Links to important economic news

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/18/AR2009061804087.html

What does it tell you when banks, investment houses, insurance companies and derivatives traders are so pleased with their regulators that they are prepared to pull out all the stops to keep them?

Does anyone seriously think the United States would be reduced to a second-rate economic power if there weren't any CDOs of CDOs, or if the number of credit default swaps on General Electric bonds were limited to the number of outstanding General Electric bonds, or if reasonable leverage limits were put on hedge funds, private-equity funds or structured investment vehicles?

How we got in this mess? And the rating agencies bless this
http://ftalphaville.ft.com/blog/2009/06/19/58146/re-mimicking-the-crisis/

I imagine they'll have contests like this on how to build the best cdo
http://www.youtube.com/watch?v=RouXygRcRC4

BANKS SHOULD BE THE INSTUMENTS NOT THE MASTERS...
http://www.npr.org/blogs/money/ THIS WEKK'S PLANET MONEY PODCAST REALLY GOOD

Economist Roubini sees double dip recession

http://uk.reuters.com/article/idUKLNE55L02Z20090622

Truly terrifying commentary about the coming deluge from Clusterfuck Nation. We'll be choking on those green shoots in a few months.

http://kunstler.com/blog/2009/06/a-snake-eating-its-own-tail.html#more?ref=patrick.net

Many scoff at the idea that China will suddenly say “no more” to the U.S. After all, the two countries have had a mutually beneficial relationship for years. China lends money to the U.S. and the U.S. buys masses of consumer goods from China. What’s more, it’s a long-standing relationship and many doubt that China would want to upset the status quo. Schiff sees no logic in that argument. “That they’ll keep lending indefinitely makes about as much sense as the argument that real estate prices have been rising, so they’ll rise forever,” he says. “Nothing that is unsustainable will go on forever.”

But the thing is, China doesn’t have to entirely cut off the U.S. to cause problems. Even if China decided to pull back slightly there would be consequences. The U.S. would still find itself short of the cash it needs to pay its bills, and like a homeowner who misses a mortgage payment, it would have to find that money somehow.

Regardless of precisely how and when this all unfolds, the dollar will inevitably become less valuable and interest rates will rise as the U.S. scrambles to attract new lenders. That will translate into inflation and higher interest rates for the average person, too. The cost of living will go up and the value of people’s savings will decline. Canada would likely get dragged into the mess too, just as it was affected by the current downturn in the U.S. The question is how severely this will all hit. “We could have another economic crisis or we could simply have a termites-in-the-woodwork scenario where we gradually have an erosion of our standard of living and become a nation in decline,” says Sawhill. At the very least, from here on in, the debt will act as a giant anchor, slowing whatever modest economic growth the U.S. can muster.

For the past five years or so, a small group of economists, researchers and former government officials have put on what they call the Fiscal Wake-Up Tour. It’s a kind of travelling road show aimed at raising awareness among citizens about America’s looming debt crisis. “We’ve been frustrated that there hasn’t been more attention paid to [the debt] and that steps weren’t taken earlier,” says the Brookings Institution’s Sawhill, who’s taken part in the tour.

Lately, however, the issue has been getting more attention, say some of the tour’s participants. The trouble is, nobody has any faith that this new-found interest will translate into any timely reaction from lawmakers. There really is no politically feasible solution to America’s debt crisis at the moment. For starters, no amount of economic growth can erase the deficits the U.S. is now facing, says Susan Irving, the director of federal budget analysis at the U.S. Government Accountability Office, a congressional body that oversees how the government spends tax dollars. No matter what numbers they enter in their simulations, she says, they can’t fix the problem.

That means any solution boils down to highly unpopular tax hikes and big spending cuts. To maintain the current debt-to-GDP ratio and prevent a debt explosion from happening over the next 75 years, the government would have to either raise revenues by 44 per cent or cut spending by 31 per cent, says Irving. It’s clear that there’s no appetite whatsoever for either of those options. Tax hikes are especially daunting when you consider that health care costs in the U.S. have been growing about two per cent faster than the economy. “You can’t raise taxes fast enough to catch up,” adds Irving.

Canadians know first-hand how hard and painful it can be to wrestle down a growing national debt. In the 1990s Canada embarked on an effort to slay its much more modest annual deficits. It worked, but not without sacrifice. We ended up with higher taxes and deep cuts to services like health care.

For the Americans, the first step is to at least “stop digging,” says the Heritage Foundation’s Riedl. “Take a step back and think twice before enacting [Obama’s] very expensive proposals.” Then, somehow, lawmakers need to get together and put some spending caps in the budget, he adds. Eventually, taxes will have to go up—on that point everyone can agree. The question now is whether this happens in the midst of a crisis, or in a more measured way, with some foresight and planning. “It’s just tragic that we’re not dealing with this now,” says Auerbach. “If we do it under time pressure because suddenly U.S. interest rates are going up, it’s not going to be nice.”

