Fri 2010-10-08 21:11 EDT

4ClosureFraud Posts Lender Processing Services Mortgage Document Fabrication Price Sheet >> naked capitalism

Yves Smith

...document fabrication is widespread in foreclosures. The reason is that the note, which is the borrower IOU, is the critical instrument to establishing the right to foreclose in 45 states (in those states, the mortgage, which is the lien on the property, is a mere ``accessory'' to the note). The pooling and servicing agreement, which governs the creation of mortgage backed securities, called for the note to be endorsed (wet ink signatures) through the full chain of title...Evidence is mounting that for cost reasons, starting in the 2004-2005 time frame, originators like Countrywide simply quit conveying the note. We are told this practice was widespread, probably endemic. The notes are apparently are still in originator warehouses. That means the trust does not have them (the legalese is it is not the real party of interest), therefore it is not in a position to foreclose on behalf of the RMBS investors. So various ruses have been used to finesse this rather large problem...We finally have concrete proof of how widespread document fabrication was...This revelation touches every major servicer and RMBS trustee in the US...The story that banks have been trying to sell has been that document problems like improper affidavits are mere technicalities. We've said from the get go that they were the tip of the iceberg of widespread document forgeries and fraud...

4ClosureFraud Posts Lender Processing Services Mortgage Document Fabrication Price Sheet; naked capitalism.

Fri 2010-10-08 21:02 EDT

Kudlow Gets Into Foreclosuregate in [Market-Ticker]

...The REMICs - the foundational conduits for all this paper - are to a large degree defective. I bet some of Fannie and Freddie's are too. Many notes were not conveyed, and in the states where recordation is necessary, most of them weren't recorded either. Many of these original notes are known to be sitting with the originator, never endorsed over and in some cases shipped overseas or deliberately destroyed. For all intents and purposes they're gone, because once the MBS closes they can't be put in later on...

Foreclosuregate; Kudlow; Market Ticker.

naked capitalism Fri 2010-09-17 19:42 EDT

Auerback: TARP Was Not a Success -- It Simply Institutionalized Fraud

Marshall Auerback

...the only way to call TARP a winner is by defining government sanctioned financial fraud as the main metric of results. The finance leaders who are guilty of wrecking much of the global economy remain in power -- while growing extraordinarily wealthy in the process. They know that their primary means of destruction was accounting ``control fraud'', a term coined by Professor Bill Black, who argued that ``Control frauds occur when those that control a seemingly legitimate entity use it as a `weapon' to defraud.'' TARP did nothing to address this abuse; indeed, it perpetuates it. Are we now using lying and fraud as the measure of success for financial reform?...Money was ``repaid'', not because the banks were accumulating massive profits as a consequence of their revival, but largely as an outgrowth of the accounting tricks sanctioned by Congress and the White House in the wake of the 2008 financial crisis...When we lie about accounting and leave zombie banks in the hands of those that looted them and caused trillions of dollars of losses we eviscerate our integrity and our efforts at economic recovery...

Auerback; naked capitalism; Simply Institutionalized Fraud; Success; TARP.

Christopher Whalen Fri 2010-09-17 19:31 EDT

The key to the future of finance is now emerging

Christopher Whalen

Basel III is entirely irrelevant to the economic situation and even to the banks. Through things like minimum capital levels, the Basel II rules provided the illusion of intelligent design in the regulation of banking and finance. In fact, Basel II made the subprime crisis possible and the subsequent bailout inevitable [by enabling off-balance sheet finance and OTC derivatives]...Part of the reason for my undisguised contempt for the Basel III process comes from caution regarding the benefits of regulating markets...But a large portion of my criticism for Basel III and the entire Basel framework is even more basic, namely the notion that any form of a priori regulation, public or private, can prevent people from doing stupid things...The key premise of Basel III is that the use of minimum capital guidelines and other strictures will somehow enable regulators to prevent a crises before it occurs. The only trouble is that regulators have no objective measures for compliance with Basel II/III, much less predicting market breaks...As in past decades and crises right through to 2008, the regulators will be the last to know about a problem...

Christopher Whalen; Emergency; finance; future; Key.

naked capitalism Fri 2010-09-17 18:52 EDT

Why Do We Keep Indulging the Fiction That Banks Are Private Enterprises?

