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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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Federal Reserve Bailout Records Provoke Limited Outrage

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On December 3, 2009 I wrote a piece entitled, “The Legacy of Mark Pittman”.  Mark Pittman was the reporter at Bloomberg News whose work was responsible for the lawsuit, brought under the Freedom of Information Act, against the Federal Reserve, seeking disclosure of the identities of those financial firms benefiting from the Fed’s eleven emergency lending programs.

The suit, Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, (U.S. District Court, Southern District of New York) resulted in a ruling in August of 2009 by Judge Loretta Preska, who rejected the Fed’s defense that disclosure would adversely affect the ability of those institutions (which sought loans at the Fed’s discount window) to compete for business.  The suit also sought disclosure of the amounts loaned to those institutions as well as the assets put up as collateral under the Fed’s eleven lending programs, created in response to the financial crisis.  The Federal Reserve appealed Judge Preska’s decision, taking the matter before the United States Court of Appeals for the Second Circuit.  The Fed’s appeal was based on Exemption 4 of the Freedom of Information Act, which exempts trade secrets and confidential business information from mandatory disclosure.  The Second Circuit affirmed Judge Preska’s decision on the basis that the records sought were neither trade secrets nor confidential business information because Bloomberg requested only records generated by the Fed concerning loans that were actually made, rather than applications or confidential information provided by persons, firms or other organizations in attempt to obtain loans.  Although the Fed did not attempt to appeal the Second Circuit’s decision to the United States Supreme Court, a petition was filed with the Supreme Court by Clearing House Association LLC, a coalition of banks that received bailout funds.  The petition was denied by the Supreme Court on March 21.

Bob Ivry of Bloomberg News had this to say about the documents produced by the Fed as a result of the suit:

The 29,000 pages of documents, which the Fed released in pdf format on a CD-ROM, revealed that foreign banks accounted for at least 70 percent of the Fed’s lending at its October, 2008 peak of $110.7 billion.  Arab Banking Corp., a lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the window in the 18 months after Lehman Brothers Holdings Inc. collapsed.

As government officials and news reporters continue to review the documents, a restrained degree of outrage is developing.  Ron Paul is the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy.  He is also a longtime adversary of the Federal Reserve, and author of the book, End The Fed.  A recent report by Peter Barnes of FoxBusiness.com said this about Congressman Paul:

.   .   .   he plans to hold hearings in May on disclosures that the Fed made billions — perhaps trillions — in secret emergency loans to almost every major bank in the U.S. and overseas during the financial crisis.

*   *   *

“I am, even with all my cynicism, still shocked at the amount this is and of course shocked, but not completely surprised, [that] much [of] this money went to help foreign banks,” said Rep. Ron Paul (R-TX),   .   .   .  “I don’t have [any] plan [for] legislation …  It will take awhile to dissect that out, to find out exactly who benefitted and why.”

In light of the fact that Congressman Paul is considering another run for the Presidency, we can expect some exciting hearings starring Ben Bernanke.

Senator Bernie Sanders of Vermont became an unlikely ally of Ron Paul in their battle to include an “Audit the Fed” provision in the financial reform bill.  Senator Sanders was among the many Americans who were stunned to learn that Arab Banking Corporation used a New York branch to get 73 loans from the Fed during the 18 months after the collapse of Lehman Brothers.  The infuriating factoid in this scenario is apparent in the following passage from the Bloomberg report by Bob Ivry and Donal Griffin:

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion — while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday.  In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Ivry and Griffin provided this reaction from Bernie Sanders:

“It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit to a bank that is substantially owned by the Central Bank of Libya,” Senator Bernard Sanders of Vermont, an independent who caucuses with Democrats, wrote in a letter to Fed and U.S. officials.

The best critique of the Fed’s bailout antics came from Rolling Stone’s Matt Taibbi.  He began his report this way:

After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds.  And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the “official” budget in size – a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

As Matt Taibbi began discussing what the documents produced by the Fed revealed, he shared this reaction from a staffer, tasked to review the records for Senator Sanders:

“Our jaws are literally dropping as we’re reading this,” says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont.  “Every one of these transactions is outrageous.”

