Friday, April 15, 2011

Weekend links

1--Goldman Sachs Misled Congress After Duping Clients: Levin, Bloomberg

Excerpt: Senator Carl Levin, releasing the findings of a two-year inquiry yesterday, said he wants the Justice Department and the Securities and Exchange Commission to examine whether Goldman Sachs violated the law by misleading clients who bought the complex securities known as collateralized debt obligations without knowing the firm would benefit if they fell in value.

The Michigan Democrat also said federal prosecutors should review whether to bring perjury charges against Goldman Sachs Chief Executive Officer Lloyd Blankfein and other current and former employees who testified in Congress last year. Levin said they denied under oath that Goldman Sachs took a financial position against the mortgage market solely for its own profit, statements the senator said were untrue.

"In my judgment, Goldman clearly misled their clients and they misled the Congress," Levin said at a press briefing yesterday where he and Senator Tom Coburn, an Oklahoma Republican, discussed the 640-page report from the Permanent Subcommittee on Investigations.

Goldman Practices

"We don't need commissions to do our job and this proves it," Coburn said. The FCIC "spent $8 million and 15 months" on its inquiry and "didn't report anything of significance."

The panel said Goldman Sachs relied on "abusive" sales practices and was rife with conflicts of interest that encouraged putting profits ahead of clients.

2--No sign of inflation, The Big Picture

Excerpt: Exhibit B - The Money Multiplier - all that heavy breathing about the flood of liquidity that was going to pour into the system. Hyper-inflation! Except not so much, apparently. As David Rosenberg (who was spot-on in his assessment of the last bogus inflation scare) put it in his Monday note:

Fully 100% of both QEs by the Fed merely was new money printing that ended up sitting idly on commercial bank balance sheets. Money velocity and the money multiplier are stagnant at best. (see chart)

Those who still think the credit spigots are going to open any moment now, consider this: We know that consumer credit, ex-student loans, is still contracting. And we know from National Federation of Independent Business that "the vast majority of small businesses (93 percent) reported that all their credit needs were met or that they were not interested in borrowing."...

And the last word to Rosie (from Monday's note):

And it remains a legitimate question as to how we end up with inflation as credit contracts. Not just in the consumer and housing sectors, but in the government sector too. The state and local government sectors have dramatically cut back on bond issuance this year and are cancelling capital projects in the process. We see on the front page of the weekend WSJ this headline ― Inflation Drives a Shift in Markets and right above it is Deadline Drama Over Budget. Not only is household credit contracting, but the same is happening at the government level. This is deflationary, not inflationary, and once commodities settle down ― they are volatile and self-correcting as we have seen in the past ― all this talk of inflation is going to subside pretty quickly.

Finally, on a semi-related matter, the NY Times ran an interesting piece that follows up nicely on my recent post highlighting the growth in student loans.

3--Fade the Consumer Credit Headline (For Now, The Big Picture

Excerpt: The Fed released its G.19 report on Consumer Credit last Thursday, and it stirred some optimism (see also here):

The new U.S. consumer credit numbers reflect an economy that is reaccelerating, and that is very bullish for growth - as well as inflation. All in all, U.S. household credit surged by $7.62 billion in February, ramping up faster than at any other time since June 2008.

I respectfully beg to differ. While the story gives a passing nod to the rise in student loans, the fact of the matter is that student loans are virtually the whole story, and the downward trend/trajectory in credit, save that category, has really not reversed.

What we've got above is Total Revolving, Total Non-revolving, and Total Non-revolving minus TOTALGOV (the category that includes student loans). Without the increase in student loans - which is to say the green line and the blue line - the trend in credit (both revolving and non) continues downward. (must see charts)

4--Beijing March New House Prices Plunge 26.7% MM, Market News via zero hedge

Excerpt: Prices of new homes in China's capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city's Housing and Urban-Rural Development Commission.

Average prices of newly-built houses in March fell 10.9% over the same month last year to CNY19,679 per square meter, marking the first year-on-year decline since September 2009.

Home purchases fell 50.9% y/y and 41.5% m/m, the newspaper said, citing an unidentified official from the Housing Commission as saying the falls point to the government's crackdown on speculation in the real estate market.