... Big finance has an unlimited credit line with governments around the globe. ``Most subsidized industry in the world'' is inadequate to describe this relationship. Banks are now in the permanent role of looters, as described in the classic Akerlof/Romer paper. They run highly leveraged operations, extract compensation based on questionable accounting and officially-subsidized risk-taking, and dump their losses on the public at large...The usual narrative, ``privatized gains and socialized losses'' is insufficient to describe the dynamic at work. The banking industry falsely depicts markets, and by extension, its incumbents as a bastion of capitalism. The blatant manipulations of the equity markets shows that financial activity, which used to be recognized as valuable because it supported commercial activity, is whenever possible being subverted to industry rent-seeking. And worse, these activities are state supported...banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction...

bank; fiction; Keep Indulging; naked capitalism; private enterprise.

China Financial Markets Wed 2010-09-15 19:28 EDT

What do banking crises have to do with consumption?

Michael Pettis

For the next several years, as Keynes reminded us in the 1930s, savings is not going to be a virtue for the world economy. It is more likely to be a vice. In order to regain growth the world desperately needs less savings and more private consumption, but I think it is not going to get nearly enough to generate growth. Why? Because in all the major economies the banking systems are largely insolvent, or about to become so, and desperately need to rebuild capital...With all of the major economies facing banking crises, they must clean up the banks by forcing the household sector to pay the bill. This will put downward pressure on household disposable income and wealth for many years...For twenty years Japanese consumption growth has limped along [due to paying for] their banking crisis...Chinese consumption dropped from a very-low 45% of GDP ten years ago to an astonishing 36% last year just as -- no coincidence -- Chinese households were forced to clean up the last banking crisis...

bank crises; China Financial Markets; consumption.

The Baseline Scenario Wed 2010-09-08 10:36 EDT

Irish Worries For The Global Economy

Peter Boone and Simon Johnson

...Ireland's difficulties arose because of a massive property boom financed by cheap credit from Irish banks. Ireland's three main banks built up loans and investments by 2008 that were three times the size of the national economy; these big banks (relative to the economy) pushed the frontier in terms of reckless lending. The banks got the upside, and then came the global crash...Today roughly one-third of the loans on the balance sheets of major banks are nonperforming...The government responded to this with what are currently regarded as ``standard'' policies in Europe and America. It guaranteed all the liabilities of banks and began injecting government funds to keep these financial institutions afloat. It bought the most worthless assets from banks, paying them government bonds in return. Ministers have promised to recapitalize banks that need more capital. Despite or perhaps because of this therapy, financial markets are beginning to see Ireland as Europe's next Greece...Until very recently, Ireland was seen as Europe's poster child of prudent reforms...The ultimate result of Ireland's bank bailout exercise is obvious: one way or another, the government will have converted the liabilities of private banks into debts of the sovereign (that is, Irish taxpayers), yet the nation probably cannot afford these debts...The idea that Ireland, Greece or Portugal can cut spending and grow out of overvalued exchange rates with still large budget deficits, while servicing all their debts and building more debt, is proving -- not surprisingly -- wrong...

Baseline Scenario; global economy; Irish worries.

Clusterstock Sat 2010-09-04 11:16 EDT

Your Textbooks Lied To You: The Money Multiplier Is A Myth

The following comes from an excellent new paper from the Fed. The paper describes the myth of the money multiplier and is an absolute must read for anyone who is trying to fully understand the current environment. It turns much of textbook economics on its head and describes in large part why the bank rescue plan and the idea of banks being reserve constrained is entirely wrong: ``Simple textbook treatments of the money multiplier give the quantity of bank reserves a causal role in determining the quantity of money and bank lending and thus the transmission mechanism of monetary policy. This role results from the assumptions that reserve requirements generate a direct and tight linkage between money and reserves and that the central bank controls the money supply by adjusting the quantity of reserves through open market operations. Using data from recent decades, we have demonstrated that this simple textbook link is implausible in the United States for a number of reasons...bank loan supply does not respond to changes in monetary policy through a bank lending channel, no matter how we group the banks...''

ClusterStock; Money Multiplier; myth; textbook lying.

New Deal 2.0 Fri 2010-09-03 18:57 EDT

The Real Lesson from the Great Depression: Fiscal Policy Works!

Marshall Auerback

...At the outset of the Great Depression, economic output collapsed, and unemployment rose to 25 per cent. Influenced by his ``liquidationist'' Treasury Secretary, Andrew Mellon, then President Hoover made comparatively minimal attempts to deploy government fiscal policy to stimulate aggregate demand...This all changed under FDR...The government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York's Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown...once the Great Depression hit bottom in early 1933, the US economy embarked on four years of expansion that constituted the biggest cyclical boom in U.S. economic history. For four years, real GDP grew at a 12% rate and nominal GDP grew at a 14% rate. There was another shorter and shallower depression in 1937 largely caused by renewed fiscal tightening (and higher Federal Reserve margin requirements)...

