Mystery Economic Theater 2010

[ewmayer]

The SEC's Flash Crash report is unmitigated crap, it basically trots out the same long-discredited "fat finger order" claim that made the rounds immediately after the crash. The e-mini trade in question was neither unusually large nor executed improperly. The only part that rings true is about the HFTs: basically one or more of these predatory algos had stuffed the quote order queue with bogus never-intended-for-execution orders, throwing a wrench into what should have been a problem-free dispatching of the legitimate e-mini order which the SEC is blaming for the day's events - the resulting market dislocation was promptly piled on by more HFTs trying to front-run everybody (this is the "hot potato" scenario the report describes, correctly), and all hell broke loose.

Instead of admitting "the 2 tier market structure introduced by for-profit exchanges and exploited by HFTs has led to a fundamentally broken market", the SEC is basically still trying to convince that "fundamentals are sound."

ZeroHedge and Denninger have multiple articles detailing just how flawed/misleading/misguided the SEC report is. I suggest interested readers check them out.

[ewmayer]

Barry Ritholtz comments on the SEC Flash Crash report:

SEC/CFTC Report: SKYnet Caused Flash Crash

Again, the SEC report in fact explains nicely how a not-unusually-large S&P e-mini sell order (believe it or not, by the standards of the S&P e-mini futures market $4B is not unusually large) was turned into a full-on market crash by the same penny-skimming predatory HFT algos I mentioned Friday - the report simply fails to lay the blame squarely on the profit-motivated 2-tier market structure which has led to this fundamentally broken system.

Because the SEC has done nothing to fix the real issue except put in place some phony ‘confidence restoring circuit breakers’, this stuff is still going on, as well – there are near-daily ‘flash crashes’ in individual issues the HFTs happen to be trying to penny-skim, just none has happened to take down the whole market … yet.


And Matt Taibbi takes on the Tea Party:

Tea & Crackers: How corporate interests and Republican insiders built the Tea Party monster

A hall full of elderly white people in Medicare-paid scooters, railing against government spending and imagining themselves revolutionaries as they cheer on the vice-presidential puppet hand-picked by the GOP establishment. If there exists a better snapshot of everything the Tea Party represents, I can't imagine it.

IMO both major parties - not just the Republicans - have themselves to blame for helping to create said monster.

[garo]

Oh c'mon, the Republicans are far more to blame for the Tea Party than Democrats. But more than either party it is Fox News and billionaires like the Koch brothers. Excellent article by Frank Rich in the NYT:
http://www.nytimes.com/2010/10/03/opinion/03rich.html

. On primary eve, a spokesman for the National Republican Senatorial Committee badmouthed O’Donnell’s “disturbing pattern of dishonest behavior.” On election night, Karl Rove belittled her “nutty” pronouncements and “checkered background” on Fox News. But by the morning after, bygones were bygones. The senatorial committee’s chairman, John Cornyn, rewarded O’Donnell’s “dishonest behavior” with an enthusiastic endorsement and a big check. A sweaty Rove reversed himself so fast you’d think he’d been forced to stay up all night listening to Glenn Beck’s greatest hits at top volume in a Roger Ailes re-education camp.

[garo]

http://chronicle.com/article/Larry-Summersthe/124790/

Prominent academic economists (and sometimes also professors of law and public policy) are paid by companies and interest groups to testify before Congress, to write papers, to give speeches, to participate in conferences, to serve on boards of directors, to write briefs in regulatory proceedings, to defend companies in antitrust cases, and, of course, to lobby. This is now, literally, a billion-dollar industry. The Law and Economics Consulting Group, started 22 years ago by professors at the University of California at Berkeley (David Teece in the business school, Thomas Jorde in the law school, and the economists Richard Gilbert and Gordon Rausser), is now a $300-million publicly held company. Others specializing in the sale (or rental) of academic expertise include Competition Policy (now Compass Lexecon), started by Richard Gilbert and Daniel Rubinfeld, both of whom served as chief economist of the Justice Department's Antitrust Division in the Clinton administration; the Analysis Group; and Charles River Associates.

