang to mind as I watched last week's G20 Pittsburgh summit.

The world's leading nations have agreed "tough new regulations" to prevent another global financial crisis, declared Barack Obama, as the two-day meeting drew to a close. The G20 has "taken bold and concerted action to forge a new framework for strong, sustainable and balanced growth".

Obama's oratory was typically impressive. The trouble is, it wasn't true. No specific rules on banks' capital reserves were announced at this summit. No leverage caps were agreed. Nothing "bold" was done to lessen systemic dangers or overhaul the global regulatory regime.

Pittsburgh produced nothing more than the usual photo calls and drab theatre. The lack of questioning of the status quo was spectacular. The world needs to learn from what we've just been through and implement financial reform, so cutting the chances of a repeat performance.

What our "leaders" produced instead was a rhetorical patch for the existing flawed regime. Worse still, they did everything possible to protect the financial vested interests – above all, the big investment banks – from the damage caused by their deeply irresponsible use of derivatives and debt, while preserving the system that allowed such excess.

[ewmayer]

FDIC Says Banks Must Prepay Fees Through 2012 to Boost Depleted Reserves: The Federal Deposit Insurance Corp., seeking to replenish deposit reserves as banks fail at the fastest pace in 17 years, today voted unanimously to have lenders prepay fees through 2012, raising about $45 billion.

Lenders would prepay FDIC premiums for the fourth quarter and next three years on Dec. 30, to replenish the deposit insurance funds that staff estimated will have a negative balance at the end of this quarter, the agency said.

The agency raised its estimate for the cost of bank failures to $100 billion through 2013, from $70 billion, and said about half the expenses will be incurred by the end of this quarter.

My Comment: Gosh, do ya think the banks will end up passing the cost of this (another form of bailout for the reckless lenders) on to their customers/ They wouldn`t do that, would they?

Note that "broke" is a euphemistic term for a government agency like the FDIC ... as you can see, they have the power to hit up the banks (i.e. the banks` customers, and that includes those of the banks which did not engage in reckless lend-and-spend behavior) for more money ... they could in an emergency also draw on their recently-created $500 Bln line of credit with Treasury. But the point is, the speed at which the FDIC insurance fund got wiped out belies all the claims in the past year by the government and by FDIC head Sheila Bair about the alleged "soundness" of the U.S. banking system, or about the current crisis "leading to far fewer bank failures" than occurred in the early-90s S&L crisis ... there may be fewer banks failing, but the average size is much larger, and the state of the average failed-bank balance sheet is at least as bad (and will probably prove worse once all is said and done and the mortgage-backed and CRE securities in question are finally marked to market) as during the S&L debacle. And of course we`re not counting the explicitly-backstopped-by-the-taxpayer TBTFs here.


Federal Reserve Buys More Than 100% of Mortgages Issued in 2009

the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued. So, through August, the Fed bought more than 100% of the entire supply of new (purchase) mortgages in 2009.

That's not a free housing market; that's a market bought, owned, and sustained by the Federal Reserve's willingness to print up three quarters of a trillion dollars out of thin air.

While the individual mortgages issued in 2009 may or may not be the exact same ones purchased by the Federal Reserve, that's immaterial. All the mortgage issuers care about is that when they issue a mortgage, a purchaser with money exists somewhere down the line. The chain needs a terminal buyer, and that buyer has become the Federal Reserve.

The impact of these purchases by the Federal Reserve is to both provide liquidity and to drive down the rate of interest for new mortgages. By lowering both the long end of the Treasury curve (which the Fed does by actively buying Treasuries) and providing more than sufficient demand for MBS and agency paper, long-term interest rates come down.

Without the Fed's activities, it is a rock-solid certainty that mortgage interest rates would be higher than they are, and possibly a LOT higher.

My Comment: so, contrary to Bernanke`s numerous pronouncements about "healing" credit and mortgage markets, the fact is that without hundreds of billions of dollars of Fed purchases (and more to come - they have allocated a total of $1.25 trillion for MBS purchases), THERE WOULD BE NO MORTGAGE SECURITIZATION MARKET. And given that a hefty percentage of those mortgages are not going to be repaid (just look at the ongoing dterioration in the FHA loan protfolio for an example of this), guess who`s going to be on the hook for the resulting losses?


Morgan Stanley's Mack Proposes Single Regulator to Oversee Banks Worldwide: Morgan Stanley Chief Executive Officer John Mack, who struggled to return the bank to profitability amid the financial crisis, said a single regulator should oversee financial institutions worldwide.

“A better system would be one uber-regulator,” Mack said in an interview in New York for Bloomberg Television’s “Conversations with Judy Woodruff,” parts of which will air today. “We do need an overall systemic-risk management that everyone buys into. It’s not a U.S. systemic boundary -- it’s a global systemic risk manager.”

