Misery Economic Theater 2011

[ewmayer]

Briefly returning to the criminal-convictions-resulting-from-the-financial-crisis theme, we do have a +1 increment today:

Ex-Taylor Bean Chairman Farkas Found Guilty on All 14 Counts in Fraud Case:

Lee Farkas, the ex-chairman of Taylor, Bean & Whitaker Mortgage Corp., was found guilty of 14 counts of conspiracy and bank, wire and securities fraud in what prosecutors said was a $3 billion scheme involving fake mortgage assets.
...
Prosecutors said Farkas, 58, orchestrated one of the largest and longest-running bank frauds in the U.S. that duped some of the country’s largest financial institutions, targeted the federal bank bailout program and contributed to the failures of Taylor Bean and Montgomery, Alabama-based Colonial Bank.

My Comment: I suspect the key reason for the prosecution of Mr. Farkas may lie less in the "wire and securities fraud" thing than the "duped some of the country’s largest financial institutions" bit.

(Psst: I hear nasty rumors that Mr. Farkas was also involved in far more nefarious activities, including - brace yourself, and send the children into the next room - online poker. If that's true, they should lock him up and throw away the key, just like they did that other nation-threatening criminal, wikileaker Bradley Manning, who has now gone 9 months in solitary with no trial in sight.)

William Black provides some excellent perspective on the Farkas conviction and its place in the larger scheme of things on his blog, including the key fact that this case was only prosecuted after being dragged into the light of day by now-retired SIGTARP Neil Barofsky. After blasting the complete inaction of the Bush administration vis-a-vis the mortgage fraud epidemic, Black has little better to say about our present leadership:

Einmal ist Keinmal (Once is Never)

Senator Obama warned of the wave of mortgage fraud and called for increased budgets for the FBI and DOJ to investigate and prosecute the frauds. He could have made the investigation and prosecution of the major accounting control frauds one of the nation’s top priorities. The result would have transformed his administration and the public support for those holding the elite frauds accountable. The DOJ press release says all the right things.

President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.

But DOJ has not “walked the walk.” Instead, we have one case brought not because of the underlying accounting fraud involving its lending, but because the leaders of the accounting control fraud sought to rip off TARP and came to the attention of one of our two (the other is Elizabeth Warren) most vigorous and effective public servants – Neil Barofsky (SIGTARP). Unfortunately, Mr. Barofsky has resigned.

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Nice op-ed by the NYT`s Joe Nocera on one of the key federal financial "regulators" which has probably gotten too little attention around here: Mr. Nocera does not mince words:

Letting the Banks Off the Hook

Judging by last week’s performance, it sure looks as though the country’s top bank regulator is back to its old tricks.

Though, to be honest, calling the Office of the Comptroller of the Currency a “regulator” is almost laughable. The Environmental Protection Agency is a regulator. The O.C.C. is a coddler, a protector, an outright enabler of the institutions it oversees.

Back during the subprime bubble, for instance, it was so eager to please its “clients” — yes, that’s how O.C.C. executives used to describe the banks — that it steamrolled anyone who tried to stop lending abuses. States and cities around the country would pass laws requiring consumer-friendly measures such as mandatory counseling for subprime borrowers, or the listing of the fees the banks were going to charge for the loan. The O.C.C. would then use its power to either block or roll back the legislation.

It relied on the doctrine of pre-emption, which holds, in essence, that federal rules pre-empt state laws. More than 20 times, states and municipalities passed laws aimed at making subprime loans less predatory; every time, the O.C.C. ruled that national banks were exempt. Which, of course, rendered the new laws moot.

You’d think the financial crisis would have knocked some sense into the agency, exposing the awful consequences of its regulatory negligence. But you would be wrong. Like the banks themselves, the O.C.C. seems to have forgotten that the financial crisis ever took place.

It has consistently defended the Too Big to Fail banks. It opposes lowering hidden interchange fees for debit cards, even though such a move is mandated by law, because the banks don’t want to take the financial hit. Its foot-dragging in implementing the new Dodd-Frank laws stands in sharp contrast to, say, the Commodity Futures Trading Commission, which is working diligently to create a regulatory framework for derivatives, despite Republican opposition. Like the banks, it views the new Consumer Financial Protection Bureau as the enemy.

