Monday, November 22, 2010

Today's links

1-- Irish application for IMF/EU rescue package approved, Irish Times

Excerpt: Taoiseach Brian Cowen tonight confirmed the European Union has approved a formal Government request for financial aid package from the European Union and the International Monetary Fund....He said the rescue package, which will run for three years, will be tied to a restructuring of the banks and a deficit reduction plan....

A senior EU source said he expected to final amount to be as much as €90 billion, adding that this sum would include money to support the Irish banking sector....

“A central element of the programme will also be to support further deep restructuring and the restoration of the long term viability and financial health of the Irish banking system,” Mr Cowen said.

2-- Peak Oil: Why the Pentagon is pessimistic, Le Monde

Excerpt: “Twilight in the desert” is a book summing up the arguments of a Texan oil banker who suggests that Saudi Arabia is overestimating its future oil production capacity. I’ve learned through the American Department of Defense that this book is the source of two recent Pentagon reports envisaging a severe lack of oil starting in 2012 and continuing until 2015 at least.

According to the thesis developed in “Twilight in the Desert”, the official numbers published by Saudi Aramco, the national Saudi oil company, highly overestimate the true level of reserves that the largest world oil power is capable of extracting from its soil. As a consequence, according to Matthew Simmons, the Saudi oil production will no longer increase, and could even be on the point of a drastic reduction.

“A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India.

3--The capital tsunami is a bigger threat than the nuclear option, Michael Pettis, China Financial Markets

Excerpt: An awful lot of investors and policymakers are frightened by the thought of China’s so-called nuclear option. Beijing, according to this argument, can seriously disrupt the USG bond market by dumping Treasury bonds, and it may even do so, either in retaliation for US protectionist measures or in fear that US fiscal policies will undermine the value of their Treasury bond holdings. Policymakers and investors, in this view, need to be very prepared for just such an eventuality...

...the real threat to the US economy is not the dumping of USG bonds. On the contrary, in the next two years the US markets are likely to be swamped by a tsunami of foreign capital, and this will have deleterious effects on the US trade deficit, debt levels, and employment. Investors and policymakers should be far more worried that China and other capital exporting countries are trying their hardest to maintain and even increase their capital exports, while the capital importing countries are either going to see capital imports collapse, or are trying desperately to bring them down....

Clearly the PBoC and (other Chinese entities) are continuing to accumulate huge amounts of USG bonds. So why not worry about Beijing’s “nuclear option”? For a start, unlike you or me the PBoC cannot simply sell Treasury bonds, pocket the cash, and go home. Dollar bills are just as much obligations of the US government as are USG bonds, only that they pay no interest. If the PBoC wants effectively to reduce its holdings of USG bonds it must swap them for something else.

4-- Countrywide Routinely Failed to Send Key Docs to MBS Trustees, B of A Employee Says, Kate Berry, American Banker

Excerpt: Countrywide, the mortgage giant that's now part of Bank of America Corp., routinely didn't bother to transfer essential documents for loans sold to investors, an employee testified.

The testimony — which a New Jersey bankruptcy judge cited in dismissing a B of A claim against a debtor — could complicate attempts by the company to foreclose on soured loans that Countrywide originated.....The B of A employee's admission that the lender customarily held on to promissory notes could also undermine the industry's position that document transfers to securitization trusts are fundamentally sound.

Linda DeMartini, a supervisor and operational team leader in B of A's litigation management department, testified that "the original note never left the possession of Countrywide"... DeMartini "testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents"... Adam Levitin, an associate law professor at Georgetown University, said in Congressional testimony Nov. 16 that ... "If the notes and mortgages were not transferred to the trust, then the trust lacks standing to foreclose"...

5--Answering the bunnies,(Questions about QE) James Hamilton, Econbrowser

Excerpt:no money is going to be printed. The Fed will pay for these purchases by crediting accounts that banks have with the Fed. Although it is true that banks could ask to withdraw these funds in the form of green currency, they currently are showing no interest in doing so. And before banks did start to want to withdraw these funds as money, the Fed plans to sell the assets off to bring the reserves back in. There is no plan now or in the future to "print a ton of money".

(James Hamilton answers question in comments section saying) The question is whether the reserves the Fed is creating today will ever end up as currency in your wallet. If they do not, then Ip is quite wrong in claiming that the distinction between currency and reserves is meaningless.

