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More Damned Lies Than You Can Count

March 15th, 2010 Posted in Uncategorized

Mar, 15 2010

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March 15, 2010

Thanks to the great work of Anton Valukas, as court-appointed bankruptcy examiner investigating the collapse of Lehman Brothers, people are finally beginning to realize how significant a role fraud plays on Wall Street. It turned out that the Enron scandal wasn’t the once-in-a-lifetime event people thought it was. Accounting fraud occurs on a regular basis, as does fraudulent stock price manipulation. The 2200-page report prepared by Valukas and his team at Jenner & Block has everyone talking. It’s about time.

Other lies are getting more exposure as well. President Obama justified the bank bailouts with the rationale that giving the money to the banks creates a “money multiplier” effect because banks can loan out 8-10 dollars for every bailout dollar they get, giving the economy more bang for the bailout buck. As I pointed out on September 21, Australian economist Steve Keen published a fantastic report from his website, explaining how the “money multiplier” myth, fed to Obama by the very people who helped cause the crisis, was the wrong paradigm to be starting from in attempting to save the economy. Here’s some of what Professor Keen had to say:

He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

* * *

If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375% — more than twice the level that ushered in the Great Depression.

This is a rescue? It’s a “hair of the dog” cure: having booze for breakfast to overcome the feelings of a hangover from last night’s binge. It is the road to debt alcoholism, not the road to teetotalism and recovery.

Fortunately, it’s a “cure” that is also highly unlikely to work, because the model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

Now that Australia’s economy is beginning to recover, they have already found it necessary to begin raising interest rates. As I pointed out last September:

If only Mr. Obama had stuck with his campaign promise of “no more trickle-down economics”, we wouldn’t have so many people wishing they lived in Australia.

Michael Shedlock (“Mish”) recently referred to Professor Keen’s debunking of the money multiplier myth in a fantastic essay:

However, conventional wisdom regarding the money multiplier is wrong. Australian economist Steve Keen notes that in a debt based society, expansion of credit comes first and reserves come later.

Indeed, this is easy to conceptualize: Banks lent more than they should have, and those loans are going bad at a phenomenal rate. In response, the Fed has engaged in a huge swap-o-rama party with various banks (swapping treasuries for collateral of dubious value) in addition to turning on the printing presses.

This was done so that banks would remain “well capitalized”. The reality is those excess reserves are a mirage. Banks need those reserves for credit losses coming down the pike, as unemployment rises, foreclosures mount, and credit card defaults soar.

Banks are not well capitalized, they are insolvent, unwilling and unable to lend.

Blogger George Washington recently wrote an extensive, thought-provoking piece about public banking and other potential alternatives to resolve the economic crisis, which appeared at the Naked Capitalism website. The essay began with a discussion of Steve Keen’s work in exposing the “money multiplier” as a sham.

Speaking of shams, former Labor Secretary Robert Reich recently wrote a great essay entitled, “The Sham Recovery”. Reich has exposed the propagandists touting the imaginary economic recovery in his unique, clear style:

Business cheerleaders naturally want to emphasize the positive. They assume the economy runs on optimism and that if average consumers think the economy is getting better, they’ll empty their wallets more readily and — presto! — the economy will get better. The cheerleaders fail to understand that regardless of how people feel, they won’t spend if they don’t have the money.

It’s always nice when a big lie gets exposed. It’s even better that we are now learning that the true cause of the financial crisis was plain, old sleaze.

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Head For The Hills

March 12th, 2010 Posted in Uncategorized

Mar, 12 2010

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March 12, 2010

When a stranger in a tinfoil hat tells me that the sky is falling, I don’t pay attention to him. On the other hand, when credible sources warn of an upcoming economic collapse as a result of our government’s financial ignorance — I listen.

Simon Johnson is a professor of Entrepreneurship at MIT’s Sloan School of Management. From 2007-2008, he was chief economist at the International Monetary Fund. He recently co-authored an article for CenterPiece with Peter Boone entitled, “The Doomsday Cycle”. Their essay began with this observation:

Each time the system runs into problems, the Federal Reserve quickly lowers interest rates to revive it. These crises appear to be getting worse and worse — and their impact is increasingly global. Not only are interest rates near zero around the world, but many countries are on fiscal trajectories that require major changes to avoid eventual financial collapse.

What will happen when the next shock hits? We believe we may be nearing the stage where the answer will be — just as it was in the Great Depression — a calamitous global collapse. The root problem is that we have let a “doomsday cycle” infiltrate our economic system . . .

The essay contains a number of proposals for correcting this problem. One of them involves tripling the requirement for core capital at major banks to 15-20% of assets. They concluded with this warning:

Last year, we came remarkably close to collapse. Next time, it may be worse. The threat of the doomsday cycle remains strong and growing.

Of course, the fact that scares me is that our government doesn’t give a damn. We aren’t likely to see any changes in capital requirements or anything else that was suggested in that article.

Niall Ferguson is a professor of economic history at Harvard. He recently wrote an article entitled, “Complexity and Collapse — Empires on the Edge of Chaos”. It was published in the March/April 2010 issue of Foreign Affairs magazine. The piece began with this summary:

Imperial collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice.

