Tuesday, August 31, 2010

Today's Best Reads

1--Banks Recruit Investors to Oppose Honest Valuation of Assets; Just how Unprepared are Banks for Major Losses?, Mish's Global Economic Trend Analysis (Banks are not prepared for future loan losses)

2--Asset Bubble Addicts Just Can’t Shake the Habit, Caroline Baum, Bloomberg (disproves the "Treasuries are a bubble" theory)

3--Another Housing Tax Credit?, calculated risk

4--THE ANSWER TO A HOUSING RECOVERY: LOWER PRICES, The Pragmatic Capitalist

5--Austerity Hawks Lose Their Celtic Poster Child: Matthew Lynn, Bloomberg

6--IMF Eliminates Borrowing Cap On Rescue Facility In Anticipation Of Europe Crisis 2.0, zero hedge

7--Procrastination on Foreclosures, Now 'Blatant,' May Backfire, American Banker

8--Brother, Can You Paradigm?, Paul Krugman, New York Times (Keynes models work just fine)

9--Andrew Ross Sorkin Warns Readers Not to Make Wall Street Unhappy, Dean Baker, CEPR

10--Fed Watch: No Clothes, Tim Duy, Fed Watch (Bernanke runs up the white flag)

Monday, August 30, 2010

Make sure the bunker is well stocked

Robert Herz was forced to resign from his job as as chairman of the Financial Accounting Standards Board (FASB) because he insisted that the banks assign a fair value to their assets. That's not what you'll read in the papers, but it's true just the same. Herz was a major proponent of mark-to-market accounting, a simple means of determining the value of a bond or security by comparing the price of similar assets sold at market. In other words, Herz is a staunch defender of universally-accepted accounting standards , which is why he was terminated, er, I mean, resigned. According to the Wall Street Journal:

"A new front has opened up in the war over mark-to-market accounting. Suddenly banks find themselves with an unexpected advantage in the fight over how they should value their vast holdings of financial instruments…

Mr. Herz had backed a recent proposal to expand the use of market-value accounting to banks’ loan books....Now, with Mr. Herz out of the picture, the future of the rule change may be in doubt."

Pretty nifty, eh? As soon as Herz became a nuisance for the banks, he got his pink slip. What a surprise. It's just more evidence that the country is ruled by a Financial Mafia. Think of it like this: If you or I went to the bank to secure a loan using dilapidated old bicycle and couple bags of empty cat food cans as collateral, we'd be ushered to the door by two burly security guards and tossed onto the street. But when the banks use their putrid mortgage-backed sludge to borrow in the repo markets (or to conceal their true condition from investors), they get high-fives from bondholders and regulators alike. Herz threatened to blow the lid off the whole charade by exposing the extent to which the banks are doctoring their balance sheets and hiding the red ink on their books. That's why he was sent packing (uhm, resigned?) before he could clean up the system. This is from the Huffington Post:

".... Herz's departure wasn't expected; his current five-year term runs for another two years...Herz has been "an effective investor advocate to improve the quality of financial reporting standards around the world." ..... Banks were forced in the aftermath of the financial crisis to write down trillions of dollars of securities tied to subprime mortgages, gutting their balance sheets even though the assets could eventually recover their value." (Huffington Post)

"Recover their value"? Not likely. These toxic turkeys will never recover their value because they were fraudulent loans made to people who don't have the means to repay the balance. The whole thing was a scam from the get go, which is why Herz got the ax. Mark-to-market would have proved that the banks were cooking the books and that the system is insolvent. Naturally, the banks could not allow that to happen, so Herz got the boot. End of story.


HIGH FREQUENCY CHICANERY: Update on the May 6 "Flash Crash"

Here's something else to munch on from Dennis K. Berman of the Wall Street Journal:

"Today, small investors are fleeing the equities markets in droves, according to data from the Investment Company Institute, pulling out a net $34 billion from stock funds so far this year.....They say, "I still feel like someone is screwing me......trading feels different than it used to."

Berman traces the problem to its source, the "inscrutable interplay between myriad exchanges and high-frequency traders, whose volume now accounts for an estimated two-thirds of all trading"..."a market that many perceive as tainted and prone to gaming by a cadre of insiders."

That sounds like an admission that the market is rigged.

High-frequency trading (HFT) is algorithmic-computer trading that finds "statistical patterns and pricing anomalies" by scanning the various stock exchanges. It's high-speed robo-trading that oftentimes executes orders without human intervention. HFT allows one group of investors to see the data on other people's orders ahead of time and use their supercomputers to buy in front of them. It's called frontloading, and it goes on every day right under the SEC's schnoz.

In an interview on CNBC, market analyst Joe Saluzzi was asked if the big HFT players were able to see other investors orders (and execute trades) before them. Saluzzi said, "Yes. The answer is absolutely yes. The exchanges supply you with the data, giving you the flash order, and if your fixed connection goes into their lines first, you are disadvantaging the retail and institutional investor."

Today's market is configured in a way that the only reliable way to make money is by increasing volume and trading on myriad venues. We're talking about gains of mere pennies per trade on zillions of trades. The problem is that--when there's a glitch in the system--the high frequency bullyboys head for the exits taking an ocean of liquidity with them. That leads to a "flash crash" like the one on May 6 when the markets tumbled nearly 1,000 points in a matter of minutes. And, there's nothing to prevent a similar cataclysm from taking place in the future, because nothing's changed. That makes another disaster a virtual certainty.

There appears to be general agreement about the nature of the problem. Here's Berman again:

"When BlackRock Inc. surveyed 380 financial advisers earlier this summer about the flash crash, their perceptions said it all: The mayhem had been primarily caused by an "overreliance on computer systems and some types of high frequency trading" strategies that roam the market en masse, looking to pick off pennies of profit." ("A Market Solution That Put Investors in a Fix", Dennis K. Berman, Wall Street Journal)

But no one wants to fix the problem, because then the big players would lose boatloads of money. So the vehicle continues to speed faster and faster down the mountain veering wildly from one side of the road to the other. How long before it jumps the guardrail and plunges to the bottom of the canyon? Stay tuned....

Capital Hill is awash in Wall Street's filthy lucre, which means that congress will block any law that threatens the main profit-centers of the big banks or brokerage houses. HFT, complex derivatives, securitization and repo transactions will all be preserved in their present state until the next big tremor rumbles through lower Manhattan bringing the markets down in a thunderous roar. Make sure the bunker is well stocked.

The backward slide into recession

Ongoing deleveraging has slowed personal consumption and trimmed 2nd quarter GDP to a revised 1.6%. The economy is sliding backwards into recession. As Obama's fiscal stimulus dries up and the private sector slashes spending, demand will continue to collapse pushing more businesses and households into default. The economy is now caught in a reinforcing downward cycle in which dwindling fiscal and monetary support is shrinking the money supply triggering a slowdown in activity in the broader economy.

Far right policymakers have shrugged off increasingly ominous economic data, choosing to pursue their political aims through obstructionism. Their goal is to block countercyclical measures that will boost activity, lower unemployment and narrow the output gap. By torpedoing the recovery, GOP leaders hope to take advantage of anti-incumbent sentiment and engineer a landslide victory in the midterm elections. But the timing could not be worse. The economy is in greater peril than most realize and badly in need of government intervention. As the current account deficit continues to widen, the global system inches closer to a major currency crisis. Ballooning trade imbalances signal that a disorderly unwinding of the dollar is becoming more probable. If the dollar drops precipitously, US demand for foreign exports will fall and the world will plunge into another deep slump.

The Fed ended its bond purchasing program (quantitative easing) at the end of March, but has promised to reinvest the proceeds from maturing bonds into mortgage-backed securities to keep its balance sheet from shrinking. But the Fed's action does not increase the money supply or reverse disinflation which is progressively edging towards outright deflation. The Central Bank is committed to providing additional resources to support the markets, but the Fed's primary policy tool--short-term interest rates---is already stuck at zero making the task more difficult. Without additional monetary stimulus, asset prices will tumble leading to another round of debt-liquidation and defaults. The housing market is already in full retreat. New and existing home sales have fallen to record levels clearing the way for steep price declines. Housing cannot recover without an uptick in employment which means that businesses need to see strong demand for their products. But product demand will remain weak until wages grow and struggling consumers dig their way out of the red. With personal consumption and business investment faltering, the government must step up its spending to avoid a return to recession.

The banks are not prepared for another wave of defaults, foreclosures and write-downs. Bank lending continues to shrink and the system is still fragile. A sudden turnaround in the equities markets would expose the banks to severe losses and force the Fed to provide emergency liquidity for wobbly financial institutions. The solvency of the banking system is largely public relations hype. The faux stress tests merely obfuscated critical details about the true, mark-to-market value of their assets. The nation's biggest banks are still wards of the state.

