Weekend Economists' Father's Day Edition, June 19-21, 2009

[Demeter]

If you were a child in the 60's, you perhaps recall Mr. Ed, the talking horse sitcom (this is before we had such a word)?

And do you recall the horse singing "Oh, My Papa"?

Here are some renditions, for the nostalgic:

http://www.youtube.com/watch?v=UwaWKrMAEnM

http://www.youtube.com/watch?v=nSVfr_-Kgtc

http://www.truveo.com/eddie-fisher-oh-my-papa/id/2720320792

Unfortunately, I was unable to locate the equine version.

And if the above videos haven't reduced you to tears, the economic nuggets that follow surely will. Read 'em and weep, folks.

[Demeter]

1. Income tax collections drop in states: report

http://www.reuters.com/article/domesticNews/idUSTRE55H3TS20090618

CHICAGO (Reuters) - Personal income taxes, a key revenue generator for most U.S. states, plummeted 26 percent, or $28.8 billion, in the first four months of 2009 compared to the same period in 2008, according to a Rockefeller Institute of Government report on Thursday.

"As we predicted in a previous report, tax returns on 2008 income that were filed in April show huge declines, likely due to stock market-driven declines in investment income and declines in bonus payments," Institute Senior Fellow Donald J. Boyd, the report's co-author, said in a statement.

As a result, many states are likely to face more budget cutting this year, additional budget fixes next year and big budget problems when federal stimulus dollars run out in 2011, he added.

States experiencing the biggest decline in personal income tax collections in January-April 2009 compared to the same period in 2008 were Arizona, down nearly 55 percent; South Carolina, off 38.6 percent; Michigan, off 34.4 percent and California, which had a 33.8 percent drop.

Only three states, Utah, Alabama and North Dakota, collected more in the tax this year than last year....

[Demeter]

2. Obama's Money Men Finally Get It By Robert Scheer

http://www.thenation.com/doc/20090629/scheer

Robert Scheer is the editor of Truthdig, where this article originally appeared. His latest book is The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America(Twelve).


Robert Scheer: It would be nice to blame the Gipper for the economic meltdown, but the facts don't support it. The real villains are closer at hand.

On Monday, two men with considerable responsibility for enabling the banking meltdown confronted the error of their ways. Not directly, of course, for accountability is hardly the mark of either Lawrence Summers, the top White House economic adviser, or Treasury Secretary Timothy Geithner.

Their careers have long been fueled by error. Summers was one of the leading prophets of radical financial deregulation in the Clinton administration. And Geithner, as head of the New York Fed, looked the other way during Wall Street's collapse and then responded by opening wide the spigot of taxpayer dollars to resuscitate Citigroup and AIG.

What they wrote this week in a joint op-ed article in the Washington Post is a condemnation of the Wall Street shenanigans they once abetted and celebrated. I hope their apparent sudden conversion to common sense indicates the seriousness of the banking regulation plan that President Obama will present to Congress today.

"Over the past two years, we have faced the most severe financial crisis since the Great Depression," they wrote, placing the blame squarely where it belongs, on the unregulated derivatives markets they once gushed over. "The current financial crisis had many causes...in the widespread use of poorly understood financial instruments, in shortsightedness and excessive leverage at financial institutions. But it was also the product of basic failures in financial supervision and regulation."

What irony that Summers, who as Bill Clinton's treasury secretary pushed through legislation guaranteeing "legal certainty for Swap Agreements" and banning the regulation of securitized mortgage debt, should now admit that "securitization led to an erosion of lending standards, resulting in market failure that fed the housing boom and deepened the housing bust."

According to Summers and Geithner, the Obama plan to be revealed today promises that all derivatives dealers will be "subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse."

If such language is ever passed into law, I hope that Brooksley Born is in the gallery and gets the standing ovation she deserves. That's the woman who, when she headed the Commodity Futures Trading Commission, warned that the derivatives market needed to be regulated. Summers and his predecessor as treasury secretary, Robert Rubin, destroyed Born's career because she dared to accurately predict today's crisis.

But better late than never, although it's a shame that Obama's economic whiz kids are only now getting serious about cracking down on Wall Street hustlers after first guaranteeing their toxic paper with trillions of taxpayer dollars. Nor should we assume that the Obama plan will not be subverted by the financial industry lobbyists, whose enormous campaign treasure chest, now financed by taxpayers, allows them to slice and dice Congressional voting blocs the way they did subprime mortgages.

Already there's a joker in the deck of the Obama proposal in that it relies heavily on the Federal Reserve, which on the regional level is fully controlled by the very financial industry firms that it is expected to monitor. Summers and Geithner write that "all large, interconnected firms whose failure could threaten the stability of the system will be subject to consolidated supervision by the Federal Reserve." Like we never heard that one before.

Because of bad deregulation laws, those large, interconnected firms were allowed to grow to the point where their failure indeed threatened "the stability of the system." What we need to do is return to the basic principle of the New Deal-era Glass-Steagall Act (which Clinton reversed) that broke up "too big to fail" financial conglomerates because, by definition, when such companies threaten to fail, we taxpayers are left picking up the tab.

It was depressing that the president told the Wall Street Journal on Tuesday that he favors "a relatively light touch when it comes to the government...in terms of financial regulation." And that "e had a regulatory system that was outdated that did not encompass the non-bank sector."

Nonsense. We had a regulatory system inherited from Franklin Roosevelt's New Deal that for sixty years sustained a wall between the traditional heavily regulated banks and the non-bank hustlers on Wall Street who should have never been allowed to play their funny money games with people's savings and home mortgages. That wall was torn down by President Clinton at the behest of Wall Street lobbyists and now must be restored if there is to be true reform. The reforms presented by Obama are an important start, but I worry they do not face up to the reality that financial conglomerates too big to fail are too big to be allowed to exist.

[Demeter]

3. Dilbert Clocks In With Pirates--Arrrg!

"http://widgets.dilbert.com/o/4782b1ae641c3eb6/4a3bfa20ea7135d8/478cf2052d7472a1/7d14e9a5"

See the Monday, Tuesday and Wednesday strips

[Demeter]

4. GM plans comeback a month early

http://www.ft.com/cms/s/0/55c48d2e-5c34-11de-aea3-00144feabdc0.html

General Motors is preparing to relaunch itself as a leaner company by mid-July, a month earlier than envisaged when the Detroit carmaker filed for bankruptcy protection on June 1.

The judge overseeing GM’s Chapter 11 case has set Friday as the deadline for objections to its restructuring plan for most parties.

Barring a surprise, GM and its advisers are confident that none of the roughly 500 objections submitted so far will derail the timetable, under which the court is due to consider the sale of most of its assets to a new entity on June 30.

“It really is remarkably quiet,” one person familiar with the process said. According to another, the company is drawing up plans to reveal its new board of directors and possibly a raft of senior management changes around the middle of July.

Most of the objections raised so far relate to suppliers’ concerns about the amount and timing of payments by the “new” GM under contracts taken on by the existing company. Assets of the “old” GM will remain in Chapter 11 to be sold or wound down for the benefit of creditors.

Possible stumbling blocks include a potential backlash from unsecured creditors as well as dissidents among holders of $27bn in unsecured bonds. A small group of dissident bondholders, holding less than 1 per cent of the securities, has asked the court to allow them to form a committee which would give them a formal voice in the proceedings....At the time GM filed for court protection, holders of about 54 per cent of the bonds had approved its offer of a 10 per cent equity stake and warrants for another 15 per cent. GM is restructuring under a seldom used provision of the US bankruptcy code: a normal process would require approval of two-thirds of the securities. The US government is set to emerge as GM’s biggest shareholder, with a 60 per cent stake.

Eric Ivester, a restructuring specialist at law firm Skadden Arps, said: “It’s certainly unique when the government is both the acquirer and the provider of debtor-in-possession financing.”

GM has taken steps to assuage the two groups – secured creditors and dealers – that worked hardest to derail Chrysler’s journey through bankruptcy court. GM has pledged to repay secured claims in full.

Although GM has told 1,100 of its 6,000 dealers that their sales and service franchises will not be renewed, it has taken a more conciliatory stance than Chrysler.

Robert Gerber, the judge hearing GM’s case, has a debtor-friendly reputation. If all goes to plan, the hearing will take a few days.

[Demeter]

16. GM executive in line for Gaz job

http://www.ft.com/cms/s/0/caef0c1a-59e0-11de-b687-00144feabdc0.html

A departing General Motors executive is in line to become chairman of Gaz, the car company owned by Oleg Deripaska, the Russian oligarch seeking a carmaking deal with Opel.

Bo Andersson, who stepped down as GM’s global head of purchasing last week, has been invited to the job at Gaz, which plans to build cars for the bankrupt Detroit carmaker’s Opel unit if a stake sale is agreed with Canada’s Magna International and Russia’s Sberbank...



Gaz said that Mr Andersson, a 53-year-old Swede, on Monday began serving as a consultant to its board and an adviser to Mr Deripaska on automotive engineering.

The appointment would be put to the vote at an extraordinary shareholders’ meeting to be called after its annual meeting on June 29, the company said.

Magna, which is building a large car parts plant in Russia, is bidding for a 20 per cent stake of Opel, and Sberbank for 35 per cent of GM’s spun-off European arm, in which the US automaker will keep a 35 per cent stake.

The two groups plan to take Mr Deripaska’s company as their industrial partner if their bid is successful, and make Opel-designed cars at Gaz’s plant in Nizhny Novgorod.

Russia’s government says it is not officially backing the deal but has welcomed the tie-up with Opel as a way of advancing its ailing car industry.

Gaz last year launched the Siber, a car modelled on Chrysler’s former-generation Sebring, which flopped amid stiff competition and a sharp slowdown of the Russian market...

[Demeter]

5. GE reassures over finance unit

http://www.ft.com/cms/s/0/5801c100-5c5d-11de-aea3-00144feabdc0.html

General Electric on Thursday sought to allay fears that the Obama administration’s plan for financial regulatory reform would force a spin-off of its finance arm, reiterating that it was “committed to retaining GE Capital”.

GE also took aim at one of the provisions in the administration’s white paper on financial regulation, arguing that erecting a firewall between financial and non-banking activities at the same company would be “unnecessary and unwise”.

“Institutions that have a track record of sound and responsible operations should be allowed to continue to engage in the same activities under the same ownership even if regulatory efficiency requires that they convert to a different form,” it said. “Our structure certainly did not contribute to the crisis.”

GE’s shares have dropped more than 6 per cent in the past two days amid fears the proposals would prompt the company to reverse its strategy for keeping GE Capital, which has about $540bn in assets.

“It does look like rules of the game have changed,” said Nick Heymann, an analyst with brokerage Sterne Agee.

Under the proposed framework, which must win congressional approval, banks and other institutions whose failure would endanger the country’s financial system would be regulated by the Federal Reserve.

If passed, the new rules could mean all of GE would be monitored by the Fed... “It’s regulation we could live with,” Brackett Denniston, GE’s general counsel, told the Financial Times.

“We’re not afraid of regulation and, in fact, support systemic regulation.”

More troubling for the company could be a provision that could limit the symbiotic relationships that have formed within GE, whose industrial businesses have benefited from the financing GE Capital extends to customers.

GE notes that it is too early to predict how the reforms will look after they have been through Congress. But there is little doubt the group will make its case in Washington.

[Demeter]

6. Goodwin hands back part of pension

http://www.ft.com/cms/s/0/fbfc582e-5bf4-11de-aea3-00144feabdc0.html

Sir Fred Goodwin, the former chief executive of Royal Bank of Scotland, has agreed to hand back more than a third of the pension he was paid after leaving the stricken bank last year.

Sir Fred was pilloried for accepting a £703,000 annual pension from RBS, which was brought to the brink of collapse last October by rash acquisitions that he spearheaded, including the purchase of ABN Amro, the Dutch bank in 2007.

The banker and his family have been in hiding since news of the pension payment broke and his Edinburgh home was attacked in March. He is thought to have been in the UK for most of the time, although he has spent time in Turkey and Spain.

Sir Fred left RBS, which is now 70 per cent state-owned, in October and was granted early retirement at the age of 50 from the bank, which needed a £20bn ($33bn) government bail-out.

His pension became the subject of a bitter political row after it emerged that part of his £16.9m pension pot was discretionary.

Sir Fred had already reduced his £703,000 annual pension to about £555,000 by taking a lump sum of £2.7m this year. But, under a new agreement announced on Thursday, he will cut his annual pension by £200,000 a year to £342,500. The total value of his pension pot is now £12.2m.

Sir Fred made the offer after an internal legal review by RBS of his expenses and use of company assets, which concluded that the former chief executive had done nothing wrong. Sir Philip Hampton, new chairman of RBS, said he had employed “more lawyers than you can shake a stick at” to see if Sir Fred’s pension contract was watertight.

Sir Fred, who had made clear he wanted to wait for the outcome of the review, made the decision voluntarily to hand back part of the pension in the past few days....

[rfranklin]

45. Contracts are always "watertight" unless...

you are a union member or working stiff.

[Demeter]

7. Switzerland looks at cutting size of banks

http://www.ft.com/cms/s/0/90c7015a-5c01-11de-aea3-00144feabdc0.html

Switzerland upped the ante in a global regulatory assault on the banking industry on Thursday as its central bank warned that Zurich was examining the forced shrinkage of banking groups such as UBS and Credit Suisse to contain the risks posed by their size.

The central bank is looking at imposing constraints on the size of its biggest domestic banks unless global policymakers can come up with a new system to deal with large banks when they fail...

SWISS QUALITY GOES BEYOND THEIR CHOCOLATES AND WATCHES!

[Demeter]

8. Eurozone banks face $283bn writedowns

http://www.ft.com/cms/s/0/34f0b6c0-59c5-11de-b687-00144feabdc0.html

[Demeter]

9. Treasury plans strict rules for securitisation

http://www.ft.com/cms/s/0/badf55c4-59ee-11de-b687-00144feabdc0.html

The US Treasury is planning a sweeping overhaul of securitisation markets with tough new rules designed to restore confidence by reducing the incentive for lenders to originate bad loans and flip them on to investors.

The authorities plan to force lenders to retain part of the credit risk of the loans that are bundled into securities and to end the gain-on-sale accounting rules that helped spur the boom of the markets at the heart of the financial crisis.

The aim is to revitalise the markets for securities backed by mortgages and other assets without re-creating the systemic risks that turned boom to bust in 2007. The plan is part of a wider overhaul of regulation to be unveiled on Tuesday.

A Treasury spokesman said that while securitisation had made credit more widely available, breaking the direct link between borrower and lender had “led to a general erosion of lending standards, resulting in a serious market failure that fed the housing boom and deepened the housing bust”.

Securitised markets – which financed more than half of all credit in the US in the years immediately preceeding the crisis – are essential for the US economy. Without a recovery in these markets, the flow of credit will not return to more normal levels, even if US banks overcome their problems.

The Treasury hopes its plan will help bring these markets back to a more stable form by improving information and changing incentives. However, bankers warned that the new rules would reduce incentives to package assets into securities, raising financing costs.

“It is the beginning of the unwinding of the securitisation-for-sale model,” a senior Wall Street banker said. “By forcing lenders to keep part of the loans and scrapping ‘gain-for-sale’, the government will raise the cost of capital and put a damper on the reopening of credit markets.”

Some experts also question the wisdom of forcing banks to retain exposure to loans sold as securities, saying that it might be better to encourage banks to properly rid themselves of all exposure to such credits.

The Treasury plans to force lenders to retain at least 5 per cent of the credit risk of loans that are securitised, ensuring that they have what investors call “skin in the game”. The 5 per cent rule – which looks set to be applied in Europe as well – is less draconian than some bankers feared. The proposed elimination of “gain on sale accounting” is to prevent financial companies from booking paper profits on loans – packaged into securities – as soon as they were sold to investors.

Banks would only be able to record income from securitisation over time as payments are received. Brokers’ fees and commissions would also be disbursed over time rather than up front, and would be reduced if an asset performed badly due to bad underwriting.

The US authorities also plan to stop credit rating agencies from assigning the same types of ratings to structured credit products that are assigned to corporate and sovereign bonds, meaning there would be no more AAA-rated subprime securities.

Contracts would be standardised to ease comparability and trades included in an electronic database currently used for corporate bonds.

Sponsors would be required to stand behind their securities by providing warranties as to the origination and the underwriting standards on the loans.

Credit ratings agencies – most of which are paid by the issuers to rate securities – would have to strengthen their policies for handling conflicts of interest.

They would have to develop a new vocabulary to rate structured credit – a move intended to underscore the fact that a triple A rating on a corporate bond and on a mortgage-backed security mean very different things.

[Po_d Mainiac]

43. Accountability?

Banks would only be able to record income from securitisation over time as payments are received. Brokers’ fees and commissions would also be disbursed over time rather than up front, and would be reduced if an asset performed badly due to bad underwriting.

What a novel approach :sarcasm:

[Dr.Phool]

10. Ahhhh....The joys of vasectomies!

[Po_d Mainiac]

44. The problem with vasectomies....

the perp still has the ability to rape, over and over again. IMHO, the use of a more permanent procedure is called for. Just for shits and giggles, lets deny the use of a local anesthetic.

[Dr.Phool]

94. What the fuck are you babbling about?

Perp of what?

It's Fathers Day. I don't have kids. I don't want kids. I don't even particularly like kids. Therefore, I've had a vasectomy.

Now, go finish your lobotomy. The last one didn't work.

[Demeter]

11. Gazprom warns on delays to key field

http://www.ft.com/cms/s/0/6a8afb68-5a7b-11de-8c14-00144feabdc0.html

Gazprom said it was delaying indefinitely plans to build a gas pipeline to China because of disagreement over price.

Alexander Ananenkov, the Russian group’s deputy chief executive, said on Wednesday that “no one is talking about gas supplies to China in 2011 any more” because the two sides had failed to agree on price.

Gazprom has been locked in talks with Beijing since Vladimir Putin, then Russian president, signed off in 2006 with much political fanfare on a pipeline deal to send up to 80bn cubic metres of Siberian gas annually to China.

The two sides were initially set to agree a price by the end of that year.

But delays mounted as China agreed to buy gas from Turkmenistan and Kazakhstan, two other former Soviet states, and as uncertainty grew about whether Gazprom would be able to produce enough gas immediately to fill the pipeline as the development of key fields in east Siberia was postponed.

The launch of the vast Kovykta gas field in east Siberia, a big potential source of gas for China, has been repeatedly delayed, firstly as TNK-BP, BP’s 50:50 Russian venture, came under pressure to sell the licence to the field to Gazprom.

The two sides reached agreement two years ago that TNK-BP would sell control to the Russian gas group but the deal is yet to be completed, also because of disagreement over price.

Talks between Gazprom and TNK-BP over the sale have all but stalled.

Mr Ananenkov said on Wednesday that a decline in demand in Russia and abroad could cause it to delay the launch of Kovykta until after 2017.

Valery Nesterov, energy analyst at Troika Dialog, the Moscow investment bank, said Gazprom had little interest in going through with the acquisition at the moment because of the squeeze on its revenues amid the crisis.

He said: “It doesn’t want to spend money now when it could get it for free later”.

Mr Nesterov added that Gazprom could move swiftly on Kovykta if it struck a deal with China on supplies, but he said China for now was dragging its heels, with the current share of gas in energy consumption in China still relatively low at 5 per cent.

Gazprom had hoped to persuade China to purchase gas at prices equivalent those paid by Europeans.

Mr Ananenkov’s comments came as Hu Jintao, the Chinese president, met Dmitry Medvedev, the Russian president, and Mr Putin, prime minister, in Moscow.

Earlier this week, Gazprom said it could delay another key project, the Bovanenkovo field on Siberia’s Yamal peninsula, for a year because of sharply falling demand.

[Demeter]

12. SEC allows Madoff to settle civil charges

http://us.yhs.search.yahoo.com/avg/search?fr=yhs-avg&type=yahoo_avg_hs2-tb-web_us&p=SEC+allows+Madoff+to+settle+civil+charges

The US Securities and Exchange Commission on Tuesday agreed to allow Bernard Madoff to settle civil fraud charges without admitting to any wrong-doing.

Mr Madoff, who in March pleaded guilty to 11 charges related to his $64bn Ponzi scheme, is scheduled to be sentenced to a long prison term this month. Victims have been lobbying the judge to impose the maximum sentence possible.

The settlement that was announced on Tuesday also barred Mr Madoff from associating with any broker, dealer or investment adviser.

The SEC’s internal watchdog is investigating how the agency handled the case.

After Mr Madoff shocked the financial world in December by revealing that his famously successful fund was a scam, it emerged that a whistleblower, suspicious of Mr Madoff’s claims about his annual returns, had warned the SEC on several occasions about his fund. In spite of those warnings, the SEC never dug deeply into Mr Madoff’s investment advisory business.

Coming at the end of 2008, a year in which the SEC was criticised for not having had a better grasp of the liquidity problems facing Bear Stearns, or the balance sheet problems faced by Lehman Brothers, the Madoff revelation provoked anger among investors and in Congress, and jeopardised the commission’s future.

While the SEC is expected to survive in the regulatory shake-up that is being proposed in Washington on Wednesday, the ability of Mr Madoff to sustain his fraud for nearly 20 years proved to be the most embarrassing blow of all.