A global regulator would ensure that U.S. banks aren’t subject to tighter regulations than the rest of the world, Mack said. A push for regulation during the financial crisis has weakened as the administration of President Barack Obama pursues other tasks, he said.

Morgan Stanley and Goldman Sachs Group Inc. converted to bank holding companies one week after Lehman Brothers Holdings Inc., Merrill Lynch & Co. and American International Group Inc. collapsed or were rescued in September of last year. Less than a month later, Morgan Stanley took $10 billion from the U.S. government as part of the Troubled Asset Relief Program. It has since paid back the government.

“I think the crisis is over,” Mack said in yesterday’s interview. “What I worry about is that we lose momentum with some of the regulatory changes that we need to go through.”

My Comment: What Mack was likely thinking but did not say: "Plus, with a single super-regulator, there are fewer people who need to be bribed to look the other way." Less facetiously, notice the somewhat-curious quote wherein Mack expresses his concern about U.S. banks not being "subject to tighter regulations than the rest of the world". I thought one of the things that led to the U.S. being the hub of last year`s meltdown was that U.S. banks and credit-rating agencies were allowed to get away with murder for years, and that key regulations such as Glass-Steagall and leverage-limits had been progressively dismantled in the past 2 decades at the behest of the zealous acolytes of the Greenspan school of frothy unfettered free-marketeering. It makes much more sense if one instead views it as an attempt to open the door to regulation-shopping. Don`t like some regulator who`s being tough on you here at home? (In the U.S., that is admittedly a strictly wild-hypothetical scenario). Just find some country where the regs are laxer and lobby for that the "be the standard". Global lowest-common-denominator-regulation, as it were.

And once again I call BS on the repeated touting of bailed-out financial firms who "have paid back the TARP" funds ... that was only the one-most-visible of the many types of bailouts the Too-Big-to-Fails got courtesy of the U.S. taxpayer, and I seem to have missed the bit about "TARP interest rates being reflective of the risk" represented by these firms. The truth is that most of them would have been unable to raise desperately-needed capital in the open debt markets at any rate of interest. So not only did they get huge capital injections at basically no cost from Uncle stupid, they also got:

- Access to Fed discount window and the alphabet soup of Fed-created emergency lending programs;
- Ability to offload large amounts of toxic assets onto the Fed at face value;
- Explicit government backstop of new debt issuance (e.g. via the FDIC program set up for this purpose);
- Government permits biggest legalized account fraud in history by pushing for FASB regulation changes allowing banks to engage in mark-to-fantasy valuation of toxic assets;
- Any number of "backdoor" bailouts, e.g. Goldman getting paid in full as a counterparty of AIG instead of taking a $10 billion-plus haircut as they should have;
- Government looks the other way as the TBTFs "recapitalize" by raising customer account and credit-card fees to outrageous levels;
- A roughly five-fold increase in their share prices due to an unprecedented market-pumping propaganda campaign by the government. Being able to (a) avoid bankruptcy and (b) issue gobs of new shares at a much-higher price than your non-government-backstopped financial status would justify is nice, very nice.

[ewmayer]

GM Will Shut Saturn After Penske Automotive Ends Talks on Supply Concerns: General Motors Co. will close Saturn, the brand created 24 years ago to mirror Japan-based companies’ carmaking, after Penske Automotive Group Inc. said it has broken off discussions to buy the unit.

Penske’s exit forces GM to adjust its post-bankruptcy plan for cutting its number of U.S. brands in half. It intended to sell the Saturn, Hummer and Saab marques and close Pontiac. The largest U.S. automaker will retain Chevrolet, Cadillac, Buick and GMC.

“This is very disappointing news and comes after months of hard work by hundreds of dedicated employees and Saturn retailers who tried to make the new Saturn a reality,” GM Chief Executive Officer Fritz Henderson said in a statement on GM’s Web site.

Saturn dealers will have until October 2010 to wind down operations, John McDonald, a GM spokesman, said in an interview. The Detroit-based automaker said in June the sale would save 13,000 jobs and 350 dealerships.

Penske Auto had planned to import vehicles carrying the Saturn label from a maker such as Renault Samsung Motors Co., a South Korean unit of France’s Renault SA that doesn’t now export to the U.S.

Penske said today it had negotiated an agreement with a manufacturer to supply vehicles, but the company’s board rejected the agreement.

New Kind of Company

GM established the Saturn brand in 1985 as an initiative to overhaul the way it built and sold cars. Deliveries peaked in 1994 at 286,003 units, according to Autodata Corp., a Woodcliff Lake, New Jersey-based industry research firm.

Sales have declined 56 percent this year through August from a year earlier.

