Misery Economic Theater 2011

[Fusion_power]

And the news today is that the Pain in Spain falls mainly on the Lein.

Bad pun I know. But you will note that Spain is paying a significantly higher interest rate because speculation is growing that they are in deep dip.

Of the PIIGS, only Italy is not yet feeling the effects. Spain will be at least another 6 months and maybe a year before the inevitable.

Spain had to pay a much higher interest rate on new debt, there was speculation of a possible default by Greece and a nationalist party in Finland made big gains in an election Sunday.

http://moneywatch.bnet.com/economic-...-debt/6219028/

Taking Xilman's and other information into account, the U.S. has enjoyed many years of low interest rates. Now it is shaping up to change.

DarJones

[ewmayer]

George, not feeling the love for the DOJ priorities these days?

Originally Posted by xilman

"If an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns.

http://www.bbc.co.uk/news/business-13118834

So, anyone want to venture bold predictions on how long the government money-printers manage to "soothe the debt markets" before this finally blows sky-high? (A la Greece, whose 2-year bonds are now "yielding" over 20% ... I use quotes because "yield" implies the bond buyers will actually get paid back their principal in non-devalued currency units at the rate of interest in question).

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

PayPal co-founder Peter Thiel (via Mish, with commentary) echoes a conversation I had via e-mail with the same Mish last year about an "education bubble" fueled by subsidized student loans, the fast-growing business of degree mills, and the false promise that "a college degree is the key to everything in the modern economy":

The "Education Bubble"; Student Loan Debt Passes Credit Card Debt, Expected to Hit $1 Trillion:

Peter Thiel, co-founder of PayPal says We’re in a Bubble and It’s Not the Internet. It’s Higher Education.

“A true bubble is when something is overvalued and intensely believed,” he says. “Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.”

My Comment: a good point marred by a horrible analogy, since most of the world does not believe in the religion which features Santa Claus, and even the part that does generally disabuses its progeny of that fable before age 10. Better would be, "It is the absolute taboo. It’s like telling the world that overpopulation is at the heart of every single one of our major global problems not directly tied to excess leverage in the financial sector." But back from my pet-peevishness to the meat of the article:

Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.

Making matters worse was a 2005 President George W. Bush decree that student loan debt is the one thing you can’t wriggle away from by declaring personal bankruptcy, says Thiel. “It’s actually worse than a bad mortgage,” he says. “You have to get rid of the future you wanted to pay off all the debt from the fancy school that was supposed to give you that future.”

Thiel’s solution to opening the minds of those who can’t easily go to Harvard? Poke a small but solid hole in this Ivy League bubble by convincing some of the most talented kids to stop out of school and try another path. The idea of the successful drop out has been well documented in technology entrepreneurship circles. But Thiel and Founders Fund managing partner Luke Nosek wanted to fund something less one-off, so they came up with the idea of the “20 Under 20? program last September, announcing it just days later at San Francisco Disrupt. The idea was simple: Pick the best twenty kids he could find under 20 years of age and pay them $100,000 over two years to leave school and start a company instead.

My Comment: While I applaud Thiel`s initiative, my wider-scale and less-radical solution is a 2-parter:

1. Get the government out of the student loan business.

If the government stopped subsidizing higher-education loans, such loans would not disappear, but would become harder to get, because those making them would actually have an interest in seeing they get repaid. One effect of this would be that the cost of the loan would reflect things like "expected earnings potential of the degreed loan recipient". Yes, I know this would be horribly unfair to many lib-arts fields like poli sci and gender studies. Legions of would-be-degree seekers in such fields would be forced to learn a useful skillset, possibly depriving them of the opportunity to write the Great American PhD Thesis on critically important subjects like "clitoral imagery in the childhood art of Maurice Sendak". I weep at the prospect of such a devastating cultural loss. But hard times call for hard choices.

"But that`s only 1 part!" you cry. The second part is needed because the first is about as likely to occur as getting government out of the home-mortgage business;

2. Make the interest-rate cost and amount-limits of student loans reflect the expected earnings potential of the loan recipient, which calculus includes the national and school-specific earnings and dropout rate for the field in question.

Mish also has his own list of remedies, which are worth a read of the full piece.