“This shows a certain bureaucratic mindedness,” says John Coffee of Columbia University Law School. “I would think the SEC would be too embarrassed to claim any victory. This settlement seems to me to show the stubborn, phlegmatic persistence of a bureaucrat.”

The revelations about the SEC’s contacts with Mr Madoff did not begin with the whistleblower. In 1992, the commission brought charges against two Florida accountants for selling unregistered securities in a fund that promised annual returns between 13 per cent and 20 per cent each year.

The accountants settled the matter, but the SEC, upon inspecting the investment fund on which the claims of returns were based, discovered that it was Mr Madoff who was generating the impressive returns. Satisfied that Mr Madoff’s operation was legitimate, the commission moved on.

I'M SPEECHLESS, FOLKS.

[Hugin]

14. I wasn't aware the SEC was part of the Judicial Branch...

Among it's other duties.

I've said all along he'd walk.

[Demeter]

15. They Are a Regulatory Agency, Supposedly

and it was only civil charges, but even so.

[Hugin]

35. With a $64Billion tab, I'd think the only one with pardoning power would be the Chief Executive.

Not some regulatory agency... Not even in Law Enforcement.

[Demeter]

13. Mafia blamed for $134bn fake Treasury bills

http://www.ft.com/cms/s/0/82091ec2-5c2f-11de-aea3-00144feabdc0.html

One summer afternoon, two “Japanese” men in their 50s on a slow train from Italy to Switzerland said they had nothing to declare at the frontier point of Chiasso.

But in a false bottom of one of their suitcases, Italian customs officers and ministry of finance police discovered a staggering $134bn (€97bn, £82bn) in US Treasury bills.

Whether the men are really Japanese, as their passports declare, is unclear but Italian and US secret services working together soon concluded that the bills and accompanying bank documents were most probably counterfeit, the latest handiwork of the Italian Mafia.

Few details have been revealed beyond a June 4 statement by the Italian finance police announcing the seizure of 249 US Treasury bills, each of $500m, and 10 “Kennedy” bonds, used as intergovernment payments, of $1bn each. The men were apparently tailed by the Italian authorities.

The mystery deepened on Thursday as an Italian blog quoted Colonel Rodolfo Mecarelli of the Como provincial finance police as saying the two men had been released. The colonel and police headquarters in Rome both declined to respond to questions from the Financial Times.

“They are all fraudulent, it’s obvious. We don’t even have paper securities outstanding for that value,’’ said Mckayla Braden, senior adviser for public affairs at the Bureau of Public Debt at the US Treasury department. “This type of scam has been going on for years.’’

The Treasury has not issued physical Treasury bonds since the 1980s – they are handled electronically – though they still issue savings bonds in paper format.

In Washington a US Secret Service official said the agency, which is working with the Italian authorities, believed the bonds were fake.

Officials in Tokyo were nonplussed. Takeshi Akamatsu, a Japanese foreign ministry press secretary, said Italian authorities had confirmed that two men carrying Japanese passports had been questioned in the bond case but Tokyo had not been informed of their names or whereabouts.

“We don’t know where they are now,” Mr Akamatsu said.

Italian officials, while pointing out that hauls of counterfeit money and Treasury bills were not unusual, were stunned by the amount involved. Investigators are looking into the origin and destination of the fakes.

Italian prosecutors revealed last month that they had cracked a $1bn bond scam run by the Sicilian Mafia, with the alleged aid of corrupt officials in Venezuela’s central bank. Twenty people were arrested in four countries.

The fake bonds were to have been used as collateral to open credit lines with banks, Reuters news agency reported. The Venezuelan central bank denied the accusations.

[snot]

40. Weirder and weirder!

"10 'Kennedy' bonds, used as intergovernment payments, of $1bn each" -- an earlier report said there's no such thing at all -- that there was no Kennedy series.

"an Italian blog quoted Colonel Rodolfo Mecarelli of the Como provincial finance police as saying the two men had been released" -- released, why???

"'They are all fraudulent, it’s obvious. We don’t even have paper securities outstanding for that value,' said Mckayla Braden, senior adviser for public affairs at the Bureau of Public Debt at the US Treasury department." What's so obvious about it, again, if the Kennedy series DOES exist for intergovernmental payments? And why did it take > two weeks for them to say so?

[Demeter]

17. Fortis chief executive to step down

http://www.ft.com/cms/s/0/cce23806-59ce-11de-b687-00144feabdc0.html

Fortis Holding, the Belgian insurance group, on Monday shocked investors as it said its chief executive would leave and it had accepted the resignation of the head of its biggest division.

The move means the fifth chief executive in under a year for Fortis, the once-diversified bancassurance group that is trying to rebuild itself as an insurer....

[Demeter]

18. Judge imposes curbs on scope of AIG case

http://www.ft.com/cms/s/0/fd45054e-5a02-11de-b687-00144feabdc0.html

A judge in an AIG civil trial that involves Hank Greenberg, the former chief executive of the stricken insurer, slapped strict curbs on the scope of the hearing on Monday.

The government bail-out of AIG and its controversial bonuses cannot be discussed during a trial over a $4.3bn lawsuit involving Mr Greenberg.

Investigations into the accounting practices that led to the departure of Mr Greenberg from AIG in 2005 is also off limits, Jed Rakoff, a federal judge ruled on Monday, as he narrowed the scope of the civil case being considered by a 10-person jury.

The case will focus on a batch of AIG shares held by Starr International Company (Sico), a company controlled by Mr Greenberg and other former AIG executives. Though Mr Greenberg, who headed both companies for over three decades, is not a defendant in the case, he is set to be the star witness. He is scheduled to take the stand on Tuesday.

Mr Rakoff said that the case was about “an alleged trust and an alleged conversion of valuable shares”. The trial was “not a forum for airing all of the innumerable other issues, most of which are resolved regarding Mr Greenberg, Starr, AIG bonuses, investigations and what have you,’’ he said.

The shares that are in dispute were used to compensate AIG executives until 2005, and the insurer, which is now 80 per cent owned by the US government, claims it should be given the stock and the $4.3bn Starr made when it sold some of its stake in the company.

Nonetheless, Ted Wells, the attorney representing AIG, said the trial was one about “people and relationships”. He said: “This is a case about a man named Hank Greenberg.”

Mr Wells claimed Mr Greenberg said that over several decades the stock was transferred to Starr to fund a deferred compensation programme for chosen employees.

Starr has said the lawsuit is baseless because the shares belong to the company, which received them in 1970 when it sold insurance businesses to AIG.

David Boies, the attorney representing Starr, told the the court on Monday that there was never any such trust created for the benefit of AIG, and that the stock in dispute belonged to Starr and its voting shareholders – who were free to do with them what they wished. “What Sico does with Sico stock is up to Sico,” he told the court.

The AIG shares held by Starr were once worth more than $20bn but the insurer’s collapse has pushed their value to just $400m-$500m.

[Demeter]

19. Mark Fiore Presents: Obama vs. Obama

http://www.markfiore.com/political/obama-vs-obama

[Demeter]

20. The Big Bank Bailout Payback Bamboozle By Nomi Prins

http://www.motherjones.com/bailout/2009/06/big-bank-bamboozle


Last week was a milestone for US treasury secretary Tim Geithner. He finally got to play the hero. The morning of June 9, Treasury notified 10 financial institutions, including JPMorgan Chase, Goldman Sachs, Morgan Stanley, US Bancorp, and Capital One Financial, that they were "eligible to complete the repayment process" for the capital they received under the Troubled Assets Relief Program (TARP). In other words, they would be allowed to pay back $68.3 billion. Even though they really owe $229.7 billion. That we know of. But Geithner didn't mention that last bit. Instead, he professed that "these repayments are an encouraging sign of financial repair," with the caveat that "we still have work to do."

The "we" he refers to is himself and Wall Street, both of whom are getting a good deal out of this fractional payback scheme. The agreement frees the banks from restrictions on executive pay or, worse, their general practices, but it still allows them to keep the cash they've received through non-TARP venues like the FDIC Temporary Liquidity Guarantee Program— or the massive sums the banks recovered from AIG (thanks to its own federal bailout) to cover their losses on credit derivatives. Not to mention any cash provided by the mother of all cheap loan programs—the Federal Reserve.

Geithner, for his part, gets to convey the message that things are looking up. "These repayments follow a period in which many banks have successfully raised equity capital from private investors," stated the press release. "Also, for the first time in many months, these banks have issued long-term debt that is not guaranteed by the government."

Well, of course certain banks have raised some money on their own: Firms have a tendency to look a whole lot better when they're backed by government capital and have cheap federal loans sitting on their books. Private investors notice that sort of thing. But more troubling than the misplaced praise is the fine print that accompanied the announcement: "These repayments," the department noted, "help to reduce Treasury's borrowing and national debt. The repayments also increase Treasury's cushion to respond to any future financial instability that might otherwise jeopardize economic recovery."

This statement belies some accounting sleight of hand.

First off, it conveniently ignores the fact that TARP accounts for a fraction—about $700 billion—of the government's $13 trillion banking stabilization scheme. At some point, investors are going to balk at buying up federal debt (Treasury bonds), thereby forcing the government to pay higher interest rates, which will wipe out much of the TARP payback benefit. The second sentence is more ominous: It suggests that if banks need that money back, it'll be waiting for them right there at the Treasury Department.

MORE AT LINK

[Demeter]

22. And We Have TWO Bank Failures So Far Tonight

Cooperative Bank, Wilmington, NC

Cooperative Bank, Wilmington, North Carolina was closed today by the North Carolina Office of Commissioner of Banks, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with First Bank, Troy, North Carolina, to assume all of the deposits of Cooperative Bank, except those from brokers.

The twenty-four offices of Cooperative Bank will reopen on Monday, as branches of First Bank. Depositors of Cooperative Bank will automatically become depositors of First Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches until First Bank can fully integrate the deposit records of Cooperative Bank.

Over the weekend, depositors of Cooperative Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of May 31, 2009, Cooperative Bank had total assets of $970 million and total deposits of approximately $774 million. In addition to assuming all of the deposits of the failed bank, First Bank agreed to purchase approximately $942 million of assets. The FDIC will retain the remaining assets for later disposition.

The FDIC and First Bank entered into a loss-share transaction on approximately $852 million of Cooperative Bank's assets. First Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-sharing arrangement is projected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers.

First Bank will purchase all the deposits, except about $57 million in brokered deposits, held by Cooperative Bank. The FDIC will pay the brokers directly for the amount of their funds. Customers who placed money with brokers should contact them directly for more information on the status of their deposits.

Southern Community Bank Fayetteville, GA


Southern Community Bank, Fayetteville, Georgia was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with United Community Bank, Blairsville, Georgia, to assume all of the deposits of Southern Community Bank.

The five offices of Southern Community Bank will reopen for normal business hours, starting Saturday, as branches of United Community Bank. Depositors of Southern Community Bank will automatically become depositors of United Community Bank. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches until United Community Bank can fully integrate the deposit records of Southern Community Bank. Depositors of Southern Community Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

As of May 29, 2009, Southern Community Bank had total assets of $377 million and total deposits of approximately $307 million. United Community Bank paid a premium of 1 percent to acquire all of the deposits of the failed bank. In addition to assuming all of the deposits of the failed bank, United Community Bank agreed to purchase approximately $364 million of assets. The FDIC will retain the remaining assets for later disposition.

The FDIC and United Community Bank entered into a loss-share transaction on approximately $253 million of Southern Community Bank's assets. United Community Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-sharing arrangement is projected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers.

Customers who have questions about today's transaction can call the FDIC toll-free at 1-866-308-4470. The phone number will be operational this evening until 9:00 p.m., Eastern Daylight Time (EDT); on Saturday from 9:00 a.m. to 6:00 p.m., EDT; on Sunday from noon to 6:00 p.m., EDT; and thereafter from 8:00 a.m. to 8:00 p.m., EDT. Interested parties can also visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/scb.html.

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $114 million. United Community Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's DIF compared to alternatives. Southern Community Bank is the 38th FDIC-insured institution to fail in the nation this year, and the seventh in Georgia. The last FDIC-insured institution to be closed in the state was Silverton Bank, National Association, Atlanta, on May 1, 2009.

[Demeter]

28. Standard & Poor's Cuts Ratings On 22 Banks

http://www.rttnews.com/ArticleView.aspx?Id=982139


(RTTNews) - Credit ratings agency Standard & Poor's lowered its ratings and revised its outlooks on 22 U.S. banks on Wednesday, citing concerns that operating conditions will be less favorable than they were in the past due to volatile financial markets during credit cycles and tighter regulatory supervision.

Standard & Poor's also said the changes reflect its ongoing broad-ranging reassessment of industry risk for U.S. financial institutions. The agency indicated that the banking industry is now in a transition period and will likely undergo material structural changes.

Further, the agency said its overall assessment of the industry includes expectations that loan losses are likely to continue to increase and could rise beyond current expectations.

Standard & Poor's credit analyst Rodrigo Quintanilla said, "We believe the banking industry is undergoing a structural transformation that may include radical changes with permanent repercussions."

"Financial institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace's new reality," Quintanilla added. "Such a transition period justifies lower ratings as industry players implement changes."

BB&T Corp.(BBT: News ), Capital One Financial Corp.(COF: News ), Key Corp. (KEY: News ) U.S. Bancorp (USB: News ), and Wells Fargo & Co.(WFC: News ) were among the larger banks on the list that saw their ratings cut by S&P.
Additionally, Standard & Poor's reassessed the relative creditworthiness of many institutions based on their ability to deal with the increased risks during this transition period and inferred that some firms may be better able to weather the risks ahead than others.

However, the agency stated that it could foresee raising ratings in the long term if lower earnings and reduced risk go along with stronger risk-adjusted capital and effective governance.

The other banks on the list include Associated Banc Corp. (ASBC), Astoria Financial Corp. (AF), Comerica Inc. (CMA), Fifth Third Bancorp (FITB), M&T Bank Corp. (MTB), PNC Financial Services Group (PNC), Regions Financial Corp. (RF), Susquehanna Bancshares Inc. (SUSQ), Valley National Bancorp (VLY), Webster Financial Corp.(WBS), Wilmington Trust Corp (WL), and First National Bank of Omaha.

Regional banks cut to junk status included Carolina First Bank, Citizens Republic Bancorp Inc. (CRBC), Huntington Bancshares Inc. (HBAN), Synovus Financial Corp. (SNV), and Whitney Holding Corp. (WTNY).

[burf]

21. The FDIC is making up

for last weekend.

On Friday, June 19, 2009, Cooperative Bank, Wilmington, NC was closed by the North Carolina Commissioner of Banks and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.

On Friday, June 19, 2009, Southern Community Bank, Fayetteville, GA was closed by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.

Further info is at FDIC.gov

[DemReadingDU]

37. and another

On Friday, June 19, 2009 First National Bank of Anthony, Anthony, Kansas, also operating branches as First National Bank of Johnson County, was closed by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.
http://www.fdic.gov/bank/individual/failed/anthony.html


complete list of failed banks
http://www.fdic.gov/bank/individual/failed/banklist.html

[Demeter]

23. "When the recession is over, how will we know?"

http://www.agorafinancial.com/5min/

"Last month, we explored the idea of peaking initial unemployment claims being the canary in the coalmine for economic recovery. While it's worked in the past... we're not convinced.

"Today, check out this D-list data point - Capacity Utilization.




"It's a simple concept that's hard to track. Capacity utilization measures what percent of businesses are using existing capabilities. 100% marks an economy 'firing on all cylinders,' as the corporate catch-phrase goes. When consumer demand drops, so too does capacity utilization... and since 1970, it hasn't picked up until the worst is over.

"Yesterday, capacity utilization in the US found a record low of 68.3%. The Federal Reserve said utilization fell another 0.7 percentage points from April to May, to the lowest score since at least 1967, when they started keeping track. Factory output is down 13.4% over the last year, the biggest drop since 1946."

[Demeter]

27. Projection: It'll be years before jobs return to much of U.S.

http://www.mcclatchydc.com/homepage/story/69823.html

WASHINGTON — Unlike the labor market collapse that killed millions of U.S. jobs in a matter of months, the nation's return to peak employment will not be nearly as uniform nor as swift.

While signs indicate that the worst of the recession may be over, only six metropolitan areas across the country are expected to regain their pre-recession employment levels by the end of 2009, according to projections from IHS Global Insight, a leading economic forecaster.

The areas poised for a jobs rebound later this year are: Anchorage, Alaska; Champaign-Urbana, Ill.; Coeur d'Alene, Idaho; Columbia, Mo.; Laredo, Texas; and the Houma-Bayou Cane-Thibodaux areas of Louisiana.

Only five areas are expected to see a similar jobs recovery in 2010: Las Cruces, N.M. and El Paso, San Antonio and the McAllen-Edinburg-Pharr and Austin-Round Rock areas of Texas.

Most of the country — 286 of 325 metro areas covered in the IHS analysis_ aren't likely to regain their pre-recession employment levels until at least 2012.

Of these areas, 112 probably won't return to their recent peaks until 2014 or later. These include Rust Belt towns such as Cleveland, Dayton and Akron, Ohio; Detroit, Warren and Flint, Mich.; the hurricane-ravaged Gulfport-Biloxi, Miss., area and the greater Los Angeles region, where the housing bubble and high unemployment have strangled the local economy.

The bleak jobs picture underscores the long, tough road ahead in rebuilding the U.S. economy after the worst recession since the Great Depression.

Of the 6 million jobs lost since the recession began 18 months ago, nearly 4 million were eliminated between November and April. The six-month freefall included a record four straight months with more than 600,000 job losses.

"This recession is unique because of the way it leveled the playing field," said James Diffley, IHS managing director of U.S. regional services. "The precipitating factor, after housing, was the finance industry, and that affected everybody. Now everybody's cutting back on debt, and the banks are being more cautious about lending, so there's less spending. All those things mitigate against a quick turnaround."

The IHS analysis covers 325 of 363 U.S. metropolitan areas, or population centers, as defined by the Census Bureau. Thirty-eight metro areas weren't included because of a lack of government data, said Jeannine Cataldi, an IHS senior economist.

Diffley said the projections reflect a local economy's response to various economic factors based on a statistical analysis of recent history.

IHS expects Texas, Oklahoma and Alaska to be among the first to match their previous employment peaks because their economies never fell as far as those in the rest of the country.

All three states are dominated by the energy industry and are benefitting from rising oil prices. They also have lower unemployment rates than the national average and have weathered only light-to-moderate job losses compared to the rest of the country. In April, Alaska was one of two states that had more people employed than it had in the previous year.

In addition, none of the states has suffered through the kind of major housing bubble that has sapped housing wealth nationwide. In fact, Alaska has one of the nation's lowest foreclosure rates.

Michigan, Ohio and Indiana, on the other hand, will take years to recover from manufacturing job losses, particularly in the troubled automobile industry.

President Barack Obama this week said that he expects the economic stimulus bill to create 600,000 jobs over the next 100 days, but most economists expect the economy to continue bleeding jobs for the foreseeable future.

"Although we expect the economy to bottom out in GDP terms during the second half of the year, job losses should continue throughout 2009, with the unemployment rate peaking just above 10 percent," said IHS chief U.S. economist Nigel Gault in a recent letter to investors. "We still expect total job losses to exceed 7 million. But the worst news is behind us, and employment declines should progressively soften as the year proceeds."

In fact, by the end of the year, the economy is expected to begin adding jobs. "We'll start to have an uptick, but it won't be very strong," Diffley said.

At least not until mid-2010, when a majority of states are likely to be adding jobs, Diffley said.

Expect much of the new job growth to occur in areas where the population is growing, Cataldi said. Many of the new jobs will be in the areas of professional and business services.

"We expect that to be a large growth sector going forward," Cataldi said.

SEE MAP AT LINK

[bread_and_roses]

41. The insanity of their claims that "worst is over" when there are no jobs

continues to boggle my mind daily.

[Tansy_Gold]

55. "Many of the new jobs will be in the areas of professional and business services."

In other words, not "real" jobs. Not "making" anything. Not "creating wealth." Pushin' paper. Busy work. More FIRE bullshit.


Oh, well.

[Demeter]

57. Highly Unlikely.

Those jobs are disappearing faster than water in the desert TODAY.

I'm thinking that the only productive field open to us today is politics. It is the only place where people can make significant change--by driving out the greasers, crooks, and corporate shills. But building up that infrastructure takes time. That's why I keep my eye on Howard Dean. He is the only visionary we've got. I see that's why Obama and Rahm keep him at arm's length or farther.


Dean IS Change we can believe in. Obama just wants us all to get along, a latter-day Rodney King.

[Tansy_Gold]

74. My frustration knows no bounds

I can't even begin to estimate how many posts I've started to DU, either SMW or WEE, and then quit halfway through. Or a quarter of the way through. Or after a couple paragraphs. It doesn't make any difference -- I quit them all in sheer outrage at how completely ineffective Obama has been. Completely. Totally. It's as if he isn't even trying.

I want to scream. I want to get up on the rooftop and shout to all and sundry -- which means my rightwing neighbors and any stray coyote who might be listening -- that we are going to hell in a handbasket and IT DOESN'T HAVE TO BE THIS WAY.

For cryin' out loud, Barack, tax the rich already. They're the ones who have sucked up all the wealth; make the bastards give some of it back. I mean, c'mon, man, it's simple. It really is fucking simple. You get the numbers, and don't tell me you don't. "Productivity is up." That means people are making things, and they're making them more efficiently than ever before. That means there's more profit. So, where is the money going?