0; Fiscal policy worked; Great Depression; new dealing 2; Real Lesson.

zero hedge - on a long enough timeline, the survival rate for everyone drops to zero Wed 2010-08-25 10:47 EDT

Illinois Teachers' Retirement System Enters The Death Spiral: AIG Wannabe's Go-For-Broke Strategy Fails As Pension Fund Begins Liquidations

Two few months ago we disclosed how the Illinois Teachers' Retirement System (TRS) was doing all it can to become the next AIG. In addition to, or maybe precisely due to, its deplorable fundamental condition, which can be summarized as being 61% underfunded on its $33.7 billion in assets, with a performance record of down $4.4 billion in 2009 and 5% in 2008, the fund, courtesy of a detailed analysis by Alexandra Harris of the Medill Journalism school at Northwestern, was found to be on its way to trying to become a veritable self-made TBTF: as was described then, "TRS is largely on the risky side of the contracts, selling and writing OTC derivatives, including credit default swaps,..."

AIG Wannabe's Go; Broke Strategy Fails; Death Spiral; dropped; Illinois teacher; long; Pension Fund Begins Liquidations; Retirement System Enters; survival rate; Timeline; zero; Zero Hedge.

Mon 2010-08-16 12:56 EDT

Help:How to research U.S. corporations - SourceWatch

This Guide, consisting of this main article and three more in-depth sub-articles, is designed to help researchers and activists gather essential information on any type of U.S.-based company, whether small or large, privately held or publicly traded. The resources listed here are all, in one way or another, part of the public record. The first part covers leading sources of basic information on companies of all kinds. The second part focuses on information sources relating to the key relationships every company must have in order to function. The final part shows you how to gather information about a company's "social responsibility" record. Together, these sections will help you find all the basic information needed to support efforts to get companies to do the right thing. Happy hunting!...

help; research U.S. corporations; SourceWatch.

Tue 2010-08-03 15:02 EDT

Economics of Contempt: Anatomy of Lehman's Failure, and the Importance of Liquidity Requirements

Remember the Lehman Examiner's Report? The 4000+ page report by the court-appointed examiner was lauded for a couple of weeks after it was released, and then largely forgotten. The media and blogosphere quickly moved on to the next outrage-du-jour...Well, I did not forget about it, and thanks to the uptick in flights -- and thus reading time -- in the last few months, I can now credibly claim to have read....well, not every single word in the Examiner's Report (some appendices are just pages of CUSIPs), but all of the substantive sections...Anton Valukas and the lawyers at Jenner & Block who wrote the Examiner's Report did a masterful job. I was, and continue to be, in awe of the quality and comprehensiveness of the report...think I have a pretty good handle on what went wrong at Lehman, and why it failed...they were misrepresenting their liquidity pool. In a huge way...the brazenness of their misrepresentation was shocking...Including the clearing-bank collateral in its liquidity pool was not only inappropriate, but also aggressively deceptive...Lehman was also including in its liquidity pool non-central bank eligible CLOs and CDOs. And they had the audacity to mark these CLOs and CDOs at 100 (par) for purposes of the liquidity pool, even though JPMorgan's third-party pricing vendor marked them at 50--60...

Anatomy; contempt; economic; important; Lehman's failure; liquidity requirements.

Tue 2010-08-03 14:34 EDT

Rajiv Sethi: The Economics of Hyman Minsky [2009-12-03]

There has been a resurgence of interest in the economic writings of Hyman Minsky over the past few years, and for good reason...Minsky's theoretical framework combines a cash-flow approach to investment with a theory of financial instability...expectations of financial tranquility are self-falsifying. Stability, as Minsky liked to put it, is itself destabilizing...An essential feature of Minsky's financial instability hypothesis is that a long period of sustained stability gives rise to changes in financial practices which are not conducive to the persistence of stable growth...A sustained period of stability gives rise to optimistic expectations and a rise in speculative financing...if a large number of investments which are prompted by the availability of speculative finance are found to be inept, so that immediate cash flows are significantly lower than expected, then the need for short-term refinancing becomes acute while at the same time banks are less willing to roll over existing debt. A sharp rise in short-term interest rates occurs which can lead to present value reversals, a rush towards liquidity, a plunge in the prices of illiquid assets, both real and financial, and a corresponding drop in new investments...described as a credit crunch, a state of financial distress, or a financial crisis...

