Re:We're Fucked - The Coming Economic Crisis
« Reply #150 on: 2010-08-18 13:12:05 »
[Blunderov] Zimbabwe attempted to print its way out of its financial crisis with the result that the currency collapsed. "Obvious", as Fark.com might say. The USA is not immune to the fundamentals of money supply no matter how many shell games are employed to disguise it. The economic crisis is not over. Stagflation looms.
The United States is running out of time to get its budget and trade deficits under control. Despite the urgency of the situation, 2010 has been wasted in hype about a non-existent recovery. As recently as August 2 Treasury Secretary Timothy F. Geithner penned a New York Times Column, "Welcome to the Recovery."
As John Williams has made clear on many occasions, an appearance of recovery was created by over-counting employment and under-counting inflation. Warnings by Williams, Gerald Celente, and myself have gone unheeded, but our warnings recently had echos from Boston University professor Laurence Kotlikoff and from David Stockman, who excoriated the Republican Party for becoming big spending Democrats.
It is encouraging to see a bit of realization that, this time, Washington cannot spend the economy out of recession. The deficits are already too large for the dollar to survive as reserve currency, and deficit spending cannot put Americans back to work in jobs that have been moved offshore.
However, the solutions offered by those who are beginning to recognize that there is a problem are discouraging. Kotlikoff thinks the solution is massive Social Security and Medicare cuts or massive tax increases or hyperinflation to destroy the massive debts.
Perhaps economists lack imagination, or perhaps they don't want to be cut off from Wall Street and corporate subsidies, but Social Security and Medicare are insufficient at their present levels, especially considering the erosion of private pensions by the dot com, derivative and real estate bubbles. Cuts in Social Security and Medicare, for which people have paid 15% of their earnings all their life, would result in starvation and deaths from curable diseases.
Tax increases make even less sense. It is widely acknowledged that the majority of households cannot survive on one job. Both husband and wife work and often one of the partners has two jobs in order to make ends meet. Raising taxes makes it harder to make ends meet -- thus more foreclosures, more food stamps, more homelessness. What kind of economist or humane person thinks this is a solution?
Ah, but we will tax the rich. The usual idiocy. The rich have enough money. They will simply stop earning.
Let's get real. Here is what the government is likely to do. Once the Washington idiots realize that the dollar is at risk and that they can no longer finance their wars by borrowing abroad, the government will either levy a tax on private pensions on the grounds that the pensions have accumulated tax-deferred, or the government will require pension fund managers to purchase Treasury debt with our pensions. This will buy the government a bit more time while pension accounts are loaded up with worthless paper.
The last Bush budget deficit (2008) was in the $400-500 billion range, about the size of the Chinese, Japanese, and OPEC trade surpluses with the US. Traditionally, these trade surpluses have been recycled to the US and finance the federal budget deficit. In 2009 and 2010, the federal deficit jumped to $1,400 billion, a back-to-back trillion-dollar increase. There are not sufficient trade surpluses to finance a deficit this large. From where comes the money?
The answer is from individuals fleeing the stock market into "safe" Treasury bonds and from the bankster bailout, not so much the TARP money as the Federal Reserve's exchange of bank reserves for questionable financial paper such as sub-prime derivatives. The banks used their excess reserves to purchase Treasury debt.
These financing maneuvers are one-time tricks. Once people have fled stocks, that movement into Treasuries is over. The opposition to the bankster bailout likely precludes another. So where does the money come from the next time?
The Treasury was able to unload a lot of debt thanks to "the Greek crisis," which the New York banksters and hedge funds multiplied into "the euro crisis." The financial press served as a financing arm for the US Treasury by creating panic about European debt and the euro. Central banks and individuals who had taken refuge from the dollar in euros were panicked out of their euros, and they rushed into dollars by purchasing US Treasury debt.
This movement from euros to dollars weakened the alternative reserve currency to the dollar, halted the dollar's decline, and financed the massive US budget deficit a while longer.
Possibly the game can be replayed with Spanish debt, Irish debt, and whatever unlucky country swept in by the thoughtless expansion of the European Union.
But when no countries remain that can be destabilized by Wall Street investment banksters and hedge funds, what then finances the US budget deficit?
The only remaining financier is the Federal Reserve. When Treasury bonds brought to auction do not sell, the Federal Reserve must purchase them. The Federal Reserve purchases the bonds by creating new demand deposits, or checking accounts, for the Treasury. As the Treasury spends the proceeds of the new debt sales, the US money supply expands by the amount of the Federal Reserve's purchase of Treasury debt.
Do goods and services expand by the same amount? Imports will increase as US jobs have been offshored and given to foreigners, thus worsening the trade deficit. When the Federal Reserve purchases the Treasury's new debt issues, the money supply will increase by more than the supply of domestically produced goods and services. Prices are likely to rise.
How high will they rise? The longer money is created in order that government can pay its bills, the more likely hyperinflation will be the result.
The economy has not recovered. By the end of this year it will be obvious that the collapsing economy means a larger than $1.4 trillion budget deficit to finance. Will it be $2 trillion? Higher?
Whatever the size, the rest of the world will see that the dollar is being printed in such quantities that it cannot serve as reserve currency. At that point wholesale dumping of dollars will result as foreign central banks try to unload a worthless currency.
The collapse of the dollar will drive up the prices of imports and offshored goods on which Americans are dependent. Wal-Mart shoppers will think they have mistakenly gone into Neiman Marcus.
Domestic prices will also explode as a growing money supply chases the supply of goods and services still made in America by Americans.
The dollar as reserve currency cannot survive the conflagration. When the dollar goes the US cannot finance its trade deficit. Therefore, imports will fall sharply, thus adding to domestic inflation and, as the US is energy import-dependent, there will be transportation disruptions that will disrupt work and grocery store deliveries.
Panic will be the order of the day.
Will farms will be raided? Will those trapped in cities resort to riots and looting?
Is this the likely future that "our" government and "our patriotic" corporations have created for us?
To borrow from Lenin, "What can be done?"
Here is what can be done. The wars, which benefit no one but the military-security complex and Israel's territorial expansion, can be immediately ended. This would reduce the US budget deficit by hundreds of billions of dollars per year. More hundreds of billions of dollars could be saved by cutting the rest of the military budget, which in its present size, exceeds the budgets of all the serious military powers on earth combined.