In case you are wondering just how “outrageous” these transactions were, Mr. Taibbi provided an outrageously entertaining chronicle of a venture named “Waterfall TALF Opportunity”, whose principal investors were Christy Mack and Susan Karches.  Susan Karches is the widow of Peter Karches, former president of Morgan Stanley’s investment banking operations.  Christy Mack is the wife of John Mack, the chairman of Morgan Stanley.  Matt Taibbi described Christy Mack as “thin, blond and rich – a sort of still-awake Sunny von Bulow with hobbies”.  Here is how he described Waterfall TALF:

The technical name of the program that Mack and Karches took advantage of is TALF, short for Term Asset-Backed Securities Loan Facility.  But the federal aid they received actually falls under a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, called “giving already stinking rich people gobs of money for no fucking reason at all.”  If you want to learn how the shadow budget works, follow along.  This is what welfare for the rich looks like.

The venture would have been more aptly-named, “TALF Exploitation Windfall Opportunity”.  Think about it:  the Mack-Karches entity was contrived for the specific purpose of cashing-in on a bailout program, which was ostensibly created for the purpose of preventing a consumer credit freeze.

I was anticipating that the documents withheld by the Federal Reserve were being suppressed because – if the public ever saw them – they would provoke an uncontrollable degree of public outrage.  So far, the amount of attention these revelations have received from the mainstream media has been surprisingly minimal.  When one compares the massive amounts squandered by the Fed on Crony Corporate Welfare Queens such as Christy Mack and Susan Karches ($220 million loaned at a fraction of a percentage point) along with the multibillion-dollar giveaways (e.g. $13 billion to Goldman Sachs by way of Maiden Lane III) the fighting over items in the 2012 budget seems trivial.

The Fed’s defense of its lending to foreign banks was explained on the New York Fed’s spiffy new Liberty Street blog:

Discount window lending to U.S. branches of foreign banks and dollar funding by branches to parent banks helped to mitigate the economic impact of the crisis in the United States and abroad by containing financial market disruptions, supporting loan availability for companies, and maintaining foreign investment flows into U.S. companies and assets.

Without the backstop liquidity provided by the discount window, foreign banks that faced large and fluctuating demand for dollar funding would have further driven up the level and volatility of money market interest rates, including the critical federal funds rate, the Eurodollar rate, and Libor (the London interbank offered rate).  Higher rates and volatility would have increased distress for U.S. financial firms and U.S. businesses that depend on money market funding.  These pressures would have been reflected in higher interest rates and reduced bank lending, bank credit lines, and commercial paper in the United States.  Moreover, further volatility in dollar funding markets could have disrupted the Federal Reserve’s ability to implement monetary policy, which requires stabilizing the federal funds rate at the policy target set by the Federal Open Market Committee.

In other words:  Failure by the Fed to provide loans to foreign banks would have made quantitative easing impossible.  There would have been no POMO auctions.  As a result, there would have been no supply of freshly printed-up money to be used by the proprietary trading desks of the primary dealers to ramp-up the stock market for those “late-day rallies”.  This process was described as the “POMO effect” in a 2009 paper by Precision Capital Management entitled, “A Grand Unified Theory of Market Manipulation”.

Thanks for the explanation, Mr. Dudley.


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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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Double Bubble

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I’m sure there has been a huge number of search engine queries during the past few days, from people who are trying to find out what is meant by the term: “quantitative easing”.  My cynical, home-made definition of the term goes like this:

Quantitative easing involves the Federal Reserve’s purchase of Treasury securities as well as mortgage-backed securities from those privileged, too-big-to-fail banks.

The curiosity about quantitative easing has increased as a result of the release of the notes from the most recent meeting of the Federal Open Market Committee (FOMC) which boosted expectations that there will be another round of quantitative easing (often referred to as QE II).  On October 15, Federal Reserve chairman Ben Bernanke delivered a speech at the Federal Reserve Bank of Boston.  After discussing how weak the economic recovery has been (as demonstrated by lackluster consumer spending and the miserable unemployment crisis) Bernanke pointed out that the Fed’s current predicament results from the fact that it has already lowered short-term, nominal interest rates to near-zero.  He then noted that the federal funds rate will be kept low “for longer than the markets expect”.  Bernanke finally got to the point that people wanted to hear him discuss:  whether there will be another round of quantitative easing.  Here is what he said:

In particular, the FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate.  Of course, in considering possible further actions, the FOMC will take account of the potential costs and risks of nonconventional policies, and, as always, the Committee’s actions are contingent on incoming information about the economic outlook and financial conditions.

