Mystery Economic Theater 2010

[ewmayer]

NBER: Worst U.S. Recession Since 1930s Ended in June 2009.

The longest and deepest U.S. recession since the Great Depression ended in June 2009, lasting 18 months, the National Bureau of Economic Research said.

“The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007,” the Cambridge, Massachusetts-based bureau’s business cycle dating group said today in a statement. “The basis for this decision was the length and strength of the recovery to date.”

My Comment: Doesn`t that make you feel ever so much better? Woohoo! part like it`s 1999! (Except for the hangover that was the dotcom bubble bursting the following year, that is). LOL, "length and strength of the recovery to date" ... you mean, length = zero, and strength = "nonexistent"? (Admittedly, I'm weird in that I don't credit government borrowing, spending and "stimulating" at over 10% of GDP as "economic growth".) But keep repeating the magic incantation: "THE recovery ... THE recovery ... THE recovery..." - and one day you will wake up to find it came true. Maybe - in fact likely - it will have come true somewhere else than here, but hey, let`s not pick nits. But in one very narrow sense the NBER is right: For the Wall Street Ponzi-finance crowd and their ill-gotten bonuses, there has indeed been a very robust recovery. And as we know - because the Wall Street Ponzi-finance crowd tell us so - the stock market and the Wall Street bonuses which accompany its every rise, are exceedingly reliable forward-looking indicators. We can`t say with any reliability how far forward the markets are looking at any given time, nor can we tell which direction they are treating as "forward", but that doesn't make it not true.


UK Proposal: Are your wages are belong to us

UK Proposes All Paychecks Go to the State First: The UK's tax collection agency is putting forth a proposal that all employers send employee paychecks to the government, after which the government would deduct what it deems as the appropriate tax and pay the employees by bank transfer.

The proposal by Her Majesty's Revenue and Customs (HMRC) stresses the need for employers to provide real-time information to the government so that it can monitor all payments and make a better assessment of whether the correct tax is being paid.

Currently employers withhold tax and pay the government, providing information at the end of the year, a system know as Pay as You Earn (PAYE). There is no option for those employees to refuse withholding and individually file a tax return at the end of the year.

If the real-time information plan works, it further proposes that employers hand over employee salaries to the government first.

"The next step could be to use (real-time) information as the basis for centralizing the calculation and deduction of tax," HMRC said in a July discussion paper.

HMRC described the plan as "radical" as it would be a huge change from the current system that has been largely unchanged for 66 years.

Even though the centralized deductions proposal would provide much-needed oversight, there are some major concerns, George Bull, head of Tax at Baker Tilly, told CNBC.com.

"If HMRC has direct access to employees' bank accounts and makes a mistake, people are going to feel very exposed and vulnerable," Bull said.

And the chance of widespread mistakes could be high, according to Bull. HMRC does not have a good track record of handling large computer systems and has suffered high-profile errors with data, he said.

The system would be massive in terms of data management, larger than a recent attempt to centralize the National Health Service's data, which was later scrapped, Bull said.

If there's a mistake and the HMRC collects too much money, the difficulty of getting it back could be high with repayments of tax taking weeks or months, he said.

My Comment: Oh, yeah, this sounds like a great idea..."much more efficient to just hand over your pay to the government and let them decide what to do with it", and all that. What could possibly go wrong there?


States Latest Ploy to Hide Insolvency: Pension-Accounting "Trickeration"

The Illusion of Pension Savings

Earlier this year, Illinois said it had found a way to save billions of dollars. It would slash the pensions of workers it had not yet hired. The real-world savings would not materialize for decades, of course, but thanks to an actuarial trick, the state could start counting the savings this year and use it to help balance its budget.

My Comment: (I had previously believed that "Trickeration" was an invention of flamboyant boxing promoter Don King, but while quick-researching to make sure I attributed it properly, I see that it in fact comes from Harlem Renaissance poet Langston Hughes. But I digress...).