US military spending reflects the unaffordable and unattainable crazed neoconservative goal of US Empire and world hegemony. What fool in Washington thinks that China is going to finance US hegemony over China?
The only way that the US will again have an economy is by bringing back the off-shored jobs. The loss of these jobs impoverished Americans while producing over-sized gains for Wall Street, shareholders, and corporate executives. These jobs can be brought home where they belong by taxing corporations according to where value is added to their product. If value is added to their goods and services in China, corporations would have a high tax rate. If value is added to their goods and services in the US, corporations would have a low tax rate.
This change in corporate taxation would offset the cheap foreign labor that has sucked jobs out of America, and it would rebuild the ladders of upward mobility that made America an opportunity society.
If the wars are not immediately stopped and the jobs brought back to America, the US is relegated to the trash bin of history.
Obviously, the corporations and Wall Street would use their financial power and campaign contributions to block any legislation that would reduce short-term earnings and bonuses by bringing jobs back to Americans. Americans have no greater enemies than Wall Street and the corporations and their prostitutes in Congress and the White House.
The neocons allied with Israel, who control both parties and much of the media, are strung out on the ecstasy of Empire.
The United States and the welfare of its 300 million people cannot be restored unless the neocons, Wall Street, the corporations, and their servile slaves in Congress and the White House can be defeated.
Nassim Taleb : The Government Bonds will Collapse, Avoid Stocks Nassim Taleb Says The Financial System Is Now Riskier Than It Was Before The 2008 Crisis
“I’m very pessimistic,” he said at the . “By staying in cash or hedging against inflation, you won’t regret it in two years.”
Treasuries have rallied amid speculation the global economic recovery is faltering, driving yields on two-year notes to a record low of 0.4892 percent today. The Federal Reserve yesterday reversed plans to exit from monetary stimulus and decided to keep its bond holdings level to support an economic recovery it described as weaker than anticipated. The Standard & Poor’s 500 Index retreated 16 percent between April 23 and July 2, the biggest slump during the bull market.
The financial system is riskier that it was than before the 2008 crisis that led the U.S. economy to the worst contraction since the Great Depression, Nassim Taleb told Bloomberg on Aug 11 2010
Rumors have circulated in China that People’s Bank of China (PBC) Gov. Zhou Xiaochuan may have left the country. The rumors appear to have started following reports on Aug. 28 which cited Ming Pao, a Hong Kong-based news agency, saying that because of an approximately $430 billion loss on U.S. Treasury bonds, the Chinese government may punish some individuals within PBC, including Zhou. Although Ming Pao on Aug. 30 published a report on its website indicating that the prior report was fabricated by a mainland news site that had attributed the false information to Ming Pao, rumors of Zhou’s defection have spread around China intensively, and Zhou’s name has been blocked from Internet search engines in China.
STRATFOR has received no confirmation of the rumor, and reports by state-run Chinese media appeared to send strong indications that Zhou is in no trouble at the moment. However, the release of this rumor and its dispersion throughout the public is significant, particularly as the Communist Party of China (CPC) is preparing for a leadership transition in 2012.
Chinese state-run media and official government websites have run several high-profile reports about Zhou, which should be seen as a move to refute the rumors. The PBC website published two articles on its homepage reporting on Zhou’s meeting with visiting Japanese Financial Services Minister Shozaburo Jimi during the third China-Japan high-level economic dialogue as well as a meeting with an Italian delegation. Xinhua news agency reported that Zhou told the PBC Party Committee Enlargement Meeting on Aug. 30 it should “continue to implement justice, and strengthen legislative work in financial system.” Prior to this news, Zhou appeared at the 2nd annual conference of the heads of the Chinese, Japanese and Korean central banks held on Aug. 3, and his most recent public appearance was Aug. 10 for China’s Financial System Anti-corruption Construction Exhibition.
Zhou is known to have lofty political ambitions and is believed to be a close ally to former Chinese President Jiang Zemin, as well as a core figure for Jiang’s “Shanghai Gang.” There has been no shortage of rumors about Zhou’s possible dismissal in the past five years, as he is believed to be associated with several high-level financial scandals. For example, Zhou was rumored to be under “shuanggui,” a form of house arrest administered by the CPC, during the massive crackdown of Shanghai Party Secretary Chen Liangyu in 2006, which was perceived in the country as a crackdown of the Shanghai Gang and part of Hu’s effort to consolidate power ahead of the 2007 power transition. There was also a rumor that he might have been detained following the investigation and arrest of Wang Yi, the vice governor of the China Development Bank, along with several other officials in the financial circle. Currently, several financial scandals are still under investigation, and it is likely that Zhou, as PBC governor and one of the most powerful economic players in the country, could be associated with some cases. Therefore, whether or not the rumor is true at this time, the leaking of this news is very likely to be associated with a power struggle within the Communist Party’s economic hierarchy.
The breathlessly awaited government report that promised to shore up public confidence by explaining why the stock market briefly plunged 998 points on May 6, with hundreds of stocks momentarily losing 60 per cent or more of their value, was released last Friday, October 1. Its neatly crafted finger-pointing to a small Kansas mutual fund firm which has been around since 1937, was immediately embraced as mystery solved by the stalwarts of the corporate press. This was done with only slightly less zeal than bestowed on the story of Saddam Hussein’s weapons of mass destruction spun out of the George W. Bush administration.
The New York Times headlined with “Single Sale Worth $4.1 Billion Led to Flash Crash.” The Washington Post went with “How One Automated Trade Led to Stock Market Flash Crash.” The Wall Street Journal led with “How a Trading Algorithm Went Awry.” Hundreds of similar headlines followed in similarly expensive media real estate. But as with the rush to war on bogus intel, the corporate press may be further damaging its credibility with the American people by ignoring the dangerous market structure that emerges in a closer reading of this report.
The so-called Flash Crash report was the product of the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) and consists of 104 pages of data that is unintelligible to most Americans, including the media that are so confidently reporting on it. It names no names, including the firm it is fingering as the key culprit in setting off the crash. Earlier media reports say the firm is the mutual fund manager, Waddell and Reed, and Waddell has conceded that it made a large trade that day to hedge its positions in its mutual funds which total $70 billion according to its web site.