“It was shocking and disappointing,” said David Fischer, owner of a Detroit-area Saturn dealership. He said he had looked forward to working with Penske, whom he called an “automotive icon.”

My Comment: Thus endeth the 2-decades-long dream that was Saturn ... back when I was an engineering prof. at Case Western, I had several talented students who took jobs with Saturn upon graduation. I hope they land on their feet.


Bank of America CEO Ken Lewis to retire: Beleaguered chief executive Ken Lewis to leave after tumultuous tenure. Bank under fire for its merger with Merrill Lynch last year.

"Retiring now will allow me to focus my efforts on attempting to stay out of prison..." -- Ken Lewis` inner defense counsel

[ewmayer]

Update on the Saturn story - I googled the name of one of my former CWRU students who went to work at the Saturn plant in Tennessee upon graduating, it seems she was working there until last year, and is now enrolled at Belmont University, a liberal-arts school in Nashville, TN - personal retooling, as it were.

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

America’s New Post-Recession Employment Arithmetic

I direct your attention to at a recent report, America’s New Post-Recession Employment Arithmetic. It is an interesting, though somewhat dispiriting, review on the Employment situation, past present and future. The report comes from Advance Realty and Rutgers, and it reviews the past few decades employment data to discern what long term implications might be for employment in any economic recovery.

The key data points are:

• The Great 2007--2009 recession is the worst employment setback in the United States since the Great Depression.

• In the twenty months from December 2007 (the start of the recession) to August 2009 (the last month of available data as of this analysis), the nation lost more than 7.0 million private-sector jobs.

• The recession followed a very much-below-normal economic expansion (November 2001--December 2007) that was characterized by relatively weak private-sector employment growth of approximately 1 million jobs per year.

• This was less than one-half of the job-growth gains of the two preceding expansions (1982--1990 and 1991--2001), when average annual private-sector employment grew by 2.4 million jobs per year and 2.2 million jobs per year, respectively.

• In the preceding two expansions combined, private-sector employment growth per year was approximately 435,000 jobs higher than the annual growth in the number
of people in the labor force.employment deficit.

• The weak economic expansion sandwiched between two recessions (2001, and 2007--2009) produced a lost employment decade.

• As of August 2009, the nation had 1.3 million (1,256,000) fewer private- sector jobs than in December 1999. This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade.

• From 1980-2000, the US gained a 35.5 million private-sector jobs. During the current decade, America has lost more than 1.7 million private-sector jobs.

• Total "employment deficit" could approach 9.4 million private-sector jobs by December 2009.

The "Harsh Arithmetic of the Employment Deficit" means that we will not likely return to 2007 employment levels until (ugh) 2017.

My Comment: What makes the above figures "look not as bad as they really are" is that - in addition to the dismal net-job-creation numbers - the average *quality* of the remaining jobs has declined precipitously, especially when one considers the ever-shrinking goods-producing part of the U.S. economy (that is the "real economy" rather than the non-productive FIRE economy, which boils down to people shuffling other people's money around and taking a cut for their "services"). This is the kind of thing that happens when a nation - encouraged by policymakers and executives at the highest levels of government and industry - spends a couple of decades busily exporting its high-wage jobs and replacing them with Wal-Mart-greeter-style McJobs^tm, and replaces organic, sustainable economic activity and productivity growth with unsustainable demand-pulled-forward consumption and debt-expansion-fueled asset bubble manias. Welcome to the Ponzi economy...


This Fortune writer isn`t going to be missing GM`s Saturn brand very much, and sees a similar dynamic in GM`s breathless hyping of its Chevy Volt concept car:

Saturn's dead: Good riddance: It looked like a great idea when it was born, but it was just another symptom of the hubris that helped bring GM to its knees.

The notion of a tiny "independent" American company like Saturn making low-margin small cars and trying to sell them profitably proved totally unworkable. The Saturn cars just weren't good enough, and GM couldn't charge enough for them.

Meanwhile, competition from Japan, and later Korea, proved much tougher than anyone expected.

Exactly 20 years after it opened for business, GM put Saturn up for sale to the highest bidder as part of its bankruptcy proceedings. By then, Roger Smith's concept of a new way of making and marketing cars was already dead.

Wednesday's collapse of the Penske deal, which was always a chancy proposition, kills the Saturn brand. Will it kill GM's historic arrogance? Critics see the same mentality that led to Saturn in GM's zealous promotion of the Chevy Volt.

As one observer pointed out recently, after the Volt's batteries have been discharged from 40 miles of driving, its performance will be reduced by half. In other words, the acceleration time of this $40,000 car under its gasoline engine will double, making maneuvers like merging onto a highway and passing pretty risky.