But all of this is much easier said than done. What’s happened in Washington so far is minor, says Sawhill, “a drop in the bucket . . . or in the sea,” she says. There are some signs that political pressure to curb deficit spending is growing (mostly from the opposition Republicans), but no agreement on how to proceed. Democrats generally fear the looming spending cuts while Republicans fear the taxes. “Those fears are understandable—but they should be outweighed by the fear of what will happen if we fail, if our debts overwhelm us, and if the fiscal meltdown comes,” said House majority leader Steny Hoyer, in a speech last month.

Riedl finds some cause for optimism in the fact that at least Americans, both inside and outside of Washington, are finally talking about the debt problem after ignoring it for all these years. That may be one of the few positive outcomes of the economic downturn: it has led Americans to slowly begin to acknowledge the elephant in the room. “The financial crisis has shown a lot of people that dire economic calamities can happen,” he says.

Schiff, the broker-turned-celebrity-prognosticator, is concerned enough about such a calamity that he says he’s now considering taking his message straight to Washington and running for a seat in the U.S. Senate. His threat to enter politics, which he first made last week on The Daily Show with Jon Stewart, has caused some buzz in Washington. But much as he seems to crave the spotlight, he says there’s another reason for his bid. “I’d do it because somebody has got to do something to stop this. It’s going to end in misery.”

http://www2.macleans.ca/2009/06/22/can-they-pay-it-back/

Richard Shelby who I like more and more each day on The Fed

“The structure of the Federal Reserve involves quasi-public Reserve Banks that are under the control of boards with members selected by banks regulated by the Fed. By design, the Board and the Reserve Banks are not directly accountable to Congress and are not easily subject to Congressional oversight. Recent events have clearly demonstrated that this structure is not appropriate for a Federal banking regulator, let alone a systemic regulator.”

Chris Whalen, calls a duck a duck...
ttp://us1.institutionalriskanalytics.com/pub/IRAMain.asp
http://www.rcwhalen.com/pdf/StatementbyChristopherWhalen_SBC_062209.pdf

"Proving yet again that it has become a puppet of its sell-side parent SIFMA, the American Securitization Forum has just released a 241-page study that it commissioned from National Economic Research Associates, Inc. (here) to prove that securitization increases the amount and lowers the cost of consumer credit. It is as though the White Star Line commissioned a book on the RMS Titanic in which the author was told to extol the power of Titanic's engines, the elegance of the china in its dining rooms, and the verve of its dance bands, while strictly ignoring its shortage of lifeboats

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6578368.ece

http://cartoonbank.com/assets/1/39278_m.gif

great michael lewis article on AIG and Cassano.

http://www.vanityfair.com/politics/features/2009/08/aig200908?printable=true&currentPage=all

I just made my way through a Forbes article called: "Heads Up: America's Most Troubled Luxury Neighborhoods" (at http://www.forbes.com/forbes/2009/0713/opinions-housing-market-values-heads-up.html) which discusses difficulties facing towns/neighborhoods that more or less held their value until seeing recent declines.

Also might be of interest: a blogger's number-heavy analysis of why NYC real estate might meet the fate of Japan's: "Don't Expect a V-Shaped Recovery in Real Estate Prices" (http://inoculatedinvestor.blogspot.com/2009/07/dont-expect-real-estate-prices-to-go.html)

Brad DeLong has a very interesting discussion of the Economist article on macroeconomics.

http://delong.typepad.com/sdj/2009/07/the-economists-take-on-the-state-of-macroeconomics-once-more.html

Ritholtz on the recent call of a housing bottom:

http://www.ritholtz.com/blog/2009/07/why-housing-isnt-yet-bottoming/

Actually, i don't think he and calculated risk really disagree, necessarily. Bill is stating that housing starts are probably at their low for this cycle, but doesn't dismiss (elsewhere) the possibility for a second cycle down or think that prices won't continue to decline.

great presentation by stiglitz. with a global perspective.

http://fora.tv/2009/02/19/Stiglitz_Temporary_Bank_Nationalization_Necessary

Noah has an interesting discussion of the timing of the downgrades on MBIA, AMBAC. I'm growing increasingly cynical.

http://www.urbandigs.com/2009/07/morning_shocker_so_ambac_reall.html

Pettis discusses increasing signs of protectionism, as the world reacts to China's investments and industrial subsidies. This could get very ugly. An important piece.

http://mpettis.com/2009/07/squeezing-out-the-exporters/

To add to the alphabet soup of recovery jargon: the Q-shaped recovery! It's actually a good read.

http://inefficientfrontiers.wordpress.com/2009/08/18/understanding-the-q-recovery/

Another good one, especially for those who place a lot of blame on the decision to let Lehman fail:

http://www.ft.com/cms/s/0/c2d523c0-8c21-11de-b14f-00144feabdc0.html

this is a good one. not really news, more an op ed. but the title, an uncomfortable choice, reflects my mood so well.

http://www.ritholtz.com/blog/2009/08/an-uncomfortable-choice/

jeff at UD, very well done.

http://www.urbandigs.com/2009/08/its_times_like_these_when_mone.html

Unfortunately, I don't think my wise midwestern banker friend is right that now is the time when money will return to its rightful owners. In fact, everywhere I look I see barriers being erected to prevent this from happening. The government has bailed out the banking system and is subsidizing purchases of the toxic assets that do trade.....a precious few after more than six months into the effort to re-liquify the system. The stock market rally that has been engineered is allowing capital raising by a much wider group than the truly worthy. I could not have put it any more eloquently than this quote from today's Wall Street Journal article about why REITs will inherit the earth in the commercial real estate space.