In my film you will see many famous economists looking very uncomfortable when confronted with their financial-sector activities; others appear only on archival video, because they declined to be interviewed. You'll hear from:

Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation.

Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration, dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender, from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives as improving the stability of both financial markets and the wider economy.

Frederic Mishkin, a professor at the Columbia Business School, and a member of the Federal Reserve Board from 2006 to 2008. He was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before the Icelandic banks' Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure form listed his net worth as $6-million to $17-million.

Laura Tyson, a professor at Berkeley, director of the National Economic Council in the Clinton administration, and also on the Board of Directors of Morgan Stanley, which pays her $350,000 per year.

Richard Portes, a professor at London Business School and founding director of the British Centre for Economic Policy Research, paid by the Icelandic Chamber of Commerce to write a report praising Iceland's financial system in 2007, only one year before it collapsed.

And John Campbell, chairman of Harvard's economics department, who finds it very difficult to explain why conflicts of interest in economics should not concern us.

The whole article is worth reading and I am very interested in the movie.

[ewmayer]

Originally Posted by garo

Oh c'mon, the Republicans are far more to blame for the Tea Party than Democrats. But more than either party it is Fox News and billionaires like the Koch brothers.

I meant that both major parties have ceased to actually try to provide a genuine alternative to each other. They may differ on this or that piece of legislation, but in the end they serve the same corporate masters.

The one think the Republicans deserve special ignominy for, though, is their encouragement of the "willful ignorance movement" which brought us things like "creation science", blaming the financial meltdown on the Community Reinvestment Act, etc. In that vein, I just put this book on my Christmas wish list:

Idiot America: How Stupidity Became a Virtue in the Land of the Free

[garo]

You'll find me in complete agreement with both points you make there.

[ewmayer]

Something About Tax Cuts Or Earnings Or Money Or Something In Recent Economic News

September 29, 2010 | ISSUE 46•39

WASHINGTON—Some sort of tax cut or earnings or money or something was reported in economic news this week in further evidence that a lot of financial- related things have been going on lately.

According to numerous articles and economics segments from major media outlets, experts on banks and such have become increasingly concerned over a new extension or rates or a proposal or compromise that could signal fewer investments, and dollars, and so on.

The experts confirmed that the stimulus has played a role.

"This is a clear sign of a changing cycle," some top guy at one of the big banks in New York said of purchasing power parity or possibly rate of return during a recent interview on CNN. "Which isn't to say that a sustained drop in wages couldn't still occur, even if the interest paid on reserves is lowered."

"In short, it's possible but not probable that growth could outpace our initial expectations," added the banking guy, who went on to say other money things, too. "It depends on investor sentiment."

The man, who also apparently mentioned the Nasdaq, the Dow, and the Japan one at some point or another, talked for a really long time about credit or reductions or possibly all these figures, which somehow relate to China.

Greece was also involved.

An analyst from Citigroup or Citibank announced on Monday that the Federal Reserve System is doing too much, while the Fed has failed to accomplish its goals to increase inflation or interest, which are different things. In addition, he was critical of the Fed's efforts to regulate the Bernanke.

[Full Article]

My Comment: And on the corporate-owned government front, a potential crucial development:

American People Hire High-Powered Lobbyist To Push Interests In Congress

October 6, 2010 | ISSUE 46•40

WASHINGTON—Citing a desire to gain influence in Washington, the American people confirmed Friday that they have hired high-powered D.C. lobbyist Jack Weldon of the firm Patton Boggs to help advance their agenda in Congress.

Known among Beltway insiders for his ability to sway public policy on behalf of massive corporations such as Johnson & Johnson, Monsanto, and AT&T, Weldon, 53, is expected to use his vast network of political connections to give his new client a voice in the legislative process.

Weldon is reportedly charging the American people $795 an hour.

"Unlike R.J. Reynolds, Pfizer, or Bank of America, the U.S. populace lacks the access to public officials required to further its legislative goals," a statement from the nation read in part. "Jack Weldon gives us that access"...