The above is on top of the fact - as reported in the weekend edition of the WSJ - that most states are *still* using grossly-unrealistic assumption of 8% annual returns (a yield based on the heyday of the Late, Great Greenspan Equity-Market Bubble, and which was possible only by a similar rise in overall debt creation, which for so long masked the fact that middle-class wages were essentially flat over the entire period, while at the same time decent-paying middle-class jobs were steadily being shipped abroad.

As the above WSJ piece notes, pension-fund assumptions are still have a long way to go to match "the new normal", but some states have slashed their return assumptions from 8.5% to - hold on onto your seats, folks - (gasp) 8%, and the extreme bears of the bunch are even considered further raising the "pension shock and awe" factor by lowering their assumed annual return to (one trembles to even contemplate such horrors) - 7.75%:

The median expected investment return for more than 100 U.S. public pension plans surveyed by the National Association of State Retirement Administrators remains 8%, the same level as in 2001, the association says.

The country's 15 biggest public pension systems have an average expected return of 7.8%, and only a handful recently have changed or are reconsidering those return assumptions, according to a survey of those funds by The Wall Street Journal.

Corporate pension plans in many cases have been cutting expectations more quickly than public plans, but often they were starting from more-optimistic assumptions. Pension plans at companies in the Standard & Poor's 500 stock index have trimmed expected returns by one-half of a percentage point over the past five years, but their average return assumption is also 8%, according to the Analyst's Accounting Observer, a research firm.

The rosy expectations persist despite the fact that the Dow Jones Industrial Average is back near the 10000 level it first breached in 1999. The 10-year Treasury note is yielding less than 3%, and inflation is running at only about 1%, making it tougher for plans to hit their return targets.

Return assumptions can affect the size of so-called funding gaps—the amounts by which future liabilities to retirees exceed current pension assets. That's because government plans use the return rates to calculate how much money they need to meet their future obligations to retirees. When there are funding gaps, plans have to get more contributions from either employers or employees.

My Comment: Absent drastic inflation, they will be lucky to achieve half that over the coming decade, and we might very well be facing another decade of “big fat zero” return-ness, if Japan is any guide.

[Fusion_power]

Who blinked?

The Obama administration's top economic adviser, Larry Summers, will be stepping down from his post at the end of 2010, the White House announced Tuesday.

Summers, the director of the National Economic Council, will return to Harvard University, the White House said. His departure comes as the administration is struggling with poor reviews of its stewardship of the economy after a deep recession that has unemployment at nearly 10 percent.

My impression of him is somewhere between poor and shltty. He was a major voice in the bailout bonanza that fueled the banks and wall street over the last 2 years.

DarJones

[ewmayer]

@Fusion_power

I guess Hah-vahd is looking to get Larry back so he can once again help the school "slash billions from its bloated endowment". I'm sure his Wall Street pals will make sure to thank him most generously for ending the recession - for them and only them, of course.

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

I see that Barry Ritholtz has simply swallowed the government data regarding GDP, retail sales, etc, and "fully agrees that based on these clear unambiguous technical indicators, the recession is indeed over" (I paraphrase). As one reader commented, if the government chose to print a $trillion and give it to the banks - oh wait, that's basically what they did, i.e. it's not merely a hyperbolic hypothetical scenario - thus "raising GDP" by that amount, how in blazes does that have bugger-anything to do with whether the real economy, that involved in the making of actual goods and providing of actual services, is in or out of recession? And yet it is one of the 5 data points NBER uses to "call" economic cycles.

Similarly, "Real Personal Income" (datum #2) does not subtract out government transfer payments, which have increased massively during the past 2 years, are not decreasing, and amount to more deficit-based spending.

Industrial Production (datum #3) does not subtract out government stimulus spending ... Retail Sales (#4) do not account for the pulled-forward demand due to yet more government borrowing-and-bribery, i.e. the homedebtor and cash-for-clunkers payments. (Which also had the perverse side effects of causing people to pay more for those items in many cases than they would have without the incentive, due to the artificially raised short-term demand resulting from the incentive). The ensuing plunge in both sales categories has not yet been factored in NBER's calculations, but for now, "it pulled out of recession!"