Much of the rot at the heart of the financial system remains hidden from view. Accounting sleight-of-hand, gigantic liquidity injections, and regulatory forbearance have all helped to perpetuate the fraud. The Fed continues to divert capital into zombie institutions which provide no tangible public benefit. Low interest rates, government guarantees on bonds, interest payments on reserves, the Fed's discount window, and the myriad lending facilities are some of the perks, subsidies, inducements and corporate welfare given to the banks at taxpayer expense. In return, the banks provide nothing; not even sufficient credit to generate another expansion. In its current configuration, the banking system is a net loss to society and a significant drag on growth.

Last week, 2nd quarter GDP was revised down to 1.6%. First quarter GDP was twice the size at 3.7%, while 4th quarter 2009 was higher still at 5%. The underlying trend is reasserting itself as growth turns to stagnation.

The Fed does not have the tools to fix the ailing economy. Quantitative easing can lower rates and keep asset prices inflated, but it cannot increase demand, reduce the output gap or lower unemployment. Only fiscal stimulus can do that and policymakers have rejected that option. The US is now facing a protracted period of high unemployment and subpar economic performance punctuated by infrequent stock market rallies and predictable bursts of optimism. The recovery is over.

Sunday, August 29, 2010

Saturday, August 28, 2010

Bernanke ponders the "nuclear option"

The equities markets are in disarray while the bond markets continue to surge. The avalanche of bad news has started to take its toll on investor sentiment. Barry Ritholtz's "The Big Picture" reports that the bears have taken the high-ground and bullishness has dropped to its lowest level since March ‘09 when the market did a quick about-face and began a year-long rally. Could it happen again? No one knows, but the mood has definitely darkened along with the data. There's no talk of green shoots any more, and even the deficit hawks have gone into hibernation. It feels like the calm before the storm, which is why all eyes were on Jackson Hole this morning where Fed chairman Ben Bernanke delivered his verdict on the state of the economy on Friday.

Wall Street was hoping the Fed would "go big" and promise another hefty dose of quantitative easing to push down long-term interest rates and jolt consumers out of their lethargy. But Bernanke provided few details choosing instead this vague commitment:

“The Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly."

Check. There's no doubt that Helicopter Ben would be in mid-flight right now tossing bundles of $100 bills into the jet-stream like confetti if it was up to him. But Bernanke is fighting a rearguard action from inside the FOMC where a fractious group of rebels want to wait and see if the recent downturn is just a blip on the radar or something more serious, another tumble into recessionary hell.

This week, the markets were blindsided by two days of dismal housing news, grim durable goods orders, a slowdown in manufacturing, and modest gains in employment. 4 years later, and housing is still mired in a depression. When does it end? Households and consumers are buried under a mountain of debt; personal bankruptcies, delinquencies, defaults and foreclosures continue to mount while politicians threaten to tighten the purse-strings putting more pressure on families who can barley put food on the table let alone pay the mortgage.

Just months ago, 57 out of 57 economists surveyed predicted that the economy would avoid a double dip recession. Now they're not so sure. Stock market gains have been wiped out and the S&P 500 has dropped 14 percent from its high in April. All of the main economic indicators are testing new lows. The so-called "soft patch" is looking like another hard landing. The fear is palpable. On Thursday, the Dow slipped another 74 points by the end of the session. It could have been worse. The markets have been holding on by their fingernails hoping that Bernanke will bail them out. But it's going to take more than the usual promise of low interest rates for an "extended period" to boost enthusiasm. Wall Street is looking for the "big fix", a trillion dollar resumption of the Fed's bond purchasing program (QE) to pump up flaccid asset prices, electro-shock demand, and raise consumer inflation expectations. The big banks and the brokerage houses want Bernanke to rout the Cassandras and the gloomsters and pump some adrenalin into sluggish indexes. The Fed chairman promised to help.....but not just yet, which is why the markets continue to seesaw.

Bernanke takes the threat of deflation seriously. His earlier speeches laid out a deflation-fighting strategy so radical it would shock the public and Wall Street alike. Here's an excerpt from a speech he gave in 2002 which illustrates the Fed boss's willingness to move heaven and earth to fend off the scourge of pernicious deflation:

Ben Bernanke: “My thesis here is that cooperation between the monetary and fiscal authorities in Japan could help solve the problems that each policymaker faces on its own. Consider for example a tax cut for households and businesses that is explicitly coupled with incremental BOJ purchases of government debt – so that the tax cut is in effect financed by money creation. Moreover, assume that the Bank of Japan has made a commitment, by announcing a price-level target, to reflate the economy, so that much or all of the increase in the money stock is viewed as permanent.

Under this plan, the BOJ’s balance sheet is protected by the bond conversion program, and the government’s concerns about its outstanding stock of debt are mitigated because increases in its debt are purchased by the BOJ rather than sold to the private sector. Moreover, consumers and businesses should be willing to spend rather than save the bulk of their tax cut: They have extra cash on hand, but – because the BOJ purchased government debt in the amount of the tax cut – no current or future debt service burden has been created to imply increased future taxes.

Essentially, monetary and fiscal policies together have increased the nominal wealth of the household sector, which will increase nominal spending and hence prices....from a fiscal perspective, the policy would almost certainly be stabilizing, in the sense of reducing the debt-to-GDP ratio....

Potential roles for monetary-fiscal cooperation are not limited to BOJ support of tax cuts. BOJ purchases of government debt could also support spending programs, to facilitate industrial restructuring, for example. The BOJ’s purchases would mitigate the effect of the new spending on the burden of debt and future interest payments perceived by households, which should reduce the offset from decreased consumption. More generally, by replacing interest-bearing debt with money, BOJ purchases of government debt lower current deficits and interest burdens and thus the public’s expectations of future tax obligations." (Some Thoughts on Monetary Policy in Japan, Governor Ben S. Bernanke, The Federal Reserve Board Tokyo, Japan, May 31, 2003)

Yikes! This is monetization writ large. Anyone who thought Bernanke lacked cohones should reread this passage. The Fed chair is prepared to launch the most radical intervention in history, monetary Shock and Awe. But will the bewhiskered professor be able to persuade congress to follow his lead, after all, the fiscal component is critical to the program's success. They're two spokes on the same wheel.

Here's how (I imagine) it would work: Congress passes emergency legislation to suspend the payroll tax for two years stuffing hundreds of billions instantly into the pockets of struggling consumers. The Fed makes up the difference by purchasing an equal amount of long-term Treasuries keeping the yields low while the economy resets, employment rises, asset prices balloon, and markets soar. As the economy accelerates, the dollar steadily loses ground triggering a sharp increase in exports and sparking a viscous trade war with foreign trading partners. Then......it's anyone's guess? Either Bernanke's "nuclear option" succeeds in resuscitating the comatose economy or foreign holders of dollars and dollar-backed assets dump their gargantuan trove of US loot in a pile and set it ablaze. It's all a roll of the dice.

Today's Best Reads

1--This is not a recovery, Paul Krugman, New York Times

2--Albert Edwards: "We Are Returning To 450 On The S&P", zero hedge

3--Shiller Sees Potential for 'Double Dip' Recession, Simon Constable, Wall Street Journal

4--Nobody could have predicted, Paul Krugman, New York Times (charts on stimulus and GDP)

5--Slack Could Lead to Sharper Inflation Decline, Jon Hilsenrath, Wall Street Journal (growing risk of deflation)

6--Have we underestimated Chinese consumption, Michael Pettis, China Financial Markets

7--The capital tsunami is a bigger threat than the nuclear option, Michael Pettis, china financial markets

Thursday, August 26, 2010

The GOP's Midterm Strategy: Make Sure Obama Fails

On Tuesday, the nonpartisan Congressional Budget Office (CBO) released a report on the estimated impact of the American Recovery and Reinvestment Act (a.k.a.--Obama's $787 billion fiscal stimulus) The report provides conclusive evidence that the stimulus did exactly what it was designed to do and helped to avert another Great Depression. Here's a summary:

It raised real (inflation-adjusted) gross domestic product (GDP) by between 1.7 per cent and 4.5 per cent;

Lowered the unemployment rate by between 0.7 percentage points and 1.8 percentage points;

Increased the number of people employed by between 1.4 million and 3.3 million;

Increased the number of full-time-equivalent jobs by 2.0 million to 4.8 million compared with what would have occurred otherwise.