As the official report goes, Waddell set off a computerized algorithm to sell 75,000 contracts of the E-mini futures contract that is based on the Standard and Poor’s 500 stock index and trades at the Chicago Mercantile Exchange. At roughly $55,000 per contract, the total amount Waddell was seeking to sell to hedge its mutual fund stock positions was $4.125 billion.
But here’s where the official theory comes apart: fourteen days after the Flash Crash, Terrence Duffy, the Executive Chairman of the CME Group which owns the Chicago Mercantile Exchange testified before the U.S. Senate’s Subcommittee on Securities, Insurance, and Investment of the Committee on Banking, Housing and Urban affairs that “Total volume in the June E-mini S&P futures on May 6th was 5.7 million contracts, with approximately 1.6 million or 28 per cent transacted during the period from 1 p.m. to 2 p.m. Central Time.” In other words, the government investigators are suggesting that a trade that represented 1 per cent of the day’s volume in a futures contract in Chicago and less than 5 per cent of contracts traded in the pivotal 1 to 2 p.m. time frame in Chicago (2 to 3 p.m. in New York) caused stocks in the cash market to plunge to a penny.
Of the 104 pages of the report, there is one sentence that is noteworthy:
“Detailed analysis of trade and order data revealed that one large internalizer (as a seller) and one large market maker (as a buyer) were party to over 50 per cent of the share volume of broken trades, and for more than half of this volume they were counterparties to each other (i.e., 25 per cent of the broken trade share volume was between this particular seller and buyer).”
Broken trades or “busts” (as the street refers to them) were only allowed for trades occurring between 2:40 p.m. and 3 p.m. (New York time) and where the stock had moved 60 per cent or more from its 2:40 p.m. value. This was an extremely controversial decision and left small investors with heavy losses of 30 to 59 per cent with nowhere to turn. The busts that were allowed covered 5.5 million shares and two-thirds of these trades had been executed at less than $1.00, some for as little as a penny. We now learn from this one sentence on page 66 of the Flash Crash report that half of the share volume in these bizarre trades came from just two firms and half the time they were exclusively trading with each other. Let me state this another way: two trading firms were predominantly involved in handing investors’ losses of 60 per cent or more in their stocks on May 6 but a staid old mutual fund company trading an S&P futures contract in Chicago has been fingered as the culprit of the Flash Crash.
An “internalizer” is a benign way for the SEC to acknowledge that the big brokerage firms serving retail customers (which have morphed into investment banks and commercial banks as well) are running their own secretive, quasi stock exchanges inside their firms. They are matching their retail customers’ buy and sell orders with no public transparency. Only after the trades are matched out of public view are the trades then printed at an exchange. Clearly, anyone carefully reading the above sentence from the report wants to know the names of these two entities. But in the report they remain nameless.
Another key area that gets short shrift in the report is quote stuffing, a practice by high frequency traders to blast out millions of bids to buy and offers to sell specific stocks, only to cancel them fractions of a second later. Mary Schapiro, Chair of the SEC, told the Economic Club of New York the following on September 7:
“These high frequency trading firms can generate more than a million trades in a single day and now represent more than 50 per cent of equity market volume. And many firms will generate 90 or more orders for each executed trade. Stated another way: a firm that trades one million times per day may submit 90 million or more orders that are cancelled.”
What’s the science behind cancelling 90 orders to get one trade done? If you blast out millions of orders in microseconds, then cancel them just as fast, you are confusing your competition as to what your true intention is. Your competition learns from this and fires a similar volley back at you. (Left in the blaze of digital ticker tape is the average investor, who doesn’t own a trading algorithm.) Questions are being asked as to whether some of these practices may constitute market manipulation, similar to painting the tape, where the sole purpose of the order is to mislead the market. If retail stockbrokers tried doing this for the small investor, they would be expeditiously led off in handcuffs.
Four days before the official Flash Crash report was released by the CFTC and SEC, Nanex, a creator and developer of a streaming datafeed that brings trading prices to workstations in real-time, put out its own impressive analysis of the Flash Crash. Among numerous areas covered, Nanex highlighted significant quote stuffing that occurred on May 6. (The full report is available at www.Nanex.net) Among the findings of Nanex:
“While searching previous days for similarities to the time period at the start of the May 6th drop, we found a very close match starting at 11:27:46.100 on April 28, 2010 -- just a week and a day before May 6. We observed it had the same pattern -- high, saturating quote traffic, then approximately 500ms later a sudden burst of trades on the eMini and the top ETF's [Exchange Traded Funds] at the prevailing bid prices, leading to a delay in the NYSE quote and a sudden collapse in prices. The drop only lasted a minute, but the parallels between the start of the drop and the one on May 6 are many.”
A potential implication of the Nanex report is that by blasting out bogus quote data, the data feeds carrying stock prices to investors could be slowed down, giving an edge to traders who understand what’s actually happening.
Mr. Duffy of the Chicago Mercantile Exchange had voiced a similar area of potential concern taking place in the futures market on May 6 in his Senate testimony, noting that 3 million system messages occurred around the trading meltdown. According to Mr. Duffy, the exchange has “implemented automated controls which monitor for excessive new order, order cancel and order cancel/replace messaging. If a session exceeds a designated message per second threshold over a three-second window, subsequent messaging will be rejected until the average message-per-session rate falls below this threshold.”
I asked Eric Scott Hunsader of Nanex for his thoughts on the Flash Crash report, given that quote stuffing was glossed over. Mr. Hunsader said that he believed the report to be “riddled with inconsistencies, makes conclusions without supporting evidence, and wastes precious time on illustrations that end up telling us nothing we didn't already know. Looking for the cause of the xFlash Crash using one-minute snapshot data is like trying to find the Higgs boson with a 10x microscope.” Mr. Hunsader goes on to note the “NYSE's admission of the delay we discovered in June; however, the executive summary tells us regarding this delay: ‘Our findings indicate that none of these factors played a dominant role on May 6.’ Later in the report, the findings presented in making that determination are only anecdotal: we would have expected to see a per centage break down of the traders affected, for example.”
The official report does not break out the wealth destruction to the small investor on May 6, but Ms. Schapiro shared that information on September 7 with the Economic Club of New York: “A staggering total of more than $2 billion in individual investor stop loss orders is estimated to have been triggered during the half hour between 2:30 and 3 p.m. on May 6. As a hypothetical illustration, if each of those orders were executed at a very conservative estimate of 10 per cent less than the closing price, then those individual investors suffered losses of more than $200 million compared to the closing price on that day.”
