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Trouble Ahead

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Forget about what you’ve been told by the “rose-colored glasses” crowd.  We are headed for more economic trouble.  On September 17, economist Lakshman Achuthan gave his prognosis for the economy to Guy Raz, of NPR’s All Things Considered:

Achuthan, co-founder and chief operations officer of the Economic Cycle Research Institute, says all of his economic indicators point to more sputtering ahead.

“The risk of a new recession is quite high,” he says.

In Toronto, Michael Babad of The Globe And Mail saw fit to focus on the latest forecast from “Dr. Doom”:

Nouriel Roubini, the New York University professor who forecast the financial crisis, went further today, warning that “we are entering a recession.”   The question isn’t whether there will be a double-dip, he said on Twitter, but rather how deep it will be.

And the answer, added the chairman and co-founder of Roubini Global Economics, depends on the response of policy makers and developments in the euro zone’s ongoing crisis.

As Gretchen Morgenson reported for The New York Times, the European sovereign debt crisis is already beginning to “wash up on American shores”.  The steep exposure of European banks to the sovereign debt of eurozone countries has become a problem for the United States:

Some of these banks are growing desperate for dollars.  Fearing the worst, investors are pulling back, refusing to roll over the banks’ commercial paper, those short-term i.o.u.’s that are the lifeblood of commerce.  Others are refusing to renew certificates of deposit. European banks need this money, in dollars, to extend loans to American companies and to pay their own debts.

Worries over the banks’ exposure to shaky European government debt have unsettled markets over there – shares of big French banks have taken a beating – but it is unclear how much this mess will hurt the economy back here.  American stock markets, at least, seem a bit blasé about it all:  the Standard & Poor’s 500-stock index rose 5.3 percent last week.

Last Thursday, I expressed my suspicion that the recent stock market exuberance was based on widespread expectation of another round of quantitative easing.  This next round is being referred to as “QE3”.   QE3 is good news for Wall Street because of those POMO auctions, wherein the New York Fed purchases Treasury securities – worth billions of dollars – on a daily basis.  After the auctions, the Primary Dealers take the sales proceeds to their proprietary trading desks, where the funds are leveraged and used to purchase high-beta, Russell 2000 stocks.  You saw the results during QE2:  A booming stock market – despite a stalled economy.

I believe that the European debt situation will become the controlling factor, which will turn the tide in favor of QE3 at the September 20-21 Federal Open Market Committee meeting.

Most pundits have expressed doubts that the Fed would undertake another round of quantitative easing.  Bill McBride of Calculated Risk put it this way:

QE3 is unlikely at the September meeting, but not impossible – however most observers think the FOMC will announce a program to change the composition of their balance sheet (extend maturities).  It is also possible that the FOMC will announce a reduction in the interest rate paid on excess reserves (currently 0.25%).

Tim Duy expressed a more skeptical outlook at his Fed Watch website:

Even more unlikely is another round of quantitative easing.  I don’t think there is much appetite at the Fed for additional asset purchases given the inflation numbers and the stability of longer-term inflation expectations relative to the events that prompted last fall’s QE2.

On the other hand, hedge fund manager Bill Fleckenstein presents a more persuasive case that the Fed can be expected to react to the “massive red ink in world equity markets” (due to floundering European bank stocks) by resorting to its favorite panacea – money printing:

So, to sum up my expectations, I believe that not only will we get a bold new round of QE from the Fed this week, but other central banks will join the party.  (The Bank of Japan and Swiss National Bank are already printing money in an attempt to weaken their currencies.)  If that happens, I believe that assets (stocks, bonds and commodities) will rally rather dramatically, at least for a while, with the length and size of the rally depending on the individual idea/asset.

If no QE is announced, and we basically see nothing done, it will probably be safe to short stocks for investors who can handle that strategy.  Markets would be pummeled until the central planners (i.e., these bankers) are forced to react to the carnage. Such is the nature of the paper-money-central-bank-moral-hazard standard that is currently in place.

The Fed will announce its decision at 2:15 on Wednesday, September 21.  Even if the FOMC proceeds with QE3, its beneficial effects will (again) be limited to the stock market.  The real American economy will continue to stagnate through its “lost decade”, which began in 2007.