Naturally, the Republican leadership is in a frenzy over the report and trying desperately to underplay its conclusions. That's why House minority leader John Boehner launched a counterattack earlier this week claiming that the stimulus "has gotten us nowhere" and that it was a sign of "government run amok."

Boehner's talking points are part of a larger political strategy to mislead the public about the effects of the stimulus while assuming the mantle of fiscal conservatives. Bear in mind, that George W. Bush nearly doubled the national debt--from $5.4 trillion to $10.5 trillion--during his tenure in office through his tax cuts and foreign wars. If GOP leaders were really "thrifty minded" conservatives as they pretend to be, they could have proved it during the time they controlled the White House and both Houses of congress. As it stands, their appeal for more belt tightening just looks like cynical ploy to drum up support for the midterms.

By the time the Republicans were swept from office in 2000, the economy was in free fall. Unemployment was rising at 750,000 per month, and all of the main economic indicators were plunging at a faster rate than following the Crash of '29. The only thing that kept the country from sliding into an even deeper slump was massive doses of monetary and fiscal stimulus. And, while the hugely unpopular TARP program ($800B) merely distributed public funds to crooked banksters (so they could continue their looting operations), Obama's fiscal stimulus saved the nation an even deeper downturn.

Here's Boehner again: “We will not solve our fiscal challenges until we cut spending and have real economic growth....But we do not have the luxury of waiting months for the president to pick scapegoats for his failing ‘stimulus’ policies."

More nonsense. Cutting spending when the economy is still weak is the fast-track to a double dip recession as Ireland, Greece, Hungary, Latvia and Spain have all found out in recent months. Each one of these countries has tried to reduce deficits by slashing government spending, and they've all discovered the same thing; that spending cuts widen the output gap, increase unemployment, shrink growth, lower government revenues and, thus, increase the deficits. That's right; when government cuts spending, revenues shrink and deficits grow, the exact opposite of what one might expect. Additionally, these belt-tightening measures make it more expensive for struggling nations to borrow in the capital markets. Most of these countries are now facing painful downgrades that will make it more costly for them to procure funding to keep government operations going.

Here's an excerpt from an article by economist Gary Burtless titled "It could have been much worse", which explains how the stimulus helped the economy avoid a steeper decline:

"The tea leaves are clear: The Great Recession will not be a second Great Depression.....Any reasonable grader of the stimulus’s effects on driving recovery and combating joblessness would give the stimulus at least a B+.....

“Federal government programs and stimulus dollars cushioned the massive blow to private family incomes. Disposable income fell less than 1 percent after the start of the recession... Reduced federal taxes and increased government benefit payments, partly funded out of the stimulus package, have kept Americans’ spendable incomes from falling as fast as their private incomes. Household consumption fell in the recession, in spite of the massive swing in taxes and public transfers, but it only fell modestly. Americans were made cautious in their spending because of the drop in their personal wealth and fear of losing their jobs. But government benefits helped boost the spending of the unemployed, and lower taxes helped insulate middle class families from some of the effect of the drop in wealth.

“Could the administration and Congress have done better? (Yes, but) opposition to stimulus spending by conservatives in the Senate precluded a larger package. In fact, Congress passed a smaller stimulus than the one the president asked for. In retrospect, the package should also have included a much bigger allocation for new government capital spending—on roads, mass transit, public buildings, and environmental capital projects. This investment would directly provide jobs to workers in construction and capital goods manufacturing, industries hard hit by the recession....." ("It could have been much worse", Gary Burtless, Brookings Institute)

The Republicans succeeded in blocking a larger stimulus bill although some of the blame clearly belongs to congressional Blue dog Democrats and Obama's feckless economics team. Even so, it could have been much worse, just as Burtless notes. Once the downward spiral of layoffs, debt-liquidation, falling asset prices and deflation begins, it is hard to reverse. It's much better to keep Pandora's Box bolted shut, than to unleash economic forces that can lead to widespread hardship and social unrest. Fortunately, those troubles have been mitigated (to some extent), but we're not out of the woods yet. Rebuilding the economy will require a long-term commitment to expand the deficits until the private sector repairs its balance sheets and can resume spending. US households are presently in a humongous hole from a decades-long credit binge. The administration must sustain stimulus outlays until the economy rebounds and private sector retrenchment ends. Absent government spending, unemployment will rise, investment will fall, and the economy will shrink.

Recent surveys show that more than 50 per cent of Americans think that the funds for Obama's stimulus were "wasted". Clearly, Republicans have been able to capitalize on the fact that activity hasn't returned to pre-crisis levels. But this is an impossibly high standard. The economy cannot return to the "frothy" bubble era without generating another gigantic credit bubble. And that's unlikely since the bubble depended on easy credit and gargantuan leveraging on the part of households and financial institutions. Those days are over, at least for the time being. The present sluggishness reflects the true state of the economy (the "new normal") sans steroids (excessive leverage). The government needs to ease the transition to slower growth by shoring up demand while the economy emerges from its postcrisis funk. That means more stimulus.

Here's an excerpt from a report by Obama's Council of Economics Advisers; "The Effects of Fiscal Stimulus; A Cross-Country Perspective"

"The evidence suggests that countries that did larger stimulus in 2009 had better GDP performance in the second quarter of 2009 than would have been expected. The relationship between “beating expectations” and stimulus looks even stronger when the sample is limited to OECD countries.....

"We do see a consistent positive statistically robust relationship between stimulus and growth performance. Countries with stimulus did better than expected and did so by a margin that is consistent with a sizable multiplier effect.....

“All the countries that did very large stimulus (over 2.3 percent of GDP) saw surprisingly strong growth when measured with respect to either private sector forecasts or simple time series forecasts. Countries with small stimulus packages did not perform as well relative to expectations when compared to the high stimulus countries.....for every 1 percent of GDP done as stimulus, countries grew roughly 2 percentage points faster."

In a new study by The Roosevelt Institute titled "The Boom Not The Slump; The Right Time for Austerity", economists Mike Konczal and Arun Jayadev show that there is "no episode" where a country that's in the grips of recession "has cut its deficit and succeeded in reducing its debt through growth." Conservatives insist that cutting deficits increases business investment because it builds confidence in government finances. But this is just public relations hype. The truth is, it just doesn't work.

Finally, consider this excerpt from a recent post by Bill Mitchell who chronicles the changes in economics that led to the emergence of the middle class post WW2. The large government deficits were instrumental in increasing demand, lowering unemployment, reducing inequality, and building powerhouse industrial centers which dominated global trade. Here's a clip from "Fiscal policy Worked":

"At the end of 2008 and into 2009, as the real sectors in our economies were starting to experience the aggregate demand collapses instigated by the banking crisis, most governments took steps to stop the meltdown from becoming the next Depression...After years of eschewing active fiscal policies, governments suddenly rediscovered the fiscal keyboard key and in varying magnitudes pushed fairly large expenditure injections into their economies....

“The experience of the Second World War showed governments that full employment could be maintained with appropriate use of budget deficits....From 1945 until 1975, governments manipulated fiscal and monetary policy to maintain levels of overall spending sufficient to generate employment growth in line with labor force growth. This was consistent with the view that mass unemployment reflected deficient aggregate demand which could be resolved through positive net government spending (budget deficits).

“Governments used a range of fiscal and monetary measures to stabilize the economy in the face of fluctuations in private sector spending and were typically in deficit. As a consequence, in the period between 1945 through to the mid 1970s, most advanced Western nations maintained very low levels of unemployment, typically below 2 per cent..." ("Fiscal policy Worked--Evidence", Bill Mitchell, Billy Blog; alternative economic thinking)

Economists know what it takes to lower unemployment and put the economy back on a strong growth-path. But GOP obstructionists want to torpedo the effort because it conflicts with their real objectives which are to force the privatization of public assets, crush the labor movement, and to further weaken the state. A robust economy makes it harder to "strangle the beast" and to assert greater corporate control over the political process. Besides, the Republicans figure the only way they can regain power is by making sure Obama fails. And that's their top priority.

