Mystery Economic Theater 2010

[cheesehead]

Originally Posted by ewmayer

With oil prices around $80 per barrel today, the rise from $3 per barrel in October 1973 represents an average annual rate of oil-price inflation of

[((80/3)^1/37-1) * 100%] = about 9.3%

(1973 was 37 years ago, rather than 27. Time flies when you're having fun. :-)

Note that prices of refined products such as gasoline have risen less (between 10-15x here in the US... I don`t know offhand whether the proportion of that which is due to various taxes has changed significantly), probably because refining costs are more likely to track broader inflationary trends.

[cheesehead]

Originally Posted by ewmayer

Movie Review: "Inside Job"

LA Times (Kenneth Turan) and NY Times (A.O. Scott) reviews of the new documentary of the 2008 financial crash as anything-but-an-unfortunate-accident, Inside Job:

Movie review: 'Inside Job': Charles Ferguson presents a clear-eyed, sobering, commendable account of how the global economic crisis developed.

Rats. I didn't know about (or didn't pay attention to) this movie when it was here several months ago.

Now, it's showing in Chicago. Hmmm...

[garo]

Originally Posted by dorcheat

Hello folks,

I am new at mersenneforum.org, but I have lurked here for years. The intelligent and informed commentary concerning this MET2010 at this site is most admirable, but also most troubling: for all of us.

If I may, I would like to direct you to a link from the Fargo (ND), Forum. It speaks of the experiences of Senator Kent Conrad, the Senate Budget Committee charman during the infamous meetings of mid September 2008 and the notorious all night Saturday meeting during what I think is October 4th of 2008.

http://www.inforum.com/event/article/id/295587/

dorcheat, welcome to the forum. I recognize your username as a very old contributor to GIMPS. At least since 2002-2003 if I am not mistaken.

Regarding the article, you linked above, it sounds very much like a CYA (Cover Your Ass) job. There is no denying that the crisis was very serious. But it is very irresponsible of Conrad to say that it was either TARP and the AIG bailout or another Great Depression. The problem is not that something was done. The problem is that the wrong stuff was done. The interests of the taxpayer were sacrificed in favour of the banks on almost every single occasion. AIG was used as a backdoor bailout for lots of Wall Street and European banks. Ditto Fannie and Freddie. They forgot Bagehot's maxim about central bank lending in times of trouble: Lend freely but at punitive rates of interest. Instead, the banks were give a free ride and the wider economy continued to suffer.

[cheesehead]

Originally Posted by garo

Regarding the article, you linked above, it sounds very much like a CYA (Cover Your Ass) job. There is no denying that the crisis was very serious. But it is very irresponsible of Conrad to say that it was either TARP and the AIG bailout or another Great Depression.

I disagree.

All the evidence I've seen indicates that at that time (mid-September 2008) we did indeed face a serious global financial crisis of Depression-bringing proportions.

We're accustomed to seeing exaggerations in political and financial discussions nowadays, but one thing that has been understated in public discussion is how bad the situation was in mid-September 2008.

The problem is not that something was done. The problem is that the wrong stuff was done.

I invite you to post your detailed analysis in my "Alternate scenarios for post-Sept. 15 2008" thread at http://mersenneforum.org/showthread.php?t=12816 !!

AIG was used as a backdoor bailout for lots of Wall Street and European banks. Ditto Fannie and Freddie.

... because so many banks had, through unregulated trade in leveraged securities, put themselves into a single-point-of-failure situation.

Instead, the banks were give a free ride

Yes, there should have been/should be more punishment meted out for their sins, but bringing down the wider financial world would have been more collateral damage than it was worth.

I fully agree with the following statements from the forum post:

Originally Posted by www.inforum.com

. . .

“If people could have been in that room and seen what I saw, what I heard – this notion that we should have just done nothing is so utterly far-fetched and detached from reality, that it really concerns me,” Conrad said.

“There seems to be an incredible disconnect between the reality of what we confronted and what some people believe were the alternatives,” he said.

. . .

Conrad said Thursday the Obama administration and Democratic leaders failed to properly explain why TARP was necessary ...

“We have done a horrible job of explaining to people why certain things had to be done, how serious the situation was,” he said.

At the time, a complete explanation would have made matters worse, though, Conrad said.

“I’ve thought back a lot: Why weren’t we more clear as to how serious this was?” Conrad said. “And I remember, we were told: ‘Look, if we say how serious the situation is, it could lead to a financial panic.’ ”

But, he added, “at some point, the people of the country needed to be told just how serious the situation had been and needed to be told why these steps had to be taken.”

Conrad said TARP’s success has been lost in political talking points. All but $29 billion of the $700 billion-package will be paid back by those companies that received aid, he said.

In some cases, such as the banks, taxpayers will actually profit from the legislation, Conrad said.

It is irresponsible (or ignorant) for folks to call TARP a "giveaway" without acknowledging this 96% payback.

. . .

... TARP demonstrated its worth by preventing the economy from hitting rock bottom.