[R.D. Silverman]

Originally Posted by ewmayer

2. Make the interest-rate cost and amount-limits of student loans reflect the expected earnings potential of the loan recipient, which calculus includes the national and school-specific earnings and dropout rate for the field in question.

.

Would not price discrimination laws get in the way? It would be like
"red-lining Black neighborhoods" vis-a-vis mortgage loans.

I can't see this happening.

[ewmayer]

Originally Posted by R.D. Silverman

Would not price discrimination laws get in the way? It would be like "red-lining Black neighborhoods" vis-a-vis mortgage loans.

That is the argument the politically correct crowd would of course make, but red-lining is an example of lenders using "other criteria" to jack up loan costs beyond the only criterion which should be of relevance, namely ability of the borrower to service the debt.

If you take a degree in some field and consider average starting (or career-weighted) wages of recipients of such a degree, odds of someone who pursues such a degree finishing it and the like, those all directly impact ability to service student loan debt. Now if you start red-lining black or hispanic applicants for student loans, that is akin to what you describe in the mortgage arena.

But you're right, such a common-sense approach has a snowball's chance in hell of getting considered, because someone throwing out the word "discrimination" in political debate about such things has a similarly discussion-halting effect as the word "rationing" does in a debate on healthcare cost containment.

(I always find the latter phenomenon amusing, because the retort is so obvious ... "Well of course we're discussing 'rationing' of healthcare spending. We have finite resources, so by definition we must ration them out.")

But be aware, I am so extreme in my "rational thinking" that I find it eminently sensible to do things like charge obese people more for plane fare, in proportion to the extra fuel cost incurred. (Not dissimilar from charging more for extra bags - just in this case the baggage is personal. Pound-for-pound, fuel-cost impact is the same, so why discriminate against poor Luggage-Lugging Larry?). Arrayed against me are legions of civil-rights activists who even claim it is unreasonable to charge someone extra because they are so overweight that they need 2 seats. (OTOH, one time years ago I had to fly with one leg in full-length cast which needed the seat in front of me to be folded down - the airline had no trouble "discriminating against me" on that basis and charging me for 2 seats.)

[cheesehead]

Originally Posted by ewmayer

But be aware, I am so extreme in my "rational thinking" that I find it eminently sensible to do things like charge obese people more for plane fare, in proportion to the extra fuel cost incurred. (Not dissimilar from charging more for extra bags - just in this case the baggage is personal. Pound-for-pound, fuel-cost impact is the same, so why discriminate against poor Luggage-Lugging Larry?).

Just imagining:

There's a weight scale at each gate? Or at the TSA area?

Hmmm... I can see that motivating folks to "make the weight" before a flight, similar to what wrestlers do. The airlines would carry more bottled water on flights, for all the passengers who had dehydrated themselves before the weigh-in.

It would motivate some to leave at home all the keys they wouldn't use during the trip, and empty all coins out of pockets. Wear their lightest-weight shoes, and shorts instead of pants. No socks.

Weigh-in at check-in.

Some sort of facilities added to airport terminals for folks trying to lose a last pound or two before the weigh-in?

Hmm... sweatier (from the pre-flight workout) passengers, as well as dehydrated ones. (No socks, also, remember.) Better upgrade the cabin air filtering, and stock Febreeze on planes.

[ewmayer]

Originally Posted by cheesehead

Just imagining:

There's a weight scale at each gate? Or at the TSA area?

Just have each would-be flier weighed together with their luggage. You could either compute a fuel surcharge based on some baseline total weight, say 250 lbs for men, 200 for women, less for kids in various age ranges. Customers knowing they will exceed the limit are free to prepay extra, otherwise their credit card gets dinged at checkin time. (Or credited, if they come in under).

Hmmm... I can see that motivating folks to "make the weight" before a flight, similar to what wrestlers do. The airlines would carry more bottled water on flights, for all the passengers who had dehydrated themselves before the weigh-in.

No problem - charge them for any drinks above some standard ration, so the dehydrators would get charged at least as much for replenishing it in-flight as they saved from sweating it off.

It would motivate some to leave at home all the keys they wouldn't use during the trip, and empty all coins out of pockets. Wear their lightest-weight shoes, and shorts instead of pants. No socks.

Again, a win-win: Less metal means less waiting in security lines, and less clothing will make the obligatory TSA groping pat-down easier and quicker.

Weigh-in at check-in.

Just like I said.

