Mystery Economic Theater 2010

[cheesehead]

Originally Posted by S485122

Those jobs disappearing in the USA are not obsolete at all : they are just moved to places where there is no environmental regulation, no work regulation, no freedom to organise, no social security.

That's what I meant; "obsolete" was sloppy. :)

Of course it is all the fault of the unions : people in the USA should accept a wage that is floating according to the market.

A True American does not float according to the whims of floatatious markets or regulators. A True American anchors markets wherever it's best for the world.

[Fusion_power]

And we all drink free bubble up and eat rainbow stew.

Irony?
Sarcasm?

On a more serious note, Cheesehead, there likely are more than just 2 overriding factors affecting the economy.

I'll echo Ernst's comment re the loss of manufacturing jobs to overseas economies has decimated the U.S. economy. It is just a huge hollow shell.

DarJones

[cheesehead]

Originally Posted by Fusion_power

On a more serious note, Cheesehead, there likely are more than just 2 overriding factors affecting the economy.

I never said there weren't. My previous post was focused on only two for the purpose of making a particular point.

It was being asserted that the unexpected duration or magnitude of unemployment lag was a refutation of my assertion that there is a common cyclic factor (employer re-hiring decisions) in all unemployment lags after a recession. (This also ties in with something I've seen elsewhere: inability, or at least reluctance, to acknowledge that other phenomena have multiple simultaneous causing factors.)

I pointed out that the supposed refutation was unfounded because the lag had multiple causes, including not only the one I asserted, but also at least one more: a not-so-cyclic long-term decline of US employment in certain fields. At no time did I claim that those two were the only possible factors.

[ewmayer]

Originally Posted by Spherical Cow

Just another great Tom Toles cartoon...

Norm

Nice ... but the reality is even more Kafkaesque:

AIG Said to Insure Goldman's Board Against Investor Suits: American International Group Inc., the financial firm rescued by the U.S., is the lead insurer of Goldman Sachs Group Inc.’s board against shareholder lawsuits

[ewmayer]

Former S&L Regulator William Black Dissects Lehman's "Massive Fraud", NY Fed's "Shameful" Actions

Yesterday the House Financial Services Committee held a set of "what went wrong?" hearings on the 2008 collapse of Lehman Brothers based on bankruptcy examiner Anton Valukas` thorough, eye-opening report. Besides a first panel consisting of the usual set of ethically conflicted word-weasels (Geithner and Bernanke, with third-wheel-of-the-day-designee being current SEC head Mary Schapiro), there were several other panels, including some folks not conflicted by recent ties to the U.S. financial (non)regulatory apparatus. Of those, probably the best was former S&L regulator William Black, currently Associate Professor of Economics and Law at the University of Missouri, who offered an oral summary of a 27-page statement with a title far more bland than its content, "Public Policy Issues Raised by the Report of the Lehman Bankruptcy Examiner". Some of the juiciest snips:

I begin with a short description of my background that is relevant to your questions. My primary appointment is in economics. I have a joint appointment in law. I am a white-collar criminologist. My research specialization is financial fraud by elites and financial regulation. I was a senior regulator during the S&L debacle [ewm: Black`s comments about the intense pressure applied by infamous "Keating Five" - which numbered among its ranks none other than recent presidential candidate John McCain - and the Reagan administration on the S&L-era agency on which he served (the Federal Home Loan Bank Board) in an (unsuccessful) effort to get it to cease and desist regarding re-regulation of the S&Ls is a real eye-opener here]...

I have a different view than [Lehman bankruptcy examiner Anton] Valukas about the overall state of Lehman’s corporate governance. First, Lehman’s nominal corporate governance structure was a sham. Lehman was deliberately out of control with regard to “risk” in its dominant operation – making “liar’s loans.” Lehman did not “manage” the risk of making liar’s loans. It engaged in massive, fraudulent transactions that were “sure things”.
...
Lehman’s principal source of (fictional) income and real losses was making (and selling) what the trade accurately called “liar’s loans” through its subsidiary, Aurora. (The bland euphemism for liar’s loans was “Alt-A.”) Liar’s loans are “criminogenic” (they create epidemics of mortgage fraud) because they create strong incentives to provide false information on loan applications.