Without any federal intervention, the U.S. would have had 8.1 million fewer jobs in the second quarter of 2010 than it did, Conrad said, citing calculations by leading economists.

The unemployment rate also would have climbed to Depression levels of 15 percent or more by this quarter of 2010, compared to the current rate of 9.7 percent, Conrad said.

I've not yet seen anyone present a biting criticism of the AIG bailout that acknowledges how critical the September 2008 situation was, and most of that criticism is stuffed with ideological talking points rather than real analysis.

[garo]

I see that cheesehead is taken in hook line and sinker with the MSM propaganda about the "96% payback" of TARP. Instead of datamining and posting lots of links, I just invite you to read Barry Ritholtz's Bailout Nation. That does a great job of explaining everything that went wrong including the AIG bailout.
Start by reading these posts:
http://www.ritholtz.com/blog/category/bailouts/
Then get back to me!

I've not yet seen anyone present a biting criticism of the AIG bailout that acknowledges how critical the September 2008 situation was, and most of that criticism is stuffed with ideological talking points rather than real analysis.

You are the one who is coming up with hot air and empty talking points here mate. Do you even know the numbers? Do you know that AIG paid the banks 100 cents to the dollar? Do you know the main beneficiaries? Do you know that AIG's deal with Uncle Sam has been re-negotiated three times, the latest being this summer? Why does Obama's treasury keep making the deal sweeter for AIG when the crisis is no longer an emergency? Please answer these questions or as Barry likes to say, "Pour yourself a tall cold glass of STFU!"

[ewmayer]

...To say nothing of the fact that TARP was sold as a program to recapitalize the banks by purchasing their "troubled" assets, and then repurposed - in many respects without congressional approval - in completely different fashion. TARP (at least in its eventual, much-modified form) did have one thing right, though - recipients were subject to strict exec-compensation restrictions. Which was of course the program's undoing as an effective means to recapitalize ... once the original recipients got past the initial panic of the this-just-got-rammed-down-out-throats phase and the big players quickly realized that Uncle Sam was also offering multiple backdoor-bailout facilities which lacked the odious exec-comp restrictions of TARP, the ones who were able to do so tripped over each other in their rush to "pay back" TARP.

Barry Ritholtz is of the opinion - and the numbers and timing certainly are supportive of this hypothesis - that the reason TARP was forced onto all of the big banks, including several who said they didn't need the funds, and quickly repaid them - was to cover up the fact that the biggest of them, Citigroup, was insolvent, and to a degree that would have been impossible to disguise for much longer. (It took the government until the following Spring to come up with the clever "solution" of suspending the longstanding mark-to-market accounting rules for banl capital and replacing them with "mark to fantasy", where they remain to this day.)

And meanwhile, the *real* troubled-asset purchases have been occurring in even larger amounts, in a place where they can be much better hidden and carry no restrictions for the beneficiaries - that is, the Fed's "balance sheet", which swelled by over trillion dollars last year, and is set to expand further as Bernanke and crew ready for yet another round of "quantitative easing". Why do you think the stock market keeps rallying even though the real economy shows zero signs of emerging from its depressed state?

(For those unfamiliar with the Fed's funny-money balance sheet, the increase represents money "printed" to buy toxic assets likely worth far less, with the difference scheduled to be made up by present and future generations of the great unwashed who will see the purchasing power of their money continue to shrink and who are earning near-zero interest on any money they have managed to save from the hands of Wall Street and the debt merchants running the banking sector. It is why, as long as the Fed exists, the U.S. will never "default on its obligations" - at least not explicitly. Hey, as long as you can continue to sucker people into lending you their gold which you "repay" with devalued scrip, you'd be an idiot not to take advantage of their stupiditygenerosity.)

Lastly, before anyone pipes up with "even Citigroup has repaid xxx% of TARP" - don't forget the $300 billion loan guarantee they received along with their TARP monies, and which the U.S. taxpayer remains on the hook for. Like garo said, for every dollar in visible TARP monies the banks received, there are multiple dollars in much-better-hidden backdoor-bailout monies. Obfuscating the true taxpayer cost of the bailouts is a huge priority for the government.

[ewmayer]

A belated welcome to recently-unlurked reader dorcheat ... one of our aims here at MET2010 central is to convert as many lurkers (who may feel unable or unwilling to contribute to the discussion at first) to well-informed, critically-minded contributors as possible.

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

Addendum to above TARP/QE Post:

By way of Mish, an analysis by John Hussman of the misguidedness of quantitative easing:

Liquidity Traps, Falling Velocity, Commodity Hoarding, and Bernanke's Misguided Tinkering: John Hussman has an interesting post this week on the misguided policies of the Bernanke Fed and how quantitative easing promotes commodity speculation and hoarding but does nothing for the real economy. Please consider Bernanke Leaps into a Liquidity Trap

Hussman knocks it out of the park here, in terms of the clarity of his reasoning (and unlike the folks running the futile money-printing policy circus, he backs everything up with data):

...the precise level of long-term interest rates is not the main constraint on borrowing here. The key issues are the rational desire to reduce debt loads, and the inadequacy of profitable investment opportunities in an economy flooded with excess capacity.

