Econ 2009

[garo]

Ernst, Manias happened before FRB too. I tend to think that Denninger is right on this one. Also, without FRB, how will the amount of credit in the system keep pace with the growing population? You are creating automatic deflation here. As the population rises, the amount of "hard currency" per person decreases.

[ewmayer]

Originally Posted by garo

Ernst, Manias happened before FRB too. I tend to think that Denninger is right on this one. Also, without FRB, how will the amount of credit in the system keep pace with the growing population? You are creating automatic deflation here. As the population rises, the amount of "hard currency" per person decreases.

You accurately describe the problem with any too-restrictive form of "hard currency", e.g. a gold standard. This is the main reason I emphasize instead using a broad "basket of goods" approach ... that would allow a nation's money supply to naturally grow (or shrink) to match its "real wealth". If you build a house, assuming you did it right and the end result is worth more than the materials that went into it, you have through dint of your labors increased the capital base of the economy. The trick is implementing actual market mechanisms that would register such wealth creation (or destruction), and especially do so in ways that are relatively immune to short-term asset-price distortions. A highly nontrivial issue, no doubt, but just as Rome wasn't built in a day, you can't expect to replace a long-entrenched fiat-money regime with a new one without some major effort. But the basic principle is clear: No sustainable monetary system can allow "wealth" to simply be conjured out of thin air, as our current one does.

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Banks brace for Latvia's collapse: The Baltic states are once again in the eye of the storm after leaked reports that Sweden is bracing for a full-blown economic and political "breakdown" in Latvia.


Study: Federal Pre-emption of State Anti-Predatory Lending Laws Led to More Mortgage Defaults

A new research report out of University of North Carolina at Chapel Hill looks at the impact of federal preemption of state Anti-Predatory Lending laws. The key factor was the decision by the Bush White House in 2004 to preempt state lending standards.

You will be not be surprised at the net results.

States that have Anti-Predatory Lending (APL) laws are associated with a lower rate of mortgage defaults than non-APL states. Typically, Anti-Predatory Lending laws require verification of borrowers’ repayment ability, as well as include limits on fees, rates and prepayment penalties. States without these restrictions and verification requirements have higher default rates.

The report concluded that in States where the APLs “require a lender to consider a borrower’s ability to pay and ban prepayment penalties” there are “significantly lower default rates.”

Why did the US preempt state APL laws? There was the ideological belief that states were interfering with profits and “financial innovation:” In February 2004, the Bush White House, working through the Office of the Comptroller of the Currency (OCC) officially preempted national banks from state laws regulating mortgage credit, including state anti-predatory lending laws. (This was far broader than the 1996 regulatory preemption by the Office of Thrift Supervision (OTS) applied to federally chartered S&Ls).

My Comment: OTS has pulled similar preemption shenanigans with predatory credit-card issuers, and similarly done zilch to perform such anti-fraud oversight itself. One of the leading state-level whistleblowers on this clear violation of states` rights was former NY AG and governor Eliot Spitzer, who was ensnared (rather conveniently for the big-finance crooks, on might say) in a high-priced call girl scandal shortly after, which ended his plotical aspirations. The interesting thing about the Spitzer case - especially contrasted with the much-more damaging-to-the-nation crimes committed by the Wall Street fraudsters and their lackeys, enablers and high-placed operatives in government, was that Spitzer`s *only* crime was paying a hooker for sex. There was no eveidence that he used anyone's money other than own, nor related state secrets to the hooker, etc. Meanwhile, all but a handful of the big-finance crooks who have brought this country`s economy to its knees remain doing what they do best ... we have some really messed-up priorities in this country.


Competitive Currency Debasement - A Look at Rampant Monetary Expansion In China: Given all the finger pointing at the US over monetary printing and the debasement of the US dollar, inquiring minds just might be asking "What is China doing?"