Niall Ferguson’s essay inspired Paul Farrell of MarketWatch to write a commentary on Ferguson’s piece, summarizing the highlights, while driving home this message:

Dismiss his warning at your peril. Everything you learned, everything you believe and everything driving our political leaders is based on a misleading, outdated theory of history. The American Empire is at the edge of a dangerous precipice, at risk of a sudden, rapid collapse.

* * *

His message negates all the happy talk you’re hearing in today’s news — about economic recovery and new bull markets, about “hope,” about a return to “American greatness” — from Washington politicians and Wall Street bankers.

* * *

“The Consummation of Empire” focuses us on Ferguson’s core message: At the very peak of their power, affluence and glory, leaders arise, run amok with imperial visions and sabotage themselves, their people and their nation. They have it all.

Fortunately, Mr. Farrell included some advice for those of us who are wondering about how to survive an economic collapse: Head for the hills. Here’s what he had to say:

At this point, investors are asking themselves: How can I prepare for the destruction and collapse of the American Empire? There is no solution in the Cole-Ferguson scenario, only an acceptance of fate, of destiny, of history’s inevitable cycles.

But there is one in “Wealth, War and Wisdom” by hedge fund manager Barton Biggs, Morgan Stanley’s former chief global strategist who warns us of the “possibility of a breakdown of the civilized infrastructure,” advising us to buy a farm in the mountains.

“Your safe haven must be self-sufficient and capable of growing some kind of food … well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson.” And when they come looting, fire “a few rounds over the approaching brigands’ heads.”

A reading of Paul Farrell’s article about Barton Biggs from July of 2009, reveals a more comfortable assessment of a crisis which may be 40 or 50 years in the future. Professor Ferguson’s essay has apparently given Mr. Farrell a greater sense of urgency about the disaster ahead. Here’s the assessment Mr. Farrell gave last summer:

But how to invest for the “End of Civilization” coming around 2050? The next 40 years will be confusing: Accelerating struggles between aging populations and disenchanted youth, soaring commodity prices, global warming, peak oil, food shortages, famine, blackouts, rationing, civil disorder, increasing crime, worldwide jihads, riots, anarchy and other dark scenarios of a tomorrow with “warfare defining human life.”

Compare and contrast that view with the concluding remark from Mr. Farrell’s recent piece:

You are forewarned: If the peak of America’s glory was the leadership handoff from Clinton to Bush, then we have already triggered the countdown to collapse, the decade from 2010 until 2020 … tick … tick … tick …

You have just read the views of some intelligent men who are warning us that a huge disaster may lie just around the corner. Yikes!

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Inviting Blowback

March 11th, 2010 Posted in Uncategorized

Mar, 11 2010

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March 11, 2010

Is it just a coincidence that “Turbo” Tim Geithner was the subject of back-to-back feature stories in The New Yorker and The Atlantic ? A number of commentators don’t think so.

The March 10 issue of The New Yorker ran an article by John Cassidy entitled, “No Credit”. The title is meant to imply that Getithner’s efforts to save America’s financial system are working but he’s not getting any credit for this achievement. From the very outset, this piece was obviously an attempt to reconstruct Geithner’s controversial public image – because he has been widely criticized as a tool of Wall Street.

The article by Jo Becker and Gretchen Morgenson in the April 26, 2009 issue of The New York Times helped clarify the record on Geithner’s loyalty to the big banks at the public’s expense, during his tenure as president of the Federal Reserve of New York. That piece began with a brainstorming session convened by Treasury Secretary Hank Paulson in June of 2008, at which point Paulson asked for suggestions as to what emergency powers the government should have at its disposal to confront the burgeoning financial crisis:

Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

“People thought, ‘Wow, that’s kind of out there,’” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward. Mr. Geithner says, “I don’t remember a serious discussion on that proposal then.”

But in the 10 months since then, the government has in many ways embraced his blue-sky prescription.

The recent article in The New Yorker defends Geithner’s bank bailouts, with a bit of historical revisionism that conveniently avoids a small matter referred to as Maiden Lane III:

During the past ten months, U.S. banks have raised more than a hundred and forty billion dollars from investors and increased the reserves they hold to cover unforeseen losses. While many small banks are still in peril, their larger brethren, such as Bank of America, Wells Fargo, and Goldman Sachs, are more strongly capitalized than many of their international competitors, and they have repaid virtually all the money they received from taxpayers. Looking ahead, the Treasury Department estimates the ultimate cost of the financial-rescue package at just a hundred and seventeen billion dollars — and much of that related to propping up General Motors and Chrysler.

Edward Harrison of Credit Writedowns dismissed the NewYorker article as “an out and out puff piece” that Geithner himself could have written:

Don’t be fooled; this is a clear plant to help bolster public opinion for a bailout and transfer of wealth, which was both unnecessary and politically damaging.

The article on Geithner, appearing in the April issue of The Atlantic, was described by Mr. Harrison as “fairly even-handed” although worthy of extensive criticism. Nevertheless, after reading the following passage from the first page of the essay, I found it difficult to avoid using the terms “fawning and sycophantic” to describe it:

In the course of many interviews about Geithner, two qualities came up again and again. The first was his extraordinary quickness of mind and talent for elucidating whatever issue was the preoccupying concern of the moment. Second was his athleticism. Unprompted by me, friends and colleagues extolled his skill and grace at windsurfing, tennis, basketball, running, snowboarding, and softball (specifying his prowess at shortstop and in center field, as well as at the plate). He inspires an adolescent awe in male colleagues.