Beijing property prices rose 0.4% m/m in February, 0.8% in January and 0.2% in December, according to National Bureau of Statistics data.

The central government has launched several rounds of measures since last year designed to cool the housing market, though local government reliance on land sales to plug fiscal holes mean enforcement hasn't been uniform.

5--History bodes ill for stock market, Mark Hulbert, Marketwatch

Excerpt: There have been only four other occasions over the last century when equity valuations were as high as they are now, according to a variant of the price-earnings ratio that has a wide following in academic circles. Stocks on each of those four occasions would soon suffer big declines.

This modified P/E was made famous in the late 1990s by Yale University professor Robert Shiller, particularly in his book "Irrational Exuberance." In this modified P/E, the denominator is not current earnings per share but average inflation-adjusted earnings over the trailing 10 years. This modified ratio - sometimes called P/E10, or CAPE (for Cyclically Adjusted Price Earnings ratio) - has a markedly better forecasting record than the simple P/E.....

The four previous occasions over the last 100 years that saw the CAPE as high as they are now:


The late 1920s, right before the 1929 stock market crash

The mid-1960s, prior to the 16-year period in which the Dow went nowhere in nominal terms and was decimated in inflation-adjusted terms

The late 1990s, just prior to the popping of the internet bubble

The period leading up to the October 2007 stock market high, just prior to the Great Recession and associated credit crunch

To be sure, a conclusion based on a sample containing just four events cannot be conclusive from a statistical point of view. Still, it will be hard to argue that the current stock market is undervalued or even fairly valued....

Perhaps the bulls' best argument, in the face of the current high CAPE level, is to point out that valuations can remain high for some time before they come back down to earth. The CAPE at the height of the Internet bubble in early 2000 was above 40, for example. And it was above 30 right prior to the 1929 stock market crash. Compared to those two lofty levels, the current CAPE might suggest that the bull market still has room to run.

Nevertheless, one can't help but notice that the bulls are on shaky ground if their best argument requires drawing analogies to the two occasions in the past when stocks were more overvalued than they ever were, either before or since.

6--Deflating inflation, Satyajit Das, Naked Capitalism

Excerpt: Quantitative easing ("QE"), the currently fashionable form of voodoo economics favoured by policymakers in the US, is primarily directed at boosting asset values and creating inflation. By essentially creating money artificially, central bankers are seeking to return the world to stability, growth and prosperity.

The underlying driver is to generate growth and inflation to enable the problems of excessive debt in the economy to be dealt with painlessly. It is far from clear whether it will work...

Central banks control the monetary base, a narrow measure of the money supply made up of currency plus the reserves that commercial banks hold with the central bank. The relationship between the monetary base, credit creation, nominal income and economic activity is unstable.

A significant problem is that velocity of money or the rate of circulation has slowed. Banks are not using the reserves created and money provided to increase lending. The reduction in velocity has offset the effect of increased money flows....

In reality, the low velocity of money, the lack of demand and excess productive capacity in many industries means the inflation outlook in the near term remains subdued. Inflation will only result if bank lending accelerates and aggregate demand exceeds aggregate supply. America's output gap is between 5% and 10% and considerably more monetisation would be necessary to create high levels of inflation.

QE's real side effects are subtle. It discourages savings, drives a rush to re-risk, encourages volatile capital flows into emerging markets and forces up commodity prices.

Low interest rates perversely discourage saving, at a time when indebted countries, like America, need to increase saving to pay down high levels of debt. Low interest rates reduce the income of retirees or others living off savings, further reducing consumption....

Low rates have driven a rush to increase risk, in search of higher returns. In January 2011, the difference between interest rates on speculative or non-investment grade corporate bonds and investment-grade debt fell to around 3.50%, the lowest level since November 2007. In 2010, companies sold a record $286.7 billion of junk bonds to investors driven by the need for higher rates. The search for yield extends to stocks and also structured products, where investors take on complex returns in return for additional returns.

The rush to re-risk has reduced general lending standards. Practices that contributed to the global financial crisis, such as "covenant lite" loans with low protection for lenders, have re-emerged. Under-pricing of risk is also evident, creating the foundations for future problems.