A stop-loss order is the dull Boy Scout knife with which the small investor attempts to protect himself from the star wars gang. It is an order placed with an unlimited time frame that sits in the system and says if my stock trades down to this level, sell me out. Unfortunately, most of these orders are placed as market orders rather than indicating a specific “limit” price that the investor will accept. (That alternative order is called a stop-loss limit order.) Stop-loss market orders go off on the next tick after the designated price is reached. In a liquid and orderly market, that should be only a fraction away from the last trade. On the day of the Flash Crash during that pivotal half hour, the next tick was frequently 10 to 60 per cent away from the last trade.
Quite contrary to restoring confidence to investors, the Flash Crash report has unmasked what many of us have suspected but couldn’t prove until this report proved it for us. While the fancy dressers in the Wall Street investment banks were absorbed in building warehouses of subprime mortgage fireworks that dazzled right up until the moment they blew up the street, techies in blue jeans were building star wars trading technologies in the bowels of Wall Street with a sole set of marching orders: beat the competition.
The marching orders to make these trading programs transparent, friendly to the small investor, fair and orderly, were noticeably absent from the job assignment. And as the new technology proliferated, showing ever greater speed, opacity, and fragmentation, the regulators stood down as the abuses mushroomed. The regulators were cowed by the same threat that Wall Street has used successfully in gutting regulation of derivatives and repealing the Glass-Steagall Act: if you don’t let us do it, we’ll move our trading business to another country. (In my early days on Wall Street, I was similarly threatened by a branch manager to sell a dubious limited partnership to my clients. He said, “If you don’t, some other broker will.” I smiled and gently nodded in anticipation of just that eventuality. The majority of those late 1980s limited partnerships blew up, taking broker careers and firm reputations with them. The mantra remains unchanged today on Wall Street: push short term profits and ignore long-term reputational risk to the firm and loss of investors’ savings and confidence.)
A search of the U.S. Patent and Trademark Office turns up thousands of patents with star wars diagrams of computers linked in incomprehensible ways to replace human traders. The patents are held by Goldman Sachs, Morgan Stanley, Citigroup, Merrill Lynch and numerous other firms that were bailed out by the U.S. taxpayer for their last innovation that attempted to spin subprime mortgages into gold.
This is an abstract for a patent held by ITG Software:
“A computer-implemented system and method for executing trades of financial securities according to a combination passive/aggressive trading strategy that reliably executes trades of lists of securities or blocks of a single security within a desired time frame while taking advantage of dynamic market movement to realize price improvement for the trade within the desired time frame. A passive trading agent executes trades at advantageous prices by floating portions of the order at the bid or ask to maximize exposure to the inside market and attract market orders. An aggressive agent opportunistically takes liquidity as it arises, setting discretionary prices in accordance with historical trading data of the specified security.”
Does this sound like something the small investor could compete with?
The market is also dangerously fragmented. SEC Chair Schapiro describes it this way, throwing out the confidence-draining words “dark pools” with the casualness that she might utter, “tea anyone?” The regulated New York Stock Exchange, which commanded an 80 per cent market share just five years ago, today “executes approximately 26 per cent of the volume in its listed stocks. The remaining volume is split among more than 10 public exchanges, more than 30 dark pools, and more than 200 internalizing broker-dealers. Indeed, today, nearly 30 per cent of volume in U.S.-listed equities is executed in venues that do not display their liquidity or make it generally available to the public. The percentage executed by these dark, non-public markets is increasing nearly every month.”
And exactly what has all this star wars trading innovation on Wall Street done for the average investor? According to the Wall Street Journal, the Standard & Poor’s 500 stock index “has fallen at an annualized rate of 3 per cent a year over the past 10 years, including dividends and controlling for inflation.” The index itself, closing last week at 1146, is back to the level it set in July of 1998; 12 years of believing in the illusion that Wall Street planned to share its wealth.
Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com
Its stock value has dropped 40 percent since April, and the bank is mum on what losses it's hiding on its $2.3 trillion balance sheet.
Will Bank of America be the first Wall Street giant to once again point a gun to its own head, telling us it'll crash and burn and take down the financial system if we don’t pony up for another massive bailout?
When former Treasury Secretary Hank Paulson was handing out trillions to Wall Street, BofA collected $45 billion from the Troubled Asset Relief Program (TARP) to stabilize its balance sheet. It was spun as a success story -- a rebuke of those who urged the banks be put into receivership -- when the behemoth “paid back” the cash last December. But the bank’s stock price has fallen by more than 40 percent since mid-April, and the value of its outstanding stock is currently at around half of what it should be based on its “book value” -- what the company says its holdings are worth.
“The problem for anyone trying to analyze Bank of America’s $2.3 trillion balance sheet,” wrote Bloomberg columnist Jonathan Weil, “is that it’s largely impenetrable.” Nobody really knows the true values of the assets these companies are holding, which has been the case ever since the collapse. But according to Weil, some of BofA’s financial statements “are so delusional that they invite laughter.”
Weil points to the firm’s accounting of its purchase of Countrywide Financial -- the criminal enterprise at the center of the sub-prime securitization market. Bank of America, Weil notes, hasn’t written off Countrywide’s entire value. “In its latest quarterly report with the SEC,” he wrote, “Bank of America said it had determined the asset wasn’t impaired. It might as well be telling the public not to believe any of the numbers on its financial statements.”
With investors valuing BofA at half the worth that the bank claims, it’s one titan of Wall Street that may be on the brink of collapse. But it’s not alone. “Everybody was doing this, this is not just something that Countrywide and Bank of America were doing," legendary investor Jim Rogers told CNBC. As a result, the banks’ balance sheets are "full of rotten stuff" that “is going to be a huge mess for a long time to come.”
And that “rotten stuff” will continue to be a drag on the brick-and-mortar economy until the mess gets cleaned up. Which, in turn, is a powerful argument for a second dip into the public trough.
When the financial crisis hit, those of us who view the free market as more than a hollow slogan urged the government to take over the ailing giants of Wall Street, wipe out their investors, send their parasitic management teams to the unemployment line and gradually unwind the huge pile of “toxic” assets that they’d amassed before selling them back, leaner and meaner, to the private sector.