Gawd! Yeech!

The reaction to the New Yorker and Atlantic articles, articulated by Yves Smith of Naked Capitalism, is an absolutely fantastic “must read” piece. Ms. Smith goes beyond the subject of Geithner. Her essay is a tour de force, describing how President Obama sold out the American public in the service of his patrons on Wall Street. The final two paragraphs portray the administration’s antics with a long-overdue measure of pugilism:

But the Obama administration miscalculated badly. First, it bought the financiers’ false promise that massive subsidies to them would kick start the economy. But economists are now estimating that it is likely to take five years to return to pre-crisis levels of unemployment. Obama took his eye off the ball. A Democratic President’s most important responsibility is job creation. It is simply unacceptable to most Americans for Wall Street to be reaping record profits and bonuses while the rest of the country is suffering. Second, it assumed finance was too complicated to hold the attention of most citizens, and so the (non) initiatives under way now would attract comparatively little scrutiny. But as public ire remains high, the press coverage has become almost schizophrenic. Obvious public relations plants, like Ben Bernanke’s designation as Time Magazine’s Man of the Year (precisely when his confirmation is running into unexpected opposition) and stories in the New York Times that incorrectly reported some Goldman executive bonus cosmetics as meaningful concessions have co-existed with reports on the abject failure of Geithner’s mortgage modification program. While mainstream press coverage is still largely flattering, the desperation of the recent PR moves versus the continued public ire and recognition of where the Administration’s priorities truly lie means the fissures are becoming a gaping chasm.

So with Obama’s popularity falling sharply, it should be no surprise that the Administration is resorting to more concerted propaganda efforts. It may have no choice. Having ceded so much ground to the financiers, it has lost control of the battlefield. The banking lobbyists have perfected their tactics for blocking reform over the last two decades. Team Obama naively cast its lot with an industry that is vastly more skilled in the dark art of the manufacture of consent than it is.

Congratulations to Yves Smith for writing a fantastic critique of the Obama administration’s combination of nonfeasance and misfeasance in responding to both the financial and economic crises.

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Seeing Reality With Gold Glasses

March 8th, 2010 Posted in Uncategorized

Mar, 08 2010

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March 8, 2010

The most recent report from the Bureau of Labor Statistics concerning non-farm payrolls for the month of February has surprised most people and it has left a number of commentators feeling upbeat. Reuters had reported that “The median forecast from the ten most accurate forecasters is for payrolls to fall by 70,000.” Nevertheless, the BLS report disclosed a figure of approximately half that much. Only 36,000 jobs had been lost and unemployment was holding at 9.7%. One enthusiastic reaction to that news came from the Mad Hedge Fund Trader:

While the employment rate for those with no high school diploma is 16%, the kind of worker who lost their manufacturing jobs to China, the jobless rate for those with college degrees is only 4.5%. This is proof that the dying sectors of the US economy are delivering the highest unemployment rates, and that America is clawing its way up the value chain in the global race for economic supremacy. It is what America does best, creative destruction with a turbocharger. There is a third influence here, which could be huge. The BLS only contacts existing businesses for its survey.

* * *

The bottom line is that payroll figures are much better than they appear at first glance.

Prior to the release of that report, many commentators had been expressing their disappointment concerning the most recent economic indicators. I discussed that subject on March 1. On the following day, John Crudele of The New York Post focused on the dramatic drop in the Consumer Confidence Index, released by The Conference Board — a drop to 46 in February from January’s 56.5. Here is the conclusion Mr. Crudele reached in assessing what most middle-class Americans understand about our current economic state:

Even with the stock market still bubbling and media trying its damnedest to convince us at least a million times a day that there’s an economic recovery, the American public isn’t buying it.

* * *

The economy has stabilized since then, helped greatly by the fact that some wealthy people feel wealthier because of an unbelievable snap back by the stock market during 2009. (And by unbelievable in this context I mean that what happened shouldn’t be believed as either legitimate or sustainable.)

Don Luskin of The Wall Street Journal’s Smart Money blog articulated his dissatisfaction with the most recent economic indicators on February 26. One week later, Luskin presented us with a very informative analysis for understanding the true value of one’s investments. Luskin spelled it out this way:

Consider stocks priced not in money, but in gold. In other words, instead of thinking of stocks as investments you make in order to increase your wealth in dollars, think of them as something to increase your wealth in gold. After all, you don’t want to make money for its own sake — you want the money for what you can buy with it. Gold is a symbol for all the things you might want to buy.

* * *

It’s easy to track stocks priced in gold because the price of the S&P 500 and the price of an ounce of gold vary closely with one another. As of Thursday’s close, they were only about $10 apart, with the S&P 500 at 1123, and gold at about 1133.

How about a year ago, on the day of the bottom for stocks on March 9? That day the S&P 500 closed at 676.53. Gold closed at 920.85. That means that one “unit” of the S&P could have bought 73% of an ounce of gold.