Wednesday, August 25, 2010

Today's Best Reads

1--We need more quantitative easing to prevent another Great Depression: Round 2, Roger Farmer, Financial Times

2--US consumer spending, Financial Times

3--Dangerous Times for the Bears, Smart Money Tracker

4--Pierce the Housing Bubble, Dean Baker, New York Times

5--Wake Up Call for policymakers, Mark Thoma, economist's view

6--Inequality and the high-end Bush tax cuts, economist's view (link to original)

7--More thoughts on what to expect from the Fed, James Hamilton, Econbrowser

Today's Best Reads

1--Credit card debt drops to lowest level in 8 years, Vicki Needham, The Hill

2--Durable Goods Orders Downside Surprise; Details Range from Weak to Abysmal, Mish's Global Economic trend Analysis

3--Roubini Says Q3 Growth in U.S. to Be `Well Below' 1%, Bob Willis, Bloomberg News

4--Gulf Chemist: Mercenaries Hired By BP Are Now Applying Toxic Dispersant - at Night and In an Uncontrolled Manner - Which BP Says It No Longer Uses, Washington's Blog

5--New Home sales slide, Diana Olick, CNBC

Continuing trouble in EU banking system

6--MONEY MARKETS-Interbank tension surfaces as global worries weigh, Reuters

7--Euribor 3-month rate defies trend to edge up, Reuters

Today's Best Reads

1--Fiscal policy worked – evidence, Bill Mitchell, Billy Blog

2--A Challenge to the US President , Fidel Castro, Marxism-Leninism Today

3--Income Inequality and Financial Crises, Louise story, New York Times

4--Kevin "Dow 36,000" Hassett* Speaks on "Keynesian Economics", Menzie Chinn, Econbrowser

5--Greek crisis refuses to go away, Ambrose Evans-Pritchard, Telegraph

6--The End of American Optimism, Mort Zukerman, Wall Street journal

7--It Pays to Riot in Europe, Ambrose Evans-Pritchard, Telegraph

8--The WSJ Changes Its Line, Paul Krugman, New York Times

9--New Home Sales decline to Record Low in July, calculated risk

10--

Housing Holocaust: Existing home sales plunge, market follows

Don't look now, but someone just pushed the housing market off a cliff. The National Association of Realtors announced on Tuesday that the sales of existing homes fell a staggering 27.2 per cent to a seasonally adjusted rate of 3.83 million units. This is the lowest number of sales since 1995. The reaction on Wall Street has been swift. Shares plunged in a wild sell-off that pushed stocks down more than 100 points in a matter of minutes. US Treasuries rallied on the news, sending bond yields lower as jittery investors sought safety from the ongoing avalanche of dismal economic data. The 10-year slid to 2.49 per cent while the 2 year note dipped to 0.46 per cent. Bond yields are a gauge of investor pessimism. At present, confidence in the management of the economy is at a nadir.

Analysts expected that housing sales would suffer after the Obama administration's First-time Home-buyer credit expired in April, (deals had to close by the June 30 deadline) but they hadn't expected a real estate holocaust ending in sales that are a paltry 25 per cent of their peak in 2005. The shocking drop in sales has added 2.5 months to the massive stockpile of unsold homes that is presently clogging the system and threatens to send prices into freefall. The pace of existing home sales is now slower than any time on record.

This latest housing smackdown will put more pressure on homeowners who are already in arrears or trying to decide whether its in their interest to make payments on a $300,000 mortgage for a house that is currently worth only $150,000. Expect foreclosures to rise sharply. 24 per cent of all mortgages already have negative equity. That's 11.2 million loans. According to housing expert Charles Hugh Smith:

"Since there are about 47 million outstanding mortgages, and 24 million homes owned free and clear (no mortgage), then we can calculate that free-and-clear owners hold about a third of the $16.5 trillion in home equity -- roughly $5.3 trillion. That leaves about $1.2 trillion in equity spread amongst the 47 million homes with mortgages.....

“Never before have American homeowners with mortgages held such a thin slice of equity, and never before have so many homeowners been at risk of negative equity. Predicting accurately how many homeowners end up underwater is impossible, as the future of home prices is unknown. But anyone claiming that the number of underwater homes can't rise further is on thin ice." ("Real Estate: The Worrying Numbers Behind Underwater Homeowners", Charles Hugh Smith, Daily Finance)

It's been four years since problems with subprime mortgages triggered the deepest slump since the Great Depression. Still, housing has yet to find a bottom. $6 trillion in home equity has been wiped out, leaving baby boomers scrambling to make up for lost wealth so they can add to their battered retirement savings.

Foreclosures have exceeded 300,000 for 17 months in a row. 10 per cent of the population is presently subsisting on foodstamps and handouts. The unemployment lines have lengthened in every city and town across the country. The shelters are full, the food banks are empty, and the economy is flat on its back. And, yet, not one banker has been indicted, prosecuted, arrested, convicted or sent to prison. Where's the justice?

Today's bleak housing numbers are not the result of a "cyclical downturn", but of a crime perpetrated on the American people. There must accountability. Someone's gotta pay!

Monday, August 23, 2010

Obama's "Recovery Summer" hits the rocks

At the time, the idea of a "Recovery Summer" tour must have seemed irresistible. After all, the stock market was inching its way higher every week and there were convincing signs that the economy was on the rebound. What better time for President Barack Obama to barnstorm his way across the heartland singing praise for his $787 fiscal stimulus package?

Now all that has changed. Jobless claims are rising, manufacturing is slowing, housing sales have fallen off a cliff, and GDP is shrinking. The whole notion of declaring "victory" over the recession now seems ridiculous. The economy hasn't reached "escape velocity" as economics czar, Lawrence Summers boasted earlier in the year. That's baloney. It's barely limping along and the prospect of another slump looms larger by the day. Obama's woefully undersized stimulus is quickly evaporating leaving a gigantic hole in spending that will inevitably lead to another contraction. That's what makes the whole "Recovery Summer" pitch so pathetic. It just shows how out-of-touch Obama's economics team really is. The latest downturn was entirely foreseeable if they had just applied themselves to the task of reviewing the data. Instead, they decided to stick with their rosy projections and dismiss their critics as Chicken Littles.

This is from the New York Times:

"Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute, the mutual fund industry trade group...If that pace continues, more money will be pulled out of these mutual funds in 2010 than in any year since the 1980s, with the exception of 2008, when the global financial crisis peaked....

On Friday, Fidelity Investments reported that a record number of people took so-called hardship withdrawals from their retirement accounts in the second quarter. These are early withdrawals intended to pay for needs like medical expenses." ("In Striking Shift, Small Investors Flee Stock Market Graham Bowley, New york Times)

Retail investors are saying "enough" and heading for the exits. The market-flight has gone on for some time, but it's gained momentum since the May 6, "Flash Crash" when the Dow Jones plunged nearly 1,000 in less than an hour. That really put the stampede in motion. A late-day rebound did nothing to allay investor fears or convince traders that the problems had been fixed. The trust is gone. Investors feel that the new architecture of the markets has fundamentally changed and that innovations like high-frequency trading, dark pools and complex derivatives have stacked the odds against them making it impossible for them to succeed. That's why they continue to leave in droves.

Who has confidence in these markets? Who believes that a well-informed investor that has reasonable expectations of future performance can compete with high-speed speculators who get a peak at every trade before the transaction is even consummated? No one, which is why more money is being stuffed into mattresses than into stock funds.


THE CENTRAL BANK: Chief enabler of fraud

The Fed's task is to perpetuate the "free market" fraud for as long as possible. That's why the Fed has pushed for "regulatory forbearance" so that insolvent, capital-starved banks can conceal their losses from the public. The Fed has transferred $1.7 trillion in toxic securities and non-performing loans from the banks to its own balance sheet to preserve the illusion that "all is well" and that asset prices will eventually return to precrisis levels. It's all smoke and mirrors.


Securitization, derivatives trading, and repo market activity are all based on the same principle, which is, to give the financial giants the ability to generate windfall profits on microscopic morsels of capital that have been leveraged into bloated debt-balloons. The banking system is not funded on loans made from deposits, but through the exchange of high-risk securities with shadow banks in the repo market. This is the system that crashed after Lehman Brothers collapsed in September 2008. The Fed and Treasury have committed trillions in public funds to stitch this wobbly, crisis-prone system back together to preserve the profit-centers of their primary constituents--the big banks and Wall Street. The system itself is a scam designed to shift wealth from the middle class to financial predators.

Is it any wonder that confidence is at an all-time low?