It's going to the rich. Remember the old saying? The one they got in Tennessee and Texas and probably in Illinois and Hawaii and maybe even in Indonesia -- The rich get richer and the poor get poorer. And it's gonna be that way unless somebody steps in and says STOP. You rich guys got enough and now it's time to give it back.

And WHY is it time to give it back? Because what has made the rich so rich is the labor of the workers. And as the rich accumulate more of the wealth produced, they put the squeeze on the workers, sucking more and more and more.

Take a look at the housing catastrophe. What happened there, what really happened there? The rich found a way to take even more out of the hands of the poor. And then they put the squeeze onto the middle class, too, because they wanted it all. And ya know what, Barack? They're well on their way to having it all. This country has just about the greatest wealth disparity since France in 1788. Hank Greenberg and John Thain and all the other multi-billionaires on one hand, and the rest of us on the other hand.

Did Hank Greenberg actually ever make anything at AIG? No, not really. What he did was come up with a scheme for TAKING someone else's money. He didn't create any wealth. He just took someone else's away from them. In fact, that's what all the derivatives and other bullshit alphabet soup of "investment opportunities" ever were: schemes for relieving some working stiff of her or his hard-earned money. They're all Ponzi schemes, Barack. All of 'em. ALL OF 'EM.

So the banks and the developers saw this great opportunity to suck the lifeblood out of the American working class -- sell them houses they can't afford. It's the American dream and everyone wants to live it. If they've already got a house, sell them a bigger one. If they can't afford to buy a house, make them believe they can. Get that down payment. Get the interest. Get the fees. Get every red cent you can out of them. And when you've sucked them dry, put them into foreclosure and sell the house again.

If they don't want to move, talk them into a refi. Push the "value" of houses through the roof, because the more they're worth, the more the mortgage brokers and bankers can suck out of them. And then they'll sell the paper to the "investors," and jack the price up again. And then the carrion-eater insurers will get their piece of the action too, scaring everyone into paying for insurance on top of what they're paying for. . . . everything else.

It was a racket, a scam, a ponzi scheme of its own, Barack. Couldn't you see that? Maybe not, not in Illinois. I grew up in Illinois, in the Chicago suburbs, so I know the real estate market wasn't quite as volatile there as where I live now, in the Phoenix suburbs. But there was something going on back in the midwest that seemed unrelated to the housing bubble yet it really wasn't. And you should have been able to see that from your front porch as easily as Sarah Palin could see Russia. Maybe even better.

Jobs are a vital part of any economy. First of all, jobs give people cash incomes with which they buy goods and services. They buy houses and cars, video games and basketballs, sneakers and bathing suits, hamburgers and hammocks. They pay their rent, their cable bill. They go to movies and McDonalds. And when they buy these things, the dollars they spend go back into the economy.

Is this too basic for you, Barack? Do you already have some concept of the circular nature of an economy? The wages paid are spent on other goods and services, and someone else gets paid from them. They in turn spend their wages on more goods and services. And the cycle continues almost in perpetuity. As goods and services are created -- whether it's a farmer growing wheat that's ground into flour to make bread, or a miner digging ore that's refined into steel to make a car, or whatever -- wealth is created. THINGS OF VALUE are created where there was nothing of value before.

But what's happened here in the U.S. is that the circle has been broken. People who aren't making things, who aren't creating wealth, are taking a cut out of the circle. It's one thing for a non-production worker -- a supervisor or an accountant or an engineer or a janitor -- to be paid out of the profits generated by the workers. But when the executives and the stockholders and the insurance companies are taking a bigger and bigger and bigger cut out of the circle of the economy, someone has to start getting less. And over the past few years, the people getting less are the workers. Sometimes they get nothing: the executives and the stockholders see higher profits if production is moved into a different country. The products are still made -- jeans or mixing bowls or ballpoint pens -- and they're still sold, but the jobs are gone. The people who filled those jobs now have nothing to spend. They buy less.

For a while, there were economic devices in place to mitigate this kind of imbalance. Those who made lots and lots and lots of money were taxed at a higher rate, and those tax revenues were used to provide benefits to those who didn't make so much (and who were taxed at a much lower rate). There was also a limitation on the size of an estate that could be passed along without some of the accumulated wealth being redistributed. It was called an estate tax or an inheritance tax, and in keeping with a "work ethic" that disaparaged unearned income and revered concepts like "the self-made man" and "the rugged individual," it promoted a more egalitarian society that would place greater importance on what an individual did rather than on who he was.

But those who were making a lot of money off the workers wanted more and more and more and more. It wasn't enough to ship jobs to lower-wage countries to make higher profits. They began breaking the unions that had fought for good wages and benefits for workers. They brought in non-union companies to replace them, or moved union production facilities to right-work-states where unions had no power.

It began a vicious spiral, Barack. It took a while; it didn't happen overnight and it covered the administrations of several presidents, Republican and Democrat alike. But always always always, the changes benefited the wealthy and made them more wealthy. The economy that had been built by the working people began to die.

We believed you when you said you were the candidate of change. Our economy needed changing. Wall Street needed changing, and so did Main Street. We needed a revised tax structure that rewarded work more than it rewarded investment. We needed changes to the institution of "corporate personhood" so that entities existing only on paper had fewer rights than real human beings. We needed a government that protected not only the borders of the United States but the workers of the United States.

We thought you would change what we saw as wrong. We thought you would understand the disparities between our "capitalist" economy and the "socialist" economies of countries that provide free education and free health care -- "free" meaning, in this case, paid for by the government through a responsible and responsive tax structure -- that make it almost impossible for our workers to compete on a level playing field in the global economy. We thought you would understand that our economy depends on our people having good jobs. We thought you would understand that the obscene disparity in incomes between the billions-a-year FIRE execs and the minimum wage retail clerk was not a sign of a healthy economy.

We thought wrong, and we don't know what to do about it.

We -- or at least I -- knew that there would be no change as soon as you installed Geithner and Summers and Rubin on the economic team. You had, in my never humble opinion, signed the American economy's death warrant with those appointments. Stiglitz calls it the suicide of the American economy but it's really political assassination.

I have my good days and I have my bad days. Today is Father's Day, and I'm at loose ends. My husband is gone, my dad, too. I should call my son in Seattle, but I'm not in the mood right now. I'm thinking of all the fathers who had dreams of providing great futures for their children and are now dependent on those children for a meager existence. I'm thinking of all the fathers who hoped their children would go on to greatness and how have those children back home, struggling to make it in an economy gone sour. I'm thinking of the fathers who can't pay child support because they've lost their jobs. I'm thinking of the fathers who have watched as their family's home has been foreclosed, their car repossessed, their lives forever destroyed by someone else's greed.

So today is one of my bad days. Financially, I'm surviving, but just barely, and I have no real safety net. But I'm not alone, just as I'm not alone in wondering where things went wrong. Did you, indeed, lie to us with all your promises of change, Barack? Did you and Michelle just somehow get sucked into the elite world and forget that there are others out here who have no health care, no job, no money for college, no hope?

The audacity of hope indeed. How dare we ever have hoped that things would change. Is that what you're telling us now? Is that why Don't Ask, Don't Tell is untouchable? Is that why you handed billions and maybe trillions to the same people who caused the economic chaos? Is that why your health care proposals all seem to revolve around making sure the insurance companies, the hospitals, the pharmaceutical companies are protected even if it means the people aren't? Is that it, Barack? Are you essentially thumbing your nose at the very people who supported you, who donated to you, who voted for you, who put their audacious hope in you?

It's been five months since you were sworn in as our president. Five months isn't enough time for you to fix all the ills that accumulated over the past half century or so. But five months is more than enough time for you to have made a start. We're all waiting.



Tansy Gold, so frustrated she couldn't even proofread this rant.

[Demeter]

76. Lordy, Tansy! Send it to the White House!

That was magnificent! And comprehensive. And in my first reading, flawless, besides.

We should all send this to the White House--multiple copies, so it has a chance of actually being read by a live person.

TO CONTACT OBAMA:

http://www.whitehouse.gov/CONTACT/

[Tansy_Gold]

78. Well, at least I remembered to update my journal

I didn't click on the link yet, but is that the one that has a 500 word max? I think I had more than 500 words. . . . . .

[Demeter]

80. It Said 5000 Words

I just sent the link, myself.

[Tansy_Gold]

83. The max is 5000 ** characters **

And the post is slightly over 9000. :-(


I'll figure out a way, because I don't know if they'll click on the link. . . . .



TG, still furious

[DemReadingDU]

89. Maybe you could send it in 2 parts?

Is it possible to send two posts to WH in one day? If so, Split in 2 parts, and send it all. It's too good to take anything out.

[Tansy_Gold]

90. The editor in me says it can be cut without losing anything

I used to write LTTEs all the time to my local rag and they'd start at 1500 words and end up at 300, with nothing lost.

I'll work on it.


TG

[DemReadingDU]

88. Excellent rant, Tansy!

I'm there with you

[CatholicEdHead]

38. Notice the overall downward trend in the graph since 1965

There may be a bounce back, but it always reaches a lower level than before the downturn. The overall slope is a downward one.

[Demeter]

24. The Actual Money Supply by Paul van Eeden

http://dailyreckoning.com/the-actual-money-supply/

On February 17, 2000, then Federal Reserve Board Chairman, Alan Greenspan, was answering a question from Congressman Ron Paul during a House of Representatives Committee on Financial Services hearing, when the following exchange took place.

Mr. Greenspan: "Let me suggest to you that the monetary aggregates as we measure them are getting increasingly complex and difficult to integrate into a set of forecasts.

"The problem we have is not that money is unimportant, but how we define it. By definition, all prices are indeed the ratio of exchange of a good for money. And what we seek is what that is. Our problem is, we used M1 at one point as the proxy for money, and it turned out to be very difficult as an indicator of any financial state. We then went to M2 and had a similar problem. We have never done it with M3 per se, because it largely reflects the extent of the expansion of the banking industry, and when, in effect, banks expand, in and of itself it doesn't tell you terribly much about what the real money is.

"So our problem is not that we do not believe in sound money; we do. We very much believe that if you have a debased currency that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money. We have had trouble ferreting out proxies for that for a number of years. And the standard we employ is whether it gives us a good forward indicator of the direction of finance and the economy. Regrettably none of those that we have been able to develop, including MZM, have done that. That does not mean that we think that money is irrelevant; it means that we think that our measures of money have been inadequate and as a consequence of that we, as I have mentioned previously, have downgraded the use of the monetary aggregates for monetary policy purposes until we are able to find a more stable proxy for what we believe is the underlying money in the economy."

"Inflation and deflation are monetary phenomena and the recent decline in prices has only lead to confusion and further obfuscation of what is really going on."

Dr. Paul: "So it is hard to manage something you can't define."

Mr. Greenspan: "It is not possible to manage something you cannot define."

Here we have possibly the most influential and powerful banker in the world, who is in charge of managing the most widely used money in the world - the U.S. dollar - telling us not only that he doesn't know what money is, or how to measure how much of it there is, but admitting that it's impossible to manage the money supply precisely because they have not yet figured out what it is or how to measure how much of it there is.

For something we use every day and that is an integral part of our lives, it is remarkable how little we know about money.

When the money supply increases (inflation) money loses value (prices rise). Because the money supply is almost always increasing (inflation), and therefore decreasing the value of money, it means that our standard of living is eroded over time if our income is fixed, or not rising as fast as the inflation rate (the rate of increase in the money supply). Yet there is no credible measure of the inflation rate. I have been searching for an answer to the actual inflation rate for more than a decade and there was none that I felt was accurate enough, so I had to design my own.

Actual Money Supply (AMS) is a tool that I created to measure the money supply in the United States and therefore the actual monetary inflation rate. The chart below is always the most recent one I have and is updated as data becomes available.



Because the monthly, year-over-year data depicted in the chart is so volatile I added a rolling 12-month average of the Actual Inflation Rate to the chart. The rolling 12-month average inflation rate is itself still quite volatile, but much less so than the actual monthly data.

It is interesting to note that the average rolling 12-month inflation rate averages 8.25% for the past 15 months. To put that in context, the average inflation rate from 1970 to 1979 was 8.32%. We are, absolutely, in a highly inflationary environment. Deflation is not only unlikely given the structure of the US banking system, but nowhere to be seen in the data either.

Demand destruction has had a severe impact on the prices of many goods and services, but that should not be confused with deflation. Inflation and deflation are monetary phenomena and the recent decline in prices has only lead to confusion and further obfuscation of what is really going on.

Monetary inflation is currently mitigating the price declines we are witnessing, meaning those prices that are declining would have declined much more were it not for the inflation, and will eventually cause prices to start rising again. Our greatest concern should not be with the current falling prices of goods and services, but with the rate at which they will rise in the future vis-à-vis our capital and income. I suspect there are very few people out there whose income and investments are keeping up with the inflation rate, which means their wealth is eroding in real terms.

I have also been aggregating and calculating similar money supply and inflation data for Canada and found that the Canadian dollar's inflation rates for 2007 and 2008 were much higher than the inflation rates of US dollar. However, the average inflation rates for 2009 thus far are exactly the opposite. Canada's inflation rate is falling while that of the US is remaining steady above 8%.

Year US CAD
2007 7.93% 9.55%
2008 8.31% 10.23%
2009 8.48% 6.89%

For those interested in gold, my fair value of gold for 2008 was $763 an ounce. Using the average of 2008 and 2009's inflation rates for the U.S. dollar, and gold's inflation rate for 2008, I come up with an approximate average value for gold of $815 for 2009. Please note that this is an estimate of the average value for the year, and not a year- end estimate.

Clearly the gold price is well above $815 an ounce, and has been so for quite some time. The macro economic environment has probably never been so obviously in favor of gold and it is my belief that the market has already priced much of this into the gold price. While I fully recognize gold's lure at these times, and the probability that the gold price could still increase quite substantially, I remain cautious about gold. Recall that investors who bought gold when it was grossly over- priced during 1979 and 1980 and then forgot to sell, suffered severe losses.

I would personally prefer gold to sell down to around $800 an ounce, where I know it represents good value, than buy gold at over-valued prices and hope that it keeps going up.

[Demeter]

25. Fed Would Be Shut Down If It Were Audited, Expert Says

http://www.cnbc.com/id/31204170

-- The Federal Reserve's balance sheet is so out of whack that the central bank would be shut down if subjected to a conventional audit, Jim Grant, editor of Grant's Interest Rate Observer, told CNBC.

With $45 billion in capital and $2.1 trillion in assets, the central bank would not withstand the scrutiny normally afforded other institutions, Grant said in a live interview.

"If the Fed examiners were set upon the Fed's own documents—unlabeled documents—to pass judgment on the Fed's capacity to survive the difficulties it faces in credit, it would shut this institution down," he said. "The Fed is undercapitalized in a way that Citicorp is undercapitalized."

Grant said he would support legislation currently making its way through Congress calling for an audit of the Fed.

Moreover, he criticized the way the Fed has managed the financial crisis, saying the central bank's target rate should not be around zero.



"I think zero is the wrong rate for almost any economy," Grant said, adding the Fed has "embarked on a vast experiment in moral hazard. Interest rates are the traffic signals in a market economy, and everything's green. ... You have to wonder whether these interest rates are the right clearing rate or rather they are the imposition of a central bank."

Amid a disparity between analysts predicting there will be no rate hikes soon and the fed funds futures indicating tightening by the end of the year, Grant said he thinks the Fed indeed will begin raising rates as inflation creeps into the picture.

Fed funds futures have fully priced in as much as a half-point rise in the target rate from its current range of zero to 0.25 percent.

"If the hairs on the back of your neck stand up when there's too much unanimity of opinion, then one begins to worry about this," he said. "The Fed proverbially has been late."

[Demeter]

26. America's Socialism For the Rich By Joseph Stiglitz

http://www.guardian.co.uk/commentisfree/2009/jun/12/america-corporate-banking-welfare

The US has a huge corporate safety net, allowing the banks to gamble with impunity, but offers little to struggling individuals



June 13, 2009 " The Guardian" -- With all the talk of "green shoots" of economic recovery, America's banks are pushing back on efforts to regulate them. While politicians talk about their commitment to regulatory reform to prevent a recurrence of the crisis, this is one area where the devil really is in the details – and the banks will muster what muscle they have left to ensure that they have ample room to continue as they have in the past.

The old system worked well for the bankers (if not for their shareholders), so why should they embrace change? Indeed, the efforts to rescue them devoted so little thought to the kind of post-crisis financial system we want that we will end up with a banking system that is less competitive, with the large banks that were too big too fail even larger.

It has long been recognised that those America's banks that are too big to fail are also too big to be managed. That is one reason that the performance of several of them has been so dismal. Because government provides deposit insurance, it plays a large role in restructuring (unlike other sectors). Normally, when a bank fails, the government engineers a financial restructuring; if it has to put in money, it, of course, gains a stake in the future. Officials know that if they wait too long, zombie or near zombie banks – with little or no net worth, but treated as if they were viable institutions – are likely to "gamble on resurrection". If they take big bets and win, they walk away with the proceeds; if they fail, the government picks up the tab.

This is not just theory; it is a lesson we learned, at great expense, during the Savings and Loan crisis of the 1980s. When the ATM machine says "insufficient funds", the government doesn't want this to mean that the bank, rather than your account, is out of money, so it intervenes before the till is empty. In a financial restructuring, shareholders typically get wiped out, and bondholders become the new shareholders. Sometimes the government must provide additional funds; sometimes it looks for a new investor to take over the failed bank.

The Obama administration has, however, introduced a new concept: too big to be financially restructured. The administration argues that all hell would break loose if we tried to play by the usual rules with these big banks. Markets would panic. So, we not only can't touch the bondholders, we also can't even touch the shareholders – even if most of the shares' existing value merely reflects a bet on a government bailout.

I think this judgment is wrong. I think the Obama administration has succumbed to political pressure and scaremongering by the big banks. As a result, the administration has confused bailing out the bankers and their shareholders with bailing out the banks.

Restructuring gives banks a chance for a new start: new potential investors (whether in equity or debt instruments) will have more confidence, other banks will be more willing to lend to them and they will be more willing to lend to others. The bondholders will gain from an orderly restructuring, and if the value of the assets is truly greater than the market (and outside analysts) believe, they will eventually reap the gains.

But what is clear is that the Obama strategy's current and future costs are very high – and so far, it has not achieved its limited objective of restarting lending. The taxpayer has had to pony up billions, and has provided billions more in guarantees – bills that are likely to come due in the future.

Rewriting the rules of the market economy – in a way that has benefited those that have caused so much pain to the entire global economy – is worse than financially costly. Most Americans view it as grossly unjust, especially after they saw the banks divert the billions intended to enable them to revive lending to payments of outsized bonuses and dividends. Tearing up the social contract is something that should not be done lightly.

But this new form of ersatz capitalism, in which losses are socialised and profits privatised, is doomed to failure. Incentives are distorted. There is no market discipline. The too-big-to-be-restructured banks know that they can gamble with impunity – and, with the Federal Reserve making funds available at near-zero interest rates, there are ample funds to do so.

Some have called this new economic regime "socialism with American characteristics". But socialism is concerned about ordinary individuals. By contrast, the US has provided little help for the millions of Americans who are losing their homes. Workers who lose their jobs receive only 39 weeks of limited unemployment benefits, and are then left on their own. And, when they lose their jobs, most lose their health insurance too.

America has expanded its corporate safety net in unprecedented ways, from commercial banks to investment banks, then to insurance and now to cars, with no end in sight. In truth, this is not socialism, but an extension of longstanding corporate welfarism. The rich and powerful turn to the government to help them whenever they can, while needy individuals get little social protection.

We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others. And, if we don't break them up, then we have to severely limit what they do. They can't be allowed to do what they did in the past – gamble at others' expenses.

This raises another problem with America's too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. Their lobbying efforts worked well, first to deregulate and then to have taxpayers pay for the cleanup. Their hope is that it will work once again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. We cannot afford to let that happen.

[Demeter]

29. Mission Shrink: We've Gone From Saving Wall St in Order to Save Main St to Just Saving Wall St

Arianna Huffington

http://www.huffingtonpost.com/arianna-huffington/mission-shrink-weve-gone_b_217708.html

Remember how, back when taxpayers were being asked to fork over hundreds of billions of dollars to bail out Wall Street, we were told it was essential to saving Main Street?

Well, in just a few months, we've gone from saving the banks in order to save the economy to just saving the banks. It's the opposite of mission creep.

In announcing his proposed "overhaul of the financial regulatory system," President Obama said, "Financial institutions have an obligation to themselves and to the public to manage risks carefully. And as president, I have a responsibility to ensure that our financial system works for the economy as a whole."

But parsing through his 85-page plan, it's not clear how these reforms will ensure that our financial system works for the economy as a whole.

"The Obama plan," writes Joe Nocera in the New York Times, "is little more than an attempt to stick some new regulatory fingers into a very leaky financial dam rather than rebuild the dam itself." For Obama's plan to have any lasting value, says Nocera, "he is going to have to make some bankers mad."

We are already hearing the usual whining from the financial industry about too much regulation and the dampening of incentives. And we are already seeing a concerted push from the banking lobby to kneecap the newly proposed Consumer Financial Protection Agency. But, all in all, there is little there to make bankers mad.