7--Retail Sales increased 0.4% in March, Calculated risk

Excerpt: ...Retail sales ex-gasoline were only up 0.1% in March - and this shows the impact of higher gasoline prices....On a monthly basis, retail sales increased 0.4% from February to March (seasonally adjusted, after revisions), and sales were up 7.1% from March 2010.

Retail sales are up 16.0% from the bottom, and now 2.5% above the pre-recession peak.

8--Mr. President: Why Medicare Isn't the Problem, It's the Solution, Robert Reich, Economist's View

Excerpt: I hope when he tells America how he aims to tame future budget deficits the President doesn't accept conventional Washington wisdom that the biggest problem in the federal budget is Medicare (and its poor cousin Medicaid).

Medicare isn't the problem. It's the solution.

The real problem is the soaring costs of health care that lie beneath Medicare. They're costs all of us are bearing in the form of soaring premiums, co-payments, and deductibles.

Americans spend more on health care per person than any other advanced nation and get less for our money. ...

So what's the answer? For starters, allow anyone at any age to join Medicare. Medicare's administrative costs are in the range of 3 percent. That's well below the 5 to 10 percent costs borne by large companies that self-insure. It's even further below the administrative costs of companies in the small-group market (amounting to 25 to 27 percent of premiums). And it's way, way lower than the administrative costs of individual insurance (40 percent). It's even far below the 11 percent costs of private plans under Medicare Advantage, the current private-insurance option under Medicare.

In addition, allow Medicare - and its poor cousin Medicaid - to use their huge bargaining leverage to negotiate lower rates with hospitals, doctors, and pharmaceutical companies. This would help move health care from a fee-for-the-most-costly-service system into one designed to get the highest-quality outcomes most cheaply.

Estimates of how much would be saved by extending Medicare to cover the entire population range from $58 billion to $400 billion a year. More Americans would get quality health care, and the long-term budget crisis would be sharply reduced.

Let me say it again: Medicare isn't the problem. It's the solution.

9--Mexicans Work the Longest Hours, New York Times

Excerpt: According to a new report from the Organization for Economic Cooperation and Development, people in Mexico spend more hours of their day working than the people of any other country.

The average Mexican devotes 10 hours a day to paid and unpaid work, like cleaning, child care and cooking at home. Belgians, on the other hand, spend the least time each day working, about seven hours, among the 29 countries covered.

That compares with an overall O.E.C.D. average of eight hours a day. In the United States, people spend about eight and a quarter hours a day doing paid and unpaid work - that is, 4 hours 49 minutes a day in paid work or in study, and 3 hours 26 minutes doing unpaid work. (The averages are for the entire population, 15 to 64 years old, whether employed outside the home or not.)

The main reason Mexicans spend so much time working is because they do so much unpaid work, more than four hours each day, the highest of all the countries evaluated by the O.E.C.D. Most of that work is housework, especially cooking.

10--Ryan's Five-Point Plan, Paul Krugman, New York Times

Excerpt: I just did a taping for All Things Considered with Douglas Holtz-Eakin, and more or less on the spur of the moment came up with a simple description of the Ryan budget plan. Basically, the plan has five points - except that only two of those points are real, while the other three are fake.

The real points are:

1. Savage cuts in programs that help the needy, amounting to about $3 trillion over the next decade.

2. Huge tax cuts for corporations and the wealthy, also amounting to about $3 trillion over the next decade....

So if we focus only on the real stuff, this is a plan to leave the deficit pretty much where it is, but to sharply cut aid to the poor while sharply cutting taxes on the rich. That's serious!

11--Americans Decry Power of Lobbyists, Corporations, Banks, Feds, Gallup

Excerpt: Lobbyists, major corporations, banks, and the federal government all have too much power, according to Americans. By contrast, the public largely believes state and local governments, the legal system, organized religion, and the military each have the right amount of power or too little power. Labor unions elicit mixed responses, with the plurality saying they have too much power, but a slim majority saying their power is about right or lacking.

The findings come from a Gallup poll conducted March 25-27.

While relatively few Americans believe any of these major societal players have too little power, roughly one in four say labor unions, organized religion, and the military are deficient in this regard. Only about the military do more people say it has too little rather than too much power, 28% vs. 14%.