The FBI began warning publicly about the epidemic of mortgage fraud in 2004 (CNN). Liar’s loans also produce intense “adverse selection” – even the borrowers who are not fraudulent will tend to be the least creditworthy. The combination of these two perverse incentives means that liar’s loans, in economics jargon, have a deeply “negative expected value” to the lender. In English, that means that the average dollar lent on a liar’s loan creates a loss ranging from 50 – 85 cents.
...
Gambling against the casino creates a negative expected value, but making liar’s loans creates inevitable, catastrophic losses.
...
Lehman’s underlying problem that doomed it was that it was insolvent because it made so many bad loans and investments. It hid its insolvency through the traditional means – it refused to recognize its losses honestly. It could not resolve its liquidity crisis because it was insolvent and its primary source of fictional accounting income collapsed with the collapse of the secondary market in nonprime loans. If Lehman sold its assets to get cash it would have to recognize these massive losses and report that it was insolvent.
...
There is no way to “manage” the “risk” of making massive amounts of liar’s loans. Lehman was the world leader in making liar’s loans. As the name makes clear, Lehman’s top managers knew that their principal source of income was making fraudulent loans. It was necessary, therefore, that Lehman not document that its liar’s loans were frequently fraudulent. Lehman, instead, classified its massively fraudulent liar’s loans as “prime” loans. Its disclosures did not identify how many of the “prime” loans it held were actually liar’s loans. As I will discuss in more detail in response to your final question, Lehman personnel that pointed out the fraudulent liar’s loans were attacked, even fired, by Lehman’s management.
...
That same pattern of conscious managerial indifference to pervasive mortgage and accounting fraud was the norm at other nonprime mortgage participants that have been investigated. I refer to it as the financial “don’t ask; don’t tell” policy. Here is a classic example from Standard & Poors. The context is that the professional credit rating specialist has asked his boss for a copy of the “tapes” which contain the nonprime loan files that are the “underlying” backing a collateralized debt obligation (CDO). The professional plans to review a sample of the lender’s loan files so that he can evaluate their credit quality. Here is the response he receives (the punctuation is from the original).

Any request for loan level tapes is TOTALLY UNREASONABLE!!! Most investors don't have it and can't provide it. [W]e MUST produce a credit estimate. It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.

Making liar’s loans is not risky – it is suicidal. That is why every significant lender specializing in liar’s loans failed. The pervasive fraud cannot be admitted – for Lehman’s entire business model was premised on massive sales of liar’s loans to others. If Lehman admitted that its liar’s loans were often fraudulent it could not sell them – cutting off one of its largest sources of income. Worse, it would be stuck with a portfolio full of fraudulent loans and have to recognize (or hide through further accounting fraud) that it was insolvent. Worse still, if it admitted its liar’s loans were often fraudulent it would risk having to repay past purchasers of its liar’s loans and risk SEC suits and criminal prosecutions. This is why “risk management” is always a sham at firms holding liar’s loans.

Black also has some choice words about the would-be protectors of the public interest:

