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European Sovereign Debt Crisis Gets Scary

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The simplest explanation of the European sovereign debt crisis came from Joe Weisenthal at the Business Insider website.  He compared the yield on the 5-year bond for Sweden with that of Finland, illustrated by charts, which tracked those yields for the past year:

Basically they look identical all through the year up until November and then BAM.  Finnish yields are exploding higher, right as Swedish yields are blasting lower.

The only obvious difference between the two:   Finland is part of the Eurozone, meaning it can’t print its own money. Sweden has no such risk.

While everyone’s attention was focused on the inability of Greece to pay the skyrocketing interest rates on its bonds, Italy snuck up on us.  The Italian debt crisis has become so huge that many commentators are voicing concern that “sovereign debt contagion” across the Eurozone is spreading faster than we could ever imagine.  The Los Angeles Times is now reporting that Moody’s Investors Service is ready to hit the panic button:

Throwing more logs on the Eurozone fire, Moody’s Investors Service said early Monday that the continent’s debt crisis now is “threatening the credit standing of all European sovereigns.”

That’s a not-so-subtle warning that even Moody’s top-rung Aaa ratings of countries including Germany, France, Austria and the Netherlands could be in jeopardy.

Meanwhile, every pundit seems to have a different opinion about how the crisis will unfold and what should be done about it.  The latest buzz concerns a widely-published rumor that the IMF is preparing a 600 billion euro ($794 billion) loan for Italy.  The problem with that scenario is that most of those billions would have to come from the United States – meaning that Congress would have to approve it.  Don’t count on it.  Former hedge fund manager, Bruce Krasting provided a good explanation of the Italian crisis and its consequences:

I think the Italian story is make or break.  Either this gets fixed or Italy defaults in less than six months.  The default option is not really an option that policy makers would consider.  If Italy can’t make it, then there will be a very big crashing sound.  It would end up taking out most of the global lenders, a fair number of countries would follow into Italy’s vortex.  In my opinion a default by Italy is certain to bring a global depression; one that would take many years to crawl out of.  The policy makers are aware of this too.

So I say something is brewing.  And yes, if there is a plan in the works it must involve the IMF.  And yes, it’s going to be big.

Please do not read this and conclude that some headline is coming that will make us all feel happy again.  I think headlines are coming.  But those headlines are likely to scare the crap out of the markets once the implications are understood.

In the real world of global finance the reality is that any country that is forced to accept an IMF bailout is also blocked from issuing debt in the public markets.  IMF (or other supranational debt) is ALWAYS senior to other indebtedness of the country. That’s just the way it works.  When Italy borrows money from the IMF it automatically subordinates the existing creditors. Lenders hate this.  They will vote with their feet and take a pass at Italian new debt issuance for a long time to come.  Once the process starts, it will not end.  There will be a snow ball of other creditors.  That’s exactly what happened in the 80’s when Mexico failed; within a year two dozen other countries were forced to their debt knees.  (I had a front row seat.)

I don’t see a way out of this box.  The liquidity crisis in Italy is scaring us to death, the solution will almost certainly kill us.

Forcing taxpayers to indemnify banks which made risky bets on European sovereign debt is popular with K Street lobbyists and their Congressional puppets.  This has led most people to assume that we will be handed the bill.  Fortunately, there are some smart people around, who are devising better ways to get “out of this box”.  Economist John Hussman of the Hussman Funds, proposed this idea to facilitate significant writedowns on Greek bonds while helping banks cope the impact of accepting 25 percent of the face value of those bonds, rather than the hoped-for 50 percent:

Given the extremely high leverage ratios of European banks, it appears doubtful that it will be possible to obtain adequate capital through new share issuance, as they would essentially have to duplicate the existing float.  For that reason, I suspect that before this is all over, much of the European banking system will be nationalized, much of the existing debt of the European banking system will be restructured, and those banks will gradually be recapitalized, post-restructuring and at much smaller leverage ratios, through new IPOs to the market.  That’s how to properly manage a restructuring – you keep what is essential to the economy, but you don’t reward the existing stock and bondholders – it’s essentially what we did with General Motors.  That outcome is not something to be feared (unless you’re a bank stockholder or bondholder), but is actually something that we should hope for if the global economy is to be unchained from the bad debts that were enabled by financial institutions that took on imponderably high levels of leverage.

Notably, credit default swaps are blowing out even in the U.S., despite leverage ratios that are substantially lower (in the 10-12 range, versus 30-40 in Europe).  As of last week, CDS spreads on U.S. financials were approaching and in some cases exceeding 2009 levels.  Bank stocks are also plumbing their 2009 depths, but with a striking degree of calm about it, and a definite tendency for scorching rallies on short-covering and “buy-the-dip” sentiment.  There is a strong mood on Wall Street that we should take these developments in stride.  I’m not convinced.  Our own measures remain defensive about the prospective return/risk tradeoff in the stock market.

The impact this crisis will have on the stock market explains why mainstream news media coverage has consistently understated the magnitude of the situation.  It will be interesting to observe how the “happy talk” gets amped-up as the situation deteriorates.


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Too Smart For The Democrats

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This was bound to happen.  Now that the Occupy Wall Street protest has become a big deal, the Democrats are trying to claim it as their own franchise.  Fortunately, the protesters aren’t interested.  My October 6 posting focused on the hypocrisy of the pseudo-populist Democrats, who – as of that time – had failed to express any support for this new movement:

The Occupy Wall Street protest has exposed the politicians – who have always claimed to be populists – for what they really are:  tools of the plutocracy.  Conspicuously absent from the Wall Street occupation have been nearly all Democrats – despite their party’s efforts to portray itself as the champion of Main Street in its battle against the tyranny of the megabanks.  As has always been the case, the Democrats won’t really do anything that could disrupt the flow of bribes campaign contributions they receive from our nation’s financial elites.

The party-crashing Democrats are now attempting to advance their status from interlopers to hosts.  At the Occupy Wall Street website, this question was posted with an invitation for comments:

“Are you cool with the Democrats taking ownership of OWS?”