The Chinese central banks' printing and respective Chinese bank lending make us look like amateurs. Chinese central bank assets and the money supply are up 25-26% annualized YTD. But this growth rate of money supply and bank lending is what is required to make up for the 8-10% net contraction in output from the collapse in exports and export-related production.
...
It is a mistake to equate Chinese, US, and Japanese printing for any kind of sustainable recovery.

As noted in Gold And The Watched Pot Theory, "Every country wants to grow by ramping up exports in a world of decreasing consumer demand. To achieve that end, every country wants its currency to be weaker against every other currency. Of course that is logically impossible. Besides, the US consumer is tapped out. European consumers are tapped out as well. And tapped out or not, the Japanese consumer just does not want to buy."

Neither the G-20 nor G-7 did anything to address the massive global imbalances. Something critical is going to blow sky high, when and what remains to be seen.

[jasonp]

A very affecting article on the collapse of the diamond (and more generally the gemstone) trade last year.

Discussing the diamond industry pretty much inevitably devolves into an argument between the "not sheep" conspiracy theorists vs the "not real men/women" who don't want to shell out. Here is a more civil such argument than most.

[ewmayer]

Originally Posted by jasonp

A very affecting article on the collapse of the diamond (and more generally the gemstone) trade last year.

Discussing the diamond industry pretty much inevitably devolves into an argument between the "not sheep" conspiracy theorists vs the "not real men/women" who don't want to shell out. Here is a more civil such argument than most.

Great article about the real-world and real-people effects of the bursting of the credit bubble. If only the Ponzi-finance nabobs who blew the bubble were forced to see the lives their actions destroyed - both figuratively and in many cases heartbreakingly literally. Best economy-related quote for me was "This is not a crisis, it’s a new reality. It’s not just about money. It’s a shift in social values.". Thanks for the link, Jason.

A weirdly parallel Bloomberg story about another type of "victim" of the credit crunch, albeit one who may be just a tad less sympathetic than the poor diamond polisher in Jason`s article above:

Cocaine Survivors Losing London Bonus See End to Bubble’s Binge

Oct. 8 (Bloomberg) -- Neill Junor remembers the exact moment he decided to quit snorting cocaine. On a chilly December afternoon in 2005, the former equities analyst took a stroll in London’s deer-filled Richmond Park to select the tree from which he would hang himself.

The decision to step back from the brink marked the end of a six-year binge of drug and alcohol abuse that by then had cost Junor his marriage and a career that paid him as much as 1 million pounds ($1.7 million) a year. He was out of work, having already walked away from both his analyst job at BT Alex. Brown and a subsequent position in a dot-com venture. “I burned through everything,” Junor says. “I knew there was a choice -- and the choice was to hang from that tree or not.”

His story reflects the cocaine use that medical experts say is rampant in the City, London’s financial district. It’s a habit that often goes hand in hand with heavy drinking. Junor says he and his mates wanted to maintain the thrill they felt at work as they poured into the Square Mile’s pubs and clubs after a day of getting high on finance.
...
Scientists say it’s no accident that trading and cocaine sometimes go together...

On to today`s news roundup: More FHA subprime follies, the Zen of deflation, and "Scenes from a Depression" in Detroit:

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

FHA Shortfall Seen at $54 Billion May Lead to Bailout

Oct. 8 (Bloomberg) -- The Federal Housing Administration, which insures mortgages with low down payments, may require a U.S. bailout because of $54 billion more in losses than it can withstand, a former Fannie Mae executive said.

“It appears destined for a taxpayer bailout in the next 24 to 36 months,” consultant Edward Pinto said in testimony prepared for a House committee hearing in Washington today. Pinto was the chief credit officer from 1987 to 1989 for Fannie Mae, the mortgage-finance company that is now government-run.

The FHA program’s volumes have quadrupled since 2006 as private lenders and insurers pulled back amid the U.S. housing slump, Pinto said. The jump has left the agency backing risky loans and exposed to fraud in a “market where prices have yet to stabilize,” he said.

My Comment: "Exposed to fraud"? The FHA - like the private subprime lenders it has now supplanted - is actively encouraging fraud.