And of course, the clearest indicator of what's going on in the real economy, Total Nonfarm Payrolls (#5) has still not budged significantly from its end-of-2009 low, and is back at pre-2000 levels, meaning that relative to total population we've lost around 10 million jobs in the past 2 years, and are still showing no signs of a turnaround on that front. But that datum simply gets dismissed by the "experts" as "a lagging indicator", which I have come to believe is a euphemism for "difficult for the government to manipulate upwards", the only one of the 5 indicators having that distressing quality.

I did hear one interesting twist on the "recession is over" theme, though - according to the official definitions, that means that any second wave of shit hitting the economic fan would be an entirely "separate event", and could no longer be laid at the feet of the W. Bush administration -- as this New York Time piece puts it

The announcement also implies that any contraction that might lie ahead would be a separate and distinct recession, and one that the Obama administration could not claim to have inherited.

Another completely ludicrous notion, but expect the Right to be spinning the double-dip in these "This one is all Obama's" terms heading into the midterm elections.

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

p.s.: I should add that my real beef abiut the NBER's end-of-recession call is not so much with their definition, which in the sense of "recession means the economy is receding" is technically correct (again from the NYT piece):

In its statement on Monday affirming the recession’s end, the bureau took care to note that the recession, by definition, meant only the period until the economy reached its low point — not a return to its previous vigor.

“In declaring the recession over, we’re not at all saying the unemployment rate, or anything else, has returned to normal,” said James H. Stock, an economics professor at Harvard and a member of the business cycle committee.

“We clearly still have a long ways to go.”

Rather it is the fact that most politicians, pundits and mainstream media aggressively misconstrue "end of recession" with "growth has resumed" ... bumping along the bottom of a deep chasm is what we're really doing.

[Fusion_power]

Well Ewmayer, I guess you are in the drink on this one.

from Yahoo: NEW YORK – Two men convicted of leading a $100 million mortgage fraud were sentenced Tuesday to prison in a scheme that amassed a cast of corrupt mortgage brokers and lawyers to dupe sellers and buyers and pocket money that banks lent people to buy real estate.

AFG Financial Group Inc. President Aaron Hand was sentenced in Manhattan to 8 1/3 to 25 years in prison. CEO Eric Shields got 5 1/2 to 16 years behind bars. The ranges reflect the possibility of time off for good behavior.

The Garden City, N.Y.-based mortgage brokerage house was a hub of fraud, prosecutors said, with spokes that reached into many corners of the mortgage business: corrupt appraisers who inflated property values, bank employees who signed off on buyers' forged bank statements, lawyers who supposedly represented buyers but were actually in league with AFG Financial and more.

"Crime was the business of AFG," Manhattan District Attorney Cyrus R. Vance said Tuesday. For Hand, Shields and others, he said, "it was literally their job."

The scam left sellers empty-handed, buyers with ruined credit, homes in foreclosure and investors with worthless investment products linked to the bad mortgages, prosecutors said.

Hand, 39, and Shields, 45, were convicted in July of charges including enterprise corruption, the state's version of racketeering.

It seems that SOMEONE is finally going to prison for mortgage fraud. Can you count up the days for this aspect of the financial meltdown?

DarJones

[ewmayer]

Originally Posted by Fusion_power

It seems that SOMEONE is finally going to prison for mortgage fraud. Can you count up the days for this aspect of the financial meltdown?

Thanks for the link...Gladly - let me dig out my 100-day-incremental calendar ... August 30 was Day 1300 since the start of my unofficial "subprime mortgage meltdown fraud" calendar, so here we go, based on today`s date and the convictions you mention:

Today is Day 1323 since the start of the global financial crisis, and there have been 2 related criminal convictions. [Only a few thousand behind schedule, but hey, it`s a start]

And allow me to accompany that with some other suitably fraud-related links...


