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.

Credit Writedowns Mon 2010-07-19 12:08 EDT

Misunderstanding Modern Monetary Theory

Paul Krugman wrote a post today regarding MMT called "I Would Do Anything For Stimulus, But I Won't Do That (Wonkish)." The gist of Krugman's post was to refute Modern Monetary Theory's view on money and deficits...Krugman's post mischaracterizes both MMT and Galbraith's statement...Krugman is trapped in a gold standard view of money as he assumes the government must issue bonds to fund itself. He forgets that we live in a fiat world...the problem for deficits is not national solvency but inflation and currency depreciation. That makes me worried about deficits. If that makes me an inflation hawk and anti-deficit, then so be it. Nevertheless, MMT does say the same thing about deficits, namely that they can lead to inflation. But MMT also says that inflation is not a problem when you have an enormous output gap from 17% underemployment. MMT proponents recommend deficit spending to close that gap. But you can't spend at will under MMT; eventually the output gap closes and inflation becomes a big problem...

credit writedowns; Misunderstanding Modern Monetary Theory.

Wed 2010-06-09 18:56 EDT

Rajiv Sethi: The New Market Makers

...the SEC's preliminary report on the flash crash...led me to believe that most of this activity was caused by algorithmic trading strategies placing directional bets based on rapid responses to incoming market data. Two strategies in particular -- momentum ignition and order anticipation -- were explicitly mentioned as potentially destabilizing forces in the SEC's January Concept Release on Equity Market Structure. The SEC invited comments on the release, and dozens of these have been posted to date. There is one in particular, submitted by R.T. Leuchtkafer about three weeks before the crash, that I think is especially informative and analytically compelling...Leuchtkafer traces the history of recent changes in market microstructure and examines the resulting implications for the timing of liquidity demand and supply...The standard argument against increased regulation of the new market makers is that it would interfere with their ability to supply liquidity. Leuchtkafer argues, instead, that the strategies used by these firms cause them to demand liquidity at precisely those moments when liquidity is shortest supply...

New Market Makers; Rajiv Sethi.

The Money Game Fri 2010-05-21 13:30 EDT

Sorry, We're Not Weimar Or Zimbabwe, And Gold Is Never Going To Be A Currency Again

Gold is hotter than ever...As an asset class gold has outperformed just about everything over the last 10 year period. It's been an impressive run. But is it all justified? Bear with me for a bit while I take a long-term macro look at gold as an asset class...the fiat currency system is here to stay (or at least some form of it). The odds of reverting back to a purely gold based system is next to zero in my opinion. The truth is, the gold standard as a currency system is a barbarous relic. It is a currency system that worked well in the old world economy, but simply does not have the flexibility to meet the demands of the growing global economy. The global economy has become too complex and too intertwined to be constrained by the gold standard. The fiat currency system is a product of economic evolution and the growing demands and strains of international trade. Famous examples of the break-down of the gold standard and its inflexibility to meet trade demands include the UK in 1931 and the U.S. government's destruction of the gold linked currency system under the Bretton Woods agreement...

currency; Go; gold; Money game; Sorry; Weimar; Zimbabwe.

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.

Culture of Life News Tue 2010-04-06 10:23 EDT

Ireland And US Will Be Devoured By Derivatives Beast

Elaine Supkis

The banking mess in the West continues. It has rather deep roots. That is, we decapitalized our own banking system long, long ago. The fix for this was to create a fake banking system with virtually no real capital reserves at all. This was possible thanks to the floating fiat currency created when Nixon suddenly cut the gold standard back in 1971. By 1987, the banking collapse was tremendous during a deflationary time that followed a hyperinflation era. This fix created conditions that caused the near-total collapse in Western banking...So far, governments in the West are being bailed out by Asia. And this is being done so Asia can continue to rapidly expand its own industrial base. This savage business gets worse and worse over time due to the self-feedback system of this debt expansion: you get more credit from export powers via letting them export even more to your own home base. So as capital vanishes, the need for debt shoots upwards and the system continues to get more and more unbalanced...Sure, we have little inflation except in important commodities but this is due to the Goddess of Zero slashing away at the mountain of debt, using the default tool to fix this mess in a very brutal way. Unfortunately, the bankers still control our `democracy' so they are moving all their losses onto our books and far from things going to zero, it is actually heading towards infinity: infinite debts owed by the taxpayers who want to continue stupidly cutting taxes while increasing credit based on virtually no capital at all! Sheesh.