Not surprisingly, the responses were overwhelmingly negative.  Here are a few examples:

WorkingClassAntiHero (Manchester, NH):

Anyone thinking about this thing in the old terms of left, right, Democrat, Republican, etc…is either not paying attention or isn’t really involved.

IndpendentTX:

There needs to be more visible demonstration that this is not a Democrat movement but a movement by a non-partisan group against the corporate political machine.  More signs protesting Democrats people!

Also make more signs that clearly state that both parties can get lost.  They’re BOTH part of the problem.

1zouzouna:

We no longer accept the idea of political ownership.  It is the corporate media wolves trying to define us as Republicrat’s, because they want to deny there is a Revolution happening here and all over the globe.  They so desperately need to define us because they are scared shitless of us.  They pretend to not comprehend our agenda, they keep saying we don’t know what we want.  They only see in Republicrat terms.  Both parties Rep. and Dem. alike have had a direct hand in passing legislation that has aided in this ponzi scheme whereby we, the 99% have been robbed of our wealth and savings and dignity.  This is a global societal movement/revolution, which I am proud to be witnessing and participating in.  Together with all our brothers and sisters of the world we will effect global change so we can all enjoy our right to abundance.

Glenn Greenwald of Salon did a thorough job of trashing the notion that Occupy Wall Street could be turned into a Democratic Party movement:

Can the Occupy Wall Street protests be transformed into a get-out-the-vote organ of Obama 2012 and the Democratic Party?  To determine if this is likely, let’s review a few relevant facts.

In March, 2008, The Los Angeles Times published an article with the headline “Democrats are darlings of Wall St, which reported that both Obama and Clinton “are benefiting handsomely from Wall Street donations, easily surpassing Republican John McCain in campaign contributions.”   In June, 2008, Reuters published an article entitled “Wall Street puts its money behind Obama”; it detailed that Obama had almost twice as much in contributions from “the securities and investment industry” and that “Democrats garnered 57 percent of the contributions from” that industry.  When the financial collapse exploded, then-candidate Obama became an outspoken supporter of the Wall Street bailout.

After Obama’s election, the Democratic Party controlled the White House, the Senate and the House for the first two years, and the White House and Senate for the ten months after that.  During this time, unemployment and home foreclosures were painfully high, while Wall Street and corporate profits exploded, along with income inequality.  In July, 2009, The New York Times dubbed JPMorgan Chase CEO Jamie Dimon “Obama’s favorite banker” because of his close relationship with, and heavy influence on, leading Democrats, including the President.  In February, 2010, President Obama defended Dimon’s $17 million bonus and the $9 million bonus to Goldman CEO Lloyd Blankfein – both of whose firms received substantial taxpayer bailouts – as fair and reasonable.

*   *   *

Would it not be a bit odd for a protest movement to “Occupy Wall Street” while simultaneously devoting itself to keeping Wall Street’s most lavishly funded politician in power?

At Washington’s Blog, we were informed about an attempt by the Democratic-aligned MoveOn organization to wrest control of Occupy Wall Street:

David DeGraw – one of the primary Wall Street protest organizers – just sent me the following email:

Top MoveOn leaders / executives are all over national television speaking for the movement.  fully appreciate the help and support of MoveOn, but the MSM is clearly using them as the spokespeople for OWS.  This is an blatant attempt to fracture the 99% into a Democratic Party organization.  The leadership of MoveON are Democratic Party operatives.  they are divide and conquer pawns.  For years they ignored Wall Street protests to keep complete focus on the Republicans, in favor of Goldman’s Obama and Wall Street’s Democratic leadership.

If anyone at Move On or Daily Kos would like to have a public debate about these comments, we invite it.

Please help us stop this divide and conquer attempt.

DeGraw – who is wholly non-partisan [like the writers at Washington’s Blog] – tells me that there are many political views represented, and that Occupy Wall Street is very diverse with opinions across the political spectrum (and see this.)

This mirrors what some of the original organizers of various “Occupy” protests in other cities have said as well:  MoveOn attempted to take credit for the events.

As I noted last week:

Everyone’s trying to cash in on the courage and conviction of the Wall Street protesters.

People are trying to associate Occupy Wall Street with their pet projects, in the same way that advertisers try to associate the goodwill of the Super Bowl, NBA playoffs, World Series or Olympics with their product.

But I hear from OWS organizers that the protesters come from totally diverse political affiliations.  Many protesters support Ron Paul, many like Obama, others are for other parties or candidates or don’t vote at all.

The protesters themselves are having none of it, tweeting today:

We don’t want to be the democratic tea party or liberal tea party. We want to be our own movement separate of any political affiliation.

Just as President Obama disregarded the opportunity to turn the economy around in 2009, his party scoffed at the opportunity to rehabilitate its tattered reputation in the wake of its failure to enact meaningful financial reform legislation.  The efforts by Democrats to jump the OWS train at this point are transparently specious.  They aren’t fooling anyone.


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Doing Fine Without A Demand

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Back on September 8, when I wrote about the plans for an “Occupy Wall Street” demonstration, I expressed my surprise that the ultimate goal of the occupation was deliberately left open.  Since that time, there has been a good deal of criticism concerning a failure of the movement to focus on a particular demand.  Many observers (including myself) believed that the lack of a single goal would doom the effort to failure.  As it turned out, the only drawback of that strategy was that it got the campaign off to a slow start.  When forced to acknowledge that the occupation was taking place after the arrest of 80 demonstrators on September 25, the corporate-controlled media made a point of emphasizing that there were only “a couple hundred” people participating in the protest.  After over 700 protesters were arrested on the Brooklyn Bridge Saturday, it became obvious that the mainstream media had been understating the number of participants involved in this effort.