Today's Best Reads

1--Debt’s Deadly Grip, GRETCHEN MORGENSON, New York Times

2--Michael Pettis on the high odds of Trade War, Yves Smith, Naked Capitalism

3--Does income inequality help cause financial crises, Yves Smith, Naked Capitalism

4--Now that's Rich, Paul Krugman, New York Times

5--It could have been much worse, Gary Burtless, Economist's View
Key quote: "The tea leaves are clear: The Great Recession will not be a second Great Depression. And, as I argue below, President Obama’s stimulus package, though imperfect, deserves a great deal of credit for bringing us back to the positive trajectory we’re on today. Any reasonable grader of the stimulus’s effects on driving recovery and combating joblessness would give the stimulus at least a B+"

6--In Striking Shift, Small Investors Flee Stock Market, Graham Bowley, New York Times

7--3rd quarter likely negative; recession never ended, Mish's global economic trend analysis

Saturday, August 21, 2010

OBAMA'S ECONOMICS TEAM: "Frozen in the headlights"

The personal savings rate has risen to 6.4%. When households save, consumer spending declines and GDP shrinks. The reduction in economic activity can have serious knock-on effects. It can lead to more layoffs as investment sputters as aggregate demand flags. If the downturn persists, asset prices and wages fall leading to tighter credit, deflation and a deepening slump. The good news is that the problem can be fixed. The government merely needs to increase the deficits to satisfy the net savings desires of the private sector. In other words, the government needs to fill the hole created by the lack of personal consumption. That's all it takes to keep people employed, reduce the output gap, and avoid much of the pain from economic contraction. When the economy returns to trend, government revenues increase and the budget deficits shrink. This isn't theory; it's the way the system works.

Stimulus works because stimulus means spending. Spending IS economic activity, so (by necessity) it increases GDP. Whether it is 'wise' to increase the budget deficits or not is immaterial. That depends on one's own political orientation. But the fact is, stimulus works.

The economy is not effected by our opinions or our political orientation. It's a system. It functions according to the rules which govern its operation. Investment and spending are the lubricants that keep the gears in motion. The economy does not distinguish between public and private spending. It's all the same. If spending and investment are sufficient to generate growth, then the economy will grow. If spending and investment dry up, the economy will grind to a halt. Either way, the economy is merely responding to the amount of stimulus feeding into the system. Policymakers--the Fed and congress--have now decided to cut off additional stimulus even though the economy is still weak and all the data has been revised downwards. Conservatives in the House and senate believe that the budget deficits are too large and that the government must slash spending. Thus, the economy--which everyone agrees is weak--is being further battered by the muddled thinking of ideologues. This is politics; it has nothing to do with economics.

The opponents of stimulus don't believe that the government should meddle in the markets. They think the Fed should allow asset prices to tumble, unemployment to skyrocket, and financial markets to crash. The liquidationist approach is principled, but shortsighted. There's no need to let the economy crash when steps can be taken to soften the blow. The government has the means to support the economy until the private sector repairs its balance sheet and resumes spending. Here's an excerpt from economist Richard Koo in "The Economist" which helps to explain what needs to be done:

"The next move for the Fed, a long overdue one in my view, should be to announce that the US is afflicted with a balance sheet recession, a rare disease that strikes only after the bursting of a nationwide debt-financed asset price bubble. With its asset prices collapsing while its liabilities remain, the private sector is forced to deleverage or minimize debt even with zero interest rates in order to repair its battered balance sheets. The Fed should explain that in this type of recession, monetary policy is largely ineffective because those with negative equity are not interested in increasing borrowings at any interest rate. The Fed’s continued failure to explain the exact nature of the disease only increases the public’s expectations for monetary policy which could lead to a big disappointment later with an equally serious loss of credibility for the central bank.

Moreover, during balance sheet recessions the effectiveness of monetary policy actually depends on the government’s fiscal policy. This is because when the private sector is deleveraging, money supply shrinks as bank deposits are withdrawn to pay down debt. The only way to keep money supply from shrinking is for the public sector to borrow money. Indeed the US money supply grew after 1933, following the worst balance sheet recession in history, precisely because of government’s New Deal borrowings. Japan’s money supply never contracted after 1990 in spite of massive private sector deleveraging, also because of government borrowings." ("What actions should the fed be taking?", The Economist)

The Fed's resumption of quantitative easing (QE) will not spark another credit expansion nor will it increase inflation expectations. It may ignite another stock market rally, but deflationary pressures will continue to build as households pay-down debt or default on loans they are unable to service. Private sector deleveraging is ongoing and irreversible. When people are deep in the red, they will not borrow no matter how low interest rates are. This is from the New York Fed's "Quarterly Report on Household debt and Credit":

"As of June 30, 2010, total consumer indebtedness was $11.7 trillion, a reduction of $812 billion (6.5%) from its peak level at the close of 2008Q3, and $178 billion (1.5%) below its March 31, 2010 level. Household mortgage indebtedness has declined 6.4%, and home equity lines of credit (HELOCs) have fallen 4.4% since their respective peaks in 2008Q3 and 2009Q1. Excluding mortgage and HELOC balances, consumer indebtedness fell 1.5% in the quarter and, after having fallen for six consecutive quarters, stands at $2.31 trillion, 8.4% below its 2008Q4 peak."

Consumers have reduced spending by a whopping $812 billion, nearly the same amount as Obama's fiscal stimulus (ARRA). No wonder the economy is flatlining. Deleveraging is outpacing growth, which is why congress needs to pass another stimulus bill or the economy will stumble back into negative territory.


British economist John Maynard Keynes spend a great deal of time studying financial markets. He didn't believe that investors were rational or that markets were self correcting. He believed that government had a role to play in mitigating the effects of the business cycle so downturns didn't morph into depressions, and depressions into revolutions. He wanted to refine capitalism--to make it more humane-- because he believed that capitalism was a better guarantor of personal liberty than the other systems. Keynes critics forget that he was a committed capitalist. They prefer to characterize him as a bumbling Teddy Kennedy-type liberal who believed that government largesse was the answer to every problem.

Today it is fashionable to disparage Keynes. His critics tend to label all excessive and wasteful government spending as "Keynesian". Thus, the TARP bailouts were "Keynesian". The AIG handouts were "Keynesian". The Fed's multi-trillion dollar liquidity facilities were "Keynesian". Well-respected academics, historians and central bankers scorn any form of government assistance as "Keynesian". But the fact remains, the best way out of a deep slump is fiscal stimulus. Keynes was right, and that hasn't changed.

To set the record straight: Keynes never advocated "blank check" bailouts for insolvent financial institutions. Nor did he believe that the government should flood the system with easy money so the economy could lurch from one gigantic asset bubble to the next. The people who attribute these policies to Keynes are either misinformed or driven by their own political agenda. Keynes wasn't even a "big spender", in fact, he believed that when the economy was healthy, the budget should be kept in surplus.

Keynes understood the destructive power of inflation and took it seriously. But he also knew that it was absurd to worry about inflation when asset prices, stock indexes, consumer spending, CPI and bonds yields were all plunging. The solution has to fit the problem, and the problem is deflation. That means the government has to step up when consumers and businesses pull back. But that doesn't mean that stimulus is a panacea. It's not; there are other factors involved. Economic stability requires a balance between supply and demand, but the outsourcing of high-paying jobs, stagnant wages and rising unemployment all weaken demand and throw the apparatus off-kilter. So fiscal stimulus is not enough. The only way to rebalance the economy is by rebuilding the middle class and increasing its buying power. That means redistribution via tax policy and collective bargaining. Keynes saw the flaws in capitalism and summed it up like this:

“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”

Keynes supported quantitative easing (the Fed's bond purchasing program) as a means of increasing the money supply, but he also understood its limitations. He knew that it wouldn't be particularly effective when consumers are trying to recover from the bursting of a gigantic asset-price bubble. Fiscal stimulus is a much better way to rev up the economy. It bypasses the privately-owned banking system altogether and delivers the money to those who will spend it. Japan learned that fiscal stimulus is the only way to fight deflation. They found out that whenever they cutoff the fiscal stimulus, the economy plummeted. (Inequality is a big part of Japan's problems, too. According to the Wall Street journal, "Japan now ranks roughly 40th in measures of personal income and that the average Japanese is now poorer that the average citizen of Mississippi.") Ultimately, there's no way to balance supply and demand when the greatest portion of the nation's wealth flows to the upper 1% of the population. This upsets the basic equilibrium that's needed to keep the economy strong. The more uneven the wealth distribution, the more government intervention will be required. There's simply not enough demand to keep the economy operating a full capacity. People are just too broke.

Down The Chute

Stocks fell sharply on Thursday (Dow down 144pts.) on news that manufacturing (Philly fed Index) shrank in August beyond analysts expectations. Nearly every category fell including shipments and new orders. The Dept of Labor (DOL) also reported that jobless claims rose 12,000 from last week to an advanced figure of seasonally adjusted initial claims of 500,000. Lastly, Moody's reports that commercial real estate prices slipped 4% in June. According to Calculated risk website, "Commercial real estate values are now down 41.3% from the peak in late 2007." Bond yields on US Treasuries continued to fall on Thursday's news feeding the fears of a double dip recession. Policymakers at the Fed, the Treasury, the White House and the Congress continue to look on impassively while the foundations of the so-called recovery crack before their very eyes. As the stimulus runs out, unemployment will edge upwards, deleveraging and debt liquidation will gain momentum, and the economy will succumb to another vicious contraction. The recession is deepening, but Obama's economics team is still frozen in the headlights.