"Everyone was predicting a have-and-have-not scenario, and that didn't play out at all," says Debra Cafaro, chief executive of health-care REIT Ventas Inc. "What happened was indiscriminate access to capital, which has buoyed the whole sector."

travel industry info. ny hotel rates.

http://paul.kedrosky.com/archives/2009/08/holiday_air_tra.html

for the china watchers out there. pettis is arguing the good news is actually bad.

http://mpettis.com/2009/08/the-credibility-of-farmers-priests-and-prostitutes-–-and-bankers/

an uncomfortable choice says it all. kind of the counterpoint to krugman's recent column applauding deficits and saying they are no problem assuming that politicans become grown ups!

krugman's fighting his own political battles, more on a populist level than as an economist in that instance. when i divided up his material into that of serious economist and that of economist on a political mission, things became easier. i'd personally have much less trouble with stimulus if it were better, but little chance for that. i think what krugman is afraid is that the upcoming perceived failure of the stimulus will enable the prevention of what will be, basically, humanitarian aid to our masses. but that's kind of hard to put into print right now.

maudlin was right, deflation sadly is the worse option. but cash for clunkers certainly wouldn't be my chosen remedy.

cc, here's a good discussion about one of the choices. and note the beginning of DeLong's argument. the problem is we can't foresee when that expansion will begin, or even whether it could.

http://delong.typepad.com/sdj/2009/08/extending-the-bush-tax-cuts.html
From my perspective, it makes no sense to let taxes go up until we are well into a strong, robust economic expansion--but it also makes no sense at all to permanently extend the Bush tax shifts of the burden from us to our children and grandchildren.

and then check out this. the same machine that will make health care reform nearly impossible will be out there about taxes, also. the financial titans can't yet rely on Chinese, etc., consumption, so we need to be given as much cash as individual consumers as possible. not only are the consumers getting fucked, so is the administration.

http://economistsview.typepad.com/economistsview/2009/08/paul-krugman-missing-richard-nixon.html

But there’s another reason health care reform is much harder now...: the vast expansion of corporate influence.
...
I’m not saying that reformers should give up. They do, however, have to realize what they’re up against. There was a lot of talk last year about how Barack Obama would be a “transformational” president — but true transformation, it turns out, requires a lot more than electing one telegenic leader. Actually turning this country around is going to take years of siege warfare against deeply entrenched interests, defending a deeply dysfunctional political system.

I agree--emotionally to me, deflation represents "getting what we deserve" but i have to remind myself that so many that would be devastated by this did not in any way participate.

maybe i should save some more pennies. sad and funny.

http://online.wsj.com/article/SB123310699999022549.html?mod=rss_Work_and_Family#articleTabs%3Darticle
http://blogs.wsj.com/economics/2009/08/27/for-young-people-a-jobless-summer/

Faced with a dismal market for college summer internships, a growing number of anxious parents are pitching in to help -- by buying their kids a foot in the door.

Some are paying for-profit companies to place their college students in internships that are mostly unpaid. Others are hiring marketing consultants to create direct-mail campaigns promoting their children's workplace potential. Still other parents are buying internships outright in online charity auctions.

http://www.bloomberg.com/apps/news?pid=20601039&sid=aFvufiRg4dg4

"By Roach’s calculations, Americans account for about 4.5 percent of the world’s population and its consumers spent about $10 trillion in 2008. China and India, which account for roughly 40 percent of the world’s population, consumed about $2.5 trillion. Good luck living without the U.S."

http://www.bloomberg.com/apps/news?pid=20603037&sid=a6mZZQ99ik80

Funds Dump Retail Shares as Cash Flows From Fortune (Update1)

Investors are dumping shares with the closest links to economic growth. While the government’s bailout of the U.S. financial system spurred record profits at New York-based Goldman Sachs Group Inc., Commerce Department data show salaries for Americans dropped the most in at least five decades during the 12 months through June. Deutsche Bank AG said this month that almost half of U.S. homeowners may owe more on mortgages than the properties are worth by 2011.
....
Since July 20, investors have boosted their sales of Nordstrom even as the shares climbed 22 percent. They unloaded about $17 million more in shares than they bought during that time, based on money-flow data that exclude block trades compiled by Bloomberg.

Institutions dumped Fortune -- the maker of Courvoisier cognac, Titleist golf clubs and Moen faucets -- even as the shares climbed 126 percent since March, data compiled by Bloomberg show.

there's a bunch of interesting stuff out there right now. the too big to fail banks keep getting bigger.

http://blogs.reuters.com/felix-salmon/2009/08/31/the-systemic-threat-posed-by-megabanks/

feels like events are overwhelming good intentions (at least i still hope they're good) in washington. read the vanity fair article/profile of Hank Paulson---who knows what's true anymore? Not only does he come across as much more sympathetic but sheds some light on many of the seemingly incomprehensible events of last fall. A number of times, purdom quotes paulson as saying we were too late.