It worked in the past -- it was Ronald Reagan’s response to the Savings and Loan crisis of the 1980s. But that was then, and today Reaganite policies are deemed to be “creeping socialism” -- thoroughly unacceptable. We were told the banks were too big to fail, and Bush saw eye-to-eye with Republicans and Blue Dogs in Congress and bailed the banks out without exacting a penalty in exchange for the taxpayers' largesse. They socialized the risk, but the financial industry went right back to its old tricks, paying its execs fat bonuses and playing fast and loose with its accounting.
Much of that toxic paper remains on their books -- somewhere. The assets are still impossible to price and now several Wall Street titans appear to be approaching a tipping point, poised to once again to extort a mountain of cash from our Treasury by claiming to be too big -- and interconnected -- to crash and burn as the principles of the free market would otherwise dictate.
But there’s a difference between then and now. At the time, most of us saw the crash as a result of hubris and greed run amok in an under-regulated financial sector. Now, we know the financial crisis was the result of unchecked criminality -- that fraud was perpetrated, in the words of University of Missouri scholar (and veteran regulator) William Black, “at every step in the home finance food chain.” As Black and economist L. Randall Wray wrote recently:
The appraisers were paid to overvalue real estate; mortgage brokers were paid to induce borrowers to accept loan terms they could not possibly afford; loan applications overstated the borrowers' incomes; speculators lied when they claimed that six different homes were their principal dwelling; mortgage securitizers made false [representations] and warranties about the quality of the packaged loans; credit ratings agencies were overpaid to overrate the securities sold on to investors; and investment banks stuffed collateralized debt obligations with toxic securities that were handpicked by hedge fund managers to ensure they would self destruct.
That homeowners would default on the nonprime mortgages was a foregone conclusion throughout the industry -- indeed, it was the desired outcome. This was something the lending side knew, but which few on the borrowing side could have realized.
And since the crash, they’ve committed widespread foreclosure fraud, dutifully whitewashed by the corporate media as nothing more than some “paperwork” problems resulting from a handful of “errors.”
It is anything but. As Yves Smith, author of Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism, wrote in the New York Times, “The major banks and their agents have for years taken shortcuts with their mortgage securitization documents — and not due to a momentary lack of attention, but as part of a systematic approach to save money and increase profits.”
Increasingly, homeowners being foreclosed on are correctly demanding that servicers prove that the trust that is trying to foreclose actually has the right to do so. Problems with the mishandling of the loans have been compounded by the Mortgage Electronic Registration System, an electronic lien-registry service that was set up by the banks. While a standardized, centralized database was a good idea in theory, MERS has been widely accused of sloppy practices and is increasingly facing legal challenges.
Judges are beginning to demand that the banks show their work -- prove they have the right to foreclose -- and in many instances they can’t, having sliced and diced those mortgages up into a thousand securities without bothering to verify the paperwork as most states require by law. This leaves what Smith calls a “cloud of uncertainty” hanging over trillions in mortgage-backed securities -- the largest class of assets in the world -- and preventing a real recovery of the housing market. In turn, that is holding back the economy at large; according to the International Monetary Fund, it’s the drag of the housing mess that’s causing the high and sustained levels of unemployment we see today.
Big financial firms have also been cooking their books in order to obscure how shaky their balance sheets really are because honest accounting would likely bring an end to those big bonuses that drive “the Street.” Yet a day of reckoning may be fast approaching.
If the worst-case scenario should come to pass, with the banks hit by thousands of lawsuits, unable to foreclose on properties in default and with investors running for the hills, expect to hear calls for TARP II. It’d be a very heavy political lift, but given Congress’s fealty to Wall Street it could plausibly be passed
There are alternatives. As in 2008, the federal government could put failing financial institutions into receivership. But some experts are saying that if we want to get off the roller coaster of an economy moving from one financial bubble to the next, a bolder approach is necessary: permanent nationalization of banks that can’t survive without public dollars.
“Inevitably, American taxpayers are going to pick up much of the tab for the banks' failures,” wrote Nobel prize-winning economist Joseph Stiglitz last year. “The question facing us is, to what extent do we participate in the upside return?” Stiglitz argued that the government should take “over those banks that cannot assemble enough capital through private sources to survive without government assistance.”
To be sure, shareholders and bondholders will lose out, but their gains under the current regime come at the expense of taxpayers. In the good years, they were rewarded for their risk-taking. Ownership cannot be a one-sided bet.
Of course, most of the employees will remain, and even much of the management. What then is the difference? The difference is that now, the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted.
Leo Panitch, a professor of comparative political economy at Canada’s York University, wrote that "the prospect of turning banking into a public utility might be seen as laying the groundwork for the democratization of the economy.”
Ellen Brown, author of Web of Debt, points to the success of the nation’s only government-owned bank, the Bank of North Dakota. “Last year,” she wrote, “North Dakota had the largest budget surplus it had ever had…and it was the only state that was actually adding jobs when others were losing them.”
North Dakota has an abundance of natural resources, including oil, but as Brown notes, other states that enjoy similar riches were deep in the red. “The sole truly distinguishing feature of North Dakota seems to be that it has managed to avoid the Wall Street credit freeze by owning and operating its own bank.” She adds that the bank serves the community, making “low-interest loans to students, farmers and businesses; underwrit[ing] municipal bonds; and serv[ing] as the state’s 'Mini Fed,' providing liquidity and clearing checks for more than 100 banks around the state.”
Several states have considered proposals to emulate North Dakota, but such a bold move would obviously be all but impossible in Washington. But it shouldn’t be off the table. Banks provide an “intermediary good” to the economy, creating no real value. But Big Finance’s speculation economy has caused great and real pain for the rest of us. As Joe Stiglitz put it, there’s no reason in the world the incentives of the banks shouldn’t be better aligned with the interests of the country and its citizens.
Joshua Holland is an editor and senior writer at AlterNet. He is the author of The 15 Biggest Lies About the Economy (and Everything else the Right Doesn't Want You to Know About Taxes, Jobs and Corporate America). Drop him an email or follow him on Twitter.