Culture; Derivative Beast; devouring; Ireland; Life News.

The Money Game Fri 2010-03-19 12:38 EDT

Kenneth Rogoff's Sovereign Debt Warnings Are So Wrong, It's Like He's Living In A Different Time Period

Marshall Auerback

We've persistently taken the view that there is no economic doctrine, no magic number, which would imply a firm external constraint as far as public spending goes, when dealing with a sovereign government issuing debt its own floating rate, non-convertible currency. At some point, we may indeed have a resource constraint, or an inflation constraint, but not a national solvency issue. Yet the hysteria surrounding fiscal policy has moved from the realm of rational debate and metamorphosed into a matter of national theology...A sovereign government is never hostage to the dictates of financial capital because it no longer faces the external constraint that was always present under a gold standard regime. A nation that adopts its own floating rate currency can always afford to put unemployed domestic resources to work. Its government may issue liabilities denominated in its own currency (for interest rate maintenance reasons or to offer its savers an interest-bearing alternative to cash), and will service any debt it issues in its own currency...

different time periods; Kenneth Rogoff's Sovereign Debt Warnings; lively; Money game; wrong.

Jesse's Café Américain Tue 2010-03-09 17:51 EST

Russia Continues to Build Its Gold Reserves Ahead of the SDR Discussions

Jesse

Thanks to friend Dave at Golden Truth for this updated chart.As you know, Russia, India, China and some of the BRIC-like countries will continue to push hard for a gold and silver content in the new formulation of the SDR this year. The US and UK are vehemently opposed...One cannot have a common currency with uncommon fiscal policies and laws. While there is some room for discretion, it is sorely tried in changing economic conditions and social attitudes...This is why a one world currency, except for international trade only and at the discretion of trading partners, is so dangerous. One cannot maintain their sovereign freedom when someone else controls the supply of their money: either you cheat or you submit. All serious economists understand this; too few of the voting public do...This is the fallacy of the US dollar as the reserve currency for the world. It 'worked' as even Mr. Greenspan noted, as long as the US dollar was able to demonstrate the objective stability of an external gold standard relative to other currencies. That lasted for a few years, and the rest is foreign policy and currency wars. The time for its replacement is long past. The BRIC's understand this, and are playing their hands accordingly...

building; gold reserves; Jesse's Café Américain; Russia continues; SDR Discussions.

naked capitalism Sun 2010-02-28 13:13 EST

Das: Mark to Make Believe -- Still Toxic After All These Years!

Satyajit Das

n 2007, as the credit crisis commenced, paradoxically, nobody actually defaulted. Outside of sub-prime delinquencies, corporate defaults were at a record low. Instead, investors in high quality (AAA or AA) rated securities, that are unlikely to suffer real losses if held to maturity, faced paper -- mark-to-market (``MtM'') -- losses. In modern financial markets, market values drive asset values, profits and losses, risk calculations and the value of collateral supporting loans. Accounting standards, both in the U.S.A. and internationally, are now based on theoretically sound market values that are problematic in practice. The standards emerged from the past financial crisis where the use of ``historic cost'' accounting meant that losses on loans remained undisclosed because they continued to be carried at face value. The standards also reflect the fact that many modern financial instruments (such as derivatives) can only be accounted for in MtM framework. MtM accounting itself is flawed. There are difficulties in establishing real values of many instruments. It creates volatility in earnings attributable to inefficiencies in markets rather than real changes in financial position...

Das; Make-Believe; marked; naked capitalism; toxic; years.

The Money Game Tue 2010-02-16 16:49 EST

Inflation Protected Bonds Murdered As PIMCO And BlackRock's Hyperinflation Fears Flounder

Investors are increasingly giving up on hyperinflation bets. For example, investors are willing to buy standard U.S. treasury bonds that pay just 3.69% yield. That doesn't leave room for much inflation...The niche market of Treasury Inflation Protected Securities (TIPS, bonds that adjust their yield to inflation) is giving up on its inflation concerns as well. As this market is too small for major central bank investment, it's far harder to argue away the lack of inflation it forecasts.