Some sort of facilities added to airport terminals for folks trying to lose a last pound or two before the weigh-in?

Not our job to help you cheat the fuel surcharges, buddy. Take it outside.

Hmm... sweatier (from the pre-flight workout) passengers, as well as dehydrated ones. (No socks, also, remember.) Better upgrade the cabin air filtering, and stock Febreeze on planes.

Or just open a couple windows...

I have a simple yet cunning plan to guard against dangerously dehydrated passengers, which again kills two metaphorical birds with one proverbial stone: Make every would-be flyer pee in a cup as part of the security screening. Hey, we're one butt-bomber away from cavity searches anyway, so mandatory drug screening is entirely appropriate. Anyway, back to the cunning part: If you can't produce at least (say) 8 ounces of urine, you're presumed to be either dehydrated or hiding something, so you don't fly. Failures-to-whiz could be given (or better, make 'em pay through the nose for it) a 16 oz. bottle of water and a 2nd chance to pass the whiz test within the next hour.

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

p.s.: Bob S. will appreciate the butt-bomber link ... it's to Bruce Schneier's blog. Some of the reader comments are quite precious, such as "just waiting for the first joke about explosive diarrhea..."

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

Getting back to the issue of the U.S. debt crisis (the media and pundits will take their sweet time calling it that, but there's no use beating the bush any longer, I say), author Nomi Prins[/url] has a pithy essay on the subject titled "Captain Obvious (S&P) vs. Captain Oblivious (Tim Geithner)"::

Today, S&P – that beacon of toxic asset rating foresight (which has yet to be slapped with any monetary accountability for its collusive role in bringing down our economy) came to the astonishing conclusion that the United States has a debt problem, and tagged the country with a 'negative watch' label. The S&P report proceeded to highlight fiscal spending issues, related political debating, and our ridiculously high debt vs. GDP percentage, which is only a few points below 100, as points of main contention. It paid minor lip service to the ‘financial crisis’ as being a factor. It surprisingly (not) shied away from blaming ongoing and potentially further devastating fallout from the overleveraged mortgage related assets still clogging the books of the Fed, housing agencies and financial firms as the banking system maintains the appearance of solvency only through federally supported accounting gimmickry and an exceedingly generous and ‘easy’ Federal Reserve keeping assets bid and rates low in the face of inflation it chooses to ignore.

My Comment: The Wikipedia entry for Ms. Prins mentions the title of her latest book, which gave me a chuckle:

"Nomi Prins is an American author, journalist, and Senior Fellow at Demos [A nonpartisan public policy think tank]. Prins is publicly known for her latest whistleblower-like book, It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street. One account of the book was discussed on C-SPAN After Words with U.S. Senator Bernie Sanders. Prins has been the subject of discussion and referenced on issues relating to the current state of the U.S. economy [3] and has published spending figures on federal programs and initiatives related to the 2008 bailout. Prins’ work has been cited for possible reinstatement of the Glass–Steagall Act as well as future regulatory reform of the financial industry including the too big to fail problem."

Perhaps Ms. Prins` book is best read to the musical accompaniment of The Pillage People:

"Bank man, there's no need to feel down.
I said, bank man, pick yourself off the ground.
I said, bank man, 'cause you're in a new town
There's no need to be unhappy.

Bank man, there's a place you can go.
I said, bank man, when you're short on your dough.
You can stay there, and I'm sure you will find
Many ways to have a good time.

It's fun to stay at the T - A - R - P..."

[R.D. Silverman]

Originally Posted by ewmayer

Originally Posted by cheesehead
Just imagining:

There's a weight scale at each gate? Or at the TSA area?

<snip>
Just have each would-be flier weighed together with their luggage.
<snip>

And on the subject of the TSA:

http://www.infowars.com/humor-grandm...at-the-airport

[R.D. Silverman]

Originally Posted by ewmayer

That is the argument the politically correct crowd would of course make, but red-lining is an example of lenders using "other criteria" to jack up loan costs beyond the only criterion which should be of relevance, namely ability of the borrower to service the debt.

If you take a degree in some field and consider average starting (or career-weighted) wages of recipients of such a degree, odds of someone who pursues such a degree finishing it and the like, those all directly impact ability to service student loan debt. Now if you start red-lining black or hispanic applicants for student loans, that is akin to what you describe in the mortgage arena.