GMAC Financial and JPM/Chase Alleged to Engage in Massive Florida "Foreclosure Mill" Fraud:

Karl Denninger has been following this story closely since it broke last week ... here are links to his pieces, oldest at top:

Ally, actually "GMAC Mortgage", which changed its name to reduce the "stigma" with taking billions in taxpayer bailouts, has apparently halted foreclosures: GMAC Mortgage may “need to take corrective action in connection with some foreclosures” in the affected states, according to a two-page memo dated Sept. 17 and obtained by Bloomberg News. Ally Financial spokesman James Olecki confirmed the contents of the memo. Brokers were told to stop evictions, cash-for-key transactions and lockouts, regardless of occupant type, with immediate effect, according to the document, addressed to GMAC preferred agents.

Alan Grayson Petitions FL Supreme Court - Foreclosures:
Three foreclosure mills - the Law Offices of Marshall C. Watson, Shapiro & Fishman, and the Law Offices of David J. Stern - constitute roughly 80% of all foreclosure proceedings in the state of Florida. All are under investigation by Attorney General Bill McCollum. If the reports I am hearing are true, the illegal foreclosures taking place represent the largest seizure of private property ever attempted by banks and government entities.

More On GMAC/Ally Foreclosures: It appears that at least one (and perhaps more) "inside officers" in various law firms filed thousands (and maybe tens of thousands) of affidavits they did not read and thus could not have attested to.

And Naw, This Wasn't Pervasive....: And if you haven't seen enough of the foreclosure affidavit story.... forwarded to me by Representative Grayson's office....

Let Me Guess: It Was Just GMAC/Ally. No?

[KD] How To Resolve The Foreclosure Mess: We now appear to have a pattern of conduct here where organizations trying to foreclose on homeowners are in fact submitting forged (that is, willfully known to be false) affidavits to courts around the nation.

MAC/Ally Responds: Sept. 21 (Bloomberg) -- Ally Financial Inc., whose GMAC Mortgage unit halted evictions in 23 states amid allegations of mishandled affidavits, said its filings contained no false claims about home loans.


Bell, CA City Officials Arrested, Charged With Misappropriation of Public Funds:

Bell officials arrested as prosecutors are set to file criminal charges.

At least eight city of Bell officials were arrested Tuesday morning, a source said, as L.A. County Dist. Atty. Steve Cooley prepared to announce criminal charges in the municipal salary scandal.

Former Bell City Manager Robert Rizzo, whose high salary sparked the outrage that led to the investigations of the city, was among those arrested in the sweep. No details have been released, but a source not authorized to speak publicly about the case said that Rizzo; former Assistant City Manager Angela Spaccia; Mayor Oscar Hernandez; Councilmembers Luis Artiga, Teresa Jacobo and George Mirabal; and former Councilmembers George Cole and Victor Bello were among those arrested.

[Updated at 11:22 p.m.: Cooley filed charges against eight Bell officials Tuesday, alleging that they misappropriated $5.5 million in public funds. Rizzo has been charged with 53 counts of misappropriation of public funds and conflict of interest.

My Comment: Now we just need similar actions in hundreds of municipalities across the country where similar outrages have occurred and are ongoing. On the local news a few days ago, there was a piece saying that in the wake of CA Attorney General (and gubernatorial candidate, currently locking horns with former eBay CEO Meg Whitman) Jerry Brown forcing disclosure of all CA public official salaries (as a direct result of the Bell scandal), there have been roughly a dozen cities right here in the bay area - including Sunnyvale where I work - identified in which officials, typically city managers, earn in excess of $300,000 per year.

[R.D. Silverman]

Originally Posted by ewmayer

@Fusion_power

I guess Hah-vahd is looking to get Larry back so he can once again help the school "slash billions from its bloated endowment". .

America's gain is Harvard's loss.

[ewmayer]

Originally Posted by R.D. Silverman

America's gain is Harvard's loss.

Barry Ritholtz - back in lucid Wall-Street-skeptic mode today - has a nice piece on how Obama`s appointment of summers to head his economic team was the diametrical opposite of "change you can believe in".