And, as we learned last week, it is doing its darndest to make sure the banks escape the foreclosure crisis — a crisis they created with their sloppy, callous and often illegal practices — with no serious consequences. There is really no other way to explain the “settlement” it announced last week with 14 of the biggest mortgage servicers (which includes all the big banks).

My Comment: Rest of the op-ed describes the OCC`s ongoing attempt - which will likely succeed as long as the (federal) courts continue to uphold the sanctity of (federal) pre-emption - to torpedo attempts by the various state AGs to actually punish the big banks for foreclosure fraud.

[cheesehead]

"IMF Bombshell: Age of America Nears End"

(However, read the IMF reaction update at end)

http://finance.yahoo.com/banking-bud...nd-marketwatch

Originally Posted by Brett Arends

This column has been updated to include a reaction from the IMF.

The International Monetary Fund has just dropped a bombshell, and nobody noticed.

For the first time, the international organization has set a date for the moment when the "Age of America" will end and the U.S. economy will be overtaken by that of China.

And it's a lot closer than you may think.

According to the latest IMF official forecasts, China's economy will surpass that of America in real terms in 2016 — just five years from now.

Put that in your calendar.

. . .

The Comparison That Really Matters

In addition to comparing the two countries based on exchange rates, the IMF analysis also looked to the true, real-terms picture of the economies using "purchasing power parities." That compares what people earn and spend in real terms in their domestic economies.

Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America's share of the world output down to 17.7%, the lowest in modern times. China's would reach 18%, and rising.

Just 10 years ago, the U.S. economy was three times the size of China's.

. . .

Updated With IMF Reaction

The International Monetary Fund has responded to my article.

In a statement sent to MarketWatch, the IMF confirmed the report, but challenged my interpretation of the data. Comparing the U.S. and Chinese economies using "purchase-power-parity," it argued, "is not the most appropriate measure… because PPP price levels are influenced by nontraded services, which are more relevant domestically than globally."

The IMF added that it prefers to compare economies using market exchange rates, and that under this comparison the U.S. "is currently 130% bigger than China, and will still be 70% larger by 2016."

My take?

The IMF is entitled to make its case. But its argument raises more questions than it answers.

First, no one measure is perfect. Everybody knows that.

But that's also true of the GDP figures themselves. Hurricane Katrina, for example, added to the U.S. GDP, because it stimulated a lot of economic activity — like providing emergency relief, and rebuilding homes. Is there anyone who seriously thinks Katrina was a net positive for the United States? All statistics need caveats.

Second, comparing economies using simple exchange rates, as the IMF suggests, raises huge problems.

Currency markets fluctuate. They represent international money flows, not real output.

The U.S. dollar has fallen nearly 10% against the euro so far this year. Does anyone suggest that the real size of the U.S. economy has shrunk by 10% in comparison with Europe over that period? The idea is absurd.

China actively suppresses the renminbi on the currency markets through massive dollar purchases. As a result the renminbi is deeply undervalued on the foreign-exchange markets. Just comparing the economies on their exchange rates misses that altogether.

Purchasing power parity is not a perfect measure. None exists. But it measures the output of economies in terms of real goods and services, not just paper money. That's why it's widely used to compare economies. The IMF publishes PPP data. So does the OECD. Many economists rely on them.

Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for The Wall Street Journal.

[ewmayer]

Mish has an interesting post today (featuring a detailed and well-thought-out article by Michael Pettis) asserting that despite all the hue and cry abroad (especially in the BRIC nations) about the world needing to abandon the dollar as the global reserve currency, that this is a smokescreen, since it would actually hurt the BRIC export-based economic-growth model. Worth a read:

Bogus Threats to US Reserve Currency Status: No Country Really Wants It!

[the italicized snip is Pettis, rest is Mish]
If cheaper consumption is such a gift, it is hard to explain why attempts by the US to return the gift to countries whose consumption costs are artificially high – demanding for example that these countries revalue their currencies and so reduce costs for their own consumers – are always so indignantly rejected. No one, it seems, is eager to lower their consumption costs at the expense of employment growth, and yet reserve status may very well require this trade-off.