But you're right, such a common-sense approach has a snowball's chance in hell of getting considered.

Actually, price discrimination is legal in some circumstances: It is
permitted if one can prove that it is cost based. Unfortunately,
it costs the same to give a loan to someone majoring in e.g. 19th
century French poetry as it does to give one to someone majoring in
e.g. civil engineering.

It is also legal to deny a loan if the issuer feels there is a high risk
involved in whether it will be paid back.

[Christenson]

Originally Posted by R.D. Silverman

Actually, price discrimination is legal in some circumstances: It is
permitted if one can prove that it is cost based. Unfortunately,
it costs the same to give a loan to someone majoring in e.g. 19th
century French poetry as it does to give one to someone majoring in
e.g. civil engineering.

It is also legal to deny a loan if the issuer feels there is a high risk
involved in whether it will be paid back.

Bob, you forgot to include RISK in your cost basis......but substituting red-lining for risk is always a hazard.... :-) !

[ewmayer]

Matt Taibbi`s latest piece is based on the results of the Fed`s financial-crisis-spawned bailout-o-rama finally being made public, after the Fed lost a FOIA lawsuits which its high-priced legal team dragged-out for as long as possible (your taxpayer dollars at work, keeping you in the dark about the financial crimes committed by a key arm of "your" government, as it were) and was on the wrong end of an act of congress (one of the very few things the current congress did right):

The Real Housewives of Wall Street: Why is the Federal Reserve forking over $220 million in bailout money to the wives of two Morgan Stanley bigwigs?

America has two national budgets, one official, one unofficial. The official budget is public record and hotly debated: Money comes in as taxes and goes out as jet fighters, DEA agents, wheat subsidies and Medicare, plus pensions and bennies for that great untamed socialist menace called a unionized public-sector workforce that Republicans are always complaining about. According to popular legend, we're broke and in so much debt that 40 years from now our granddaughters will still be hooking on weekends to pay the medical bills of this year's retirees from the IRS, the SEC and the Department of Energy.

Most Americans know about that budget. What they don't know is that there is another budget of roughly equal heft, traditionally maintained in complete secrecy. After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the "official" budget in size — a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

Now, following an act of Congress that has forced the Fed to open its books from the bailout era, this unofficial budget is for the first time becoming at least partially a matter of public record. Staffers in the Senate and the House, whose queries about Fed spending have been rebuffed for nearly a century, are now poring over 21,000 transactions and discovering a host of outrages and lunacies in the "other" budget. It is as though someone sat down and made a list of every individual on earth who actually did not need emergency financial assistance from the United States government, and then handed them the keys to the public treasure. The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. "Our jaws are literally dropping as we're reading this," says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. "Every one of these transactions is outrageous."

But if you want to get a true sense of what the "shadow budget" is all about, all you have to do is look closely at the taxpayer money handed over to a single company that goes by a seemingly innocuous name: Waterfall TALF Opportunity. At first glance, Waterfall's haul doesn't seem all that huge — just nine loans totaling some $220 million, made through a Fed bailout program. That doesn't seem like a whole lot, considering that Goldman Sachs alone received roughly $800 billion in loans from the Fed. But upon closer inspection, Waterfall TALF Opportunity boasts a couple of interesting names among its chief investors: Christy Mack and Susan Karches.

Christy is the wife of John Mack, the chairman of Morgan Stanley. Susan is the widow of Peter Karches, a close friend of the Macks who served as president of Morgan Stanley's investment-banking division. Neither woman appears to have any serious history in business, apart from a few philanthropic experiences. Yet the Federal Reserve handed them both low-interest loans of nearly a quarter of a billion dollars through a complicated bailout program that virtually guaranteed them millions in risk-free income ... This is what welfare for the rich looks like.

...