I love how the preceding article is entitled "Good Billions After Bad." about the Paulson treasury. cc, it was very shrewd of Paulson to allow eight hours of interviewing, an exclusive, and he's intelligent and presented well. and i'd never wish that job on anyone. nor the president's job currently (maybe Palin, but i'd never wish her upon us). and i 100% agree that it probably was too late. that what the uncomfortable choice article was getting at, right? but why was it too late? the article did a great job at showing what Krugman was talking about, the near-inability to deal with Washington. and very interesting that he selected Frank and Pelosi for his compliments.

this, though, was my favorite part:

"He was far from an authority on housing: “I’m not a housing expert. We don’t have housing experts at Treasury.” He was also far from an expert on financial regulation: “I knew a lot about regulation, but not nearly as much as I needed to know, and I knew very little about regulatory powers and authorities.”"

I ask you, should the former CEO of Goldman Sachs and head of Treasury, know anything about housing? Was he sincere, or was that just the biggest cya i've read in a long time. i also liked the line about how Blankfein was happy that he was taking the Treasury position.

http://www.vanityfair.com/politics/features/2009/10/henry-paulson200910?currentPage=1

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6110621/Our-quarter-century-penance-is-just-starting.html

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6035300/Theres-no-quick-fix-to-the-global-economys-excess-capacity.html

wage deflation

http://www.businessinsider.com/hitman-charges-just-200-2009-8

"This is almost as ridiculous as the prostitute who agreed to be paid in Frito-Lay chips"

http://www.businessinsider.com/prostitutes-price-a-30-box-of-chips-2009-6

Wow! Just when I think I've seen it all....wow

AR, as we discussed a while back, the Chinese stock market has come down appreciably and more to come. While the dollar has not begun its rally, yet, TLT, which is the way that I chose to position myself for a dollar rally, has been doing fairly well. Check out Mish's post today for a nice argument as to why those calling for the dollar implosion and hyperinflation are early.
Now we are just waiting for the commodity run-up to end. Oil is moving down, but a one or two day trend is meaningless. I suspect oil will approach or breach 60 before year's end, and we could see a 25% pull-back in copper.

Pardon any redundancy if this has been posted here in another thread. NYDN referenced this article (posted last week) just today...

10 Housing Markets Have Hit Fair Value! Unfortunately These 8 Haven't

Henry Blodget|Aug. 25, 2009, 12:51 PM|33

Dan Alpert of Westwood Capital compares the housing price level in 20 American cities to the "fair value" estimate that might be expected using the local price-to-rent ratio.

The good news: The housing markets in some cities are now distinctly undervalued. Others, unfortunately, are still overvalued (listen up, New York).

read the rest, look at the charts and links:

http://www.businessinsider.com/henry-blodget-10-housing-markets-have-stabilized-unfortunately-these-8-havent-2009-8

actually otto i haven't seen that. we econ obsessors welcome all econ news here, but that's specific to real estate, and further specific to our own market, so it would also be a prime candidate for its own thread.

http://www.bloomberg.com/avp/avp.htm?N=video&T=Andy%20Xie%20Interview%20on%20China%20Economy%2C%20Stock%20Market%20&clipSRC=mms://media2.bloomberg.com/cache/vtRxSlHu5jUA.asf

mh23, i don't try to read the tea leaves any longer for the equity and fx areas. debt markets make a little bit more sense, but even there. there's just too much liquidity and too much gaming to know what's going to happen when.

my husband always jokes "dow rose on rumors of dow rising." "inflation rises on rumors inflation will rise" is becoming a very common theme. but that just might not happen. whatever happens will be ugly, and i think it was Roubini who recently posited potential stag-deflation (just had to top Japan's earlier debacle, didn't we) which seems heinous. it's like everything else, nothing makes sense. a strong dollar seems ludicrous, and a weak dollar occurring seems ludicrous.

a rather awesome conspiracy theory to start the week:

http://www.ritholtz.com/blog/2009/08/the-recent-concentration-of-volume-in-financial-stocks-coordinated-capital-infusion/#more-37037

If we look at just the NYSE trading of these firms, they are accounting for about 40% of NYSE volume. It is not surprising that Brian would notice TRIN flipping up and down as these stocks change direction.

Again, the question is what all this means. There is no way that mom and pop trader and investor are involved in any meaningful way in generating these kind of daily trading volumes. Nor are proprietary trading shops capable of generating volumes that exceed those of the entire New York Stock Exchange. While I have no doubt that the algorithmic trade close to the market is participating in this movement, the directionality of the involvement suggests that large financial institutions are systematically buying the beaten-up shares of the poster children for TARP: C, FNM, FRE, AIG, and the like.

It is worth noting in this regard that other major (healthy) financial firms, such as GS and JPM, have seen no such surge in their volume or their trading prices.

