Weekend Economists" Washington's Birthday February 20-22, 2009

[Demeter]

I cannot tell a lie, it's time for another compilation of news, rumor, speculation, innuendo, stretched truths, and outright falsehoods in honor of the Father of His Country.

George Washington is a sterling figure in our history, but that wasn't enough for Parson Weems, who thought that by embellishing Washington's reputation with childhood fabrications, he could teach the youth of his day to be more upright and honest. Hence, the story of the cherry tree and little George's axe.

http://en.wikipedia.org/wiki/Parson_Weems

If ever there was a month for false tales of derring-do, this must be the perfect one. We have Madoff, Stanford, and others too numerous to mention, all running about like decapitated chickens now that their frauds are discovered. The FBI must be having great fun. They live for car chases and such. The SEC is shaking itself up after 8 years of sleep, an institutional Rip Van Winkle, to discover to its shame that the tide has turned. It's Morning in America like Reagan never intended. Of course, Reagan is our native Father of Lies.

So, let's see who is swimming naked this weekend, shall we?


Oh, and will somebody please wake up Congress, while we're at it?

[Demeter]

1. Bank rescue details key to stave off bears

AS OF THIS POST 8:30 PM FRIDAY, NO BANK SEIZURES HAVE BEEN ANNOUNCED, NOT THAT THAT MEANS ANYTHING...




http://news.yahoo.com/s/nm/20090221/bs_nm/us_column_stocks_outlook_1

NEW YORK (Reuters) – Bears could have the upper hand again next week if Wall Street fails to get assurance that major banks can be rescued without being seized by the U.S. government.

The Dow breached a six-year low in the holiday-shortened week amid mounting fears that the White House would nationalize banks, thus wiping out shareholders.

Stocks pared losses in the final hours of trading on Friday after the White House said it strongly believed in a privately held bank system.

"We don't care about anything but bank details at this point," said Robert Francello, head of equity trading for Apex Capital hedge fund in San Francisco. "It's all about bank details and a bank rescue."

With indexes at multi-year lows, the focus will be on battered banks Citigroup (C.N) and Bank of America (BAC.N), two of the cheapest stocks on the Dow, after a top U.S. senator on Friday said short-term nationalization for some banks was possible.

The fate of both companies will have important consequences for the sector and the broad U.S. economy that is in the throes of an ever-deepening recession, analysts said.

"We're dependent on seeing some stability in the financial sector," said Steve Goldman, market strategist for Weeden & Co in Greenwich, Connecticut.

"Each day we walk into the market and we see them down 5 to 8 percent. It makes it difficult for stocks to advance."

For the week, the Dow fell 6.2 percent and the S&P dropped 6.9 percent, while the Nasdaq stumbled 6.1 percent. It was the Dow's lowest close since October 2002.

.............

Citing unnamed U.S. Treasury sources, CNBC said the administration will release some details next week on its bank rescue plan. A Treasury spokesman told Reuters he could not immediately comment on the report.

Federal Reserve Chairman Ben Bernanke is set to testify on monetary policy before the Senate Banking Committee on Tuesday and Paul Volcker, a top economic adviser to President Barack Obama, testifies before a Joint Economic Committee hearing on Thursday.

Investors will be watching both officials for any hints about how the government will bolster banks.

Details will be key, especially after Christopher Dodd, chairman of the Senate Banking Committee, told Bloomberg on Friday that the option to nationalize banks, although undesirable, was on the table.

Wall Street is still reeling from Treasury Secretary Timothy Geithner's failure to provide any details when he announced a bank plan.

"People are obviously very anxious to know what's going to be done and trillions of dollars are at stake," said Marc Groz, chief investment officer for Topos, an asset management and risk advisory firm. "It's a battle about who's going to pick up the tab."

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3. There's a Petition for Nationalizing Banks

Dear CommonDreamer,

When Congress passed the George W. Bush $700 billion bank bailout plan, the goal was to rescue our banking system by propping up the banks that deregulation had allowed to become 'too big to fail.' We now know that the bailed out banks didn't use our money to start lending more - rather they paid out big bonuses to executives and bailed out the banks' shareholders. In return for our money the American people got nothing.

We, the people, became majority owners in many of the major banks. But we have no voice in the way the banks are run. If taxpayers are footing the bill for rescuing the banks, why shouldn't we get ownership, at least until private buyers can be found?

Nobel laureate economist Paul Krugman calls this a "a classic exercise in 'lemon socialism': taxpayers bear the cost if things go wrong, but stockholders and executives get the benefits if things go right."

Now the Obama economic team is proposing more of the Bush policy: the socialization of risk, the privatization of profits.

President Franklin Roosevelt once told a group of activists lobbying him, "I agree with everything you said. Now go out and make me do it."

As part of our effort to help President Obama "do the right thing" CommonDreams.org has just launched a petition to President Obama urging him to nationalize the insolvent banks.

We know that President Obama is hearing from Wall Street. We know that he is hearing from the financial 'wizards' and the lobbyists who helped wreck our economy in the first place. And we know that he's hearing from the inside-the-beltway Democrats who are terrified of the "N" word - nationalize.

It's our job to make sure he hears from the rest of us.

There are two ways for you to sign our petition:

1. If you are a member of Facebook, please sign here: http://apps.facebook.com/causes/petitions/75 And, please join the new CommonDreams.org Facebook page here: http://www.facebook.com/pages/CommonDreamsorg/32109457015
2. If you are not a Facebook member, you may add your name to our petition here http://salsa.wiredforchange.com/o/1493/t/4160/p/dia/action/public/?action_KEY=119

A compiled petition will be presented to President Barack Obama.

Thanks for joining with us and for showing grassroots support for the bold, creative change Americans voted for.

Craig Brown
for the whole CommonDreams.org team

p.s. Please forward this to your friends and family. Together, we can make a difference.

[Demeter]

55. Nationalism: Not So Bad?

http://www.cnbc.com/id/15840232?video=1041773905

Video analysis

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14. 10:30 PM and There's a Bank Seizure!

On Friday, February 20, 2009, Silver Falls Bank, Silverton, OR was closed by the the Oregon Department of Consumer and Business Services and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed.

The FDIC has assembled useful information regarding your relationship with this institution. Besides a checking account, you may have Certificates of Deposit, a car loan, a business checking account, a commercial loan, a Social Security direct deposit, and other relationships with the institution. The FDIC has compiled the following information which should answer many of your questions.


http://www.fdic.gov/bank/individual/failed/silverfalls.html

http://www.fdic.gov/bank/individual/failed/banklist.html


I'D EXPECT ANY BIG UGLY SEIZURE SUNDAY---LIKE PREVIOUS ONES...

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2. Obama Stimulus Saves Microsoft Billionaire Hundreds Of Millions

http://www.businessinsider.com/obama-stimulus-saves-microsoft-billionaire-hundreds-of-millions-phew-2009-2


Billionaire Paul Allen is a Microsoft cofounder, the owner of the NFL's Seattle Seahawks and the owner of the NBA's Portland Trailblazers.

And, thanks to the stimulus bill President Obama signed this week, he's also about to be as much as a billion dollars richer.

Here's how:

* Allen owns a majority stake in cable provider Charter Communications.
* Charter Communications this month said it would reduce its debt load by $8 billion and enter Chapter 11.
* Normally, partners at a firm like Charter Communications would have to pay taxes on the amount of debt forgiven in this process, which is, in a sense a one-time income windfall. Tax law calls it a "deemed distribution."
* But under the new bill, companies like Charter Communications will be able to avoid paying taxes on forgiven debt until 2014. Even then, Paul will have until 2018 to pay it completely off.
* Paul owns about half of Charter, so his share of the Charter Commuincations' $8 billion debt forgiveness is around $4 billion. At a tax rate of 25%, Allen could avoid paying as much as $1 billion in taxes until 2014, tax expert Robert Willens told the WSJ.

Not clear how a corporate tax benefit would be passed through to Paul's personal tax payments? A reader informs us:

"It's not a 'corporate tax' since it's a partnership rather than a corporation. The partners pay tax on their share of a partnerships income, which is why partnerships are referred to as "pass-through" entities."

For what it's worth, one of Paul's representatives told the WSJ the billionaire didn't lobby for the windfall. It just fell into his lap, lucky dog.

So what will Paul do with that money until 2014? Invest it in technology that reduces our dependence on foreign oil and creates new "green collar" jobs for America, per the goals of Obama's stimulus plan, of course.

Or maybe Paul could buy a new boat! Here are the two he already owns:

http://static.10gen.com/businessinsider/~~/f?id=499d56574b5437da001064f6

http://static.10gen.com/businessinsider/~~/f?id=499d563e14b9b9e200acca2f

[tclambert]

10. Here's how lucky he is:

The largest lottery win so far was only $390 million. Oh, wait, that was a shared Mega Millions jackpot. There were two winning tickets, one in New Jersey, one in Georgia. A single ticket won $365 million, but it was shared by eight people. The largest individual win is still Jack Whittaker's from 2002, $314 million. Whittaker took the lump sum payout option of $113.4 million, and a little over four years later, his life was in financial ruins. (You can read the sad story here: http://www.karemar.com/blog/lottery-winner-loses-114-million-four-years-plus-look-biggest-winners-all-time )

So anyway, lucky guy Paul Allen just won $1 billion without even popping in to buy a ticket at the Quick Stop.

[Demeter]

13. Good Evening, TC

I'm about to call it quits for the night--feel free to add to the list. Our theme is Truth or Fiction.

[Joe Chi Minh]

53. Those boats. How pathetic is that! The American Dream. Thank you,

but I'll take a European nightmare. And I mean continental Europe!

[Demeter]

4. SEC Was Told To Back Off Stanford In 2006

http://www.businessinsider.com/sec-was-told-to-back-off-stanford-in-2006-2009-2

It's becoming clear that the juiciest aspects of the Stanford Fraud have to do with his political connections. We know he was a friend of George W. Bush, that he donated a lot to Congressmen, and that he practically bought off big-time Democrats to kill an anti-money laundering bill. Now we learn that the SEC's initial investigation into Stanford was waived off in 2006.

This was buried at the end of a NYT report:

The current S.E.C. charges stem from an inquiry opened in October 2006 after a routine exam of Stanford Group, according to Stephen J. Korotash, an associate regional director of enforcement with the agency’s Fort Worth office.

He said the S.E.C. “stood down” on its investigation at the time at the request of another federal agency, which he declined to name, but resumed the inquiry in December 2008.

Who told the SEC to stand down? Given that he was a fraudster, it's almost impossible to think of a benign explanation for this, particularly given Sir Allen Stanford's political tentacles.

So perhaps the SEC could've caught him earlier if it hadn't been for pals of his, though there's still not much to feel confident about at the agency.

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15. SEC Statement on the Case Against R. Allen Stanford

http://www.sec.gov/news/press/2009/2009-32.htm

FOR IMMEDIATE RELEASE
2009-32

Washington, D.C., Feb. 19, 2009 — The Securities and Exchange Commission today made the following statement regarding its enforcement action against Robert Allen Stanford:

"At the request of the SEC, Special Agents of the Federal Bureau of Investigation's Richmond Division today located and identified Stanford Financial Group chairman Allen Stanford in the Fredericksburg, Va., area. The agents served Mr. Stanford with court orders and documents related to the SEC's civil filing against him and three of his companies. The SEC very much appreciates the outstanding assistance of the FBI in this matter."

The SEC on February 17 charged Robert Allen Stanford and three of his companies, alleging a fraudulent, multi-billion dollar investment scheme. Stanford's companies include Antiguan-based Stanford International Bank (SIB), Houston-based broker-dealer and investment adviser Stanford Group Company (SGC), and investment adviser Stanford Capital Management. The SEC also charged SIB chief financial officer James Davis and Stanford Financial Group chief investment officer Laura Pendergest-Holt in the enforcement action.

The orders and documents that the FBI served on Stanford were the SEC's complaint, the memorandum of law filed with the complaint, the court order freezing assets, and the court order appointing a receiver.

The Honorable Reed O'Connor, U.S. District Court Judge for the Northern District of Texas, granted the SEC's request for emergency relief for investors, and issued the orders freezing assets and appointing a receiver over R. Allen Stanford and other defendants.

[Demeter]

5. Economic Porn

Oh where, oh where is the committee to save the world when we need it? ---Daily Reckoning.Com

[Demeter]

6. And Snark!

But Greenspan's successor wants to get his picture on the cover of TIME just as much as his former boss did. He's determined to beat the bust. If he can do it, TIME will probably give him the Man of the Year award. If he can't, he'll probably get the 'Schmuck of the Year' award from us.

He's tried cutting rates. In fact, he cut them more than Greenspan, who stopped at a nominal rate of 1%. Bernanke didn't stop. Once he had his chainsaw in gear, he just kept cutting...down to zero.

Greenspan didn't put in jeopardy the Fed's own balance sheet either. When he was running things, the Fed held only a bare minimum of Wall Street's junk assets. Now, they've got trillions' worth of them.

Nor did Greenspan resort so nakedly to printing money. The Bernanke Fed has already used "quantitative easing." Soon, the will embark on 'inflation targeting' too. No kidding. That's what it says in the paper. Bernanke is going to set a target for inflation ...say 3%...and keep the printing presses running hot until prices are rising by at least that much.

We never thought central bank management was a science. It certainly isn't. The theories that guide it are unproven in practice...and unbelievable in theory. Instead, it's all guesswork, bunkum and dead reckoning. Which is to say, the Fed will hit its target or we reckon the economy will be dead.

Maybe Ben Bernanke is a champion marksman...and maybe he isn't. We don't know, but if we were you, dear reader, we wouldn't stand too close to the target...if you know what we mean.


---Daily Reckoning.Com

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9. Alan Greenspan: The Oracle Or The Master Of Disaster?

http://www.huffingtonpost.com/2009/02/19/alan-greenspan-the-oracle_n_168168.html

On June 10, 1999, at the height of his power, Alan Greenspan told members of Harvard's graduating class how, in the future, they should assess their lives: "The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake."

At the time, Greenspan, 73, clearly thought he had lived up to his own standard. Four months earlier, on February 15, Time magazine had honored him with a cover story, presenting Greenspan as the de facto chair of the three-member "Committee To Save The World."

The American economy Greenspan had overseen for 12 years from his perch as chairman of the Federal Reserve was, by his description, "in the grip of what . . . Joseph Schumpeter, many years ago called 'creative destruction'.... This is the process by which wealth is created, incremental step by incremental step. It presupposes a continuous churning of an economy as the new displaces the old."

The free market, Greenspan told the graduating seniors, is a pillar of civilization which "presupposes the productive interaction of people engaged in the division of labor, driven -- I cannot resist the jargon -- by economic comparative advantage. This implies mutual exchange to mutual advantage among free people."

Greenspan's years of running the Federal Reserve, from August 1987 to January 2006, were a time of economic glory. On July 16, 2003, for example, when such other figures as Warren Buffett and George Soros were warning of the dangers of derivatives, Greenspan told the Senate Banking Committee, according to a transcript of the session:

"What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so. Prior to the advent of derivatives on a large scale, we did not have that capability. And we often had, for example, financial institutions, like banks, taking on undue risk and running into real, serious problems....


"The vast increase in the size of the over-the-counter derivatives markets is the result of the market finding them a very useful vehicle. And the question is, should these be regulated? Well, indeed, for the United States, they are obviously regulated to the extent that banks, being the crucial creators of these derivatives, are regulated by the banking agencies, but not beyond that. And the reason why we think it would be a mistake to go beyond that degree of regulation is that these derivative transactions are transactions amongst professionals. And the institutions which are involved have very considerable what we call counterparty surveillance, where, for example, one major bank will know far more about its customer, whether it's a bank or something else, than we could conceivably know as regulators. In a sense, this counterparty surveillance has become the crucial element which has created stability in that particular system."

Greenspan's tenure coincided with a period during which total wealth increased dramatically, although much of the growth was concentrated among the richest of the rich, not just the top one percent of the income distribution, but the top 0.1 percent.

The gross national product, in inflation-adjusted 2000 dollars, rose from $6.47 trillion in 1987 to $11.32 trillion in 2006, while unemployment fell by a substantial 1.6 percentage points, from 6.2 percent in 1987 to 4.6 percent in 2006. Corporate profits rose from $368.8 billion to $1.59 trillion, without adjusting for inflation.
Story continues below

The Dow Jones, which was just above 2700 when Greenspan took office in 1987, rose to over 11,000 in January, 2006, when he retired.