[cheesehead]

"Credit for the Recovery"

http://www.nytimes.com/2010/10/06/opinion/06gross.html

This op-ed points out that recent apparent declines in consumer and mortgage debt are more bookkeeping actions than actual changes in consumers' debt-incurring behaviors.

Originally Posted by Daniel Gross

Every time the United States suffers a recession, trendspotters hasten to identify signs of frugality, extol the rediscovery of thrift and find evidence that Americans are finally (finally!) kicking their demon debt habit. We crack open history books to locate the anti-debt impulse in pre-revolutionary America and troll through quotation collections for ammunition. I’ve been around long enough to go through this exercise twice — first in the early 1990s and then in 2001 after the dot-com bust. Here we go again.

Since the comprehensive, economy-wide debt bubble of the aughts burst spectacularly in September 2008, Americans, we are told, have rediscovered their inner skinflint. Indeed, the savings rate, which fell into negative territory in 2005 at the height of the boom, bounced back strongly. Through 2009 and thus far in 2010, Americans have been setting aside 5 percent to 7 percent of disposable income as savings. Web sites like couponmom.com and Groupon have attracted millions of penny-pinching users.

When the Federal Reserve reports figures on consumer credit, despite the dry prose, we conjure up visions of shoppers throwing their Visa cards into public bonfires. “Household debt contracted at an annual rate of 2 1/4 percent in the second quarter, the ninth consecutive quarterly decline,” the central bank reported last month. The outstanding balances of revolving credit accounts — i.e. credit cards — peaked in 2008 at a little less than $1 trillion, and have fallen for 22 straight months, to $827 billion in July 2010.

It’s a great story — if you believe it.

In fact, though, since the Lehman Brothers debacle in September 2008, the nations’ total indebtedness has continued its inexorable rise, some measures of consumer debt are starting to rise again and the easy-money, no-money-down culture still prevails in crucial sectors.

Oh, and a look at the data suggests that the decline in personal debt is driven less by Americans giving up on credit cards than on credit card issuers giving up on Americans.

CardHub.com, a credit-card industry site, crunched data from rating agencies and the Federal Reserve and found that in the 18-month period from January 2009 through June 2010, American lenders simply wrote off $124.1 billion in credit card balances as uncollectable. That accounts for nearly the entire $134 billion decline in revolving credit balances outstanding in the same period. And in the second quarter of this year, company write-offs were actually nearly $10 billion greater than the amount consumers paid down.

A similar dynamic may be taking place in the much larger housing-debt market. Mortgage debt has fallen for nine straight quarters — from $10.5 trillion in the first quarter of 2008 to $10.1 trillion in the second quarter of this year. But anyone who works in the industry knows that most of this decline can likely be ascribed to lenders writing off many of the loans they had heedlessly extended during the boom.

. . .

In an economy in which consumers account for 70 percent of activity, credit is both a vital lubricant and the indispensable fuel. Money may make the world go ’round, but credit makes the gears of commerce run smoothly.

. . .

[ewmayer]

Cheesehead, while Gross is not entirely off-base in the context of a credit-based economy, he seems to be seeing "facts" which no one else is privy to - see the links in my MotWee at bottom.

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

Well, well, well ... just as the mass-foreclosure-paperwork-fraud scandal seems poised to blow sky-high (with AGs in most of the 50 states looking at some kind of legal action against the major crime syndicates big banks and mortgage servicers involved), Reuters reports this interesting little bit of legislative, um, 'interestingness':

Bill Toughening Foreclosure Challenges Passes Quietly: A bill that homeowners advocates warn will make it more difficult to challenge improper foreclosure attempts by big mortgage processors is awaiting President Barack Obama's signature after it quietly zoomed through the Senate last week.

Published: Thursday, 7 Oct 2010 | 4:28 AM ET

By: Reuters

The bill, passed without public debate in a way that even surprised its main sponsor, Republican Representative Robert Aderholt, requires courts to accept as valid document notarizations made out of state, making it harder to challenge the authenticity of foreclosure and other legal documents.