 

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Well-Deserved Scrutiny For The Fed

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In the wake of the 2010 elections, it’s difficult to find a pundit who doesn’t mention the Tea Party at least once while discussing the results.  This got me thinking about whether the man referred to as “The Godfather” of the Tea Party movement, Congressman Ron Paul (father of Tea Party candidate, Senator-elect Rand Paul) will become more influential in the next Congress.  More important is the question of whether Ron Paul’s book, End The Fed will be taken more seriously – particularly in the aftermath of the Fed’s most recent decision to create $600 billion out of thin air in order to purchase even more treasury securities and mortgage-backed securities by way of the recently-announced, second round of quantitative easing (referred to as QE2).

The announcement by the Federal Open Market Committee to proceed with QE2 drew immediate criticism.  The best rebuke against QE 2 came from economist John Hussman, whose Weekly Market Comment – entitled, “Bubble, Crash, Bubble, Crash, Bubble …” was based on this theme:

We will continue this cycle until we catch on.  The problem isn’t only that the Fed is treating the symptoms instead of the disease.  Rather, by irresponsibly promoting reckless speculation, misallocation of capital, moral hazard (careless lending without repercussions), and illusory “wealth effects,” the Fed has become the disease.

One issue raised by Mr. Hussman – which should resonate well with supporters of the Tea Party – concerns the fact that the Fed is undertaking an unconstitutional exercise of fiscal policy (rather than monetary policy) most notably by its purchase of mortgage-backed securities:

In this example, the central bank is not engaging in monetary policy, but fiscal policy.  Creating government liabilities to acquire goods and assets, unless those assets are other government liabilities, is fiscal policy, pure and simple.

Hussman’s analysis of how the “the economic impact of QE2 is likely to be weak or even counterproductive” was best expressed in this passage:

We are betting on the wrong horse.  When the Fed acts outside of the role of liquidity provision, it does more harm than good. Worse, we have somehow accepted a situation where the Fed’s actions are increasingly independent of our democratically elected government.  Bernanke’s unsound leadership has placed the nation’s economic stability on two pillars:  inflated asset prices, and actions that – in Bernanke’s own words – should be “correctly viewed as an end run around the authority of the legislature” (see below).

The right horse is ourselves, and the ability of our elected representatives to create an economic environment that encourages productive investment, research, development, infrastructure, and education, while avoiding policies that promote speculation, discourage work, or defend reckless lenders from experiencing losses on bad investments.

On November 6, another brilliant critique of the Fed came from Ashvin Pandurangi (a/k/a “Ash”) of the Simple Planet website.  His essay began with a reminder of what the Fed really is:

The most powerful, influential economic policy-making institution in the country, the Federal Reserve (“Fed”), is an unelected body that is completely unaccountable to the people.

*   *   *

The Fed, by its own admission, is an independent entity within the government “having both public purposes, and private aspects”.  By “private aspects”, they mean the entire operation is wholly-owned by private member banks, who are paid dividends of 6% each year on their stock.  Furthermore, the Fed’s decisions “do not have to be ratified by the President or anyone else in the executive or legislative branch of government” and the Fed “does not receive funding appropriated by Congress”.  In 1982, the Ninth Circuit Court of Appeals confirmed this view when it held that “federal reserve banks are not federal instrumentalities … but are independent, privately owned and locally controlled corporations”.

As we all know:  “Absolute power corrupts absolutely”.  At the end of his essay, Ash connected the dots for those either unable to do so or unwilling to face an ugly reality:

In the last two years, the almighty Fed has printed trillions of dollars in our name to buy worthless mortgage assets from “too big to fail” banks.  It has lent these banks our hard-earned money at about 0% interest, so they could lend our own money back to us at 3%+.  These banks also used our free money to ramp equity and commodity markets, which mostly benefited the top 1% of our population who owns 43% of financial wealth [2], and conveniently, also owns the Fed.  The latter has kept interest rates at next to nothing to punish savers and encourage speculation, making everything less affordable for average Americans who have seen their wages stay the same, decrease or disappear.  What’s left standing is the perniciously powerful, highly secretive and entirely unaccountable Fed, who now epitomizes the state of American democracy.

At least we still have freedom of speech!  As part of the Fed’s roll-out of QE2, Chairman Ben Bernanke found it necessary to write a public relations piece for The Washington Post – perhaps as an apology.  Stock market commentator Bill Fleckenstein had no trouble ripping Bernanke’s article to shreds:

Bernanke goes on to say:  “Although low inflation is generally good, inflation that is too low can pose risks to the economy — especially when the economy is struggling.  In the most extreme case, very low inflation can morph into deflation.”