Given the fact that the SEC was self-neutered by its leadership during the period Lehman was in crisis in 2001-2008, there was no chance that it would succeed. Its only hope was to form an effective partnership with the Fed. The Fed had unique authority under the Home Ownership and Equity Protection Act of 1994 (HOEPA) to regulate all mortgage lenders and had unprecedented practical leverage during the crisis because of its ability to lend and convert investment banks to commercial bank holding companies. The Fed is supposed to be an experienced “safety and soundness” regulator (though I will express doubts that it is effective). An SEC/Fed partnership would at least have some chance. The Valukas report reveals that the FRBNY staff at Lehman recognized that the SEC staff at Lehman’s offices were not capable of understanding its financial condition.
...
It was a painful, as a former regulator, to read the Valukas report’s discussion of the FRBNY staff’s open disdain for working cooperatively with the SEC to protect the public. The Valukas report exposes the sick relationship between the country's main regulatory bodies and the systemically dangerous institutions (SDIs) they are supposed to be policing. The FRBNY, led by President Geithner, had a clear statutory mission -- promote the safety and soundness of the banking system and compliance with the law – stood by while Lehman deceived the public through a scheme that FRBNY officials likened to a “three card monte routine”
...
The FRBNY knew that Lehman was engaged in fraud designed to overstate its liquidity and, therefore, was unwilling to loan as much money to Lehman. The FRBNY did not, however, inform the SEC, the public, or the OTS (which regulated an S&L that Lehman owned) of the fraud. The Fed official doesn’t even make a pretense that the Fed believes it is supposed to protect the public. The FRBNY remained willing to lend to a fraudulent systemically dangerous institution (SDI). This is an egregious violation of the public trust, and the regulatory perpetrators must be held accountable. The Fed wanted to maintain a fiction that toxic mortgage product were simply misunderstood assets, so it allowed Lehman to keep dealing the three card monte scam.

...the Fed didn’t want Lehman and other SDIs to sell their toxic assets because the sales prices would reveal that the values Lehman (and all the other SDIs) placed on their toxic assets (the “marks”) were inflated with worthless hot air. Lehman claimed its toxic assets were worth “par” (no losses), but Citicorp called them “bottom of the barrel” and “junk”. JPMorgan concluded: “the emperor had no clothes”. The FRBNY acted shamefully in covering up Lehman’s inflated asset values and liquidity. It constructed three, progressively weaker, stress tests – Lehman failed even the weakest test. The FRBNY then allowed Lehman to administer its own stress test. Surprise, it passed.

My Comment: This one`s a print-the-whole-thing-and-read-at-leisure-with-utter-disbelief keeper. Part of my own disbelief is that former Lehman CEO Dick Fuld is still a free (and enormously wealthy as a result of the above-detailed fraud) man, and in fact gave testimony before the very same committee yesterday, though not in the same session as Black. (Now *that* would have been interesting.)

[ewmayer]

Apologies for the really long post yesterday ... but I felt Mr. Black`s statement documented the outrageous conduct by Lehman & the FRBNY in such exquisite fashion that a lengthy excerpt was justified. On a related note, Bloomberg (here by way of ZeroHedge, which promises to dissect the associated detailed expense reports in its usual hilarious fashion) notes that not only was Lehman the biggest bankruptcy in U.S. history, but the ensuing liquidation has yielded the largest bankruptcy-related Fee bonanza in U.S. history. When death stalks the savannah, It's good to be a vulture.

Eurostat reports PIIGS Had Much Higher Deficits Than "Expected": Greece and Ireland had much larger budget deficits last year than expected and the Greek data may be revised further due to its unreliability, the European Union's statistics office said, sending the euro lower.

"It looks like a terrible situation just got worse," said Nick Kounis, economist at Fortis.

Greece, now negotiating a three-year emergency loan package with the European Commission, European Central Bank and International Monetary Fund, had a gap of 13.6 percent of gross domestic product, rather than 12.7 percent as reported earlier, Eurostat said.

But the deficit may turn out to be even higher.

"Eurostat is expressing a reservation on the quality of the data reported by Greece, due to uncertainties on the surplus of social security funds for 2009, on the classification of some public entities and on the recording of off-market swaps," Eurostat said in a note attached to the data.
...
"What concerns me is the general uncertainty about the Greek official figures. This affects market perception about Greece ... that one can`t rely on the Greek statistics and that the deficit is revised up and up and up," said Giada Giani, economist at Citigroup.

[EWM: The irony of someone at Citigroup complaining about off-balance-sheet shenanigans by others does not escape me.]

Greek debt rose to 115.1 percent of GDP in 2009 from 99.2 percent in 2008, the Eurostat data showed.