Summers: Good Riddance

Summers was the Treasury Secretary when Glass Steagall was repealed. Instead of speaking out against the irresponsible Gramm–Leach–Bliley Act (Financial Services Modernization Act of 1999) that allowed the Financialization of America to progress, he actively supported it. Instead of explaining to the public how Glass Steagall had prevented every Wall Street crisis since the Great Depression from spilling over onto Main Street, he rolled over for Citibank.

Understand that the repeal of Glass Steagall was not a cause of the crisis. But, it allowed the net damage to be far greater and extend far wider than it would have otherwise been. From a libertarian perspective, it was emblematic of the corporate takeover of the legislative process. For a hefty fee (aka campaign donation) you could pretty much write the regulations that covered your own industry. How could that ever go wrong?

Summers oversaw the passage of the even more ruinous Commodities Futures Modernization Act of 2000. The CFMA exempted all financial derivatives from any and all regulatory oversight. The CFMA not made the AIG collapse possible, it made it highly likely. It helped to set up both the Lehman and Bear Stearns` collapses. The CFMA allowed AIG FP to write over $3 trillion in derivatives, reserving precisely zero dollars in case these insurance policy-like obligations had to be paid out.

Failing upwards: When Obama appointment the Rubin duo of Summers and Geithner, it a perverse reward for a job done poorly. The two were creatures of the banking system, and were unlikely to do anything that threatened the existing order. Even worse, it created a dynamic where the new administration was committed to defending the policies that helped to contribute to the crisis in the first place. Instead of To Hell with the Banks, Save the Banking System, we got the exact reverse. This was Rubin`s lasting gift to the Obama White House: A third term for George W. Bush`s economic policies. When Obama becomes a one-termer, it will be his own fault for following this horrific economic advice.

p.s.: While we`re on the topic of hubris-addled Wall Street assholes: Here's an item that`s quickly made the rounds of the economic blogosphere, namely the story - I believe ZeroHedge broke it, but perhaps they merely got the most hits when they ran with it - about Warren Buffett billionaire Berkshire Boys` club buddy Charlie Munger speaking at my alma mater Michigan and telling astonished audience ... well, let me just link and quote:

Munger Tells 25 Million Americans To "Suck It In", And To "Thank God For Bank Bailouts" As BRK Benefits From $95 Billion Of TARP Funding

There is a reason why many countries institute mandatory retirement age: it is so that when dementia strikes, and people spout any damn thing that comes to mind, only the nearest four walls are subject to their insanity. Alas, when it comes to Berkshire Hathaway, no such luck. And while we have extensively discussed Warren Buffett's recent inexorable decline from merely a successful rider of the biggest cheap credit bubble in history to a captured puppet of Wall Street courtesy of his tens of billions of Wall Street-related investments, little has been said about his even older, and apparently even more affected by the unpleasant side-effects of a public televised senescence, sidekick, Charlie Munger. Luckily, courtesy of Bloomberg we now know just how deep the rot runs in the Berkshire family. During a discussion at the University of Michigan, the 86 year old told the 25 million of Americans who comprise the 16.7% of the underemployed population in the country, to "suck it in and cope." Not only that, but apparently, all those who have been without a job for 99 weeks and more and no longer have recourse to insurance benefits, should "thank God for bank bailouts." Why of course he would say that: after all $26 billion worth of direct BRK investments were the recipient of over $95 billion in bailouts. So when it comes to him, thank god for the bailout indeed... But when it comes to the little man, old Charlie is all about doing the right thing.

p.p.s.: I see Matt Taibbi has also picked this one up, though he admits he`s on a deadline, so I expect he'll have more to say on the subject later.

[cheesehead]

Bloomberg seems to be the original source quoted by columnists. http://www.bloomberg.com/news/2010-0...t-bailout.html

To another who asked whether the government should have bailed out homeowners instead of Wall Street, Munger said: “You’ve got it exactly wrong.”

“There’s danger in just shoveling out money to people who say, ‘My life is a little harder than it used to be,’” Munger said at the event, which was moderated by CNBC’s Becky Quick. “At a certain place you’ve got to say to the people, ‘Suck it in and cope, buddy. Suck it in and cope.’”