The timing raised eyebrows, coming during a rising furor over improper affidavits and other filings in foreclosure actions by large mortgage processors such as GMAC, JPMorgan and Bank of America.

Questions about improper notarizations have figured prominently in challenges to the validity of these court documents, and led to widespread halts of foreclosure proceedings.

The legislation could protect bank and mortgage processors from liability for false or improperly prepared documents.

The White House said it is reviewing the legislation.

"It is troubling to me and curious that it passed so quietly," Thomas Cox, a Maine lawyer representing homeowners contesting foreclosures, told Reuters in an interview.

A deposition made public by Cox was what first called attention to improper affidavits by GMAC.

Since then, GMAC, JPMorgan and others have halted foreclosure actions in many states after acknowledging that they had filed large numbers of affidavits in which their employees falsely attested that they had personally reviewed records cited to justify the foreclosures.

Cox said the new obligation for courts to recognize notarizations of documents filed by big, out-of-state companies, would make it more difficult and costly to challenge the validity of the documents.

The law, the "Interstate Recognition of Notarizations Act," requires all federal and state courts to recognize notarizations made in other states.

The law specifically includes "electronic" notarizations stamped en masse by computers.

Currently, only about a dozen states allow electronic notarizations, according to the National Notary Association.

"Constituents" Pressed For Passage

After languishing for months in the Senate Judiciary Committee, the bill passed the Senate with lightning speed and with hardly any public awareness of the bill's existence on Sept.27, the day before the Senate recessed for midterm election campaign.

The bill's approval involved invocation of a special procedure.

Democratic Senator Robert Casey, shepherding last-minute legislation on behalf of the Senate leadership, had the bill taken away from the Senate Judiciary committee, which hadn't acted on it.

The full Senate then immediately passed the bill without debate, by unanimous consent. The House had passed the bill in April.

The House actually had passed identical bills twice before, but both times they died when the Senate Judiciary Committee failed to act.

Some House and Senate staffers said the Senate committee had let the bills languish because of concerns that they would interfere with individual state's rights to regulate notarizations.

Senate staffers familiar with the judiciary committee's actions said the latest one passed by the House seemed destined for the same fate.

But shortly before the Senate's recess, Judiciary Committee Chairman Patrick Leahy pressed to have the bill rushed through the special procedure, after Leahy "constituents" called him and pressed for passage.

The staffers said they didn't know who these constituents were or if anyone representing the mortgage industry or other interests had pressed for the bill to go through.

These staffers said that, in an unusual display of bipartisanship, Senator Jeff Sessions, the committee's senior Republican, also helped to engineer the Senate's unanimous consent for the bill.

My Comment: The "unusual display of bipartisanship" here is not at all unusual if one recognizes whose interests the lawmakers in question actually represent ... corporate-owned all the way.


Moron of the Week:

...Is Daniel Gross, who writes in an op-ed in the NYT, with NYT in-house economic overlord Paul Krugman likely smiling broadly at the 'wisdom' expressed here:

"The renewed willingness and confidence to spend money we don’t have is vital to the continuing recovery".

Which makes me wonder "recovery of what? Ponzi-financier bonuses? Didn't those already 'recover' in record fashion last year?". Thankfully, non-Ponzi-economist David Rosenberg has seen fit to take Mr. Gross to the proverbial woodshed. I find most amusing that at the end of the op-ed we see the following note about the author:

Daniel Gross, author of “Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation,” is the economics editor and columnist at Yahoo! Finance.

You just can't make this stuff up...

[cheesehead]

Originally Posted by ewmayer

Cheesehead, while Gross is not entirely off-base in the context of a credit-based economy, he seems to be seeing "facts" which no one else is privy to - see the links in my MotWee at bottom.

Did you follow the link to http://education.cardhub.com/q2-2010...rd-debt-study/ that Gross provides? Anyone is "privy" to that link AFAIK -- it's not hidden.

I don't see where either Rosenberg or you take into account the lender write-downs that Gross cites. Your ridicule isn't going to be convincing until you show that you aren't simply ignoring part of Gross's explanation.