Chris Martenson has a similar view as I do about needing to replace the current "fiat-world" monetary model with something based on tangible (and hence finite, which is his main thrust) resources:

My central thesis to this crisis, developed a few years before it even hit, is that the economic troubles are the symptoms while the money system itself is the cause.

My views on this are expressed in the opening of an article I initially penned in 2006, but updated in 2008:

Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment. Our choices now are to either evolve a new economic model that is compatible with limited physical resources, or to risk a catastrophic failure of our monetary system, and with it the basis for civilization as we know it today.

In order to understand why, we must start at the beginning. While it was operating well, our monetary system was a great system, one that fostered incredible technological innovation and advances in standards of living, two characteristics that I fervently wish to continue. But every system has its pros and its cons, and our monetary system has a doozy of a flaw.

It is this: Our monetary system must continually expand, forever.

My Comment: The ZeroHedge guest post by Martenson (in which the above quote serves as a context-setter) is a fascinating analysis of "what does deflation mean in a world in which insolvent institutions are allowed to hide losses seemingly in perpetuity?" - Highly recommended reading. I expect Denninger will (or would) respond to the "in perpetuity" idea with something along the lines that certain types of balance-sheet losses *cannot* be hid forever - for example, the banks can`t simply allow folks who stopped trying to make their mortgage payments a year ago continue to "squat" in properties forever, because at some point the ongoing losses to the resulting nonperforming "asset" (which is in fact now strictly a liability) will exceed the cost to the bank of foreclosing and selling the property for whatever they can get. The paradox here being that the more overpriced the property was when last sold (and hence the deeper underwater the no-longer-paying mortgage holder is), the longer it takes for that breakover point to be reached. And as long as the banks are getting all the money they need to speculate in the commodities and equities markets make new loans from Uncle Stupid`s money-printing racket and are not getting served notices to foreclose and sell from the communities in which their squatter homes reside, they have no incentive to dispose of such properties in any great hurry. (Especially with talk of a new, greatly expanded "cash for housing clunkers" government giveaway gaining traction in Washington DC).


Chaos at Cobo: Detroiters turn out for federal help

Detroit -- Thousands hoping to get applications for federal help on rent and utility bills turned Cobo Center into a chaotic scene today.

They came by foot, wheelchair, bicycle and car. About six left by ambulance after tensions rose and people were trampled, according to a paramedic on the scene. One unfortunate soul got his car booted.

Detroiters were trying to pick up 5,000 federal assistance applications from the city at Cobo because Detroit received nearly $15.2 million in federal dollars under the Homeless Prevention and Rapid Re-Housing Program, which is for temporary financial assistance and housing services to individuals and families who are homeless, or who would be homeless without this help.

People in wheelchairs and others using canes were being leaned on by people too weak to stand. Emergency medical technicians on the scene said they treated applicants who were injured during the rush to get inside the venue.

That's what happens when a town full of broke people gets a whiff of free money, said Walter Williams, 51, who came before the sun to get an application and a shot at some federal assistance.

"This morning, I seen the curtain pulled back on the misery," he said. "People fighting over a line. People threatening to shoot each other. Is this what we've come to?"

...

Tony Johnson came at 5 a.m. Johnson has not found a job in three years.

"If I could win the mega lottery, I'd be tighty-iddy. I wouldn't be here," Johnson said. "But there's no peace 'cause there ain't no jobs. Everybody's looking for the freebie, the hand-out. They don't count me as unemployed 'cause I ain't drawing a check. It's like I don't even exist. But I do. Look around. There's thousands ... millions of us."

Dan McNamara, president of the Detroit Firefighters Association Local 344, was looking down from his office window across from Cobo.

"This absolutely is representative of the struggling middle class in America," he said. "We've been betrayed by the government, Realtors and those who've got. The promise has been broken."