I don't expect there will be too many on Wall Street unhappy with the massive loophole the new plan leaves by calling for so-called plain vanilla derivatives to be traded on an exchange but allowing customized derivatives -- which were at the heart of the financial meltdown -- to remain largely unregulated. This is very good news for the wheelers and dealers who helped turn Wall Street into a casino.

The larger problem continues to be the administration's habit of conflating the health of the Wall Street economy with the health of the real economy -- when, in fact, the two economies have become decoupled. The Dow may be up 30 percent since March, but the numbers that matter most to everyday Americans continue to tell a very different tale.

Unemployment, the single most important statistic when it comes to taking the temperature of the real economy, is at a 26-year high. Yes, the number of people filing continuing claims last week dropped for the first time since January, but the number of new people seeking unemployment benefits rose -- as did the number of people receiving benefits under the emergency federal program that extended benefits beyond the 26-week program offered by most states. All told, over 9 million people are getting some form of unemployment compensation. And most economists are expecting unemployment to continue to rise, hitting 10 percent -- some even say 11 percent -- by 2010.

Another indication of the troubled state of the real economy is the record high credit card default rates reported in May. The numbers are staggering. Bank of America's default rate hit 12.5 percent -- up from 10.4 percent in April. Citigroup wrote off over 1-out-of-10 of its credit card loans last month. American Express did the same. If the numbers stay around these levels, credit card issuers stand to lose over $70 billion this year. And it's worth noting that a number of the biggest banks are reporting default rates higher than the "worst-case scenario" numbers from the Treasury's recent stress tests. Tim Geithner's team might need to come up with some new terms: "worst-case -- and this time we really mean it -- scenario"; "even worse than worst-case scenario"; "can't imagine a worse case -- and believe us we tried -- scenario".

On the housing front, in May foreclosures dipped 6 percent from April -- but the 321,480 homes lost was still the third-highest total on record. May was the third consecutive month with over 300,000 foreclosed properties -- the first time that's happened since RealtyTrac began tracking foreclosure numbers. Nevada, California, and Florida were the hardest hit states. In Nevada, one out of every 64 homes received a foreclosure filing last month. Nationwide, one out of every 398 homes received a foreclosure note. That's a whole lot of people looking for some place to live.

And lending -- the increase of which was supposedly the primary reason for the bank bailout -- is also down. "If the banks aren't lending money," Jeffrey Rosen, deputy chairman of Lazard told me, "the economy can't get going." But, according to the Treasury's latest report on lending by the top 21 recipients of government money, consumer and commercial lending fell 7 percent in April -- with nearly 75 percent of the banks reporting a decline in loan originations.

Despite this gloomy picture of the real economy, the administration prefers to focus on the rising sense of consumer confidence -- even though this confidence hasn't translated to greater consumer spending.

"Everyone feels mildly better about where the economy is going," is how Joe Biden put it earlier this week. Perhaps the vice president needs to get out more. There are 9 million out-of-work workers, thousands of former credit card holders, and 321,480 newly homeless homeowners (and their families) who might say otherwise.

So the economic bubble continues to be deflated, but the rhetorical bubble is being pumped with plenty of hot air. Maybe we could use one of the many green shoots the administration is marveling at to pop it.

If the Wall Street economy is ever going to be recoupled with the real economy, we'll have to start by recoupling rhetoric with reality.

[Demeter]

30. The United States is Committing Economic Suicide

http://www.economyincrisis.org/articles/show/3026

When and if foreign individuals and governments stop buying our freshly printed U.S. paper T-Bills, U.S. paper bonds, and other paper U.S. securities at slightly less than face value, and/or start buying these items at the foreign currency exchange equivalent of a few pennies on the dollar, the government checks, social security checks, government payroll checks, and private paychecks will then not buy very much food or anything else that we consume. Your life savings might only sustain you for a couple of weeks.

After we have sold the title to all of our U.S. assets to foreign entities as required to settle our foreign trade obligations, there will not be anything left for the foreign entities to buy and then U.S. government will not be able to raise any funds for any re-industrialization and the U.S. citizens will not have any possibility of employment in their future. The money that was passed out to the financial industries did nothing to create any jobs or eliminate the foreign trade problems with the U.S. economy.

Foreign entities will very soon own everything of value in the U.S. and they will become the major (or only) source of employment for U.S. citizens. The American population will then become employees; possibly indentured servants; or maybe even beg to become slaves owned by the foreign countries and/or foreign individuals that will own everything of value in the U.S. in the very near future.

We are selling off our childrens legacy to foreign owners, and the U.S. government calls it "Investing in America." We are racing to print money and then sell title to everything in the U.S. in order to keep from working.

What will be the buying power of the dollar when there are no remaining assets that the foreigners want to exchange for the dollars they earned by manufacturing the things that American citizens imported and consumed? The U.S. will very soon run out of titles to assets that foreign manufacturers will want to purchase with the freshly printed U.S. government currencies and securities that they earned.

The U.S. needs to direct the funds derived from the sale of the few remaining assets toward investing in activities such as technical education that will get the Gold and U.S. dollars from these foreign countries back into the U.S. via re-industrialization. Wall Street and Banking Business bailouts will not accomplish this. (Will the Chinese buy title to Dogpatch? I think that the U.S. government declared Dogpatch to be the most worthless property in America!)

Other countries view the U.S. as printing and spending huge amounts of paper money with the careless abandon of a drunken sailor on shore leave.

This is very disturbing to those very same foreigners that the U.S. government hopes will buy some more of our freshly printed U.S. securities (hopefully at not too much of a discount) to pay for our economic stimulation, trade deficit, and other various government expenses.

The discounts offered at public bid for our freshly printed U.S. securities by manufacturing nations that have acquired U.S. dollars will depend and reflect upon the confidence that the U.S. instills in these foreigners by our economic actions.

Many countries are losing confidence in the dollar as the benchmark for world trade and currency values. Other currencies, like the Chinese Yuan with a more stable value, are now being talked about as a replacement for the dollar as the benchmark for international currency values.

Bio: Gerald Spencer is an engineer who has been interested in economics since attending Texas A&M in the 1950's.

[AnneD]

31. Father was the first to teach me economics and life.....

here are a few of his chestnuts....

"What, you think money grows on trees."

"Do you think I'm made of money."

"When you've finished cooling the outside, shut the door."

"Thanks for packing my lunch hon-love your leftovers."

But he was a creampuff....

"Now don't tell your Mom, Here's some folding money for your date-no gal should ever be without her own money."

"Young man, lets get to know each other while she's getting ready."

"New socks, now there's something I always wanted, Oh and new under ware too. I'm the luckiest dad."

"I'm glad I got some overtime. Those teeth of yours will sure look pretty once those braces come off."

"No wife of mine is going to work unless she wants too, I'll work overtime first."

"Now what kind of Valentines Day would it be if I didn't bring all my sweethearts a box of chocolates."

He was an old fashioned Dad-made you earn your allowance but he always managed to find some extra here and there. We always had everything we needed and most of what we wanted.Even though he was our step dad-he never begrudged marrying a women with 4 kids and helping raise us. It was a point of pride with him that he could take care of us and his 2 daughters from his first marriage. He was a hard working generous man.

[Demeter]

34. You Were Indeed Blessed

My father went to night school for 10 years, while working and raising 4 kids in Detroit.

Sleeping was his idea of recreation, but we went to museums, and parks and swimming...

At the age of 60 he was laid off by GE. He was shocked that age discrimination happened to him. He thought he would be immune. It took him two years to digest it.

He watched Mother die of cancer...his only wife, and for all I know, his only girl ever. If she hadn't died, they would have made the 3rd generation to reach a 50th wedding anniversary. Got to 43, though.

And although he is driving my Sis and me nuts with his contrariness, I guess he's earned the right.

[AnneD]

111. About driving you nuts......

It's the cycle of life thing. Cherish your time with him.

[Demeter]

32. US groups face regulatory revamp

http://www.ft.com/cms/s/0/6bcf0554-5b5d-11de-be3f-00144feabdc0.html

By Tom Braithwaite in Washington and Francesco Guerrera in New York

Big US companies ranging from Wall Street banks to insurers, investment groups and General Electric on Wednesday faced fundamental changes in the business environment as President Barack Obama proposed what could be the biggest regulatory revamp since the 1930s.

The plan, which still must win congressional approval, would give the Federal Reserve new powers to oversee companies whose failure could endanger the banking system – a category that includes not only traditional lenders, but any company with significant financial operations, such as GE.

Remuneration and profits at Wall Street and beyond could be hit by the reforms, which would see the administration attempt to tighten capital and leverage rules at global banks in negotiation with the Basel Committee on Banking Supervision.

The administration sees the new rules as a rejection of the light-touch approach that held sway under Alan Greenspan, former Fed chairman.

“A culture of irresponsibility took root from Wall Street to Washington to Main Street,” said Mr Obama on Wednesday. “And a regulatory regime basically crafted in the wake of a 20th century economic crisis – the Great Depression – was overwhelmed by the speed, scope, and sophistication of a 21st century global economy.”

Mr Obama said he did not undertake intervention into the economy lightly. “We are called upon to recognise that the free market is the most powerful generative force for our prosperity – but it is not a free licence to ignore the consequences of our actions,” he said.

Corporate experts said the extension of the Fed’s powers would change the playing field for companies with finance operations, including Ford and General Motors, and others. It also could affect the strategies of companies such as retailer Wal-Mart, which had considered entering the financial sector.

“In the US, we had a long-standing debate over the separation of commerce and banking and concluded that commerce and banking will not be mixed,” said Don Ogilvie, the former head of the American Bankers Association who now chairs the Deloitte Center for Banking Solutions, a think-tank.

Large private equity groups and hedge funds such as Blackstone and Fortress could also come under the Fed’s purview if their size and importance to the economy continues to grow.

GE, whose finance arm GE Capital is bigger than many banks and had been regulated by the soon-to-be-scrapped Office of Thrift Supervision, was not available for comment.

The proposals attempt to bring transparency to previously opaque areas of financial markets, such as over-the-counter derivatives trading, and give the government unprecedented power to seize failing institutions. The new powers are intended as a response to the authorities’ inability to deal with the failure of large financial companies, such as AIG and Lehman Brothers, which were systemically important but remained outside the purview of the main US banking regulators.

Although parts of the white paper are expected to gain the support of business and both political parties, people in Congress expect a bitter fight over the detail. The Senate looks set to be the key battleground, with aides warning that the argument over the proposals could extend into next year in spite of the administration’s plans to pass it all in 2009.

Tim Geithner is due to testify before Congress on the reforms on Thursday morning.

[Demeter]

33. That will have to hold you folks for tonight

Please, decorate, elaborate, or just berate!

If I survive tonight, I'll see you in the morning. The humidity nearly dropped me today. Had to turn on the air conditioning....

[DemReadingDU]

36. Thanks Demeter!

Today was the 1st day that I turned on my air conditioner. I much prefer summer than winter, until the humidity rises. So glad for the A.C.

Back to reading....

[AnneD]

112. Had to turn mine on in May...

It just sucks here and we aren't even into the bad month of July, August, and September.

[Danascot]

39. Peter Schiff explains why the Fed shouldn't be chief regulator

"Obama proposes to entrust the critical job of “systemic risk regulator” to the Federal Reserve, the very organization that has proven most adept at creating systemic risk. This is like making Keith Richards the head of the DEA."

http://news.goldseek.com/EuroCapital/1245436556.php

[DemReadingDU]

42. I remember Mr. Ed, the talking horse

I don't remember him singing though, guess I didn't routinely watch the show.

more info about Mr. Ed
http://en.wikipedia.org/wiki/Mister_Ed

[Demeter]

46. Happy Saturday Everyone

It's definitely summer here, the worst kind of summer.


After working through a torrential downpour last night, and sleeping in air conditioning, which is so bad for the sinuses and makes me grind my teeth, I went out briefly. It's 80 and 80 out there! So I guess I'll just stay in and post gloom and doom...or go swimming.

The more I look at the data and the speculations, the less and less I see a way out. One thing is certain, Obama has less of an idea than anyone could have imagined. Let's hope, for the sake of everything, that he gets a really good economic education really fast. And not on our nickel or suffering.

[Demeter]

47. Admiral Prueher, General Franks leave BofA board

http://news.yahoo.com/s/nm/20090619/bs_nm/us_bankofamerica_1



NEW YORK (Reuters) – Bank of America Corp (BAC.N) said on Friday retired Army Gen. Tommy Franks and retired Navy Adm. Joseph Prueher have resigned from its board, meaning more than a third of its board has stepped aside since late April.

The departures were effective June 17 and come as the bank tries to improve corporate governance and bolster its board's banking and financial expertise at the behest of the U.S. government and investors.

Bank of America said the departures did not result from any disagreement with the company or management. The bank did not immediately return a call seeking further comment.

In the last two months, seven directors have left what had been a 19-person board, including lead director O. Temple Sloan, a longtime supporter of Chief Executive Kenneth Lewis.

The board now has 16 members, including four new directors with banking or regulatory experience. Among these are former Federal Reserve governor Susan Bies and former Federal Deposit Insurance Corp chairman Donald Powell.

Overhauling the board is expected to increase director scrutiny of Lewis, who was stripped in April of his role as chairman after criticism over the Charlotte, North Carolina- based bank's falling share price and the January 1 acquisition of Merrill Lynch & Co.

The bank has taken $45 billion of federal bailout money, including $20 billion to help absorb Merrill. It was not among the 10 large U.S. banks that regulators allowed this week to repay their infusions from the government's Troubled Asset Relief Program.

As part of the Merrill acquisition, three Merrill directors, including Prueher, joined the board. Prueher is the first of the three to step down.

Franks joined the board in January 2006 and is a former Commander in Chief of the U.S. Central Command. He oversaw the 2003 U.S. invasion of Iraq and overthrow of Saddam Hussein.

Prueher and Franks sat on the board's audit committee.

[Demeter]

48. The Obama Financial Reforms: Road To Change Or Perdition?

http://informationclearinghouse.info/article22873.htm

Stabilizing A Flawed System is Not The Same As Restructuring Or Remaking It

By Danny Schechter

June 19, 2009 "Information Clearing House" -- A recent study cited by the Editor of the Financial Times argues that we are now in a Depression although no one wants to use the term or face the music.

Recall that it took the National Bureau of Economic Research a full year to recognize the reality of a recession that analysts at investment banks had been acknowledging for as long. Despite everything that has happened, and is continuing to occur on the economic front---a rise in unemployment claims, mounting foreclosures, and escalating bankruptcies—the sense of crisis is being downplayed to stoke confidence and encourage the belief in “green shoots” and an emerging recovery.

The Obama Express is in full motion with new announcements, proposals, and laws signed daily. Yet, something’s missing. Au Contraire, Mr. Maher, there is no lack of audacity, just a failure to recognize that cosmetic alterations do not fundamental change make. What we have is a political elite that is more Clintonesque than Rooseveltesque. (If only the Repugs were right with their fears of the Socialist menace!)

These proposals, described as “new rules for the road,” were mostly embraced by the banks, a sign they are not tough enough. The Congress will probably approve them quickly because they were “hammered out” through a process of negotiations that seems to have heard more from the industry than public interest advocates....




So now we have 88 pages of financial reforms, as if the authors of this compromised and consensualized agenda were being paid by the word. The President is telling us that “mistakes” were made, as if massive crimes, theft, fraud and unregulated greed were not involved in causing the calamity at the heart if the crash of the economy.

Bloomberg surveyed the wreckage: “Financial firms worldwide have recorded more than $1.4 trillion in writedowns and credit losses since 2007 as the U.S. housing market collapsed and the economy sank into recession.”

Billions spent to unlock credit and get banks lending again have led nowhere. The financial news service quotes Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.

“It is becoming clearer that banks are not as willing to lend,” he said in an e-mailed message. “With their risk rising once again, risk premiums on non-financials must rise commensurately.”

They don’t see a recovery around the corner either, “The broad sense is we have not seen the bottom there yet,” said Bert Ely, a banking consultant in Alexandria, Virginia. “For later this year, and into next year, there are just big question marks out there.”
...............

What are the questions we should be asking? What happened to changes for ratings agencies that gave high marks for bogus mortgage securities? Why trust the Fed which, in the words of one critic “started the fire” through low interest rates, to extinguish it?

Simon Johnson, the ex-IMF Chief now at MIT asks some others

•Has the President really been briefed on the supposed benefits of having large financial institutions with great economic power and pervasive political influence? Don’t just claim that these are a good thing – tell us, in detail and preferably with numbers, what we the public gain from the presence of these behemoths among us. Keep in mind that “everyone has them” is no kind of argument – something so manifestly dangerous is not to be blindly copied.

•Why was executive and other compensation so notably absent from the latest Geithner-Summers joint statement of our problems and likely solutions? Does the President really expect us to believe that any set of reforms will work if they do not directly constrain the amounts that can be earned from misunderstanding risk today and hoping that the consequences do not appear on your watch? Does he have any idea of how the people who run big financial firms will game whatever controls try to limit their risk-taking?

•. Can President Obama finally talk about the much broader break down of corporate governance in this country, with boards of directors serving no discernible purpose in terms of limiting the excesses of corporate executives in the financial sector but also more broadly? Surely, without a reform package that includes measures to address this core issue, we will get exactly nowhere.”

Perhaps “exactly nowhere” is the real destination” in the sense that the real goal of the Geithner-Summers-Obama “reform” package seems to be to restore the old financial order, not restructure it, or heavens forbid, bring it under public control and accountability. New Rules and regulations are great, but do they add up to real reform?

Have the banks really acknowledged their role in the demolition derby that wrecked the economy? Not really, even as Llloyd Blankfein of Goldman Sachs admits, "We know that we have an explicit contract with our shareholders to be responsible stewards of their capital . . . we regret that we participated in the market euphoria and failed to raise a responsible voice."

Is that all they are copping to? A few weeks back. Goldman paid $60 million to Massachusetts to settle a complaint that they funded mortgages “designed to fail.” They admitted no wrong-doing, in a practice so common when Wall Street gets its fingers caught in the cookie jar of criminality.

Tell that to the millions losing their homes.

After helping to fund the subcrime market, Goldman was hailed as a visionary for turning against it. “it made $4bn profit from betting against the sub-prime mortgage market, and because - bar the fourth quarter of 2008 - it has continued to make a profit throughout.”

Clearly the profiteers are far more secure than their victims. Here are the thoughts of some knowledgeable people who want progressive change and who are in the know:

Former Investment Banker Nomi Prins: “The plan makes no mention of reconstructing the financial system.”

Marshall Auerback sees an opportunity for real reform squandered.

“As with so much of the Obama administration, great-sounding words, but nothing in the way of substantive change. Particularly disturbing are the moves on derivatives, notably “credit default swaps”. Excuse us for not liking a market that is rigged in favor of the sellers, the monopoly dealers, who even today refuse to allow open price discovery in credit default swaps among and between other dealers. True to their Wall Street ethos, Summers and Geithner have capitulated on the most important aspect of derivatives, by refusing to place these instruments on a regulated exchange, where transparency and standardization would be far more operative.

A New Way Forward: “It’s not enough to try to patch up the current system. We demand serious reform that fixes the root problems in our political and economic system: excessive influence of banks, dangerous compensation systems, and massive consolidation. And we demand that the reform happen in an open and transparent manner.”

“You go to war,” the not missed Mr. Rumsfeld once said “with the army you have.” Unfortunately in the case of Financial Reform, we are being led by Generals at the top but there are no troops or people’s army below to hold them accountable, much less push them to emulate a more aggressive approach a la FDR,

Organizing put this president in office. Only organizing can push him to do what must be done. Can we get the Congress to toughen up these uneven and timid proposals?

News Dissector Danny Schechter, blogger in chief at www.Medichannel.org, is making a film based on his book PLUNDER (Cosimo) news.dissector.com/plunder. Comments to [e-mail]

[Demeter]

49. Geithner's Plan to Have a Reform Plan Skewered by Senate

http://www.nakedcapitalism.com/2009/06/geithers-plan-to-have-reform-plan.html


...Compare the behavior of the Chairmen of the 1950s and Volcker to that of Greenspan. Chairman Eccles and McCabe both lost their Chairmanships because they wouldn’t compromise Fed independence. They stood their ground even after being summoned to the White House. Martin, appointed by Truman, was in later life referred to by Truman as “the traitor” presumably for taking the punch bowl away. The public image of Volcker is that of a man who twice a year endured public Congressional assaults, resisted political pressure, and enabled the Fed to stay the course.

Greenspan, on the other hand, jumped at the chance to meet Clinton, traveling to Little Rock before the inauguration. Bob Woodward in his book “Maestro” quotes Clinton telling Gore after the pre-inauguration meeting: “We can do business.” Woodward also quotes Secretary of the Treasury Bentsen telling Clinton that they had effectively reached a “gentleman’s agreement” with Greenspan. The agreement evidently involved Greenspan’s support for budget deficit reduction financed in part by tax increases. It is not clear what Greenspan received.


Yves here. One must presume it was reappointment. Back to Alford:

Even if the deal with Clinton contributed to a good policy mix, Greenspan should never have entered into that agreement/deal/understanding or another agreement/deal/understanding. The very act of negotiating and injecting the Fed into a discussion of budget decisions compromised Fed independence. Why shouldn’t Bush have expected the same? Why shouldn’t every succeeding President expect the Fed Chairman to be a “business” partner? Refusal to deal on the part of the Fed can no longer be attributed to principle and precedent. Refusal “ to do business” will now be viewed as a rejection, partisan or otherwise. The Fed is no longer able to stand apart from political battles. Greenspan severely compromised the Fed standing as an agency insulated from the short-sighted and partisan politics of Washington DC....