Oh, yeah?  Says who?  I have not seen any instance where a “too low” inflation rate led to deflation.  When deflation is caused by new inventions or increased productivity (or in the old days, bumper crops), which we might term “good” deflation, it was not a consequence of too little inflation; it was due to progress.  Similarly, the “bad” deflation isn’t created via inflation that is too low; it tends to come from burst bubbles.  In other words, misguided policies, not low inflation, are the cause of deflation.

Because the timing of the Fed’s controversial move to proceed with QE2 dovetails so well with the “energizing” of the Tea Party movement, it will be interesting to observe whether life will become more uncomfortable for Chairman Bernanke.  A recent article by Joshua Zumbrun of Bloomberg News gave us this hint:

Six out of 10 self-identified Tea Party supporters who said they were likely to vote supported overhauling or abolishing the Fed, according to a Bloomberg News national poll conducted Oct. 7-10.

The article made note of the fact that Ron Paul’s ill-fated effort to Audit the Fed (HR 1207) received bipartisan support:

“You had a really strange alliance last year that supported the audit of the Fed and that may come back into play,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

Here’s to bipartisanship!


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Bogus Editorial Gets Exposed

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August 16, 2010

One of my favorite commentators, Bill Fleckenstein, wrote an interesting piece calling attention to the fact that the Patent Office is underfunded to the tune of about $1 billion.  The good news is that fixing this problem might create as many as 2.5 million new jobs over the next three years.  Fleck based his article on a New York Times essay by Paul Michel (former Chief Judge of the United States Court of Appeals for the District of Columbia Circuit) and Henry Nothhaft, co-author of the upcoming book, Great Again.

Bill Fleckenstein began his discussion by noting another letdown by our Disappointer-In-Chief:

As the financial crisis was unfolding in late 2008 and early 2009, I actually thought for a while that the incoming Obama administration might try to do something intelligent regarding incentivizing jobs.  That was 100% incorrect.  The only incentives it has created are ones not to hire more employees, which has only made a bad situation worse.

Unfortunately, Fleck decided to support his perspective with an editorial from the August 9 Wall Street Journal entitled, “Why I’m Not Hiring” by Michael Fleischer.  Fleischer whined about how President Obama has made things difficult for his “little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings.”  Fleischer concluded the piece with this lament:

And even if the economic outlook were more encouraging, increasing revenues is always uncertain and expensive.  As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company’s vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment.

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up.  From where I sit, the government’s message is unmistakable:  Creating a new job carries a punishing price.

Bill Fleckenstein was not the only commentator who was apparently “taken in” by this editorial.  It has been getting re-blogged all over the Web.

What most people don’t realize is that the author of the Wall Street Journal editorial, Michael Fleischer, is the brother of Ari Fleischer, the former press secretary to President George W. Bush.

Kevin Drum wrote a piece for Mother Jones, which began with his criticism of the Journal for not admitting that the aforementioned editorial was written by Ari Fleischer’s brother.  Beyond that, Mr. Drum provided us with a little more information about Michael Fleischer’s background:

Michael, thanks to his White House connections, was one of the squadron of free market evangelizers who parachuted into Baghdad to privatize Iraqi industry after the war.  We all know how well that went, which is probably what qualifies him to write op-eds about creeping Obama-ism for the Wall Street Journal.

Drum then quoted this reader’s comment, posted at the Outside The Beltway blog, concerning the Fleischer editorial:

The fact is that if Mr. Fleisher’s company has to buy an extra box of paper clips it will cause them to go belly up.  He’s in not position to hire anyone regardless of tax policy.

The reason Mr. Fleischer’s company isn’t hiring has nothing to do with taxes or the policies of any administration.  It’s because his business has been in decline for a decade.  As the CEO, that decline is his fault.  All his complaining about taxes and benefits is just a smokescreen for his own incompetence.