That's hardly likely to be a strong selling point for a car that GM is promoting -- as it did with Saturn -- as a revolutionary game changer.

Shadow Housing Inventory Will Halt A Housing Recovery

There is no sense in quibbling with the CS home price data, which continue to show improvement — a 1.6% gain in July on top of +1.4% in June and +0.5% in May. These numbers, remember, were for July — when the Red Sox were still leading the AL East.

We already see from the August data-flow that average resale home prices fell 2.0% both on an average and median basis in their worst showing since January, and median new home prices collapsed 9.5% MoM and on average fell 6.0%. And, some homebuilders are now back resorting to national discounting programs to lure buyers — after all, it is now taking builders a record 13 months to make a sale upon completion.

Moreover, the supply data have been distorted in part because of all the inventory that has been held off the market on bank balance sheets, but this cannot last forever. Estimates we have seen, peg the “shadow” inventory at 7 million housing units — those in foreclosure, those just entering the process, and those that have been in arrears for the past year but have yet to receive a notice. Tack these on to the “official” unsold inventory count of 3.6 million and what we are talking about is an overhang equivalent to 25 months’ supply. It is truly hard to believe that home prices are doing anything more than a wiggle right now in a long-term downtrend; a wiggle, mind you, that has come courtesy of unprecedented government support.

My Comment: I`ll be interested to see how the NAR spins things once the long-term downtrend once again reasserts itself - perhaps an Ad campaign with the theme of "housing availability is better than ever!"

[ewmayer]

Denninger breaks down the September U.S. jobs data:

Nearly 1 Million Jobs Disappeared in September

Headlines: 263,000 "jobs lost" and unemployment rate up to 9.8%.

That's not good - there goes the "second derivative" argument.

Weekly earnings are also down by $1.54, which is bad news too.

But the Household Data is VASTLY worse than reported. Here are the month-over-month changes, and they're in the realm of frightening:

Civilian Labor Force: 154,879,000 to 153,617,000 this month.

Employed: 140,074,000 down to 139,079,000 this month.

That's a loss of 995,000 jobs, not 263,000, and the labor force contracted by 1,262,000 people!

The participation rate was absolutely decimated, down 0.6% this last month alone. The people "not in the labor force" rose by a staggering 1,516,000 in the last month.

The government doesn't count people as "unemployed" who have given up and exited the labor force, but as I have repeatedly noted whether the government counts them or not the corner store owner sure as hell does!

The fact of the matter is that nearly 1 million fewer people were working in September as compared to August; there has been absolutely no improvement in that trend whatsoever.

My Comment: Former Merrill Lynch Chief Economist David Rosenberg (let go because he was "too bearish", and now with Gluskin-Scheff in Toronto) did a similar breakdown of the allegedly-better-than-expected jobs numbers for August, which showed that the ranks of the Employed were decimated by 980,000 that month ... these are the numbers the government and MSM are definitely *not* touting in their headlines, but they are key to the prospects of real economic recovery, because though most of those lost jobs are not counted in the gerrymandered "headline" unemployment stats, there are real people behind them who are slashing their spending, defaulting on their mortgages and credit-card debt, drawing extended unemployment benefits (the lucky ones) and not contributing to the wealth of the nation.

[Addendum: Since I wrote the above this morning, news has broken that apparently the BLS is admitting that their black-box statistical fudgery has been wildly optimistic all year long. This will probably come as a surprise mainly to "most economists".]

And speaking of folks going bankrupt...

2009 Consumer bankruptcies top 1 million: Mounting unemployment and housing crisis push the number of consumer bankruptcies to highest level since 2005.

Consumer bankruptcies in 2009 are up 35% from the same period in 2008 according to a report from the American Bankruptcy Institute out Friday.

"Bankruptcy filings continue to climb as consumers look to shelter themselves from the effects of rising unemployment rates and housing debt," said ABI executive director Samuel Gerdano.

There were 1,046,449, consumer bankruptcies in the first nine months of this year. That figure crossed the one million mark for the first time since 2005, when consumers filed 1,350,360 bankruptcies in the first nine months of the year, according to ABI, which uses data from the National Bankruptcy Research Center.

My Comment: The one-time spike in 2005 was due to a flood of filings ahead of the passage of the credit-card-industry-sponsored lifetime debt slavery act Bankruptcy Reform Act ... despite the much-more-onerous terms for personal bankruptcy filings resulting from passage of that bill, we are set to break that year`s dismal record for number of bankruptcies.


TARP: Taxpayers on the hook for $200 billion: Experts say the cost of the $700 billion bailout to taxpayers is a small price to pay for saving the economy. Others argue we are just staving off an inevitable collapse.

My Comment: Would that it were only $200 billion we were on the hook for, for our generosity in saving the crooks on Wall Street and at the Megabanks and Mortgage Lenders from the consequences of their own crimes and misdeeds.