Today, with stocks and gold each having risen over the last year — but with stocks rising more — one “unit” of the S&P can buy 99% of an ounce of gold. All we have to do is compare 73% a year ago to 99% now, and we can see that stocks, priced in gold, have risen 34.9%.

A 34.9% gain for stocks priced in gold is pretty good for a year’s work. But it’s a far cry from the 69.1% that stocks have gained when they are priced in dollars. Do you see what has happened here? Stocks have made you lots of dollars. But the dollar itself has fallen in value compared to the real and eternal value represented by gold.

Here’s the most troubling part. The entire 34.9% gain made by stocks — priced in gold, that is — was achieved in just the first five weeks of rallying from the March 2009 bottom. That means for most of the last year, since mid-April, while it has appeared that stocks have been furiously rallying, in reality they’ve just been sitting there. All risk, no reward.

* * *

So why, then, did stocks — priced in dollars, not gold — continue so much higher? Simple: We experienced inflation-induced growth. Throw enough stimulus money, an “extended period” of zero interest rates from the Fed, and a big dose of government debt at the economy, and you will get some growth — and, eventually, lots of inflation.

Luskin concluded the piece by explaining that if stocks move higher while gold moves lower, we will be seeing evidence of real growth. On the other hand, if gold increases in value while stocks go down or simply get stuck where they are, there is no economic growth.

Luskin’s approach allows us to see through all that money-printing and excess liquidity Ben Bernanke has brought to the stock market, creating an illusion of increased value.

Everyone is hoping to see evidence of economic recovery as soon as possible. Don Luskin has provided us with the “x-ray specs” for seeing through the hype to determine whether some of that evidence is real.

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Elizabeth Warren To The Rescue

March 4th, 2010 Posted in Uncategorized

Mar, 04 2010

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March 4, 2010

We reached the point where serious financial reform began to look like a lost cause. Nothing has been done to address the problems that caused the financial crisis. Economists have been warning that we could be facing another financial crisis, requiring another round of bank bailouts. The watered-down financial reform bill passed by the House of Representatives, HR 4173, is about to become completely defanged by the Senate.

The most hotly-contested aspect of the proposed financial reform bill — the establishment of an independent, stand-alone, Consumer Financial Protection Agency — is now in the hands of “Countrywide Chris” Dodd, who is being forced into retirement because the people of Connecticut are fed up with him. As a result, this is his last chance to get some more “perks” from his position as Senate Banking Committee chairman. Back on January 18, Elizabeth Warren (Chair of the Congressional Oversight Panel and the person likely to be appointed to head the CFPA) explained to Reuters that banking lobbyists might succeed in “gutting” the proposed agency:

“The CFPA is the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants,” she told Reuters in an interview.

* * *

Consumer protection is relatively simple and could easily be fixed, she said. The statutes, for the most part, already exist, but enforcement is in the hands of the wrong people, such as the Federal Reserve, which does not consider it central to its main task of maintaining economic stability, she said.

The latest effort to sabotage the proposed CFPA involves placing it under the control of the Federal Reserve. As Craig Torres and Yalman Onaran explained for Bloomberg News:

Putting it inside the Fed, instead of creating a standalone bureau, was a compromise proposed by Senator Bob Corker, a Tennessee Republican, and Banking Committee Chairman Christopher Dodd, a Connecticut Democrat.

* * *

Banking lobbyists say the Fed’s knowledge of the banking system makes it well-suited to coordinate rules on credit cards and other consumer financial products.

* * *

The financial-services industry has lobbied lawmakers to defeat the plan for a consumer agency. JP Morgan Chase & Co. Chief Executive Officer Jamie Dimon called the agency “just a whole new bureaucracy” on a December conference call with analysts.

Barry Ritholtz, author of Bailout Nation, recently discussed the importance of having an independent CFPA:

Currently, there are several proposals floating around to change the basic concept of a consumer protection agency. For the most part, these proposals are meaningless, watered down foolishness, bordering on idiotic. Let the Fed do it? They were already charged with doing this, and under Greenspan, committed Nonfeasance — they failed to do their duty.

The Fed is the wrong agency for this.

In an interview with Ryan Grim of The Huffington Post, Congressman Barney Frank expressed a noteworthy reaction to the idea:

“It’s like making me the chief judge of the Miss America contest,” Frank said.

On Tuesday, March 2, Elizabeth Warren spent the day on the phone with reform advocates, members of Congress and administration officials, as she explained in an interview with Shahien Nasiripour of The Huffington Post. The key point she stressed in that interview was the message: “Pass a strong bill or nothing at all.” It sounds as though she is afraid that the financial reform bill could suffer the same fate as the healthcare reform bill. That notion was reinforced by the following comments:

My first choice is a strong consumer agency . . . My second choice is no agency at all and plenty of blood and teeth left on the floor.

* * *

“The lobbyists would like nothing better than for the story to be the [proposed] agency has died and everyone has given up,” Warren said. “The lobbyists’ closest friends in the Senate would like nothing better than passing an agency that has a good name but no real impact so they have something good to say to the voters — and something even better to say to the lobbyists.”

Congratulations, Professor Warren! At last, someone with some cajones is taking charge of this fight!