2009-12-03; economic; Hyman Minsky; Rajiv Sethi.

Credit Writedowns Fri 2010-07-30 15:30 EDT

Subversive Economists

The economic research staff at the Federal Reserve Bank of New York has been busy. Last week we wrote about the New York Fed's Staff Report No. 458 , which discussed the shadow banking system in the United States. Today we refer to two other new reports: Staff Report No. 457 , entitled ``Resolving Troubled Systemically Important Cross-Border Financial Institutions: Is a New Corporate Organizational Form Required?'', and Staff Report No. 463 , ``The Central-Bank Balance Sheet as an Instrument of Monetary Policy.'' After reviewing them, we are left to conclude that these three papers demonstrate that the research staff at the New York Fed is perhaps the most subversive group of working economists currently on the government payroll....The combination of these three papers seems to suggest that the Federal Reserve is conducting a serious re-evaluation of its traditional role in the new financial landscape. No. 458 acknowledges that the shadow banking system is huge, but largely beyond the regulatory reach--and backstopping help--of the Fed. No. 457 suggests that the complexity of a large, modern financial institution is not only a challenge for managers, but is also a challenge for regulators. It is a cri de coeur for simplicity. And No. 463 breaks new ground by explicitly including central bank balance sheet management as a part of the monetary policy model...

credit writedowns; Subversive Economists.

naked capitalism Sun 2010-07-25 16:13 EDT

The bailouts continue: The Economic Populist

Garrett Johnson

Most people [wrongly] think that the Wall Street bailouts ended at least a year ago...Increased housing commitments swelled U.S. taxpayers' total support for the financial system by $700 billion in the past year to around $3.7 trillion...the current outstanding balance of overall Federal support for the nation's financial system...has actually increased more than 23% over the past year, from approximately $3.0 trillion to $3.7 trillion -- the equivalent of a fully deployed TARP program -- largely without congressional action, even as the banking crisis has, by most measures, abated from its most acute phases, the TARP inspector general, Neil Barofsky, wrote in the report...Congress nearly comes to a standstill over $33 Billion for unemployment extensions, but there isn't even a debate over $700 Billion for Wall Street.

bailout continued; economic populist; naked capitalism.

Sat 2010-07-24 16:13 EDT

Disequilibria: A Constant State Of Instability >> The Shadow Banking System

RueTheDay

What we saw from mid-2007 through early-2009 was a run on the shadow banking system. There were two primary channels by which the shadow banking system operated: the Money Market/Commercial Paper Channel and the Repo Channel...we have largely unregulated [money market funds (MMMFs)] taking deposits (largely withdrawable on demand and usually checkable) and making the equivalent of loans, in other words, acting as banks. Except that the MMMFs were not subject to much in the way of prudential regulation beyond some broad parameters that dictated what investments they could buy, did not have access to FDIC deposit insurance, and did not have lender of last resort access to the Fed's discount window. They were a disaster waiting to happen...Repos also became a very popular mechanism for raising funds in the pre-crisis days, with MMMFs becoming large buyers of repos (lenders) and the broker dealers becoming both buyers and sellers (borrowers and lenders)...during the crisis...the classic maturity mismatch situation...concerns about the quality of commercial paper...triggered by the collapse of Lehman...Without the traditional protection of deposit insurance and lender of last resort financing by the Fed, it turned into a full blown panic...Any meaningful financial reform must bring the shadow banking system out of the shadows. It must be treated as banking, and its institutions regulated as banks...

constant state; Disequilibria; instability; Shadow banks Systems.

zero hedge - on a long enough timeline, the survival rate for everyone drops to zero Fri 2010-07-23 11:01 EDT

Charting The Second Half Economic Slowdown

Goldman's Jan Hatzius...summarizes all the adverse trends that continue to not be priced into stocks. He notes that while the inventory cycle has boosted growth, this artificial rise is now losing steam. Key headwinds facing the economy are that fiscal policy, which has been expansionary, has now become to restrictive; that there has been no overshoot in layoffs for a mean reversion expectation; that the labor market multiplier is very much limited; that while capital spending is just modestly above replacement levels, the large output gap suggests spending should be subdued; the housing overhang is still huge and house prices have further to fall; that there are risks to US from European crisis; that inflation is dropping (and non-existent) even as utilization is low everywhere, which creates a major deflation risk; that the scary budget deficit will destroy any hope for future fiscal stimulus as public debt is surging out of control; lastly, with Taylor-implied Fed rates expected to be negative, the Fed's monetary policy arsenal is non-existent...

chart; dropped; economic slowdown; long; survival rate; Timeline; zero; Zero Hedge.