[ewmayer]

Originally Posted by cheesehead

Did you follow the link to http://education.cardhub.com/q2-2010...rd-debt-study/ that Gross provides? Anyone is "privy" to that link AFAIK -- it's not hidden.

I don't see where either Rosenberg or you take into account the lender write-downs that Gross cites. Your ridicule isn't going to be convincing until you show that you aren't simply ignoring part of Gross's explanation.

Gross writes:

“As the economy slowly recovers, there are signs that Americans are rediscovering their free-spending ways. Total consumer credit, which includes non-revolving debt like car loans, have stabilized, and it rose in both June and July. It’s back to where it was in the second quarter of 2009.”

As Rosenberg notes:

We just went to the Fed’s database and saw that in July, outstanding consumer credit shrank $3.6 billion and has contracted now in each of the last six months and in 18 of the past 19, which makes it mathematically impossible to have gone back to 2009 Q2 levels. And, the August data for bank-wide consumer loans showed a $6.0 billion slide.

How do we reconcile these apparently-incompatible data? Let`s look at the data at the Cardhub link:

        Outstanding     Outstanding   Quarterly      Quarterly 
        Revolving       Credit Card   Credit Card    Credit Card 
        Consumer Debt   Debt        Charge-Off Rate  Charge-Off in $
Q2 2010    $823.4         $806.9       10.8%           $21.8
Q1 2010    $835.7         $818.9       10.1%           $21.7
2009       $894.0         $876.1                       $81.6
Q4 2009    $894.0         $876.1        9.4%           $20.6
Q3 2009    $893.5         $875.6       10.1%           $22.1
Q2 2009    $905.2         $887.1        9.77%          $21.6

The numbers in both "outstanding" columns are both steadily decreasing ... but then we see annotations like this:

Q2 2010

* In Q2 of 2010, outstanding credit card debt decreased relative to Q1 2010: $12,054,000,000
* In Q2 the credit card charge-off rate in dollars was: $21,827,510,600
* Consumer pay down: -$9,773,510,600
(a negative number indicates an increase in debt)
* Relative to last year: 249% more than the increase last year
* CONCLUSION: Consumers accumulated almost $9.8 billion more credit card debt in Q2 than Q1 2010, given that the drop in outstandings is smaller than the dollar amount that was charged-off. This is 249 percent more debt accumulation than was accumulated in this quarter last year.

Indeed, if chargeoffs are larger than the decrease in CC debt in a given period, that implies consumers actually spent more using their CCs, just that they were defaulting on existing debt faster than they were racking up new debt. That seems to be what Gross is referring to ... but he specifically says "total consumer credit has stabilized", without making mention "I added chargeoffs". And e.g. in Q2 2010 we see above that total credit decreased by $(12.3 + 12.0) = $24.3 billion, i.e. decreased slightly even if one factors in that $21.8 billion of the decrease was due to chargeoffs (The difference is thew $3.6 billion net decrease Rosenberg mentions ... there is a $.1 billion rounding error difference between my figures and his - he is probably using more-precise raw data, rather than the rounded table data above).

If we do the same computation for the full year, we see total credit decreases (starting with Q2 2009 - Q3 2009) of $23.2, -1.0, 115.5 and 24.3 billion, versus quarterly chargeoffs of $22.1, 20.6, 21.7 and 21.8 billion. Total decrease in credit = $162 billion. Of that $86.2 is due to chargeoffs. Conclusion: There is no "stabilization" here in the overall trend. Gross is cherry-picking just the last quarterly change and drawing a spurious "stabilization" trend conclusion.

The mere willingness of consumers to rack up more credit contributes nothing - in fact contributes negatively - to any economic recovery, if the credit default rate is as large or larger than the increase in credit. Somebody has to eat that defaulted debt, there is no free lunch as far as the overall balance of payments is concerned.

If anything, consumers are saying, "hey, if you're gonna keep giving me access to new credit cards even after I default, I'd be an idiot not to lather, rinse and repeat ... I gotta feed my family here."