My best guess? We’re seeing a massive infusion of capital into very troubled financial institutions, no doubt aided by short covering and the participation of program traders and proprietary daytrading firms. Where is the capital coming from? Why has it poured in so suddenly (the really large infusions began in early August)? Why is it coming in at such a pace that it is dominating NYSE volume? Zero Hedge rightly wonders why this hasn’t triggered alarms at the exchange. And why is it happening with only the weakest financial institutions?

If you were the government and you saw that these institutions were on the verge of a major fail, with billions of taxpayer dollars at risk, I’m not sure you’d announce that to the world. Nor, at this point politically, could you ask for yet another bailout package. But you would only pour money into those stocks at a frantic pace (capable of detection) if you perceived a dire need for the capital.

I’m not inclined toward conspiracy theories, but it’s difficult to imagine a scenario in which this is not a (frighteningly necessary) coordinated capital infusion, with taxpayer dollars ultimately at work in financial markets.
.

moyers interview on maher. links are in this. interesting analysis of washington. moyers believes that BOTH parties are almost fully owned now by corporate money, with the exception of some idealistic dems.

http://www.salon.com/opinion/greenwald/2009/08/29/moyers/index.html

unbelievable conspiracy theory; but what other possible explanation is there?

it's definitely market manipulation, but how much by whom and for what purpose could be slightly different. i read someone somewhere who opined that it might the the gov't providing assistance because it knows these companies need to raise more capital and with higher stock prices they'll get more (ostensibly) when they have their stock offerings. they know congress won't give approval.

maybe the fed just was bored buying treasuries.

http://economistsview.typepad.com/economistsview/2009/08/an-echo-chamber-of-boom-and-bust.html

Shiller:
All of this suggests that a social epidemic is supporting renewed confidence. This confidence can keep growing by contagion, as a kind of self-fulfilling prophecy, and we may see the markets and the economy recover further.

But in an economy that is still unstable, the stories could also morph into different forms, the price feedback could turn downward and the dynamic could turn ugly again — just as it has in the past.

Thoma's commentary:
It seems quite reasonable that the spread of information (wrong or right) can reinforce trends in economic activity, and hence magnify and propagate shocks, but as noted in a part of the article not included above, this doesn't help us much with the problem of predicting turning points in economic activity. Predicting when the stories suddenly "morph into different forms ... is actually very complex. And even when feedback mechanisms are straightforward, they can produce very strange outcomes, not predictable very far into the future..."

paul tudor jones won't listen to GS. ritholtz wonders if it's because they're viewed as untrustworthy at this point, from a client perspective.

http://www.ritholtz.com/blog/2009/09/is-goldman-sachs-trustworthy/

http://money.cnn.com/2009/09/01/news/economy/cities_financial_crises/index.htm?postversion=2009090103

the stimulus package should help, but it's unclear how much. and this will be a GOOD year for property tax collections, assuming they can collect them.

"More than nine out of 10 cities are slashing spending this year as the recession wreaks havoc on their sales and income tax revenue, a new study found.

And the future looks even worse, as the housing market's steep declines continue cutting into property tax revenue, according to the National League of Cities, which issued the update on city fiscal conditions Tuesday.

City finance officers' pessimism is running at its highest level in the history of the group's 24-year survey. The economic situation on the local level has grown more dire in the seven months since the group released its last report.

"City leaders know the worst is still ahead of them in terms of revenue declines and service cuts," said Chris Hoene, the league's director of research."

effectiveness per unit of auto and housing tax credit stimulus. not very.

http://www.calculatedriskblog.com/2009/09/houses-and-autos-cost-of-tax-credit-per.html

With 1.9 million first-time buyers, the total cost of the tax credit will be $15.2 billion. Divide $15.2 billion by 350 thousand, and the program cost $43.4 thousand per additional buyer.

in fairness, no one really has any data to support how many of the presumed first time buyers would have bought anyway.

as we have discussed, i have a fundamental problem with these types of direct stimului (?) that can often lead people to make purchases that are not fundamentally economically sound for them. but, as we lamented yesterday morning we appear addicted to the quick and easy (so called) fix.

http://www.washingtonpost.com/wp-dyn/content/article/2009/09/08/AR2009090803519.html

Washington Post article, key to recovery is spending by the affluent.

In this new era of frugality, well-to-do shoppers have gone into hiding and stowed away their splashy logos. But they may hold the key to a consumer recovery.

Affluent shoppers are the most important segment of consumer spending, which in turn drives the national economy. The top 20 percent of the nation's households -- with income of at least $150,000 -- account for 40 percent of all spending, according to government data. That makes them a crucial spoke to any turnaround.

"Unless these people turn up, a lot of companies won't turn up," said Milton Pedraza, founder of the Luxury Institute, a consulting firm. "When they are not spending, it definitely impacts all of us in a negative way."

US Economy Facing 'Death by a Thousand Cuts': Roubini

Published: Monday, 14 Sep 2009 | 8:50 AM

The US economy faces a difficult time ahead as consumers stop spending and the fallout escalates from the collapse of the commercial real estate market, economist Nouriel Roubini told CNBC.

Repeating his prediction that the economy faces a threat of a "double-dip" recession and at best a slow-growth U-shaped recovery, Roubini said in a live interview that more banks will fail and residential real estate prices have more room to decline.