Thu 2010-07-22 10:39 EDT

A Dual Mandate for the Federal Reserve, The Pursuit of Price Stability and Full Employment

Willem Thorbecke (2000)

Federal Reserve currently has two legislated goals--price stability and full employment--but a debate continues about making price stability the Fed's primary and overriding goal. Evidence from the recent history of monetary policy contradicts arguments in favor of assigning primacy to inflation fighting and supports giving full employment equal importance. Economic performance under the dual mandate has been excellent, with low unemployment and low inflation, while many European countries whose central banks focus solely on inflation are experiencing double-digit unemployment. The costs of unemployment are high, but the costs of even moderate inflation are estimated to be low. Central bankers, who tend to be inflation-averse, need to be prodded to consider goals other than inflation. And, if the Fed pursues price stability exclusively, the price level is not free to increase in the event of an adverse supply shock to prevent large increases in unemployment. A dual mandate allows the Fed to focus on one goal or the other as conditions demand and to balance policy effects.

dual mandate; Federal Reserve; full employment; priced stabilize; pursuit.

naked capitalism Mon 2010-07-19 17:07 EDT

Is the SEC Settlement Really a Win for Goldman?

Tom Adams and Yves Smith

...Conventional wisdom in the financial media is that the settlement announced by the SEC over its lawsuit on a Goldman 2007 Abacus CDO is a home run for Goldman. But a closer reading suggests that Goldman's victory is qualified, and the enthusiastic press response is in large measure due to the firm's skillful manipulation of perceptions...it is hard to see how anything in the settlement, if affirmed, would be negative for private parties considering lawsuits against sellers of CDOs...we imagine potential CDO investors will be mightily encouraged that Goldman ended up returning the full amount of investment to the one true third party investor in the deal -- IKB...An investor considering bringing an action against a bank that sold them a CDO that failed (meaning virtually all 2006 and 2007 ``mezzanine'' CDOs) would probably be encouraged that a bank was required to pay such a large amount for making inaccurate statements about the true nature of the CDO...Plaintiffs who sue CDO sellers have good reason to be optimistic...The settlement thus tarnishes the popular myth that the subprime shorts were insightful outsiders who executed ``the greatest trade ever''...the SEC has demonstrated that investors in such a CDO can win a recovery as a result of such inaccurate statements.

Goldman; naked capitalism; SEC Settlement Really; Wins.

naked capitalism Mon 2010-07-19 17:02 EDT

Elizabeth Warren in Treasury Crosshairs Again, Geithner Opposes Her as Head of Consumer Financial Services Protection Agency

To say there is no love lost between Treasury and Elizabeth Warren is probably putting it mildly. Treasury was gunning for her ouster in early 2009...During the period when the COP was openly and effectively critical of the TARP, there was also a full court press in the media against Warren. Warren is the obvious choice to head the otherwise-guaranteed-to-be-a-joke consumer financial services agency due to set up its shingle at the Fed. She has been a tireless consumer advocate, is trusted and well liked by the public at large, an effective communicator and a respected legal scholar, and is willing to stare down political opponents. All those qualities make her hugely threatening. Banksters and their lobbyist allies have been saying loudly and clearly that they are firmly opposed to having Warren head the new consumer agency. So, predictably, Geithner acts as their water-carrier...this Administration...may actually see loss of the Democrat majority in the House as a win (as in is finding creative ways to rationalize its fallen standing as a possible longer-term advantage). First, it allows Team Obama to blame whatever happens (or fails to happen) on the Republicans. Second, it gives the Administration plenty of air cover to become more openly corporatist (recall Clinton's famed move to the right after the 1994 mid term debacle).

Consumer Financial Services Protection Agency; Elizabeth Warren; Geithner opposes; Head; naked capitalism; Treasury Crosshairs.

