Mon 2009-12-21 18:24 EST

Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008

Moritz Schularick, Alan M. Taylor

The crisis of 2008-09 has focused attention on money and credit fluctuations, financial crises, and policy responses. In this paper we study the behavior of money, credit, and macroeconomic indicators over the long run based on a newly constructed historical dataset for 12 developed countries over the years 1870-2008, utilizing the data to study rare events associated with financial crisis episodes. We present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as shown by a decoupling of money and credit aggregates, and we also find a decline in safe assets on banks' balance sheets. We also show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, we can also show that credit growth is a powerful predictor of financial crises...

1870-2008; Credit Booms Gone Bust; financial crises; leverage cycle; monetary policy.

Jesse's Café Américain Thu 2009-12-17 10:11 EST

Is the Price of World Silver the Result of Legitimate Market Discovery?

Jesse

Ted Butler: ...the concentrated short position in COMEX silver futures is so extreme, that it is hard to imagine how it can be resolved in an orderly manner. The most recent data from the CFTC indicate that one US bank, JPMorgan, now holds 200 million ounces net short in COMEX silver futures, fully 40% of the entire net short position on the COMEX (minus spreads). As I have previously written, JPMorgan accounted for 100% of all new short selling in COMEX silver futures for September and October, some 50 million additional ounces...So extreme is JPMorgan's silver short position that it cannot be closed out in an orderly fashion...As extreme as JPMorgan's position is, there is a total true net short position of 500 million ounces (100,000 contracts) in COMEX silver futures. Try to put that 500 million ounce short position in perspective. It equals 75% of world annual mine production, much higher than seen in any other commodity.

Jesse's Café Américain; Legitimate Market Discovery; Price; resulting; World Silver.

Wed 2009-12-16 12:38 EST

TrimTabs: The Government Is Grossly Miscalculating Employment

Joe Weisenthal

(Unemployment, Jobs) Something's fishy in the government's rosy jobs data, says the fellow who always says that.

government; Grossly Miscalculating Employment; Trimtabs.

Jesse's Café Américain Tue 2009-11-03 20:15 EST

The US Dollar Rally of 2008: The Consequence of a Bull Market in Fraud

Jesse

The theory of a short squeeze in Eurodollars which we had first put forward last year "The Dollar Rally and Deflationary Imbalances in the US Dollar Holdings of Overseas Banks" seems to be confirmed by this paper from the NY Federal Reserve bank, and the latest figures on cross border currency transactions from the BIS...the latest data from BIS shows that the dollar rally tracked the acquisition of eurodollars with a significant correlation...But much of the European outrage, as least, was in feeling that they had been 'set up' by the very banks that had sold them the foully rated instruments in the first place. A classic face ripping, as they say at Wall and Broad. And this similar to the reason is why the Chinese government declared that its own institutions could walk away from derivatives arrangements that had been sold to them by the Wall Street wiseguys under false pretenses. US towns and states are not so fortunate it appears...The foreign banks have now unwound a significant amount of the dodgy US dollar financial assets that caused the short squeeze through their fraudulent valuations.

2008; Bull Markets; consequences; Dollar Rally; fraud; Jesse's Café Américain.

Tue 2009-10-27 13:06 EDT

Courthouse News Service

Bank of America and Countrywide Home Loans destroyed mortgage documents, and "recreate" them by "insert(ing) data as they see fit," to cover up their own failure to keep records - or their fraud - according to a federal RICO class action. "To cover up the servicing mistakes and fraud and misrepresentation in the servicing of a consumer escrow, Defendants 'recreate' letters, insert data as they see fit, and fail to produce the entire HUD complaint form. This way, a consumer is left in the dark about the fraud that occurred to them," the complaint states. Lead plaintiff Kim Gorham says that when she sent a letter seeking information about her escrow account, she was informed that it had been "destroyed by a letter opener."

Courthouse News Service.

zero hedge Tue 2009-10-13 20:07 EDT

Global Central Banks Join The "Short Dollar" Bandwagon

A recent piece by Barclay's Steven Englander demonstrates how everybody and the kitchen sink is soundly amused by Geithner's call for a strong dollar. "The IMF Composition of Official Foreign Exchange Reserves data suggest that central banks are doing more than talking about reducing the concentration of USD in their reserve portfolios. They are actually acting on their statements." [dollar losing reserve currency status]

bandwagon; Global Central Banks Join; short dollar; Zero Hedge.