In one of his more controversial decisions, the Fed under Greenspan flooded the market with cash in the immediate aftermath of the 9/11 terrorist attacks and sharply cut interest rates as part of a worldwide effort on the part of central bankers to reinvigorate the global economy.

Now, three years after he left the Fed, Greenspan confronts a catastrophic legacy. All around him is the evidence of an extraordinary "trail of casualties" left in his wake -- men and women losing their jobs at a rate of half a million-a-month; foreclosures forcing Americans out of their homes; and the Dow plunged by 46.7 percent from its high of 14,164.53 on October 9, 2007.

The gross domestic product began to fall at an annual rate of 0.5 percent in the third quarter of 2008 and then accelerated to a 3.8 percent rate of decline in the fourth quarter; corporate profits fell by $160 billion from $1.67 trillion in the third quarter of 2007 to $1.51 trillion in the fourth quarter of 2008. The unemployment rate has risen from 4.7 percent in January 2006, when Greenspan retired, to 7.6 percent last month.

The Dow Jones Industrial Average, which reached a high of 14164.53 on October 9, 2007, has collapsed to 7,555.63 at the close of business Wednesday - a drop of nearly 47 percent.

Much of the blame has been aimed at Greenspan: "Because the Federal Reserve under Alan Greenspan pushed interest rates too low and kept them low for too long, and because regulation of financial intermediaries had over the years dwindled and became especially lax during the Bush Administration, the bankers were allowed, and competition forced them, to take risks that could have and have had disastrous results," wrote Richard A. Posner, Seventh Circuit Court of Appeals Judge.

Nobel Laureate Joseph Stiglitz adds other culprits as crucial to the making of the current economic crisis. Among them:

1) the April 1998, decision of President Clinton's Working Group on Financial Markets to quash a proposal by Brooksley E. Born, head of the Commodity Futures Trading Commission, to regulate derivatives;
2) enactment of Gramm-Leach-Bliley Act on November 12, 1999 allowing consolidation of commercial and investment banks;
3) passage of the Commodity Futures Modernization Act of 2000 removing derivatives from federal oversight;
4) the Bush tax cuts of 2001 and 2003;
5) the failure of the Federal Reserve to take responsibility for regulating derivatives; and
6) the Securities and Exchange Commission decision in April, 2004, to allow large investment banks to increase their debt-to-capital ratio from 12 to 1 to 30 to 1, or higher.

What each of these actions (and inactions) has in common is that Greenspan either initiated or endorsed them.

The rejection of Commodity Futures Trading Commission chief Born's proposal to regulate derivatives was backed by Treasury Secretary Robert E. Rubin and Securities and Exchange Commission Chairman Arthur Levitt Jr., both members of the Working Group on Financial Markets, but, according to most accounts, Greenspan led the charge.

Some argue that Greenspan was less an independent power in his own right than a reflection of the forces that have generally dominated the setting of banking regulation over the years.

Columbia economist Massimo Morelli, for example, contends that:

"allowing banks to become much more than banks and allowing investment banks to operate in an almost lawless environment were huge mistakes, and with large unfair distribution consequences....the strong financial lobbies have certainly had an impact on such mistakes, and so part of the responsibility goes certainly to the fed and treasury secretaries, but it would be hard for me to take sides on who or what institution was primarily responsible. The unfortunate point I would make today is that the same lobbies seem to be still very powerful, given the unfair distributional consequences of the TARP and the unwillingness of the decision makers in Washington to resolve the lending problems of this economy by a simple resort to swapping debt into equity, making the bank debt holders suffer to a greater extent than taxpayers."

Greenspan has struggled to come to terms with the economic collapse and his role in it.

Last autumn, with the economy in a tailspin, Greenspan remained remarkably sanguine, voicing little or no self-reproach for the possible consequences of his hands-off, free-market approach to the regulation of derivatives. In an October 2, 2008, speech at the Sandra Day O'Connor Conference at Georgetown University, Greenspan blamed a lack of trust, not a lack of regulation, for the financial meltdown, and predicted a quick turnaround (italics added):

"In a market system based on trust, reputation has a significant economic value. I am therefore distressed at how far we have let concerns for reputation slip in recent years. Reputation and the trust it fosters have always appeared to me to be the core attributes required of competitive markets. Laws at best can prescribe only a small fraction of the day-by-day activities in the marketplace. When trust is lost, a nation's ability to transact business is palpably undermined. In the marketplace, uncertainties created by not always truthful counterparties raise credit risk and thereby increase real interest rates and weaker economies.


"During the past year, lack of trust in the validity of accounting records of banks and other financial institutions in the context of inadequate capital led to a massive hesitancy in lending to them. The result has been a freezing up of credit. As I noted in my opening remarks, trust will eventually reemerge as investors dip hesitantly back into the marketplace. From that point, history tells us, financial and economic revival sets in. I suspect it will be sooner rather than later. In either event, human nature being what it is, revival will come. It always has in this society governed by that remarkable document we call the Constitution of the United States."

Just 21 days later, however, testifying before the House Oversight and Reform Committee on October 23, 2008, a suddenly chastened Greenspan appeared repentant and certainly no longer the defender of untrammeled laissez-faire.

In his prepared testimony, Greenspan told the committee:

"hose of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets' state of balance."

Under questioning by committee chair Henry Waxman, Greenspan was more explicit:

"Waxman: his is your statement. 'I do have an ideology. My judgment is that free competitive markets are by far the unrivaled way to organize economies. We've tried regulation. None meaningfully worked.'....Do you feel that your ideology pushed you to make decisions that you wish you had not made?


"Greenspan: Well, remember that what an ideology is. It's a conceptual framework with the way people deal with reality. Everyone has one. You have to. To exist you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is 'yes, I have found a flaw.' I don't know how significant or permanent it is. But I have been very distressed by that fact.....A flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak."

More recently, Greenspan had adopted a different tack. Once proud of his nickname, "The Oracle," and of his de facto chairmanship of the Committee to Save the World, Greenspan told CNBC that during the critical years leading up to the 2008 collapse, he was both ignorant of the scope of the problem and powerless to deal with it. An account of the CNBC program, first aired on February 12, 2009, reads:

"I remember my initial response when a staff member came up to me and he says, 'I don't know if you have seen something like this'," while showing the then-Fed chairman data that subprime mortgages represented 20 percent of all new mortgages. "I said, 'I don't believe that number,'" Greenspan recounted.

Asked if the Fed could have prevented the housing bubble, Greenspan pleaded powerlessness: "If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?...When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society -- would we have been able to do that? I doubt it."

Not only that, Greenspan contended on CNBC, but if the Fed had taken action, the results would have been disastrous: "We could have basically clamped down on the American economy, generated a 10 percent unemployment rate. And I will guarantee we would not have had a housing boom, stock market boom, or indeed a particularly good economy either."

Most recently, Greenspan's ideological journey has taken an abrupt left turn. On February 18, the Financial Times reported that the one-time libertarian devotee of Ayn Rand now thinks the government might be best advised to take over 'lemon' banks. "It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring," he said in an interview.

Now, there is no way to predict what the former Chairman will say in his next commencement address.

[Demeter]

17. THE LACK OF JOY IS UNIVERSAL

“Greenspan backs nationalization,” says a headline.

Well, that does it for us here at The Daily Reckoning . If Greenspan is in favor of it, we’re against it. No one man bears more responsibility for the present worldwide financial crisis and coming depression that Alan Greenspan.

The Fed’s job is to take the punchbowl away when the party gets too wild, said former Fed chairman William McChesney Martin. Greenspan did no such thing. As soon as the party began to quiet down and people began fumbling for their car keys, Greenspan added more rum to the punch and turned up the music. By the time the credit cops finally shut it down, people were dancing on tabletops all over the world.

And now, poor Mr. Obama has to deal with the headaches.

Yesterday, the Dow held steady. But the Dow is a bit of a fraud anyway. Failing stocks are routinely removed. In the present case, financial stocks slipped below $10 and were taken out of the index. Result: the index does not measure real world results...

[Demeter]

7. William Black: "There Are No Real Stress Tests Going On"

SUPPOSEDLY 100 ACCOUNTANTS ARE EXAMINING THE BOOKS AT CITI AND SUCH.

I THOUGHT THIS MIGHT BE A SNEAKY WAY TO GET THE BODIES IN PLACE FOR A BANK SEIZURE, BUT IF IT IS, IT HASN'T HAPPENED YET....


http://www.nakedcapitalism.com/2009/02/william-black-there-are-no-real-stress.html

By way of background, William Black is a former senior bank regulator, best known for his thwarted but later vindicated efforts to prosecute S&L crisis fraudster Charles Keating. He is currently an Associate Professor of Economics and Law at the University of Missouri - Kansas City.

More germane for the purpose of this post, Black held a variety of senior regulatory positions during the S&L crisis.He managed investigations with teams of examiners reporting to him, redesigned how exams were conducted, and trained examiners.

Via e-mail, he has confirmed our suspicions about the bank stress tests announced by Treasury Secretary Timothy Geithner: they simply cannot be adequate, given the number and experience of the staff, and perhaps as important, their relationship with the banks (see detailed comments below).

I also asked him about the fact that bank examiners examine banks (duh) and would not have much (any?) experience in the capital markets operations or sophisticated products that the big investment bank, now banks, participated in. Goldman and Morgan Stanley ought to be subject to these exams; Citi, JP Morgan, and Bank of America have large capital markets operations. These firms are where the biggest risks and exposures lie. Do the examiners what to look for in a even the low-risk operations, like repo desks, much the less derivatives and proprietary trading books? He agreed (as presented below) that it was a near certainty that this was beyond their skill level.

Now this begs the question: why has the Treasury Secretary set in motion an obviously bogus process? It suggests the result is pre-ordained.

One possibility is that even a very quick and dirty look at many of the big banks' books will reveal them to be in very bad shape. In fact, the inadequate staffing could be part of the private conversation: "You know we didn't send in enough bodies to do this right, and even using your numbers, which we can assume in some cases will be flattering, you look like a goner."

But all of Geithner's actions to date are inconsistent with him taking a tough stand. Having a lot of people party to a process that finds that some of the big banks are in trouble would be hard to keep secret (to my knowledge, none of these people have high level security clearances. Government employees and contractors in those cohorts do keep their mouths shut). So I think it is more likely that the banks will get scorecards that show them to be in various stages of peril, but none will be found to be terminal. (They can't be given a clean bill of health, that would call the whole rationale of the TARP and its various injections into question, and also would put Geithner at considerable risk if any bank declared OK fell over in less than 12 months).

But even the designation of "sick but not ready to be hospitalized" carries with it risk to the Administration. If the banks get sicker than anticipated, how can they explain it? They can't say, "oh, things got worse than we contemplated". The whole point of a stress test is to anticipate worst case scenarios. And it is pretty certain a fair number of the big banks will be on such large-scale life support by year end that it will be hard to make a case not to put them in receivership.

Whatever statement Geithner puts out about the results of the stress test is likely to come back to haunt him, as did Colin Powell's "there are WMD in Iraq" speech before the UN did. And Powell had a better reputation going into Iraq than Geithner has in prosecuting his war.

From William Black:

There are no real stress tests going on.

1) If you did a real stress test, as Geithner explained them, you wouldn't just have a $2 trillion hole -- you'd impose regulatory capital requirements of 50%. (FYI, the regulators have the power to set HIGHER individual capital requirements based on unusually large risks at a particular bank.)


Yves here. By implication, the results of anything approaching a true stress test, plus reasonable regulatory responses, would dictate radical action. We have not seen any corresponding groundwork laid for that sort of thing. Back to Black:

2) You can't conduct a meaningful stress test without reviewing (sampling) the underlying loan files and it seems likely that the purchasers of securitized instruments (not just mortgages) do not even have the loan file data. Moreover, loss ratios vary enormously depending on the issuer, so even a bank that originates (or has purchased a bank that originates) similar product cannot simply take its own loss rate and extrapolate it to the measure the risk on the value of securitized credit instruments.

3) The regulators are overwhelmed because of personnel cuts (particularly heavy among their best, most experienced examiners that had worked banks that had engaged in sophisticated frauds. Buyouts were common, because more experienced examiners appear more expensive. This isn't true when you consider effecitiveness and productivity, but management didn't care about that. Treat what I write after the colon as hearing from me at my most serious and thoughtful: it is vastly more difficult to examine a bank that is engaged in accounting control fraud. You can't rely on the bank's books and records. It doesn't simply take more, far more, FTEs -- it takes examiners with experience, care, courage, and investigative instincts and abilities. Very few folks earning $60K are willing to get in the face of the CEO and CFO making $25 million annually and tell them that they are running a fraudulent bank and they are liars. FYI, this is one of the reasons why having "resident examiners" never works. The examiners don't even get to marry the natives. They get to worship God's annoited. Effective examination is good for you, but it is very unpleasant, ala a doctor's finger up your rectum. It requires total independence.

So, the examination force doesn't have remotely the numbers or the relevant experience and mindset to examine the largest banks with the greatest problems.


Yves here. Black is not using the fraud word lightly. He believe that we have Enron-level accounting fraud happening, now, in the financial services industry. And we have asked repeatedly, why has there been no investigation of fraud at Lehman? There was a $100 billion plus hole in its balance sheet, meaning a substantial negative net worth, when its financial statements presented a completely different picture. Back to Black:

4) As Geithner describes the process, NO ONE can conduct reliable "stress testing." It inherently requires testing everything in every way any and all aspects of everything could conceivably interact. It also doesn't provide any meaningful output that can be operationalized (unless you want to force an enormous rise in minimum regulatory capital requirements, which he obviously doesn't want to do).

5) Examiners certainly can't A) do the stress testing that Geithner describes or B) evaluate the reliability of a large bank's proprietary stress test. If they were serious about constructing reliable stress tests, which they aren't, you'd require their analytics to be made public. You'd have the industry fund independent investigations by rocket scientists chosen by a committee selected by the regulators of the soundness of the analytics. You'd also have the industry fund competitions to rip them apart (a bit like we hire legit hackers to test security by trying to defeat it) and show where they produce absurd results. The geeks would have a field day (that would probably last a decade). There are probably zero examiners that have the modeling skills required to evaluate the most sophisticated stress test models. The concept that there are 100 examiners with these skills, suddenly freed up from all other duties, assigned to CONDUCT stress tests is a lie.

6) It is, however, possible to use even the less experienced examiners to conduct a far more useful examination of the quality and value of nonprime loans. My nightmare scenario which I fear is often true is that A) because the biggest originators of nonprime loans were mortgage bankers, B) because every large mortgage banker that specialized in nonprime loans went bankrups, C) because many of them went into Chapter 7 liquidations and even those that went into Chapter 11's had little incentive to hang on to files on mortgage loans they had sold to other entities -- the loan files on many nonprime loans may no longer exist. (My fervent prayer is that the loan servicers have tapes with copies of the underlying loan files, but I fear that this prayer will not be answered.) Under this nightmare scenario it will be extraordinarily hard to determine loan quality and losses and very hard to foreclose against borrowers that can afford attorneys (admittedly a minority) and that claim fraud in the inducement.


Yves again. Remember, aside from the discussion of the bank's risk models, he is still framing the stress test in terms of more or less traditional banking activities, that is, that most of the assets that need examining are loans. I asked for how he thought the examiners would fare with more complicated products, like CDOs, CDS, and derivatives. His comments:

Yes, few examiners understand more exotic products. In my experience, nobody understands all the products. I certainly don't, and if I did I'm sure my knowledge would be out of date within weeks.

The problem is compounded by the fact that understanding how the product is actually used (CDS is a good example) v. how its proponents picture it as being used is essential. Understanding its sensitivity to credit and interest rate risk is well beyond the ken. Understanding the liquidity risks and interaction effects is out of the question.

Examiners rarely know that financial risks are not normally distributed, but have far fatter tails. (Nor do they understand why this makes truncating the VAR a recipe for disaster.) Examiners rarely understand that any econometric analysis undertaken during the expansion phase of a bubble will invariably find the strongest positive correlation with the worst possible business practices (because those practices maximize accounting fraud).

We were, 15 years ago, able to get some strong capital markets people and give them advance training. We sent them out on exams, they impressed the industry -- and they were promptly hired away from us at substantial raises


Some countries have found ways around this problem, but they don't translate well to America. In Japan, the most prestigious jobs are in the top ministries, so they get and hang on to good people. In Singapore, Lee Kwan Yew felt he had to depart from the typical corrupt Asian government norm for Singapore to prosper. Top government bureaucrats are paid like top private sector professionals (think law firm partners). They are well enough paid (or have the prospects of being well enough paid) so as to have an incentive not to screw it up (tough internal audits also help).