Re:We're Fucked - The Coming Economic Crisis
« Reply #158 on: 2010-11-26 09:59:08 »
Quote:
[Blunderov]....<snip>As Joe Stiglitz put it, there’s no reason in the world the incentives of the banks shouldn’t be better aligned with the interests of the country and its citizens.<snip>
(Business Insider) There's nothing funnier to 99% of America than Ben Bernanke's claim that he's not printing money.
Especially when, thanks to the Jon Stewart, you see Ben's latest 60 Minutes interview juxtaposed against another 60 Minutes interview when the Chairman said he was printing money -- the difference between now and then being that the Fed was buying corporate assets and now it's buying government bonds.
Re:We're Fucked - The Coming Economic Crisis
« Reply #161 on: 2011-02-09 16:24:46 »
The March 4th date looming, it will be interesting to watch if the Republicans are willing to hold the nation hostage for their principles.
Cheers
Fritz
The union's troubled state
Source: The Economist Author: Print Edition Date: 2011.01.27
A strikingly unaudacious speech from Barack Obama failed to address America’s problems
IN A show of civility prompted by the dreadful shootings in Tucson, Republicans and Democrats sat side by side to hear Barack Obama’s state-of-the-union message. But that truce could not hide the fact that the two sides have starkly different analyses of what has gone wrong in America. And in so far as either side has solutions to offer (which is sadly not very far), these are starkly different, too. Everyone pretends to be in favour of bipartisan dialogue, but it is a dialogue of the deaf.
America faces two huge, linked problems. Its unemployment rate is running at 9.4%; once you add in those who want full-time work but can find only part-time jobs, it is almost twice that. Job creation is not even keeping pace with the rise in population. And the budget deficit is running at almost 10% of GDP; on that measure this year and the previous two will have been the three worst since the second world war.
To the Republicans who now control the House of Representatives, the main problem is the deficit and the cumulative burden of debt it brings with it. The deficit will of course narrow as the economy recovers, but because of the insatiable demands for health care of America’s now-creaky and retiring baby-boomers, unless taxes are hiked it will not dip below 4% of GDP, and it will start to rise again after 2015. That is not sustainable. Not only will borrowing on this scale tend to crowd out more productive investment: the interest on it is already eating up 10% of government revenue, a figure that will rise as interest rates go up. Hence the Republican demand for swift and deep cuts. Get spending down, shift government off the backs of the people, and jobs will return, as the invisible hand works its magic.
Mr Obama sees things the opposite way round. His state-of-the-union speech was an attempt to place jobs—which, according to pollsters, most Americans say are their priority—at the forefront of the debate, and he put the deficit at the end of a long list of concerns. After two years in which he concentrated more than was wise on getting health reform passed, refocusing on jobs makes some sense. It is obviously true that America’s infrastructure, both human and physical, is sub-par (its children’s maths skills were recently placed 25th out of 34 in a ranking of OECD countries). And it is hard to reduce the deficit while the country has a large group of persistently un- or underemployed people.
But two large difficulties arise. First, neither Mr Obama nor the Republicans has a workable plan for dealing with even their own main concern; and second, neither side seems interested in dealing with the other’s priority. This is not a recipe for a productive partnership.
Sputter-nik
Mr Obama claimed that America needs to “out-innovate, out-educate and outbuild the rest of the word”. Yet his speech provided only the waffliest of ideas about how it might do that, and no indication of how they might be paid for. The parallel he likes to draw with the moment when Sputnik was launched and America realised Russia was winning the space race falls down there, for in 1957 America’s government had piles of cash to spend on catching up. Now it has none.
True, some of the measures Mr Obama talked about this week, such as rewarding schools for holding poor teachers more accountable, should not cost much. But others—such as bringing high-speed rail to 80% of Americans and broadband internet to 98% of them—will. And the federal government’s record suggests the money may not be well spent: a report by the World Economic Forum puts America at 68th in the world for the effectiveness of its public-sector spending.
The big cop-out
Mr Obama also said far too little about what most concerns Republicans and what led to his party’s defeat at the mid-terms: the deficit. Cutting hard this year is too risky; but laying out a concrete set of proposals on how to get the budget back into shape from 2012 onwards is essential.
A year ago Mr Obama set up a deficit-reduction commission, which duly produced a sensible report at the end of last year. He has failed previously, and failed again this week, to endorse the commission’s conclusions. He offered no specific proposals for cutting the cost of the biggest drains on the federal purse: health care, Social Security (pensions) and defence. And, although revenues will have to rise if the budget is to be brought into balance, he failed to explain to middle-class Americans that they will have to pay more tax. His only gestures in the direction of fiscal responsibility were to propose reforming corporate tax, increasing some taxes on the very rich and extending a freeze on some categories of discretionary spending, all of them tiny parts of the overall picture. If he is serious about the deficit, this was the time to show it. He should have taken courage from recent improvements in both his poll ratings and the economy. He copped out.
For their part, the Republicans have made it clear that they have no interest in Mr Obama’s plans to spend or invest more money. Given that they are supposed to be the party of fiscal rectitude, that is understandable. But they, too, are failing in their main brief, having neglected to come up with a plan for dealing with the long-term problem caused by entitlements. The only medicine they propose is cuts of 20% and more on parts of the “non-security discretionary” bits of the budget (ie, on only about 17% of it) which would succeed in causing a lot of pain while failing to solve the problem.
Both parties’ ideas are rotten, but the collision between them looks like being worse. On March 4th the federal government will run out of money unless Congress first passes a bill voting more; a few weeks after that, it will bump up against the federal debt ceiling, now set at an apparently insufficient $14.3 trillion, unless, again, Congress votes to increase it. Both measures must be passed by a House of Representatives now firmly in Republican hands, and also require the support of seven or more Republican senators. The Republicans have vowed to exact deep spending cuts in return for their assent. The president will not accept these. The stage is set for a savage spring.
Re:We're Fucked - The Coming Economic Crisis
« Reply #162 on: 2011-03-09 20:57:49 »
It seems the global food shortage could easily be exacerbated with higher fuel cost and the resulting discontent will cause more turmoil and the problems will escalate. It will be interesting to see how the few will deal with this; the traditional "let them eat cake" I suspect will end badly yet again, so here is hoping caring might provide a more sustainable solution.