The massive imbalances that this system has permitted are destabilizing for the world because they permit large and unstable debt buildups both in countries that over-produce, like China and Japan, and those that over-consume, like the US. If the world were forced to give up the dollar, there is no doubt that there would be an initial cost for the global economy – it would reduce global trade somewhat and it would probably spell the end of the Asian growth model. But giving up the dollar would also lower long-term economic costs for the US and reduce dangerous global imbalances.

I am quite sure that Pettis has this correct. After all, if reserve currency status was such a gift, why doesn't China take the steps that would make it possible. Why doesn't Europe?

The fact is, for all their bitching, nearly every country on the planet does not want to relinquish their "export growth model". Every week there is some trumped-up report by someone about how China is trading more in the Yuan with Russia and Southeast Asia countries. In the grand scheme of things such trade in Yuan nearly meaningless, not representative of a significant adjustment.

Mathematically, the fact remains, the US runs a huge trade deficit, and countries accumulate US assets, most frequently US Treasuries.

The Fed is fighting back by attempting to force the US dollar lower. Mathematically every currency cannot be weak relative to each other. Central bank actions to achieve the impossible are behind the rise in commodities, especially silver and gold.

Unstable Mess

The irony in this mess is those cheering the demise of the US and the US dollar look at baby-step moves countries like China make in that direction as if that would hurt the US.

The reality is the US would be better off (and so would the world), were the US to lose reserve currency status. Nonetheless, don't expect it any time soon. China is not ready and Europe is in the midst of a sovereign debt crisis that will not go away for years.

And while we`re on the topic of commodity-price ramps, silver is nearing $50 per ounce, which is close to its January 1980 Hunt Brothers high in absolute terms, although still appreciably below that in inflation-adjusted terms. Thank you, U.S. deficit-spending and your enablers in the Treasury and Federal Reserve - though Mish thinks there also is a significant speculative-bubble component to the price at these levels, which, given all the "silver to the moon!" rah-rah-ing by the metalheads over at ZeroHedge of late, is likely to be true.

(In an interesting coincidence with other current events, Wikipedia notes that Nelson Hunt "played a very significant role in the discovery and development of the oil fields in Libya which would later be nationalized by Muammar al-Gaddafi".)

That means that the 10-lb bulk bag of U.S. silver/copper WW2 nickels I bought about 15 years ago for only 3-4x face value has appreciated to around $2.50 per nickel. Of course now I wish I'd bought several tons of the things.

[xilman]

Originally Posted by ewmayer

And while we`re on the topic of commodity-price ramps, silver is nearing $50 per ounce.

Back in the good old days a pound sterling was the value of a pound (12 troy ounces) of silver. If I've done my sums correctly, 12 * USD 50 = GBP 360.

An inflation of only 360-fold in 1200 years, or 0.5% annually, is pretty good going by most standards!

Paul

[ewmayer]

McDonalds Hires 62,000, Turns Away Over 938,000 Applicants For Mostly Minimum Wage, Part-Time Jobs

This is clearly very bullish news for the ever-strengthening U.S. economic recovery, as all those newly-hired part-time minimum-wagers will be happily spending half their new paychecks on $5-per-gallon gasoline to get to work and back. Highly economically stimulative, that.

Hopefully this hiring binge by Mickey D's and similar employment bastions of the new expectations-downsized American "muddle class" will be enough to get most of those nattering nabobs of negativity who are the 71% of Americans who still irrationally believe the economy is "in a depression", "in a recession" or "slowing down" on board with the government's "happyFlowerPuppyDreams your way to recovery!" program of positive-thinking.

[Fusion_power]

Inflation keeps cropping up. We've had energy inflation i.e. the price of gas at the pump and electricity, etc. for quite a while. The bugaboo now is the price of food which has increased dramatically in the last year. Now thing about this a bit. The CIP-U which is the official measure of inflation says we are up 2.3 percent in the past year. But energy and food are up double digits. Here is an article that tosses some mud at the CPI.
http://news.yahoo.com/s/dailybeast/2...tionofthe2010s

Back in March, the president of the New York Federal Reserve, William Dudley, was trying to explain to the citizens of Queens, N.Y., why they had no cause to worry about inflation. Dudley, a former chief economist at Goldman Sachs, put it this way: “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful. You have to look at the prices of all things.” Quick as a flash came a voice from the audience: “I can’t eat an iPad.”