We're broke ... time for a new tax: Given the country's fiscal hole, former Fed chair Paul Volcker and many tax experts say there may be a need for a value-added tax.

An increasing number of influential Democrats and fiscal-policy experts have signaled that lawmakers will have to get a handle on the deficit. And they recommend seriously considering the creation of a value-added tax (VAT) on top of the federal income tax.

That could mean more money out of everyone's pockets when buying virtually anything -- sweaters, school books, furniture, pottery classes, dinners out.

A VAT is tax on consumption similar to a national sales tax. But it's not just paid at the cash register. It's levied at every stage of production. So all businesses involved in making a product or performing a service would pay a VAT. And then the end-user -- such as the retail customer -- ponies up as well.

My Comment: That`s right ... why make any attempt to rein in rampant government spending on unneeded wars, pork-barrel projects, a hugely bloated military-industrial complex and to bail out the crooked and incompetent, when you can simply tax the crap out of everything and doom the American economy to eternal suckiness?

A ZeroHedge contributor has an article with extensive reader discussion about the possible effects of a VAT here.


Federal Reserve Actions in Lehman Bankruptcy Confirm Fed is a Criminal Conspiracy

These guys really do believe that Laws are for the Little People:

Will Disclosure In Lehman Bankruptcy Case Lead To Lawsuit Against Federal Reserve?

During its final days Lehman was a revolving door for Fed cash coming in (and promptly leaving) as the situation demanded. Whether borrowing at the Fed's discount window against garbage collateral ..., using the TAF program, or otherwise, Lehman ended up gobbling an ungodly amount of cash from the Fed which was subsequently improperly yanked by the Chairman, instead of being used to satisfy pari passu creditor claims. According to the WSJ:

The New York Fed lent Lehman $46.2 billion in cash and Treasury securities for $50.6 billion in collateral, according to Federal Reserve affidavits filed in bankruptcy court. As a result of Lehman's sale to Barclays PLC following its bankruptcy, the New York Fed was later paid back in cash, with the Treasury securities returned. Lehman's broker-dealer also borrowed tens of billions of dollars from the Fed in the period from Sept. 11 through Sept. 15 last year.

This is all fine and great, however where the issue lies is whether there was an improper superposition of the Fed relative to all other creditors of the firm. If, in fact, the Fed recouped any money at a point after the bankruptcy process was initiated (and potentially even before the instant of filing), Jenner can file a preference claim against the Federal Reserve. The suit would, in theory imply that there was an action of "avoidance" by the Fed to be considered a preferred creditor without legal justification or reason.

It is obvious why the Fed would have wanted to avoid this: General Unsecured Claims and unsecured Notes issued by Lehman Brothers traded down from 90 cents on the dollar in the days prior to September 15 all the way to 10 cents on the dollar in the week following. Had the Fed's assets become commingled in the GUC pool, it would have seen a loss of nearly $40 billion of taxpayer money. However, the Fed's gain is other creditors' loss.

My Comment: Note that this all aside from the issue that the Fed's accepting of such "collateral" from Lehman (and Bear, and AIG, and BofA, and Citi...) is a flagrant violation of the Federal Reserve Charter. Denninger has additional commentary on the above story here.

[R.D. Silverman]

Originally Posted by ewmayer

snip.....

My Comment: Note that this all aside from the issue that the Fed's accepting of such "collateral" from Lehman (and Bear, and AIG, and BofA, and Citi...) is a flagrant violation of the Federal Reserve Charter. Denninger has additional commentary on the above story here.

Note that the CEO of Barf on America is leaving and getting a $125million
golden bailout in the process.

[ewmayer]

[Re. Bob's note about Ken Lewis's Platinum Parachute]

That will hopefully serve him as a nice nest egg with which to keep his future prison cell tastefully decorated...

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

September Employment Data: The More You Dig Into the Numbers, the Worse They Get: Barron’s Alan Abelson calls the September employment report “An absolute horror.”

“As Doug Kass, our hedge-fund-manager friend, who was a whiz at arithmetic when he was 10 years old and still can do his sums, totes it up, there are 2.2 million of these marginally attached souls, who would like to work but haven’t been able to land a job and aren’t receiving benefits. Add in some 9.2 million involuntary part-timers and the aforementioned 15.1 million formally unemployed, and the jobless total swells to over 26 million.

A compassionate portfolio manager (if there is such an animal), Doug tries to fathom in flesh-and-blood terms what those dry-as-dust dry statistics mean. And what he envisions are 26 million people not going to malls for extras, or taking the kids to the movies, hunting the cheapest victuals they can find at the supermarket and who are denying themselves the pleasures of travel, eating out, upgrading to Windows 7 or buying iPhone apps.