In other words:  They’re still thinking about it.  Meanwhile, former Secretary of  Labor, Robert Reich, wrote a great essay telling us that the Fed will go ahead with more quantitative easing.  After defining the term, Professor Reich added this important tidbit:

Problem is, it won’t work.  Businesses won’t expand capacity and jobs because there aren’t enough consumers to buy additional goods and services.

I’m sure that was a helluva lot more common sense than many people were expecting from a professor at Berkeley.  Beyond that, Professor Reich gave us the rest of the bad news:

So where will the easy money go?  Into another stock-market bubble.

It’s already started.  Stocks are up even though the rest of the economy is still down because money is already so cheap. Bondholders (who can’t get much of any return from their loans) are shifting their portfolios into stocks.  Companies are buying back more shares of their own stock.  And Wall Street is making more bets in the stock market with money it can borrow at almost zero percent interest.

When our elected representatives can’t and won’t come up with a real jobs program, the Fed feels pressed to come up with a fake one that blows another financial bubble.  And we know what happens when financial bubbles get too big.

Another bubble currently under expansion is the “junk bond” bubble.  Sy Harding wrote an important article for Forbes entitled, “Fed Still Blowing Bubbles?“.  Here is some of what he said:

The economy’s problems at this point don’t seem to be the level of interest rates, but the lack of jobs, dismal consumer confidence, and the unwillingness of banks to make loans.

However, just the anticipation of additional quantitative easing and still lower long-term interest rates has already potentially begun to pump up the next bubbles, as investors have moved out the risk curve in an effort to find higher rates of return. Money has been flowing at a dramatic pace into high-yield junk bonds, commodities, and gold.  And the stock market has surged up 12% just since its August low when talk of another round of quantitative easing began.  Meanwhile, the U.S. dollar has been trashed further on expectations that the Fed will be ‘printing’ more dollars to finance another round of quantitative easing.

Nevertheless, Sy Harding isn’t so sure that QE II is a “done deal”.  After making his own cost-benefit analysis, Mr. Harding reached this conclusion:

It’s a no-brainer.  Blow another bubble and worry about the consequences down the road.

Yet in his speech Friday morning Fed Chairman Bernanke did not go all in on quantitative easing, stopping short of announcing a new policy, saying only that the Fed contemplates doing more, but “will take into account the potential costs and risks.”

So uncertainty remains for a market that has probably already factored in a substantial new round of stimulus.

This raises an important question:  How will the markets react if the consensual assumption that there will be a QE II turns out to be wrong?

Bond guru, Mohamed El-Erian of PIMCO,  recently wrote a piece for the Financial Times, in which he asserted his conclusion that judging from the FOMC minutes, “it is virtually a foregone conclusion” that the Fed will proceed with QE II.  El-Erian described this anticipated action by the Fed as an effort to “push” investors “to move out on the risk spectrum and buy corporate bonds and stocks”.

Getting back to my earlier question:  If the Fed decides not to proceed with QE II, will the bubbles that have been inflated up to that point make such a large pop as to drive the economy toward that dreaded second dip into recession?  On the other hand, if the Fed does proceed to implement QE II:  What will be the ultimate cost to taxpayers for something Robert Reich describes as a “fake” jobs program “that blows another financial bubble” and accomplishes nothing else?

As Professor Reich has pointed out, the Fed itself is the one being “pushed” to take action here because “our elected representatives can’t and won’t come up with a real jobs program”.  Unfortunately, any “jobs program” initiated by the government has become a “third rail” issue with mid-term elections looming.   As I stated previously, if the economic crisis had been properly addressed two years ago, when the political will for an effective solution still existed, the Fed would not be faced with the current dilemma.  But here we are   .  .  .   just blowing more bubbles.