One of the most fascinating aspects of the current debate about monetary policy is the belief that changes in the money stock are tightly related either to GDP growth or inflation at all. Look at the historical data, and you will find no evidence of it.

You can see why monetary base manipulations have so little effect on GDP by examining U.S. data since 1947. Expand the quantity of base money, and it turns out that velocity falls in nearly direct proportion. The cluster of points at the bottom right reflect the most recent data.

Just to drive the point home, the chart below presents the same historical relationship in Japanese data over the past two decades. One wonders why anyone expects quantitative easing in the U.S. to be any less futile than it was in Japan.

My Comment: With respect to the last point, the incisive analysis which has led our economic leadership to conclude that QE will work here even though the virtually-identical approach has failed miserably (except in terms of ballooning trhe national debt - there, it has succeeded spectacularly) to revive the moribund Japanese economy despite over a decade of multiple attempts is this gem of reasoning: "The U.S., is not Japan". (I *knew* there was a reason they pay these folks big bucks and give them economic fake-Nobel prizes sponsored by a big Swedish bank.)

p.s.: Regular readers of Mish`s blog know that he has been beating the it's-deflation-not-inflation-stupid drum for years, but methinks his POV here has gotten a bit dogmatic, as he seems to making great efforts to sweep the various forms of "selective inflation" (e.g. in commodity prices) the Fed's easy-money policies have led to under his deflationary rug. Mish seems to narrowly view price inflation only in terms of prices paid by the consumer/end-user, which - except in commodities where margins were already razor-thin or sellers effectively collude on pass-through pricing (e.g. gasoline sales) - indeed are not showing clear inflationary signs in the U.S., due to weak demand. I say that producer-price inflation is still inflation: Whether the inflationary price gets paid by the consumer in terms of higher prices or the producer in terms of reduced profitability, there is still a diversion of capital to service the price increases taking place.

p.p.s: Breaking News: Neil Barofsky, the special inspector general appointed for TARP, has just a released an apparently-quite-scathing 300-page quarterly report on the "success" of the program:

SIGTARP Calls Out Tim Geithner On Various Violations Including Data Manipulation, Lack Of Transparency, "Cruel" Cynicism, And Gross Incompetence

[cheesehead]

Originally Posted by garo

You are the one who is coming up with hot air and empty talking points here mate. Do you even know the numbers? Do you know that AIG paid the banks 100 cents to the dollar? Do you know the main beneficiaries? Do you know that AIG's deal with Uncle Sam has been re-negotiated three times, the latest being this summer? Why does Obama's treasury keep making the deal sweeter for AIG when the crisis is no longer an emergency? Please answer these questions or as Barry likes to say, "Pour yourself a tall cold glass of STFU!"

See what I mean, folks?

Not

one

single

word

about

how critical the September 2008 situation was.

[ewmayer]

Originally Posted by cheesehead

how critical the September 2008 situation was.

Agreeing that things were very dire in the Fall of 2008 - as most here will do - is not the same as agreeing the "desperate times call for idiotic-and-or-illegal remedies". So much of the banking system was insolvent in 2008 and the credit markets had largely ground to a halt. Government steps in, bails out the TBTFs to the tune of several $trillion, punishes none of the guilty parties (the insolvency was mostly self-inflicted), and aside from restoring a false sense of confidence in the financial sector (or better, the sense that if you are deemed a TBTF financial firm, no matter how badly you screw up, the government has your back), none of the fundamental issues that led to the crisis has been addressed in any serious way. Worse, by visibly and deliberately not prosecuting the criminal rackets which brought us all the misery, the government has further emboldened them.

[cheesehead]

Garo,

My opposition to some single aspect of an opinion posted here does not constitute whole-hearted endorsement of all opposition to the poster's views. Please refrain from treating it as such, lest you be thought as hot-headed as I have been several times in the past. :-)

[cheesehead]

Originally Posted by ewmayer

Agreeing that things were very dire in the Fall of 2008 - as most here will do - is not the same as agreeing the "desperate times call for idiotic-and-or-illegal remedies".

You aren't implying that the phrase in quotes represents my views, are you? It doesn't.

So much of the banking system was insolvent in 2008 and the credit markets had largely ground to a halt.

So, do you agree with me that it was necessary for the U.S. government to intervene (in some manner), because private interests were unable to cope with the situation through market forces and ordinary business procedures -- in contradiction to what so many conservatives have maintained?

Government steps in, bails out the TBTFs to the tune of several $trillion,

What were the workable alternatives in mid-September 2008?

punishes none of the guilty parties

I've consistently condemned that.

and aside from restoring a false sense of confidence in the financial sector

... which was a short-term necessity for preventing a panic, but the truth should have come out more into the MSM since then.

none of the fundamental issues that led to the crisis has been addressed in any serious way.

I agree.

Worse, by visibly and deliberately not prosecuting the criminal rackets which brought us all the misery, the government has further emboldened them.

I agree.