[Demeter]

8. So Much For Stimulus: Chinese Loans Diverted to Stocks, Feeding Rally

http://www.nakedcapitalism.com/2009/02/so-much-for-stimulus-chinese-loans.html

The China bulls have commented approvingly on the growth in loans in China, seeing it as a sign of pending recovery, along with an upswing in stock prices. We've pointed out that economist and China commentator Michael Pettis has heard quite a few reports that many of these loans were in fact sham transactions to meet government targets.

And now it gets even better. One analyst estimates that more than 1/3 of the total "new" lending (assuming that the loans were truly extended) may have gone into the stock market.

From Bloomberg (hat tip reader Michael):

Chinese companies may be using record bank lending to invest in stocks, fueling a rally that’s made the benchmark Shanghai Composite Index the world’s best performer this year, according to Shenyin & Wanguo Securities Co.

As much as 660 billion yuan ($97 billion) may have been converted by companies into term deposits or used to buy equities, Li Huiyong, Shanghai-based analyst at Shenyin Wanguo, said in a phone interview today, citing money supply figures.

China’s banks lent a record 1.62 trillion yuan in January as part of a government drive to stimulate the world’s third- largest economy, while M2, the broadest measure of money supply, climbed 18.8 percent from a year earlier. The Shanghai Composite has surged 29 percent since the start of 2009, compared with a 10 percent decline in the MSCI World Index.

[Demeter]

11. Obama Bans Gimmicks, and Deficit Will Rise

I shamelessly stole this from roseBudd in LBN


Source: New York Times

WASHINGTON — For his first annual budget next week, President Obama has banned four accounting gimmicks that President George W. Bush used to make deficit projections look smaller. The price of more honest bookkeeping: A budget that is $2.7 trillion deeper in the red over the next decade than it would otherwise appear, according to administration officials.

The new accounting involves spending on the wars in Iraq and Afghanistan, Medicare reimbursements to physicians and the cost of disaster responses.

But the biggest adjustment will deal with revenues from the alternative minimum tax, a parallel tax system enacted in 1969 to prevent the wealthy from using tax shelters to avoid paying any income tax.

Mr. Obama’s banishment of the gimmicks, which have been widely criticized, is in keeping with his promise to run a more transparent government.



Read more: http://www.nytimes.com/2009/02/20/us/politics/20budget....

[MattSh]

30. Now they need to report real unemployment...

Not the phony cooked numbers they've been using for decades. You'd see the rate double (or more) overnight.

[Demeter]

37. Agreed. But Can People Face the truth?

Well, with everything going to pot, what's one more ugly number?

[tclambert]

73. I can't HANDLE the truth.

Long ago, I decided to take sides. I'm in favor of the killer robots. Human beings are a failed experiment. Let's move on.

[Demeter]

12. Why the Failure to Understand the Global Financial System?

"It is well enough that people of the nation do not understand our banking and monetary
system, for if they did, I believe there would be a revolution before tomorrow morning."
-- Henry Ford (1863-1947) Founder of Ford Motor Company

http://www.nakedcapitalism.com/2009/02/why-failure-to-understand-global.html

Some readers may take issue with the headline, but bear me out.

Within ten days of 1987 stock market crash, President Reagan established what was popularly called the Brady Commission to investigate the causes of the meltdown and recommend remedies. A little more than two months after it was created, the Commission submitted its report.

The 1987 crash was trivial in complexity compared to our current mess. Stocks trade on exchanges, so transaction sized, prices, and execution time are a matter of public record. Even though foreign markets swooned in sympathy with the US downdraft, the crisis was a domestic event.

Contrast the 1987 panic with our credit meltdown. The 1987 crash was a single country event, in transparent markets (equities and equity futures). This crisis revolves around multiple over the counter markets (asset backed securities, including securitized auto, student, residential and commercial real estate loans, CDOs, CLOs, CDS) that were originated and sold around the world. The authorities have an weak to non-existent picture of trading volumes and prices. In addition. they also do not have a good feel for the terms of the instruments themselves (these were privately negotiated agreements; unlike registered securities, the offering documents are not a matter of public record). And the lack of an understanding of the range and mix of types of deals impedes developing sound policy. For instance: it is widely known that many residential mortgage-backed securities contain restrictions on modifying mortgages. Admittedly, some do not prohibit them, but some bar them completely, others limit them to a certain percentage of the pool. But since these deals were all sold OTC with no document registry, no one knows what the distribution among these three types is.

I have complained for some time that it is inexcusable for the authorities to be fumbling in the dark as they are without trying to light a candle. One could argue that in the first two acute phases of the crisis (August-September 2007 and November-December 2007), the authorities. could tell themselves that their remedies would work, this would pass relatively quickly. like the Asian crisis (while the affected countries suffered a long aftermath, the international market disruption resolved itself much faster). But by the Bear failure, with other investment banks known to be in precarious shape, it was clear this crisis was not going to resolve itself quickly. That was when the need to get a better grasp on what was going on was undeniable.

Before readers say it would take too long and be too hard, consider: if you had a mysterious disease, would you rather have your doctor treat by analogy to common ailments or do the needed testing to come up with a diagnosis?

Even with a full court press starting in March 2008, it probably would have taken 6 months to get a better picture. It would be impossible to get a full picture in that time, but if one set investigation priorities well, one could have a great deal of insight on the key issues (most things in life are 80/20, meaning 80% of the value comes from the top 20%; there is no reason why an effort like this should be any different). And before you say regulators were overtaxed and lacked sufficient personnel, the Brady Commission was headed on a day-to-day basis by a Harvard Business School finance professor and staffed largely by junior-mid career people from the private sector with relevant analytical and industry knowledge (they were seconded from their firms; it was considered an honor and a career boost to participate).

A Financial Times comment recognized the same underlying problem, but suggests going about it in a different way. Otmar Issing and Jan Krahnen suggest putting in place mechanisms to capture information that would help give a better overview of the financial system, as opposed to just individual institutions. I am not convinced that the data gathering would create a "risk map" as they contend, but it would provide an enormously valuable database and should greatly reduce the number of regulatory blind spots (at least those due to lack of data).

From the Financial Times:

Consider the insights gained during this crisis. First, supervision has to focus on containing systemic risk rather than on avoiding individual bank defaults. Second, early warning signals need to be backed up by reliable information on all financial markets, including derivatives. Both aspects have been neglected in the past and continue to be neglected today.

Setting up a solid information base capturing global financial exposures is imperative. There is a long list of exposures that are not transparent today, for example the cross-border links between large, complex financial institutions (LCFIs) and the whereabouts of credit default swaps, collateralised debt obligations and other asset-backed securities. Putting together a global “risk map” displaying financial links among LCFIs as well as the most important risk drivers, such as asset price changes and yield spread dynamics, would enable authorities to carry out financial system stress tests.

The basis for the risk map would be a global database. We have proposed that standards be defined by a task force of experienced international agencies, such as BIS, the European Central Bank, the Organisation for Economic Co-operation and Development and the International Monetary Fund, allowing the data to be aggregated by region or by product. Data privacy conditions and capacity limits mean data collection must be defined on a discrete – for example, quarterly – basis. The risk map project could be chaired by the IMF. Data sharing could be on an aggregated level to preserve data privacy and to maintain a level playing field for international competition. Furthermore, data analysis would focus on an early warning methodology and a general assessment of systemic risk, which in turn could feed directly into the minimum capital requirement of international banks. Such a hard-wiring of systemic risk analysis to capital standards would allow supervisors to carry out counter-cyclical policies.

The control of systemic risk could be further enhanced by the use of a global credit register, which would essentially extend the risk map to exposures of banks with regard to large corporations. Existing credit registers are basically still national. This is an anachronism at a time when companies borrow and banks lend on a global scale.

Returning to our initial questions: have central banks and supervisors taken appropriate action to establish a reliable data foundation for systemic risk assessment? The answer is, unfortunately, no. Although 18 months have elapsed since the outbreak of the financial crisis, there is still no co-ordinated initiative.

What explains the reluctance of governments to get involved in a data generation exercise? The most likely explanation draws on the competitive situation in international financial markets, with governments aiming at preserving the competitive advantage of national banking industries.

Referring to the first question in the introduction, the answer is negative as well. We are still not prepared to avoid a disastrous financial crisis like the one that started 18 months ago.

However, in the interest of improved macro-prudential super vision, one can see at least what needs to be done. As the huge losses caused by the financial crisis forcefully show, macro-financial stability is a public good that has to be actively managed. The risk map is one element in such an endeavour, and a vital element for that matter.


OR, THEY COULD DO WHAT WE DO HERE---POOL ALL THE BITS OF INFORMATION IN OUR INDIVIDUAL KNOWLEDGE STORES...AND SHARE IT FREELY

[Demeter]

16. Who’ll Stop the Pain? By PAUL KRUGMAN

http://www.nytimes.com/2009/02/20/opinion/20krugman.html?_r=1


Earlier this week, the Federal Reserve released the minutes of the most recent meeting of its open market committee — the group that sets interest rates. Most press reports focused either on the Fed’s downgrade of the near-term outlook or on its adoption of a long-run 2 percent inflation target.

But my eye was caught by the following chilling passage (yes, things are so bad that the summarized musings of central bankers can keep you up at night): “All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.”

So people at the Fed are troubled by the same question I’ve been obsessing on lately: What’s supposed to end this slump? No doubt this, too, shall pass — but how, and when?

To appreciate the problem, you need to know that this isn’t your father’s recession. It’s your grandfather’s, or maybe even (as I’ll explain) your great-great-grandfather’s.

Your father’s recession was something like the severe downturn of 1981-1982. That recession was, in effect, a deliberate creation of the Federal Reserve, which raised interest rates to as much as 17 percent in an effort to control runaway inflation. Once the Fed decided that we had suffered enough, it relented, and the economy quickly bounced back.

Your grandfather’s recession, on the other hand, was something like the Great Depression, which happened in spite of the Fed’s efforts, not because of them. When a stock market bubble and a credit boom collapsed, bringing down much of the banking system with them, the Fed tried to revive the economy with low interest rates — but even rates barely above zero weren’t low enough to end a prolonged era of high unemployment.

Now we’re in the midst of a crisis that bears an eerie, troubling resemblance to the onset of the Depression; interest rates are already near zero, and still the economy plunges. How and when will it all end?

To be sure, the Obama administration is taking action to help the economy, but it’s trying to mitigate the slump, not end it. The stimulus bill, on the administration’s own estimates, will limit the rise in unemployment but fall far short of restoring full employment. The housing plan announced this week looks good in the sense that it will help many homeowners, but it won’t spur a new housing boom.

What, then, will actually end the slump?

Well, the Great Depression did eventually come to an end, but that was thanks to an enormous war, something we’d rather not emulate. The slump that followed Japan’s “bubble economy” also eventually ended, but only after a lost decade. And when Japan finally did start to experience some solid growth, it was thanks to an export boom, which was in turn made possible by vigorous growth in the rest of the world — not an experience anyone can repeat when the whole world is in a slump.

So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.

Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.

Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.

The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.

The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873. That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later.

You can see, then, why some Fed officials are so pessimistic.

Let’s be clear: the Obama administration’s policy initiatives will help in this difficult period — especially if the administration bites the bullet and takes over weak banks. But still I wonder: Who’ll stop the pain?

I DON'T THINK THE COUNTRY CAN WAIT THAT LONG, MYSELF

[Demeter]

18. PBS Video on Bear Stearns and the Meltdown--Instant History

http://informationclearinghouse.info/article22043.htm

[Demeter]

19. Get Ready for Mass Retail Closings

http://finance.yahoo.com/tech-ticker/article/187534/Get-Ready-for-Mass-Retail-Closings?tickers=sks,^gspc,jwn,tif,zlc

About 220,000 stores may close this year in America, says our guest, retail consultant Howard Davidowitz of Davidowitz & Associates. As more Americans save and spend less, it's clear there's too much retail space. Just visit Web site deadmalls.com and track retail's growing body count. And luxury retailers? They're on "life support," Davidowitz says.

Among the brandname stores Davidowitz says are in trouble:

*
Nordstrom
*
Neiman Marcus
*
Tiffany
*
Jeweler Zale Corp.
*
Saks
*
J.C. Penney
*
Sears

Plus, earlier we discussed:

* Retail goods on sale -- perhaps permanently.
* And the 'worst is yet to come:' Americans' standard of living permanently changed.

SEE VIDEO AT LINK

[Theres-a]

26. Dead malls

What a site. I saw Wonderland Mall on there.Sad.I remember getting my wedding dress there at Gantos in 92 and having lunch at Elias Bros Big boy afterward.

[Hugin]

62. I'm having a serious 'Dawn of The Dead' (The original movie) moment here...

http://www.labelscar.com/

[Dr.Phool]

27. A friend of mine owns a major accounting firm, with offices in 3 Florida cities.

He has a birds-eye view of just what is happening. It's worse than we think. A lot of these places are his clients.

He had his annual x-mas party in December, where he passes out a percentage of profits as bonuses to his employees every year. He told them all to brace for the worst. Save their money for expenses. There may not be any profits for bonuses this year. There may be fewer jobs.

[Hugin]

35. There's that 'saving' meme again.

Let's get this straight... Nobody is 'saving', at best people are buying food and at worst they're paying down their usurious debt... or trying to.

This 'saving' thing needs to be put to rest.

[Demeter]

20. Oliphant Picking on GM and Chrysler

What do you think? Is the scorn heaped on the auto makers deserved?

[Demeter]

21. G.M. To Cut 47,000 Jobs While Chrysler Will Dump 3,000 Positions

http://www.citynews.ca/news/news_32166.aspx

One thing is certain about the plan top officials at GM and Chrysler have come up with for restructuring and staving off bankruptcy - it's going to come with a huge price tag both monetarily and from the workforce.

The two companies had until Tuesday to justify the multi-billion dollar bailouts being given to them in the U.S.

And late in the day, General Motors delivered the news that will make auto towns like Oshawa and St. Catharines cringe. The world's biggest car company says it will need between US$16.6 and $30 billion in federal aid to get back on all four wheels - and it will have to shed a startling 47,000 positions to do it. It will also close five plants but won't say which ones.

It's not clear how many of those jobs will come in Canada.

Under the plan, G.M. hopes to start repaying its massive loans by 2012, with a goal to be over the debt completely by 2017...

HOW DOES THIS SAVE JOBS? ANYONE? ANYONE? BUELLER?


LINK INCLUDES TOTAL GM PLAN DOCUMENT

[Demeter]

22. Goodyear posts loss, plans 5,000 job cuts

http://news.yahoo.com/s/nm/20090218/bs_nm/us_goodyear

DETROIT (Reuters) – Goodyear Tire & Rubber Co plans to cut 5,000 jobs worldwide in 2009, or 6.7 percent of its staff, after a prolonged downturn in vehicle demand led to a deeper-than-expected loss in the fourth quarter.

Goodyear (GT.N), the largest U.S. tire maker, said it would freeze salaries worldwide and cut production capacity as part of efforts to reduce costs by $700 million this year. The target adds to $1.8 billion of cost savings completed over the past three years.

[tclambert]

31. I've been generally defending the automakers.

We need manufacturing. We need jobs. We need unions. And their current problems are not the stupidity from years ago. Even the Japanese automakers are seeing sales decline 30 and 40 per cent in this recession that predatory mortgage lenders and crazy bankers created.

Yet, despite all that, I vote deserved. If you have to ask for that much help, you deserve some ridicule.

The problem I have is that the financial sector has received far, far larger handouts and much less grief from Congress and the White House. Yeah, go ahead and make the car companies jump through those hoops, but make the banks jump through 20 times as many hoops.

[Hugin]

33. I'd say 20 times as many -flaming- hoops... and make sure they're up high too.

Right at chin level...


I just read in the Newsweak, Stress is good for 'em. (My fictional contribution for today.)

http://www.newsweek.com/id/184154

Edit to add link and comment: Sure! Leading stressful lives is why those who have the least stress in their lives are consistently shown to live the longest in honest-to-goodness scientifical studies... Time and time again. I'm filing this pablum under the 'Economic Crisis Feel Good Stories' AnneD, Myself, and others have been saying would begin to appear in our hollow Corporate Media.

[Hugin]

38. The Corporate Media's next stop... 'Up by the Bootstraps."

Coming soon.

[Demeter]

51. The "Naked" Truth About Auto Bailout

Yves from naked capitalism:

So Geithner and Summers have made themselves the point men on this one, which could easily have been largely delegated to guys who knew something about the car business. The consequence is that they have less time to spend on what ought to be the top priority, namely, what to do about the financial system.