Saturday, August 14, 2010

Down the Drain: "The economy is in big trouble"

Imagine the reaction at the White House when the Department of Labor released its weekly unemployment figures on Thursday. Jobless claims rose by 12,000 to 500,000 in the second week of August. There's been no improvement in the jobs market in 9 months and now unemployment is edging upwards again. This wasn't supposed to happen. The Obama administration had bet everything that the economy had turned the corner and would gradually get better. Many economists saw less than a 10 per cent chance that the economy would tip back into recession. After all, double dip recessions are "extremely rare". Now more people are losing their jobs and Team Obama is caught in the headlights. There is no back-up plan, no Plan B. The Democrats will face the midterms with no stimulus to create new jobs and with an economy that is steadily deteriorating. It's going to be a massacre and they know it.

Obama and his lieutenants have stopped talking about austerity measures. The plan to dismantle Social Security has been put on hold,( though the Commission headed by the appalling former Senator Alan Simpson grinds on with its mission of destruction.) No one wants to hear about belt tightening when the future is uncertain and they're worried about losing their jobs. Obama will have to shift-gears again; switch from promoting the elitist "privatize everything" agenda to his "I feel your pain" routine. He might want to dig up some archived video of B. Clinton chewing his lip and blinking back the tears.

All of the economic data is being revised downwards. The economy is in big trouble and the politicians are just starting to catch on. Stocks fell sharply on Thursday (Dow down 144 points) on news that manufacturing (Philly Fed Index) shrank in August beyond analysts expectations. Nearly every category fell including shipments and new orders. The Dow Jones is off 10 per cent since April 23, more than a 1,000 point loss in the last 4 months. Also, Moody's reported that commercial real estate prices slipped another 4 per cent in June. According to Calculated risk website, "Commercial real estate values are now down 41.3 per cent from the peak in late 2007." It's a bloodbath.

Bond yields on US Treasuries continue to tumble as investor pessimism grows and increasingly bleak news feeds the fears of another slump. The two-year note has been setting records nearly every day. The benchmark 10-year which peaked at 3.99 per cent in April has since descended into Bernanke's inferno. It was last seen parachuting to terra firma at 2.61 per cent. If it continues to plunge at this rate, it will be below 2 per cent by year-end. Welcome to Japan.

Try to grasp the significance of bond yields. The business media spins the news and tries to dress up the data with all kinds of happy talk. Bond yields reflect cold hard reality. Investors only plunk their money into low-yielding liquid assets when they're sure things are going to get worse. Much worse. The rumors of a "bond bubble" is all nonsense. These aren't leveraged assets; there's no risk. People accept modest returns because they're afraid to put their money anywhere else. It's a referendum on failed monetary policy.

30-year mortgage rates are pinned to the 10-year which is why rates are lower now than any time in history. Still, housing inventory continues to build. Realtors are finding that they can't giveaway homes at any price. So much for the American dream.

Policymakers at the Fed, the Treasury, the White House and the Congress now look on as the foundations of the so-called recovery crack before their very eyes. Many of their careers will undoubtedly follow the economy down the drain. As the stimulus runs out, unemployment will rise, deleveraging and debt liquidation will gain momentum, and the economy will succumb to a second vicious contraction. Digging out will not be easy.

Tuesday, August 10, 2010

PARTY LIKE IT'S 1929

On Tuesday, the Fed announced that it will reinvest the proceeds from maturing mortgage-backed securities (MBS) into US Treasuries. The process is called Quantitative Easing. In theory, Q.E. increases inflation expectations so that consumers spend more and rev up the economy. That's the theory. But adding to bank reserves when the banks are already loaded to the gills, achieves nothing. It doesn't put money in the hands of people who will spend it, generate more economic activity or increase growth. It's a big zero. Oddly enough, the Fed even admits this. According to an article in Bloomberg News, "The Central Bank posted a paper co-written by Seth Carpenter, associate director of the Fed’s monetary-affairs division, finding that the “quantity of reserve balances itself is not likely to trigger a rapid increase in lending.” No "increase in lending" means no credit expansion and no rebound. Thus, QE will have no real impact.

From the FOMC Statement:

"Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.....

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability."

There's not a glimmer of light in the Fed's statement, and yet, "the Committee anticipates a gradual return to higher levels of resource utilization". But how? And on what is the Fed basing its prediction? Certainly not the data. Maybe tea leaves? The truth is the economy is in very bad shape and getting worse. This is from Wednesday's New York Times:

"The government’s preliminary estimate for economic growth in the second quarter is likely to be revised substantially lower...."Combining the bigger-than-expected trade deficit with other weak data suggests that Q2 growth was only 1.2 percent rather than the 2.4 percent originally estimated, placing the economy on even shakier ground than it seemed,” wrote Nigel Gault, chief United States economist at IHS Global Insight." (New York Times)

The Fed has dramatically revised its growth forecast downward since its last meeting. The fiscal stimulus is petering out and inventory restocking is nearly over. Now the economy will have to stand on its own without the support of fiscal and monetary aid. But is it strong enough? Households are still patching their balance sheets, credit is tight, and businesses have no incentive to invest due to flagging demand. So where's the growth going to come from? If the government does not provide more stimulus, asset prices will tumble, unemployment will rise, and the economy will contract.

This is from Wednesday's Wall Street Journal:

"A Wall Street Journal survey found that by a two-to-one margin Wall Street economists see deflation as a bigger threat to the U.S. economy over the next three years than inflation.

“Deflation is dangerously close,” said David Resler of Nomura Securities, one of 53 economists surveyed by the Wall Street Journal. Among economists who answered the question, nearly two-thirds said that deflation poses the bigger risk to the economy over the next three years; the remainder said inflation is the bigger threat. That compares to an April survey, when the economists were split 50/50 over whether inflation or disinflation posed the bigger risk over the next year." ("WSJ Survey: Risks of Deflation on the Rise, Fed on Hold Longer", Phil Izzo, Wall Street Journal)

The looming risk of deflation is what makes the future so "unusually uncertain". (Bernanke words) But investors don't like uncertainty, which is why they pulling their money out of equities and moving it into bonds. That's also why the flight to safety has continued for more than 2 years since the crisis began. No one knows what the policy is or what the rules are. It's catch-as-catch-can. At the same time, falling bond yields are a referendum on Bernanke's performance. Historic low yields on Treasuries indicate that the Fed has been unable to restore confidence or allay investor fears. Recent surveys of small business owners (National Federation of Independent Business) and CEO's show that confidence continues to plunge. Consumer confidence is in the dumps, too. Bottom line: No one has faith in the Fed's approach.

Bernanke hoped that restarting his bond purchasing program would convince Wall Street that he was prepared to provide as much liquidity as needed. But traders saw through the ruse. The bond market cast its ballot immediately, driving yields into the ground. Investor pessimism pushed the 10-year below 3% while 2 year Treasuries slumped to historic lows. Investors are betting that the economy is headed into another vicious cycle of debt-liquidation and depression. They don't believe the Fed can stop the freefall, so they are shifting into risk-free liquid assets.

It took the stock market a bit longer to grasp what was going on, but 24 hours later, the rout on Wall Street began. Shares plunged throughout the session pushing down the Dow Jones 265 points by the end of the day. The other indexes were battered as well. The dollar strengthened on fears of deflation while bond yields on short-term notes fell sharply. Bernanke thinks the economy can muddle through on its own, but Wall Street isn't buying it. They want more monetary stimulus, and they want it now.