The world changed around them a decade ago and they failed to adapt.  In 2000, their annual sales were 66 million dollars with cash on hand of 12 million.  By 2003, sales were down to 55 million and cash was down to 6 million.  That was before the financial crisis and under the allegedly pro business policies of the previous administration.  In 2009, sales were down to 44 million and cash was down to 2 million.     They managed to lose 17 million dollars that year and got a carry back refund of some 5 million dollars.  Mr. Fleischer should spend less time complaining about taxes and more time thinking about how he can correct 10 years of mismanagement.

Don’t take my word for it, read the balance sheets yourself.

http://www.bogen.com/aboutus/financials/#historical

Another blogger had some fun digging into the truth about Fleischer’s Bogen Communications and hanging out the dirty laundry on the Internet:

Here’s the thing, though.  If you actually look into Bogen, you find out that there are far better reasons for why Fleischer isn’t hiring.  Like the stock price absolutely cratering last year.  Or the settlement that they reached with a contractor who alleged “multiple causes of action for breach of contract and various torts”; a settlement that came after the contractor had already been awarded a cool $12.5 mil in “compensatory and punitive damages.”

It’s always funny when a political hatchet job gets exposed.  It’s even funnier when the perpetrators are too dumb to realize that —  in  what Marshall McLuhan used to call “the electronic information environment” (back in the 1960s)  — it’s pretty easy to dig up the truth.

Anyone trying to ascertain the truth about why companies aren’t hiring would be better served to peruse websites such as MarketWatch or Bloomberg, rather than the Wall Street Journal’s editorial page.  Bill Fleckenstein should have known better.



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Still Wrong After All These Years

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June 21, 2010

I’m quite surprised by the fact that people continue to pay serious attention to the musings of Alan Greenspan.  On June 18, The Wall Street Journal saw fit to publish an opinion piece by the man referred to as “The Maestro” (although – these days – that expression is commonly used in sarcasm).  The former Fed chairman expounded that recent attempts to rein in the federal budget are coming “none too soon”.  Near the end of the article, Greenspan made the statement that will earn him a nomination for TheCenterLane.com’s Jackass of the Year Award:

I believe the fears of budget contraction inducing a renewed decline of economic activity are misplaced.

John Mauldin recently provided us with a thorough explanation of why Greenspan’s statement is wrong:

There are loud calls in the US and elsewhere for more fiscal constraints.  I am part of that call.  Fiscal deficits of 10% of GDP is a prescription for disaster.  As we have discussed in previous letters, the book by Rogoff and Reinhart (This Time is Different) clearly shows that at some point, bond investors start to ask for higher rates and then the interest rate becomes a spiral.  Think of Greece.  So, not dealing with the deficit is simply creating a future crisis even worse than the one we just had.

But cutting the deficit too fast could also throw the country back in a recession.  There has to be a balance.

*   *   *

That deficit reduction will also reduce GDP.  That means you collect less taxes which makes the deficits worse which means you have to make more cuts than planned which means lower tax receipts which means etc.  Ireland is working hard to reduce its deficits but their GDP has dropped by almost 20%! Latvia and Estonia have seen their nominal GDP drop by almost 30%!  That can only be characterized as a depression for them.

Robert Reich’s refutation of Greenspan’s article was right on target:

Contrary to Greenspan, today’s debt is not being driven by new spending initiatives.  It’s being driven by policies that Greenspan himself bears major responsibility for.

Greenspan supported George W. Bush’s gigantic tax cut in 2001 (that went mostly to the rich), and uttered no warnings about W’s subsequent spending frenzy on the military and a Medicare drug benefit (corporate welfare for Big Pharma) — all of which contributed massively to today’s debt.  Greenspan also lowered short-term interest rates to zero in 2002 but refused to monitor what Wall Street was doing with all this free money.  Years before that, he urged Congress to repeal the Glass-Steagall Act and he opposed oversight of derivative trading.  All this contributed to Wall Street’s implosion in 2008 that led to massive bailout, and a huge contraction of the economy that required the stimulus package.  These account for most of the rest of today’s debt.

If there’s a single American more responsible for today’s “federal debt explosion” than Alan Greenspan, I don’t know him.

But we can manage the Greenspan Debt if we get the U.S. economy growing again.  The only way to do that when consumers can’t and won’t spend and when corporations won’t invest is for the federal government to pick up the slack.