MEOW!

[Demeter]

23. BoJ to buy Y1,000bn of corporate bonds

http://www.ft.com/cms/s/0/77176940-fe44-11dd-b19a-000077b07658.html


By Michiyo Nakamoto in Tokyo

Published: February 19 2009 05:19 | Last updated: February 19 2009 19:53

The Bank of Japan on Thursday stepped up measures to help embattled companies suffering in the credit crisis, with plans to buy up to Y1,000bn ($10.6bn) in corporate bonds and extend its emergency purchases of other assets from financial institutions.

In a sign of its alarm over the economic outlook, the BoJ said it would buy corporate bonds rated A and higher from next month. It will extend its programmes to buy commercial paper and provide unlimited collateral-backed loans to financial institutions...

[Demeter]

25. Germany drafts bank takeover law

http://english.aljazeera.net/news/europe/2009/02/200921817362186380.html



Germany has approved a draft law allowing the forced nationalisation of banks, saying it would use its new powers to take control of giant propery lender Hypo Real Estate.

The legislation, which was backed by the cabinet of Angela Merkel, the German chancellor, on Wednesday must still be approved by parliament.

The move is the latest example of state intervention in the banking sector as countries across the world abandon free-market principles and move to shore up institutions seen as crucial to the functioning of their broader economies.

With regard to taking control of Munich-based Hypo, Merkel said: "We examined this very carefully and I don't believe we have any alternative."

Dire straits

Hypo has so far received $128bn in guarantees from the state and fellow banks over the past year, but remains in dire financial straits.

In video


Job-loss fears take toll on European workers
Berlin has said the bank, which was hit hard by its exposure to the collapsing mortgage market in the United States a year ago and has spiralled downwards since, cannot be allowed to fail because of its key role in German bond markets.

But taking control of Hypo and preventing it from absorbing more taxpayer money has been complicated by the fact that JC Flowers, the US private equity firm, owns a quarter of its stock.

Berlin has been negotiating with Flowers, which bought the stock last June for $28-a-share before it plummet to just above $1.25, but has yet to reach a settlement.

Before taking a decision to confiscate the bank, Berlin has vowed to explore all other options.

The favoured solution appears to be a process which would push up the state's holding and allow it to squeeze out other shareholders....

[Demeter]

24. Court's 'rocket docket' blasts through foreclosures

http://www.heraldtribune.com/article/20090219/ARTICLE/902190341/2055/NEWS?Title=Court-s-rocket-docket-blasts-through-foreclosures


FORT MYERS - Hoping to save her house, Saundra Hill Scott arrived at the county courthouse clutching dog-eared mortgage bills and letters from her lender.

She need not have bothered. The foreclosure hearing lasted less than 20 seconds, with Judge John Carlin asking her two questions: Are you current on your mortgage and are you living in the home? She answered no and yes and then offered to show him her paperwork.

"I don't need to see that. That's between you and the bank," he said as he gave Hill Scott, her husband and three grandchildren 60 days to work out a deal with their lender or vacate their three-bedroom house.

As the Obama administration unveiled its plan to rescue the U.S. housing market, officials in Lee County have come up with their own plan for dealing with the crisis. To clear a huge backlog of foreclosures, judges are hearing "rocket dockets" of nearly 1,000 cases per day and calling retired colleagues back to the bench to help ease the workload....

[Hugin]

40. Well, after the judges finish they can take their place at the end of the soup line...

They can expect some dirty looks from those they've put in line ahead of them.

:hmmpf: You'd think the judges would know they're largely paid through taxes... Unless they're on the scam like those charming juvenile court judges in PA.

[Ghost Dog]

28. Morning (5th) rec.

After a another disturbed night's sleep,

and coffee and cigarettes. Off to the local eco-fruit & veg. & eggs stall in the next village now.

[Demeter]

39. Morning! Treat Yourself Well, You Deserve It

[MattSh]

29. And a 6th, while we're at it... n/t

[Hugin]

32. Eighth!

Wow! :thumbsup:

[Dr.Phool]

34. Ten and good morning!

[Hugin]

36. Morning Dr.Phool.

:donut:

:hi:

[Demeter]

41. Good Heavens! Ten?

Everybody feeling that perpetual anticipation again?

We're anticipating another snowstorm here. It's bitter cold yet again. I haven't checked to see if the snowdrops have retreated back into the ground. I would, if it were possible.

Maybe it won't snow. Maybe Citibank will still exist on Monday. Stranger things have happened!

[Dr.Phool]

60. Those crazy Ann Arbor people.

I just talked to a guy and young daughter at the dog park. They're down here visiting his father this week.

It wasn't even 60 degrees this morning, and they actually thought it was warm. They're in shorts and a t-shirt. I'm wearing 2 sweatshirts and jeans.

Crazy people!

[Tansy_Gold]

66. Snowbirds are easy to spot

They're walkin' around in shorts and tank tops while us year-rounders are huddled in sweatshirts, parkas, mittens.


Tansy Gold, in sunny AJ where it could hit 80 by mid-afternoon

[Demeter]

42. Obama tells Treasury to begin cutting taxes

http://news.yahoo.com/s/nm/20090221/ts_nm/us_obama_2

WASHINGTON (Reuters) – President Barack Obama ordered the U.S. Treasury on Saturday to implement tax cuts for 95 percent of Americans, fulfilling a campaign pledge he hopes will help jolt the economy out of recession.

The tax cuts are part of a $787 billion economic recovery plan passed by the Democratic-controlled Congress over Republican opposition. The aim is to put more money in the pockets of Americans and stimulate the economy by increasing consumer spending.

"I'm pleased to announce that this morning the Treasury Department began directing employers to reduce the amount of taxes withheld from paychecks, meaning that by April 1st, a typical family will begin taking home at least $65 more every month," Obama said in his weekly radio address.

"Never before in our history has a tax cut taken effect faster or gone to so many hard-working Americans," he said....

[Hugin]

43. I can hear the Banks chuckling now...

Hey! These people will have $65 more a month! Fees! More Fees!

If it was just me saying this... I wouldn't worry. But, it's also Thom Hartmann's take on it. Either that or employers will gradually cut pay to absorb the differential. That's historically what has happened.

[Demeter]

46. It's the Thought that Counts

[Hugin]

49. I'll mention that thought down at the courthouse.

Maybe the Judge will be more sympathetic at a Foreclosure Hearing.

[Dr.Phool]

61. Progress Energy (electric) already beat them to it.

First of the year we got a 25% surcharge added on. Just in time for the Social Security increases.

[Demeter]

44. I've Got a Musical Choice for Today

Evil Ways by Santana

You've got to change your evil ways... baby

Before I stop loving you.

You've go to change... baby

And every word that I say, it's true.

You've got me running and hiding

All over town.

You've got me sneaking and peeping

And running you down

This can't go on...

Lord knows you got to change... baby.



When I come home... baby

My house is dark and my pots are cold

You're hanging ÚFFFFEBround... baby

With Jean and Joan and a who knows who

I'm getting tired of waiting and fooling around

I'll find somebody, who won't make me feel like a clown

This can't go on...

Lord knows you got to change


<embed src="http://www.metacafe.com/fplayer/yt-rzE2RApyyu4/evil_ways_carlos_santana.swf" width="400" height="345" wmode="transparent" pluginspage="http://www.macromedia.com/go/getflashplayer" type="application/x-shockwave-flash"></embed><br/><font size="1">
<a href="http://www.metacafe.com/watch/1891966/evil_ways_carlos_santana/">Evil Ways - Carlos Santana - video powered by Metacafe</a></font>

[Hugin]

47. Get off my brain waves!

:tinfoilhat:

:spray:

That is -exactly- the song which has been lurking in my mind for the last couple of days looking for an opportunity to be slathered up in the SMW or here.

[Hugin]

57. Alternate Musical Choice: "Stuck in the Middle With You" -- Stealers Wheel.

"Stuck in the Middle With You" -- Stealers Wheel

"Well I don't know why I came here tonight,
I got the feeling that something ain't right,
I'm so scared in case I fall off my chair,
And I'm wondering how I'll get down the stairs,
Clowns to the left of me,
Jokers to the right, here I am,
Stuck in the middle with you.

Yes I'm stuck in the middle with you,
And I'm wondering what it is I should do,
It's so hard to keep this smile from my face,
Losing control, yeah, I'm all over the place,
Clowns to the left of me, Jokers to the right,
Here I am, stuck in the middle with you.

Well you started out with nothing,
And you're proud that you're a self made man,
And your friends, they all come crawlin,
Slap you on the back and say,
Please.... Please.....

Trying to make some sense of it all,
But I can see that it makes no sense at all,
Is it cool to go to sleep on the floor,
'Cause I don't think that I can take anymore
Clowns to the left of me, Jokers to the right,
Here I am, stuck in the middle with you.

Well you started out with nothing,
And you're proud that you're a self made man,
And your friends, they all come crawlin,
Slap you on the back and say,
Please.... Please.....

Well I don't know why I came here tonight,
I got the feeling that something ain't right,
I'm so scared in case I fall off my chair,
And I'm wondering how I'll get down the stairs,
Clowns to the left of me,
Jokers to the right, here I am,
Stuck in the middle with you,
Yes I'm stuck in the middle with you,
Stuck in the middle with you."

http://www.stlyrics.com/lyrics/reservoirdogs/stuckinthemiddlewithyou.htm

YouTuber's Edition: http://www.youtube.com/watch?v=xMrm7ZQ0aMA

[tclambert]

74. Hey, I sing that one to myself a lot while driving.

But I always picture Mr. Blond doing his little dance.

The other song I've been singing, at the top of my lungs thus disturbing anyone wandering too close to the road, is Puff the Magic Dragon. What does this mean, I wonder?

I've also added a couple more verses:

Puff the Magic Dragon,
Lies sleeping by the shore,
And dreams about a little boy,
Who won't play with him any more.

Little Jimmy Paper,
Whose father's name is Jack,
Went looking for adventure,
and brought that dragon back.

Together they now travel,
By land and sea and air.
Since Jimmy woke the magic up,
The pair go everywhere.

Puff the Magic Dragon
Lives once again.
As long as there are little boys,
His tale will never end.

[Hugin]

76. You and Gaylord "Greg" Focker's F-I-L have that in common.

"-in the car listening to "Puff the Magic Dragon"-
Greg Focker: Who'd have thought it wasn't about a dragon.
Jack Byrnes: Huh?
Greg Focker: Well some people think that 'to puff the magic dragon' means to... puff... smoke... a marijuana cigarette.
Jack Byrnes: Puff is just the name of the boy's magical dragon... You a pothead, Focker?
Greg Focker: No, I pass on grass always. Well not always.
Jack Byrnes: Yes or no?
Greg Focker: No, um, yes, um..."

;)

From: http://www.imdb.com/title/tt0212338/

Edit: Damned square brackets.

[DemReadingDU]

45. General Growth Properties has defaulted on loans

posted in Economy forum by FieldsBlank
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x57835


Good morning everyone!

:hi:

[Demeter]

48. Aggressive Reductions of Principal in Mortgage Mods Reduces Borrower Recidivism

http://www.nakedcapitalism.com/2009/02/aggressive-reductions-of-principal-in.html

Yves Says:

I've been asserting for some time, based on the comments from mortgage counsellors, that mortgage mods that do not substantially reduce principal balances don't make enough of a difference to the borrower to change outcomes. And with banks and servicers looking at 40%+ losses on many foreclosures, they can reduce principal a lot and still come out ahead.

Mortgage servicers have been experiencing high recidivism rates on loan mods, leading commentators to say that mods don't work. However, it has been reported (Calculated Risk) that many of the so-called mods were payment catch up plans, and not true mods, but the composition of the balance was unclear. Thus it was similarly not certain whether my view was correct.

Some support comes from Wilbur Ross, no soft touch, but a distressed investor (they are not called vultures in polite company). He owns American Home Servicing, the biggest third party servicer in the US. He also offers a program for how to deal with the housing crisis.

Note that American Home Servicing has done a lot of loan mods. Ross makes no mention of the supposed legal obstacles to making mods. That suggests the issue is way overblown (as in investors in theory might sue, but no one is a big enough holder in any one trust for it to be worth the trouble). That also indicates the real obstacle is some combination of servicer greed (lack of financial incentives to do mods, costs of adding staff to do mods) and concerns about impact to bank balance sheet. Recall that AHS is third party. Most other big servicers are part of big banks. If the servicer starts offering mods, say, with 25% principal reductions, it would suggest that any similar loans held by the parent bank ought to be marked down to the same level.

From HousingWire:

Ross has plenty of skin in the mortgage servicing game, as he owns Irving, Tex.-based American Home Mortgage Servicing, Inc., which recently became the nation’s largest third-party servicer with the acquisition of a large portfolio from Citigroup Inc. (C: 2.51 -13.75%). See earlier coverage.

Last week, Ross told HousingWire in an interview that he thinks the best way to motivate lenders, servicers, and homeowners work together on modifications requires far more than what’s been proposed so far. In particular, he believes that what’s needed is aggressive principal modifications for borrowers most in need. He has said that his American Home servicing shop has seen six-month recidivism rates below 20 percent — compared to the 50 or 60 percent standard in the industry — because the servicer has been aggressively looking to cut principal balances.

“The price of housing needs to be cleaned out. The Obama administration could right-size every underwater home and reduce principal to fit the current market value of the home. If they are going to deal with it they have to deal with it in a severe way,” Ross told HousingWire. “They also really need to consider all borrowers who are underwater, and not just the ones that have gone into default.”

The Homeowner Affordability and Stability Plan does some of that, but doesn’t go far enough, Ross suggested. “The have to reduce the principal amount of loan, not just nonperforming loans, but also performing ones,” he told CNBC. “Why should a guy who’s not paying benefit, while some poor citizen who’s struggling to make the payments gets stuck with the mortgage?”

His own plan looks something like this:

1. The lender takes a write-down in principal, and the servicer takes a similar hit on any servicing strip on the newly-reduced UPB.

2. After principal reduction, the government guarantees half of the remaining principal the lender now holds.

3. This guarantee of half the principal can now be sold into the securitization market, which will give the lender an income stream on the home again and offset some of the losses the owner of the loan has to take when they write down the principal.

4. When the house is sold, if the value of the home has gone up at the point of sale, the homeowner and the lender share in the profits earned on the gain.


Ross isn’t the first to suggest an home equity sharing plan, and there are clearly strong complexities in how any such plan would be put together, particularly as it relates to second lien holders and/or investors in junior bond classes. But the fact that a large investor with such a strong hand in the servicing business is suggesting it’s possible at all to accomplish is something that perhaps bears more attention than the idea has been getting as of late.

[Demeter]

50. Paul Volcker Speaks at Columbia U

http://www.youtube.com/watch?v=WW1003o7ZzQ


Volcker sees crisis leading to global regulation
http://finance.yahoo.com/news/Volcker-sees-crisis-leading-apf-14430040.html

http://blogs.wsj.com/economics/2009/02/20/volcker-not-cheering-for-a-little-inflation/

Volcker: Not Cheering for ‘a Little Inflation’

It’s been a common witticism in recent months: When asked about the possibility of pernicious inflation down the road as a result of the massive amount of money being pumped into the financial system right now, most economists and analysts brush off the question and slyly remark that they’d welcome a little inflation at this point, as a sign the U.S. economy was rebounding rather than getting mired in a deflationary trap.

But Paul Volcker, longtime Federal Reserve chairman now hailed for his aggressive actions to kill inflation in the late 1970s and early 1980s, doesn’t seem to be amused. Mr. Volcker, who is also part of President Obama’s economic team, was the keynote speaker at Columbia University’s sixth annual Center on Capitalism and Society conference, held Friday in New York. He touched on the “shocking” international nature of the current crisis, adding “I don’t remember any time – maybe even the Great Depression – when things went down quite so fast and quite so uniformly around the world.”

Yet he cautioned that the Fed shouldn’t lose sight of a key part of its mandate — to fight inflation. “I think ‘a little inflation’ is bad, because a little inflation means some more inflation,” he said. “I don’t think here’s any arguing for a little inflation solving our problems in any realistic sense.”

“I don’t want to lose the accomplishment of the last 30 years of the central importance of price stability and the role of an independent central bank in maintaining that price stability,” he said.