Despite the transparent media efforts to under-report this event, there was one conspiracy allegation that fell apart.  Many protesters claimed that the New York police “set up” the Brooklyn Bridge marchers, by directing them from the pedestrian walkway onto the vehicular traffic lanes. Natasha Lennard of the City Room blog at The New York Times – who ended up getting arrested with the Brooklyn Bridge protesters – debunked the claims of entrapment:

The Internet was filled with pointed suggestions that officers from the New York Police Department led protesters onto the road as a trap to perform mass arrests; indeed, some video footage seems to show officers leading protesters onto the “illegal” section of the bridge.  From what I saw, however, a couple of dozen marchers made the decision to move off the sidewalk into the road at the bridge’s entrance to chants of “off the sidewalks, into the streets.”

This breakaway group quickly gained support of surrounding marchers, numbers of whom jumped over barricades on the sidewalk’s edge to stream into the road, until hundreds of people eventually covered the passageway usually intended for a steady flow of traffic.

As the Occupy Wall Street movement spawned similar protests around the nation, critics continued to bemoan the absence of a clear-cut message – many of whom offered their own suggestions.  These remarks by Nicholas Kristof were typical of the criticisms expressed since the occupation began:

Where the movement falters is in its demands:  It doesn’t really have any.  The participants pursue causes that are sometimes quixotic – like the protester who calls for removing Andrew Jackson from the $20 bill because of his brutality to American Indians.

On the other hand, the lack of a specific goal seems to be having the same “Rorschach effect” exploited by Barack Obama during his 2008 campaign.  The avoidance of a narrow agenda appears to be attracting a broader range of participants from across the political spectrum, who are now joining the protest.

Tina Susman of the Los Angeles Times discussed the views of some who emphasized keeping the message vague or simply sticking with no unified message at all:

Michael T. Heaney, a University of Michigan political science professor who has studied social protest movements, said such groups often bump up against pressure to become more focused and to either build or join institutions that can support them.

“What you’re talking about is a degree of buying into a political system,” Heaney said.  “But the more you use tactics that we recognize as getting you influence, the more you buy into the system, and the more you buy into the system, the more you open yourself up to compromise.”

In Occupy Wall Street’s case, Heaney said demands could be as vague as simply calling for financial bailout programs to apply to individuals rather than banks.

Most of those in Zuccotti Park, though, don’t see the need for a change in tactics.  At least not yet.

“There isn’t a consolidated message, and I don’t think there needs to be,” said Andrew Lynn, 34, who drove the three hours from his home in Troy, N.Y., to help the demonstrators’ media team.

So far, Occupy Wall Street seems to be doing just fine without a unified message.  As Andrew Grossman reported for The Wall Street Journal, the protest doesn’t appear to be losing any steam:

Meanwhile, the encampment in Zuccotti Park showed no signs of ending, despite falling temperature and a night of rain.  Shortly after 1 a.m. Sunday, a few hundred people huddled under tarps and sleeping bags filled the windswept plaza.  Once the sun rose, more joined:  Members of Transport Workers Union Local 100, which represents nearly 38,000 workers in the city’s bus and subway systems, marched in to cheers.

Protesters distributed a newspaper – “The Occupied Wall Street Journal” – that they printed using money raised online.

Its lead story began:  “What is occurring on Wall Street right now is remarkable.  For over two weeks, in the great cathedral of capitalism, the dispossessed have liberated territory from the financial overlords and their police army.”

At this point, it appears as though the activists participating in the Occupy Wall Street effort should stick with their unrestricted focus.  If it ain’t broke, don’t fix it.


 

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Obama Presidency Continues To Self-Destruct

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It’s been almost a year since the “Velma Moment”.  On September 20, 2010, President Obama appeared at a CNBC town hall meeting in Washington.  One of the audience members, Velma Hart, posed a question to the President, which was emblematic of the plight experienced by many 2008 Obama supporters.  Peggy Noonan had some fun with the event in her article, “The Enraged vs. The Exhausted” which characterized the 2010 elections as a battle between those two emotional factions.  The “Velma Moment” exposed Obama’s political vulnerability as an aloof leader, lacking the ability to emotionally connect with his supporters:

The president looked relieved when she stood.  Perhaps he thought she might lob a sympathetic question that would allow him to hit a reply out of the park.  Instead, and in the nicest possible way, Velma Hart lobbed a hand grenade.

“I’m a mother. I’m a wife.  I’m an American veteran, and I’m one of your middle-class Americans.  And quite frankly I’m exhausted.  I’m exhausted of defending you, defending your administration, defending the mantle of change that I voted for, and deeply disappointed with where we are.”  She said, “The financial recession has taken an enormous toll on my family.”  She said, “My husband and I have joked for years that we thought we were well beyond the hot-dogs-and-beans era of our lives.  But, quite frankly, it is starting to knock on our door and ring true that that might be where we are headed.”

The President experienced another “Velma Moment” on Monday.  This time, it was Maureen Dowd who had some fun describing the confrontation:

After assuring Obama that she was a supporter, an Iowa mother named Emily asked the president at a town hall at the Seed Savers Exchange in Decorah what had gone wrong.

*   *   *

“So when you ran for office you built a tremendous amount of trust with the American people, that you seemed like someone who wouldn’t move the bar on us,” she said.  “And it seems, especially in the last year, as if your negotiating tactics have sort of cut away at that trust by compromising some key principles that we believed in, like repealing the tax cut, not fighting harder for single-payer.  Even Social Security and Medicare seemed on the line when we were dealing with the debt ceiling.  So I’m just curious, moving forward, what prevents you from taking a harder negotiating stance, being that it seems that the Republicans are taking a really hard stance?”

President Obama can no longer blame the Republicans and Fox News for his poor approval ratings.  He has become his own worst enemy.  As for what Obama has been doing wrong – the title of Andrew Malcolm’s recent piece for the Los Angeles Times summed it up quite well:  “On Day 938 of his presidency, Obama says he’ll have a jobs plan in a month or so”.

Lydia Saad of the Gallup Organization provided this report on the President’s most recent approval ratings:

A new low of 26% of Americans approve of President Barack Obama’s handling of the economy, down 11 percentage points since Gallup last measured it in mid-May and well below his previous low of 35% in November 2010.