On Wednesday, March 3, the Associated Press reported that the Obama administration was getting involved in the financial reform negotiations, with Treasury Secretary Geithner leading the charge for an independent Consumer Financial Protection agency. I suspect that President Obama must have seen the “Ex-Presidents” sketch from the FunnyOrDie.com website, featuring the actors from Saturday Night Live portraying former Presidents (and ghosts of ex-Presidents) in a joint effort toward motivating Obama to make sure the CFPA becomes a reality. When Dan Aykroyd and Chevy Chase reunited, joining Dana Carvey, Will Ferrell and Darryl Hammond in promoting this cause, Obama could not have turned them down.

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A Wary Eye On The Indicators

March 1st, 2010 Posted in Uncategorized

Mar, 01 2010

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March 1, 2010

The past few days brought us some observations by a number of financial commentators, who expressed concern about how our economic recovery is coming along. Although none of the following three are ready to start sounding alarms, they all seem to share a similar tone of discouragement.

Don Luskin of The Wall Street Journal ’s Smart Money blog began his February 26 piece with an explanation of how proud he used to be about the accuracy of his May, 2009 declaration that the recession had ended. Although he still believes that he made the right call back then, the most recent economic indicators have muddied the picture:

I made my recession end call in May because of an entirely different set of statistics, designed to be predictive rather than merely to recognize what has already happened. What worries me is that these statistics have all started to get a little worse recently.

Luskin explained that although initial unemployment claims reached their peak in early April, the four-week moving average has risen 7 percent from where it was a few weeks ago.

Over history, upticks like that have no predictive value. There have been many of them, and very few have led to recessions. Still, 7% is a big reversal. In May when I got excited about the drop in claims, that drop was only about 4%!

Luskin found another disappointing trend in the fact that earnings expectations for the S&P 500 are now growing at a much slower pace than they were in April. Two other trends concerned him as well. The fact that the dollar has rallied ten percent in the last couple of months raises the question whether “the fear that gripped world markets in 2008 and 2009” could be returning. Finally, the fact that the credit spread between Treasuries and “junk bonds” is now at six percent after having been below 5%, brings a little discomfort simply because of a move in the wrong direction. Nevertheless, Luskin is still optimistic, although his perspective is tempered with realism:

So is the economic recovery over? I don’t think so. I think it’s just being tested. None of the indicators I use to detect the onset of recession are giving signals. But it’s haunting, nevertheless. After the horrific global recession we went through, you’d think we ought to come roaring back. We’re back, but we’re not exactly roaring.

In Sunday’s Washington Post, Frank Ahrens wrote an article discussing three indicators that “spell trouble for the recovery”. Here’s how he explained them:

— On Wednesday, the Commerce Department reported that January new-home sales dropped 11.2 percent from December, plunging to their lowest level in nearly 50 years.

— On Tuesday, the Conference Board reported that February consumer confidence fell sharply from January, driven down by the survey’s “present situation index” — how confident consumers feel right now — which hit its lowest mark since the 1983 recession. On Friday, the Reuters/University of Michigan consumer sentiment survey also showed a falloff from January to February.

— On Thursday, the government’s report on new jobless claims filed during the previous week shot up 22,000, which was exactly opposite of what economists predicted. Forecasters expected new jobless claims to drop by about 20,000.

Taken together, what do these reports tell us?

We’ve got a long way to go to get out of this economic mess, and we may be actually losing a little ground.

At the conclusion of that piece, Mr. Ahrens added that another factor holding back recovery is the current state of activity in the stock market. Investors seem to be exhibiting caution, uncertainty and “a hard-to-shake sense that we haven’t hit bottom yet”.

As I frequently point out, one of my favorite financial gurus is Jeremy Grantham of GMO. The February 26 issue of Bloomberg Business Week featured an article by Charles Stein concerning Grantham’s career. In the section of the piece discussing Grantham’s current outlook, we see yet another view toward a very lean, slow recovery process:

Grantham’s favorite asset class today is high-quality U.S.stocks, companies defined by high, stable returns and low debt. The allocation fund had 31 percent of its money in that category at year-end, sometimes called blue chips, according to the GMO Web site. In the interview, he said he expects such stocks to return an average of 6.8 percent a year over the next seven years, compared with 1.3 percent for all large-cap U.S. stocks.

Emerging-market stocks may rise about 4 percent annually in the next seven years, as investor enthusiasm for economic growth in developing countries carries the stocks to unsustainable levels, Grantham said.

“Why not go along for the ride?” he said. The MSCI Emerging Markets Index returned an average of 22 percent in the past seven years, compared with a gain of 5.5 percent by the S&P 500 index.

U.S.government bonds will return 1.1 percent a year over the seven-year period, according to the latest GMO forecast. The Bank of America Merrill Lynch U.S. Treasury Master Index rose 4.3 percent from 2003 through 2009.

Grantham said he expects a difficult, not disastrous, period for the economy and investments.

“It will feel like the 1970s,” he said. “One step forward, one step back.”

None of the three gentlemen whom I have quoted here are seeing visions of rainbows and unicorns in our economic future — at least not for the next few years. Be sure to keep the opinions of these experts in mind if the cheerleading by some perma-bull, TV pundit motivates you to “get in on the ground floor of the next stock market rally”. You could save yourself a lot of money and even more pain.