Bottom Line

Americans generally agree that lobbyists, major corporations, and banks have too much power, potentially making them vulnerable to calls for greater regulation. The federal government is close behind, with 58% calling it too powerful -- including large majorities of Republicans and independents.

Attitudes about labor unions are the most ambiguous of all 10 entities measured: while nearly half of Americans (43%) say unions have too much power, a fairly hefty 24% say they have too little power, leaving just 28% who consider their power about right.

The survey results highlight the major gulf between Democrats' and Republicans' views on unions and the federal government. Republicans are highly likely to say both have too much power, while Democrats are much less likely to believe either has too much power and, in fact, tend to believe unions have too little power.

12--Inflation Actually Near 10% Using Older Measure, CNBC

Excerpt: Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

Since 1980, the Bureau of Labor Statistics has changed the way it calculates the CPI in order to account for the substitution of products, improvements in quality (i.e. iPad 2 costing the same as original iPad) and other things. Backing out more methods implemented in 1990 by the BLS still puts inflation at a 5.5 percent rate and getting worse, according to the calculations by the newsletter's web site,

"Near-term circumstances generally have continued to deteriorate," said John Williams, creator of the site, in a new note out Tuesday. "Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial-market expectations catch up with underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results in the month and months ahead."

13--Fed ownership of the yield curve, The Big Picture

Excerpt: We've updated our chart illustrating the Fed ownership of the U.S. yield curve. We've also included the percentage of total maturities the Fed owns in each year from the April 2011 data and December 2010 data. Most of POMO buying since December has taken place in the 7-9 year maturities. In December, for example, the Fed owned 13.4 percent of the bonds maturing in 2019 compared to 31.6 percent today.

We're with the conventional wisdom of no QE3, no massive flight to quality, or a miracle long-term budget agreement. We therefore expect continued upward pressure on interest rates. We recently posted our Flow of Funds analysis showing that the Federal Reserve and foreign flows effectively funded 100 percent of the U.S. budget deficit in Q4 2010. Interest rates need an upward adjustment to attract new non-official buyers, which could also put a short-term lid on commodities, in our opinion. (see chart)

14--Some market discipline for economists, Dean Baker, The Guardian

Excerpt: the basic facts show the incredible level of incompetence of the IMF in failing to recognise the dynamics of the crisis.

The housing bubbles that were driving growth in the United States, United Kingdom, Spain, Ireland and several other countries in this period were front and centre in the crisis. These bubbles created sharp divergences in house prices both from historic trends and also from rents. There was no plausible story whereby these prices could be sustained; the only question was when the bubbles would burst.

Furthermore, there was no plausible story whereby the bubbles could burst without leading to a serious falloff in demand and a sharp jump in unemployment. In the case of the United States, the bubbles in the residential and non-residential real estate had raised construction spending by close to 4 percentage points of GDP and consumption spending by an even larger amount.

The overbuilding from the bubble virtually guaranteed that construction would fall below its trend level following the collapse of the bubble. This means that the collapse of the bubble would leave a gap of 8-10 percentage points of GDP. In the United States, this gap in annual demand is between $1.2tn and $1.5tn....

Featuring the financial crisis so prominently in the story makes it more complex than necessary. Credit default swaps (CDSs) and collaterised debt obligations (CDOs) are complicated. Bubbles are simple.

15--Putting People to Work, Alan Nasser, Counterpunch

Excerpt: Ben Bernanke's second round of bond buying, QE2, has been a grand flop. Housing sales and prices are falling at an unhealthy clip, foreclosures and bankruptcies continue to mount and QE2 has had no measurable impact on the dismal employment picture. Nor should we expect it to. A study by the highly reliable Macroeconomic Advisors indicates that even an additional $1.5 trillion bond purchase by the Fed would reduce unemployment by a mere two tenths of one percent. (J. Hilsenrath, "Fed Fires $660 Billion Stimulus Shot", Wall Street Journal, November 4, 2010)...

Closing the output gap is a general and somewhat vague objective. It aims to stimulate "aggregate demand" or "growth". Closing the employment gap requires a specifically targeted stimulus, intended to stimulate not merely aggregate demand, but "effective demand". This was the kind of stimulus Keynes had in mind as his remedy for chronic unemployment. Aggregate demand stimulation is not authentically Keynesian. Keynes was explicit that the goal of macroeconomic stabilization policy is "a closer approximation of full employment as nearly as is practicable." (The General Theory, p. 378-379) He was unambiguous as to the principal effective means of accomplishing this goal: direct government job creation through public works projects.