Obama earns similarly low approval for his handling of the federal budget deficit (24%) and creating jobs (29%).

*   *   *

President Obama’s approval rating has dwindled in recent weeks to the point that it is barely hugging the 40% line. Three months earlier, it approached or exceeded 50%.

The voters have finally caught on to the fact that Barack Obama’s foremost mission is to serve as a tool for Wall Street.  In Monday’s edition of The Washington Post, Zachary Goldfarb gave us a peek at Obama’s latest gift to the banksters:  a plan to provide a government guarantee of mortgage backed securities:

President Obama has directed a small team of advisers to develop a proposal that would keep the government playing a major role in the nation’s mortgage market, extending a federal loan subsidy for most home buyers, according to people familiar with the matter.

The administration’s reaction to curiosity about the plan was a tip-off that the whole thing stinks.  Mr. Goldfarb’s article included the official White House retort, which was based on the contention that the controversial proposal is just one of three options outlined earlier this year in an administration white paper concerning reform of the housing finance system:

“It is simply false that there has been a decision to move forward with any particular option,” said Matt Vogel, a White House spokesman.  “All three options remain under active consideration and we are deepening our analysis around how each would potentially be implemented.  No recommendation has been made to the president by his economic advisers.”

And if you believe that, you might be interested in buying some real estate located in  . . .

Zachary Goldfarb explained the plan:

Fannie, Freddie or other successor firms would charge a fee to mortgage lenders and banks and use the money to create an insurance pool to cover losses on mortgage securities caused by defaults on the underlying loans.  The government would be the last line of defense in case of another housing market meltdown, using taxpayer money to cover losses only if the insurance pool ran dry.

The Washington Post report inspired economist Dean Baker to expose the ugly truth about this scheme:

It would be difficult to find an economic rationale for this policy other than subsidizing the financial industry. The government can and does directly subsidize the purchase of homes through the mortgage interest deduction.  This can be made more generous and better targeted toward low and moderate income families by capping it and converting it into a tax credit (e.g. all homeowners can deduct 15 percent of the interest paid on mortgages of $300,000 or less from their taxes).

There is no obvious reason to have an additional subsidy through the system of mortgage finance.  Analysis by Mark Zandi showed that the subsidy provided by a government guarantee would largely translate into higher home prices.  This would leave monthly mortgage payments virtually unaffected.  The diversion of capital from elsewhere in the economy would mean slower economic growth and would kill jobs for auto workers, steel workers and other workers in the manufacturing sector.

For these reasons, if President Obama was really against big government and job killing measures, he would oppose this new scheme to subsidize mortgage securitization.  On the other hand, if the goal is to ensure high profits and big salaries for top executives in the financial sector, then a government subsidy for mortgage securitization is good policy.

Frustration with the inevitability that the 2012 Presidential Election will ultimately become a choice between two corporatists has inspired a movement to encourage a Democratic Primary challenge to Obama.  The organization – StopHoping.org – is based on this simple objective:

The majority of U.S. citizens favor protecting Social Security, Medicare, and Medicaid; taxing the rich; cutting military spending; and protecting the environment.  We don’t have a candidate . . . yet.  Potential candidates supported on this site will be notified and encouraged to run.

I hope they succeed!


 

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Disaster And Dishonesty

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The recent earthquake in Japan caused one of the worst nuclear accidents in history.  At the aptly-named Fukushima nuclear facility, two reactors (#1 and #3) reportedly experienced “partial meltdowns” and hydrogen blasts while a third (#2) experienced “cooling problems”.  Since the Fukushima nuclear crisis began, we were given spotty, uninformative reports about the extent of the damage to the critical equipment, despite assurances that the “reactor vessels remain intact”.  The video depicting the explosion of the containment building for reactor #1 immediately raised questions about the risk of radiation leakage.

Within minutes after the earthquake struck, we were informed about “an incident” at Fukushima reactor #1, involving “overheating”.  We later learned that people within a 6-mile radius of the plant had been evacuated.  Shortly thereafter, the evacuation zone was expanded to 12 miles, resulting in the evacuation of 180,000 people.  Because the cooling systems for reactors #1 and #3 were not operating properly, it became necessary to pump in sea water to cool the fuel rods.  Despite government assurances that there had been no radiation leakage hazard, we later learned that there had been deliberate releases of reactor steam containing radioactive cesium.  The Union of Concerned Scientists provided this bit of information about cesium:

Cesium-137 is another radioactive isotope that has been released.  It has a half-life of about 30 years, so will take more than a century to decay by a significant amount.  Living organisms treat cesium-137 as if it was potassium, and it becomes part of the fluid electrolytes and is eventually excreted.  Cesium-137 is passed up the food chain.  It can cause many different types of cancer.

The news reports concerning the nuclear facility often seemed idiotic.  One article began with an explanation that the explosion at reactor #1 damaged the containment building only, causing the roof to blow off.  Later in the story, we were assured that although a “partial meltdown” may have been taking place within the reactor core, the reactor vessel remained intact.  Then came the remark that even if the reactor vessel began to leak radioactivity, the containment building would prevent the dissipation of those contaminants into the atmosphere.  The reporter apparently forgot about the statement a few paragraphs earlier that the containment building no longer had a roof.  Whoever wrote that story did an obvious, “cut and paste job” without realizing that the reassuring remarks about the containment building were no longer valid.  This was typical of the sloppy reportage of the Fukushima predicament.   .  .  . But hey – it was a weekend! Another tactic frequently employed in the lame coverage of the radiological situation would involve beginning a report with a stale factoid about reactor cooling problems and shifting the focus of the story over to the earthquake itself or to the tsunami.