Additionally, non-government bonds will face pressure, the securitization market is all but dead, the credit markets are still frozen and consumers will continue to save more rather than spend and boost growth.

"It's going to be death by a thousand cuts," said Roubini, chairman of RGE Monitor and economics professor at New York University's Stern School of Business. "The financial system is severely damaged, and it's not just the banks."

Roubini predicted more than 1,000 financial institutions could fail before all is said and done.

At the same time, he said housing prices are likely to fall another 12 percent in the next year—40 percent overall since the market began its steep decline—and about half of all homeowners will owe more on their mortgages than their houses are worth.

"The gap between supply and demand is so huge we could stop producing new homes for a year to get rid of all the inventory," he said. "This price adjustment, in my opinion, is going to continue for another year."

In addition to assessing the current problems, Roubini reflected on the year since Lehman Brothers collapsed and its effects on the financial markets. Roubini was among the most prescient economists in predicting the failure of the financial system, though he has said that aggressive intervention has prevented the worst-case scenario from happening.

Many in his field have blamed regulators for allowing Lehman to collapse, but Roubini said the system would have failed regardless of what happened to the Wall Street titan.

"We already were in the middle of a very severe crisis. Saying that bailout out Lehman, everything would have been OK, is nonsense," he said. "Lehman was a symptom of the crisis, not the cause of the crisis."

He warned, though, that regulators are repeating some of the same mistakes made during the financial crisis, this time with the commercial real estate market. Allowing forbearance in the deeply troubled sector will mask underlying problems that will come back and bite the economy, he said.

Still, he said Federal Reserve Chairman Ben Bernanke, whom Roubini had criticized harshly when the financial crisis began, took strong measures to avoid a complete collapse of the system.

"I criticized Bernanke for many of the mistakes he made before the crisis," Roubini said. "But I give him credit for his actions that led to the avoidance of another Great Depression."

http://www.cnbc.com/id/32837255

stiglitz, toward a better measure of well-being.

http://www.ft.com/cms/s/0/95b492a8-a095-11de-b9ef-00144feabdc0.html?nclick_check=1

Too often, we confuse ends with means. One of the criticisms of our economies in the years prior to the crisis is that they did exactly that – a financial sector is a means to a more productive economy, not an end in itself. Even worse is to confuse an improvement in a measurement of well-being with an improvement in well-being itself. Our economy is supposed to increase our well-being. It, too, is not an end in itself.

http://www.ritholtz.com/blog/2009/09/elements-of-deflation-part-2/

http://seekingalpha.com/article/161241-look-who-s-betting-on-inflation

I really like that Stiglitz article, Aboutready. Great post.

Ah, the bear in me wallows in the joy of being and knowing just how right I've been as revered international economists virtually parrot componets of my past posts. The boy scout in me is glad I placed an extra clean pair of underware in my desk draw because this stuff scares the...

Fed via interest rate policy transferring our money to financial institutions...

http://www.nakedcapitalism.com/2009/09/guest-post-assessing-the-recent-performance-of-the-fed.html

Some of the transfers are simply impossible to estimate. However, an estimate of one component is just a few assumptions way from being “ballparkable”. The Fed has cut short-term rates to near zero with an eye to among other things allow financial institution that borrow short and lend long a chance to” earn” their way back to financial health and resume “normal” lending. This represents a transfer wealth from depositors and holders of short-term investment vehicles to those institutions which borrow short to lend long. The scale of the wealth transfer in terms of a % of GDP can then be “guestimated”. Given a chosen measure of short-term assets (as a % Of GDP); an estimate on how much lower on average the interest paid on those instruments is than it would “normally”: and ) the length of time that the Fed will be holding short-term rates at artificially low levels. Given the Dollar volume of outstanding short-term paper and the likelihood the money market rates will remain substantially below where they would have been in the absence of the crises, it seems likely that policy induced transfer from savers to the financial institutions post 2007 will be of the same order of magnitude of net wealth transfer that occurred between households and the government sector in the 1970s.

This is certainly a bit OT, but I found it interesting in showing the link between Wall Street and other industries. There's a ripple around the world discussed here, but certainly as well the local jewelry merchants are impacted:

"[Diamond] Prices rose 38 percent from the end of 2003 through mid- 2008, buoyed by growing U.S. household wealth, which peaked at $64.3 trillion in the third quarter of 2007. Rough stones rose 81 percent over the same period, said Platt. About half of the world’s polished diamonds are sold in the U.S., according to De Beers...In the six months following [Lehman's] collapse, as credit markets froze, prices for rough stones fell 40 percent and those for polished gems slumped 19 percent"

http://www.bloomberg.com/apps/news?pid=20601109&sid=adeU_YHAT0uQ

LP1, and over 9 million guns have been bought in the US in the past 8 or 9 months. i think there are more guns owned than the number of residents here.

i happen to be in the possession of Judge Rakoff's Memorandum Order in the SEC v. BOA action.

"The proposed consent judgment in this case suggests a rather cynical relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth."