[Demeter]

52. Did Ben Bernanke Pull the TARP Over Eyes? Dean Baker

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2009&base_name=did_ben_bernanke_pull_the_tarp

The Facts:

The week that Lehman Brothers went under and AIG collapsed, Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernacke wne to Congress and told the leadership that the financial system was collapsing and that Congress had to take immediate action to avert economic collapse. That weekend, Secretary Paulson put in a request for $700 billion for a bailout program with no strings attached.

Over the next two weeks Congress debated the bill, adding some provisions that were ostensibly designed to constrain Treasury for example by limiting executive compensation at the banks getting public funds and also limiting the extent to which banks could profit off these funds. Many members of Congress, and millions of people across the country, objected that the restrictions were inadequate. Congress ended up approving the bill, based on the claim that the need for the money was urgent and there was insufficient time to produce a better bill.

One of the important factors behind the urgency was the claim that even healthy non-financial companies (e.g. Verizon or Boeing) could not borrow in commercial paper markets to get the credit they needed to meet their payrolls and pay their other bills. Ben Bernanke contributed to this view when he answered a question at a press conference:

"I see the financial markets as already quite fragile. The credit markets aren't working. Corporations aren't able to finance themselves through commercial paper."

The weekend after Congress passed the TARP, Bernanke announced that the Fed would begin to directly buy the commercial paper of non-financial corporations.


The Conspiracy Theory:

Bernanke was working with Paulson and the Bush administration to promote a climate of panic. This climate was necessary in order to push Congress to hastily pass the TARP without serious restrictions on executive compensation, dividends, or measures that would ensure a fair return for the public's investment.

Bernanke did not start buying commercial paper until after the TARP was approved by Congress because he did not want to take the pressure off, thereby leading Congress to believe that it had time to develop a better rescue package.


New Evidence for the Conspiracy Theory.

At a speech at the Press Club this week, Bernanke was asked why he waited until after the TARP was approved before he began buying up commercial paper of non-financial corporations. He responded:


"Well, look at the calendar. The financial crisis intensified in mid-September and got worse to the point where there was a huge global financial crisis in early October. During that interim, Congress passed the Emergency Economic Stabilization Act, which includes the TARP. And that TARP, the money there was very useful in helping to stabilize the banking system in early October. There was this critical moment. I think it was about the 14th of October, following a G7 meeting here in Washington, where not The United States but countries around the world took very strong actions in terms of capital, in terms of guarantees and other actions to try to stabilize the world banking
system.

It was during this period that the commercial paper market and the money markets, money market mutual funds showed the worst stress. It was in those 18 weeks that that stress appeared and those markets began to dysfunction. And we can't set these programs up immediately. It takes a bit of time to get them structured legally and to arrange for the market terms and to work with market participants and so on. But we got it going actually quite quickly. It's been now more than three months since the commercial paper facility has been functioning. And it seems to have had notable impact on both commercial paper rates and on the terms of finance available."

This statement, that the commercial paper market first seized up in October would seem to contradict Mr. Bernanke's statement of September 24th: "Corporations aren't able to finance themselves through commercial paper."

The question here: why aren't any reporters asking questions about this?

--Dean Baker


OF COURSE THEY DID! NO TINFOIL NEEDED.

[tclambert]

75. The Bush administration promoted a climate of panic?

Surely our former fearless leader would not allow such chicanery.

Yet, somehow it sounds familiar. Tell me, did this banking crisis have a color code associated with it?

[Demeter]

54. Career Options for Ex-Wall Street Workers By MICHAEL WILSON

http://www.nytimes.com/2009/02/21/nyregion/21retrain.html?_r=1&hp


This week’s news that the city plans to spend $45 million to retrain jobless Wall Street executives may, understandably, have been met with less than sobs of gratitude in that demographic. After all, as the happily divorced like to say, stick a fork in a toaster once, it’s an accident. But a second time?

Ross Baltic, a managing partner with Mercury Partners, a headhunter in Midtown, said the simplest transition might be the most straightforward: Analysts for investment banks might leap to the industries they analyzed, traders might move to the companies they bought and sold. “They may know the pharmaceutical industry, they may know aerospace and defense,” he said. “You may have skill sets and be able to transfer those to those sectors.”

But while Mr. Baltic said laid-off Wall Street workers had been calling “like you couldn’t imagine,” he acknowledged that executive headhunters were often of little help these days.

“We’re long on candidates and short on jobs,” he said.

While many of the tens of thousands of masters of the unemployed universe would most likely happily return to doing what they know, others may be looking for a change of pace. Here then, some possibilities for recycling a Wall Street résumé:

Lead walking tours amid the ruins of your past life. Who better to show people around the financial district than someone who has worked — who has bled — on the very spot?

Maybe, said Seth Kamil, founder of Big Onion Walking Tours. But Big Onion tour guides must have advanced degrees in history.

“We’ve actually gotten a couple of résumés from no-longer-employed Wall Streeters,” Mr. Kamil said. “I’ve been kind of graciously trying to say, ‘Working on the street just doesn’t do it.’ ”

Become a butler. “Somebody coming from the Wall Street arena typically would have management background,” said Keith Greenhouse, president of the Pavillion Agency, which trains and places household employees, including chefs, personal assistants, nannies and butlers. “It could tie in, indeed, to personal service.”

It can be a handsome living. “Butlers are starting at around $70,000 on the low end, to upwards of $150,000 a year,” Mr. Greenhouse said. “I’ve got to tell you, the salaries are terrific. A really good nanny could make $100,000-plus a year, plus benefits. That’s a top nanny.”

Of course, there is the possible awkwardness of a man used to having someone light his cigar for him suddenly finding himself on the other end of the match. But Mr. Greenhouse said he was used to riches-to-rags sorts crossing his threshold: “Divorcees coming in who were married to multimillionaires. All of a sudden they need to go to work and they come to us looking for a personal assistant job: ‘Oh, I know about this because I’ve had the rich lifestyle myself. I know how to take care of rich people’s affairs.’

“I’ve had people that come from all sorts of career paths and all of a sudden they want to be a butler,” he added. Speaking of cigars:

Sell cigars. Great idea, said Anthony Cee, manager at Florio’s in Little Italy, which contains the Three Little Indians Cigar Shop. The image of the Wall Street big shot, the Gordon Gekko type, is exactly what his store likes to project.

“Most of them are cigar smokers, so the education is there,” he said. “If you smoke cigars, I would say frequently you know a little bit about cigars. Professionalism is everything. ‘Dress to impress,’ that’s my motto.” One little problem: no one is buying cigars.

“We have no openings at all,” Mr. Cee said. “Different times, we help everybody. We had a lot of regulars who are out of work right now.”

Shred documents. No one knows sensitive paperwork like a Wall Street veteran. Just ask Al Vari, a salesman with Code Shred, whose service area includes Lower Manhattan.

“I spent 25 years on Wall Street, and now I’m in the shredding industry with two friends of mine,” he said. “It’s not an easy business. It’s a service industry. It’s a trucking company. You send out trucks to shred documents for people who have to shred them by law, or are, in a sense, paranoid.” Mr. Vari warned, however, that this is not a career for a person who has pushed a pencil all his life. “It’s done by a truck driver,” he said. “It’s a labor job.” He considered a possible Wall Street applicant. “These guys, the worst thing that’s happened to them is lead poisoning or deteriorated livers.”

Someone, however, does have to sell the service. “To be an outside salesman, to have contacts in the industries, they could probably make a living,” Mr. Vari said. “Not what they were making on Wall Street though, I’ll tell you that.”

Entertain small children. Because even sad clowns are a hoot at a birthday party, said Gary Pincus, owner of the Send In the Clowns Entertainment Corporation, which plans parties in the metropolitan region....

[Demeter]

56. The return of capital controls Willem Buiter

http://www.voxeu.org/index.php?q=node/3104

It looks like capital controls for central and eastern European countries as well as emerging markets everywhere. This column argues that imposing capital outflow controls – while sometimes unavoidable – discourages future capital inflows and creates rents. This is why they should be explicitly made temporary.

When Iceland’s banking system and currency collapsed last September, a key component of the emergency package that was introduced under the auspices of the IMF was controls on capital outflows, implemented through rigorous foreign exchange controls. This made sense. The currency was in free fall. The foreign exchange markets had seized up. There was no level of domestic interest rates the Central Bank of Iceland (which had zero credibility at this stage) could set that would induce domestic and foreign investors to hold on to their Icelandic kroner rather than converting them into euro, US dollars, sterling or any other serious convertible currency.
Capital controls in Central and Eastern Europe

Iceland is about to have company. The most likely candidates for the imminent imposition of capital controls are in Central and Eastern Europe (CEE) and among the CIS countries. We can expect to see capital controls imposed even by some of the EU members from Eastern Europe that have not yet adopted the euro as their currency (the Baltics, Bulgaria, the Czech Republic, Hungary, Poland, and Romania).

All these countries have banking sectors that are overwhelmingly foreign-owned. With the de-globalisation and repatriation of the cross-border banking sector that is underway, parent banks (mainly in Western Europe) have become progressively less able and/or less willing to finance their subsidiaries in Central and Eastern Europe. The resulting financial stresses in the host countries have led the ECB to take the extremely unusual step of making swap facilities available to the central banks of two non-Eurozone EU members, Hungary and Poland. Hungary, which suffers from long-standing fiscal incontinence, has an IMF program as well.

The financial support from the ECB (and from the EC) is probably not unrelated to the fact that a number of Eurozone commercial banks are heavily exposed in CEE and the CIS. Austrian banks, in particular, have a massive exposure to the former Austro-Hungarian empire, as does Unicredit (an Italian bank) and several Nordic banks are at risk throughout the region, from the Baltics to Ukraine.

In most CEE countries, households and non-financial corporations played the reverse carry trade by borrowing in the foreign currencies with the lowest interest rates, oblivious to the exchange risk this involved. These CEE counterparts of Mrs Watanabe did so without having any natural foreign exchange hedges (foreign currency assets or income) and without taking out any synthetic hedges. Households throughout CEE have Swiss-franc-denominated residential mortgages. I am surprised there weren’t more yen-denominated residential mortgages taken out! With the sharp decline in the external value of their currencies (the Polish zloty has declined against the euro by more than 35% since its peak in mid-2008, the Hungarian forint by 26% and the Czech koruny by 22%), the real value of their debt and debt service has increased sharply. Fortunately, most of these mortgages have long remaining maturities.

The same does not hold for the foreign currency debt taken on by the non-financial corporate sector in CEE. Much of this has a short maturity. In addition, during the period prior to the middle of 2008, when their currencies were appreciating, many CEE corporates bet on further appreciation of their currencies by writing puts on them. With their currencies way down, these corporates find themselves having to buy zloty, say, from the buyers of these puts, in exchange for euro at a much higher price for the zloty in terms of the euro than the current spot exchange rate, let alone the exchange rate anticipated when these CEE corporates wrote the puts. A further collapse of the currency would raise the likelihood and incidence of defaults among corporate borrowers.

he banks in CEE may have both assets and liabilities denominated to a large extent in foreign currency. Because their clients are not currency-matched, the banks have replaced currency risk on their balance sheets with credit risk.

Some of the CEE countries were the victims of wild domestic credit and asset market booms and bubbles even before they were hit by the global credit crunch (through the drying up of funding for the local subsidiaries by the parent banks). Latvia is the most extreme example, but Estonia and, to a lesser degree Lithuania, were also caught up in classic, post-reform unsustainable emerging-market booms, with out-of-control construction industries and epic current account deficits. Bulgaria, which like the Baltics has a currency board vis-à-vis the euro, Romania and Poland (both with floating exchange rates) also ran growing current account deficits that had unsustainability warning lights flashing.

All CEE countries, including those that had unsustainable domestic credit and asset market booms, are being hit hard by the domestic impact of the global credit crunch and by the collapse of world trade. The Czech Republic and Poland are the two CEE non-Eurozone members least likely to impose capital controls. The rest ranges from possible to quite likely.

The imposition of capital controls on a temporary basis to deal with a foreign exchange crisis/balance of payments emergency is compatible with the EU Treaties. Indeed, de-facto informal foreign exchange rationing has been taken place for quite a while in some countries. When I was in Latvia a year ago, local commercial bankers told me that if someone wished to borrow lat (the local currency), they would not lend it to him if the bank thought he was likely to use it to speculate against the currency peg of the lat with the euro. This is against the rules - indeed against the law — but it happened. Where could the frustrated would-be short seller of the lat go to complain? To the Latvian central bank?

Of course, an EU country that imposes capital controls could forget about joining the Eurozone in the foreseeable future, unless the Maastricht criteria for EMU membership were waved or scrapped. Although the unconditional offer of immediate full EMU membership to all EU members would be a wise and wonderful contribution to the stabilisation of the region, I consider it unlikely that such wisdom will indeed be found in Frankfurt, Brussels and the national capitals of the EU - inhabited as these locations are by bears of very little brain. With Eurozone membership years away, the cost of imposing capital controls, in terms of further delays in EMU accession, would be minor.

Some of the non-EU countries in the Balkans (Albania, Bosnia-Herzegovina, Croatia, Macedonia, Serbia) are also likely to have recourse to capital controls before long. Montenegro already has the euro as its currency, despite not being a member of the Eurozone. Among the CIS countries that are likely candidates for the imposition of capital controls are Ukraine, Russia and Kazakhstan.
Capital controls in Russia, Ukraine and Kazakhstan

Ukraine is in an economic and political mess. Its banking system is a triumph of hope over fair value. Its currency is weakening rapidly. Its export-oriented heavy industry and its agricultural sector have been hit hard by declining prices and world demand. It has an IMF program.

Russia has gone from Himmelhoch jauchzend to zum Tode betrübt in the space of less than a year. With oil at $140 a barrel and $460 billion of foreign exchange reserves, Russia felt and acted like a would-be super power. With oil at $40 a barrel and reserves draining fast in an unsuccessful attempt to stabilise the Rouble without raising interest rates, Russia looks increasingly like Venezuela with nukes. Industrial production has collapsed and the public finances are under severe strain. Russia’s industry has borrowed heavily abroad, in foreign currency, and on a short-term basis. Its banking system can no longer fund itself in the international wholesale markets. Russia 2009 looks more and more like Russia 1998. Capital controls would be an obvious tool to regain control of the Rouble without having to engage in immediate heroic monetary and fiscal policy tightening. Even if the anti-capital controls faction in the Russian leadership wins the ongoing argument with the pro-capital controls faction, events may well force the hand of the authorities.

Kazakhstan may have enough financial resources and gas/oil revenues (despite the decline in oil prices) to get through the financial storm and the global slump without being forced to impose capital controls. It already had one major bail-out of its banks, however, and if Russia and Ukraine were to impose capital controls, Kazakhstan may well follow.
The joys and pain of an open capital account
For countries with a minor-league currency (every currency except for the US dollar, the euro and the yen), an open capital account will always be a mixed blessing. The joys of an open capital account - the undoubted benefits from decoupling domestic capital formation from national saving and from unrestricted international portfolio diversification and risk trading - cannot be enjoyed without the pain; the risk of its domestic financial institutions, capital markets, non-financial enterprises, consumers and public finances becoming the flotsam and jetsam on massive and mindless killer waves propelled by an out-of-control global financial storm.

Capital controls permit monetary and fiscal policy to be directed to the stabilisation of economic activity without having to worry about a collapse of the currency and its deleterious effects on the sectoral and national balance sheets. Of course capital controls will leak. They always leak. But provided they are enforced aggressively, say, with transgressors stoned to death in public after a fair trial, they can be made to work well enough to regain control of monetary and fiscal policy. And capital controls will leak progressively more copiously, the longer they are in place. This is why their imposition should be viewed as temporary, with a gradual relaxation as economic conditions improve and global financial stability returns. Capital controls create rents whose allocation is at the discretion of public officials. They therefore encourage bribery, graft and corruption, which is again why they should only be temporary.

The emerging markets of CEE and the CIS (and indeed emerging markets everywhere) have been progressively cut off from new external funding as the crisis deepened. At this stage, imposing capital controls (only controls on capital outflows really matter, at this stage; controls on capital inflows should have been imposed earlier) would not bring with it a heavy cost in terms of a sudden stop on capital inflows. That stop has happened already. Imposing capital outflow controls may discourage future capital inflows. The example of Malaysia, which imposed capital controls during the Asian crisis of 1997 suggests that foreign capital either has a short memory or can be convinced.
Conclusion

I predict that at least some of the emerging market countries of CEE and the CIS will impose capital controls before long. I recommend that emerging markets everywhere consider this option seriously.

This article may be reproduced with appropriate attribution.

[Demeter]

58. That's It for Now From Me--Enjoy Your Saturday!

See you all tonight, or tomorrow! Post them if you've got them!