[Demeter]

50. Has the Fed Compromised Its Independence? (And Otherwise Messed Up?)

http://www.nakedcapitalism.com/2008/06/has-fed-compromised-its-independence.html


Former Federal Reserve economist Richard Alford takes issue with that view. Alford has criticized the Fed's recent policies (see here for an interview that was very popular with readers) and has gone digging deeper to find its roots.

Alford was so kind as to share with me an article he is developing. It's a bit too long to post in full, so let me give the broad strokes followed by the concluding section.

Few have any memory of America's central bank having a openly contentious relationship with the Treasury and Congress. Even though Paul Volcker had to withstand considerable pressure, some of his predecessors fought open turf wars. Yet from the end of World War II to the (sadly) supine Arthur Burns era, there were not infrequent pitched battles with the Fed with incidents that would seem unthinkable now. For example, Truman summoned the FOMC to pressure them into a more accommodative policy during the Korean War, then issued a White House press release claiming the Fed had made a commitment that it had not agreed to. The Fed played hardball, leaking its version of the meeting, which contradicted the press release. That led Congress to join the fray, trying to bring the Fed to heel via sharply critical hearings.

While Volker did endure widespread criticism and harangues from Congress, even for those who lived through that era. the memories of the ritual roughings up are dim. In addition, there was at least initial support for his harsh measures. Moreover, (unbeknownst to me) Volcker was masterful at defanging Congress long enough for his remedies to take hold. Had someone less adept been at the helm, a firefight might well have ensued.

[Demeter]

51. Review of Gillian Tett's "Fool's Gold"

http://www.nakedcapitalism.com/2009/06/guest-post-review-of-gillian-tetts.html

Submitted by Knute Knutson:

As I imagine many of your are, I'm an avid reader of Gillian Tett’s Financial Times columns, I therefore purchased her recent book, Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe, shortly after its release. Ms. Tett is head of financial market coverage at the FT. She was named British journalist of the year in 2008 for her coverage of the financial crisis. With a PhD in social anthropology, she has an unusual background for a financial journalist.

The book traces the development of the credit derivatives market from its inception circa 1994 to its eventual blowup. It does so by profiling a group of J.P. Morgan bankers that were instrumental in the invention and proliferation of credit derivatives. In a nutshell, the storyline is that these bankers started a well-intentioned revolution that eventually spun out of control when other greedier or less competent players got involved. From a publisher’s standpoint, Fool’s Gold is arguably the ideal mass-market book about the financial crisis: it is timely, has engaging characters and an engrossing story, and is written on a level that is easily understandable to laypersons with little or no previous knowledge of derivatives or finance. It also does a good job of coherently explaining how the financial meltdown happened. Even though I had closely followed the financial crisis as it unfolded in real time, I still learned quite a bit from the book, particularly in terms of the big picture. Overall, I found Fool’s Gold to be an engrossing enjoyable read. But ultimately, its pleasures were superficial, a sugar high rather than a good meal.

My main criticism of the book is that it often reads like a puff piece. All of the story’s “heroes” (e.g., the JPM bankers, Jamie Dimon, Tim Geithner) are portrayed flatteringly. The author, an active journalist, presumably had to cast her sources in a favorable (or at least not harsh) light lest she jeopardize her future access to them. Or she could have gotten too involved in their view of the story and lost objectivity. The dustjacket blurb boasts of the author's "exclusive access to JPMorgan Chase CEO Jamie Dimon and...the 'Morgan Mafia,' as well as in-depth interviews with dozens of other key players, including Treasury Secretary Timothy Geithner."

Fool's Gold portrays JPM as more prudent and risk-averse than other banks and, by virtue of these qualities, largely unscathed by the financial crisis. To wit, another quote from the dustjacket: "Tett's access to Dimon and the J.P. Morgan leaders who so skillfully steered their bank away from the wild excesses of others sheds invaluable light not only on the untold story of how they engineered their bank's escape from carnage but..." In contrast to such a hagiographic portrayal, Institutional Risk Analytics recently had this to say about JPM:

Many of our clients believe that JPM is the last redoubt for both cash and collateral. We remind them, however, that all of the bailouts to date engineered by Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke, including the merger of Bear Stearns, the acquisition of WaMu and the rescue of American International Group (NYSE:AIG) were designed to prevent the trigger of CDS and the resultant evaporation of JPM. The bank is an afterthought compared to the OTC derivatives exchange that JPM has become.


Suffice it to say that JPM may not be as pristine a hero as Fool’s Gold would have us believe. But the book certainly is a PR coup for JPM.

I had a couple of other quibbles. For one, I felt the book paid short shrift to events post Bear Stearn’s collapse. I got the impression that it may have been rushed into print. Second, I was disappointed in the author’s closing comments, which came across to me as obligatory and largely platitudinous. Nonetheless, I found Fool’s Gold to be a worthwhile read despite its shortcomings (and my review may be guilty of accentuating the negative), but I suspect that many Naked Capitalism readers would consider it to be lightweight fare.

I had a couple of other quibbles. For one, I felt the book paid short shrift to events post the Bear Stearns collapse. I got the impression that it may have been rushed into print. Second, I was disappointed in the author’s closing comments, which came across to me as obligatory and largely platitudinous. Nonetheless, I found Fool’s Gold to be a worthwhile read despite its shortcomings (and my review may be guilty of accentuating the negative), but I suspect that many Naked Capitalism readers would consider it to be lightweight fare.

[Demeter]

52. Xie: Chinese Banks Funding Commodities Speculation, Casting Doubt on Recovery

http://www.nakedcapitalism.com/2009/06/xie-chinese-banks-funding-commodities.html


Andy Xie, writing for Cajing, questions the durability of China's recovery. He argues that much of the upsurge in lending, which was one of the developments that cheered commentators, is fueling asset speculation, in this case in commodities, Reports this spring has suggested that as much as a third of the new lending was going into the stock market.

Observers have argued that China is stockpiling commodities as a diversification strategy., Xie adds an important tidbit to this equation, that banks are lending against commodities, using mortgage-like structures, and argues that the current price levels of commodities are a function of easy credit, not fundamentals.

From Cajing.com.cn:

China's credit boom has increased bank lending by more than 6 trillion yuan since December. Many analysts think an economic boom will follow in the second half 2009. They will be disappointed. Much of this lending has not been used to support tangible projects but, instead, has been channeled into asset markets.

Many boom forecasters think asset market speculation will lead to spending growth through the wealth effect. But creating a bubble to support an economy brings, at best, a few short-term benefits along with a lot of long-term pain. Moreover, some of this speculation is actually hurting China's economy by driving asset prices higher.

The current surge in commodity prices, for example, is being fueled by China's demand for speculative inventory. Damage to the domestic economy is already significant. If lending doesn't cool soon, this speculative force will transfer even more Chinese cash overseas and trigger long-term stagflation.

Commodity prices have skyrocketed since March....The weak global economy can't support high commodity prices. Instead, low interest rates and inflation fears are driving money into commodity buying.

Exchange-traded funds (ETFs) alone account for half of the activity on the oil futures market. ETFs allow retail investors to act like hedge funds. This product has serious implications for monetary policymaking. One consequence is that inflation fears could lead to inflation through massive deployment of money into inflation-hedging assets such as commodities.

Financial demand alone can't support commodity prices. Financial investors can't take physical delivery and must sell maturing futures contracts. This force can lead to a steep price curve over time.

Early this year, the six-month futures price for oil was US$ 20 higher than the spot price. Investors faced huge losses unless spot prices rose. A wide gap between spot and futures prices increased inventory demand as arbitrageurs sought to profit from the difference between warehousing costs and the gap between spot and futures prices. That demand flattened the price curve and limited losses for financial investors. Without inventory demand, financial speculation doesn't work.

For some commodities, warehousing costs are low, limiting net losses for financial buyers. Some commodities can be used just like stocks, bonds and other financial products. Precious metals, for example, are like that. Copper, although 5,000 times less valuable than gold, still has low warehousing costs relative to its value. Some commodities such as lumber and iron ore are bulky, costly to warehouse, and should be less susceptible to financial speculation. Chinese players, however, are changing that formula by leveraging China's size. They've made everything open to speculation.

There's little doubt that China's bank lending since last December has driven speculative inventory demand for commodities. Chinese banks lend for commodity purchases, allowing the underlying commodities to be used as collateral. These loans are structured like mortgages.

Banks usually have to be extremely cautious about such lending, as commodity prices fluctuate far more than property prices. But Chinese banks are relatively lenient....

The international media has been following reports of record commodity imports by China. The surge is being portrayed as reflecting China's recovering economy. Indeed, the international financial market is portraying China's perceived recovery as a harbinger for global recovery. It is a major factor pushing up stock prices around the world.

But China's imports are mostly for speculative inventories. Bank loans were so cheap and easy to get that many commodity distributors used financing for speculation. The first wave of purchases was to arbitrage the difference between spot and futures prices. That was smart. But now that price curves have flattened for most commodities, these imports are based on speculation that prices will increase. Demand from China's army of speculators is driving up prices, making their expectations self-fulfilling in the short term....

The iron ore market has been brutal for China, partly due to China's own inefficient system. China imports more ore than Europe and Japan combined. Skyrocketing prices have cost China dearly.

For four decades before 2003, fine iron ore prices fluctuated between US$ 20 and US$ 30 a ton. As ore was plentiful, prices were driven by production costs. After 2003, Chinese demand drove prices out of this range. Contract prices quadrupled to nearly US$ 100 per ton, and the spot price reached nearly US$ 200 a ton in 2008.....

China's local governments have been obsessed with promoting steel industry growth....But the spot market is relatively small, and mines can easily manipulate spot prices by reducing supply. On the other hand, numerous Chinese steel mills simultaneously want to buy ore to sustain production so their governments can report higher GDP rates, even if higher GDP is money-losing. China's steel industry is structured to hurt China's best interests.

As steel demand collapsed in the fourth quarter 2008 and first quarter 2009, steel prices fell sharply. That should have led to a collapse in ore demand. But the bank lending surge armed Chinese ore distributors, giving them money for speculating and stocking up....

What is happening in the commodity market is glaring proof that China's lending surge is hurting the country. Even more serious is that it is leading Chinese companies away from real business and further toward asset speculation – virtual business...

As the economy weakened in late 2008, private lenders began demanding money back from distressed private companies. Loans from state-owned enterprises may have kept many private companies from going bankrupt. It has served to re-channel bank lending into cash for individuals and businesses that were in the lending business. This money may have flowed into asset markets. It is part of the phenomenon of the private sector withdrawing from the real economy into the virtual one.

It's worrisome that businessmen have become de facto fund managers and speculators. This happened 10 years ago in Hong Kong, and since then the city's economy has stagnated. Some may argue that China has SOEs to lead the economy. However, private companies account for most employment in China, even though SOEs account for a larger portion of GDP. Now, the government is spending huge amounts of money to provide temporary employment for 2009 college graduates. If private sector employment doesn't grow, the government may have to spend even more next year. The government is using fiscal stimulus and bank lending to support economic recovery. But the recovery may be a jobless one. China needs a dynamic private sector to resolve the employment problem.

We are seeing a dark side to the lending surge as commodity speculation hurts the economy. More lending may lead to higher commodity prices, threatening stagflation. Cheap loans benefit overseas commodity suppliers, not necessarily the Chinese economy. Lending policy should consider this self-inflicted damage.

Many analysts argue GDP growth follows loan growth, and inflation is a problem only when the economy overheats. This is naive. Borrowed money channeled into speculation leads to inflation. And China may face a lasting employment crisis if private companies don't expand.

This lending surge proves China's economic problems can't be resolved with liquidity. China's growth model is based on government-led investment and foreign enterprise-led export. As exports grew in the past, the government channeled income into investment to support more export growth. Now that the global economy and China's exports have collapsed, there will be no income growth to support investment growth. The government's current investment stimulus is tapping a money pool accumulated from past exports. Eventually, the pool will dry up.

If exports remain weak for several years, China's only chance for returning to high growth will be to shift demand to the domestic household sector. This would require significant rebalancing of wealth and income. A new growth cycle could start by distributing shares of listed SOEs to Chinese households, creating a virtuous cycle that lasts a decade.

Putting money into speculative investments isn't totally irrational. It's better than expanding capacity which, without export customers, would surely lead to losses. Businesses currently lack incentive to invest. But many boom forecasters wrongly assume that recent asset appreciation, fueled by speculation, signaled an end to economic problems. That's an illusion. The lending surge may have created more problems than it resolved.

[Demeter]

53. Roubini: New Regulations "Go in the Right Direction," But Not Far Enough

http://finance.yahoo.com/tech-ticker/article/266396/Roubini-New-Regulations-

[Demeter]

54. Hoover or Roosevelt? Obama gets comparison to past presidents

http://www.newdeal20.org/?p=2594


In the July issue of Harper’s, Kevin Baker compares Obama to Herbert Hoover: Excerpts from “Barack Hoover Obama”:

“The comparison is not meant to be flippant. It has nothing to do with the received image of Hoover, the dour, round-collared, gerbil-cheeked technocrat who looked on with indifference while the country went to pieces. To understand how dire our situation is now it is necessary to remember that when he was elected president in 1928, Herbert Hoover was widely considered the most capable public figure in the country. Hoover-like Obama-was almost certainly someone gifted with more intelligence, a better education, and a greater range of life experience than FDR. And Hoover, through the first three years of the Depression, was also the man who comprehended better than anyone else what was happening and what needed to be done. And yet he failed.

It is impossible not to wish desperately for his success as he tries to grapple with all that confronts him: a worldwide depression, catastrophic climate change, an unjust and inadequate health-care system, wars in Afghanistan and Iraq, the ongoing disgrace of Guantanamo, a floundering education system. Obama’s failure would be unthinkable. And yet the best indications now are that he will fail, because he will be unable-indeed he will refuse-to seize the radical moment at hand.

Every instinct the president has honed, every voice he hears in Washington, every inclination of our political culture urges incrementalism, urges deliberation, if any significant change is to be brought about. The trouble is that we are at one of those rare moments in history when the radical becomes pragmatic, when deliberation and compromise foster disaster. The question is not what can be done but what must be done.”

Today, the New York Times continues the comparisons to presidents past with Joe Nocera’s analysis of Obama’s financial regulatory reform plans:

“Three quarters of a century ago, President Franklin Roosevelt earned the undying enmity of Wall Street when he used his enormous popularity to push through a series of radical regulatory reforms that completely changed the norms of the financial industry. Wall Street hated the reforms, of course, but Roosevelt didn’t care. Wall Street and the financial industry had engaged in practices they shouldn’t have, and had helped lead the country into the Great Depression. Those practices had to be stopped. To the president, that’s all that mattered.

On Wednesday, President Obama unveiled what he described as “a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression.” In terms of the sheer number of proposals, outlined in an 88-page document the administration released on Tuesday, that is undoubtedly true. But in terms of the scope and breadth of the Obama plan - and more important, in terms of its overall effect on Wall Street’s modus operandi - it’s not even close to what Roosevelt accomplished during the Great Depression.

Rather, the Obama plan is little more than an attempt to stick some new regulatory fingers into a very leaky financial dike, and not rebuild the entire system. Without question, the latter would be more difficult, more contentious and probably more expensive. But it would also have more lasting value.”

http://www.harpers.org/archive/2009/07/0082562?redirect=1982284879

http://www.nytimes.com/2009/06/18/business/18nocera.html?_r=2&ref=politics

[Hawkowl]

93. Crap

I've been reading a lot about Hoover lately, and unfortunately I think the comparison to Obama is apt. A very smart technocrat who really doesn't have the cojones for confrontation and conflict that real reform demands.

It is going to be a shame that the first black president is going to resemble Hoover if he doesn't pull his head out of his ass. Hoover was a very smart, capable and caring public servant--and a complete failure as president. Obama is surely traveling down that same road.

[Demeter]

97. Hoover Was the Perfect Steady-State President

who had the misfortune to be handed a massive credit and economic and ecological collapse.

He also was Republican, therefore less empathetic and less flexible, than the situation required.

Another asset Roosevelt had, besides his total indifference to what the rich thought about him, was his ruthlessness (when appropriate) to push people beyond their mindset limits.

[Demeter]

56. The next big investment bubble - green energy

http://www.moneyweek.com/investments/commodities/the-next-big-investment-bubble-green-energy-14911.aspx



We're not sure that investors have another bubble in them just yet. But with all that money floating around, it's eventually going to go somewhere. And one area stands out as a prime candidate – alternative and renewable energy.

The sector has the heavy backing of the government. It has some great stories behind it – solar towers, wave farms and electric cars – all linked together by smart grids, already being hyped as "the energy internet"

There's also a genuine infrastructure problem to solve. The laying of internet cables and railway lines bankrupted many people and companies. But those bubbles created the infrastructure necessary to improve our lives and increase productivity and efficiency. Alternative energy has a similar driving force behind it. Regardless of your take on the greenhouse effect, you can't deny that it would be useful to reduce our dependence on oil.

So the conditions are ripe in the alternative energy sector for a bubble.

TRANSLATIONS: THERE ARE STILL CHARLATANS OUT THERE--LIKE THE DOTCOM BUBBLE

[Demeter]

58. Goldman's Blankfein issues apology as bank prepares to repay $10bn

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5554488/Goldmans-Blankfein-issues-apology-as-bank-prepares-to-repay-10bn.html

Goldman Sachs chairman Lloyd Blankfein has publicly apologised for the first time for the investment bank's participation in the "market euphoria" that spurred the global financial crisis.


By James Quinn Wall Street Correspondent
Published: 6:00AM BST 17 Jun 2009

Ahead of Goldman's repayment of its $10bn (£6bn) in US taxpayer's funds later today, Mr Blankfein also admitted that the bank failed to speak out on the problems occurring in the market.

"We know that we have an explicit contract with our shareholders to be responsible stewards of their capital . . . we regret that we participated in the market euphoria and failed to raise a responsible voice."

The stark admissions are contained in letters to four leading US politicians who are the chairmen and ranking members of Capitol Hill's two leading financial services committees...In the letters, copies of which have been seen by The Daily Telegraph, Mr Blankfein also warns that stability in the financial markets can only return if the industry accepts that some of its practices are "unhealthy".

He also calls on the industry to "ensure that compensation reflects the true performance of the firm and motivates proper behaviour".

His comments are similar in tone to a speech given at the Council of Institutional Investors in May, although this is the first time the comments have emerged into the mainstream public arena.

Throughout the credit crisis, Goldman has been vilified by some in the industry, not least because of the fact it made $4bn profit from betting against the sub-prime mortgage market, and because - bar the fourth quarter of 2008 - it has continued to make a profit throughout.

But in his letters to Congressmen Barney Frank and Max Bacchus and Senators Chris Dodd and Richard Shelby, Mr Blankfein strongly stands by the bank's actions, stressing that it has worked hard on behalf of investors.

In what may be read by some as a new era of enlightenment by the investment bank, Mr Blankfein writes that the return of the $10bn of government funds will not "end our obligations to the public interest".

WELL, THAT MAKES IT ALL BETTER THEN. (DOING MY BEST BRITISH IMPERSONATION)

[Tansy_Gold]

77. "Max Bacchus"???? (Demeter didn't do it! It's in the original!) n/t

[Demeter]

81. God of Wine, Women and Song

It's that training in the Classics at those tony Public Schools

[Demeter]

59. The Case for California Defaulting, Even If It Won't By Paul Kedrosky

http://paul.kedrosky.com/archives/2009/06/thinking_the_un_1.html


The State of California is having another horrible week. This one started with the legislature missing Monday's deadline for a new budget to be submitted -- a deadline that laughably ungovernable California has dutifully missed every year since 1986 -- and it continued with S&P putting the state on credit watch for a possible downgrade.

Bill Lockyer, the state's treasurer (sic.), ignored the former news, but, via his spokes-thingie, went bat-shit nuts at the latter development. Why? Because he knows there is precisely zero chance the state's on-beyond-incompetent legislature will entirely close California's $24-billion and growing budgetary deficit. At best we might see it halved through cuts, a goodly chunk of which will be phantom and/or punts to the future. So that means Treasurer Lockyer must make up the difference with Other People's Money, which puts him on the bond-flogging trail sometime this summer. That will be at higher than usual higher yields, but not nearly so high as yields would be if S&P followed through on its threat and downgraded California's droopy, A-rated GO bonds.

The root issue, of course, is that California is insolvent, and irritating people like S&P analysts keep noticing. The state -- let's call it Latvia by the Pacific -- has a $24-billion budget gap that must be closed for it to continue operating (and I use that word advisedly). Without a clear sense of how that will happen rational creditors are going to be increasingly skittish about filling the hole. Now, does that mean California can't sell enough bonds to backfill the gap this time? You bet it can, and it will. This is part Schwarzenegger/Lockyer Financial Theater, and partly a laughably transparent attempt to demonstrate budgetary semi-competency in hopes of a few basis-points of relief on the inevitable bond sale. That's all.