Not holding his breath
Fritz
The 2011 oil shock More of a threat to the world economy than investors seem to think
Source: The Economist Author: print Date: 2011.03.03
THE price of oil has had an unnerving ability to blow up the world economy, and the Middle East has often provided the spark. The Arab oil embargo of 1973, the Iranian revolution in 1978-79 and Saddam Hussein’s invasion of Kuwait in 1990 are all painful reminders of how the region’s combustible mix of geopolitics and geology can wreak havoc. With protests cascading across Arabia, is the world in for another oil shock?
There are good reasons to worry. The Middle East and north Africa produce more than one-third of the world’s oil. Libya’s turmoil shows that a revolution can quickly disrupt oil supply. Even while Muammar Qaddafi hangs on with delusional determination and Western countries debate whether to enforce a no-fly zone (see article), Libya’s oil output has halved, as foreign workers flee and the country fragments. The spread of unrest across the region threatens wider disruption.
The markets’ reaction has been surprisingly modest. The price of Brent crude jumped 15% as Libya’s violence flared up, reaching $120 a barrel on February 24th. But the promise of more production from Saudi Arabia pushed the price down again. It was $116 on March 2nd—20% higher than the beginning of the year, but well below the peaks of 2008. Most economists are sanguine: global growth might slow by a few tenths of a percentage point, they reckon, but not enough to jeopardise the rich world’s recovery.
That glosses over two big risks. First, a serious supply disruption, or even the fear of it, could send the oil price soaring (see article). Second, dearer oil could fuel inflation—and that might prompt a monetary clampdown that throttles the recovery. A lot will depend on the skill of central bankers.
Of stocks, Saudis and stability
So far, the shocks to supply have been tiny. Libya’s turmoil has reduced global oil output by a mere 1%. In 1973 the figure was around 7.5%. Today’s oil market also has plenty of buffers. Governments have stockpiles, which they didn’t in 1973. Commercial oil stocks are more ample than they were when prices peaked in 2008. Saudi Arabia, the central bank of the oil market, technically has enough spare capacity to replace Libya, Algeria and a clutch of other small producers. And the Saudis have made clear that they are willing to pump.
Yet more disruption cannot be ruled out. The oil industry is extremely complex: getting the right sort of oil to the right place at the right time is crucial. And then there is Saudi Arabia itself (see article). The kingdom has many of the characteristics that have fuelled unrest elsewhere, including an army of disillusioned youths. Despite spending $36 billion so far buying off dissent, a repressive regime faces demands for reform. A whiff of instability would spread panic in the oil market.
Even without a disruption to supply, prices are under pressure from a second source: the gradual dwindling of spare capacity. With the world economy growing strongly, oil demand is far outpacing increases in readily available supply. So any jitters from the Middle East will accelerate and exaggerate a price rise that was already on the way.
What effect would that have? It is some comfort that the world economy is less vulnerable to damage from higher oil prices than it was in the 1970s. Global output is less oil-intensive. Inflation is lower and wages are much less likely to follow energy-induced price rises, so central banks need not respond as forcefully. But less vulnerable does not mean immune.
Dearer oil still implies a transfer from oil consumers to oil producers, and since the latter tend to save more it spells a drop in global demand. A rule of thumb is that a 10% increase in the price of oil will cut a quarter of a percentage point off global growth. With the world economy currently growing at 4.5%, that suggests the oil price would need to leap, probably above its 2008 peak of almost $150 a barrel, to fell the recovery. But even a smaller increase would sap growth and raise inflation.
Shocked into action
In the United States the Federal Reserve will face a relatively easy choice. America’s economy is needlessly vulnerable, thanks to its addiction to oil (and light taxation of it). Yet inflation is extremely low and the economy has plenty of slack. This gives its central bank the latitude to ignore a sudden jump in the oil price. In Europe, where fuel is taxed more heavily, the immediate effect of dearer oil is smaller. But Europe’s central bankers are already more worried about rising prices: hence the fear that they could take pre-emptive action too far, and push Europe’s still-fragile economies back into recession.
By contrast, the biggest risk in the emerging world is inaction. Dearer oil will stoke inflation, especially through higher food prices—and food still accounts for a large part of people’s spending in countries like China, Brazil and India. True, central banks have been raising interest rates, but they have tended to be tardy. Monetary conditions are still too loose, and inflation expectations have risen.
Unfortunately, too many governments in emerging markets have tried to quell inflation and reduce popular anger by subsidising the prices of both food and fuel. Not only does this dull consumers’ sensitivity to rising prices, it could be expensive for the governments concerned. It will stretch India’s optimistic new budget (see article). But the biggest danger lies in the Middle East itself, where subsidies of food and fuel are omnipresent and where politicians are increasing them to quell unrest. Fuel importers, such as Egypt, face a vicious, bankrupting, spiral of higher oil prices and ever bigger subsidies. The answer is to ditch such subsidies and aim help at the poorest, but no Arab ruler is likely to propose such reforms right now.
At its worst, the danger is circular, with dearer oil and political uncertainty feeding each other. Even if that is avoided, the short-term prospects for the world economy are shakier than many realise. But there could be a silver lining: the rest of the world could at long last deal with its vulnerability to oil and the Middle East. The to-do list is well-known, from investing in the infrastructure for electric vehicles to pricing carbon. The 1970s oil shocks transformed the world economy. Perhaps a 2011 oil shock will do the same—at less cost.
Re:We're Fucked - The Coming Economic Crisis
« Reply #163 on: 2011-04-17 17:11:29 »
As the BRIC crew put yet another brick in the wall at last weeks summit and continue serious lobbying to get the world off of US green backs, this I thought represented a Marshall McLuhan insight in the new motivations and goals or is that the same old ones, but just from the new brick layers.
Cheers
Fritz
Golf Channel off the air during BRICS meeting
Source: Global Post Author: Kathleen E. McLaughlin Date: 2011.04.15
The banned channels were not what you might expect during the China-hosted BRICS summit this week in Hainan. Former President of the Philippines Fidel Valdez Ramos plays a shot during the BFA Golf Invitation 2011 on April 14, 2011 in Boao, Hainan Province of China. (Stringer/AFP/Getty Images)
Much has already been said about tight controls on information from the China-hosted BRICS summit this week in Hainan.
Most journalists who traveled to China's far south for the event were barred from the main event — a "press briefing" consisting of speeches by the leaders of Brazil, Russia, India, China and Brazil. A joint trade ministers' press conference the day before allowed no questions. It was clear China was controlling the message, sequestering most foreign journalists in a media center off-site from the actual event.