The fiscal stimulus agenda of the Obama administration has been to stimulate aggregate demand. This is what some of the most prominent "Keynesian" economists urge. Paul Krugman writes that "we need policies to sustain aggregate demand." (New York Times Blog, January 19, 2011) And Joseph Stiglitz tells us that "the deficit increase has been caused by the enormous shortfall between the economy's potential and actual output." (Politico, March 28, 2011) Framing the problem this way reinforces the notion that the desireable goal is to increase the magnitude of the GDP. This policy has been ineffective in its stated purpose, to reduce unemployment. But the problem is not merely that the stimulus was not large enough.....

To the extent that the unemployment rate has stabilized, i.e. not risen further, the predominant causal factor has been the great increase in discouraged workers who have given up looking for work. We are now witnessing the longest running decline in the labor force participation rate in postwar history. The employment-to-population ratio has not been as low as it is now -58 percent- since the Reagan-Volcker recession of the early 1980s....

Looking at the business cycle over the last forty years, a striking and ominous trend emerges: in each business-cyclical expansion, the long-term unemployment rate remains either at or above the level of the previous expansion. In a word, for the last forty years the short-term unemployed have been a declining, and the long-term unemployed an increasing, percentage of all unemployed. Is this what we should expect from successful conventional fiscal policy? (1)

The Virtues of Effective Demand Policy and Elite Resistance To It

If we want to close the employment gap, i.e. the labor demand gap, and not merely the output gap, the agenda should be to boost effective demand, not just overall output....

If boosting effective demand is the explicit goal of fiscal policy, then work projects and the jobs they require must be provided directly by government. A resurrected Works Progress Administration is what will do the trick. It's a reasonable bet that attempts to stimulate the abstraction Aggregate Demand will do nothing for working people.

Aggregate demand policies work through the market; effective demand policies are initiated and implemented by government. Obama has repeatedly affirmed that any politically acceptable remedy for intractable joblessness must be market-based. His administration is commited to the view that "[While] government has a critical role in creating the conditions for economic growth, ultimately true economic recovery is only going to come from the private sector." In the same speech, he admonished those who push for a government jobs program "to face the fact that our resources are limited.It's not going to be possible for us to have a huge second stimulus, because frankly, we just don't have the money." (Speech at "jobs summit", December 3, 2009) The "critical role" that Obama assigns to government is of course giving tax breaks to companies and cash to banks.....

16--Big banks are government-backed: Fed's Hoenig, Reuters

Excerpt: Big banks like Bank of America Corp and Citigroup Inc should be reclassified as government-sponsored entities and have their activities restricted, a senior Fed official said on Tuesday.

The 2008 bank bailouts at the height of the financial crisis and other implicit guarantees effectively make the largest U.S. banks government-guaranteed enterprises, like mortgage finance companies Fannie Mae and Freddie Mac, said Kansas City Fed President Thomas Hoenig.

"That's what they are," Hoenig said at the National Association of Attorneys General 2011 conference.

He said these lenders should be restricted to commercial banking activities, advocating a policy that existed for decades barring banks from engaging in investment banking activities.

"You're a public utility, for crying out loud," he said.....

Hoenig also said banks are still not adequately prepared for the next financial crisis, despite new capital rules requiring lenders to raise billions of dollars to buttress against future losses.

Hoenig said the proposed Basel III capital requirements -- which demand as much as 8 percent core capital ratio -- will not be enough to weather catastrophic losses.

"That is far too little capital with this complexity and this risk profile," he said.

17--The Fed's path of destruction, David Stockman, Marketwatch

Excerpt: the evidence that the Fed no longer has any clue about the transmission pathways which connect the base money it is emitting with reckless abandon (e.g. Federal Reserve credit) to the millions of everyday pricing, hiring, investing and financing outcomes on Main Street sits right on its own balance sheet. Specifically, if the Fed actually knew how to thread the needle to the real economy with printing press money it wouldn't have needed to manufacture $1 trillion in excess bank reserves - indolent entries on its own books for which it is now paying interest.