The Greek government has said it wants to bring the deficit down to 5.6 percent of GDP in 2011, 2.8 percent of GDP in 2012 and 2 percent by 2013 from 8.7 percent of GDP in 2010.

[EWM: Bwahahahahahahahahaha...pull the other one, guys. How does one say "and rainbow-carrying tiny unicorns and shiny 24K-gold monkey figurines will fly out of my butt" in Greek?]

Ireland had its budget deficit revised even more -- to 14.3 percent from the initially reported 11.7 percent. Irish Finance Minister Brian Lenihan said this was a result of a technical reclassification associated with government support provided to the banking sector.
...
The overall budget deficit in the 16 countries using the euro rose to 6.3 percent in 2009 from 2 percent in 2008 and debt surged to 78.7 percent of GDP from 69.4 percent.

Some related Euronews:

Papandreou Faces Bond Rout as Budget Deficit Worsens, Greek Workers Strike: Greek bond yields surged to the highest since 1998 as the country’s worsening budget outlook put pressure on the government to accept a European Union bailout and ignore street protests against its austerity measures.

Greece Should Be Prepared to Abandon Euro, German Lawmaker Schaeffler Says: German government lawmaker Frank Schaeffler said Greece should be prepared to leave the euro region if it can’t push through enough austerity measures to cut its budget deficit, Handelsblatt said, citing an interview.

Airspace Closure Was Exacerbated by Too Much Modeling, Too Little Research: A shutdown of European airspace that cost carriers $1.7 billion following a volcanic eruption in Iceland was exacerbated by a lack of research into the effects of ash on jet engines and over-reliance on computer modeling.

[cheesehead]

Originally Posted by ewmayer

Apologies for the really long post yesterday ... but I felt Mr. Black`s statement documented the outrageous conduct by Lehman & the FRBNY in such exquisite fashion that a lengthy excerpt was justified.

I thought it was fine.

Airspace Closure Was Exacerbated by Too Much Modeling, Too Little Research: A shutdown of European airspace that cost carriers $1.7 billion following a volcanic eruption in Iceland was exacerbated by a lack of research into the effects of ash on jet engines and over-reliance on computer modeling.

It's hard for most of us to seriously contemplate, and recognize the need to plan for, types of natural disruption (volcanoes, earthquakes, comet/asteroid impacts) that are relatively rare in our neighborhoods.

[xilman]

Originally Posted by ewmayer

The Greek government has said it wants to bring the deficit down to 5.6 percent of GDP in 2011, 2.8 percent of GDP in 2012 and 2 percent by 2013 from 8.7 percent of GDP in 2010.

[EWM: Bwahahahahahahahahaha...pull the other one, guys. How does one say "and rainbow-carrying tiny unicorns and shiny 24K-gold monkey figurines will fly out of my butt" in Greek?]

Ernst, really, you should pay attention. "The Greek government wants to bring down the deficit" and I'm pretty sure it does. Whether it can do so is another matter altogether. I'm about as doubtful as you appear to be on that matter.


Paul

[garo]

Ireland had its budget deficit revised even more -- to 14.3 percent from the initially reported 11.7 percent. Irish Finance Minister Brian Lenihan said this was a result of a technical reclassification associated with government support provided to the banking sector.

Eurostat says "Nein" to off-balance sheet (OBS) accounting shenanigans. To quote this poster the EU will only allow one OBS shenanigan. The government here is trying to portray this as a technicality and a "one-off". It would be a one-off except that they are planning to put in at least another 20 billion into the black holes that are Anglo and INBS in a clear transfer of wealth from the taxpayer to the bondholders. And they have a 40 billion plus commitment to NAMA which is another OBS shenanigan. The mere interest on this 60 billion of prospective commitments ensures that it will not be a one-off.

[xilman]

According to http://news.bbc.co.uk/1/hi/business/8639440.stm, Greece has finally called in the EU and IMF for assistance. Wishing the problem would just go away clearly hasn't worked.

Paul

[garo]

And the Euro is shooting up. Such are the mysterious ways of the market.