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Jobless Recovery Myth Is Dead

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August 12, 2010

On July 29, I discussed the fact that for over a year, many pundits have been anticipating a “jobless recovery”.  In other words:  don’t be concerned about the fact that so many people can’t find jobs – the economy will recover anyway.  Recent economic reports have exposed how the widespread corporate tactic of cost-cutting by mass layoffs (to gin-up the bottom line in time for earnings reports) has finally taken its toll.  Although this tactic has helped to inflate stock prices and produce the illusion that the broader economy is experiencing a sustained recovery, we are finding out that the opposite is true.  The “jobless recovery” advocates ignore the fact the American economy is 70 percent consumer-driven.  If those consumers don’t have jobs, they aren’t going to be spending money.  Timothy Homan and Alex Tanzi of Bloomberg News gave us the ugly truth on Wednesday:

A lack of jobs will shackle consumer spending and restrain the U.S. recovery more than previously estimated, according to economists polled by Bloomberg News.

*   *   *

“Simply put, job growth in the private sector hasn’t improved as we would’ve expected,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina.  “The consumer continues to contribute to growth but at a subpar pace.”

*   *   *

Purchases, which rose 3 percent on average over the past three decades, dropped 1.2 percent last year, the biggest decrease since 1942.

*   *   *

Joblessness will be slow to fall, signaling it will take years for the economy to recover the more than 8 million jobs lost during the recession that began in December 2007.  Unemployment will average 9.6 percent in 2010 and 9.1 percent next year, according to the survey.

*   *   *

“We need a stronger economy, job creation and better consumer confidence,” Richard Dugas, chief executive officer of Pulte Group Inc., said in an Aug. 4 conference call.  “Our industry continues to face incredibly low demand.”

The August 10 press release from the Federal Open Market Committee (FOMC) began this way:

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months.  Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.  Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls.  Housing starts remain at a depressed level.  Bank lending has continued to contract.

Steve Goldstein of MarketWatch recently wrote a piece entitled, “The jobless recovery won’t go further without jobs”.   Mr. Goldstein explains that the corporations relying on layoffs to juice their earnings reports are running out of people to sacrifice for their bottom line:

Earnings per share grew 43% for the 450 members of the S&P 500 that have reported second-quarter results, according to FactSet Research data.

So what these productivity figures may be showing is that, as the Great Recession blew into town, companies stretched their employees to the limit.

The data suggest companies won’t be able to job-cut their way to continued profit growth — and, at some point, if companies want to expand, they will need to start offering jobs to the pool of 14.6 million out of work in July.

Business consultant Matthew C. Keegan wrote an essay for the SayEducate website entitled, “Jobless Recovery & Other Illusions”.  He began the piece with this thought:

The economic numbers continue to pour in with very few people believing that they offer a promise of a sustained recovery.  That’s bad news for America, because high unemployment (9.5 percent in July 2010) means that every sector of the economy will remain depressed longer than some imagined it would.

Steve Goldstein’s MarketWatch article raised the possibility that this cloud may have a silver lining:

The productivity report isn’t great news, but at least it shows that the jobless recovery won’t be able to recover much further without employment making a significant contribution.

Another myth bites the dust.





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The Battle Over Bernanke

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January 25, 2010

Ben Bernanke’s four-year term as chairman of the Federal Reserve ends on January 31.  There is presently no vote scheduled to confirm President Obama’s nomination of Bernanke to that post because four Senators (Bernie Sanders, D-Vt.; Jim Bunning, R-Ky.; Jim DeMint, R-S.C. and David Vitter, R-La.) have placed holds on Bernanke’s nomination.  In order for the Senate to proceed to a vote on the nomination, 60 votes will be required.  At this point, there is a serious question as to whether the pro-Bernanke faction can produce those 60 votes.  A number of commentators have described last week’s win by Scott Brown as a “chill factor” for those Senators considering whether to vote for confirmation.  Ryan Grim of The Huffington Post put it this way:

Opposition to the reconfirmation of Federal Reserve Chairman Ben Bernanke is growing in the Senate in the wake of a Republican Scott Brown’s victory, fueled by populist rage, in the Massachusetts Senate race.

James Pethokoukis of Reuters explained the situation in these terms:

Liberals in Congress want him gone.  Then again, they want pretty much the whole Obama economic team gone.  But Geithner and Summers aren’t up for a Senate vote.  Bernanke is.  And if Dems start bailing, don’t expect Republicans to save him.  No politician in America gains anything by voting for Bernanke.  A “no” vote is a free vote.  Wall Street still loves him, though.  Geithner, too.

At The Hill, Tony Romm reported:

Bernanke has taken heat as Wall Street’s profits have soared while unemployment has become stuck in double digits, and the wave of economic populism soaring through Washington in the wake of a stunning Democratic loss in the Massachusetts Senate races comes at a bad time for his confirmation.