[Danascot]

59. The Crisis of Credit Visualized

May be too elementary for some of the economic powerhouses here but it's very succinctly done for the rest of us:

Part 1 - http://www.youtube.com/watch?v=Q0zEXdDO5JU

Part 2 - http://www.youtube.com/watch?v=iYhDkZjKBEw&feature=related

[DemReadingDU]

63. Those were good

Not too elementary at all. Must send to family and friends. Maybe seen thru these videos, they will begin to see the big picture. They only see that their 401(k), became a 201(k).

[Hugin]

64. This does not cover Job and Wage Stagnation's role in the crisis.

So, it's only part of the overall story.

Why were the smoking and fat people unable to pay? Where's that video?

[DemReadingDU]

68. maybe that is in video part3?

These 2 videos only explained how the credit crisis started, how the mortgages were combined into CDOs for greedy investors to make even more money. Then the defaults on the mortgages which is causing the banks not to lend because they are worthless.

Maybe part3 would be a continuation of more companies going bankrupt, people losing jobs, etc.

[RedEarth]

70. TARP Visualized ... easy to understand

via..... Calculated Risk....





















The last two are photo-shopped....

http://www.calculatedriskblog.com/2009/02/tarp-visualized.html

[Danascot]

65. Take a Free Economics Course From Yale on Financial Markets by Robert Shiller

How would you like to study a economics course offered by an Ivy League university taught by one of the top economists in the world from the comfort of your home? And what if it was all completely free? Well, you can. Thanks to Yale’s open courses project and great technology, you can take part in a higher learning experience like no other.

Financial institutions are a pillar of civilized society, supporting people in their productive ventures and managing the economic risks they take on. The workings of these institutions are important to comprehend if we are to predict their actions today and their evolution in the coming information age. The course strives to offer understanding of the theory of finance and its relation to the history, strengths and imperfections of such institutions as banking, insurance, securities, futures, and other derivatives markets, and the future of these institutions over the next century.

http://oyc.yale.edu/economics/financial-markets

[CatholicEdHead]

71. Thanks! Now I can say I have taken an Ivy League course

[Danascot]

72. Robert Shiller is well known as the author of "Irrational Exuberance"

a 2000 best seller about speculative bubbles.

http://books.google.com/books?id=x1PaZY_KtBEC&printsec=frontcover&dq=Robert+J.+Shiller+%22Irrational+Exuberance.%22#PPA13,M1

Nouriel Roubini credits a chart that appeared in that book as being an influence in helping him to call the housing bubble.

The chart shows that historically housing values were relatively flat until the late 1990's when they took off.

Here's an updated version of the chart:

[DemReadingDU]

79. Looks interesting

Course Structure:

This Yale College course, taught on campus twice per week for 75 minutes, was recorded for Open Yale Courses in Spring 2008.

Just glancing through, there are 26 sessions and 3 exams with solutions.


edit for link
http://oyc.yale.edu/economics/financial-markets/content/sessions.html

[Demeter]

67. Robert Reich: The Stimulus and the Auto Bailout: The Perils of Confusing American Companies With Ame

http://robertreich.blogspot.com/2009/02/stimulus-and-auto-bailout-perils-of.html


Do not confuse American companies with American jobs.

The new stimulus bill, for example, requires that the money be used for production in the United States. Foreign governments, along with large U.S. multinationals concerned about possible foreign retaliation, charge this favors American-based companies. That's not quite true. Foreign companies are eligible to receive stimulus money for things they make here (as long as the nations where they're headquartered have signed the WTO procurement agreement). For example, Alstom, the French engineering company, is eligible to receive stimulus funds for the power turbines it produces in Tennessee; Japan’s Sanyo, for the solar cell parts it makes in Oregon; and French-owned Lucent Technologies, for the high-speed internet components it produces here, as well as the research it does here through its research arm, Bell Labs. On the other hand, U.S. Steel may not be eligible for stimulus money for the steel slabs it casts in Ontario, Canada.

I'm not defending the "buy American" provisions of the stimulus bill. I'm just saying they're not the same as "buy from American companies." And although these provisions skate close to protectionism and risk foreign retaliation, at least a case can be made that if American taxpayers are footing the bill in order to create American jobs, the jobs should be created, well, here in America.

The same confusion haunts the debate over the auto bailout. Advocates of bailing out GM and Chrysler, and most likely Ford, say America can’t afford to lose "its" auto industry. But this argument leaves out the fact that foreign-owned automakers, already producing cars here in the United States, employ – directly or indirectly – hundreds of thousands of Americans. And at the rate the Big Three are shrinking, and plan to shrink even further -- even if they get bailed out --foreign automakers may soon be employing more Americans than the Big Three.

Meanwhile, the Big Three themselves are global. A Pontiac G8 shipped by GM from Australia has less American content than a BMW X5 assembled in the United States. General Motors’ European subsidiaries include Opel and Saab; Ford’s include Volvo.

I’m not arguing against an auto bailout. But it ought to be focused on helping American auto workers rather than helping global auto companies headquartered in America. Why pay the Big Three billions of taxpayer dollars to stay afloat when, even after being bailed out, they cut tens of thousands of American jobs, slash wages, and shrink their American operations into small fractions of what they used to be?

That’s backwards. The auto bailout should help American autoworkers keep their jobs or get new ones that pay almost as well.

Whether it’s stimulus or bailout, policy makers must remember that American companies aren’t the same as American workers – and our first responsibility is to the latter.

[Demeter]

69. U.S. Doubles Fannie, Freddie Backing to $400 Billion (Weds. 18)

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/18/AR2009021801467.html


The federal government yesterday doubled its commitment to Fannie Mae and Freddie Mac, promising to reimburse the companies for up to $400 billion in losses on their investments in mortgage loans...

Officials said in September that $200 billion was much more money than the companies would need. Officials now acknowledge that won't be enough to calm investors. Yesterday, they said that $400 billion would be much more money than the companies would need...

The Obama plan also increases by $100 billion, to $1.8 trillion, the volume of mortgage loans the two companies can own. The change has the effect of allowing the companies to sell more debt to raise money to buy additional loans. The administration also said that the Treasury would continue to buy securities created by the two companies, easing the pressure to find private investors. Both moves will tend to reduce the cost of financing mortgages, holding down interest rates for customers...

As other sources of financing disappeared, Fannie and Freddie bought or agreed to buy about three-quarters of all new mortgage loans last year...Now the companies also will play a central role in the Obama administration's plan. Officials described the effort as requiring sacrifices by private firms, but the greatest costs will be incurred by two in which the government owns an 80 percent stake.

Fannie and Freddie have been instructed to offer up to 5 million refinancings and to modify millions of additional mortgage loans. The plan is intended to benefit the companies in the long term by avoiding defaults on many of the loans, but only by reducing the amount they collect each month.

Staff writer Zachary Goldfarb contributed to this report.

[Hugin]

77. "Dodd, Frank Clash Over Need for Obama Administration to Take Over Banks" (Bloomberg)

"U.S. Lawmakers Clash Over Nationalizing Banks to Stem Declines"

By Alison Vekshin

Feb. 21 (Bloomberg) -- U.S. Senate and House Democrats who steer financial-industry legislation clashed over having the government take over some banks as a way to help lenders that have been hammered by the worst economic slump in 75 years.

Senate Banking Committee Chairman Christopher Dodd said yesterday some banks may have to be taken over for “a short time,” and his House counterpart, Financial Services Committee Chairman Barney Frank, along with Republican Senator Jon Kyl rejected having the government step in to run banks.

“I don’t welcome that at all, but I could see how it’s possible it may happen,” Dodd, a Connecticut Democrat, said on Bloomberg Television’s “Political Capital with Al Hunt,” broadcast this weekend. “I’m concerned that we may end up having to do that, at least for a short time.”

Citigroup Inc. and Bank of America Corp., which received $90 billion in U.S. aid in four months, tumbled as much as 36 percent yesterday on concern the U.S. may take over the banks. The Obama administration in response said a “privately held” banking system is the “correct way to go.”

Dodd, a Connecticut Democrat, also said Treasury Secretary Timothy Geithner has “an awful lot of leeway” in interpreting how the executive compensation restrictions he wrote into the economic stimulus legislation will be applied for banks that take federal aid.

Dodd’s statement gives Geithner the flexibility to say the rules don’t apply to firms that participate in the public-private partnership Treasury announced Feb. 10 to buy banks’ toxic assets, but only to companies that get cash injections under the Troubled Asset Relief Program.

</snip>

More @: http://www.bloomberg.com/apps/news?pid=20601103&sid=aR6hS.HsqHc4&refer=news
________________________________________________________

Oddly enough this article has the subject headline in Bloomberg's headline stream and the other more general quote at the top of the post on the article itself. I don't know if this is common practice at Bloomberg.

[Dr.Phool]

78. Good morning Comrades!

I running out of here to catch a flight in about 10 minutes, to the frozen wastelands of the Carolina's. I'll be back next Sunday. I'm trying to get my dad into a retirement-assisted living community down here.

I'll try to check in when I can, as long as I can poach the neighbors wireless router.

Try not to destroy the economy while I'm gone, Okay?



:hi: :hi:

[Hugin]

80. Have a safe trip!

See you then and good luck with your task.

:hi:

[Demeter]

81. That's Asking a Lot, But We'll Try

After all, it's Sunday. How much trouble can we get?

[Joe Chi Minh]

97. Give my regards to Colonel Douglas Mortimer, Doc. I honestly can't pay off my

credit-cards, though, so the economic outlook will continue to be very ugly and imperilled. I can't make any promises.

[Demeter]

82. Radical revamp splits Royal Bank of Scotland in two

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5780280.ece

The Royal Bank of Scotland (RBS) is to be split into a “good bank” and “bad bank” in a dramatic rescue restructuring in which assets worth several hundred billion pounds will be put up for sale.

Stephen Hester, RBS chief executive, will outline the plans this week as he unveils Britain’s biggest-ever corporate loss of up to £28 billion. He will cut costs by more than £1 billion a year, a move expected to lead to the loss of about 20,000 jobs, more than half of which will be in Britain.

Large parts of the group’s investment-banking business will be earmarked for sale or closed down. Its Asian operations and retail operations across central and eastern Europe will also be sold off.

All these operations will be bundled together in a “bad bank” inside the group, which will report its figures separately.

Related Links

* RBS dodges promise to end cash bonuses

* RBS agrees stage one for toxic debt insurance

* RBS's pioneer of debt-heavy deals is to go

RBS will also place at least £200 billion of toxic assets into the government’s asset-protection scheme, a controversial insurance scheme designed to protect banks against further losses.

Billionaire investor Wilbur Ross leads a pack of vulture funds that are talking to the bank and the government about buying some of the bad loans, although it is unlikely a deal will be agreed in time for Thursday’s results. Virgin Money, Sir Richard Branson’s mortgage business, is another possible buyer.

The “good bank” will comprise retail and commercial banking in Britain, America and a handful of other countries where RBS has a significant presence.

A similar break-up deal is planned for Northern Rock, under a government initiative to kick-start lending into the economy. The government is expected to inject between £5 billion and £10 billion of new funding into Northern Rock as part of the deal.

The asset sell-off will be one of the biggest ever seen, and will lead to a substantial reduction of the bank’s £1 trillion balance sheet.

The £1 billion cost-cutting plan relates to the businesses being retained.

The group still employs more than 180,000 people around the world, including 100,000 in Britain. RBS has already cut more than 12,000 jobs in the past year.

This week’s results are expected to confirm a loss of between £7 billion and £8 billion, and a further write-down of up to £20 billion on its acquisition of the Dutch bank ABN Amro.

The £8 billion of credit losses suffered by the bank can be traced back to just 500 people, according to banking sources. About 80% of those responsible for the losses have already left the company, sources say.

Jay Levine, former head of RBS’s American investment-banking operations, who led the bank’s charge into sub-prime loans, left in late 2007 – after receiving close to £40m in pay and bonuses over three years.

Market sources believe the bank has made profits of several billion pounds through trading in the foreign-exchange markets, both in its operations in London and in its RBS Greenwich division in America.

The bank is also offering loans to staff who had been expecting cash awards. They will be allowed to use the stored-up bonuses as collateral on their loans.

Billions more to prop up lenders

A further £500 billion of taxpayers’ money is to be pumped into the banks through a slew of initiatives to be announced this week.

The Bank of England will launch its so-called “quantitative-easing” plan, in which at least £100 billion will be spent on buying bonds and gilts from Britain’s banks. The final figure could climb much higher, according to economists.

The government will also launch its controversial asset-protection scheme, which is expected to protect at least £400 billion of “toxic” loans with a taxpayers’ guarantee.

Royal Bank of Scotland is expected to place at least £200 billion of assets into the insurance scheme, although negotiations on the final figure are continuing this weekend.

Lloyds Banking Group, which will unveil losses of more than £10 billion this week, is also in negotiations to use the scheme. Analysts believe the bank could place about £200 billion of assets into it.

The moves coincide with the launch in America of President Barack Obama’s new bank “stress-test” plan, also expected this week.

[Demeter]

83. The Complete Biggest Losers!

http://www.businessinsider.com/2009/1/the-complete-biggest-losers




The global economic collapse has been rough on everyone. But it's been really rough on these guys.

Do these moguls still have more money than you'll ever make in 178 lifetimes? Of course! (In most cases. Some of them have been wiped out.)

But it's not every day that you wake up and realize you've lost, say, $30 billion (casino mogul Sheldon Adelson). And it's a bummer to have to choose between your professional soccer team and your 300+ foot yacht with missile-detection system (Roman Abramovich).

And, so, without further ado, here's The Complete Biggest Losers, our list of global moguls creamed by the crash. There are 64 of them, so grab your coffee, start clicking, and watch the wealth evaporate...


SEE SLIDE SHOW AT LINK

[Demeter]

84. 'Good Banks' Are the Cost Effective Way Out of the Financial Crisis By WILLEM H. BUITER

http://online.wsj.com/article/SB123517593808837541.html

Treasury Secretary Tim Geithner's bank rescue -- the Financial Stability Plan (FSP) -- has been poorly received by the markets. My proposal last month to create brand new "good banks" with the limited taxpayer resources available is the best solution to the crisis.

One reason the Geithner plan has been poorly received is that the money isn't there to recapitalize U.S. banks as a whole. Mr. Geithner has only $350 billion, what's left of the original $700 billion in the previous administration's Troubled Asset Relief Program. That's nowhere near enough to get Mr. Geithner's proposed Public-Private Investment Fund going on any significant scale. The scale of this investment fund -- $500 billion-$1 trillion -- is an empty wish unless the Treasury convinces the Congress to provide substantial additional resources to guarantee the toxic assets to be valued and bought by private investors.

Moreover, Mr. Geithner's Consumer and Business Lending Initiative only puts up one dollar of Treasury money as credit protection for every $10 dollars of Fed lending, hoping that any losses will not exceed 10% of the amount lent by the Fed (up to $1 trillion). This leverage means that the Federal Reserve system has in effect become a branch of the Treasury.

The truth is that the federal government has little fiscal spare capacity. States and municipalities have, at best, none. With the fiscal boost provided by the stimulus legislation ($787 billion, or about 5.4% of GDP over two years), the federal deficit could easily rise to 12% or even 14% of GDP for the next two years. These are numbers historically associated with banana republics headed for insolvency or hyperinflation.

The current federal debt-to-GDP ratio is around 40%, well below the above-100% level at the end of World War II. Any such ratio can be sustainable, as long as the economy is capable of generating large future government primary surpluses (that is, surpluses excluding net interest payments). But if markets judge that such future primary surpluses are not credible, they will be spooked.

Any anticipation or fear by domestic or international markets that the future will bring some combination of government default and public debt "amortization" through inflation will push up medium- and long-term nominal interest rates, inflation risk premia, default risk premia, foreign exchange risk premia and real interest rates. These responses will nullify the government's attempt to expand the economy through increased public spending or tax cuts.

Credible larger future primary surpluses presuppose future political support for tax increases or cuts in public spending. I fear that the U.S. political system will support neither -- the necessary social capital is no longer there.

The trust of the American citizen in the state is vanishingly low. Political polarization has reached the point where Democrats in Congress will kill almost any cut in public spending, and Republicans will kill almost any tax increase.

At the end of World War II, Americans willingly shouldered the burden of paying down a public debt incurred because the nation had been at war with a hated external enemy. A few years down the road, the U.S. could find itself faced with a comparable public debt burden, but incurred because the nation has been at war with itself. Solidarity, cohesion and burden sharing don't come naturally when the defining event is not Pearl Harbor but a subprime crisis.