Reminds me of a quote from someone else five years ago:

And so many of the people in the arena here, you know, were underprivileged anyway so this (chuckle) – this is working very well for them.

[Fusion_power]

While we sat idly by....

Rome Burned

The Great Depression sank cold slivers into our spines.

The Great Bubble Collapse ate away our savings and our livelihoods.

Did you know there is a skunk in the outhouse? Really.

Take a close look at Fannie Mae and Freddie Mac. Take a really close look and see what it is that stinks to high heaven. Between the two of them, they have consumed $150 billion that ultimately is guaranteed by taxpayers. They are NOT finished. The best I can anticipate, they will be used to gulp down another $80 billion to prop up the mortgage market over the next 18 months. AIG cost $180 billion but with time and manipulation we will probably get back most of it. But Fannie and Freddie represent a total irreversible LOSS. Like I said, Skunk in the Outhouse. Why is it that this level of incredible waste is allowed? Why do taxpayers pick up the bill for such incompetence?

Yeah, I know. It is a bit melodramatic.

DarJones

[garo]

http://kfmonkey.blogspot.com/2009/03...ra-2009-7.html

There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs.

[ewmayer]

Mish has a nice news roundup of the recent diplomatic and territorial spat between China and Japan, which escalated to idiotic levels thanks to Japan`s irritating propensity to pretend it is still the 1930s, and whose resolution has a crucial economic aspect:

Rare Earth Diplomacy: Japan Holds Chinese Boat Captain; China Blocks Rare Earth Exports to Japan; China Holds 4 Japanese on Spy Charges; Captain Set Free

Sharply raising the stakes in a dispute over Japan’s detention of a Chinese fishing trawler captain, the Chinese government has blocked exports to Japan of a crucial category of minerals used in products like hybrid cars, wind turbines and guided missiles.

China mines 93 percent of the world’s rare earth minerals, and more than 99 percent of the world’s supply of some of the most prized rare earths, which sell for several hundred dollars a pound.

Japan has been the main buyer of Chinese rare earths for many years, using them for a wide range of industrial purposes, like making glass for solar panels. They are also used in small steering control motors in conventional gasoline-powered cars as well as in motors that help propel hybrid cars like the Toyota Prius.

American companies now rely mostly on Japan for magnets and other components using rare earth elements, as the United States’ manufacturing capacity in the industry became uncompetitive and mostly closed over the last two decades.

The Chinese halt to exports is likely to have immediate repercussions in Washington. The House Committee on Science and Technology is scheduled on Thursday morning to review a detailed bill to subsidize the revival of the American rare earths industry. The main American rare earths mine, in Mountain Pass, Calif., closed in 2002, but efforts are under way to reopen it.

The House Armed Services Committee has scheduled a hearing on Oct. 5 to review the American military dependence on Chinese rare earth elements.

The Defense Department has a separate review under way on whether the United States should develop its own sources of supply for rare earths, which are also used in equipment including rangefinders on the Army’s tanks, sonar systems aboard Navy vessels and the control vanes on the Air Force’s smart bombs.

My Comment: Perfect illustration of the dangers of single-sourcing an entire industry over time for efficiency`s sake. The U.S. has a decent native supply of rare earths, but China can extract and refine them much more cheaply due to the usual reasons China can do things much more cheaply: Zero concern for the environment and worker safety and low labor costs. The U.S. doesn't want to annoy its #2 trading partner and risk "stifling the ever-nascent economic recovery" by imposing tariffs would would raise prices on many Chinese goods, so as a result the field our native production capacity withers to zero and now our addiction to cheap consumer goods boomerangs as a potentially huge strategic liability. Japan is even more over a barrel because they have no significant native supply of rare earths, and their export industry uses massive quantities of them. Faced with what they belatedly realized is an existential threat to their industrial economy they had no choice but to cave in. Fortunately for them, the stakes in human terms this time were tiny - but the loss of political face is much more significant, especially coming in the wake of the recent announcement that China has passed Japan to become the second-largest economy in the world.