If Bernanke is not confirmed, he will continue to sit on the Federal Reserve Board of Governors because each Fed Governor is appointed to a 14-year term.  Donald Kohn, the vice chairman, would serve as the interim chairman until Bernanke’s successor is nominated and confirmed.

The forces pushing for Bernanke’s confirmation have now resorted to scare tactics, warning that dire consequences will result from a failure to re-confirm Bernanke.  Senator “Countrywide Chris” Dodd warned that if Bernanke is not confirmed, the economy will go into a “tailspin”.  An Associated Press report, written by Jennine Aversa and carried by The Washington Post, warned that a failure to confirm Bernanke could raise the risk of a double-dip recession.  At The Atlantic, Megan McArdle exploited widespread concern over already-depleted retirement savings:

Spiking his nomination may have grim effects on 401(k)s throughout the land.

Not to be outdone, Judge Richard Posner issued this warning from his perch at The Atlantic:

If he is not confirmed, the independence of the Fed will take a terrible hit, because the next nominee will have to make outright promises to Congress of bank bashing, and of keeping interest rates way down regardless of inflation risk, in order to be confirmed.

I guess that these people forgot to mention that if Bernanke is not confirmed:

A plague of locusts shall be visited upon us,

The earth will be struck by a Texas-sized asteroid,

An incurable venereal disease will be spread via toilet seats,

The Internet will vanish, and   . . .

Osama bin Laden will become the next Justice of the United States Supreme Court.

At the Think Progress website, Matthew Yglesias pondered the issue:

What happens if Ben Bernanke isn’t reconfirmed?  Well, some folks seem to think it will send markets into a tailspin.  But it’s worth emphasizing that in literal terms almost nothing will happen.

Beyond that, as Sudeep Reddy and Damian Paletta explained in The Wall Street Journal:

The Federal Open Market Committee — which consists of the presidentially appointed Fed governors in Washington and the presidents of the regional Fed banks — meets Jan. 26-27 and traditionally elects a chairman and vice chairman at its first meeting of the year.  The committee, which makes monetary policy decisions, is set to elect Mr. Bernanke as its chairman at that meeting, a move that doesn’t require approval of the White House or the Senate.

Min Zeng of The Wall Street Journal filled us in as to what else we can expect from the FOMC this week:

Next week, the two-day FOMC meeting will end Wednesday afternoon with a statement on an interest-rate decision and policymakers’ latest outlook on the economy and inflation.

The FOMC is widely expected by market participants to keep its main policy rate — the fed-funds target rate — at ultra-low levels near zero as recent data haven’t demonstrated a persistent and strong economic recovery, with a jobless rate still hovering around the highest level in more than two decades.

Fed policymakers are also likely to stick to their plan to end the $1.25 trillion mortgage-backed securities purchases program at the end of March.  The central bank should also reiterate its plan to let some emergency lending programs expire Feb. 1.

The Fed could soon hike the rate it charges on emergency loans, known as the discount rate, but that would largely be symbolic now that banks have been borrowing less and less from it as financial markets stabilized.

Meanwhile, the battle against the Bernanke confirmation continues.  Mike Shedlock (a/k/a Mish) has urged his readers to contact the “undecided” Senators and voice opposition to Bernanke.  Mish has also provided the names and contact information for those Senators, as well as the names of those Senators who are currently on record as either supporting or opposing Bernanke.

I’d like to see Bernanke lose, regardless of the consequences.  The rationale for this opinion was superbly articulated by Senator Jim Bunning during the confirmation hearing on December 3.  If you’re not familiar with it — give it a read.  Here is Senator Bunning’s conclusion to those remarks, delivered directly to Bernanke:

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure.  You stated time and again during the housing bubble that there was no bubble.  After the bubble burst, you repeatedly claimed the fallout would be small.  And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for.  Where I come from we punish failure, not reward it.  That is certainly the way it was when I played baseball, and the way it is all across America.  Judging by the current Treasury Secretary, some may think Washington does reward failure, but that should not be the case.  I will do everything I can to stop your nomination and drag out the process as long as possible.  We must put an end to your and the Fed’s failures, and there is no better time than now.

Amen.