Given the limited scope U.S. authorities have for increasing the public debt burden without adverse asset market responses, it is best to forget about tax cuts or public spending increases. Instead, the available fiscal resources should be focused on restoring the flow of credit to nonfinancial enterprises and, to a lesser extent, to households (most of which are already over-indebted and should not be encouraged to spend more).

Rather than wasting the $1.4 trillion of public funds it would take to restore (according to NYU economist Nouriel Roubini's estimate) the capitalization of the U.S. banking sector to its fall 2008 level, it would be better to use public money to capitalize new banks that don't suffer from an overhang of past bad investments and loans -- and to guarantee new borrowing or new loans and investment by these banks. This "good bank" model achieves this by identifying the systemically important banks that are kept afloat only by past, present and anticipated future public financial support ("bad banks") and taking their banking licenses away.

The "stress test" proposed by Mr. Geithner for major banks (assets in excess of $100 billion) could be used to gather the necessary information to identify the bad banks. New banks, capitalized by the government (possibly with private co-financing) would take the deposits of the bad banks and purchase the good assets from the bad banks. Future government support, through guarantees or other means, would be focused exclusively on new lending and new borrowing by the new good banks and those old banks that passed the stress test.

The legacy bad banks would not be allowed to make new investments or new loans and would simply manage the inherited stocks of assets in the interest of their owners. They sink or swim on their own. If they fail, their unsecured creditors can figure out what to do with the bad assets.

When public resources are scarce, they should be concentrated not on supporting the valuations of existing impaired or toxic assets -- representing yesterday's mistakes -- but on encouraging new flows of lending and borrowing, for which success or failure is still to be determined. To decouple flows of new lending from existing stocks of bad and toxic assets, a legal and institutional separation between the owners of the bad assets and the investors in the new assets is necessary. This objective is achieved by the good bank model.

The good bank approach would not be welcomed by the markets: They price the existing bad banks but not the taxpayer resources saved.

This model is better than full nationalization, because it does not require the government to trust the valuation of toxic assets implicit in the market capitalization of the banks that own them. It only requires the valuation of good assets. It is better as a recession-fighting policy because it stimulates new lending to the real economy more effectively than would an injection of capital into the existing banks, for which old toxic assets act as a tax on new lending.

The good bank model is also better from the point of view of moral hazard because it does not reward past reckless lending and investment. And it is fairer, because the losses on past failed investments are borne by those who made the bad decisions rather than by taxpayers.

Mr. Buiter is professor of European political economy at the London School of Economics and Political Science.

[Demeter]

85. Incredibly Lengthy Nation-by-Nation Economic analysis of Europe

http://www.creditwritedowns.com/2009/02/while-rome-burns.html

[Joe Chi Minh]

98. Very interesting and scary. Thanks.

[Demeter]

86. Geithner's Catch-22

http://www.dailykos.com/story/2009/2/19/05524/5446/499/699191

To understand the dilemma facing Mr. Geithner and the Obama Administration, you could do a lot worse than read Catch-22 (something I have also found to be true of life in general.) Because unfortunately, Heller’s chocolate-covered cotton metaphor rather precisely describes the estimated $2 or $3 trillion in "legacy" assets – to use the administration’s preferred euphemism – clogging the arteries of the global financial system.

Except that while chocolate-covered cotton at least has some novelty value, most -- if not all -- of Big Shitpile (to use Atrios’s favorite euphemism, and mine) has none.

This, in turn, means it would literally be easier to square a circle, or maybe invent a perpetual motion machine, than to devise a plan that a.) lifts Big Shitpile off the balance sheets of the banks, while at the same time leaving them b.) solvent and c.) in the hands of private investors, without d.) constituting a flat-out transfer of wealth from taxpayers to bank shareholders.

These are simply not realistic policy objectives – in fact, they are mutually exclusive, as even Alan Greenspan now seems prepared to admit...

MUCH RUMINATION, REVIEW AND THEORIZING TO READ AT LINK!

[Demeter]

87. More on That Dirty Word "Nationalization" and Possible Approaches

http://www.nakedcapitalism.com/2009/02/more-on-that-dirty-word-nationalization.html

In a post yesterday, some readers bandied about the idea of developing some reasonably thought out proposals for "nationalization" or "receivership" or "pre-privatization", possibly on an open source model of some sort. (Aside: those who know how Linux was developed know that it wasn't free form; Linus Torvalds exercised control, one might think of it as final edit, and he also delegated areas of supervision to key lieutenants. That was obviously a much bigger task than this would be, but I just wanted to give readers a head's up that there needs to be someone, maybe several someones, in charge if we collectively take this to the next step).

That's a long-winded way of saying this is an idea I'd like to pursue, and per my earlier post, I don't see Team Obama moving in this direction soon (as I said, it would be much better were I proven wrong). But to make the most of it, some preliminary discussion would be useful.

One of the things about group problem solving is that people tend to want to drive for solutions before they have all the relevant data at hand. And studies have shown that putting proposals on the table, even at a supposedly early stage in the process (i.e., while fact gathering is being done) winds up cutting down on idea generation (the problem here, of course, is there are already options on the table, but I'd like to focus upstream as much as possible).

The better way to go about it is to segregate problem definition/examination of possibly relevant facts from option generation/assessment. So I'd like to push further on flushing out possible complicating issues.

I also want to address the knee jerk reaction I get from some readers when the word "nationalization" comes up, particularly from those readers who say they'd prefer a form of receivership.

Folks, this is a nomenclature issue. Let me turn the mike over to reader Steve, who worked for the FDIC:

Americans are funny. `Nationalization' immediately evokes Soviet commissars and bearded guys yelling in Spanish -- the unjust taking of successful businesses by brutes and bullies. If someone does think of the companies that failed into government ownership in Europe, well, those pinko wussies ran them into the ground in the first place and wouldn't let Real Men come in and run them, and I hope they've learned their lesson. But if you say that when Dopey Bank & Trust failed its assets were nationalized, the response is, oh please, that doesn't happen in America. Everybody knows that deposit insurance comes from the tooth fairy.

Ultimately, the taxpayer is on the hook for deposit insurance, so while FDIC is technically a government corporation rather than a government agency, it's still nationalization. The failed bank's assets are removed from the private sector and returned to it over time. Even in an immediate sale, FDIC often retains a loss position; and while the asset sale is technically a receiver's sale, the deposit insurance is paid by FDIC in its corporate capacity, with a due-from receiver to cover the insurance outlay. Under FDICIA, the nationalization aspect is even more pronounced than in the past: FDIC used to share pari passu with all general creditors of the failed bank, now it has absolutely priority as a creditor until it is made whole for the deposit insurance paid and the costs of paying it. Bair has bent this priority quite a bit by paying advanced dividends to excess depositors even when it clear that FDIC will incur a substantial loss on coverage of deposits under the legal limit.


So if you are OK with the FDIC (actually, technically, the chartering authority, namely the OCC, OTS, or state closes the bank, the FDIC is the receiver) taking over dud banks), you are OK with nationalization. What we then need to figure out is what form it would be best to take for big banks, since the normal FDIC process (as discussed in our earlier post) doesn't fit the mega banks too well.

And to clarify: I am not a fan of nationalization or otherwise taking financial firms out and shooting them per se, but the alternative of having them have in effect an open funding source from taxpayers is worse. As Steve Waldman put it:

Zombie banks beg for money. They are very clever. They come up with ways you can give them money while pretending not to give them money, such as guaranteeing their assets, guaranteeing new debt issues, or buying up assets at "hold to maturity" values. Just say no! A healthy financial system cannot be run by zombies. "Rescuing" insolvent banks makes about as much sense as tying string to the arms of a loved one's corpse so it can come to the dinner table as a marionette. For a while that may be comforting (or not), but pretty soon it's sure to smell really bad, and it's gonna ooze. If you think you have engineered a miraculous turnaround, you have only made matters worse. An undead bank is an abomination. It will pretend good health but hide a rot. It will afflict you, over and over and over again, with harrowing near insolvencies (cf Citibank). Dead banks must be allowed to die.


The big problem is the bad incentives. The taxpayer has been putting money in at well below rates the private sector would require, and worse, management and stockholders get the upside. That means they still have reason to take risk since Joe Public will eat any mistakes. And if you think this won't happen, some believe that the reason Merrill's results deteriorated badly in the fourth quarter was due to trader bets gone bad.

Any private investor who had put as much as the government has put into faltering banks would have far more supervision (board seats, probably regular operational reports) and would also have replaced the CEO, with an understanding that he could clean house if he saw fit. Getting a new CEO in is usually standard operating procedure with distressed organizations, but the Treasury and Fed are writing checks and failing to make inquiries. Look at the contrast with the treatment of GM and Chrysler, which are being asked plenty of tough questions and are required to submit turnaround plans that could be rejected or be revised under duress.

Now to some of the problems with nationalization :. I'd like readers to help start an "problems to be addressed" list. One set came up in the prior post: the really big banks, Citi and BofA in particular, have large capital markets operations. There isn't an obvious way to put the trading operations into receivership. The notion of a normal Chapter 11 is creditors are kept at bay, for biggies there is DIP financing to pay for routine expenses (beyond what revenues might cover) while the bankruptcy is on. But trading firms live on credit. The DIP model won't work here.

What remedies or alternatives might there be? Could the trading ops be segregated with a government backstop to be kept going, and the other non-trading capital markets businesses (prime brokerage, asset management, prop trading, etc) be put into receivership? What are the issues here, regulatory and practical? (This is one reason why Willem Buiter's "good bank" model does not seem applicable to these firms, unless you want to see the investment banking rump of Citi and the former Merrilll go into a Lehman style collapse).

Bonds are risk capital, and it would seem better to take out bondholders before having taxpayers pony up. But that is treated a as third rail issue. What are the potential complications that need to be thought through here?

There are also many regulators involved here. The SEC regulates broker dealers and asset managers; the CFTC, any commodity trading; BofA and Citi are subject to foreign regulation of both their banking and securities operations. I don't know to what extent these are mere complications (one could assume they'd largely accede to a reasonable plan from the Treasury/Fed, particularly if the alternatives looked worse, but there could be some sticky issues, like worries that foreign depositors would be shafted, as Icelandic banks did in their meltdown). However, the really bad stuff is OTC debt and derivatives, which are largely unsupervised. Anyone who has any insight here is encouraged to speak up.

Please feel free to address these issues and flag others in comments. If nothing else, this should be instructive for all. Thanks!

[Demeter]

88. More on Big Bank Endgames

http://www.nakedcapitalism.com/2009/02/more-on-big-bank-endgames.html

Some readers and fellow bloggers have been anticipating an over-the-weekend resolution of some sort for Citigroup and/or Bank of America, given the impressive fall (admittedly from already distressed levels) in their stock prices over the last ten days.

I could well be proven wrong, but I didn't expect it this weekend, and I don't see it happening.....yet. It will take another trigger, which could very well come shortly.

The reason that stock price falls in the past have provided the impetus for nailbiting and sometimes precipitous government action has been that the bank (and the same dynamic applies to the monolines) were under pressure to bolster capital levels somehow to avoid downgrades. Given that accomplishing that via retained earnings seemed unlikely to impossible, with continued writedowns likely, the only hope was new capital raising. A certain amount of that could be accomplished via the issuance of preferred stock, but the ratings agencies had limits on the ratio of common to preferred, and most affected institutions would need in pretty short order to issue stock. So a tanking share price would greatly lower the odds of shoring up capital levels (it would be massively dilutive, assuming it could even be carried off).

With the TARP, for better or worse, that pressure is in abeyance. The Treasury has given money to banks on non-market terms; there is no reason to think that won't continue.

I see no desire of Geithner and Summers to move forward on pre-emptively-take-zombie-banks-out front. Geithner announced his plan to have a plan; Obama is making an announcement of some sort next week (apparently an effort to soothe rattled nerves; presumably some elements of the Geithner work in progress will be released to shore up confidence).

Team Obama is still on Plan A, which is "we can patch this up with the duct tape and bailing wire we have on hand" and they really want to play that out if at all possible. I'm sure they believe that when, for instance, the trillion dollar consumer credit facility is out buying credit card, student loan, and auto receivables, that that will lead to more commercial bank lending (ie fee generation on their part) and we will see some halting progress towards normalcy.

Now what could force their hand is a run on either bank, either depositors (replay of WaMu, on a bigger scale) or counterparties refusing to extend credit or moving accounts out (the Bear scenario). The possible perps of a deposit run would be those whose balances exceed FDIC guarantees (most likely businesses, since if you have payroll of any size, it is impractical operationally to divide your payroll processing among a lot of banks, and you need to have enough cash in the till to make the payments) and foreign depositors. As Felix Salmon noted earlier, Citi has a LOT of foreign deposits. as in....over half a trillion (this relative to a balance sheet of $1,9 trillion).

I haven't (yet) seen any indication of counterparties headed for the exits. Again, with the government apparently at ready to throw cash at institutions deemed systemically important, there is far less cause for anxiety. Everyone seems to have gotten the memo that there won't be a second Lehman.

Now let us go to part two. Let us say the stock markets are right, and something happens to push one of these two a lot closer to the edge.

As much as the drumbeat for nationalization/receivership is increasing, I don't see that happening either (and I would really prefer to be wrong here, see related post). First is the fact that (as I am told by those more expert than me in these matters) that neither bank could be taken out involuntarily over a weekend. Part of the reason apparently is that the FDIC is too short-staffed; it had 20,000 employees during the S&L crisis, it is now down to about 5,000, and the cuts in the staff that handle receivership were deeper. It would take more planning and lead time. Maybe the stress tests are a Trojan horse for this course of action. They seem to be far too superficial to be useful (Stiglitz among others, as reader Dwight pointed out, has made this observation), but the banks may be so deeply under water that a cursory exam will show that.

But the other issue is that these banks (Citi in particular) have operations way way outside the FDIC's normal ken: big overseas offices, and large capital markets operations. Does the FDIC have the foggiest idea of what to do with a CDS book, CDOs, foreign currencies (some of the exotics and long dated forwards can create headaches, particularly in volatile markets like the ones we have today), proprietary trading operations, prime brokerage? And forget the SEC, they've never taken interest in these areas.

So we have two constraints, albeit both operational: a receivership for banks of this size would take longer to put into place than another cobbled together bailout package of some sort. And the power that be almost certainly do not have any sort of blueprint for how to put a major capital markets operation into some form of receivership, either mechanically or legally.

The latter problem is an appalling, criminal lapse. When Bear went under, it illustrated vividly how quickly securities firms go down (Drexel Burnham also went poof). Securities firms collapse into liquidation. Counterparties will not trade with a bankrupted entity. They have to extend credit in order to trade (repos and reverse repos are the lifeblood of trading), and no one is going to extend new credit to an entity in receivership.

It was also VERY well known at the time of the Bear collapse that other securities firms were at risk. Lehman was top of the list, but other names were bandied about: UBS, Morgan Stanley, Merrill. But Paulson & Co. were in kick the can down the road,. There is no evidence they made any effort to determine whether some change in procedures, regulations, or even bankruptcy law, might allow for a more orderly resolution of a failing large investment bank. But no, instead the officialdom decided to redefine the problem. Lehman was deemed to be systemically unimportant since the powers that be had never bothered to develop a Plan B, and Plan A, fobbing it off on the industry, turned out to be a non-starter.

Now it may have been there was no tidy solution, or any "tidy" solution would have required legislative changes that might have been awkward to impossible to get through. For instance, it may have been possible to segregate certain operations and put them in receivership of some sort to reduce the scale of the damage. Regardless, the failure to even consider the issue is an unforgivable failure of foresight.

[Hugin]

95. I hadn't thought of 'Nationalization' in these terms, but, it's probably where the irrational...

resistance is coming from.

"Americans are funny. `Nationalization' immediately evokes Soviet commissars and bearded guys yelling in Spanish -- the unjust taking of successful businesses by brutes and bullies. If someone does think of the companies that failed into government ownership in Europe, well, those pinko wussies ran them into the ground in the first place and wouldn't let Real Men come in and run them, and I hope they've learned their lesson. But if you say that when Dopey Bank & Trust failed its assets were nationalized, the response is, oh please, that doesn't happen in America. Everybody knows that deposit insurance comes from the tooth fairy."

Now hear this! (All of you Commie-phobes) I'm forced to deal with on a daily basis both in casual and business settings.