This brings us back to my initial question of why anyone would still take Alan Greenspan seriously.  As far back as April of 2008 – five months before the financial crisis hit the “meltdown” stage — Bernd Debusmann had this to say about The Maestro for Reuters, in a piece entitled, “Alan Greenspan, dented American idol”:

Instead of the fawning praise heaped on Greenspan when the economy was booming, there are now websites portraying him in dark colors.  One site is called The Mess That Greenspan Made, another Greenspan’s Body Count.  Greenspan’s memoirs, The Age of Turbulence, prompted hedge fund manager William Fleckenstein to write a book entitled Greenspan’s Bubbles, the Age of Ignorance at the Federal Reserve.  It’s in its fourth printing.

The day after Greenspan’s essay appeared in The Wall Street Journal, Howard Gold provided us with this recap of Greenspan’s Fed chairmanship in an article for MarketWatch:

The Fed chairman’s hands-off stance helped the housing bubble morph into a full-blown financial crisis when hundreds of billions of dollars’ worth of collateralized debt obligations, credit default swaps, and other unregulated derivatives — backed by subprime mortgages and other dubious instruments — went up in smoke.

Highly leveraged banks that bet on those vehicles soon were insolvent, too, and the Fed, the U.S. Treasury and, of course, taxpayers had to foot the bill.  We’re still paying.

But this was not just a case of unregulated markets run amok.  Government policies clearly made things much worse — and here, too, Greenspan was the culprit.

The Fed’s manipulation of interest rates in the middle of the last decade laid the groundwork for the most fevered stage of the housing bubble.  To this day, Greenspan, using heavy-duty statistical analysis, disputes the role his super-low federal funds rate played in encouraging risky behavior in housing and capital markets.

Among the harsh critiques of Greenspan’s career at the Fed, was Frederick Sheehan’s book, Panderer to Power.  Ryan McMaken’s review of the book recently appeared at the LewRockwell.com website – with the title, “The Real Legacy of Alan Greenspan”.   Here is some of what McMacken had to say:

.  .  .  Panderer to Power is the story of an economist whose primary skill was self-promotion, and who in the end became increasingly divorced from economic reality.  Even as early as April 2008 (before the bust was obvious to all), the L.A. Times, observing Greenspan’s post-retirement speaking tour, noted that “the unseemly, globe-trotting, money-grabbing, legacy-spinning, responsibility-denying tour of Alan Greenspan continues, as relentless as a bad toothache.”

*   *   *

Although Greenspan had always had a terrible record on perceiving trends in the economy, Sheehan’s story shows a Greenspan who becomes increasingly out to lunch with each passing year as he spun more and more outlandish theories about hidden profits and productivity in the economy that no one else could see.  He spoke incessantly on topics like oil and technology while the bubbles grew larger and larger.  And finally, in the end, he retired to the lecture circuit where he was forced to defend his tarnished record.

The ugly truth is that America has been in a bear market economy since 2000 (when “The Maestro” was still Fed chair).  In stark contrast to what you’ve been hearing from the people on TV, the folks at Comstock Partners put together a list of ten compelling reasons why “the stock market is in a secular (long-term) downtrend that began in early 2000 and still has some time to go.”  This essay is a “must read”.  Further undermining Greenspan’s recent opinion piece was the conclusion reached in the Comstock article:

The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed numbers to a point where they are less depressed.  And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy.  In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable.

As always, Alan Greenspan is still wrong.  Unfortunately, there are still too many people taking him seriously.




Reality Check

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July 13, 2009

Have you become sick of hearing about the “green shoots”?   Back on March 15, Federal Reserve Chairman Ben Bernanke appeared on 60 Minutes and made the self-serving, self-congratulatory claim that “green shoots” could be found in the economy.  I guess we’re supposed to thank him for all the extra money printing he had mandated, to facilitate this claimed result.  While we normal people continued to cope with ongoing job losses, an almost nonexistent job market, unavailable mortgages, a constipated real estate market and fear about the future   . . .   Chairman Bernanke was trying to sell us on some good news.  Since that time, the expression “green shoots” has been the mantra for those pundits who, for whatever reason, want the naive public to believe in the emperor’s new clothes.  The usual motive for chatting up the “green shoots” is to encourage a widespread popular return to investing in the stock market and by so doing, make life more rewarding for those at brokerage firms.