My Comment: Dude ... stop complaining - Dow tickling 10,000 again, anyone who`s not participating in the "robust V-shaped, bank-shares-led economic recovery" which the powers that be assure us is happening all around us (but it`s still "fragile", so they can`t stop handing out billions in newly-printed money to Wall Street just yet) must be some kind of frickin` loser. Get with the program and scrape together some empty-bottle-and-can rebate money to buy some shares of AIG, Fannie, Freddie and CIT - life is good!

[Prime95]

Originally Posted by ewmayer

If only the Ponzi-finance nabobs who blew the bubble were forced to see the lives their actions destroyed...

Ha, ha, ha. Does anyone here really believe these soulless jerks care one iota about the lives they've destroyed? They got their big bonuses - end of story.

[Fusion_power]

I once read a sci-fi story that posited some beings were 'ethical absolutes' able to determine the right choice no matter the complexity of choice presented to them. Unfortunately, I think the writer missed a major failing of the human race; we are all lacking in ethics, but some are more challenged than others.

Which is better? Abortion? or an unwanted child growing up to be a mass murderer? Which is worse?

Whats wrong with the statement - We only go round once so get all you can and live it up while you're here.

DarJones

[Fusion_power]

An article today reminds me that all dogs have to bark. and some dogs in this economy have not yet barked.

http://finance.yahoo.com/loans/artic...mod=loans-home

A year after Fannie Mae and Freddie Mac teetered, industry executives and Washington policy makers are worrying that another government mortgage giant could be the next housing domino.

Problems at the Federal Housing Administration, which guarantees mortgages with low down payments, are becoming so acute that some experts warn the agency might need a federal bailout.

Running questions about the F.H.A.’s future — underscored by interviews with policy makers, analysts and home buyers — came to the fore on Thursday on Capitol Hill. In testimony before a House subcommittee, the F.H.A. commissioner, David H. Stevens, assured lawmakers that his agency would not need a bailout and that it was managing its risks.

Stevens is blathering. The underlying numbers don't lie. FHA has too lax underwriting standards and is taking on too many risky mortgages. This may be good for the homebuyer, but too many of them will be wiped out by the sour economy over the next 18 months.

On another note, GM is still up to its scuppers in bad decisions and overweight overpriced manufacturing capacity. Anyone care to bet that they are on the verge of bankruptcy again within 7 years?

DarJones

[mdettweiler]

Originally Posted by Fusion_power

On another note, GM is still up to its scuppers in bad decisions and overweight overpriced manufacturing capacity. Anyone care to bet that they are on the verge of bankruptcy again within 7 years?

Yes, that sounds about right to me. Actually, though, I would think that at least a significant portion of what contributed to their problems so far (besides, of course, the overpriced union stipulations, which I won't go into here) is that they just plain don't make cars that stack up to the best in the market. Notice that Ford is the only one of the Big 3 that hasn't gone bankrupt--and over the last few years, they've improved their lineup significantly enough that now their lineup is quite competitive with the Japanese brands. Yet GM and Chrysler both have largely unimpressive lineups, with only one or two GM models that I would (IMO) consider worth considering compared to other, better brands; Chrysler is even worse, with pretty much nothing that isn't subpar. I doubt this is a coincidence; after all, Ford (and even the Japanese automakers, many of which make a lot of their cars in the US anyway) is bound by many of the same union difficulties, which though aren't the easiest to live with, at least are not sending them over the brink. What's saving them, IMO, is that they actually make cars worth buying.