But it seems the government was also concerned about what information entered Hainan during the BRICS summit and the Boao leaders forum that followed today. In a circular at one hotel, management apologized to guests that four foreign satellite channels would be blocked by the State Administration of National Security Bureau in hotels from April 11-18. The banned channels were not what you might expect; CNN was available.
Those on the list: German broadcaster Deutsche Welle, Hong Kong entertainment channels NOW and Star World, and the Golf Channel. No further explanation was given, but the last is a particularly interesting choice given Hainan's reputation as a golf resort destination.
Re:We're Fucked - The Coming Economic Crisis
« Reply #164 on: 2011-05-30 17:57:22 »
I wonder when the notion that looking forward will be unlike the boom of the past; will finally change how we act and expect.
Cheers
Fritz
Housing Index Is Expected to Show a New Low in Prices
Source: New York Times Author: DAVID STREITFELD Date: 2011.05.30
SAN FRANCISCO — The desire to own your own home, long a bedrock of the American Dream, is fast becoming a casualty of the worst housing downturn since the Great Depression.
Even as the economy began to fitfully recover in the last year, the percentage of homeowners dropped sharply to 66.4 percent from a peak of 69.2 percent in 2004. The ownership rate is now back to the level of 1998, and some housing experts say it could decline to the level of the 1980s or even earlier.
Disenchantment with real estate is bound to swell further on Tuesday when the most widely watched housing index is all but guaranteed to show prices of existing homes sank in March below the lows reached two years ago — until now the bottom of the housing crash. In February, the Standard & Poor’s/Case-Shiller index of 20 large cities slumped for the seventh month in a row.
Housing is locked in a downward spiral, industry analysts say, not only because so many people are blocked from the market — being unemployed, in foreclosure or trapped in homes that are worth less than the mortgage — but because even those who are solvent are opting out.
“The emotional scars left by the collapse are changing the American psyche,” said Pete Flint, chief executive of the housing Web site Trulia. “There was a time when owning a home was a symbol you had made it. Now it’s O.K. not to own.”
Trulia, a real estate search engine for buyers and renters that is based here, is a hive of renters, including Mr. Flint. “I’m in no rush at all to buy,” he said. He expects homeownership to decline further to about 63 percent, a level the country first achieved in the mid-1960s.
Tim Hebb, a Los Angeles systems engineer, expertly called the real estate bubble. He sold his bungalow in August 2006, then leased it back for a year. Since then, the 61-year-old single father has rented a succession of apartments.
“I have flirted with buying again many times over the past few years,” said Mr. Hebb. “Let’s face it, people are not rational creatures.”
But he always resists, figuring housing is still overpriced and even when it stops declining it will stumble along the bottom for years and years. He says there is plenty of time to get back in if he should ever want to.
The market signaled further trouble on Friday when the April index of pending deals was released by the National Association of Realtors. Analysts had predicted the index, which anticipates sales that will be completed in the next two months, would be down 1 percent from March. Instead, it plunged 11.6 percent.
Many of those in the business of building and selling houses believe the current disaffection with real estate will pass. After every giddy boom comes the hangover, they acknowledge, but that deep-rooted desire for a castle of one’s own quickly reasserts itself.
“There’s no question that people are reticent to own,” said Douglas C. Yearley Jr., chief executive of Toll Brothers, the builder of high-end homes. “They’re renting and they’re happy renting because they’re scared.”
Yet those fears will fade, he predicted.
“Most people still want the big house with the big lot in the desirable school district in the suburbs. No one ever renovated the kitchen or redid a room for the kids in a rental,” Mr. Yearley said. “I think — I hope — we’ll be O.K.”
The market’s persistent weakness, however, runs the risk of feeding on itself. Buyers are staying away despite the lowest interest rates and the highest affordability levels in many years, which in turn prompts others to hesitate.
Trulia and another real estate site, RealtyTrac, commissioned Harris Interactive to take a poll last November about when people thought the market would recover. A third of the respondents chose 2014 or later. But in a new poll, released this month, the percentage giving that answer rose to 54 percent.
The sharp decline in prices since 2006 has meant a lost decade for many owners. But what may prove even more discouraging to potential buyers is academic research showing the financial rewards of ownership were uncertain even before the crash.
In a recent paper, a senior economist at the Federal Reserve Bank of Kansas City found that the notion that homeownership builds more wealth than investing was true only about half the time.
“For many households in many years, renting and investing the saved cash flow has built more wealth than homeownership,” the economist, Jordan Rappaport, concluded.
Economics affects potential owners in other ways. A house is a long-term commitment that many are loath to make in uncertain times like these.
“What I’m hearing from people is that they don’t want to be tied to a particular geography, which inclines them to renting,” said Mr. Flint of Trulia.
San Francisco is one of the country’s most expensive cities, so renting has a natural appeal here. But Associated Estates Realty Corporation, which owns 13,000 apartments in Georgia, Indiana, Michigan and other Midwest and Southeast states, also is seeing more people deciding to rent.
“We have more of what we call ‘renters by choice’ than I’ve seen in the 40 years I’ve been in the apartment business,” said Jeffrey I. Friedman, chief executive of Associated Estates.
For decades, the company has asked former tenants why they were moving out. During the housing boom, as many as a quarter of those moving on said they were buying a house. In 2009, the percentage of new owners fell in the first quarter to 13.7 percent, the lowest ever.
Last year, as the economy improved, the number rebounded. This year, it fell back again, to 14 percent.
Builders clearly believe that the future includes many more renters. So far this year, construction of multiunit buildings is up 21 percent compared with 2010, while single family-homes are down 22 percent. Sales of new single-family homes are lower than any time since the data was first kept in 1963.
Susan Lindsey, a San Diego software programmer, was once eagerly waiting for the housing market to crash. She said she would have no guilt about swooping in on some foreclosed owner who had bought a place he could not afford.
With prices now down by a third, however, she is content to stay in her $2,500-a-month rented house. She prefers to invest in gold, which she has been buying since 2003.
“I could afford a median-priced house, no problem,” said Ms. Lindsey, 48, as she headed off for a holiday weekend in Las Vegas. “But I would be paying more to live in a place I like less.”
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