Now conceivably, they may not miss the Windows 7 or buying iPhone apps. (Apple and Microsoft might not agree.) Still, 26 million, even give or take a million, is an awesome number of unemployed men and women. The ironic conclusion Doug draws from this dismal picture as an investment pro is that corporate revenues are destined to continue to drag, and companies straining to realize those absurdly inflated Street expectations for 2010-11 earnings will continue to focus on cutting costs, which translates into cutting jobs.”

My Comment: The last comment, a.k.a "The high cost of maintaining the pretense" (that is, the pretense that there is some kind of genuine economic recovery occurring), is spot on ... it describes a self-reinforcing jobs-loss spiral which is very akin to a classical deflationary economic spiral.

Related: Charles Biderman of TrimTabs Investment research (yes, I know it sounds like a weight-loss supplement - and I see from the article comments that I'm not alone in wishing they'd change their name) takes the BLS to task for their employment-numbers fudging.


ZeroHedge writer Bruce Krasting has an article detailing the effects of the recession on the huge "shadow" sector of the economy occupied by illegal aliens:

An American Story

Everything collapsed for this family in 2008. Unemployment for illegals went from 0 to 50% in the course of months. They had stopped working for me long ago. Their car was repossessed; they were behind in the rent. They had gone through their savings from the good years. There was no more money for food. To make matters worse the legal system was closing in on them. The police were harassing them wherever they went. Employers were no longer hiring any illegals.

So they came to me this morning for help. They wanted two things. They wanted the money for a plane ticket back to Ecuador for Ruth and Cesar. They wanted me to take Danny and raise him until he was an adult. They were prepared to give up their son so that he would have a shot. I gave them money for three tickets. I could not take Danny. It damn near broke my heart to say no.

I know that there are many who will read this story and say, “Good, they should not have been here in the first place”. And those people are right. But the fact is that America is culpable in this disaster. We let this Diaspora happen. It was not an accident that 10,000 people crossed our border illegally every day for years.

The Cesars, Ruths and Dannys are leaving. In the general area that I live the illegal population has been reduced by 40% over the past eighteen months. That is the recession. For these people it has been a depression. Cesar said before he left, “There is no opportunity in America any more.” Maybe he is right.

My Comment: Please read the full article and understand what these people went through to get to the U.S. (and note that *anyone* whose family did not legally emigrate here and was not in the present-day U.S. at least 10,000 years ago is the descendant of "illegal aliens") before posting any knee-jerk "good riddance" comments.

[ewmayer]

Schumer and Cornyn - "We Agree on Tax Credit": There was a love fest on ABC’s This Week. The odd couple was Senators Schumer (D.NY) and Cornyn (R.TX)

When Schumer says, ”We have to extend the housing tax credit” Cornyn says, “Chuck and I agree”.

Cornyn went on to make a plug for Senator Isakson’s (R.GA.) bill. This would expand the $8,000 tax credit to $15,000. It would also make it available to all comers. The existing bill is only for first time buyers.

While Cornyn is talking, Chuck is shaking his head, Yes, yes, yes.

The clip is here. The discussion on the tax credit is at -9.55.

Read this to mean that it is certain that the existing subsidy will be extended. In my view these two making nice on TV means that a form of the Isakson bill is what we are going to get. This is a very significant development.

For the sake of discussion assume we do get a $15k credit. Assume also that the FHA makes available 90% mortgages at low rates (they are currently doing 96.5% LTV, so this is a conservative assumption). The question is how many will take advantage of this and what might be the consequences.

On September 17th the IRS came out with this headline:

First-Time Homebuyer Credit Provides Tax Benefits to 1.4 Million Families to Date, More Claims Expected

There is a backlog on these deals today. It is reasonable to assume that the $8,000 credit could result in 2mm homes being sold in just nine months. Based on this what is an estimate for the number of homes sold with the $15k incentive that is open to all? I think 4 million is a good number. Let’s use 3 million to be conservative.

The average price of a home is $200,000 (also conservative). Using all of these assumptions you get some very big results.

-This translates into a total sale value of $600 billion.

-The direct cost to the government would be $45 billion.

-The total equity required by the private sector net of the subsidy would be $15 billion. The equivalent of only 2.5% down.

-FHA would guaranty an addition $540 billion in new mortgages.


Based on the assumptions the following positives may occur:

-This would be a back door bailout of the GSE’s. It would give them an opportunity to off load some of their REO. It would also reduce costs of short sales that will come in the next year. This only lessens the loss however.

-The FHA would have an explosion of new activity. This premium income would dramatically increase their cash cushion. It would temporarily avoid a bailout of FHA. It would insure that the ultimate bailout costs will be much higher.