[R.D. Silverman]

Originally Posted by mdettweiler

"Most Economists See Recovery Beginning
By MAE ANDERSON, AP
posted: 3 HOURS 11 MINUTES AGOfiled under: Financial CrisisPrintShareText SizeAAANEW YORK (Oct. 12) - More than 80 percent of economists believe the U.S. recession is over and an expansion has begun, but they expect the recovery will be slow as worries over unemployment and high federal debt persist.
That consensus comes from leading forecasters in a survey by the National Association for Business Economics released Monday.
"The survey found that the vast majority of business economists believe that the recession has ended but that the economic recovery is likely to be more moderate than those typically experienced following steep declines," said NABE President-elect Lynn Reaser, chief economist at Point Loma Nazarene University.
The forecasters upgraded the economic outlook for the next several quarters, but cautioned that unemployment rates and the federal deficit are expected to remain high through the next year. Forecasters now expect the U.S. economy, as measured by gross domestic product, to advance at a 2.9 percent pace in the second half of the year, after falling for four straight quarters for the first time on records dating to 1947. They expect a 3 percent gain in 2010.
Still, the federal deficit has ballooned and the jobless rate is expected to lag behind, as employers remain cautious.
The unemployment rate rose to 9.8 percent in September from 9.7 percent, the Labor Department said earlier this month, the highest point in 26 years.
Forecasters expect the unemployment rate to continue to rise, to 10 percent in the first quarter of next year, before edging down to 9.5 percent by the end of 2010.
The recession, the worst since the 1930s, has eliminated a net total of 7.2 million jobs. More job cuts were announced last week. Thermo Fisher Scientific Inc., which makes industrial and scientific equipment, said it will close a plant in Dubuque, Iowa, next year, costing 350 jobs.
Worries about unemployment are likely to continue to constrain household spending. Personal consumption spending likely began rising in the second half of this year, but is expected to remain low in 2010. Still, Americans aren't expected to save as much as they have in past decades. The savings rate is expected to be above the 2 percent average of the past four years, but below the 9 percent average in the 1970s and 1980s.
The housing recovery is one bright spot. Forecasters expect 2010 to be the first year since 2005 that the housing sector will contribute to overall growth. Home prices are expected to rise 2 percent in 2010, but panelists do not believe that will stifle the housing recovery.
Inflation is expected to remain low due to the weak labor market and other factors. Thus, the NABE panel — which consists of 44 economists surveyed Sept. 2 through Sept. 24 — expects the federal funds rate to remain at its current record low near zero until late next spring, before a gradual rise begins.
"The good news is that this deep and long recession appears to be over, and with improving credit markets, the U.S. economy can return to solid growth next year without worry about rising inflation," said Reaser.


Copyright 2009 The Associated Press. The information contained in the AP news report may not be published, broadcast, rewritten or otherwise distributed without the prior written authority of The Associated Press. Active hyperlinks have been inserted by AOL.
"

18% unemployment. Noone is hiring. And the recovery is beginning????

Are these cretins on drugs????

[ewmayer]

Business as usual for Moody's and S&P: Ratings agencies played a substantial role in the market meltdown -- and real reform is a long ways off.

Washington has promised reform. But leading plans under discussion would do little to address two longstanding structural problems.

First, the firms earn most of their money taking fees from bond issuers, creating a thorny conflict of interest.

Second, investors and regulators use the ratings for everything from investing decisions to capital requirements -- yet the accuracy of the ratings isn't even officially tracked, much less subject to meaningful scrutiny.

DSB Placed Under Dutch Central Bank Control as Outflows Threaten Solvency: DSB Bank NV, run by the owner of the Dutch national soccer champion, has been placed under the control of the central bank as the outflow of capital threatened the bank’s existence.

DSB Bank’s solvency is under “great pressure,” the Amsterdam-based central bank said today, revising an Oct. 1 statement that the lender met requirements for solvency and liquidity. DSB’s problems weren’t caused by the credit crisis, Dutch Finance Minister Wouter Bos said at a press conference in Amsterdam, adding he has no concerns about other Dutch banks.

Pieter Lakeman, chairman of a foundation that represents customers who seek compensation after being overcharged for their mortgages, called for deposit withdrawals at DSB on Dutch public television Oct. 1. Capital outflows at DSB amounted to 600 million euros ($888 million) from that day and the lender currently has about 3.5 billion euros in deposits, Dutch Central Bank President Nout Wellink said.