A good deal of the frustration experienced by those attempting to ascertain the status of the potential nuclear hazards at Fukushima, was obviously due to the control over information flow exercised by the Japanese government.  I began to suspect that President Obama might have dispatched a team of Truth Suppressors from the Gulf of Corexit to assist the Japanese government with spin control.  An article by Norimitsu Onishi, Henry Fountain and Tom Zeller Jr. of The New York Times provided this history of how nuclear power hazards have been handled in Japan:

Over the years, Japanese plant operators, along with friendly government officials, have sometimes hidden episodes at plants from a public increasingly uneasy with nuclear power.

In 2007, an earthquake in northwestern Japan caused a fire and minor radiation leaks at the world’s largest nuclear plant, in Kashiwazaki City. An ensuing investigation found that the operator — Tokyo Electric — had unknowingly built the facility directly on top of an active seismic fault.  A series of fires inside the plant after the earthquake deepened the public’s fear.  But Tokyo Electric said it upgraded the facility to withstand stronger tremors and reopened in 2009.

Last year, another reactor with a troubled history was allowed to reopen, 14 years after a fire shut it down.  The operator of that plant, the Monju Prototype Fast Breeder Reactor, located along the coast about 220 miles west of Tokyo, tried to cover up the extent of the fire by releasing altered video after the accident in 1995.

Such a track record suggests that the lack of information concerning the Fukushima episode is the result of a lack of probity.

Nevertheless, after an entire weekend of attempting to find out what was transpiring in Fukushima, I finally came across an informative article by Thomas Maugh of the Los Angeles Times.  Here is the answer to the question no other media outlets were willing or able to address:

The worst that could happen if all cooling stopped is that the fuel would melt and fall to the floor of the containment vessel.  The containment vessel is designed to hold the hot fuel in, but the type of nuclear reactor in danger at the Fukushima plant —General Electric Mark One boiling water reactors — has been widely reported to have a vulnerability in its design that would let the fuel burn through the floor of the vessel.  If that happened, radiation could spread through the environment, but on a much more limited basis than happened at Chernobyl, where there was no containment vessel and the core contained graphite that burned, dispersing radioactivity widely. A massive plume of radioactive smoke and ash could spread from the site, exposing people for miles away, depending on the wind and weather.

Most news outlets provided us with “answers” from know-nothing politicians such as Chuck Schumer who — when asked about the future of nuclear power in America — seized the opportunity to trumpet the bogus narrative about “foreign oil”, despite the fact that oil is not used to produce electricity.

We are witnessing the hazardous consequences of entrusting unreliable individuals with authority over the use of nuclear reactors.  It’s not looking good.


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Listening To Smart People

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As the mid-term election cycle reaches its climax, we find ourselves exposed to an increasing amount of stupid pronouncements by desperate politicians, overworked commentators and plain-old idiots, who managed to attract the interest of television news personnel.  I was particularly amused by the recent outburst from Juan Williams about the fact that he gets nervous when he sees people in “Muslim garb” boarding a plane in which he is a passenger.  NPR saw fit to fire him for making a remark described as “inconsistent with our editorial standards and practices”.  Despite the widespread hand-wringing over the “bigoted” nature of the statement, I was more focused on its stupidity.  Does Juan Williams seriously believe that terrorists would board a plane dressed in Muslim garb?  I would assume that all terrorists learn in Jihad 101 that the traditional garb for airborne martyrdom is the Adidas warm-up suit.  Wearing “Muslim garb” for such an occasion would serve only as an offer to be waterboarded.

Another example of election year asininity is the thought that someone could get elected to the Senate by claiming that the incumbent opponent of said candidate “actually voted to use taxpayer dollars to pay for Viagra for convicted child molesters and sex offenders”.  It was beginning to appear as though stupid has become the “new normal”.

Finally, some fresh air came along when a few news outlets reminded us that there are still some smart people among us.  The Los Angeles Times was kind enough to publish an interview with Elizabeth Warren, conducted by Jim Puzzanghera.  President Obama decided to appoint Professor Warren to launch the newly-created Consumer Financial Protection Bureau out of fear that a protracted confirmation battle would ensue if he appointed her as director of that agency.  With non-stop news coverage currently focused on the recent disclosures of fraudulent conduct extending from the mortgage origination process right through the foreclosure process, it would seem that the election-eve interview would provide an opportunity to assail the targets of the new agency.  When asked whether she would support the scattergun approach of seeking a nationwide foreclosure moratorium “while bank paperwork problems are being worked out”, Professor Warren gave us a glimpse of some traits we haven’t seen in a while:  restraint and common sense.  Here is her response to that tough question:

This agency will not veer from its support of American families, whether it’s in the foreclosure crisis or elsewhere.  But no one would want this agency … to act before it had collected all of the necessary data and thought through the options.  The (state) attorneys general are moving fast, and at this moment, I think that’s the right response … with emphasis on “at this moment.”

Professor Warren wasn’t the only smart person to draw some curiosity from the ADD-addled news media this week.  My favorite stock market guru, Jeremy Grantham, released his latest Quarterly Letter on Tuesday.  Its Halloween-based theme made it impossible to overlook.  As usual, Mr. Grantham gave us his unique, brilliant perspective in exposing how the Federal Reserve’s reckless (if not actually criminal) monetary policy helped cause the financial crisis and how Chairman Bernanke’s anticipated move toward more quantitative easing could make a bad situation worse.  Here are a few gems from Grantham’s must-read essay:

And these are most decidedly not normal times.  The unusual number of economic and financial problems has put extreme pressure on the Fed and the Administration to help the economy recover.  The atypical disharmony in Congress, however, has made the Federal government dysfunctional, and almost nothing significant – good or bad – can be done. Standard fiscal stimulus at a level large enough to count now seems impossible, even in the face of an economy that is showing signs of sinking back as the original stimulus wears off. This, of course, puts an even bigger burden on the Fed and induces, it seems, a state of panic.  Thus, the Fed falls back on its last resort – quantitative easing.  This has been used so rarely that its outcome is generally recognized as uncertain.