New Deal 2.0 Fri 2010-07-16 18:50 EDT

Despite Foreign Debts, U.S. Has the Upper Hand

Henry Liu

U.S. public debt as of July 8, 2010 was $ 13.192 trillion against a projected 2010 GDP of $14.743 trillion. As of April 2010, China held $900.2 billion of US Treasuries, surpassing Japan's holding of $795.5 billion. As of 2007, outstanding GSE (Government Sponsored Enterprises like Fanny Mae; Freddy Mac) debt securities (non-mortgage and those backed by mortgages) summed up to $7.37 trillion. Does this mean disaster for the US? ...the U.S., while vulnerable, is not critically over a barrel by massive foreign holdings of U.S. sovereign debt. The reason is because U.S. sovereign debts are all denominated in dollars, a fiat currency that the Federal Reserve can issue at will. The U.S. has no foreign debt in the strict sense of the term. It has domestic debt denominated in its own fiat currency held in large quantities by foreign governments. The U.S. is never in danger of defaulting on its sovereign debt because it can print all the dollars necessary to pay off foreign holders of its debt. There is also no incentive for the foreign holders of U.S. sovereign debt to push for repayment, as that will only cause the U.S. to print more dollars to cause the dollar to fall further in exchange rates... ...trade globalization through cross-border wage arbitrage also pushes down wages in the US and other advanced economies, causing insufficient consumer income to absorb rising global production. This is the main cause of the current financial crises which have made more severe by financial deregulation. But the root cause is global overcapacity due to low wages of workers who cannot afford to buy what they produce. The world economy is plagued with overcapacity as a result. It is not enough to merely focus on job creation. Jobs must pay wages high enough to eliminate overcapacity. Instead of a G20 coordination on fiscal austerity, there needs to be a G20 commitment to raise wages globally. [Henry C.K. Liu]

0; Foreign debt; new dealing 2; U.S.; upper hand.

billy blog Fri 2010-07-02 18:17 EDT

A total lack of leadership

Bill Mitchell

Another G20 talkfest has ended in Toronto and the final communique suggests that the IMF is now back in charge...The line now being pushed is, as always, structural reform of product and labour markets -- which you read as deregulation and erosion of worker entitlements...They buy, without question the notion that ``(s)ound fiscal finances are essential to sustain recovery, provide flexibility to respond to new shocks, ensure the capacity to meet the challenges of aging populations, and avoid leaving future generations with a legacy of deficits and debt.'' But what constitutes ``sound fiscal finances'' is not spelt out. It is all fudged around what the bond markets will tolerate. But what the bond traders think is a reasonable outcome for their narrow vested interests is unlikely to be remotely what is in the best interests of the overall populace...A sovereign government is never revenue constrained because it is the monopoly issuer of the currency and so the bond markets are really superfluous to its fiscal operations. What the bond markets think should never be considered. They are after all the recipients of corporate welfare on a large scale and should stand in line as the handouts are being considered. They are mendicants. It is far more important that government get people back into jobs as quickly as possible and when they have achieved high employment levels then they might want to conclude the fiscal position is ``sound''...The G20 statement is full of erroneous claims that budget surpluses ``boost national savings'' when in fact they reduce national saving by squeezing the spending (and income generating capacity) of the private sector -- unless there are very strong net export offsets...The on-going deflationary impact on demand that persistently high unemployment imposes is usually underestimated by the conservatives...

Billy Blog; leadership; total lack.

Sat 2010-05-22 14:06 EDT

A Japanese Rx for the West: Keep Spending - Interview with Richard Koo - Barrons.com

LESLIE P. NORTON

America seems to be suffering from the same affliction that has hobbled Japan for so long -- a balance-sheet recession. And no matter how hard the Federal Reserve tries, it won't end until businesses shake their heavy loads....the private-sector companies are no longer maximizing profits; they are minimizing debt. They are minimizing debt because all the assets they bought with borrowed money collapsed in value, but the debt is still on their books, so their balance sheets are all under water. If your balance sheet is under water, you have to repair it. So everybody is in balance-sheet-repair mode...It took us [in Japan] a decade to figure out. People said, "Ah, just run the printing presses, ah, structural reform, ah, just privatize the post office, this and that, and everything will be fine." Nothing worked. This is pneumonia, not the common cold. When people are minimizing debt because of their balance-sheet problems, monetary policy is largely useless. If your balance sheet is under water, in negative equity, you are not going to borrow money at any interest rate, and no one will lend you money, either...