So in the present circumstances, ZIRP and QE2 amount to a monetary Hail Mary. There is no monetary tradition whatsoever that says the way back to U.S. economic health and sustainable growth is through herding Grandma into junk bonds and speculators into the Russell 2000 /quotes/comstock/64a!i:rut (RUT 823.92, +1.65, +0.20%) .

Admittedly, the junk-bond financed dividends being currently extracted by the LBO kings from their debt-freighted portfolios may enable them to hire some additional household help and perhaps spur some new jobs at posh restaurants, too. Likewise, the 10% of the population which owns 80% of the financial assets may use their stock market winnings to stimulate some additional hiring at tony shopping malls.

That chairman Bernanke himself has explained in so many words this miracle of speculative GDP levitation, however, does not make it so. The fact is, if transitory wealth effects add to current consumer spending, they can just as readily subtract on the occasion of the next "risk-off" stampede to the downside. Indeed, the proof - if any is needed - that cheap money fueled asset inflations do not bring sustainable prosperity lies in the still smoldering ruins of the U.S. housing boom....

This is the only possible explanation for its preposterous decision to allow the big banks to resume dissipating their meager capital accounts by paying "normalized" dividends and by resuming large-scale stock buybacks. These are the same financial institutions that allegedly nearly brought the global economy to its knees in September 2008, according to the Fed chairman's own words.

In what is no longer secret testimony to the FCIC (Financial Crisis Inquiry Commission), Federal Reserve Chairman Bernanke claimed that the Wall Street meltdown "was the worst financial crisis in global history" and that "out of maybe 13...of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two".

That testimony was recorded just 15 months ago, but the financially seismic events it references have apparently already faded into the dustbin of history. Still, even if the dubious proposition that the banking system has fully healed were true, what did the Fed hope to accomplish besides goosing the S&P 500 /quotes/comstock/21z!i1:in\x (SPX 1,314.41, +0.25, +0.02%) via speculative rotation into the bank indices? ...

During the 1980's, however, this long-standing household leverage ratio began a parabolic climb, and never looked back. By the bubble peak in Q4 2007, total household debt had reached $13.8 trillion and was 96% of GDP. Yet after 36 months of the Great Recession wring-out, the dial has hardly moved: household debt outstanding in Q4 2010 was still $13.4 trillion, meaning that it has shrunk by the grand sum or 3% (entirely due to defaults) and still remains at 90% of GDP or double the leverage ratio that existed prior to the debt binge of the past three decades....

By contrast, the ratio of household debt to private wage and salary income - a far better measure of debt carrying capacity - has not improved at all. Household debt amounted to 255% of private wage and salary income at the peak of the credit boom in late 2007, and was still 251% in Q4 2010. At the end of the day, the household debt-to-DPI ratio improved solely because Uncle Sam went on a borrowing spree and temporarily juiced DPI with tax abatements and transfer handouts.

In short, banks don't need more capital to support household credit because the latter is still shrinking, and will be for a long time to come. Moreover, it might as well be said in this same vein that the business sector doesn't need no more stinking debt, neither!

At the end of 2005 - before the credit bubble reached its apogee - the non-financial business sector (both corporate and non-corporate entities) had total credit market debt of $8.3 trillion, according to the Fed's flow of funds data. By the end of 2007, this total had soared by 25% to $10.4 trillion. But contrary to endless data fiddling by Wall Street economists, the business sector as a whole has not deleveraged one bit since the financial crisis. As of year-end 2010, business debt was up a further $500 billion to $10.9 trillion.

The whole propaganda campaign about the business sector becoming financially flush rests on an entirely spurious factoid with respect to balance sheet cash. Yes, that number is up a tad - from $2.56 trillion in fourth quarter 2007 to $2.86 trillion at the end of 2010. Still, this endlessly trumpeted gain in cash balances of $300 billion is more than offset by the far larger gain in business sector debt - meaning that, on balance, the alleged cash nest egg held by American business is simply borrowed money. ...

And it is here where the historical data on Bernanke's 12 out of 13 crashing financial dominoes essentially speaks its own cautionary tale. At the peak of the credit and housing boom in 2006, these 13 most important financial institutions booked $110 billion of net income, and disgorged more than $40 billion of that amount in dividends and stock buybacks.