This week brings us a “reality check” that will come in the form of earnings reports from the second quarter of 2009, required for disclosure by publicly-held corporations, traded on our nation’s stock exchanges.  Recent news reports have focused on the fact that despite the “bear market rally” that began in May, last week’s drop in stock prices revealed widespread investor concern that the truth will not support all the hype they have been reading since the spring.  Here’s what E.S. Browning had to say in the July 8 edition of The Wall Street Journal:

Expectations for the current earnings season are very low, and investors are worried companies will give weak outlooks for the second half of the year.

“We kind of think the market got ahead of itself.  It ran too fast, too hard, and we are soon going to be staring at second-quarter earnings reports that are not going to be pretty,” said Janna Sampson, who helps oversee $1.3 billion as co-chief investment officer of OakBrook Investments in Lisle, Ill.

After the market bottomed March 9, investors increasingly embraced risky assets, bidding up stocks, especially those of smaller companies with little or no profit.

Those unfortunate investors were hit by two “sucker punches”.  The first was the often-repeated claim that “stocks are now a bargain  . . .  we’ve hit the bottom so now is the time to BUY!”  The second sucker punch involved the use of high-speed trading programs (such as the one recently stolen from Goldman Sachs) to run up the prices on stocks and exploit “retail investors” such as you and me.  An astute explanation of this process was recently published by Sal Arnuk and Joseph Saluzzi of Themis Trading.  You can read that report here.  What’s even more interesting about the computer program used by (and stolen from) Goldman Sachs, is the statement made by Assistant U.S.Attorney Joseph Facciponti, as quoted in the July 6 article by David Glovin and Christine Harper for Bloomberg News:

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said, according to a recording of the hearing made public today.

So Goldman Sachs has a computer program that allows the user to “manipulate the markets in unfair ways”?  That’s quite a revelation!  If that weren’t bad enough  . . .  according to a recent report by Tyler Durden at Zero Hedge, Goldman Sachs is not the only kid on the block with a high-frequency trading program.

Alexendra Twin of CNN (in addition to providing us with a schedule of earnings reports and other important economic data to be released over this week and next) pointed out another important reason for last spring’s stock market rally, which is not likely to be a factor this month:

Last quarter, analysts and corporations alike ratcheted down forecasts, setting up a period in which a greater percentage of companies than usual beat forecasts.  But this quarter could be different.  Fewer companies have been cutting forecasts and analysts haven’t budged as much either, giving corporations less of an opportunity to defy expectations.

“The question is whether we’ll see a similar surprise factor this time,” said John Butters, senior research analyst at Thomson Reuters. “If companies haven’t cut and analysts haven’t cut, can results beat forecasts?”

My take on this process is a bit more cynical:  the system is being “gamed” by companies’ providing artificially low estimates for future earnings, in order to win at what commentator Bill Fleckenstein calls “beat the number”.

Once we have read about all these reports  —  will we finally stop hearing about “green shoots”?  I have my money on bad economic news, as I continue to maintain my position in the SRS exchange-traded fund.  Nevertheless, I’m keeping one hand on the ripcord, ready to bail out at any minute.

Another Troubling Appointment By Obama

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February 5, 2009

It all started with Bill Richardson.  On January 4, New Mexico Governor Bill Richardson announced that he was withdrawing as nominee for the position of Commerce Secretary, due to an investigation into allegations of influence peddling.

Then there was a brief moment of concern over the fact that Treasury Secretary nominee, Timothy Geithner, was a little late with some self-employment tax payments.  Since his new position would put him in charge of the Internal Revenue Service, many people found this shocking.  Even more shocking was his admission that he prepared his income taxes using the TurboTax software program.  That entire controversy was overlooked because Geithner has been regarded as the only person in Washington who fully understands the TARP bailout bill (as Newsweek‘s Jonathan Alter once said).

On February 3, two more Obama appointees had to step aside.  The first was Nancy Killefer, who had been selected to become “Chief Performance Officer”, in which role she would have been tasked with cleaning up waste in government programs.  Her situation didn’t sound all that scandalous.  The Wall Street Journal explained that she “… had a $946.69 tax lien imposed on her home by the District of Columbia for unpaid taxes on household help, a debt she had satisfied long ago.”  Later that day, Tom Daschle had to withdraw his nomination to become Secretary of Health and Human Services.  It seemed that his failure to timely pay over $100,000 in taxes was just part of the problem.  As the previously-mentioned Wall Street Journal article pointed out, the Daschle nomination provided additional embarrassment for President Obama:

Beyond the tax issue, Mr. Daschle was increasingly being portrayed as a Washington insider who made a fortune by trading on his Beltway connections — an example of the kind of culture Mr. Obama had pledged to change.