BlackRock's Hyperinflation Fears Flounder; Inflation Protected Bonds Murdered; Money game; PIMCO.

Thu 2010-01-07 20:04 EST

Hard times at the Washington Post

Dean Baker

The Washington Post is a newspaper with a proud legacy. It has done much important reporting over the years, most famously its coverage of the Watergate scandal that resulted in the resignation of Richard Nixon. Unfortunately, it seems to have abandoned its journalistic standards. In its last issue of the decade, it published as a news piece an article by the Peter Peterson Foundation-funded Fiscal Times. This compromised the Post's journalistic integrity to the extent that readers can no longer take it seriously.

hard times; Washington Post.

Wed 2009-12-16 12:30 EST

James Grant Mourns the Loss of the Gold Standard - WSJ.com

...There's no business value in financial safety when the government bails out the unsafe. And by bailing out a scandalously large number of unsafe institutions, the government necessarily puts the dollar at risk...Collateralize the dollar--make it exchangeable into something of genuine value. Get the Fed out of the price-fixing business. Replace Ben Bernanke with a latter-day Thomson Hankey. Find--cultivate--battalions of latter-day Hellmans and set them to running free-market banks. There's one more thing: Return to the statute books Section 19 of the 1792 Coinage Act...

com; gold standard; James Grant mourns; losses; WSJ.

Thu 2009-11-19 10:12 EST

Business & Technology | Part one | Reckless strategies doomed WaMu | Seattle Times Newspaper

Drew DeSilver

In its headlong pursuit of growth, WaMu systematically dismantled or weakened the internal controls meant to prevent the bank from taking on too much risk -- the very standards and practices that had helped it grow in the first place. WaMu's riskiest loans raked in money from high fees, but because the bank skimped on making sure borrowers could repay them, they eventually failed at disastrously high rates. As loans went bad, they sucked massive amounts of cash that WaMu needed to stay in business. WaMu's subprime home loans failed at the highest rates in nation. Foreclosure rates for subprime loans made from 2005 to 2007 -- the peak of the boom -- were calamitous. In the 10 hardest-hit cities, more than a third of WaMu subprime loans went into foreclosure.

business; part; Reckless Strategies Doomed WaMu; Seattle Times Newspaper; Technology.

The Big Picture Fri 2009-10-23 09:03 EDT

Dick Alford on Opportunities Lost by the Fed

Richard Alford (via Chris Whalen)

Against a backdrop of continued financial fragility and extraordinary policy actions, policymakers are discussing re-balancing global growth, restoring financial stability, and the future of the Dollar as the world's reserve currency. In 2005, Edwin Truman proposed a list of policy measures that if followed would have reduced the US external imbalance and placed the reserve status of the Dollar on better footing. Truman's proposal differed from the standard litany of US fiscal discipline, Dollar adjustment, and increased demand in surplus countries. It called upon the Federal Reserve to slow the growth in US demand. More recent research, by Shin and Adrian, suggests that if the Fed had heeded Truman's prescription, then monetary policy would have also mitigated the recent turmoil in financial markets...

Big Picture; Dick Alford; Fed; opportunity lost.

Fri 2009-10-23 08:55 EDT

Is Goldman Sachs Evil? Or Just Too Good? -- New York Magazine (2009-07-26)

Joe Hagan

(Goldman Sachs, Financial Times, The Wall Street Journal, Rolling Stone, John Rogers, John Whitehead, AIG, Neil Barofsky, Troubled Asset Relief Program, Morgan Stanley, Hank Paulson, Lloyd Blankfein, John Thain, Lehman Brothers, Standard & Poor's, Tim Geithner, JPMorgan Chase, Jon Winkelried, David Solomon, Richard Friedman, Jamie Dimon, Robert Rubin, Dan Jester, Eric Dinallo, Hank Greenberg, Edward C. Forst, Neel Kashkari, Edward Liddy, Stephen Friedman, Sidney Weinberg, TARP, Joseph --Stiglitz, Lucas van Praag, Frank Suozzo, Mike Morgan, Matt Taibbi, Edith Cooper, Byron Trott, Warren Buffett, Barney Frank, John Thornton, Michael Lewis, Larry Summers, Barack Obama, Rahm Emanuel, Robert Hormats, Eliot Spitzer) Inside Goldman Sachs, America's most successful, cynical, envied, despised, and (in its view, anyway) misunderstood engine of capitalism. [2009-07-26]

2009-07-26; Goldman Sachs evil; good; just; New York magazine.