THESE BANKS ARE FAILED, DEAD, INSOLVENT, BROKE, DONE, UNSUCCESSFUL, ZOMBIED...

*gasp*

AND THEY DID IT TO THEMSELVES! THERE IS NO 'Red Dawn' SCENARIO AT WORK HERE... NO REAGANESQUE 'Evil Empire' (Unless you count the greedy PTB themselves.) IT'S ALL DUE TO THE SUPPLY-SIDE VOODOO ECONOMICS PRACTICED BY THOSE WHO YOU, IN YOUR IGNORANCE, CLAIM TO IDEOLOGICALLY FOLLOW.

*whew*

Now that we have that out of the way, let's only add... After their failure, 'Nationalizing' the Banks is a move to save your precious 'Free-market' system. Keep in mind there are many other more Draconian measures which could be under consideration, but, aren't due to your pansy assed right-wing sensitivities that for some reason are currently being pandered to by a relatively moderate centrist Administration.

So, STFU...

:rant:

[Joe Chi Minh]

99. Not a measure post, but an eloquent one. Mellifluous, even.

[Demeter]

100. Well Said, Hugin!

That covers it all.

[Demeter]

89. How (and Why) The Japanese Survive: Consumer Frugality in Japan: Object Lesson

http://www.nakedcapitalism.com/2009/02/object-lesson-consumer-frugality-in.html


In case you managed to miss it, Japan has taken a huge fall in its relative economic standing by more or less standing still for almost a generation. The comparative fall is 30%. And even though visitors to Japan do not see the superficial signs of distress (infrastructure is well maintained, people are neatly dressed, restaurants, bars, and tea houses look busy), the consumer has retrenched to a degree that (now) seems unimaginable to the US.

The big reason Japan has had a high savings rate is the lack of Social Security or tax-advantaged retirement plans, plus families are more nuclear than in other societies (i.e., less reliance on extended families). But a second reason is the extreme instability of employment among the young. Many are so-called "freeters", or basically long-term temps, doing low level work for employers, the first to be fired, and little hope of advancement even if they do wind up staying with the same company a long time. This is not only materially difficult, but psychologically hard, since Japan places great standing on group membership.

The examples from this New York Times story are revealing:

The economic malaise that plagued Japan from the 1990s until the early 2000s brought stunted wages and depressed stock prices, turning free-spending consumers into misers and making them dead weight on Japan’s economy.

Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.

The Takigasaki family in the Tokyo suburb of Nakano goes further to save a yen or two. Although the family has a comfortable nest egg, Hiroko Takigasaki carefully rations her vegetables. When she goes through too many in a given week, she reverts to her cost-saving standby: cabbage stew.

“You can make almost anything with some cabbage, and perhaps some potato,” says Mrs. Takigasaki, 49, who works part time at a home for people with disabilities.

Her husband has a well-paying job with the electronics giant Fujitsu, but “I don’t know when the ax will drop,” she says. “Really, we need to save much, much more.”...

To better compete, companies slashed jobs and wages, replacing much of their work force with temporary workers who had no job security and fewer benefits. Nontraditional workers now make up more than a third of Japan’s labor force.

Younger people are feeling the brunt of that shift. Some 48 percent of workers age 24 or younger are temps. These workers, who came of age during a tough job market, tend to shun conspicuous consumption.

They tend to be uninterested in cars; a survey last year by the business daily Nikkei found that only 25 percent of Japanese men in their 20s wanted a car, down from 48 percent in 2000, contributing to the slump in sales.

Young Japanese women even seem to be losing their once- insatiable thirst for foreign fashion. Louis Vuitton, for example, reported a 10 percent drop in its sales in Japan in 2008.

“I’m not interested in big spending,” says Risa Masaki, 20, a college student in Tokyo and a neighbor of the Takigasakis. “I just want a humble life.”...

“My husband is retiring in five years, and I’m very concerned,” says Ms. Masaki’s mother, Naoko, 52. She says it is no relief that her husband, a public servant, can expect a hefty retirement package; pension payments could fall, and she has two unmarried children to worry about.

“I want him to find another job, and work as long as he’s able,” Mrs. Masaki says. “We must be ready to fend for ourselves.”


Perhaps I am wrong, but my impression is Americans understand frugality borne of real or near poverty but are less able to identify with middle class desperation. But studies have also found that happiness is correlated strongly with relative rather than absolute economic standing, that is, someone would be happier earning $100,000 in a community where the average income is $75,000 than they would earning $150,000 in a community where the average income is $200,000. Since Japan has very little income disparity, the fact that the belt-tightening is widespread no doubt makes it somewhat easier to bear. I do not know how well America would bear up if we had a long period of Japanese style austerity with the big differences we have between the bottom, middle, and top echelons.

[Demeter]

90. What We Don’t Know Will Hurt Us By FRANK RICH

http://www.nytimes.com/2009/02/22/opinion/22rich.html?ref=opinion



AND so on the 29th day of his presidency, Barack Obama signed the stimulus bill. But the earth did not move. The Dow Jones fell almost 300 points. G.M. and Chrysler together asked taxpayers for another $21.6 billion and announced another 50,000 layoffs. The latest alleged mini-Madoff, R. Allen Stanford, was accused of an $8 billion fraud with 50,000 victims.

“I don’t want to pretend that today marks the end of our economic problems,” the president said on Tuesday at the signing ceremony in Denver. He added, hopefully: “But today does mark the beginning of the end.”

Does it?

No one knows, of course, but a bigger question may be whether we really want to know. One of the most persistent cultural tics of the early 21st century is Americans’ reluctance to absorb, let alone prepare for, bad news. We are plugged into more information sources than anyone could have imagined even 15 years ago. The cruel ambush of 9/11 supposedly “changed everything,” slapping us back to reality. Yet we are constantly shocked, shocked by the foreseeable. Obama’s toughest political problem may not be coping with the increasingly marginalized G.O.P. but with an America-in-denial that must hear warning signs repeatedly, for months and sometimes years, before believing the wolf is actually at the door.

REST OF COLUMN AT LINK...

We are now waiting to learn if Obama’s economic team, much of it drawn from the Wonderful World of Citi and Goldman Sachs, will have the will to make its own former cohort face the truth. But at a certain point, as in every other turn of our culture of denial, outside events will force the recognition of harsh realities. Nationalization, unmentionable only yesterday, has entered common usage not least because an even scarier word — depression — is next on America’s list to avoid.

[Demeter]

91. Not All Certificates of Deposit Are Plain Vanilla — or Safe By RON LIEBER

http://www.nytimes.com/2009/02/21/your-money/21money.html?em




It was bad enough when big banks started going under. Then, money market funds became suspect. But now, even the humble certificate of deposit has become mired in scandal.

This week, the Securities and Exchange Commission accused a Texas financier named Robert Allen Stanford of fraud. Investigators allege that the scheme revolved in large part around the sale of about $8 billion of suspiciously high-yielding C.D.’s through Stanford International Bank.

These C.D.’s were not insured by the Federal Deposit Insurance Corporation. So once again, we’re faced with images of forlorn people trying and failing to extract their life savings.

There’s some question as to whether Stanford ought to have been using the phrase “certificate of deposit.” Most investors who hear “C.D.” immediately assume that it’s safe.

Faulty terminology or not, it’s a bad time for C.D.’s to get a black eye, given that growing numbers of people are looking for secure investments as stocks approach their bear market lows. So now that C.D.’s have been sullied, it makes sense to take a step back and review the basic product as well as other, more exotic C.D.’s that are being offered at banks, brokerage firms and elsewhere.

BASIC C.D.’S When you buy a C.D. you hand over a pile of money to a bank and agree to keep it there for a certain period of time. In return for the certainty that it can use your funds for that long, the bank pays you interest, usually more interest than it would pay on a normal checking or savings account. Investments in C.D.’s are covered by the F.D.I.C., which currently offers insurance of up to $250,000 per person per bank. Additional coverage may be available depending on how you set up your accounts. (Links to the pertinent part of the F.D.I.C.’s Web site are available from the version of this story at nytimes.com/yourmoney.)

That $250,000 figure will fall to $100,000 for some types of accounts at the end of the year absent any new governmental action, so long-term C.D. investors need to keep that in mind.

There are plenty of places to shop for the best C.D. rates. Bankrate.com is one useful site, while MoneyAisle allows banks to compete for your business in an auction on the Web. Often, the banks offering the best rates are small banks you won’t have heard of or large banks that may be somewhat troubled.

As long as you don’t invest more than the F.D.I.C. limits, you don’t need to worry about losing your money. If the bank that issues your C.D. fails, however, another bank may end up with the failed bank’s deposits and has the right to lower your C.D. rate.

With any C.D., including the more complicated ones I outline below, there are a number of questions you should ask about the terms. Is the interest rate fixed? How long is the term? Is it callable, meaning the bank can give your money back to you before the term is up if it wants to? What sort of penalties exist if you need to take money out before the term is up? If the penalties are large enough, you could end up losing principal if you unexpectedly need the funds early.

You also want to check to see how the interest will be paid. Retirees may want a check, while others may want the money reinvested in the C.D. Also, how often does the bank pay out the interest? And will the bank try to automatically roll the money into a new C.D. when the term is up? Are there any commissions?

BROKERED C.D.’S These are C.D.’s sold by brokerage firms, both large investment firms like Charles Schwab and small operations that maintain Web sites or try to cold-call you. They generally pool money from investors and then invest it in C.D.’s from F.D.I.C.-insured banks that the brokers find on their own. Sometimes, the banks are willing to pay better rates on brokered C.D.’s if the brokerage firm can bring a large enough pile of money to the bank.

One advantage here, according to René Kim, a senior vice president of Charles Schwab, is that you can keep multiple C.D.’s of different maturities in one account. And if you have a lot of money to put to work, you can place it with different banks to stay under the F.D.I.C. limits. Just be sure that the broker doesn’t place it with a bank where you already have other accounts, if the new money would put you over the F.D.I.C. limits.

Brokerage firms may tell you that there are no fees for early withdrawal of a brokered C.D. The S.E.C. warns, however, that if you want to get your money out early, your broker may need to try to sell your portion of the C.D. on a secondary market. You may not be able to sell it for an amount that will allow you to get all of your principal back.

INDEXED C.D.’S These C.D.’s, also known as market-linked C.D.’s, generally guarantee that you’ll get your original investment back. They also let you share in the gain of a stock market index, like the Dow Jones industrial average or the Standard & Poor’s 500-stock index. If stocks are up during the term of your C.D., you’ll make some money. If not, you’ll still get your initial investment back, though inflation may have eroded its value.

While this downside protection and upside participation may be tempting at a time like this, these C.D.’s can be complicated. (They’re also a bit scarce at the moment, since stock market volatility makes it more expensive for banks to offer them.) Your return will depend on how the issuer of the C.D. calculates the average return on the index. So ask to see an example.

Also, the bank that offers the C.D. may not credit any of the money you earn until the end of the C.D.’s term, even though you still have to pay taxes each year on your interest.

Finally, while your initial investment may have F.D.I.C. protection, any gain during the term of the C.D. may not be covered if the bank goes under before the C.D.’s term is up, depending on how the interest is calculated and credited. Again, ask about this in advance. Also, don’t assume that your investment comes with F.D.I.C. insurance, because there are similar-sounding investments that may not.

FOREIGN CURRENCY C.D.’S Here, you’re using American dollars to make a bet. At EverBank, which offers many foreign currency C.D.’s, you earn interest in the currency that you choose and can earn even more money if it appreciates against the dollar. If it moves in the opposite direction, however, you can lose not just your interest but some of the principal, too.

While the F.D.I.C. does insure the principal here, EverBank notes that the coverage is only for failure of the institution, not for fluctuation in currency prices. “Please only invest with money that you can afford to risk, and as part of a broadly diversified investment strategy,” its disclosure says.

The bank might as well say that you should only invest what you can afford to lose, which is not how most people normally think about C.D.’s.

So if you’re trying to stay safe, consider a plain, old-fashioned C.D. instead. And don’t ever assume, as some of the Stanford investors may have done, that F.D.I.C. insurance is automatically part of the C.D. package.

[Demeter]

92. Can Talk of a Depression Lead to One? By ROBERT J. SHILLER

http://www.nytimes.com/2009/02/22/business/economy/22view.html?em


PEOPLE everywhere are talking about the Great Depression, which followed the October 1929 stock market crash and lasted until the United States entered World War II. It is a vivid story of year upon year of despair.

This Depression narrative, however, is not merely a story about the past: It has started to inform our current expectations.

According to the Reuters-University of Michigan Survey of Consumers earlier this month, nearly two-thirds of consumers expected that the present downturn would last for five more years. President Obama, in his first press conference, evoked the Depression in warning of a “negative spiral” that “becomes difficult for us to get out of” and suggested the possibility of a “lost decade,” as in Japan in the 1990s...

The attention paid to the Depression story may seem a logical consequence of our economic situation. But the retelling, in fact, is a cause of the current situation — because the Great Depression serves as a model for our expectations, damping what John Maynard Keynes called our “animal spirits,” reducing consumers’ willingness to spend and businesses’ willingness to hire and expand. The Depression narrative could easily end up as a self-fulfilling prophecy.

The popular response to vivid accounts of past depressions is partly psychological, but it has a rational base. We have to look at past episodes because economic theory, lacking the physical constants of the hard sciences, has never offered a complete account of the mechanics of depressions.

The Great Depression does appear genuinely relevant. The bursting of twin bubbles in the stock and real estate markets, accompanied by huge failures of financial institutions and a drop in confidence, has no more recent example than that of the 1930s....

[Demeter]

93. IT'S HUMOR, I THINK: Finance for Our Times By GAIL COLLINS

http://www.nytimes.com/2009/02/21/opinion/21collins.html?em


...As we’re all supposed to know, the Obama plan revolves around the creation of a public-private investment fund to help the banks sell off their toxic assets.

The first important thing to point out is that the fund is not, under any circumstances, to be considered a bad bank. A bad bank is something created by a government to buy up toxic assets, cleaning out the financial system and then disposing of said assets for whatever the market will bear.

Which sounds ... not irrational. But when you think of a bad bank, what do you imagine?

You walk into the lobby decorated with portraits of Bernie Madoff, past a row of tellers who are not giving out any money because they are all too busy planning to have octuplets or adopting a chimpanzee as a family member. The executive suite is empty because everybody has gone off on his or her own personal corporate jet. To lunch. Which would consist only of products made with peanut butter. And the bad bank would, of course, have a corporate softball team that was open only to employees who took steroids on a regular basis.

So, no bad banks. The government is just going to be a kind of helper, bringing the toxic asset buyers and sellers together, maybe creating some incentives to make the deals happen.

This is going to take some really powerful persuasion. We’re pretty sure that a bunch of foreclosed homes in Coral Gables have value, even if the water in their swimming pools has turned a disturbing shade of green. But they’re all scrambled in those financial instruments that Alan Greenspan can’t get a grip on.

One problem with the government plan is that nobody is ever going to have any confidence in a savior called “public-private investment fund.” The term aggregator bank has been floated around; the Treasury Department should consider stealing it, since it sounds like a kind of Transformer. In a crisis, Treasury Secretary Timothy Geithner could just yell “Aggregator, we need help!” And a normal-looking office building would instantly change into an enormous avenger who clumps down the street squashing the nasty little toxic assets that scurry around, making unpleasant squeaks.

If the banks and investors don’t get together and make deals, the Aggregator could always threaten to step on them.

Is any of this necessary? What if the government just decides to stay out of it? Why doesn’t Washington stick to putting people to work building unnecessary highways and wait for capitalism to right itself?

That’s a nonstarter because we’d wind up like Japan did in the ’90s, and nobody wants to be like Japan in the ’90s. It is true that we all wanted to be like Japan in the ’80s, in every possible way. But now, that is so over.

The financial community wants the government involved, but it hates, hates, hates the Obama approach. This is partly because the details are fuzzy and partly because it is not Wall Street’s own favored option, which involves giving the banks tons and tons and tons of money until there is so much cash sloshing around that the financial markets bob up and start to float....

[Demeter]

94. What the Chinese Want From Obama

http://roomfordebate.blogs.nytimes.com/2009/02/20/what-the-chinese-want-from-obama/

[Joe Chi Minh]

96. Hilarious "Demented" cartoon by Jacky Fleming in a Mail on Sunday supplement:

Dishevelled-looking man in a wild stance and with an expression of horror on his face and clutching his head, crying, "AAAGH", "AAAGH", "AAAGH" Where's all the money gone??

Supercilious wife, glass in hand, turns to him with a withering look, "You put it in your offshore account. Keep up".