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Three New Books For March

February 24th, 2010 Posted in Uncategorized

Feb, 24 2010

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February 24, 2010

The month of March brings us three new books about the financial crisis. The authors are not out to make apologies for anyone. To the contrary, they point directly at the villains and expose the systemic flaws that were exploited by those who still may yet destroy the world economy. All three of these books are available at the Amazon widget on the sidebar at the left side of this page.

Regular fans of the Naked Capitalism blog have been following the progress of Yves Smith on her new book, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism. It will be released on March 2. Here is some information about the book from the product description at the Amazon website:

ECONned is the first book to examine the unquestioned role of economists as policy-makers, and how they helped create an unmitigated economic disaster.

Here, Yves Smith looks at how economists in key policy positions put doctrine before hard evidence, ignoring the deteriorating conditions and rising dangers that eventually led them, and us, off the cliff and into financial meltdown. Intelligently written for the layman, Smith takes us on a terrifying investigation of the financial realm over the last twenty-five years of misrepresentations, naive interpretations of economic conditions, rationalizations of bad outcomes, and rejection of clear signs of growing instability.

In eConned (sic), author Yves Smith reveals:

–why the measures taken by the Obama Administration are mere palliatives and are unlikely to pave the way for a solid recovery

–how economists have come to play a profoundly anti-democratic role in policy

–how financial models and concepts that were discredited more than thirty years ago are still widely used by banks, regulators, and investors

–how management and employees of major financial firms looted them, enriching themselves and leaving the mess to taxpayers

–how financial regulation enabled predatory behavior by Wall Street towards investors

–how economics has no theory of financial systems, yet economists fearlessly prescribe how to manage them

Michael Lewis is the author of the wildly-popular book, Liar’s Poker, based on his experience as a bond trader for Solomon Brothers in the mid-80s. His new book, The BigShort: Inside the Doomsday Machine, will be released on March 15. Here is some of what Amazon’s product description says about it:

A brilliant account — character-rich and darkly humorous — of how the U.S. economy was driven over the cliff.

* * *

Michael Lewis’s splendid cast of characters includes villains, a few heroes, and a lot of people who look very, very foolish: high government officials, including the watchdogs; heads of major investment banks (some overlap here with previous category); perhaps even the face in your mirror. In this trenchant, raucous, irresistible narrative, Lewis writes of the goats and of the few who saw what the emperor was wearing, and gives them, most memorably, what they deserve. He proves yet again that he is the finest and funniest chronicler of our times.

Our third author, Simon Johnson, recently co-authored an article for CenterPiece with Peter Boone entitled, “The Doomsday Cycle” which explains how “we have let a ‘doomsday cycle’ infiltrate our economic system”. The essay contains a number of proposals for correcting this problem. Here is one of them:

We believe that the best route to creating a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise. If we triple core capital at major banks to15-25% of assets, and err on the side of requiring too much capital for derivatives and other complicated financial structures, we will create a much safer system with less scope for “gaming” the rules.

Simon Johnson is a professor of Entrepreneurship at MIT’s Sloan School of Management. From 2007-2008, he was chief economist at the International Monetary Fund. With James Kwak, he is the co-publisher of The Baseline Scenario website. Johnson and Kwak have written a new book entitled, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. Although this book won’t be released until March 30, the Amazon website has already quoted from reviews by the following people: Bill Bradley, Robert Reich, Arianna Huffington, Bill Moyers, Alan Grayson, Brad Miller, Elizabeth Warren and others. Professor Warren must be a Democrat, based on the affiliation of nearly everyone else who reviewed the book.

Here is some of what can be found in Amazon’s product description:

. . . a wide-ranging, meticulous, and bracing account of recent U.S. financial history within the context of previous showdowns between American democracy and Big Finance: from Thomas Jefferson to Andrew Jackson, from Theodore Roosevelt to Franklin Delano Roosevelt. They convincingly show why our future is imperiled by the ideology of finance (finance is good, unregulated finance is better, unfettered finance run amok is best) and by Wall Street’s political control of government policy pertaining to it.

As these authors make the talk show circuit to promote their books during the coming weeks, the American public will hearing repeated pleas to demand that our elected officials take action to stop the mercenary financial behemoths from destroying the world. Perhaps the message will finally hit home.

If you are interested in any of these three books, they’re available on the right side of this page.

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Rethinking The Stimulus

February 22nd, 2010 Posted in Uncategorized

Feb, 22 2010

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February 22, 2010

On the anniversary of the stimulus law (a/k/a the American Recovery and Reinvestment Act of 2009 — Public Law 111-5) there has been quite a bit of debate concerning the number of jobs actually created by the stimulus as opposed to the claims made by Democratic politicians. For their part, the Democrats take pride in the fact that John Makin of the conservative think-tank, the American Enterprise Institute, recently published this statement at the AEI website:

Absent temporary fiscal stimulus and inventory rebuilding, which taken together added about 4 percentage points to U.S.growth, the economy would have contracted at about a 1 percent annual rate during the second half of 2009.

A few months ago, I had a discussion with an old friend and the subject of the stimulus came up. My beefs about the stimulus were that it did not offer the necessary degree of immediate relief and that a good chunk of it should have gone directly into the hands of the taxpayers.