My Comment: Uh, going from "we have no liquidity or solvency issues" to "this bank is insolvent" (the "great pressure" statement is just bureaucratic obfuscat-ese to try to avoid the dreaded I-word) is what we normally call a "180" ... referring to it as a "revision" is just a wee bit of an understatement. And despite the fact that the Dutch Finance Ministry was completely wrong about this bank, they "have no concerns about other banks". Reassuring, that.


Iceland Shrinks 8% as Prices Rise 11% in Deepest Recession of 33 Countries: Arni Hallgrimsson lost his job as a public relations consultant when Iceland’s three biggest banks collapsed last year, putting him out of work for the first time since 1980. After a stint cleaning the docks at a whaling station during the summer hunt, he’s unemployed again.

“Nightmares come to an end when you wake up, but this one just goes on and on and on and on,” the 53-year-old father of three said at his home in Reykjavik, Iceland’s capital. “I’ve applied for many jobs that fit my profile. Sometimes I’ve been on the short-list, but eventually not been offered the job.”

A year after the banking crisis brought Iceland to the brink of bankruptcy, the island nation is mired in the deepest recession among advanced economies. The stock market has lost 97 percent of its value, and more than 780 companies have buckled under the weight of foreign currency loans as the krona plunged. Consumers refuse to borrow at Europe’s highest interest rates, and international banks reject requests for new financing.

Prime Minister Johanna Sigurdardottir, who took office in February, pinned hopes for a recovery on the International Monetary Fund after Kaupthing hf, Landsbanki Islands hf and Glitnir Banki hf racked up $80 billion in debt, 16 times Iceland’s economic production. Now she says the economy may implode again as a dispute over Icelandic savings accounts held by overseas depositors delays a promised $5.1 billion bailout.

My Comment: At the risk of sounding harsh, Arni, "public relations consultant" doesn`t exactly sound like the kind of employment profile the Icelandic (or world) economy is going to to be needing terribly much in the foreseeable future. Iceland needs to get its economy back on a sustainable non-Ponzi-finance-centric footing and that means getting back to genuinely productive work, if if it is down and dirty work among the docks and fishing boats. It might not have paid terribly well, but you probably did more for the *real* economy of your country in your brief stint as a dock cleaner than in all your years as a PR consultant.

That having been said, some of the debt-repayment issues mentioned in the above article beg the question as to whether it wouldn`t be better to "strategically default".


MarketWatch | Stockholm's Shocking Lapse In Not Considering Obama For The Economics Prize

In a decision as shocking as Friday's surprise peace prize win, President Obama failed to win the Nobel Memorial Prize in Economic Sciences Monday. While few observers think Obama has done anything for world peace in the nearly nine months he's been in office, the same clearly can't be said for economics. The president has worked tirelessly since even before his inauguration to wrest control of the U.S. economy from failed free markets, and the evil CEOs who profit from them, and to turn it over to wise, fair and benevolent bureaucrats.

[ewmayer]

NYT Sunday Book Review: The Years of Magical Thinking

The End of Easy Money and the Renewal of the American Economy
By Peter S. Goodman
336 pp. Times Books/Henry Holt & Company. $25


The delightful motif that enlivens Peter S. Goodman’s otherwise sobering new book on economic delusion suggests that we’ve been living in Neverland. The fairy dust of easy money — heedless borrowing by homeowners and investment bankers alike — has lost its magic, and now we have returned to harsh reality.

Goodman, a national economics correspondent for The New York Times, doesn’t go so far as to match literary characters with real-life figures, but clearly the former Federal Reserve chairman Alan Greenspan would be his Peter Pan: the fantastical flying boy who wouldn’t grow up to confront the adult world, where his theory of pristine, self-correcting markets simply doesn’t work the way he wishes it would. If Greenspan is Peter, then his band of Lost Boys who live with him in Neverland would include the current Fed chairman, Ben Bernanke, and the chief White House economic adviser, Lawrence Summers. Unless our Lost Boys imitate their literary counterparts and return to the gravity-bound world, we could face further rounds of economic disaster...