Meanwhile, many Democrats were expressing dismay over the February 2 announcement that Republican Senator Judd Gregg had been tapped to become Commerce Secretary.  Back in 1995, as United States Senator representing New Hampshire, he voted in favor of a budget measure that would have abolished the Commerce Department.  To many, this seemed too much like the George W. Bush tactic of putting a saboteur in charge of an administrative agency.  Nevertheless, Senator Gregg was ready to address those concerns.  As Liz Sidoti reported for the Associated Press:

In a conference call with reporters, Gregg dismissed questions about the vote.

“I say those were my wild and crazy days,” he said.  “My record on supporting Commerce far exceeds any one vote that was cast early on in the context of an overall budget.”

Gregg said he’s strongly supported the agency, particularly its scientific initiatives, including at the agency’s largest department, the National Oceanic and Atmospheric Administration.

Finally, on Wednesday February 5, those who concurred with President Obama’s appointment of Mary Schapiro as Chair of the Securities and Exchange Commission (SEC) had good reason to feel anxious.  That day brought us the long-awaited testimony of independent financial fraud investigator, Harry Markopolos, before the House Financial Services Committee.  Back in May of 2000, Mr. Markopolos tried to alert the SEC to the fact that Bernie Madoff’s hedge fund was a multi-billion-dollar Ponzi scheme.  As Markopolos explained in his testimony, he repeatedly attempted to get the SEC to investigate this scam, only to be rebuffed on every occasion.  Although his testimony included some good advice directed to Ms. Schapiro about “cleaning up” the SEC, this portion of his testimony, as discussed by Marcy Gordon of the Associated Press, deserves some serious attention:

While the SEC is incompetent, the securities industry’s self-policing organization, the Financial Industry Regulatory Authority, is “very corrupt,” Markopolos charged.  That organization was headed until December by Schapiro, who has said Madoff carried out the scheme through his investment business and FINRA was empowered to inspect only the brokerage operation.

So Schapiro’s defense is that FINRA was empowered to inspect only brokerages and Madoff Investments was not a brokerage.  This doesn’t address Markopolos’ testimony that FINRA is “very corrupt”.  Mary Schapiro was the Chair and CEO of that “very corrupt” entity from 2006 until December of 2008.  Let’s not forget that during her tenure in that position she appointed Bernie Madoff’s son, Mark Madoff, to the board of the National Adjudicatory Council.  The Mark Madoff appointment was discussed back on December 18 by Randall Smith and Kara Scannell, in The Wall Street Journal.  At that time, they provided an informative analysis of the SEC nominee’s track record, which should have discouraged the new President from appointing her as he did on his second day in office:

She was credited with beefing up enforcement while at the National Association of Securities Dealers and guiding the creation of the Financial Industry Regulatory Authority, which she now leads.  But some in the industry questioned whether she would be strong enough to get the SEC back on track.

*   *   *

Robert Banks, a director of the Public Investors Arbitration Bar Association, an industry group for plaintiff lawyers  . . .  said that under Ms. Schapiro, “Finra has not put much of a dent in fraud,” and the entire system needs an overhaul.  “The government needs to treat regulation seriously, and for the past eight years we have not had real securities regulation in this country,” Mr. Banks said.

Since Ms. Schapiro took over Finra in 2006, the number of enforcement cases has dropped, in part because actions stemming from the tech-bubble collapse ebbed and the markets rebounded from 2002 to 2007.  The agency has been on the fringe of the major Wall Street blowups, and opted to focus on more bread-and-butter issues such as fraud aimed at senior citizens.

Out of the gate, Ms. Schapiro faces potential controversy.  In 2001 she appointed Mark Madoff, son of disgraced financier Bernard Madoff, to the board of the National Adjudicatory Council, the national committee that reviews initial decisions rendered in Finra disciplinary and membership proceedings.  Both sons of Mr. Madoff have denied any involvement in the massive Ponzi scheme their father has been accused of running.

I would be much more comfortable with a small-time tax cheat in charge of the SEC, than I am with Mary Schapiro in that position.  As his testimony demonstrates, Harry Markopolos is the person who should be running the SEC.