So what is the realistic inflation rate? If you read the article, it suggests 10%. I would agree with that based on my cost of eating and purchasing gas for my car.

What do we have to look forward to? Real term inflation should run between 10% and 14% for the next year at least.

Just for background, my last post on this topic was Feb 15, 2011.

DarJones

[cheesehead]

Just arrived in my mailbox: a help-wanted advertisement that is for light electronics assembly work and warehouse kitting, receiving and shipping at a local company about three miles away.

What's notable is that this is the first help-wanted mailing I've received in a long time that is not for "work-at-home". It's mass-mailed ("Dear Neighbor"), but evidently directed to households relatively near the work location of a small (130 employees) electronics firm.

[ewmayer]

Originally Posted by Fusion_power

Inflation keeps cropping up. We've had energy inflation i.e. the price of gas at the pump and electricity, etc. for quite a while. The bugaboo now is the price of food which has increased dramatically in the last year. Now thing about this a bit. The CIP-U which is the official measure of inflation says we are up 2.3 percent in the past year. But energy and food are up double digits. Here is an article that tosses some mud at the CPI.

Ah yes, the old "hedonic adjustments" fudging of the CPI ... Now see, if you stopped being such a tech hedonist and next time you needed a replacement iPad, instead of greedily buying a new iPad2 you bought just *half* and iPad2 - same processing power as the iPad1 for roughly half the price - you would enjoy the benefits of the technological advances the esteemed Mr. Dudley lauds, and have money left over to buy this "food" of which you speak.

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Matt Taibbi has a mailbag-related blog entry today explaining why he cannot vote for Ron Paul. While most of his beef is with (Rand) Paul the younger, the newsletters he cites from the elder Paul in the 80s and 90s indicate that the apple may not have fallen as far from the tree as some (including me) like to believe.

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And on a lighter note, We present a small selection of Selected quotes from the Royal Wedding.

No, no, not from any of those stuffy "news outlets"... ours are far more interesting, they are from the readership and fashion mavens at GoFUGYourself.com - The FUG being a reference to the neologism “fugly”, which is a contraction of “effin ugly”, as in “that outfit is so effin ugly, it’s ‘fugly’.”

We proceed directly to the most crucial story, the incisive fashion critique of the royal entrance [hey, football and entertainment royalty is still royalty, innit?] of Not-Yet-Quite-A-Sir David Beckham, OBE (that is apparently *not* commonly followed by a "/GYN" - I must say, I find British medical jargon terribly confusing) and his once-again-pregnant-but-still-committed-to-the-sky-high-stilettos wife Victoria, neé Posh Spice Adams:

Royal Weddingpalooza Well Played, Posh and Becks

jcpdiesel21: "I don’t care for Posh’s hat. Like Rupert Everett said on TLC this morning, it looks like it has tentacles."

Rae: "In that third picture in the slideshow, Becks looks like Ricky Gervais’ younger, thinner, taller, hot brother. It’s weirding me out in a big way."

Meryl: "Why on earth is Becks wearing his OBE on the wrong side of his jacket? What a knob. Posh looks darling, though."

Sandra: "I must confess that back in the day, I had these two pegged as “white trash with money”. But they’ve grown up nicely and stayed together, so I like them better now.

Also, when I am Empress of the Universe, I shall decree formal morning suits EVERY DAY for EVERY MAN! Unless he has a formal dress uniform, of course. Don’t guys realize how incredibly hot we find well-dressed fellows to be?"

Patricia: "I kind of thought they looked like the Evil Godparents arriving to place a curse on the firstborn of the couple. Not that they didn’t look attractive and fashionable. Just that there was an dark aura of evil surrounding them. It happens."

Noire: "How is it possible to be that pregnant, wearing that high of shoe? That woman is a mutant!"

jerkygirl: "I actually love that hat, but WHY did she have to wear it protruding from her forehead like some kind of sawed-off unicorn horn???"