Because California has $5.7-billion in debt servicing obligations. And while that will grow, debt occupies pride of place in California's constitution -- only education must be paid off before the next slug of cash goes to creditors. Get that? Healthcare, prisons, and other frivolities can all go to rack and ruin, but creditors must be paid, constitutionally speaking. That means, if you're looking at this through the gimlet eyes of muni-bond ghouls, that California has something like $50-billion in budgetary space to make its $5.7-billion in payments. It's pretty easy to calculate that California can make the payment nut, even if it has to close hospitals, release prisoners and stop patrolling the highways to do it.

And that's the problem. Because while California won't default, at least not right now, for practical purposes it should. Its income and expenses are structurally out of whack, not merely temporarily so. The imbalance is an artifact of a bygone era, one that won't come back any time soon -- perhaps not in our lifetimes. So, default. Say "whoops", financially speaking, and bite it. Better now than later. But California can't. It operates at the mercy of its creditors, and when this bit of theater is over said creditors will buy more debt, and California will keep making payments on it, right up until it can't.

OR.... THEY COULD RAISE SOME TAXES!!! SAY THEY CUT ALL LEGISLATOR AND GOVERNOR SALARY PAYOUTS UNTIL THEY HAVE RAISED ENOUGH FUNDS TO BALANCE THE BUDGET--AND AS A KICKER, INCLUDE THEIR HEALTH INSURANCE! THAT OUGHT TO MOTIVATE THE TROOPS.

[Demeter]

60. SOUR GRAPES: AN ATTACK ON THE BLACK SWAN GUY

http://www.thebigmoney.com/articles/money-trail/2009/06/15/swan-song?page=full


Swan Song By Mark Gimein

First he was very famous, now he's very rich. But Nassim Taleb is still wrong.

While for just about everyone involved in the markets, the last two years of financial history have been a massacre, they have been a long victory lap for Nassim Nicholas Taleb. Taleb is the author of The Black Swan, the book about, as the subtitle puts it, "The Impact of the Highly Improbable." It came out in 2007, just before everything that seemed highly improbable became painfully actual. As everyone else's fortunes have shrunk, Taleb's have risen. Not only have his books made him the public face of the New Catastrophism, but his insights have turned out to be extremely profitable: The Wall Street Journal reports that Universa, a hedge fund for which Taleb serves as guru and adviser, gained more than 100 percent last year and now holds $6 billion.

It's hard to argue with success. In bubble markets and bear markets, the talk always turns to new paradigms. If there was a huge crash yesterday, why shouldn't there be an even bigger one tomorrow? For a while now, though, I've been trying to explain to people why I am loath to jump on the Taleb bandwagon. The news about Universa doesn't change this. I am not surprised that Taleb's approach has made money for investors. But I will be if—assuming he doesn't change his approach—he keeps doing so.

Taleb has become the go-to philosopher of the markets with a straightforward and appealing precept: that people always underestimate the chances of improbable, out-of-the-ordinary events. This to me seems a dangerous proposition about the markets. It is also, I think, a questionable proposition about human behavior.

While Taleb has acquired a huge following in the world of business and investment, he does not present himself mainly as a "business" thinker. Little of his 2004 book, Fooled by Randomness, and even less of The Black Swan talks about investing directly. His conceit is that he helps readers see possibility. It is attractive because it separates people into the plodders—or, as Taleb calls them, nerds—and the street-smart Talebites who've learned to appreciate the unexpected. But the closer you look, the less clear it is that the plodders are as consistently wrong as Taleb thinks.

One thing to be said in Taleb's favor is that he has never lost a spectacular amount of money at once. Three times now he has made money when few others did. The first was in the 1987 Black Monday stock market crash, when he made $35 million to $40 million as a trader. The second was the tech stock crash of 2000, when Taleb's own fund, Empirica, gained 60 percent. And the third is Universa.

What you might miss in this, though, is what happened to Taleb in the in-between years. Taleb, in the pre-Universa days, said that his Black Monday windfall made up 97 percent of the money he'd made. Afterward, he moved through several trading jobs without much success. In 1999, he started Empirica, which, as the Wall Street Journal reported, followed the gains of 2000 with several lackluster years and closed in 2004. In Taleb's telling, this is part of the magic. "When you lose money steadily and then make money in lumps," Taleb told Bloomberg magazine, "people think you're crazy."

Well, maybe. Or maybe they just think that you're steadily losing money. Taleb's basic trading insight was that he could buy "deep out of the money" options that would pay off in a dramatic market fall. Most of the time, such options expire worthless. But in a market crash, they deliver a big payoff. In effect, Taleb's strategy has been to buy insurance, reasoning that folks underestimated the likelihood of catastrophic events. It's a lot like buying $200,000 of insurance on a $150,000 house. If it burns down, you've made money. Taleb's idea was that this insurance was underpriced.

The problem with catastrophism, however, is that it's very difficult for anyone in the market to wait around for the unexpected. And while Taleb buys insurance, most other market players prefer to sell it. In the New Yorker profile that first brought Taleb to prominence, Malcolm Gladwell cannily contrasts Taleb with Victor Niederhoffer, a hedge-fund manager whose stock in trade was selling the same kinds of options that Taleb bought. At the end of Gladwell's story, Niederhoffer loses a lot of money. It's a pattern that Niederhoffer repeats over and over—a later story about him christens him "The Blow-Up Artist."

By this point, what's wrong with the Niederhoffer approach has become abundantly clear. Offering insurance without knowing the odds is a strategy that is prone to blowing up in spectacular ways. It doesn't matter whether the instruments involved are options or credit-default swaps (which are literally insurance against defaults on corporate bonds) or any of the other tools of finance. In the worst case, you wind up with Niederhoffer—or AIG (AIG).

But the failures of the Niederhoffers and AIGs do not translate to a validation of Taleb-style catastrophism because these two approaches turn out to be linked. They are mirror images. In noncatastrophic times, the Niederhoffers and AIGs make money consistently and quietly and then end up losing it conspicuously and painfully. The Talebs make money rarely, amaze everyone because they do it when everybody else is getting killed—and so make it easy to forget about years of steady losses. Over the long run, the anti-catastrophists often do fairly well (if they don't get too greedy and make bets that cost them all their money in even a small market drop). But it is the catastrophists, a la Taleb, who look smarter. If you're always planning for crisis, you look like a genius when it does come.

Arguing against Taleb is a little embarrassing; who among us wants to side with the plodders when for the price of a paperback you can join the elect? But the experience of the markets here is important because it shows that neither consistently discounting the chance of unforeseen risks, as AIG did with such gusto, nor betting day after day on unforeseen catastrophes is a reliable way to make money.

In his books Taleb presents a wealth of examples of how prone we are to discount the unexpected and unlikely, but what is notably missing from The Black Swan are examples of just how likely we are to overestimate the chances of unlikely events when they are presented to us under a spotlight. Taleb is, of course, right that we fail to anticipate what we are not looking for. But we also overanticipate when we are looking too hard for the outliers. Lottery players overvalue their chances of winning $10 million, and horse bettors put too much money on 100-1 long shots. People who watch the local news too avidly believe there is a child kidnapper around every corner, and followers of Taleb assume that every time they pass a dark alley, catastrophe is about to pop out with a bloody knife.

One issue in investing that Taleb spends some time on in his book Fooled By Randomness is "survivorship bias." It's well known that fund managers as a group look much better than they should because the least successful ones go out of business. As Taleb points out, we notice the ones who do well a lot more because those who do badly simply drop out of sight. So it is also with predictions of disaster: We mostly get to hear about the few times that they turn out to be right.

* Mark Gimein is a columnist for The Big Money. He also blogs about finance at Chumpchanger.com.

[Demeter]

61. MORE THAN YOU'LL EVER NEED TO KNOW ABOUT LATVIA

http://www.ft.com/cms/s/0/2543ee96-5a9b-11de-8c14-00144feabdc0.html

FAILURE IN A NUTSHELL, POST BUBBLE

[Demeter]

62. PROOF THAT SOME ANIMALS(COUNTRIES-JAPAN) ARE MORE EQUAL THAN OTHERS

Fitch to keep sovereign debt rating unchanged FOR JAPAN
Bloomberg

Fitch Ratings Ltd. said it will maintain Japan's sovereign debt rating at AA- even though the government has abandoned its goal of balancing the budget by 2011.

"We maintain a stable outlook on Japan's ratings, suggesting there will be no change in the coming year," James McCormack, head of Asian sovereign ratings at Fitch, wrote in an e-mailed reply to questions. "We recognized some time ago that the original target of 2011 was not possible."

Prime Minister Taro Aso's economic advisory panel proposed last week that the government postpone its target of eradicating the budget deficit to 2019. The original target became unattainable after the recession caused tax revenue to fall and prompted Aso to provide stimulus plans equivalent to about 5 percent of gross domestic product.

Fitch's AA- rating for Japan's local-currency long-term debt is its fourth-highest and one notch lower than Moody's Investors Service's Aa2 and Standard & Poor's AA. Of the Group of Seven nations, only Japan and Italy have assessments below the top grade at each ratings company.

Moody's said last month it is unlikely to cut Japan's debt rating over the next year because investors remain willing to buy government bonds and the economy will probably recover.

"Japan's government debt versus GDP ratio is much higher than those of any other country, including the U.S. and U.K.," McCormack said.

Fitch forecasts Japan's public debt will reach 200 percent of GDP by 2010; the U.S. burden will climb to about 90 percent and the U.K. will reach 80 percent, he said.

Fitch monitors fiscal policy objectives to assess ratings because they can "drastically" alter the proportion of debt to GDP, the annual budget deficit and the government's debt-servicing costs, McCormack said.



AS YVES SMITH REMARKS: for having nearly 200% debt to GDP? OK.

[Demeter]

69. Fiscal options for the UK: sovereign insolvency, inflation or serious fiscal pain

http://blogs.ft.com/maverecon/2009/06/fiscal-options-for-the-uk-sovereign-insolvency-inflation-or-serious-fiscal-pain/



Standard and Poor’s on Thursday, May 21 2009, issued the following statement: “Standard and Poor’s has revised the outlook on the United Kingdom to negative from stable. — The AAA’ long-term and A-1+’ short-term sovereign credit ratings were affirmed. — The outlook revision is based on our view that, even factoring in further fiscal tightening, the U.K.’s net general government debt burden may approach 100% of GDP and remain near that level in the medium term. ”

Is this good news for the UK or bad news? Both the UK’s long-term sovereign credit rating (reflecting the probability of sovereign default in the medium and long term) and its short-term sovereign credit rating (reflecting the probability of sovereign default during the next year) remain at the highest possible levels, AAA and A-1+ respectively. However, the negative outlook is bad, even if it is not bad news. Based on past behaviour, there is a one-in-three chance of a sovereign moving from a negative outlook to a one-notch downgrade.

The fact that one of the three leading credit agencies is publicly hinting at less than complete confidence in the solvency of the British sovereign is not in and of itself terribly significant any longer. Following their incompetent and deeply conflicted performance in rating structured products, the credibility of the rating agencies is badly impaired even in those domains - sovereign debt and the debt of large corporates - where they have not made complete asses of themselves.

Even though the credibility and reputation of the rating agencies is in tatters, the fact that they have not yet been written out of the regulations and rule books governing the investment behaviour of many institutional investors means that a downgrade would still affect market demand for UK sovereign debt. This will probably raise the funding cost of the UK sovereign somewhat.

But even without the input from the rating agencies, it would have been clear that the UK is about to exit its AAA status. It shares this fate with most of the other G7 countries. In two or three years, Canada may be the only G7 country left to have an AAA rating. France could conceivably join Canada. There is nothing too shocking about this. Not that long ago, Japan’s sovereign rating was on a par with Botswana’s (I thought that was rather unfair on Botswana).

MORE WONKISH DETAIL AT LINK

[Demeter]

84. “The Swiss economy is in good shape” (YVES HAS DOUBTS)

http://revue.ch/nl02en

[Demeter]

85. Down and out for the long term in Germany

http://www.ft.com/cms/s/0/5901f960-538b-11de-be08-00144feabdc0.html

[Demeter]

86. O CANADA! Not so Loonie By Martin Hutchinson

http://www.breakingviews.com/2009/06/01/canada.aspx?sg=nytimes

a favorable report which I cannot cut and paste

[Demeter]

63. THE REAL THING: Obama's Financial Sector Reform Proposal

http://www.scribd.com/doc/16517476/Obamas-Financial-Sector-Reform-Proposal

[Demeter]

64. A more comprehensive look at Obama’s proposed financial reforms

http://www.nakedcapitalism.com/2009/06/more-comprehensive-look-at-obamas.html

Submitted by Edward Harrison of Credit Writedowns.

If you listen to the criticism from the right and from the left, from pro-regulation and anti-regulation pundits, you can understand the political constraints which produced the white paper which the President unveiled yesterday. Given those constraints, I consider the white paper a good effort.

My initial reaction, therefore, was largely positive. However, upon further reflection, it is clear this is a political document more than a regulatory one. The white paper is a govern by consensus product about which I have grave reservations. There is much to like about the white paper, but also much to question. As a result, I see no need to rush ahead and enact sweeping legislation and reform before the full measure of the financial crisis has been felt and the implications of regulatory lapses is known.

Propaganda campaign is coming

An orchestrated media blitz is now under way. We have Summers and Geithner's Op-Ed in the Washington Post Monday. Christina Romer on Bloomberg today. The President giving his speech, Austan Goolsbee was on CNBC talking this thing up and Sheila Bair released a statement of support. Obama’s whole financial team is out making the rounds in support of this legislation.

How are people reacting to the plan? Banks seem happy. Arthur Levitt, a consultant to Carlyle and Goldman Sachs, is happy. Ron Paul and most economists – not so much – but for very different reasons. This should tell you that the legislation is fairly bank-friendly. But the unhappy parties make clear that there are political constraints.

There is no need to rush

During the Great Depression, most of the important pieces of legislation were enacted after the economy had already bottomed. The economy started down in 1929, bottoming in 1933. The reforms were enacted starting in 1933. The Glass-Steagall Act of 1933 was the comprehensive piece of regulation reform. It also established the FDIC. The Securities Exchange Act establishing the SEC was enacted in 1934. Fannie Mae was founded even later in 1938.

Today, the knock-on effects of the financial crisis are still being felt. Just yesterday, California was rejected in its request for a U.S. government bailout. Today, the large U.S. retailer Eddie Bauer was declared bankrupt. The market for municipal bonds is still impaired because of municipalities deteriorating financial condition. Credit Card delinquencies are hitting a record high. These are just a few of the many events which make clear that we are still in the midst of some horrific economic turmoil. Enacting sweeping legislation in that environment would be tragically premature.

Having said that upfront, I am going to run through some of the more important bits in the white paper with you.

What’s wrong with this proposal

1. Financial Services Oversight Council. This is the new day-to-day super-regulator. Really it is more of a gathering of regulators to hash out turf wars and co-ordinate policy. I am hearing that this structure was implemented because there was a lot of pushback from lawmakers about abolishing regulatory agencies and consolidating power in the hands of the Federal Reserve. The Treasury leads this council, putting an unelected official in the executive branch in control of the most powerful day-to-day regulatory structure. I do not like this at all. Better would be an oversight council headed by an official appointed by members of Congress so that more elected officials have a role in those decisions.

2. Tier 1 FHCs. (Tier 1 Financial Holding Companies) This is the designation used for too big to fail financial institutions like JPMorgan Chase and Citigroup. Under the proposed regulations, there will be a penalty for being too big to fail: these organizations must have more capital and are subject to more oversight than other companies. This is great in theory. However, in practice right now it will mean less lending – one reason there is no need to rush to institute reforms prematurely. In fact, just today a number of Tier 1 FHCs repaid $68 billion in TARP money i.e. they reduced their capital base by $68 billion. Higher capital requirements/less capital equal less lending.

3. Systemic Risk Regulator. (SiRR) As expected, the Federal Reserve is going to be the SiRR. This is the same organization that brought us 1% rates in 2003 and 0% rates this year. The Federal Reserve is also the same institution which refused to crack down on loose lending standards during the height of the housing bubble. Under no circumstances should the Federal Reserve’s lapses be rewarded with the role as the SiRR.

4. Executive Compensation. As far as I am aware, there is nothing to restrict executive compensation in the financial services sector in this proposal. And if you haven’t heard already, mega-bonuses are already making a comeback. Clearly this is an area that must be addressed in any reform package. You cannot get the right behaviors if you do not align incentives to those behaviors.

5. OTC Derivatives. Larry Summers was not a big fan of regulation on this score when he was in the Clinton Administration. This time, the proposal suggests ‘clearinghouses’ for these derivatives. What does ‘clearinghouse’ mean? To me, it doesn’t mean anything. George Soros wants to ban OTC derivatives outright like CDS contracts. At a minimum, we need to see these contracts traded on exchanges like the CME or CBOE in standardized forms with adequate collateral from counterparties. Forget about ‘clearinghouses.’

6. Office of National Insurance. While I like the fact that we are seeing a move to comprehensive regulation of insurance instead of the present state-by-state system, this proposal should be a non-starter because, yet again, the power lies at Treasury. Why is Treasury a good place for an Office of National Insurance other than the desire to increase power in the executive branch? Moreover, this does not remove the balkanized regulatory framework in insurance. I see this as an inadequate half-measure.

What’s 50-50

1. Determine Future role of Frannie Mac. This is a complete punt. There is no information here. It’s probably for the best as it is too early to make a call one way or another.

2. Enhance International Coordination. This is another punt. At least, we see an effort in the right direction. In my view, this will be an important area to flesh out with other regulators as the world of finance is global and global regulatory controls are needed.

3. Consumer Finance Protection Agency. The proof here is in the pudding. But, clearly abuses in the last decade were extreme. How this agency works in concert with other regulators is unclear. As they have zero authority as the bank regulator, I do not think putting them in a separate agency is going to work.

4. Credit Rating Agencies. There is a proposal to tighten oversight over the rating agencies in this white paper. This proposal has no meat on the bones so the devil will be in the details.

What’s right with this proposal

1. Hedge funds. Hedge funds and other large pools of capital must now be regulated under this proposal. In all likelihood, the proposed changes will end the shadow banking system as we know it, with hedge funds being completely outside the regulatory structure.

2. Money Market Funds. The SEC is going to strengthen the rules around MMFs in order to prevent runs and to mandate MMFs always have access to emergency liquidity facilities.

Conclusion

As you can see from the number of items in each category, there is probably more to dislike than to like. I do think this is a good effort but it is not nearly concrete enough to be the basis for legislation. Moreover, it is much to soon to start making comprehensive reforms. We are still in crisis mode. On the whole, it would be a deep disappointment to see any legislation resulting from this white paper, particularly now as we are in crisis. However, by this time next year, things should be clearer and having this white paper in hand will be to everyone’s benefit.

One last thought: Barack Obama does a very good job of striking the right tone and saying the right things, but I am suspicious about his commitment to true reform. This document is not the product of someone who wants reform, but of someone looking to strike a middle ground in a political game.

[Demeter]

65. Why not protect the homeowner?

http://www.nakedcapitalism.com/2009/06/why-not-protect-homeowner.html

Submitted by Edward Harrison of Credit Writedowns.

This morning I was reading Simon Johnson’s excellent post “President Obama’s Regulatory Reforms Announcement: A Viewer’s Guide” about what Barack Obama should say when he makes his regulatory reform pitch today at 12:30 PM. I agree with what he has to say about the need to re-assure us his ‘administration ‘gets it.’ And I suggest you read his commentary. But, all the while I was reading it, I couldn’t help but think: ‘what about the homeowner?’

See, we have bailed out the financial services industry to the tune of nearly $14 trillion in guarantees and support according to the U.S. bank regulator the FDIC. Yet, time and again we see differential treatment elsewhere. Chrysler and GM were forced into bankruptcy and, more recently, California was denied aid. The preponderance of evidence suggests that President Obama views the banking industry as systemically important in a way these other industries may not be. The question is: how does he view homeowners, who collectively are American workers, taxpayers and voters?

I ask this because mortgage debt was the trigger for the financial crisis. And I have yet to see any comprehensive legislation protecting homeowners from financial distress, while we have certainly put the financial services industry and its reform front and center. Just yesterday, in his “Ideas for fixing the economy,” Felix Salmon mentioned an idea first proposed in August 2007 by Dean Baker and Andrew Samwick which I will dub ‘rent-to-own.’ Baker and Samwick propose the following:

There is a simple way to allow troubled homeowners to stay in their homes without also bailing out the mortgage issuers and speculators.

Congress can pass legislation granting current homeowners the right to stay in their homes as long as they like, simply by paying the fair-market rent. In other words, no one gets tossed out on the street, as long as they can pay the rental value of their house. The fair rent would be determined by an independent appraiser — exactly the same way that a lender is supposed to determine the size of a mortgage that can be issued on a home.

Under this plan, homeowners would turn over their property to the mortgage holder. This would generally not be a loss since borrowers currently face crises precisely because they owe more than the value of their house. If the value of the home exceeded their debt, then they wouldn’t have to sign up for the program.

As a renter with secure tenure, the former homeowner would have incentive to do necessary maintenance and keep the home from falling into disrepair. This would prevent the blight that is already hitting neighborhoods where foreclosures have become commonplace.

The mortgage holder would get possession of the house, but they would be stuck having the former homeowner as a tenant. Otherwise the mortgage holder is free to hold or sell the property as they choose. Being stuck with a renter may reduce the resale value of the house, but intelligent investors knew there was risk when they got into the business.