-The economic activity related to the sale of 3mm homes will contribute to GDP. For example; the RE commissions will be $30 billion, the mortgage brokers will get $6 billion, The lawyers will collect another $6b in closing costs. This is how America makes money. This class of beneficiaries just takes commission as part of the creation of debt. There is zero residual value to this. It is just pumping up current consumption.

-You have to assume it would benefit the big, publicly traded, homebuilders. How much clout does this group have? Plenty. Senator Isakson’s family owns one of the largest private RE brokerages in the country.

-This could be beneficial for holders of busted MBS. Additional demand for the underlying collateral will create better exit opportunities. While this does not make any of the old crap money good, some smart folks are going to make some dough off of this. It might even benefit the zombies. You can be sure the GS’s of Wall Street will make a buck. More clout.

There are some negatives:

-There is an on budget cost of $45 billion. A very big number. There will be some who appose it. But I think it will pass. Congress is looking for a new stimulus package. This is going to be a part of that. The ‘Bear Hug’ on TV today convinced me.

-In my example 97.5% or about $585 billion will be debt issuance by either Treasury or Ginnie Mae. This would increase the 2010 funding requirement by about 30%. No one cares about this issue. Bernanke still has $500b of Agency buy back power. If they want to do more, there is nothing stopping them.

-This program will have the same effect as the Clunkers program. While the window is open that stimulus is powerful. The existing housing tax credit has been very successful. It is reasonable to assume that a larger, broader program would also bring results.

But as with Clunkers, when the music stops demand stops as well. Given the magnitude of this potential bill the impacts would be very substantial when the program is ended. There will be a great sucking noise in the months that follow the end of this and the other ‘fixes’. We will not QE [ewm: quantitatively-ease, that is, money-print] ourselves out of that one. The sucking noise will be heard around the world.

My Comment: Let`s see ... $45 billion would have seemed like a huge sum of money, a couple of years ago. Now that $100-billion-plus to bail out a single TBTF like AIG is established precedent and we just threw $700 billion at the banking sector via TARP and slightly more at the huge collection of prok-barrel make-work projects known as the Economic Recovery Act (= "stimulus bill"), it`s relative peanuts. I do like the fact that Senator Isakson is pushing this legislation despite his "interestingly related" familial business ties ... but if there were any real conflict of interest I`m sure the appropriate Washington regulator would have alerted congress immediately, just like the SEC immediately sprang into action when they first (and second, and third, and, and) got detailed information about the Madff fraud back in the 1990s. Oh, wait...

[ewmayer]

Denninger was very quiet this past weekend ... I figured either he'd had an unfortunate run-in with a vampire squid or was working on something in-depth ... appears to have been the latter. He has a highly detailed post laying out the basic principles of banking, and argues - in opposition to Mish Shedlock - that fractional reserve lending is not the root of all Ponzi-lending evil, but rather that *unsound* lending (e.g. accepting crap as collateral, or nothing at all) is the real problem:

Sound Banking: A Capitalist Imperative

The important point is that the asset that the bank holds from Steve is nothing more than a signature and promise.

This is unacceptable and in fact is the cause of every economic Depression featuring a deflationary credit collapse over time, as defaults begat more defaults and those defaults, uncovered with capital, cascade through the system instead of being isolated to the failed institution. All of them. 1873, 1929 and the present mess were all caused by systemic and pernicious violation of the most fundamental rule of sound banking: One must never lend out more unsecured than one has in excess capital.
...
Note that this has exactly nothing to do with whether you are on a Gold Standard nor does it have anything to do with fractional reserve lending. In fact the Depressions of both 1873 and the 1929/1930s occurred while on "hard money". A gold standard (or any other "hard" currency) will do nothing to stop this, because the problem has never been the fiat nature of currency - it is the fact that credit is being extended without collateral beyond the actual cash reserves of the institution in question.

My Comment: I don't want to overly prejudice interested readers against Denninger`s argument, but IMO while fractional reserve banking is not the *only* cause of evils-in-lending, it so lends itself to abuse (pardon the pun) and by its credit-inflationary nature encourages misallocation of capital, that it greatly magnifies the speculative ills present in human nature and hence in any market economy. Note this telling quote from the Wikipedia article about the above-mentioned Panic of 1873:

...even as the Union Pacific and Central Pacific railroads were being joined together in May 1869 at Promontory Summit, Utah, hence connecting the east coast to the west coast, the first tremors of over speculation were manifesting themselves in an incident that became known as The Black Friday panic. It was caused by the attempt of Jay Gould and Jim Fisk to corner the gold market in 1869. They were prevented from doing so by the decision of the administration of President Ulysses S. Grant to release government gold for sale. The collapse of gold premiums culminated in a day of panic when thousands of overleveraged speculators were ruined - Friday, September 24, 1869, popularly called Black Friday. There was great indignation against the perpetrators.