Dr. Housing Bubble Blog Tue 2009-10-13 20:03 EDT

No Country for Old Jobs: 10 Charts Showing the Fragile Recovery. Home Sales, Buying versus Renting, Unemployment, and Real Economy Data.

...Until jobs start showing up, any talk of a rebounding housing market is moot especially with this entire artificial stimulus still bouncing around the economy. And collapsing tax revenues are not a good sign. I don't buy the jobless recovery argument and the government tends to agree. If all is well, why is the U.S. government and Fed buying $1.25 trillion in agency debt to lower mortgage rates, putting in place an $8,000 tax credit, boosting car sales with gimmicks, encouraging risky low money down loans with FHA insured products, and extending unemployment insurance to a record 92 weeks in states like California? Do these things sounds like policies of a booming economy?

10 Charts Showing; Buying versus Renting; country; Dr. Housing Bubble Blog; Fragile recovery; home Sale; old job; Real Economy Data; unemployment.

Mish's Global Economic Trend Analysis Mon 2009-09-21 14:57 EDT

Strategic Default Data Suggests Foreclosure Prevention Tactics Useless

Michael Shedlock

An interesting report in the Los Angeles Times shows that a person with super-prime credit scores is more likely to walk away from an underwater mortgage than a person with a subprime credit rating.

Mish's Global Economic Trend Analysis; Strategic Default Data Suggests Foreclosure Prevention Tactics Useless.

The Economic Populist - Speak Your Mind 2 Cents at a Time Mon 2009-09-21 14:33 EDT

Fed accounts for 50% of treasury purchases

There once was a time when the Federal Reserve abhorred the idea of monetizing debt. That day is long over. In the second quarter, the most recent for which data is available, the Fed bought $164 billion out of the $339 billion in net new Treasurys sold. In the mortgage-backed debt markets, the Fed has been buying upward of 80% of the bonds issued by agencies such as Freddie Mac and Fannie Mae. ZeroHedge helps to put this number into perspective: the Fed was a greater factor in UST demand than all three traditional players combined: Foreigners, Households and Primary Dealers, which amounted to a $158 billion in net Q2 purchases.

50; economic populist; Fed Accountable; Mind 2 Cents; speaking; Time; Treasury purchases.

Bogarty Files Sun 2009-09-20 14:22 EDT

Bogarty Files: The Postmodern Explanation

...Every time there is a gap between what appears to be reality, and what mainstream seems to believe, I get this uneasy feeling. Is it me, I wonder, am I missing something?...I ordered a few books on postmodernism...So now everything is starting to make sense. This is the Obama strategy -- the ``Geithner plan''. While I'm busy studying the balance sheets of the banks, unemployment data etc. they acted, creating a new reality, one without another great depression. Are the banks insolvent? What is insolvency? My definition or Ken Lewis's? There is no universal meaning for insolvent, there is no transcendental signified, just some archaic meaning handed down to us. We don't have to accept it, we can define it anyway we want, especially if another great depression hinges on its meaning...

Bogarty Files; Postmodern Explanation.

The IRA Analyst Thu 2009-09-17 10:22 EDT

Back to Basis for Securitization and Structured Credit: Interview With Ann Rutledge

To get some further insight into the world of securitization and cash flows, we spoke last week to Ann Rutledge of RR Consulting...The difference between a futures contract for T-bonds and a credit default swap is that the former is a real contract for a real deliverable, whereas the CDS trades against what people think is the cash basis, but there is no cash market price to discipline and validate that derivative market. Rutledge: a contract or structure without a cash basis should not be allowed at all. You cannot have a derivative that is honest and fair to all market participants without a true cash basis. ...derivatives markets such as CDS and CDOs that have no cash basis tend to magnify speculative excesses, while derivative markets where there is a visible cash basis market to discipline investor behavior seem less unstable in terms of systemic risk. Rutledge: If the cash market were visible and could be examined by all participants, then it would give away the ability of the dealer banks to tax participants in the market and extract these abnormal returns. So how do we fix the problem... Rutledge: These originators play this game over and over again and they don't get caught, in part because we do not have a common, standardized set of definitions for governing the most basic aspects of the securitization process. The buyers don't do the work and the accounting framework is a counterparty-oriented framework, not one that is focused on the underlying assets. So banks like Countrywide and WaMu originated and sold some truly hideous structures during the bubble, but the buyers only diligence was reliance upon recourse to these banks. It costs maybe 50bp for a buyer to get the data and grind the numbers to really diligence a securitization based on cash flows, even a complex CDO. But the cost to the buyer and the system of not doing the diligence is an order or magnitude bigger. If the Congress, the SEC and the FASB, and the financial regulators only do one thing this year when it comes to reforming the world of structured credit, then it should be to impose by law and regulation common standards for the definitions used in the marketplace.