To limit the size of the program and to ensure that it only benefits those who are really in need, there can be a cap placed on the value of homes that qualify. For example, Congress could stipulate that only homes with a market value below the median price for an area are eligible for this plan.

This security-of-housing proposal meets the needs of the homeowners who were victimized by deceptive lending practices and pro-homeownership ideologues. It gives them the right to stay in their home as long as they want. It accomplishes this task in a way that provides minimal opportunities for fraud and should require very little by way of new government bureaucracy.

It also manages to benefit homeowners in crisis without also rescuing the financial institutions that were speculating in mortgages gone bad. This will give the presidential candidates, and other members of Congress, a clear choice between helping distressed homeowners or bailing out financial institutions that should have known better.

Although the Baker-Samwick proposal does not specifically include a rent-to-own provision, whereby the renter has the option within a certain timeframe of buying back the house, it can easily be added. Clearly this proposal has merits, yet I have heard nothing on this score for months except via Felix’s post.

I might add that there is also a huge amount of shadow inventory – repossessed houses not currently on the market due to the glut of residential housing inventory – which needs to be dealt with. Calculated Risk has a sobering video from Jim the Realtor which makes this issue plain. This glut of inventory is likely to push house prices down lower, forcing many into negative equity and default.

So, my suggestion is that you should keep the homeowner in the back of your mind as you listen to President Obama make his case for banking regulatory reform. I certainly want to see real reform, much as Simon does – and I will be listening for cues that we are going to get it. However, I also think the time is right for homeowners to move center stage as well.

[Demeter]

66. Transparency: The Largest Bankruptcies in History

for a larger view:

http://awesome.goodmagazine.com/transparency/web/0906/trans0609largestbankruptcies.html

for other graphic goodies:


http://www.good.is/sections/department/department.php?tname=transparency

[AnneD]

113. Since most of these are in Finance.......

you think it might be benefical to regulate them more closely????? Gee I don't have an economics degree or anything.

[Demeter]

67. Means of deficit reduction: Medicare and Social Security

http://www.nakedcapitalism.com/2009/06/means-of-deficit-reduction-medicare-and.html

Edward Harrison is the main writer at Credit Writedowns.

Yesterday, I argued that the United States faced a policy dilemma in avoiding debt deflationary forces while maintaining fiscal prudence. The reality is that President Obama faces political constraints in Washington right now in regards to budget deficits. He is not likely to get another stimulus package through the Congress unless he can credibly demonstrate a longer-term deficit reduction outlook. In my view, this necessarily means changes to Social Security and/or Medicare.

Last June and July, I presented five charts from Ross Perot’s website perotcharts.com which demonstrate the future budgetary problem:

* Chart of the day: US Federal government spending
* Chart of the day: US federal spending and receipts
* Chart of the day: projected US government deficit
* Chart of the day: US national debt
* Chart of the day: US Federal Deficit

SEE ARTICLE FOR LINKS

Fiscal Year 2007: before the bubble burst

What becomes apparent if you look at these charts is that the United States faces a very large fiscal problem under present tax and spend scenarios given likely future growth outcomes. In plain English: there is a gigantic hole in the U.S. Government’s balance sheet under normal GAAP accounting. Let’s look at the balance sheet for 2007 because John Williams at ShadowStats.com has already done the analysis and this was a budget that was created before the housing bust was apparent.

On December 17th, The U.S. Treasury released the annual Financial Statements of the United States Government for fiscal year 2007 (year-ended September 30th), prepared using generally accepted accounting principles (GAAP), audited by the General Accountability Office (GAO) and signed off on by Treasury Secretary Paulson.

The statements still show that the federal government’s fiscal woes continue to careen wildly out of control. Based on my estimate of the 2007 GAAP-based deficit exceeding $4.0 trillion (see discussion below), the term "out of control" is not used loosely. If the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis.

(BUT DON'T TOUCH THE ESTATE TAX, OR THE CAPITAL GAINS EXEMPTIONS! AND DON'T CUT THE MILITARY OR THE WARS, WE CAN'T HAVE THAT! AND FORGET ASSET-STRIPPING OF WHITE COLLAR CRIMINALS--AFTER ALL, THEY WON'T BE IN PRISON, SO THEY NEED TO EAT AND LIVE THE HIGH LIFE!)

The number $4 trillion is the number you would see if the U.S. Government reported its accounts as businesses do on an accrual basis using Generally Accepted Accounting Principles (GAAP). GAAP accounting means that all promises i.e. future pension and healthcare spending must be accounted for on today’s financial statement. If we did not do accounts on an accrual basis, then many companies would go bankrupt when the unaccounted for future liabilities not addressed on their balance sheet came due. In the case of General Motors, future liabilities for pensions and healthcare are a large part of their financial problem.

The U.S. government reports its accounts on a cash basis. That means it matches the cash that comes in the door against bills it must pay in that current year. This is how small businesses run their accounts. Under this methodology, the accounting looks very different. Here is how George W. Bush summed up his 2007 budget deficit (Fiscal Year 2007 Overview).

For 2007, the Budget forecasts a decline in the deficit to 2.6 percent of GDP, or $354 billion. By 2009, the deficit is projected to be cut by more than half from its projected peak to just 1.4 percent of GDP, which is well below the 40-year historical average deficit.

As last year’s dramatic increase in receipts demonstrates, the most important factor in reducing the deficit is a strong economy.

His last words are well-placed because we know that the course of events was quite a bit different than was predicted in this budget. In sum, there is a large hole in the government’s accounts that an order of magnitude larger when you use GAAP. This was true even before the housing bubble and makes plain that the U.S. government’s budgetary problems are structural. (Also see Wikipedia’s entry on the 2007 Budget. It gives a good overview)

Honing in on the problem: Medicare and Social Security

The problem, of course, is Medicare and Social Security. Looking again at 2007 and the composition of spending (Chart of the day: US federal spending and receipts), one can see that 40 percent of the budget went to spending on Medicare/Medicaid and Social Security. This percentage will rise inexorably as the Baby Boom generation retires starting in 2011. If you look at the government’s own accounts (PDF), they tell the story. Notice the over $40 trillion in unfunded liabilities associated with Medicare/Medicaid and Social Security

Social Security and Medicare

How this fits in to today’s debate

These unfunded liabilities fit into today’s policy debate in that reducing Social Security and Medicare benefits would not only eliminate structural budgetary problems, it would also allow Obama to demonstrate fiscal prudence – even while the present deficit balloons. I guarantee you that Summers, Geithner, Orszag and Romer are on to this and that this is a debate of huge importance inside the Administration. I anticipate we will see a Social Security/Medicare change under Obama. The question is how would this change be achieved. There are four possible ways:

1. Raise Taxes. To satisfy liberals, who have become more and more worried about Obama, one could see the Administration allowing Congress to eliminate the payroll tax exemption on some of the income earned above $100,000. If you listened to Joe Biden on Meet the Press on Sunday, it was clear that the President is going to make pragmatic decisions on budget issues and will not veto bills unless their totality is “wrong for America.” Translation: he would not necessarily add in a payroll tax increase himself, but he would sign a bill that has one if he could tout this as a tax increase for the rich and stress the fact that the middle class would see no rise in the income tax.
2. Reduce Benefits. Another way to reduce entitlement liabilities is to reduce the net benefits. Obviously raising tax on benefits for those earning a specific threshold outside income would be the taxation way of achieving net benefit reduction. Again, this would be touted as a tax on the rich. Cutting benefits outright is a non-starter and political suicide. On Meet the Press, Biden was unwilling to dismiss the potential that the President would sign a Universal Health Care bill that taxed health care benefits. I think this is a crucial statement regarding both UHC and entitlement programs.
3. Reduce Coverage. Because medical care has advanced hugely over the last decades, we are now able to keep patients alive (and often healthy) who would have died years ago. As a result, medical costs have skyrocketed. The simple fact is that using all available medical science to treat patients costs a lot of money. This makes attractive the potential cut of Medicare coverage i.e. reducing which procedures and care will be paid for. I expect, this is another option that is going to be explored.
4. Delay Benefits. This is my preferred option. The average lifespan of Americans has increased tremendously particularly since Social Security was enacted. As a result, retirees today receive many more benefits than they did in the 1940s. (“The 2000 U.S. census revealed that the number of Americans over 65 years old has more than doubled since 1950 and increased from 31.1 million to 34.91 million from 1990 to 2000, largely because of continuing advances in medical science and nutrition.” - MSN Encarta Encyclopedia). These demographics are killing the U.S. and they are going to get worse. Given relatively low fecundity rates among young American women, they will get worse still. Therefore, the U.S. government is going to have to raise the age at which Americans are eligible for Social Security.

In sum, while I prefer a delay of benefits, all of these ways of reducing entitlement benefits are going to be researched and suggested. The Obama Administration does seem willing to address these issues, potentially as a quid pro quo for another round of stimulus.

An alternative view

I would be remiss if I didn’t present you with links to the other side of this argument. This is handled capably by Dean Baker of the Center for Economic and Policy Research, one of the few economists to have spotted the housing bubble early (see his 2002 article here). In April, he penned a piece at Andrew Cockburn’s site counterpunch.org called “Hands off Social Security.” I suggest you read this for an alternative view. In addition, I would also recommend his book with CEPR colleague Mark Weisbrot “Social Security: The Phony Crisis.”

One reason Baker is so vehement in his arguments is that he knows ideologues are orchestrating a battle against social security in order to deprive you of your retirement benefits. Remember the 2004 Bush plan to privatize Social Security? What lies underneath this is a desire to give the financial services industry even greater power by allowing it to control the funds for Social Security. So, be forewarned.

In the end, while I have great respect for Baker – and agree with many of his arguments, I disagree with his conclusions (summarized here in his opposition to the film I.O.U.S.A.). Social Security and Medicare must be changed.

Conclusion

In the end, if you are looking for ways to increase stimulus to prevent a double dip or debt deflation while remaining fiscally prudent, a cut to entitlement programs is going to be necessary. As I see it, you can’t have your cake and eat it too.

[Demeter]

68. Arthur Levitt Hired by Goldman Sachs

http://jessescrossroadscafe.blogspot.com/2009/06/arthur-levitt-hired-by-goldman-sachs.html


Arthur is often trotted out as an independent analyst and pundit on financial news programs. His name has been floated for some of the top regulatory jobs in the Obama Administration.

Goldman does not require advice from Arthur Levitt. People like Art and Larry Summers are hired for their connections, insider knowledge, and for future services to be rendered. In this case Arthur will be offering to help to shape the evolving regulatory structure as it is 'reformed.'


Arthur Levitt to Serve as Advisor to Goldman Sachs

NEW YORK -- (Business Wire) --

The Goldman Sachs Group, Inc. (NYSE: GS) today announced that Arthur Levitt has agreed to serve as an advisor to Goldman Sachs. In this capacity, he will provide strategic advice to the firm on a range of matters, including those related to public policy.

“Arthur’s experience and deep knowledge of our industry will be of tremendous value to our firm,” said Lloyd C. Blankfein, Chairman and Chief Executive Officer of The Goldman Sachs Group, Inc. “We look forward to having the benefit of his insight on a range of issues relating to the firm and financial services in general.”

Mr. Levitt was the 25th Chairman of the U.S. Securities and Exchange Commission and its longest serving Chairman. He began in this role in July 1993 and left the Commission in February 2001.

Before joining the SEC, Mr. Levitt owned Roll Call, a Washington D.C.-based newspaper that focuses on the US government. He also served as the Chairman of the New York City Economic Development Corporation, Chairman of the American Stock Exchange and President of Shearson Hayden Stone. He is presently a Senior Advisor to The Carlyle Group, Promontory Financial Group, Getco and serves on the board of Bloomberg LP...






YVES SMITH REMARKS:"Hired" = "Bought". Levitt was up for some regulatory posts, and when he was the head of the SEC, exhibited a bit of backbone, enough so that he got perilously few board seats when he stepped down.

[Demeter]

70. The fate of nations (graphs to contemplate)

http://animalspiritspage.blogspot.com/2009/06/fate-of-nations-graphs-to-contemplate.html

Click on graphs IN THE ORIGIANL LINK for larger image in new window.

?imgmax=800

Sometimes it helps to look at larger patterns from an almost biological perspective. Note that economic growth accelerates as the tax burden rises over the past 80 years. We are now in the negative-sum phase in which—following our hypothesis of a broken social contract—the rich classes that control the country manipulate the system (taxes and otherwise) to their advantage. For reference here are the top marginal tax rates over the same period.

?imgmax=800

Source: Matt Yglesias

And here is Emmanual Saez’s awesome chart of the income distribution.



The forecast is for more bitter fighting over a dwindling pie until growth stalls completely in about five years. That is when the real crisis begins.

In the meanwhile the allocation of economic pain will reveal the usually hidden pecking order of American society: bankers (except some investment bankers, but that was personal) feel no pain, but auto workers do; women and children are some of the first to lose benefits in California; and so on. In this sense President Obama’s time in office resembles the Hurricane Katrina experience, in which so much of the underbelly of American society was exposed.

With his focus on maintaining the status quo, the President does not seem to understand the basic problem. Or perhaps he realizes he is powerless to change it. It would be nice to see the stimulus reconfigured to concentrate on helping people in dire straits with health care and livable workfare to get them through the crisis.

So if you think we’ve seen a long-term bottom in the stock market, you’ve got another think coming. This is research, not investment advice. You invest at your own risk.

Reference:
The Animal Spirits Page: Income inequality, debt, crisis and depressions (3 June 2009) http://animalspiritspage.blogspot.com/2009/05/income-inequality-debt-crisis-and.html

[Demeter]

71. Krugman Gets His History Wrong

http://williamgreider.com/content/krugman-gets-his-history-wrong


Paul Krugman, like many other Democratic partisans, wants to blame Republicans and right-wingers for causing the financial disaster by deregulating the system. This may be comforting to Dems but, alas, it requires them to falsify the history, as Krugman does in this morning's column. Krugman flogs the notorious Garn-St. Germain Depository Institutions Act of 1982 and quotes Ronald Reagan's extravagant praise for the measure. <http://www.nytimes.com/2009/06/01/opinion/01krugman.html?_r=1&hpw>

What Krugman leaves out is that financial deregulation actually started two years earlier -- before the Gipper got to Washington. A Democratic Congress and Democratic president (Jimmy Carter) enacted the Monetary Control Act of 1980 which removed all remaining controls on interest rates and repealed the federal law prohibiting usury (note that sky-high interest rates and ruinous predatory lending have been with us ever since). It was the 1980 legislation that took the lid off banking and doomed the savings and loan industry, the mainstay that used to provide housing loans and home mortgages. The thrifts were able to raise capital because they were allowed to pay a half percent more in interest to depositors. Bankers wanted them out of the way. The Democratic party obliged.

Economist Albert Wojnilower warned at the time: "Freeing the thrift and mortgage markets from government subsidy and guarantee is like freeing the family pets by abandoning them in the jungle."

His sardonic prediction was swiftly realized. The 1982 legislation that upsets Krugman was actually Congress's clumsy attempt to make amends by expanding the lending powers of the failing S&Ls. That only made things worse and the crisis followed a few years later -- a bipartisan fiasco that politicians tried to conceal from voters. But why blame Garn-St. Germain on Reagan? Ferdie St. Germain was a Democrat and chairman of House banking, notorious himself for his slavish attention to the financial interests.

Getting the history right still matters. It helps explain why contemporary Democrats are so reluctant to enact more serious reforms, like capping interests or restoring the usury law. That would require them to clean up the mess they made 30 years ago and finally acknowledge their costly errors. The Times should run a correction on Krugman's column, maybe with an apology to the Gipper.

[Demeter]

72. The Chicago School is eclipsed Brad DeLong

http://www.theweek.com/article/index/97134/The_Chicago_School_is_eclipsed#

Richard Posner, leader of the Chicago School of Economics and Fourth Circuit Court of Appeals judge, uses his new book, “A Failure of Capitalism,” to try to rescue the Chicago School’s foundational assumption that the economy behaves as if all economic agents and actors are rational, far-sighted calculators. In some sense, Posner must try. For without this underlying assumption, the clock strikes midnight, the stately brougham of Chicago economic theory turns into a pumpkin, and the analytical horses that have pulled it so far over the past half- century turn back into little white mice.

Thus he writes: "At no stage need irrationality" on the part of markets or their participants "be posited to explain” the collapse of financial markets last year and the current deep recession.

Posner’s effort looks to me like an earlier effort to “save the appearances” in the face of discomfiting contradiction. The Jesuit astronomers of 17th-century Rome wanted above all to maintain the assumption that the sun revolved around the earth—for if it did not then the Bible’s declaration that Joshua called on God to make the sun stand still in the sky was a lie, and a Bible that lies even once cannot be the inerrant foundation of faith.

Thus the Jesuits created much more complicated models than the elegant heresy of Copernicus, in which the earth revolved around the sun. They succeeded in their attempt to save the appearances. Posner’s attempt does not: It is definitely a retrograde motion, for we see many things in the financial crisis and the recession that are not what we would see in an economy populated by smoothly rational utilitarian calculators.

* It was not rational for Bear-Stearns CEO James Cayne, with his own $1 billion fortune on the line, to allow his firm to become hostage to the excessive risks taken by his subordinates in the mortgage markets.

* It was not rational for Citigroup CEO Charles Prince to keep dancing to the music, without thinking which seat Citi would claim when the round of musical chairs came abruptly to a halt.

* It was not rational for shareholders of newly incorporated investment banks to offer traders large annual bonuses for performance assessed by a year-to-year mark-to-market yardstick—rather than rewarding them with long-run restricted stock that would hold its value only if the traders' portfolio strategies proved durable.

* It was not rational for the shareholders and executives of General Motors and Chrysler to ignore the need for a Plan B in the event Americans fell out of love with SUVs.

The litany of financial lunacy is longer than even the Eastern Orthodox litany of the saints. Yet Posner’s insistence that the crisis cannot spring from compound irrationality drives him to a claim that the real cause is a failure of government—specifically a too-lax, too-nurturing, insufficiently strict Mommy State that raised the children all wrong.

"The mistakes were systemic,” he writes, “the product of the nature of the banking business in an environment shaped by low interest rates and deregulation rather than the antics of crooks and fools." What we needed, Posner implies, was a Daddy State in the early 2000s that would have kept interest rates high, kept the recovery from the 2001 recession much weaker, and kept unemployment much higher. The Daddy State should have restricted financial innovation because a "depression is too remote an event to influence business behavior. The profit-maximizing businessman rationally ignores small probabilities that his conduct in conjunction with that of his competitors may bring down the entire economy."

Posner's claim that the Princes of Wall Street were rationally ignoring small probabilities is simply not true. The venture capitalists of Silicon Valley in the 1990s raised money for their funds overwhelmingly through equity rather than debt tranches. They did so because they wanted themselves and their clients to retain some considerable fraction of their fortunes in an event that they regarded as small probability—but actually happened—that the overwhelming bulk of the value from the internet revolution flowed to customers rather than to businesses.

Jamie Dimon and his team at JPMorgan Chase tried to move their firm out of the subprime mortgage market and into position to profit from the correction by the end of 2006. So did Lloyd Blankfein and his team at Goldman Sachs. (They suffered anyway because neither imagined the possibility that a hedged long position in mortgages was not really hedged at all if the counterparty on the short leg was AIG.)

Yet while Posner insists on saving the appearance of individual rationality, he is willing to jettison the Chicago School's conclusion that markets are everywhere and always perfect. As Robert Solow observed: "If I had written that, it would not be news. From Richard Posner, it is." Abandoning the conclusion of market perfection opens the door to the idea that government needs to properly check, balance, and regulate markets in order to help them function as well as possible. But clinging to the assumption of individual rationality forces Posner’s view of what regulation is appropriate into a very awkward straightjacket.

If the dons of the Chicago School were locked in an ivory tower, it would not matter that Posner tries to save the appearances, and so attributes the crisis not to failure on the part of “capitalists” but rather of regulators. Posner, however, is one of America’s leading public intellectuals. His views spread. His influence is very wide. For example, Jonathan Rauch in The New York Times Book Review joins in and extends Posner’s error. For Rauch, “to see the crisis through populist spectacles, as President Obama does when he attributes it to 'irresponsibility,' is to misunderstand the whole problem by blaming capitalists." Rauch echoes and congratulates Posner, asserting that Posner’s “merciless scrutiny” leaves "not one populist cliché” remaining intact.

But Posner’s Chicago clichés not only remain intact but burst into full flower. Attributing responsibility to the errant Princes of Wall Street, and the directors and shareholders who were supposed to be overseeing them, would be "populism." And "populism" is bad. There should be no sanctions—not even a reduction in influence—for financiers. As for reregulation of the financial market, we should be satisfied with “pretty small beer,” because the failure was not a failure of individual capitalists but of capitalism itself.

As remedy, we should prohibit the Federal Reserve from seeking full employment through low interest rates. One actor whom Posner does clearly blame is Alan Greenspan, whose reduction of interest rates to 1 percent in 2002–2003 was, in Posner's eyes, a root of the evil. Full employment already loses out to price stability when the latter is threatened by inflation. In Posner's view, full employment must also give way if achieving it requires low interest rates.