I'm against government meddling in bonuses usually, but when you do the table napkin calculation of $15 billion in bonuses against a $50 billion purhcase price you realize that 30% of the purhcase price went out the door. The judge saw that and it raised questions.

http://www.nytimes.com/2009/09/16/business/16home.html?_r=1

The real estate industry, including the powerful 1.1 million-member National Association of Realtors, wants Congress to extend the credit at least through next summer. The group hopes to expand the program to $15,000 and to allow all buyers, not just those who have been out of the market for at least three years, to qualify. The price tag on that plan: $50 billion to $100 billion.

this encapsulates the fear of government programs: once in place, no politican has the guts to end them.

Calculated Risk did excellent table napkin calculation to prove the idiocy of the housing credit...

But if we actually look at the numbers, this is a poor choice for a second stimulus package. The NAR recently reported:
NAR estimates that about 1.8 to 2.0 million first-time buyers will take advantage of the $8,000 tax credit this year, with approximately 350,000 additional sales that would not have taken place without the credit.
You can calculate the new $15 billion projection; 1.9 million times $8,000.

But this only resulted in 350,000 additional sales. Divide $15 billion by 350 thousand, and the program cost is about $43,000 per additional buyer. Very expensive.

it really does seem as though we're damned no matter what we do.

http://www.telegraph.co.uk/finance/financetopics/recession/6190818/US-credit-shrinks-at-Great-Depression-rate-prompting-fears-of-double-dip-recession.html

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

Graph says it all people. We have a long way to go before we're out of debt

http://4.bp.blogspot.com/_pMscxxELHEg/SrJfoQXWrUI/AAAAAAAAGXE/s9zZT6Ieylk/s1600-h/Flow2.jpg

http://www.nakedcapitalism.com/2009/09/guest-post-steve-keen-out-thinks-larry-summers.html

"Keen concludes simply:

So giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch—the opposite of the advice given to Obama by his neoclassical advisers…
Obama has been sold a pup [i.e. tricked into buying something that is not worth anything] by neoclassical economics: not only did neoclassical theory help cause the crisis, by championing the growth of private debt and the asset bubbles it financed; it also is undermining efforts to reduce the severity of the crisis.

This is unfortunately the good news: the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed."

http://www.nakedcapitalism.com/2009/09/guest-post-william-k-blacks-proposal-for-%e2%80%9csystemically-dangerous-institutions%e2%80%9d.html

on ending TBTF.

http://www.ritholtz.com/blog/2009/09/wolf-economy-recovering-but-still-plenty-of-time-for-govt-to-blow-it/

pretty bleak picture.

must-see of the week. discussion starts at 6 minutes.

http://www.ritholtz.com/blog/2009/09/simon-johnson-prospects-for-your-future/

Harvard's Greg Mankiw had biting commentary on his site today. Seriously this guy could challenge Andy Borowitz in the humor department....
http://gregmankiw.blogspot.com/

Wednesday, September 30, 2009
Memo to White House Speechwriters
Feel free to insert this into President Obama's next speech:

"There has been a lot of talk lately about taxing Cadillac health plans. Well, I have thought about this idea, and I have talked with my economic advisers, and we have decided that it indeed makes a lot of sense.

"Now some of you may wonder whether endorsing this proposal breaks my pledge not to raise taxes on the middle class. After all, you don't need to be rich to drive a Cadillac, and you don't need to be rich to have a Cadillac health plan. So, hereafter, I will refer to them as Rolls Royce health plans.

"Seriously, though: Yes, it is a tax increase on the middle class. When I said during the campaign that I would raise taxes only on the rich, I meant it. Or at least I wanted to mean it. But my damn economic advisers keep bugging me about the laws of arithmetic. And, you know, they are right. I am more interested in expanding entitlements than reining them in, so I don't have much choice but to raise taxes on the vast majority of Americans. If you think this Cadillac tax is the end of it, you just wait.

"I also know that this tax offends some of my supporters in the union movement, who now enjoy the benefits of Cadillac health plans. But how much do you guys expect from me? I have already thrown you the bone of a completely unjustifiable tariff on Chinese tires, risking a trade war in the midst of a global economic downturn. You guys should be happy with that. Will you please get off my case?

"Finally, I need to make an apology. No, not to Europe for Bush-era foreign policy this time. But to Senator McCain. During the campaign, I lambasted you for proposing to tax health insurance benefits. I knew at the time that your goals were laudable--to finance tax credits for lower income families and to rein in tax incentives for excessive insurance. And indeed your proposal was not very different from the tax on Cadillac plans that is now being considered in Congress and that I will gladly sign into law. But the issue offered just too good of a sound bite to give up. Now that I am safely in the White House, however, I am man enough to admit that Senator McCain was right all along, and I was wrong. Gosh, it feels good to get that off my chest."

NY Times Ran a very interesting story on Swiss Health Care model.
http://www.nytimes.com/2009/10/01/health/policy/01swiss.html?ref=business

The article discussed several interesting ideas. A basic no-frills and a higher priced plan that allows insurance companies to earn a profit. It was also interesting that instead of a gov't option the government provided directed cash subsidies for those who cannot afford. According to the Times administrative costs are low.

http://www.washingtonsblog.com/2009/10/real-reason-giant-insolvent-banks-arent.html

Why isn't the government breaking up the giant, insolvent banks?
***************************************************************************

Top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion:

Smaller banks are stepping in to fill the lending void left by the giant banks' current hesitancy to make loans

While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to "creative accounting", such as Goldman "skipping" December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.