My Comment: The key word here being "overleveraged" ... such excessive systemic leverage is simply not possible without some form of fractional-reserve lending (whether legal or illicit) being in play. By building it into the overall market economy one lays the groundwork for the kind of systemic speculative excesses which mark the latest, greatest asset bubbles.

Note that in 1873 the meltdown resulting from all the excess leverage had as its proximate cause President Grant's hard-reversion to an all-gold standard. Some incorrectly describe the effects in terms like "the gold standard caused the crisis", but that is not so ... any time you take an economic system which - for all its flaws - relies on certain assumptions about money supply and credit to function and subject it to a radical, ill-conceived "shock therapy", the law of unintended consequences comes to bear in a major way. Grant`s gold standard decree had much the same effect as last year`s shutdown in the credit markets post-Lehman had ... the credit-market analog of taking away a hard-core heroin addict`s supply.

So, where do I stand with respect to Mish and Karl`s main points-and-counterpoints?

- I agree with Mish that preventing creation of fiat currency with reckless abandon is terribly important, but disagree that there is a single "one true hard currency" ... as I`ve said before the main claim gold (Mish`s choice for HC) has to be a store of value is historic (and also by way of its relative indestructibility and scarcity). But the supply of gold is not in any way reflective of total economic production, some countries are blessed with lots of it despite having low overall economic productivity, and procuring more of it is terribly and needlessly environmentally destructive. Any modern form of a hard currency standard would thus need to be much broader, and encompass a wide range of goods and materials which are (a) transportable and (b) economically useful: oil, timber, cement, any of a number of "base" metals ... even things like electrical power and computer chips could be in the mix.

- I agree with Karl that sound lending can and does occur within the context of a fractional-reserve system, but believe that such systems are an invitation to abuse and asset-price bubbles. KD notes that "Lending someone $9,000 to buy an $18,000 car (they put the other half down in case) is in fact not a fractional loan. The lending is in fact fully-secured and thus bears no fractional reserve of any sort", but if you look at the last decade`s spate of reckless lending you see the problem: Clever financial engineers will eventually find a way to offload the risk of such lending to other parties, and then it becomes a race to maximize loan-issuance volume, and the resulting rise in monetary velocity (roughly, leverage) will inevitably lead to asset-price bubbles as we saw in real estate. Then you end up lending someone not $9,000 to buy an $18,000 car, but rather $27,000 to buy an $18,000 car whose price has doubled to $36,000 due to a speculative bubble in automobile prices. The buyer may find another lender to finance the remaining $9,000 and thus has zero skin in the game, and all those "fully secured" loans made at the height of the bubble prove to be effectively unsecured once the bubble bursts and the buyers start walking away from those loans.


Report on Bailouts Says Treasury Misled Public

WASHINGTON — The inspector general who oversees the government’s bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks.

A Treasury official made incorrect statements about the health of the nation’s biggest banks even as the government was doling out billions of dollars in aid, according to a report on the Troubled Asset Relief Program to be released on Monday by the special inspector general, Neil M. Barofsky.
...
Mr. Barofsky’s office also says that regulators were wrong to tell the public last year that the earliest bailout recipients were all healthy.

Former Treasury Secretary Henry M. Paulson Jr., for instance, said on Oct. 14 that the banks were “healthy,” and that they accepted the money for “the good of the U.S. economy.” The banks, he said, would be better able to increase their lending to consumers and businesses.

In truth, regulators were concerned about the health of several banks that received that first bailout, the inspector general writes.

The inspector general said government officials need to be more careful when describing their actions and rationale. In a letter included with the report, the Federal Reserve concurred with Mr. Barofsky’s concern about the statements made last year, but the Treasury Department said that any review of announcements last year “must be considered in light of the unprecedented circumstances in which they were made.”

My Comment: So "it`s OK to repeatedly and egregiously lie to the American public in times of crisis." Wow ... just wow. Not that I really expected much other than an attempt to whitewash the criminal goings-on of last Fall (which are ongoing) by anyone involved with the current administration ... so much for "change we can believe in".

[Fusion_power]

You are a confirmed cynic and pessimist at times Ewmayer.

I personally see quite a bit of good coming out of a big housing stimulus. Just think. We already have 1.5 trillion in 'incentives' that benefited just about all the big bankers and car companies and Japan and etc.... (add your favorite ...). Why not finally have something that benefits a big section of the working populace? After all, I didn't buy a car under CFC, but I just might buy a house for a $15,000 up front writeoff.

DarJones (somewhat tongue in cheek with the above so don't get ideas I'm chaniging my tune)