Let us conduct a thought experiment. Suppose that Judge Posner had been willing to embrace Copernican theory. In that case, what would his policy recommendations have been? Start with the observation that financial markets have six useful purposes:

* to aggregate the money of people who ought to be savers into pools large enough to finance large-scale enterprises.

* to channel the money of people who ought to be savers to institutions and people who ought to be borrowers.

* to spread risks so that no one individual finds herself ruined by the failure of any one investment or the bankruptcy of any one company or the slow growth of any one region.

* to keep managements efficient by upsetting and replacing teams and organizations that have outlived their usefulness.

* to encourage savings by creating liquidity—the marvelous fact that one can own a piece of an extremely illiquid and durable piece of social capital (an oil refinery, say) and yet get your money out quickly and cheaply should you suddenly have an unexpected need for it.

* to take the money of rich people who like to gamble and, by providing some excitement for them as they watch their gains and losses, use it to buy capital equipment that raises the wages of the rest of us (at the price of paying a 20 percent cut to the Princes of Wall Street). This is a superior use for the rich—and for the rest of us—than, say, taking their wealth to the craps tables of Vegas.

Wall Street innovations and practices are useful only insofar as they promote these six useful purposes. Call them aggregation, accumulation, diversification, efficientization, liquiditization, and casinoization.

By these standards, the current compensation scheme on Wall Street—large annual bonuses based on annual marked-to-market results—is absurd. It helps achieve none of these six goals, and it greatly increases the chance of a crash by providing everyone with an incentive to help their friends by marking up value, marking down risk, and ignoring the impact of their actions on the long-term survival of the enterprise. Silicon Valley compensation schemes seem much better: no large payouts until assets have reached maturity and portfolio strategies have proved their value in all phases of the business cycle.

From this perspective, the rapid growth of derivative markets has also proved to be absurd. Derivatives were supposed to assist in risk spreading and diversification. Amateurs and outsiders could take on a position easily, and the professionals who sold it to them could then dynamically hedge it away, and so tap the risk-bearing capacity of the public to a greater degree. It did not work, and it made the books of Wall Street firms opaque even to the most sophisticated of executives. Kenneth Arrow would tell us that stocks, bonds, commodities, puts, and calls alone already carry us as close to a spanning set of securities as we are going to get. The potential diversification benefits of more complicated securities appear to be outweighed by the information they destroy.

The thirty-to-one effective leverage ratios achieved in the 2000s by major banks were absurd. When public money is involved—and when high-leverage portfolio strategies become common, public money is always involved—any system that relies on the intelligence of equity holders to restrain traders’ risks within bounds at a thirty-to-one leverage ratio is absurd. Every financial institution should be a bank holding company regulated by the Federal Reserve. And every bank holding company should keep a healthy proportion of its liabilities—10 percent? 20 p?—on deposit at the local Federal Reserve.

In the future, we need to change the culture of Wall Street by changing how top-earning financial professionals are paid, changing the assets they trade to make the markets less opaque, and changing the risks they run by taking capital requirements very seriously once again. If we accomplish all three, there’s a chance that the next Minsky Moment that comes along will be a minor disturbance rather than a globe-shaking catastrophe for 100 million people.

The key irrationality was a private-sector failure on the part of the shareholders and top managements of the banks to make sure that their traders had an appropriate stake in the long-run survival of the bank and not just in constructing a portfolio that would be marked-to-market at a high valuation on Dec. 31. And the government needs, for all our sakes, to compensate for this private-sector irrationality. That’s the conclusion that Posner’s book should have reached. But it never gets there: Because to get there, he would have had to begin his book by acknowledging that it matters that the earth revolves around the sun.

- BRAD DELONG is a professor in the Department of Economics at U.C. Berkeley; chair of its Political Economy major; a research associate at the National Bureau of Economic Research; and from 1993 to 1995 he worked for the U.S. Treasury as a deputy assistant secretary for economic policy. He has written on, among other topics, the evolution and functioning of the U.S. and other nations' stock markets, the course and determinants of long-run economic growth, the making of economic policy, the changing nature of the American business cycle, and the history of economic thought.

[Demeter]

73. Road to Ruin: Online Lenders Fight Regulation (PAYDAY LENDERS)

http://americannewsproject.com/videos/road-ruin-online-lenders-fight-regulation

[Demeter]

75. MORE AIG / GREENBERG LAWSUIT BACKGROUND

THIS SUPPLEMENTS FRIDAY'S POSTING IN SMW:

http://www.nypost.com/seven/05312009/business/aig_charity_grab_171832.htm


Insurance giant AIG is trying to seize a $490 million charitable endowment -- and claw back $27 million it already awarded to New York charities -- to pay executive bonuses, The Post has learned.

The endowment, called Starr International Foundation, is run by former AIG chairman Hank Greenberg, and has given millions to the Sept. 11 Memorial and Museum, Citymeals and other local groups.

At issue is a legal conundrum that started in the 1970s, when Greenberg was building AIG into the world's largest insurance empire, and wanted a way to reward his executives off the books.

He and several co-founders set up their own offshore piggy bank -- unaffiliated with AIG ownership -- and seeded it with their own stock shares that would pay dividends and build up nest eggs and bonuses for retiring executives.

The separate company, Starr International Co., worked well for decades. But in 2005, Greenberg was pushed out of AIG in a boardroom coup, foreshadowing AIG's collapse.

Greenberg closed his piggy bank for any future bonuses beyond 2005, though AIG executives who had vested by that point can collect when they turn 65.

The rest of the AIG shares held by Starr International Co. -- about 290 million -- were transferred to a charitable subsidiary, Starr International Foundation.

AIG said it's entitled to the whole pot of stock going back to 2005, when it was worth about $20 billion. A year ago, it was worth nearly $11 billion, until AIG's recent collapse. At Friday's close, the shares were worth $490 million.

AIG says it has the right to seize the stock because Greenberg set up the company specifically for company employees. The insurer says in a legal filing that it needs the foundation's money "for the exclusive purpose of being distributed to AIG employees in the future." AIG intends to go to trial in federal court June 15.

AIG lawyers said in documents it would seek not just the shares still left in the foundation's coffers, but the shares the foundation already cashed out in the past three years to raise $27 million in grant money. That money went to groups like the Sept. 11 Museum ($1 million), Seedco ($500,000) and Citymeals ($250,000).

AIG didn't return calls by The Post about how the seizure and potential clawbacks of assets would impact charities. Greenberg declined to comment.

AIG has stuck by its previous statement that it needs the charity's assets "so the company can attract and retain top employees to manage the business, preserve and restore stockholder value and ultimately repay taxpayers."

Legal experts say that if AIG wins its case, it would have the right to sue to claw back some of the $27 million already awarded to charities.

The government owns nearly 80 percent of AIG due to the Treasury's $70 billion cash infusion and loans for up to $85 billion.

Rep. Brad Sherman (D-Calif.), who has often grilled AIG in congressional probes, said that if AIG wins the money from the foundations and other charities, "it should go to taxpayers, not for bonuses."

[Demeter]

79. Citibank Withholding Severance to Some Former Execs

http://www.nakedcapitalism.com/2009/06/citibank-withholding-severance-to-some.html

Readers know well that I am of the view that more than a few senior people on Wall Street who should have gotten nothing, and in some cases, should have gone to jail, instead made off with princely sums.

But Citi's half-baked remedy, of withholding the payouts of a few recently departed top dogs, is as bad a cure as the ailment. It's arbitrary and ham-handed, almost guaranteed to elicit sympathy for the hapless few caught up in Citi's sudden sensitivity to the possibility to negative public reaction. Funny how that didn't stop the Sleep-Deprived Bank from paying out the (at the time) $40 million of goodies to former CEO Chuck Prince upon his departure (that on top of shares he already held then worth $53 million). The bank may have believed it had plenty of air cover, since Prince's final payout was only 1/4 of that of departing Merrill CEO Stan O'Neal.

In fact, one has to wonder whether the ham-handedness is a feature, not a bug. Anyone in the moneyed or "sanctity of contracts" crowd will be up in arms.

And frankly, this "just say no" strategy is sheer laziness. Wall Street has a very lax culture as far as expense reimbursement is concerned. Producers and top execs (even junior staff) often put in for and have approved expenses that are not permitted under the official policy. For instance, when firms are doing well, if someone has had a few very late nights, they might charge a cab home on the day of a big deadline (say a board presentation) at 5:00 PM even though the official policy is that car service is reimbursable only after 9:00 PM. So scale that sort of thing up for top dogs (for instance, using one's secretary to help with charities where one is on the board, Technically, that is personal, not firm business). So I imagine it would be a no-brainer for the vast majority of these guys to go over their affairs with a fine tooth comb to find abuses of official policy.

There would then at least be a basis for withholding payment, and then both sides could negotiate a settlement.

Given the amounts at stake, versus the not-high cost of the exercise above (frequently done to middle level people who have become inconvenient but the firm does not want to fire for various reasons), it seems clear that the capriciousness is intentional. Even people who are in favor of reining in the plutocrats will find it hard to support it. And the amount at stake is peanuts, too little to make any practical difference.

On the one hand, this could be the sort of ritual sacrifice that routinely occurs in large organizations. But it could also be an effort designed to prove that messing with severance payments is a bad idea. And if so, a Machiavel seems to have dreamed it up.

From the Wall Street Journal:

Citigroup Inc. has told about five former top executives that it won't pay them tens of millions of dollars in promised severance payouts, according to people familiar with the matter.

The affected executives include Michael Klein, who was co-head of the New York company's investment bank, and Kevin Kessinger, formerly in charge of operations and technology at Citigroup, these people said. Messrs. Klein and Kessinger both got lucrative severance packages when they left last year, including periodic cash payments.

Citigroup already has doled out more than half of the roughly $100 million it promised to the former executives. But company officials recently decided not to proceed with the remaining payments, concluding that they wanted to avoid even the possibility of a public backlash over the money,...

Citigroup has received $50 billion in taxpayer-funded capital...Government officials didn't demand that the bank end its payouts...

Under the terms of exit agreements with the departed executives, Citigroup is contractually obliged to make the payments. But bank officials essentially are wagering that the former executives will conclude that it would be publicly embarrassing for them to file lawsuits against the struggling, taxpayer-backed company seeking the money....

Citigroup has been an especially aggressive cost-cutter. Since Chief Executive Vikram Pandit took over in December 2007, the company's work force has shrunk by 18% to 309,000 from 375,000. Thousands of additional jobs are on the chopping block.

Company officials also are curtailing bonus and severance payouts, including by barring any senior executives who leave the company after March 31 from receiving most exit payments.

[Demeter]

82. GRAPHIC PORN: Not a robust recovery

http://www.econbrowser.com/archives/2009/06/not_a_robust_re.html

[Demeter]

87. My Brain Is Fried--Calling It a Day. See You On Sunday!

The inbox is down to almost manageable size now, at least.

Nobody's posting anything fatherly, though. Come on now! You weren't ALL hatched from eggs....

[Dr.Phool]

95. I'm glad I had my eggs scrambled.

I just spent the day being reminded of why I declined fatherhood.

I was drug to a 4th birthday party for my niece's daughter. Kids are cute sometimes, as long as you don't have to take them home with you.

[DemReadingDU]

91. Jib Jab: He's Barack Obama

http://sendables.jibjab.com/originals/hes_barack_obama


:rofl:

[Demeter]

98. That Was Something

What exactly, I'm not sure.

[DemReadingDU]

103. Not sure if there is any hidden meaning either

but something to chuckle about amidst the doomy stuff

[DemReadingDU]

92. Charles Hugh Smith: Spoiled Brat Syndrome

Incentives, Disincentives and Spoiled Brat Syndrome (June 17, 2009)
by Charles Hugh Smith
.
.
Now we have a culture and economy based on Spoiled Brat Syndrome: only incentives and praise are allowed as motivators. One of my correspondents emailed me this reflection of Corporate America management practice:

We are providing management training for our management team and there are four areas that motivate most people:

1. Learning and/or teaching
2. Being creative and/or problem solving
3. Helping others and/or making a contribution
4. Taking risks.

I'm all for positive motivation, but if we read between the lines, here is what's being communicated: since we can't fire you or motivate you with disincentives then we have to offer happy-happy Spoiled Brat Syndrome "positive motivators" to get you to perform.

Every parent knows the ideological "religion" in education now is positive praise, gold stars for showing up, grade inflation (every kid is a genius and deserves an A), etc.

Yet strangely enough, studies have shown that people habituate very quickly to constant praise and regular pay raises and that such positive reinforcement/incentives quickly lose their motivational effectiveness. (Unpredictable "out of the blue" bonuses work far better than scheduled raises.)

Instead, an entitlement attitude takes hold in which pay raises, additional benefits, constant praise and an A for mediocre results are expected, and any reversal is met with resentment and a profound sense of disenchantment: what was owed/deserved was unfairly withheld.

That is, Spoiled Brat Syndrome, in which said Spoiled Brat whines and cries if he doesn't get a new toy every time Mommy takes him into a store.
.
.
more...
http://www.oftwominds.com/blogjune09/spoiled-brat-syndrome06-09.html





More on Spoiled Brat Syndrome (June 20, 2009)
by Charles Hugh Smith

The value of reader commentary to me is that it always opens a new understanding of the full range of the problem/challenge at hand. With that in mind, please read these diverse and thought-provoking commentaries in response to Incentives, Disincentives and Spoiled Brat Syndrome (June 17, 2009).

No one wrote to make the opposing case, i.e. that Americans were not spoiled. That in itself speaks volumes. Certainly not all Americans are spoiled brats, but the mindset of entitlement and self-aggrandizement has conquered the culture.

Click the link at bottom to read 6 very interesting reader commentary

Lastly by Charles Hugh Smith:
ENDNOTE: What strikes me as the purest form of misleading propaganda is the MSM's shrill insistence that "everything will come back": housing valuations, jobs, tax revenues, etc.

Sadly, this is completely unfounded: None of these things are coming back, not housing, not jobs, and certainly not tax revenues. The structures which supported abundant credit and government-backed mortgages (and thus the housing bubble) are gone. The structures which supported abundant consumer credit and spending (and thus millions of service-sector jobs) are gone. The structures which supported high tax revenues (huge capital gains from stocks and housing, the FIRE economy's transactional fees, rampant irresponsible credit and consumer spending) are also gone.

Pundits/think-tankers making the case that "everything's going to come back" never address the structural decay/destruction which prohibits everything from returning to 2005. Thus they are nothing but propagandists, paid cons and shills of a crumbling status quo.

http://www.oftwominds.com/blogjune09/haiku06-09.html

[Dr.Phool]

96. Maybe they should try, "The beatings will continue until morale improves".

[Demeter]

100. That's What They Use on The Little People

and I don't mean midgets.

[Demeter]

99. The Manufacturing Jobs Will Come Back Eventually

but a lot of the parasitical ones are gone for good (and you can take that both ways).

[Demeter]

101. Well, I Survived Two Midnight Paper Routes

Something I hadn't done in years...now I remember why.

See you all after a bath and a nap (it's unbelievably humid here still. This does not bode well for the summer!)

[Karenina]

102. Thanks, Demeter!!!

:loveya:

[Demeter]

104. The Sunday Comics

http://www.cartoonbank.com/product_details.asp?sitetype=1&sid=130901&did=4&utm_campaign=CartoonOfTheDay&utm_medium=RSS-Feed&utm_source=RSS-Feed

[CatholicEdHead]

105. Ad industry wrestles with recession

Two years ago the Twin Cities advertising community giddily assumed it was on its way back to the glory days of the 1980s, with Carmichael Lynch's newly won $200 million Subaru account leading the way.

The recession changed all that. Some agencies saw layoffs. Some saw revenues decline. Some struggled for new business. Some treaded water. Very few have thrived.

"Flat is the new up," became the mantra for bottom-line financial growth, but even flat is an ambitious goal when corporate clients are slashing marketing and advertising dollars.

"Those cuts travel down to the agencies and there's only one way to reduce costs and that means you let people go," said John Purdy, a professor of advertising at the University of St. Thomas with 35 years of hands-on experience in the business.

http://www.startribune.com/business/48642537.html

[Demeter]

108. I Think Advertising As a Career Has Gone the Way of Autos

The two were so heavily dependent on each other.

[CatholicEdHead]

110. It depends on what type of advertising

the internet model is still developing and has not found its feet yet.

[CatholicEdHead]

106. Investors are shying away from medical device firms as cost pressures mount.

Kevin Nickels' company has developed a new way to treat hard-to-heal wounds and, like many medical entrepreneurs, he believes the discovery can reduce suffering and save lives.

Influential people agree. The company, Celleration Inc., of Eden Prairie, has raised millions of dollars from top venture capital firms. His technology, a combination of ultrasound and saline mist, has been approved by regulators in the United States and Europe and is backed by a dozen scientific studies.

What's missing? Paying customers. Celleration has been turned down for coverage by Medica, HealthPartners, Blue Cross and Blue Shield of Minnesota and the giant federal Medicare program. "There is not enough money to go around,'' Nickels said. "Payers are saying 'Stop: We just can't afford what you're selling.'"

Nickels' story is being repeated at one med-tech company after another as a new austerity settles over the nation's health care economy. The drive to rein in health care costs has made insurance companies and government agencies more stingy about paying for new technology. Meanwhile, venture capitalists, battered by stock market losses, are less willing to invest in promising startups if they can't foresee healthy profits and a big payout.
http://www.startribune.com/lifestyle/health/48645607.html

[CatholicEdHead]

107. Sales of office properties weak

Tight credit and the weak economy continue to put a lid on sales of office properties in the Twin Cities and across the country, with no immediate signs the situation will improve, according to the latest data from Bloomington-based NorthMarq Real Estate Services.

Scott Pollock, NorthMarq vice president of investment services, said deals for large multi-tenant office buildings have all but dried up. Would-be buyers are wary because they're not sure if they could fill the increased amount of space that's gone vacant this year from businesses shutting down or cutting back, he said. Preliminary figures from NorthMarq show the overall vacancy rate for area office space, including subleased space, is about 20 percent.

"There's also been some deterioration in rents," Pollock said, eroding revenue for building owners.

Pollock said large investors are playing it safe by acquiring single-tenant office buildings occupied by blue-chip corporate tenants. A German investment fund that bought the first phase of the Excelsior Crossings office campus last year bought the second building in the Hopkins complex earlier this year. IVG Institutional Funds of Wiesbaden, Germany, paid $52.3 million for the 268,000-square-foot second phase. Both buildings are occupied by Cargill Inc.

http://www.startribune.com/business/48630252.html

[Demeter]

109. More Firms Cut Pay to Save Jobs

http://online.wsj.com/article/SB124450717216996329.html

By KATHLEEN MADIGAN

Pay cuts, rather than layoffs, have emerged as an alternative way for many companies to reduce labor costs as demand slumps during the recession.

If enough companies use pay cuts to avoid layoffs in the future, then the unemployment rate may no longer give a true reading on how workers are faring.

Employees, who have relied on pay raises to increase spending and boost their 401(k) contributions, would no longer be able to count on more cash in their paychecks over time. Even Social Security benefits down the road could be less than anticipated if annual salaries zig and zag every year.

Cuts in compensation are "more widespread now than in past recessions," said John Challenger, chief executive of outplacement firm Challenger, Gray & Christmas Inc., which tracks employment trends. Last week, Challenger reported that more than half of human-resource executives surveyed in May said their companies had instituted salary cuts or freezes in an effort to cut costs. That was up from 27% in the same survey in January.

The Bureau of Labor Statistics' employment report Friday showed that average hourly pay for production workers rose only 0.1% in May for the second month in a row. Yearly growth has slowed to 3.1% -- the weakest since 2005.

With unemployment heading toward double digits by year's end, it appears many workers will have few choices -- or bargaining power -- but to continue to accept the lower salaries.

David Levy of the Levy Economic Forecasting Center said the distress in finance, autos, retailing and other industries is exerting downward pressure on compensation. He expects unemployment to rise to double digits, and "pay rates may eventually cease rising altogether," he said.

Besides large companies announcing pay cuts, state and local governments also are trimming wages or forcing workers to take unpaid furloughs.

Federal Reserve officials are keeping a close eye on developments in wages. Continued downward pressure on wages could lead to further declines in inflation, which in turn would give Fed officials an incentive to keep interest rates low for a longer period of time. But there is a division within the Fed on whether slack in the labor market will translate into downward inflation pressure. Some inflation hawks believe the Fed has pumped so much money into the financial system that inflation pressures could build, even with high jobless rates.

Nominal wage growth didn't turn negative in the 1973-75 or 1981-82 recessions. But both severe downturns occurred during times of high inflation. As a result, companies were able to cut their real labor costs by awarding raises that were lower than the prevailing inflation rate. In 1981, for instance, nominal pay rose 7.2%, but inflation soared 10.3%.

Pay cuts are likely to spread further until unemployment stops rising and workers' position strengthens. The jobless peak isn't expected until 2010, meaning layoffs will be the norm for at least another year.

Some employees are fighting pay reductions. Members of the Boston Newspaper Guild at the Boston Globe voted Monday to reject $10 million in concessions. New York Times Co., which owns the Globe, had said it would try to impose deeper cuts or close the Boston paper if the union didn't accept the deal on the table. (Please see related article.)

Many companies oppose pay cuts as much as the rank-and-file do. Pay cuts are often demoralizing, and low morale can cut into productivity, which is a backdoor way of raising costs.

—Jon Hilsenrath contributed to this article.