Jesse's Café Américain Sat 2009-10-10 13:07 EDT

Why the Feds Seized the Gold in 1933

Jesse

...The Feds acted on gold because at the time it WAS the currency of the country, and the government had some proper claims on it. When the US left the gold standard it relinquished all such claims, as gold became purely private property. Except perhaps if you are holding gold American eagles, which bear the patina of 'currency.' It should also be noted that the sole action of the government was to ask for the gold, to withdraw convertibility of gold notes from the domestic public, and to monitor the activity of safe deposit boxes taking certain categories of gold, and essentially nothing else. There were no investigations, searches, or even active prosecutions for non-compliance. The purpose of the confiscation was to prepare the way for a formal devaluation of the dollar while it was still on the gold standard.

1933; Feds seize; gold; Jesse's Café Américain.

The Economic Populist - Speak Your Mind 2 Cents at a Time Sat 2009-10-10 12:53 EDT

Proposal: A New Mortgage Finance System

Our mortgage finance system is broken. It needs some serious restructuring or a complete overhaul. We can learn a lot about a new structure from the Danes. The Danish mortgage system is one of the oldest and most sophisticated housing finance markets in the world...Danish mortgage system is a pass-through system that allows mortgage borrowers to benefit from close to capital market financing conditions. In the Danish system, borrower/homeowner don't obtain a mortgage from a mortgage loan originator such as a bank or mortgage lender. They borrow from investors in a transparent and standardized bond market through a mortgage credit institution (MCI). MCI issues bonds in the bond market that match as much as possible the amount and maturity of the borrower's mortgage. The beauty of this system is that a mortgage is exactly matched and balanced with an actively traded bond. MCIs play the vital roles of advisors to the borrower/homeowner and bearer of the credit risk of the mortgage -- they remain ``on the hook'' in the event of delinquency or default. They are mortgage credit insurers. The MCI originator bears full responsibility for timely payments from the borrower/homeowner. So, MCI has an incentive to make sure borrower/homeowners obtain a mortgage loan that is affordable for that family. Meanwhile, bond investors worry about only interest rate risk, with complete insurance on the mortgage that backs the their bond investment. This makes for a highly efficient system.

economic populist; Mind 2 Cents; New Mortgage Finance System; proposed; speaking; Time.

Tue 2009-09-29 11:33 EDT

How Bad Will It Get?

Mike Whitney, CounterPunch

In the two years since the crisis began, neither the Fed nor policymakers at the Treasury have taken steps to remove toxic assets from banks balance sheets. The main arteries for credit still remain clogged despite the fact that the Bernanke has added nearly $900 billion in excess reserves to the banking system. Consumers continue to reduce their borrowing despite historically low interest rates and the banks are still hoarding capital to pay off losses from non performing loans and bad assets. Changes in the Financial Accounting Standards Board (FASB) rules for mark-to-market accounting of assets have made it easier for underwater banks to hide their red ink, but, eventually, the losses have to be reported. The wave of banks failures is just now beginning to accelerate. It should persist into 2011. The system is gravely under-capitalized and at risk...The economy cannot recover without a strong consumer. But consumers and households have suffered massive losses and are deeply in debt. Credit lines have been reduced and, for many, the only source of revenue is the weekly paycheck...The current recession has exposed the fault-lines dividing the classes in the US. Neither party represents working people. Both the Democrats and the Republicans are supportive of "social engineering for the rich"; regressive taxation and economic policies which shift a greater portion of the wealth to the richest Americans. The question of inequality, which has grown to levels not seen since the Gilded Age, will dominate the national conversation as the recession deepens and more people slip from the ranks of the middle class...After Obama's stimulus runs out, consumer spending will again sputter and the economy will slide back into recession.

bad.

Thu 2009-09-17 10:31 EDT

China, Bernanke, and the price of gold - Telegraph Blogs

Ambrose Evans-Pritchard

China has issued what amounts to the ``Beijing Put'' on gold. Former Vice-Chairman of the Communist Party's Standing Committee Cheng Siwei: China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation. [dollar losing reserve status]

Bernanke; China; gold; Price; Telegraph Blogs.

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.