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The Home Stretch

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October 27, 2008

We are entering the final week of the longest Presidential campaign in our nation’s history.  At the same time, the world economy continues to flirt with chaos and our nation’s equities market indices are diving at a faster pace than Superman’s swooping down from the sky to save Lois Lane from a potential rapist.  Some stockbrokers believe that an abrupt and decisive nosedive in the markets might have a cathartic effect and finally bring us to the long-awaited “bottom”, from which there would be only one place to go:  up.  Rock musician Tom Petty wrote a song about the death of his mother, called: Free Fallin’.  That song has recently become the theme for America’s stock markets.  The situation has become so bad that many fear it may be necessary for the feds to suspend equities trading until all of the nervous investors and frenzied hedge fund managers have a chance to gather their wits.  Would the government really intervene and close the stock markets for a day or more?

There is one authority who earned quite a bit of “street cred” when our current economic crisis hit the fan.  He is Nouriel Roubini, an economist at the Stern School of Business at New York University.  He earned the nickname “Doctor Doom” when he spoke before the International Monetary Fund (IMF) on September 7, 2006 and described, in precise detail, exactly what would bring the financial world to its knees, two years later.  As reported by Ben Sills and Emma Ross-Thomas in the October 24 edition of Bloomberg:

Roubini said yesterday that policy makers may need to shut down financial markets for a week or two as investors dump assets. Trading in futures on the Standard & Poor’s 500 Index and the Dow Jones Industrial Average was limited today after declines of more than 6 percent.

This week brings us more earnings reports and new housing starts that could send already skittish investors (as well as terrified hedge fund managers) on a “panic selling” binge.  Could this trigger a market shutdown by the government as predicted by Dr. Roubini?  If so, we may find the markets closed for the final days before the Presidential election.  The Republicans and their media trumpet, Fox News, would likely seize upon such a development, characterizing it as validation of their claim that the investing public fears a “socialist” Obama Presidency.  In reality, there would be no way to measure the impact of the election results on the equities markets under such circumstances.  If the markets were kept closed until after the election, there would be quite a number of investors, chomping at the bit to dump their portfolios during the hiatus, ready to do so as soon as the markets re-opened.  On the other hand, Stuart Schweitzer, global market strategist at JP Morgan Private Bank appeared on the October 24 broadcast of the PBS program, Nightly Business Report, and explained what to really expect about the impact of the Presidential election on the securities markets.  Schweitzer believes that regardless of who is elected, once we get past Election Day, there will be a sense of certainty established as to who will be making economic policy going forward into the new Presidential term.  This fact in itself, regardless of what that economic policy might become, will eliminate the element of uncertainty that breeds some degree of the fear in the hearts of investors.

If the stock markets really end up being closed during the final days before the election, we would likely see more havoc than calming.  The timing would prove too irresistible for conspiracy theorists to ignore.  Some would see it as a plot by the Republicans to conceal how bad the economy really is.  Others might see it as a ploy by “Washington elites” (a term used by some in reference to Obama supporters) to conceal widespread fear of putting a “communist” in charge of our nation.  The smartest course from here would be for the Federal Reserve Board’s FOMC (Federal Open Market Committee) to undertake a responsible, public relations role when it meets on Tuesday.  They should be ready to explain to the public what has really been happening in the markets:  an unregulated species of investments called “hedge funds” has been causing mayhem on the trading floors.  Many (if not most) of these hedge funds are going broke and they are attempting to secure a place in the line for Federal bailout money.  They have caused equities trading to function more like eBay:  the only market movement that matters over the course of any given day is what takes place during the final three minutes before the closing bell, when the hedge fund managers dump stocks.  On eBay, the winning bid for an item is usually made during the minute before an auction ends.  Unlike eBay, the stock market numbers can go up or down.  These days, the index movement prior to the closing bell is usually seismic (in one direction or the other).   It was never like this before.  These trading patterns often trigger pre-established “stop loss orders” to sell stocks, usually established by individual investors upon purchase of those stocks.  The result is an avalanche of “sell” orders at the end of the day.  The FOMC needs to explain this disease to the public and let us know the Fed is working on a cure.  Closing the markets in the final days before a Presidential election will not be a cure.  Such a move will just create a scab that will quickly be picked away by an investing public that needs to ease up on the caffeine and go out for a walk.