Christy and her pal Susan launched their investment initiative called Waterfall TALF. Neither seems to have any experience whatsoever in finance, beyond Susan's penchant for dabbling in thoroughbred racehorses. But with an upfront investment of $15 million, they quickly received $220 million in cash from the Fed, most of which they used to purchase student loans and commercial mortgages. The loans were set up so that Christy and Susan would keep 100 percent of any gains on the deals, while the Fed and the Treasury (read: the taxpayer) would eat 90 percent of the losses. Given out as part of a bailout program ostensibly designed to help ordinary people by kick-starting consumer lending, the deals were a classic heads-I-win, tails-you-lose investment.
.,.
A key aspect of TALF is that the Fed doles out the money through what are known as non-recourse loans. Essentially, this means that if you don't pay the Fed back, it's no big deal. The mechanism works like this: Hedge Fund Goon borrows, say, $100 million from the Fed to buy crappy loans, which are then transferred to the Fed as collateral. If Hedge Fund Goon decides not to repay that $100 million, the Fed simply keeps its pile of crappy securities and calls everything even.

This is the deal of a lifetime. Think about it: You borrow millions, buy a bunch of crap securities and stash them on the Fed's books. If the securities lose money, you leave them on the Fed's lap and the public eats the loss. But if they make money, you take them back, cash them in and repay the funds you borrowed from the Fed. "Remember that crazy guy in the commercials who ran around covered in dollar bills shouting, 'The government is giving out free money!' " says [former bank regulator William] Black. "As crazy as he was, this is making it real."
...
The public has no way of knowing how much Christy Mack and Susan Karches earned on these transactions, because the Fed has repeatedly declined to provide any information about how it priced the individual securities bought as part of programs like TALF. In the Waterfall deal, for instance, we know the Fed pledged some $14 million against a block of securities called "Credit Suisse Commercial Mortgage Trust Series 2007-C2" — but that data is meaningless without knowing how many units were bought. It's like saying the Fed gave Waterfall $14 million to buy cars. Did Waterfall pay $5,000 per car, or $500,000? We have no idea. "There's no way of validating or invalidating the Fed's process in TALF without this pricing information," says Gary Aguirre, a former SEC official who was fired years ago after he tried to interview John Mack in an insider-trading case.

My Comment: Now apply the same we-have-no-idea-what-they-paid to the Fed`s $1.25 trillion MBS-shopping spree started in the spring of 2009. I keep saying, TARP is the small potatoes of these monster bailouts, because it was so public and carried exec-comp restrictions which the Wall Street crooks found onerous, especially once they realized there were all these other, much-more-secret ways of getting free government cash.

And finally, the coda:

Perhaps the most irritating facet of all of these transactions is the fact that hundreds of millions of Fed dollars were given out to hedge funds and other investors with addresses in the Cayman Islands. Many of those addresses belong to companies with American affiliations — including prominent Wall Street names like Pimco, Blackstone and . . . Christy Mack. Yes, even Waterfall TALF Opportunity is an offshore company. It's one thing for the federal government to look the other way when Wall Street hotshots evade U.S. taxes by registering their investment companies in the Cayman Islands. But subsidizing tax evasion? Giving it a federal bailout? What the f***?

As America girds itself for another round of lunatic political infighting over which barely-respirating social program or urgently necessary federal agency must have their budgets permanently sacrificed to the cause of billionaires being able to keep their third boats in the water, it's important to point out just how scarce money isn't in certain corners of the public-spending universe. In the coming months, when you watch Republican congressional stooges play out the desperate comedy of solving America's deficit problems by making fewer photocopies of proposed bills, or by taking an ax to budgetary shrubberies like NPR or the SEC, remember Christy Mack and her fancy new carriage house. There is no belt-tightening on the other side of the tracks. Just a free lunch that never ends.

[ewmayer]

By the way, since most of the stuff Taibbi describes in his articles is either outrageous or just flat-out depressing, I find it essential to supplement the articles with the lighter-hearted commetaries and reader letters on Taibbi's blog. For example:

Matt,

About how many times a day do you find yourself saying "What the f***?" to nobody in particular? I'm up to about 23 these days.

Mike


Mike,

Maybe twice or three times a day. Fewer than before, certainly. See, what I've done, and you all can try this yourselves, is to simply avoid reading the news as much as possible. I read old books and the only periodicals I even look at lately are NFL draft guides. I've read Nolan Nawrocki's draft booklet like 400 times already. To me he’s the greatest novelist since Waugh. That does wonders for my general sanity, but then I'll have something happen like last Friday, when I went into 30 Rock to do a hit on Cenk Uygur's show and saw him talking about a poll that had Donald Trump leading the field of prospective Republican candidates. Donald Trump has 26% of the Republican vote right now? What the f***? Things like that, honestly, I don't even want to know, until I have no choice…