Barrons; com; interview; Japanese Rx; keep spending; Richard Koo; West.

winterspeak.com Sat 2010-05-22 14:02 EDT

Richard Koo, who is so close, is still wrong

winterspeak

...Richard Koo, who understands the situation in Japan (which is very very similar) quite well still makes suboptimal recommendations because he too does not understand how the financial system works...He's correct in saying that massive fiscal stimulus saved Japan. They really were on the brink of their Great Depression in the 80s, and have avoided it without going to War. This is good, but none of it was necessary, so really represents a massive failure. Koo thinks that the Govt is spending the money the private sector has saved. In fact, Govt spending is what is giving the private sector its savings! Government is not borrowing anything. Japan should really just massively slash taxes and fund its private sector. Let the balance sheets heal already! Koo does not talk about all the terrible malinvestment that the Governments fiscal spending did. The US should simply implement a payroll tax holiday until inflation starts to tick up. Right now, the US's savings desire is not as high as the Japanese's, but a double dip might get it closer. That just means the US will need even higher deficits. It took Japan 20 years to start getting comfortable with sufficiently large deficits. Now might be a good time to go long the Nikkei, actually.

closed; com; Richard Koo; Winterspeak; wrong.

naked capitalism Thu 2010-05-20 15:44 EDT

Germany's Short Selling Bans: Prudence, Populism or Bank Protection?

...Now why do the Germans in particular feel a tad nervous? Well, Germany, like the UK and Switzerland, has a banking system so large relative to its economy that it cannot credibly backstop it if it goes seriously off the rails. The problem is more acute in Germany because it does not control its own currency (as it cannot simply throw whatever it takes at the banks and if need be, ``print'' later; by contrast, the risk to the UK and Swiss banking system comes from its banks' foreign currency exposures)...The bailout plan shifted risk from the periphery to the core of Europe, and the core, upon examination, does not look too solid. Prepare yourself for a rough ride.

Banks Protected; Germany's short-selling ban; naked capitalism; population; prudence.

zero hedge Wed 2010-05-19 11:37 EDT

Guest Post: Goldman's CDOs Had Nothing to Do With the Real Estate Bubble

David Fiderer

If Goldman Sachs wanted to reduce its exposure to subprime mortgage investments, why didn't it simply sell the assets it owned? Two reasons: First, those large sales would have sent a signal that something was terribly, terribly wrong, and thereby pushed prices down further. That's how supply and demand normally works. Second, Goldman professed to be market maker, which uses its trading book to instill confidence. It ostensibly bought, sold and inventoried mortgage securities to provide stability and liquidity to the marketplace. Of course, we now know that such market confidence was entirely misplaced. To sidestep these issues, Goldman and other major banks found a solution that subverted the laws of supply and demand, and escaped the price discovery of a transparent marketplace. They fabricated synthetic CDOs, such as Abacus 2007 AC-1. These toxic assets, invented out of thin air, made the meltdown worse than it otherwise would have been...

Goldman's CDOs; Guest Post; real estate bubble; Zero Hedge.

PRAGMATIC CAPITALISM Tue 2010-05-18 15:15 EDT

A DEFLATIONARY RED FLAG IN THE $U.S. DOLLAR

TPC

...the performance of the dollar is the surest evidence of the kind of environment we're currently in. The surging dollar is a clear sign that inflation is not the concern of global investors. This is almost a sure sign that deflation is once again gripping the global economy and should be setting off red flags for equity investors around the world. The recent action in the dollar is eerily reminiscent of the peak worries in the credit crisis when deflation appeared to be taking a death grip on the global economy and demand for dollars was extremely high...As for the gold rally, I think it's clear gold is rallying in anticipation of its potential to become a future reserve currency. The potential demise of the Euro has become a rally cry for inflationistas who don't understand that the Euro is in fact another single currency system (like the gold standard) which is destined to fail. In the near-term, the rise in gold is likely justified as fear mongering and misguided governments increase demand for the yellow metal. Ultimately, I believe investors will realize that there is little to no inflation in the global economy and that the non-convertible floating exchange systems (such as the USD and JPY) are fundamentally different from the flawed currency system in place in Europe. Debt deflation continues to plague the global economy. Thus far, policymakers have been unable to fend off this wretched beast and I attribute this largely to the widespread misconceptions regarding our monetary systems. This extends to the very highest levels of government...Positioning yourself for hyperinflation and a U.S. dollar collapse has been a recipe for disaster and will continue to be a recipe for disaster as debt deflation remains the single greatest risk to the global economy.

DEFLATIONARY RED FLAG; PRAGMATIC CAPITALISM; U.S. dollar.