There can be huge fluctuations in the quantity of reserves held in the current environment with little effects on other variables. There could not be similarly huge fluctuations in the quantity of currency held by the public without significant effects on other variables. I do not understand how anyone could look at those facts and assert that the distinction between reserves and currency is meaningless.

6-- Road map that opens up shadow banking, Gillian Tett, Financial times

Excerpt: his week, a senior banker friend gave me a poster that had been created by downloading a chart recently produced by economists at the New York Federal Reserve.* It was shocking stuff. Entitled The Shadow Banking System, the graphic depicts how money goes round the modern world, particularly (but not exclusively) in the US. At the top lies a smart section labelled the “Traditional Banking System”, in which a simple flow of boxes explains how investors’ funds are deposited with traditional commercial banks, which then transform this into long and short-term loans, and equity.

So far, so comprehensible. But most of the poster is dominated by two sections called the “cash” and “synthetic” shadow banking systems, or those “financial intermediaries that conduct maturity, credit and liquid transformation without access to central bank liquidity or public sector credit guarantees”, as the associated NY Fed working paper says. These flows are so extraordinarily complex that hundreds of boxes create a diagram comparable to the circuit board of a high-tech gadget. Even as poster size, it is difficult to decode.

But it should be mandatory reading for bankers, regulators, politicians and investors today. Indeed, they might do well to hang similar posters next to their desks, for at least three reasons. For one thing, this circuit board is a reminder of how clueless most investors, regulators and rating agencies were before 2007 about finance. After all, during the credit boom, there was plenty of research being conducted into the financial world; but I never saw anything remotely comparable to this road map.

7-- Bernanke translated, David Wessel, Wall Street Journal

Excerpt: CHINA’S RESERVES

“A key driver of this “uphill” flow of capital [from emerging markets to developed economies] is official reserve accumulation in the emerging market economies that exceeds private capital inflows to these economies. The total holdings of foreign exchange reserves by selected major emerging market economies, have risen sharply since the crisis and now surpass $5 trillion –about six times their level a decade ago. China holds about half of the total reserves of these selected economies, slightly more than $2.6 trillion.”

TRANSLATION: “The only reason the Chinese yuan isn’t rising faster is that China is selling it heavily and buying dollars, and you can see this by looking at how huge their hoard of U.S. dollars has grown.”


“Currency undervaluation on the part of some countries has been part of a long-term export-led strategy for growth and development. This strategy, which allows a country’s producers to operate at a greater scale and to produce a more diverse set of products than domestic demand alone might sustain, has been viewed as promoting economic growth and, more broadly, as making an important contribution to the development of a number of countries. However, increasingly over time, the strategy of currency undervaluation has demonstrated important drawbacks, both for the world system and for the countries using that strategy.”

TRANSLATION: “Holding down your currency to boost your exports has been a winning strategy for emerging markets around the world for some time — Japan, Korea, etc. — but it is now causing some big problems for China and for us.”

8-- Tent Cities, Homelessness And Soul-Crushing Despair: The Legacy Of Decades Of Government Debt And Mismanagement Of The Economy, Michael Snyder, Economic Collapse

Excerpt: For decades, our politicians have been deeply addicted to government debt, they have stood idly by as millions of our jobs have been shipped overseas and they have passed countless business-crushing regulations and they never thought that it would catch up with us. Well, it has. America has been living in the biggest debt bubble in the history of the world, and now that bubble is starting to pop. There has never been such an extended period of unemployment in the United States since the Great Depression, and millions of Americans are losing their homes. Homelessness is skyrocketing, tent cities are popping up everywhere and countless numbers of American families are experiencing the soul-crushing despair that comes from desperately trying to hang on for month after month after month.

Now, because of the horrific hole that our politicians have dug for us, we are faced with some heartbreaking choices. For example, right now the U.S. Congress is deciding whether or not to extend long-term unemployment benefits for the nation's jobless.

Extending those benefits through the end of February would add another $12.5 billion to the U.S. national debt. But not doing it would cut off the only lifeline that many Americans have just in time for the holidays.

The extension of jobless benefits that was passed last summer expires on December 1st. If these long-term benefits are not renewed, approximately 2 million unemployed Americans will lose their checks.

9-- What you can expect before your next flight, The Rick Mercer Report

Funny short video on new airport inspection system

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