I recently read a blog posting by Keith Hennessey, the former director of the National Economic Council under President George W. Bush, which expressed some opinions similar to my own on what the stimulus should have offered. Although Mr. Hennessey preferred the traditional panacea of tax cuts as the primary means for economic stimulus, he made a number of other important points. With so much fear being expressed about the possibility of a “double-dip” recession, our government could find itself in the uncomfortable position of considering another stimulus bill. If that day comes, we have all the more reason to look back at what was right and what was wrong with the 2009 stimulus.

Keith Hennessy began with this statement:

Unlike many critics of the stimulus law, I think that fiscal policy can increase short-term economic growth, especially when the economy is in a deep recession. In other words, I think that fiscal stimulus is a valid concept. This does not mean that I think that every increase in government spending, or every tax cut, (a) increases short-term economic growth or (b) is good policy.

At the end of his second paragraph, he got to the part that was music to my ears:

If the Administration had instead put $862 B directly into people’s hands, you would have seen more immediate spending and economic growth than we did, even if people had saved most of it.

In contrast, government spending is powerful but painfully slow. If the government spends $1 on building a road, eventually that entire $1 will enter the economy and increase GDP growth. Your bang-for-the-deficit-buck is extremely high. The problem is that bang-for-the-buck doesn’t help us if that bang occurs two or three or four years from now.

* * *

I would instead prefer that people be allowed to spend and save the money how they best see fit. My preferred path also has less waste and bureaucracy.

A bit later in the piece, Hennessey said some things that probably caused a good number of the CPAC conventioneers reach for the Tums:

I agree with the Administration that last year’s stimulus law increased economic growth above what it otherwise would have been. I agree that employment is higher than it would have been without a stimulus.

Of course, Hennessey complained that “The law was poorly designed and inefficient” — in part because the money was funneled through federal and state bureaucracies — another valid point. Then, he got to the important issue:

Given a decision last year to do a big fiscal stimulus, I would have preferred, in this order:

1. putting all the money into a permanent reduction in income and capital taxes;

2. putting all the money into a temporary reduction in income and capital taxes;

3. putting all the money into transfer payments;

4. what Congress and the President did.

Given the policy preferences of the President, his team’s big policy mistake last year was to let Congress turn a reasonable macroeconomic fiscal policy goal into a Congressional spending toga party. Given his policy preferences, the President should have insisted that Congress put all the money into (2) and (3) above. He would have had a bigger macro stimulus bang earlier.

In case you’re wondering what “transfer payments” are — you need to think in terms of “wealth transfer”. In this case, it concerns situations where the government gives away money to people who aren’t rich. A good example of this was the stimulus program that took place under President Bush. Individuals with incomes of less than $75,000 received a $300 “stimulus check” and households with joint incomes under $150,000 got $600.

My own stimulus idea would involve a “tax rebate” program, wherein the taxpayers receive a number of $50 vouchers based on the amount of income tax they paid the previous year. The recipients would then be instructed to go out and buy stuff with the vouchers. So what if they spent it on imported merchandise? The American retailers and shipping companies would still make money, finding it necessary to hire people. The vouchers would display the person’s name and address. In order to use the vouchers, identification would be needed, so as to prevent resale. The maximum amount of cash change one could get back from a voucher-funded purchase would be $10.

Hopefully, we won’t need another stimulus program. However, if we do, I suggest that the government simply give us vouchers and send us shopping.

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More Super Powers For Turbo Tim

February 18th, 2010 Posted in Uncategorized

Feb, 18 2010

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February 18, 2010

I shouldn’t have been shocked when I read about this. It’s just that it makes no sense at all and it’s actually scary — for a number of reasons. On Wednesday, February 17, Sewell Chan broke the story for The New York Times:

The Senate and the Obama administration are nearing agreement on forming a council of regulators, led by the Treasury secretary, to identify systemic risk to the nation’s financial system, officials said Wednesday.

They’re going to put “Turbo” Tim Geithner in charge of the council that regulates systemic risk in the banking system? Let the pushback begin! The first published reaction to this news (that I saw) came from Tom Lindmark at the iStockAnalyst.com website:

Only the Congress of the United States is capable of this sort of monumental stupidity. It appears as if the responsibility for running a newly formed council of bank regulators is going to be delegated to the Treasury Secretary.

Lindmark’s beef was not based on any personal opinion about the appointment of Tim Geithner himself to such a role. Mr. Lindmark’s opinion simply reflects his disgust at the idea of putting a political appointee at the head of such a committee:

The job of overseeing our financial system is going to be given to an individual whose primary job is implementing the political agenda of his boss — the President of the US.

Regulation of the banks and whatever else gets thrown into the mix is now going to be driven by politicians who have little or no interest in a safe and sound banking system. As we know too well, their primary interest is the perpetuation and enhancement of their own power with no regard for the consequences.

So there you have reason number one: Nothing personal — just bad policy.

I can’t wait to hear the responses from some of my favorite gurus from the world of finance. How about John Hussman — president of the investment advisory firm that manages the Hussman Funds? One day before the story broke concerning our new systemic risk regulator, this statement appeared in the Weekly Market Comment by Dr. Hussman:

If one is alert, it is evident that the Federal Reserve and the U.S. Treasury have disposed of the need for Congressional approval, and have engineered a de facto bailout of Fannie Mae and Freddie Mac, at public expense.