Ann Rutledge; basis; interview; IRA Analyst; securitizations; structured credit.

naked capitalism Thu 2009-09-17 09:46 EDT

``How China Cooks Its Books''

We've commented from time to time on dubious Chinese data releases. But this report from Foreign Policy reports on an interest aspect: that the statistics are not manipulated only in the normal bureaucratic manner (fudging them) but also by getting companies to change behavior so it can be tallied in a more flattering fashion....unemployment is likely 40 to 50 million, as opposed to the widely reported 20 to 30 million; the statistical manipulations are a surprisingly broad-based initiative.

books; China Cooks; naked capitalism.

naked capitalism Sun 2009-09-13 16:32 EDT

Guest Post: The Economy Will Not Recover Until Trust is Restored

George Washington of Washington's Blog

...our economy is not fundamentally stabilizing ...because the government and the financial giants are taking actions and releasing data which encourage more distortion and less trust..all of the happy talk in the world won't turn the economy around when the fundamentals of the economy are lousy, or there has been a giant bubble and vast overleveraging, or there has been massive fraud, or the government has gone so far into debt that it has formed a black hole... the chair of the congressional oversight committee of the bailouts (Elizabeth Warren) and the senior regulator during the S & L crisis (William Black) both say that hiding the true state of affairs and trying to put a happy face on an economic crisis just prolongs the length and severity of the crash...trying to instill false confidence will actually backfire on Summers, Geithner, Bernanke and the boys and make the crisis worse.

economy; Guest Post; naked capitalism; recover; restore; trust.

Calculated Risk Fri 2009-09-04 19:01 EDT

Junk Bond Default Rate Passes 10 Percent

CalculatedRisk

From Rolfe Winkler at Reuters: U.S. junk bond default rate rises to 10.2 pct -SP The U.S. junk bond default rate rose to 10.2 percent in August from 9.4 percent in July ... Standard & Poor's data showed on Thursday. The default rate is expected to rise to 13.9 percent by July 2010 and could reach as high as 18 percent if economic conditions are worse than expected, SP said in a statement. ... In another sign of corporate distress, the rating agency has downgraded $2.9 trillion of company debt year to date, up from $1.9 trillion in the same period last year. Bad loans everywhere ...

Calculated Risk; Junk Bond Default Rate Passes 10 Percent.

Jesse's Café Américain Sun 2009-08-30 11:59 EDT

US Equity Markets Look Dangerously Wobbly As Insiders Sell In Record Numbers

Jesse

"Investors Intelligence's latest survey of advisory services showed an impressive 51% bullish and a meager 19% bearish...the spread hasn't been that wide since November 2007." Alan Abelson, Barrons, Aug. 29, 2009Next week we move into September, the riskiest month of the year for financial markets, with the federals escalating preparations for a flu pandemic, while Congress considers legislation... ``selling by corporate insiders in August has surged to $6.1 billion, the highest amount since May 2008. The ratio of insider selling to insider buying hit 30.6, the highest level since TrimTabs began tracking the data in 2004.''

Equity Markets Look Dangerously Wobbly; Insider sell; Jesse's Café Américain; record number.

Tue 2009-06-16 00:00 EDT

naked capitalism: Guest Post: The Imminent Disinformation Schism

``naive, easily-manipulated, small-time mom and pop investors, who only care about looking at their daily yahoo finance screens and 401(k) statements...and the forward looking taxpayers, who see the upcoming budget deficit fiasco, the social security ponzi scheme, the Medicare/Medicaid debacle, the ridiculous underfunding in public and corporate pension funds, the rising city and state taxes, the shuttering factories, the rising unemployment, the plummeting American production base, the "seasonally" upward-adjusted economic data coupled with consistently downward revised prior economic releases, the increasing savings rate and the multi trillion discrepancy in consumer purchasing power.'' Time contributing author Douglas McIntyre declares end to 2008 banking crisis

Guest Post; Imminent Disinformation Schism; naked capitalism.