*   *   *

And of all of the many mistakes of the current Administration, the worst, in my opinion, are directly related to this fiasco:  the inexplicable choice of Geithner, who was actually placed at the scene of the crime in New York and whose fingerprints were on the murder weapon, and the reappointment of  … gulp … Bernanke himself, about whose reappointment much juicy Republican criticism was made, all of it completely justified in my view.  There may, however, be a small ray of hope.  The recent Fed appointee, Vice Chair Janet Yellen, said not long ago, “Of course asset bubbles must be taken seriously!”  She also said, “It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk taking.”  Yes, sir!  Or rather, madam!  A promising start.  These sentiments, of course, are completely contrary to the oft-repeated policies of Greenspan and his chief acolyte, Bernanke.  Perhaps she will slap some good sense into her boss on this issue.

*   *   *

Since it is customary in polite society to apologize for causing distress, on behalf of the Fed, let me apologize for the extraordinary destructiveness of its policies for the last 15 years.  Bernanke’s version of an apology, delivered in January this year to the American Economic Association, was to claim that the Fed’s monetary policy during the 2000-08 period was appropriate, and that there were no major failings, such as missing the housing bubble completely, that were worth mentioning.  This stubbornness in the face of clear data is right up there with efficient market believers.  And very impolite indeed.

Now I have to go back to waiting another three months for Jeremy Grantham’s next Quarterly Letter.  As always, the current one will be tough to beat.  In the mean time, it’s nice to know that there are some smart people around, capable of providing solutions to our most pressing problems.  If only those vested with the authority to implement those ideas were paying attention   .   .   .



Not Getting It Done

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August 9, 2010

Are the Democrats trying to lose their majorities in both the Senate and the House in November?  Their two biggest accomplishments, the healthcare “reform” bill and the financial “reform” bill haven’t really impressed the electorate.  According to a Gallup Poll, voter reaction to the passage of the “Affordable Healthcare Act” is 49 percent contending that the bill is a “good thing” as opposed to 46 percent who believe it is a “bad thing”, with 5 percent undecided.  Criticism of the “Wall Street Reform and Consumer Protection Act of 2010” has been widespread, as I have previously discussed here, here and here.  The latest critique of the bill came from Professor Thomas F. Cooley, of the Stern School of Business at NYU.  His Forbes article entitled, “The Politics Of Regulatory Reform”, was based on this theme:

The awareness of how close we came to paralyzing the financial system created an opportunity to do something truly significant to make the system safer and more in tune with the needs of our economy.  Sadly, because all things in Washington are political, we fumbled the ball.

Rahm Emanuel’s infamous doctrine, “You never want a serious crisis to go to waste” is apparently being disregarded by Rahm Emanuel and company at The White House.  Of course, the entire economic catastrophe has provided the Obama administration with a boatload of crises – most of which have already gone to waste.  For example, consider this fiasco-in-progress:  The “small business” sector plays such an important role in keeping Americans employed, a bill to facilitate lending to small businesses has been sponsored by Senator Mary Landrieu (D-Louisiana).  An August 7 report by Sharon Bernstein of the Los Angeles Times provided this update on the status of the measure:

The small business loan assistance ran into trouble in the Senate when members from both parties began attaching amendments to support their favored causes.

The ineffective efforts of Senate Democrats are unfairly souring public opinion on their more unified counterparts in the House.  In attempt to redeem the image of Congressional Dems, House Speaker Nancy Pelosi scheduled a special session of Congress for Tuesday, August 10, (an interruption of their August recess) to pass a $26-billion bill to avert public employee layoffs.

With the passing of time, it has become more obvious that President Obama’s biggest mistake since taking office was his weak leadership in promoting the economic stimulus effort.  Many commentators have expressed the opinion that Christina Romer’s resignation as chair of the President’s Council of Economic Advisors was based on her frustration with the under-funded stimulus program.

I recently wrote an “I told you so” piece, referencing my July, 2009 prediction that it would eventually become necessary for President Obama to introduce a second stimulus bill because the $787 billion proposal would prove inadequate.  At his blog, liberal economist Paul Krugman similarly reminded readers of his prediction about the consequences for failing to pass an effective stimulus bill:

So here’s the picture that scares me:  It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up.  Mr. Obama finally concedes that a bigger stimulus is needed.

But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts.  And as a result, the recession rages on, unchecked.

The reality has turned out even worse than Krugman’s prediction because we are now approaching September 2010 – an election year – and the unemployment rate is being understated at 9.5 percent.  The conflation Krugman discussed has manifested itself in the narrative of the Tea Party movement.  In September of 2009, I discussed why Obama should have been listening to Australian economist Steve Keen, who – by that point – was saying basically the same thing:

So giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch — the opposite of the advice given to Obama by his neoclassical advisers.

Economist Joseph Stiglitz recently provided us with this update about how the global financial crisis is affecting Australia in August of 2010:

Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country in the world.  He realized that it was important to act early, with money that would be spent quickly, but that there was a risk that the crisis would not be over soon.  So the first part of the stimulus was cash grants, followed by investments, which would take longer to put into place.

Rudd’s stimulus worked:  Australia had the shortest and shallowest of recessions of the advanced industrial countries.

Meanwhile, President Obama and the Democrats have decided to utilize a mid-term campaign strategy of assessing all of the blame for our current financial chaos on President George W. Bush.  Criticism of this approach has been voiced by people outside of the Republican camp.  Frank Rich of The New York Times lamented the lack of message control exercised by the Democrats and their ill-advised focus on the Bush era:

But rather than wait for miracles or pray that Bushphobia will save the day, Democrats might instead start playing the hand they’ve been dealt.  Elections, the cliché goes, are about the future, not the past.  At the very least they’re about the present.

At this point in American history, it’s becoming more obvious that the two-party system has served no other purpose than to perpetuate the careers of blundering grafters.  The voting public must accept the reality that the only way it will be honestly and effectively represented in Washington is by independent candidates.  The laws that keep those independents off the ballots must be changed.