Tue 2010-05-18 14:16 EDT

billy blog >> Blog Archive >> The enemies from within

...Unemployment is the major source of poverty whether it be in a advanced or developing country. It is alienating, soul destroying, extends its costs well beyond the individual and the income losses alone dwarf the costs arising from so-called microeconomic inefficiencies. The daily loss of GDP involved in not having all available workers doing something productive is mammoth. It is a no-brainer that it is the large economic problem that should be solved in any country...If the private sector cannot produce enough then there is only one sector left ladies and gentleman who can do the trick!...Given the private sector doesn't want to spend at present -- and you cannot blame them for that given the appalling state of their balance sheets and the very unsteady housing market -- there is a danger that demand will drop further unless the government adds to its stimulus packages...the US is an economy that desperately needs more aggregate demand. The only constraint on employment is the lack of spending and there is no financial constraint that exists in a fiat monetary system that prevents the government from eliminating that demand deficiency...

Billy Blog; blogs Archive; enemies.

zero hedge Sun 2010-05-09 09:45 EDT

The Day The Market Almost Died (Courtesy Of High Frequency Trading)

A year ago, before anyone aside from a hundred or so people had ever heard the words High Frequency Trading, Flash orders, Predatory algorithms, Sigma X, Sonar, Market topology, Liquidity providers, Supplementary Liquidity Providers, and many variations on these, Zero Hedge embarked upon a path to warn and hopefully prevent a full-blown market meltdown. On April 10, 2009, in a piece titled "The Incredibly Shrinking Market Liquidity, Or The Black Swan Of Black Swans" we cautioned "what happens in a world where the very core of the capital markets system is gradually deleveraging to a point where maintaining a liquid and orderly market becomes impossible: large swings on low volume, massive bid-offer spreads, huge trading costs, inability to clear and numerous failed trades. When the quant deleveraging finally catches up with the market, the consequences will likely be unprecedented, with dramatic dislocations leading the market both higher and lower on record volatility." Today, after over a year of seemingly ceaseless heckling and jeering by numerous self-proclaimed experts and industry lobbyists, we are vindicated...absent the last minute intervention of still unknown powers, the market, for all intents and purposes, broke. Liquidity disappeared. What happened today was no fat finger, it was no panic selling by one major account: it was simply the impact of everyone in the HFT community going from port to starboard on the boat, at precisely the same time...It is time for the SEC to do its job and not only ban flash trading as it said it would almost a year ago, but get rid of all the predatory aspects of high frequency trading, which are pretty much all of them...HFT killed over 12 months of hard fought propaganda by the likes of CNBC which has valiantly tried to restore faith in our broken capital markets. They have now failed in that task too. After today investors will have little if any faith left in the US stocks, assuming they had any to begin with. We need to purge the equity market structure of all liquidity-taking parasitic players. We must start today with High Frequency Trading...

courtesy; day; dies; high frequency trade; Market; Zero Hedge.

zero hedge Sun 2010-05-09 09:25 EDT

Dissecting The Crash

Here are two accounts dissecting in detail the events from yesterday. One is from Dan Hinckley at Wild Analytics, the second from Dan O'Brien. ...The idea that it was a 'fat finger' error is ludicrous; unless the fat finger hit every market in the world virtually simultaneously. Liquidity simply left the world financial markets for about four minutes this afternoon. The bids just vanished...In one second more or less someone (and yes, under these circumstances, human beings take control of the machines) made the decision to pull the bids on every equity in the S&P, every financial futures contract, every FX contract in every market in the world. This kind of thing just doesn't happen in a pure auction environment; there just isn't a tight enough communication link between the parties to allow the decisions to propagate within the same second -- even with HFT algorithms. No. Some human made the decision to pull the bids; all of them, all at once. If that is not a condemnation of the concentration of financial power and the systematic risk it engenders I don't know what is...How does all of this happen? Well, you can thank the Federal Reserve... 1) The Fed prints fake money out of thin air... 2) Large banks and hedge funds borrow money from the Fed at near-ZERO interest rates... 3) These institutions buy Treasuries with a guaranteed 4% return, thus guaranteeing the banks massive and risk-free profits on the backs of the middle class (remember, you're not allowed to earn an interest rate on your savings accounts!)... 4) These institutions then swap Treasuries with the Fed for cash... 5) These same institutions (banks) then take the cash and gun the stock market higher with its FREE MONEY from the government...I meant free money from you. By the way, were you asked to vote on this? Frankly, it's better than free money - they're being PAID to do this... 6) Banks pay the very clown-posse that cause the 2008 crash (and today's) the largest bonuses...EVER...with your tax dollars.

Crash; dissecting; Zero Hedge.