This is from David Rosenberg's "Breakfast with Dave":

"I know this sounds a bit dire, but little has changed from where we were a year ago......we had a huge bounce off the lows, but we had a similar bounce off the lows in 1930. The equity market was up something like 50% in the opening months of 1930, and while I am sure there was euphoria at the time that the worst of the recession and the contraction in credit was over, it’s interesting to see today that nobody talks about the great run-up of 1930 even though it must have hurt not to have participated in that wonderful rally. Instead, when we talk about 1930 today, the images that are conjured up are hardly very joyous. I’m not saying that we are into something that is entirely like the 1930s. But at the same time, we’re not in Kansas any more." ("Not in Kansas Anymore", David Rosenberg, Gluskin Scheff)

The economy is on the rocks and another round of quantitative easing won't help. The Obama administration will have to toughen up and push through another fiscal stimulus program. It's the only way. QE, low interest loans, zero rates, consumer subsidies, tax cuts or more bank reserves will not do the trick. Private sector deleveraging is beginning to accelerate, which means that economic contraction is unavoidable unless government spending increases substantially for an extended period of time. The budget deficits are going to balloon. Get used to it. That's what it will take to get back on track. Obama's stimulus was never big enough. Experts like Paul Krugman, Joseph Stiglitz and Obama's-own Christiana Romer figured it would take roughly $1.4 trillion to suck up the excess capacity in the system and really put a dent in unemployment. $787 billion is a pittance compared to the $6 trillion in home equity and $4 trillion in retirement funds that were lost in the housing bubble flameout. When that much money vanishes from the system, it takes time to regroup. It blows a hole in personal balance sheets and forces people to cut back on spending. That's why the personal savings rate has skyrocketed to 6.4% in a matter of months. People are strapped and trying to pull themselves of the red. It's government's job to give them a hand.

Here's an excerpt from a report by Goldman Sachs:

"The economic landscape has changed significantly during the last two months. The macroeconomic data that seemed to indicate improvement in April and May deteriorated sharply in June and early July. Cutting our 2011 EPS estimate to $89 represents a reversal for us and reflects the more challenging economic environment we now face compared with the backdrop just a few months ago."

Bernanke maintains the recovery is on track and that the economy is slowly improving, but as economist Dean Baker points out, demand has been weak throughout the crisis and is showing no signs of a rebound. Here's Baker:

"Growth has been boosted over the last 4 quarters by an inventory cycle as firms went from depleting to building their inventories. This cycle has now ended. Inventory growth is unlikely to accelerate further in the quarters ahead. This means that GDP growth will be close to final demand growth. Final demand growth has averaged 1.2 percent in the last four quarters and was 1.3 percent in the most recent quarter. There is no obvious reason to expect that the rate will increase in the near future." (Dean Baker, CEPR)

Bernanke's no-jobs, no-growth recovery has run out of gas. Now we need a real solution, a fiscal solution; a solution that will lower unemployment, put the country back to work and restore public confidence in government. And there's not much time to act either. As pessimism spreads and economic atrophy sets in, the prospect of a general fall in the price level becomes more likely. That will lead to more layoffs, more excess capacity, more plummeting asset prices, more debt-liquidation, more defaults and more bankruptcies. Obama and Co. need to get this thing right before the underlying downward trend reasserts itself and we find ourselves back in the soup.

Monday, August 9, 2010

Hurrah for Hugo Chavez

It's no fun being on Washington's enemies list. Just ask Hugo Chavez. Last week, the Venezuelan president had to cancel a trip to Cuba after he was told that a coup was underway and his life was in danger. The information came from the same anonymous source who had warned him of an earlier coup in 2002. The letter said: “The execution phase is accelerating..… There is an agreement between Colombia and the US with two objectives: one is Mauricio and the other is the overthrow of the government.… They will hunt down ‘Mauricio’ (and) try to neutralize part of the Armed Forces.” ("Venezuela Pushes for Peace", Coral Wynter, Green Left News)

“Mauricio” is Chavez's codename. Whoever is behind the coup, wants to kill Chavez.

There's no way of knowing whether Chavez is really in danger or not, but don't be surprised if he is. After all, the US claims it has the right to kill anyone it sees as a threat to its national security, and Chavez ranks high on its list of threats. In any event, the warnings coincide with other unsettling developments. At a recent meeting of the Organization of American States (OAS), Colombian officials charged Chavez with harboring guerrillas on Venezuelan territory. (The allegations could be used to justify a preemptive attack) Chavez reacted angrily to the accusations and broke off diplomatic relations with Colombia. But the row did not end there. Obama's nominee as US ambassador to Venezuela, Larry Palmer, decided to throw a little gas on the fire by backing-up Colombia's claims. Now the two countries are at loggerheads which seems to be what the Obama administration had in mind from the very beginning. US policy towards Venezuela has changed at all under Obama. If anything, it's gotten worse.

US Expands 7 Bases in Colombia

The Pentagon recently announced that it plans to expand 7 military bases in Colombia. State Dept officials said that the US merely wants to step up its counter-narcotics operations, but no one's buying it. Everyone knows the US wants to reestablish its control over the region. The military build up in Colombia is another way of ratcheting up the pressure on Chavez and fanning the flames of political instability in the hemisphere. Naturally, the base-expansion has the region's leftist leaders worried that Latin America may be headed for another era of US-backed dirty wars.

Also, the internet is abuzz with stories that Obama is planning to deploy warships and ground troops to Costa Rica in the near-future. Here's an excerpt from an article on Alternet that provides some of the details:

"Rather than retooling its diplomatic approach to fit the new reality in Latin America, Washington is expanding its military footprint. It is will soon be operating out of seven military bases in Colombia and has reactivated its 4th Fleet, both highly unpopular moves in Latin America. Rather than taking the advice of countries in the region to demilitarize its war on drugs, the U.S. recently announced it is deploying 46 warships and 7,000 soldiers to Costa Rica to “interdict” drug traffic and money laundering." ("Recent Colombian Mass Grave Discovery May Be “False-Positives", Conn Hallinan, Alternet)

Although the rumors haven't been verified, the anxiety is growing. The US has never played a constructive role in Latin America's affairs, and the prospect of more meddling and violence is frightening. The truth is, US intervention has persisted even during (relatively) peaceful periods like the last decade. US intelligence agents and NGOs are sprinkled throughout the civilian population gathering information, swaying elections, and fomenting social unrest. Here's a clip from an article titled "America's Covert 'Civil Society Operations: US interference in Venezuela keeps growing" which shows how America's tentacles extend everywhere:

"Foreign intervention is not only executed through military force. The funding of “civil society” groups and media outlets to promote political agendas and influence the “hearts and minds” of the people is one of the more widely used mechanisms by the US government to achieve its strategic objectives. In Venezuela, the US has been supporting anti-Chavez groups for over 8 years, including those that executed the coup d’etat against President Chavez in April 2002. Since then, the funding has increased substantially. A May 2010 report evaluating foreign assistance to political groups in Venezuela, commissioned by the National Endowment for Democracy, revealed that more than $40 million USD annually is channeled to anti-Chavez groups, the majority from US agencies....

A large part of NED funds in Venezuela have been invested in “forming student movements” and “building democratic leadership amongst youth”, from a US perspective and with US values....In the last three years, an opposition student/youth movement has been created with funding from various US and European agencies. More than 32% of USAID funding, for example, has gone to “training youth and students in the use of innovative media technologies to spread political messages and campaigns”, such as on Twitter and Facebook.

NED has also funded several media organizations in Venezuela, to aid in training journalists and designing political messages against the Venezuelan government. ..What these organizations really do is promote anti-Chavez messages on television and in international press, as well as distort and manipulate facts and events in the country in order to negatively portray the Chavez administration... Yet such funding is clearly illegal and a violation of journalist ethics. Foreign government funding of “independent” journalists or media outlets is an act of mass deception, propaganda and a violation of sovereignty. ("America's Covert 'Civil Society Operations: US interference in Venezuela keeps growing", Eva Golinger, Global Research)

It's hard to believe that a two-year senator from Chicago with a background in "community organizing" presides over this elaborate and opaque system of imperial rule. He doesn't, of course; it's all a fake. The real leaders remain hidden behind the cloak of phony democratic institutions. Obama is merely a public relations hologram; a cheery frontman that conceals the machinations of a global Mafia. Other people--whoever they may be--control the levers of power moving the pieces as needed to assure the best outcome for themselves and their constituents. Now, it appears this shadow government has its eyes on Latin America once again. That's bad news for Chavez and anyone else who hoped that political instability and black ops were a thing of the past.

Washington hates Chavez because he's raised living standards for the poor. That's why he's pilloried in the media, because his socialist model of democracy doesn't jive with America's cutthroat-brand of capitalism. Chavez's policies have reduced ignorance, poverty, and injustice. He has enacted land and oil industry reform, improved education and provided universal healthcare. He's initiated job training programs, subsidies for single mothers, drug prevention programs, and assistance for recovering addicts. Illiteracy has been wiped out. The list goes on and on.

Venezuelans are more engaged in the political process than ever before. That's what scares Washington. US elites don't want well-informed, empowered people participating in the political process. They believe that task should be left to the venal politicians chosen by corporate bosses and top-hat banksters. That's why Chavez has to go. He's given people hope for a better life.