[ewmayer]

U.S. Sues Deutsche Bank Over Mortgage Practices: The United States government sued Deutsche Bank on Tuesday, demanding at least hundreds of millions of dollars to make up for bad loans that the bank issued.

In a complaint filed in Federal District Court in New York, the government accused Deutsche Bank and a unit, known as MortgageIT, of “knowingly, wantonly and recklessly” failing to adequately scrutinize borrowers, then lying to federal officials who pointed out shortcomings.

The suit involves Deutsche Bank’s involvement with the Federal Housing Administration, an arm of the government that guarantees mortgages made to less qualified borrowers than those who have loans backed by Fannie Mae or Freddie Mac.

MortgageIT was qualified to issue F.H.A.-backed loans and from 1999 to 2009 the unit sponsored more than 39,000 such loans, worth more than $5 billion, according to the complaint. The bank knowingly used the government guarantee on unqualified, risky loans, the complaint says, because it was able to then quickly sell those loans to investors.

By this year, the complaint says, about a third of those loans had defaulted, costing the government $386 million, but the final cost is expected to exceed $1 billion. Many of the losses, the complaint says, were caused by false statements the bank and its MortgageIT unit made to the government about the loans.

The bank had “powerful financial incentives to invest resources into generating as many F.H.A.-insured mortgages as quickly as possible for resale to investors,” the complaint says. “By contrast, Deutsche Bank and MortgageIT had few financial incentives to invest resources into ensuring the quality of its F.H.A.-insured mortgages.”

At a news conference, the United States attorney for the Southern District of New York, Preet Bharara, said that Deutsche and MortgageIT had “indulged in the worst of the industry’s lending practices.”

The defendants ignored every red flag, he said, and “repeatedly abused the public’s trust.”

The government has filed relatively few cases against big banks related to the financial crisis, and those it has filed have mainly been civil complaints, like the one filed Tuesday against Deutsche Bank. The government has found it difficult to prove intent to defraud, and investigators got off to a slow start in building possible cases during the crisis because regulators were primarily focused on stabilizing the system back in 2008. The Department of Justice has generally had more success prosecuting small mortgage brokers and borrowers for mortgage fraud than it has had in pursuing major financial institutions. The case against Deutsche Bank does not name any individual bank employees.

My Comment: A.k.a. "Too Big to Jail"...

[fivemack]

Originally Posted by Fusion_power

So what is the realistic inflation rate? If you read the article, it suggests 10%. I would agree with that based on my cost of eating and purchasing gas for my car.

How much of your actual expenditure goes on eating and purchasing gas?

So far this year, 2.1% of my outgoings have been on travel, 11.9% on food and 41.4% on rent and utilities, with 32.1% going on 'fun' and 'savings' combined. Increasing the price of food and travel by 10% wouldn't be a problem.

[ewmayer]

Originally Posted by fivemack

How much of your actual expenditure goes on eating and purchasing gas?

So far this year, 2.1% of my outgoings have been on travel, 11.9% on food and 41.4% on rent and utilities, with 32.1% going on 'fun' and 'savings' combined. Increasing the price of food and travel by 10% wouldn't be a problem.

It doesn't take more than a 1-2% loss of discretionary-purchasing power at this point to turn a very-fragile recovery (that's if you believe the government's characterization) into another round of contraction. (Though higher gas prices feed into GDP, so the fact that people have less money to spend on other things - like debt-servicing - won't show up in GDP per se, except via second-order effect.)

Remember, it's not the fiscally prudent folks who drove the boom and bust (though they are as always being forced to disproportionally foot the bill), it's the vast crowd of typical-overleveraged-consumerBots. For an underwater homedebtor who is just barely able to make payments with gas at $3 per gallon, loss of $50-100 per month due to higehr gas prices can be the last straw. Recall that with the massive leverage in the financial system circa 2006, it only took a roughly 4% drop in home prices to trigger the biggest recession since the 1930s. Consumer leverage is (thankfully, and no thanks to the government here) slightly lower now, but systemic leverage is still at or near record highs, and only government deficit spending of over 10% of GDP is keeping GDP nominally flat-to-barely-positive. When you are skating on the ragged edge of a double-dip, a 1-2% hit is a lot.