What better qualification could one have for sitting at the helm of the systemic risk council? Choose one of the guys who bypassed Congressional authority to bail out Fannie Mae and Freddie Mac with the taxpayers’ money! If Geithner is actually appointed to chair this council, you can expect an interesting response from Dr. Hussman.

Jeremy Grantham should have plenty to rant about concerning this nomination. As chairman of GMO, Mr. Grantham is responsible for managing over $107 billion of his clients’ hard-inherited money. Consider what he said about Geithner’s performance as president of the New York Fed during the months leading up to the financial crisis:

Timothy Geithner, in turn, sat in the very engine room of the USS Disaster and helped steer her onto the rocks.

Mr. Grantham should hardly be pleased to hear about our Treasury Secretary’s new role, regulating systemic risk.

The coming days should provide some entertaining diatribes along the lines of: “You’ve got to be kidding!” in response to this news. I’m looking forward to it!

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An Early Favorite For 2010

February 11th, 2010 Posted in Uncategorized

Feb, 11 2010

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February 11, 2010

It appears as though the runner-up for TheCenterLane.com’s 2009 Jackass of the Year Award is well on his way to winning the title for 2010. After reading an op-ed piece by Ross Douthat of The New York Times, I decided that as of December 31, 2009, it was too early to determine whether our new President was worthy of such a title.

Since Wednesday morning, we have been bombarded with reactions to a story from Bloomberg News, concerning an interview Obama had with Bloomberg BusinessWeek in the Oval Office. In case you haven’t seen it, here is the controversial passage from the beginning of that article:

President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay.

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free-market system.”

Many commentators have expounded upon what this tells us about our President. I’d like to quote the reactions from a couple of my favorite bloggers. Here’s what Yves Smith had to say at Naked Capitalism:

There are only two, not mutually exclusive, conclusions one can reach from reading this tripe: that Obama is a lackey of the financiers, and putting the best spin he can on their looting, or he is a fool.

The salient fact is that, their protests to the contrary, the wealth of those at the apex of the money machine was not the result of the operation of “free markets” or any neutral system. The banking industry for the better part of two decades has fought hard to create a playing field skewed in their favor, with it permissible to sell complex products with hidden bad features to customers often incapable of understanding them. By contrast, one of the factors that needs to be in place for markets to produce desirable outcomes is for buyers and sellers to have the same information about the product and the objectives of the seller.

Similarly, the concentrated capital flows, often too-low interest rates, and asymmetrical Federal Reserve actions (cutting rates fast when markets look rocky, being very slow to raise rates and telegraphing that intent well in advance) that are the most visible manifestations of two decades of bank-favoring policies, are the equivalent of massive subsidies.

And that’s before we get to the elephant in the room, the massive subsidies to the banksters that took place during the crisis and continue today.

We have just been through the greatest looting of the public purse in history, and Obama tries to pass it off as meritocracy in action.

Obama is beyond redemption.

At his Credit Writedowns website, Edward Harrison made this observation:

The problem is not that we have free markets in America, but rather that we have bailouts and crony capitalism. So Americans actually do begrudge people this kind of monetary reward. It has been obvious to me that the bailouts are a large part of why Obama’s poll numbers have been sinking. It’s not just the economy here — so unless the President can demonstrate he understands this, he is unlikely to win back a very large number of voters who see this issue as central to their loss of confidence in Obama.

Is it just me or does this sound like Obama just doesn’t get it?

Victoria McGrane of Politico gave us a little background on Obama’s longstanding relationship with The Dimon Dog:

Dimon is seen as one of the Wall Street executives who enjoys the closest relationship with the president, along with Robert Wolf, head of the American division of Swiss bank UBS. A longtime Democratic donor, Dimon first met Obama in Chicago, where Dimon lived and worked from the late 1990s until 2007.

And both Dimon and Blankfein have met with the president several times. In their most recent meeting, Obama invited Dimon to Washington for lunch right before the State of the Union, according to a source familiar with the meeting.

Some commentators have expressed the view that Obama is making a transparent attempt to curry favor with the banking lobby in time to get those contributions flowing to Democratic candidates in the mid-term elections. Nevertheless, for Obama, this latest example of trying to please both sides of a debate will prove to be yet another “lose/lose” situation. As Victoria McGrane pointed out:

But relations between most Democrats and Wall Street donors aren’t as warm this cycle as the financial industry chafes against the harsh rhetoric and policy prescriptions lawmakers have aimed at them.

As for those members of the electorate who usually vote Democratic, you can rest assured that a large percentage will see this as yet another act of betrayal. They saw it happen with the healthcare reform debacle and they’re watching it happen again in the Senate, as the badly-compromised financial reform bill passed by the House (HR 4173) is being completely defanged. A bad showing by the Democrats on November 2, 2010 will surely be blamed on Obama.

As of February 11, we already have a “favorite” in contention for the 2010 Jackass of the Year Award. It’s time for the competition to step forward!

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Three New Books For March

Rethinking The Stimulus

More Super Powers For Turbo Tim

An Early Favorite For 2010

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