Getting Cozy

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April 1, 2010

This week’s decision by the United States Supreme Court, in the case of Jones v.Harris Associates received a good deal of attention because it increased hopes of a cut in the fees mutual funds charge to individual investors.  The plaintiffs, Jerry Jones, Mary Jones and Arline Winerman, sued Harris Associates (which runs or “advises” the Oakmark mutual funds) for violating the Investment Company Act, by charging excessive fees.  Harris was charging individual investors a .88 percent (88 basis points) management fee, compared to the 45-bps fee charged to its institutional clients.

In his article about the Jones v. Harris case, David Savage of the Los Angeles Times made a point that struck a chord with me:

Pay scales in the mutual fund industry, like those in banking and investment firms, are not strictly regulated by the government, and as the Wall Street collapse revealed, investment advisors and bankers sometimes can earn huge fees while losing money for their shareholders.

In 1970, however, Congress said mutual funds must operate with an independent board of directors.  And it said the investment advisors for the funds have a “fiduciary duty,” or a duty of trust, to the investors when setting fees for their services.  The law also allowed suits against those suspected of violating this duty.

But investors have rarely won such claims.  In Tuesday’s decision, the Supreme Court gave new life to the law, ruling that investment advisors could be sued for charging excessive fees.

But the court’s opinion also said such suits should fail unless there was evidence that advisors hid information from the board or that their fees were “so disproportionately large” as to suggest a cozy deal between the advisors and the supposedly independent board.

The lousy job that boards of directors do in protecting the investors they supposedly represent has become a big issue since the financial crisis, as Mr. Savage explained.  Think about it:  How could the boards of directors for those too-big-to-fail institutions allow the payouts of obscene bonuses to the very people who devastated our economy and nearly destroyed (or may yet destroy) our financial system?  The directors have a duty to the shareholders to make sure those investors obtain a decent dividend when the company does well.  If the company does well only because of a government bailout, despite inept management by the executives, who should benefit – the execs or the shareholders?

Michael Brush wrote an interesting essay concerning bad corporate boards for MSN Money on Wednesday.  His opining point was another reminder of how the financial crisis was facilitated by cozy relationships with bank boards:

Here’s a key take-away from the financial crisis that devastated our economy:   Bad boards of directors played a big role in the mess.

Because bank boards were too close to the executives they were supposed to police, they did a lousy job of spotting excessive risk.  They allowed short-term pay incentives such as huge options grants that encouraged bankers to roll the dice.

Michael Brush contacted The Corporate Library which used its Board Analyst screener to come up with a list of the five worst corporate boards.  Here is how he explained that research:

The ratings are based on problems that can compromise boards, including:

  • Allowing directors to do too much business with the companies they are supposed to oversee.
  • Letting the CEO chair the board, which is supposed to oversee the CEO.
  • Overpaying board members and keeping them on too long.
  • Allowing directors to miss too many meetings to do an effective job.

These and other red flags signal that a board is entrenched — too close to management to do its job of overseeing the people in the corner offices.

*   *   *

The big problem with bad boards is that they’re unlikely to ask CEOs tough questions, act swiftly when it is time to replace a CEO or tighten the reins on pay and perks.  And bad boards hurt shareholders.  Several studies have indicated that the stocks of companies with weak boards underperform.

I won’t spoil the surprise for you by identifying the companies with the bad boards.  If you want that information you will have to read the full piece.  Besides — you should read it anyway.

All of this raises the question (once again) of whether we will see any changes result in the aftermath of the financial crisis that will help protect the “little people” or the not-so-little “investor class”.   I’m not betting on it.



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The Employment Outlook Debate

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March 10. 2010

The February non-farm payrolls report from the Bureau of Labor Statistics boosted the optimism of many commentators who follow the unemployment crisis.  Nevertheless, predictions about the employment outlook for the remainder of 2010 are extremely conflicting.  Surfing around the web will give you completely divergent prognostications, usually depending on the locale.  Here are some examples:  Los Angeles job outlook expected to improve (Los Angeles Times); Atlanta employers expect to hold payrolls steady — neither hiring nor firing (Atlanta Journal-Constitution) Boston employers expected to add jobs (The Boston Globe — quoting a Manpower report); Employers still skittish on hiring (CNNMoney.com); Columbus hiring prospects for upcoming quarter weaken slightly (ledger-inquirer.com).

In an essay for the istockanalyst.com website, Ockham Research began by pointing out that 8.4 million jobs have been lost since the recession began in December of 2007.  The fact that the S&P 500 has advanced 70% during this time has encouraged pundits to believe in a jobless recovery.  After noting Senator Harry Reid’s odd reaction to the February non-farm payrolls report:  “Only 36,000 people lost their jobs today, which is really good” — the piece continued:

After that blunder, the report on Bloomberg.com struck us in just how optimistic it is towards March’s employment data, thanks in part to temporary hiring for census workers which could add more than 100,000 jobs this month.  However, a strategist for Goldman Sachs (GS) estimated 275,000 job gains; another economist predicted “easily” reaching 300,000.  Chief  US economist at Deutsche Bank (DB) took the prize though, saying that a gain of 450,000 “can’t be ruled out.”

The Ockham Research piece again emphasized that many of the optimistic views are based on the addition of census workers to the rolls of the employed, despite the fact that these are temporary positions, eventually disappearing in mid-summer.  Ockham Research was also dismissive of the inclusion of workers added to payrolls simply because of summertime seasonal employment opportunities.  They concluded on this note:

Of course, no one can predict the future and predictions about macroeconomic data points are extremely thorny.  As much as we would like to believe they are correct and job growth will return in robust fashion, we are a bit skeptical.  They have raised the bar for expectations, so it will be extremely interesting to see the market’s reaction when the data comes in.

The Seeking Alpha website featured a posting by David Goldman which began with these remarks:

.  .  .  it would be hard to envision significant declines in payroll employment from already miserable levels.  But the sort of things that generate jobs — venture capital investments, small business expansion, and so forth — are as dead as the Monty Python parrot.