Would that these fulsome profits and attendant distributions had been real and sustainable, but the historical facts inform otherwise. By 2007, the groups' profits had dropped to $64 billion, and then in 2008, the 10 institutions which survived to year-end reported a staggering loss of $56 billion. Moreover, if the massive loses incurred by the terrible three - Washington Mutual /quotes/comstock/13*!jpm/quotes/nls/jpm (JPM 46.25, -0.39, -0.84%) , Wachovia /quotes/comstock/13*!wfc/quotes/nls/wfc (WFC 30.68, -0.72, -2.29%) and Lehman - during their final, unreported stub quarter is added to the tally, losses for the year would approach $80 billion....

While the banks have been relieved of mark-to-market accounting, they are still knee-deep in the very asset classes whose ultimate recoverable value remains exposed to the real estate meltdown. Residential housing prices are now clearly in the midst of a double dip, and rates of new construction and existing unit sales are spilling off the bottom of the historical charts

Still, the banking system holds $2.5 trillion of residential mortgages and home equity lines - plus $350 billion of construction loans and more than a trillion of mortgage backed securities. Maybe they have enough reserves to cover the remaining sins in this $4 trillion kettle of residential debt, but betting on housing bottom has been a widow-maker for several years now - and there is nothing on the horizon to suggest that this epochal bust will not make a few more.

Likewise, the banking system is carrying $1 trillion of commercial real estate loans, and the open secret is that "extend and pretend" refinancing is the primary underpinning of current book values. Similarly, the Fed has rigged the steepest yield curve in modern times, but it is a fair bet that as it is gradually forced to normalize interest rates, current record net interest margins will be squeezed. And it is also probable that some of the $2.7 trillion of government, corporate and other securities owned by the banking system may be worth less than par in a world where money rates are more than zero.....

One thing is certain, however, and that is that these behemoths are now truly too big to fail. At the end of 2006, the asset footings of the Big Six - J.P. Morgan, Bank of America /quotes/comstock/13*!bac/quotes/nls/bac (BAC 13.27, -0.20, -1.48%) , Wells Faro /quotes/comstock/13*!wfc/quotes/nls/wfc (WFC 30.68, -0.72, -2.29%) , Citigroup /quotes/comstock/13*!c/quotes/nls/c (C 4.50, -0.05, -1.10%) , Goldman Sachs /quotes/comstock/13*!gs/quotes/nls/gs (GS 160.17, -0.25, -0.16%) and Morgan Stanley /quotes/comstock/13*!ms/quotes/nls/ms (MS 26.79, -0.02, -0.07%) - were $7.1 trillion. Saving the system through shotgun marriages in the interim, our financial overloads have permitted the group to grow its assets by 30% to $9.2 trillion.

If you believe that these massive financial conglomerates are a clear and present danger to the American economy, you might opine that they are too big to exist, as well. But even from a more quotidian angle - unless you are in the banking index for a trade - it's pretty easy to see that so-called banking profits should have remained under regulatory sequester for a few more economic seasons, at least. (a truly great read)

18--Balance sheet recession, Richard Koo (video), Economist's View (must watch)

19--UK disposable income falls to lowest since 1921, Rupert Neate, Telegraph

British household budgets face their biggest squeeze in 90 years, according to a leading economic consultancy.

The Centre for Economics and Business Research (CEBR) said soaring inflation coupled with low pay rises means household peacetime disposable income is at its lowest since 1921.
Rising food, clothing and energy prices mean the average British family will have £910 less to spend this year than they did in 2009. The CEBR calculates that household disposable income will fall by 2pc this year, more than double last year's fall of 0.8pc and the biggest drop since the savage 1919 to 1921 post-First World War recession.

It forecasts inflation will average 3.9pc in 2011, its highest since 1992, as January's increase in VAT from 17.5pc to 20pc and the rising cost of oil and other commodities continue to drive up prices. At the same time, salaries will rise just 1.9pc as unemployment remains high and the public sector makes cut-backs.

Douglas Williams, chief executive of the CEBR, said: "The virtually unprecedented peacetime squeeze on real household incomes, combined with [our] more realistic forecasts for exports and investment growth means that GDP growth will be subdued for the next two or three years."

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