Movie director, Oliver Stone, summed it up perfectly in a recent interview with Nathan Gardels. He said, "The US remains hostile to anyone on the left coming to power in their "backyard," anyone who thinks the resources of a country belong to its people....For the first time in modern history, much of South America is beyond US control.....It is also beyond the influence of the US-dominated IMF."

The people of Venezuela are better off under Chavez; better fed, better educated, and with better access to medical care. The government safeguards their civil liberties and political activism continues to grow. Democracy is thriving in Venezuela. Hurrah for Hugo Chavez!

Friday, August 6, 2010

An Avoidable Depression; Land of Squandered Opportunity

The economy has gone from bad to worse. On Friday the Commerce Department reported that GDP had slipped from 3.7% to 2.4% in one quarter. Now that depleted stockpiles have been rebuilt and fiscal stimulus is running out, activity will continue to sputter increasing the likelihood of a double dip recession. Consumer credit and spending have taken a sharp downturn and data released on Tuesday show that the personal savings rate has soared to 6.4%. Mushrooming savings indicate that household deleveraging is ongoing which will reduce spending and further exacerbate the second-half slowdown. The jobs situation is equally grim; 8 million jobs have been lost since the beginning of the recession, but policymakers on Capital Hill and at the Fed refuse to initiate government programs or provide funding that will put the country back to work. Long-term "structural" unemployment is here to stay.

The stock market has continued its highwire act due to corporate earnings reports that surprised to the upside. 75% of S&P companies beat analysts estimates which helped send shares higher on low volume. Corporate profits increased but revenues fell; companies laid off workers and trimmed expenses to fatten the bottom line. Profitability has been maintained even though the overall size of the pie has shrunk. Stocks rallied on what is essentially bad news.

This is from ABC News:

"Consumer confidence matched its low for the year this week, with the ABC News Consumer Comfort Index extending a steep 9-point, six-week drop from what had been its 2010 high....The weekly index, based on Americans’ views of the national economy, the buying climate and their personal finances, stands at -50 on its scale of +100 to -100, just 4 points from its lowest on record in nearly 25 years of weekly polls...It's in effect the death zone for consumer sentiment."

Consumer confidence has plunged due to persistent high unemployment, flat-lining personal incomes, and falling home prices. Ordinary working people do not care about the budget deficits; that's a myth propagated by the right wing think tanks. They care about jobs, wages, and providing for their families. Congress's unwillingness to address the problems that face the middle class has led to an erosion of confidence in government. This is from the Wall Street Journal:

"The lackluster job market continued to weigh on confidence. The share of consumers who expected the job market to improve in the next six months fell to 14.3% in July, the second-straight monthly drop and the lowest reading since March...Views of business conditions also worsened. The share of people who expected conditions to improve over the next half-year fell to 15.9% in July, the lowest since April 2009." ("Home prices rise but outlook for sector dims", Conor Dougherty, Wall Street Journal)

No one believes that the U.S. is the land of opportunity anymore or that their children will have a better life than they did. As the slump deepens, pessimism will turn to desperation, higher crime and social unrest. Everyone pays for long-term unemployment.

Factory orders, household purchases and personal consumption expenditures (PCE) are all in the dumps. New mortgage applications and home sales have plummeted to historic lows. Housing prices are expected to follow the downward trend in sales. Still, the stock market lunges upward in fits-and-starts utterly disconnected from the underlying "real" economy where personal balance sheets are in a shambles and where 6 applicants battle for every new job opening.

This is from Naked Capitalism:

"A Wells Fargo/Gallup survey of 604 small business owners conducted in early July showed a plunge in already negative readings to new lows. This gloomy outlook matters because small businesses were the biggest source in job creation in the last upturn and are expected again to be the main source of hiring.

Even worse, small business owners expect things to get worse. The main reason for the decline in the index was the decay in the Future Expectations subindex, which is the first time business owners as a whole have been negative about their companies’ prospects for the upcoming year."

("Small Business Sentiment Hits New Low", Naked Capitalism, Yves Smith)

Washington has sold out its small businesses to Wall Street and the multinationals. America's jobs-generating engine is kaput. Expect more outsourcing, more offshoring, more tax-dodging, and more middle class bloodletting for the foreseeable future. The New World Order continues apace.

Unlike stocks, the bond market reflects the true condition of the economy. 2-year Treasuries are at historic lows, while the 10-year has dipped below 3%. The flight-to-safety is pushing bond yields down even while equities continue to surge. Deflationary pressures are building. Bondholders are not taken-in by the cheery news of green shoots. They know how to read the data--spending is down, credit is tight, unemployment is headed higher, the banks are hiding their red ink, Europe's in trouble, manufacturing is about to slide, housing is in freefall, the money supply is shrinking, and the Fed is sitting on its hands doing nothing. When industry-leader Proctor & Gamble missed analysts estimates on Tuesday, it became clear that product prices would be slashed in an effort to retain market share. When prices fall, inventories are reduced and workers are laid-off. That's how the downward spiral begins.

The next leg down will be falling wages and collapsing asset prices. That will increase unemployment and put more pressure on bank balance sheets leading to another round of bank closures. The Fed will be forced to restart quantitative easing (QE)--the central bank's bond-purchasing program designed to pump liquidity into the economy when interest rates are stuck at zero. Here's an excerpt from the New York Times:

"Pay cuts are appearing most frequently among state and local governments, which are under extraordinary budget pressures and have often already tried furloughs, i.e., docking pay in exchange for time off.....Some businesses are also cutting workers’ pay, often to help stay afloat or to eliminate their losses, although a few have seized on the slack labor market and workers’ weak bargaining power to cut pay and thereby increase their profits and competitiveness….

Factory owners sometimes warn that they will close or move jobs to lower-cost locales unless workers agree to a pay cut. In its most recent union contract, General Motors is paying new employees $14 an hour, half the rate it pays its long-term workers.

Sub-Zero, which makes refrigerators, freezers and ovens, warned its workers last month that it might close one or more factories in Wisconsin and lay off 500 employees unless they accepted a 20 percent cut in wages and benefits."

("More Workers Face Pay Cuts, Not Furloughs", Steven Greenhouse, New York Times)

The economy is slipping fast into deflation, but there's still time to act. The bond market is telling us that the economy needs more fiscal stimulus. The labor market is telling us that the economy needs more fiscal stimulus. The housing market s telling us that the economy needs more fiscal stimulus. Manufacturing, consumer spending, consumer credit and bank lending are all telling us that the economy needs more fiscal stimulus. Every sector and data-point is telling us the economy needs more fiscal stimulus. But congress, the White House, and the myriad far-right think tanks and foundations won't budge. They want debt consolidation, austerity measures, structural adjustment and belt-tightening. "That is what the market demands", they opine. Here is a response from economist J.Bradford DeLong from his blog "Grasping Reality With Both Hands":

"What else does history tell us? It tells us that in 1925 Chancellor of the Exchequer Winston Churchill was ill-served when he rejected the arguments of John Maynard Keynes and accepted the arguments of his Treasury staff that Britain required retrenchment and austerity: Churchill thus gave Britain a three-year head start on suffering from the Great Depression.

It tells us that from 1930-1936 the belief of government after government of France’s Third Republic that if only they retrenched a little longer that the confidence of world capital markets in France would be so great that it could escape the Great Depression unscathed: the length of the Great Depression and the class war thus engendered in France weakened it enormously in the late 1930s.....” It teaches us that Weimar German SPD leader Rudolf Hilferding was extremely ill-advised to commit the SPD to policies of retrenchment and austerity when his labour economist Wladimir Woytinsky was calling for the SPD to develop a plan for a New Deal for Germany. And it teaches us that in his memoirs U.S. President Herbert Hoover, who was bitter about many things, was bitterest that he had let Treasury Secretary Andrew Mellon hamstring Hoover’s progressive impulses and lead the Hoover administration to policies of retrenchment and austerity.

History teaches us that when none of the three clear and present dangers that justify retrenchment and austerity--interest-rate crowding-out, rising inflationary pressures on consumer prices, national overleverage via borrowing in foreign currencies--are present, you should not retrench and austerity: don’t call the fire truck when there is no smoke. And history teaches us that when economies suffer from high unemployment, enormous excess capacity, incipient deflation, businesses terrified of a lack of customers, and an enormous excess demand for high quality assets, then is the time for expansion and stimulus: when the deck is awash, start bailing."

("Jean-Claude Trichet rejects the counsels of history", J.Bradford DeLong, "Grasping Reality With Both Hands")

Policymakers are determined to drag the country into another Depression. And that's the tragedy.