Mr. Goldman focused on the February Small Business Confidence report by Discover Card, which revealed that America’s small business owners remained cautious about the economy during February as they expected economic conditions to stay largely the same during the coming months.  At the close of the piece, we are reminded of its title, “Where Will the Jobs Come From?”   —

With the continuing catastrophe in both the residential and commercial real estate markets, small business capital has imploded.  And small business surely isn’t getting help from the banking system, where loans still are contracting at the fastest pace on record.

Two economists for the Federal Reserve Bank of San Francisco, Mary Daly and Bart Hobijn, recently published a research paper addressing the surprisingly high unemployment rate for 2009, based on a principle known as Okun’s Law.  They explained it this way:

Okun’s law tells us that, for every 2% that real GDP falls below its trend, we will see a 1% increase in the unemployment rate.  Since real GDP was almost flat in 2009 while its trend level increased by 3%, the unemployment rate under Okun’s law should have increased by 1.5 percentage points.  Instead it rose by 3 percentage points, more than twice the predicted increase.

I will now fast-forward to their conclusion:

The data presented here consistently point to unusually strong productivity growth as the main driver of the departure from Okun’s law in 2009.  A key question that remains unanswered by this analysis is whether this pattern will continue in 2010.  Most forecasters assume that the economy will return to its historical path this year, following Okun’s two-to-one ratio of changes in GDP and changes in unemployment.  Under this scenario, unemployment would begin to edge down this year as the economy recovers and gains momentum.  But there are clearly risks to this view.            .  .   .

Anecdotal evidence suggests that efforts to contain costs and remain nimble in the face of uncertainty have become a fixture in business strategy.  If productivity keeps on growing at an above-average pace, then unemployment forecasts based on Okun’s law could continue to be overly optimistic.

So there you have it.  Pick your favorite prediction and run with it.  The Manpower Employment Outlook Survey seems to have a reasonable take on expectations for the second quarter of 2010:

“U.S. hiring activity is still in neutral, but revving toward first gear,” said Jonas Prising, Manpower president of the Americas.  “It’s moving in the right direction, but it will take some time, with no major speed bumps, before it can accelerate.”

Let’s just hope the road ahead doesn’t have any sinkholes.



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More Heat For The Federal Reserve

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October 5, 2009

On Thursday, October 1, Federal Reserve chairman Ben Bernanke testified before the House Financial Services Committee.  That event demonstrated how the Fed has fallen into the crosshairs of critics from both ends of the political spectrum.  A report in Friday’s Los Angeles Times by Jim Puzzanghera began with the point that the Obama administration has proposed controversial legislation that would expand the Fed’s authority, despite bipartisan opposition in a Congress that is more interested in restricting the Fed’s influence:

Worried about the increased power of the complex and mysterious Fed, and upset it did not do more to prevent the deep recession, Capitol Hill has focused its anger over the financial crisis and its aftermath on the central bank.  The Fed finds itself at the center of a collision of traditional political concerns – conservatives’ fears of heavy-handed government intervention in free markets, and liberals’ complaints of regulators who favor corporate executives over average Americans.

More than two-thirds of the House of Representatives has signed on to a bill that would subject the central bank to increased congressional oversight through expanded audits.  A key senator wants to strip the Fed of its authority to regulate banks.  And the chairman of the House Financial Services Committee wants to rein in the Fed’s emergency lending power, which it used to help engineer the sale of Bear Stearns Cos. and bailout American International Group Inc.

The article noted the observation of Jaret Seiberg, a financial policy analyst with Concept Capital’s Washington Research Group:

“The Fed is running into unprecedented opposition on Capitol Hill,” he said.

“In the Senate, there’s open hostility toward any expansion of the Federal Reserve’s authority.  And in the House, you certainly have Republicans looking to focus the Fed solely on monetary policy and strip it of any larger role in financial regulation.”

Mr. Puzzanghera’s report underscored how the Fed’s interventions in the economy during the past year, which involved making loans (of unspecified amounts) and backing commercial transactions, have drawn criticism from both sides of the aisle.  The idea of expanding the Fed’s authority to the extent that it would become a “systemic risk regulator” has been criticized both in Congress and by a former member of the Federal Reserve Board of Governors:

House Republicans want to scale back the Fed’s power so the bank focuses on monetary policy.  And many have opposed the administration’s proposal to give the Fed the new role of supervising large financial institutions, such as AIG, that are not traditional banks but pose a risk to the economy if they fail.

“I’m not alone with my concerns about the Fed as a systemic regulator,” said Rep. Scott Garrett (R-N.J.).  Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) has similar concerns, as do others on his panel.  In fact, Dodd has proposed stripping the Fed of all of its bank oversight functions as part of his plan for creating a single banking regulatory agency.

Former Fed Gov. Alice M. Rivlin also said it would be a mistake to increase the Fed’s regulatory powers because it would distract from the central bank’s monetary policy role.

“Do we want to augment the regulatory authority of the Fed?      . . .  My answer is no,” said Rivlin, a senior fellow at the Brookings Institution.  “My sense is many people would be nervous about that augmentation.”

The colorful Democratic chairman of the House Financial Services Committee, Barney Frank, recently published a report card on the committee’s website, criticizing the Fed’s poor record on consumer protection.  The report card contrasted what Congressional Democrats had done to address various issues (categorized under the heading:  “Democrats Act”) with what the Fed has or has or has not done in dealing with those same problems.

Meanwhile, Republican Congressman Ron Paul of Texas, is making the rounds, promoting his new book:  End The Fed.  A recent posting at The Daily Bail website includes a YouTube video of Ron Paul at a book signing in New York, which resulted in a small parade over to the New York Fed.  Although the Daily Bail piece reported that Paul’s book had broken into the top ten on Amazon’s list of bestsellers — as I write this, End The Fed is number 15.  I would like to see that book continue to gain popularity.  Perhaps next time Chairman Bernanke testifies before a committee, he will know that something more than his own job is on the line.  It would be nice to see him make history as the last Chairman of the Federal Reserve.



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