* Manhattan Institute senior fellow Nicole Gelinas agrees:

The too-big-to-fail financial industry has been good to elected officials and former elected officials of both parties over its 25-year life span

* Investment analyst and financial writer Yves Smith says:

Major financial players [have gained] control over the all-important over-the-counter debt markets...

* William K. Black says:

There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

William K. Black's statement that the government's entire strategy now - as in the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts") makes a lot more sense.

Spendulous disaster:

http://gregmankiw.blogspot.com/2009/05/accountability.html

When the Obama stimulus plan was proposed, the president's economic team put out a report in January 2009 that purported to show what would happen with and without the fiscal stimulus. The chart above is from page four that report, together with the actual results over the past couple months. As you can see, the actual outcome is significantly worse than the projection with the stimulus plan and is, in fact, roughly on track with what was projected without the stimulus.

What does this mean? One interpretation is that the fiscal stimulus has failed to achieve what Team Obama thought it would. Another interpretation is that the baseline was worse than they believed at the time. I am confident the report authors would adopt the second interpretation. If so, that fact is consistent with what I said in a previous post: In light of the shifting baseline, it is impossible to hold the administration accountable for whether its policies are achieving their intended effects.

To be clear, this lack of accountability is not a feature on this specific administration but is, instead, a reflection of the inherent uncertainties associated with macroeconomics. The administration, however, has not been particularly forthright in admitting to this lack of accountability. Indeed, the act of releasing quarterly reports on how many jobs have been "created or saved" gives the illusion of accountability without the reality.

Mandelbrot on market returns and risk. A must read if you want to understand why markets move..
http://www.ft.com/cms/s/0/bc6e6148-ee26-11dd-b791-0000779fd2ac.html

f you read a mutual fund prospectus, or a hedge fund’s exposure, the odds are that it will supply you, among other information, with some quantitative summary claiming to measure “risk”. That measure will be based on one of the above buzz words that derive from the bell curve and its kin.

Such measures of future uncertainty satisfy our ingrained desire to “simplify” by squeezing into one single number matters that are too rich to be described by it. In addition, they cater to psychological biases and our tendency to understate uncertainty in order to provide an illusion of understanding the world.

The bell curve has been presented as “normal” for almost two centuries, despite its flaws being obvious to any practitioner with empirical sense. Granted, it has been tinkered with, using such methods as complementary “jumps”, stress testing, regime switching or the elaborate methods known as GARCH, but while they represent a good effort, they fail to address the bell curve’s fundamental flaws.

..while weight, height and calorie consumption are Gaussian, wealth is not. Nor are income, market returns, size of hedge funds, returns in the financial markets, number of deaths in wars or casualties in terrorist attacks. Almost all man-made variables are wild. Furthermore, physical science continues to discover more and more examples of wild uncertainty, such as the intensity of earthquakes, hurricanes or tsunamis.

Economic life displays numerous examples of wild uncertainty. For example, during the 1920s, the German currency moved from three to a dollar to 4bn to the dollar in a few years. And veteran currency traders still remember when, as late as the 1990s, short-term interest rates jumped by several thousand per cent.

We live in a world of extreme concentration where the winner takes all. Consider, for example, how Google grabs much of internet traffic, how Microsoft represents the bulk of PC software sales, how 1 per cent of the US population earns close to 90 times the bottom 20 per cent or how half the capitalisation of the market (at least 10,000 listed companies) is concentrated in less than 100 corporations.

Taken together, these facts should be enough to demonstrate that it is the so-called “outlier” and not the regular that we need to model. For instance, a very small number of days accounts for the bulk of the stock market changes: just ten trading days represent 63 per cent of the returns of the past 50 years (see graph below).

Great Video on Mandelbrot.... We've had too many crashes/crisis in the last 20 years. Our assumptions need to be rethought..

http://www.ft.com/cms/93ece7c0-07af-11dd-a922-0000779fd2ac.html?_i_referralObject=10195731&fromSearch=n

Janet Tavakoli(apx 20 years wall street mortgage experience) explains the issue with CDS and derivatives.

http://www.youtube.com/watch?v=MFMK9uHm5gE

Wow, Larry Summers & Tim Geithner contribute to october 3rd Dilbert Strip.
http://dilbert.com/strips/comic/2009-10-03/

Interesting MIT video on banking and bailouts, I disagree with many of the conclusions but Larence Fish does make one very good one. Risk Based Capital needs to be rethought. We need absolute capital standards as well.

http://economix.blogs.nytimes.com/2009/09/29/simon-johnson-and-lawrence-k-fish-on-the-banking-crisis/

already posted. and i agree with just about everything.

a review of Rogoff and Reinhart's new book, This Time is Different, Eight Centuries of Financial Folly.

sounds a bit dry. too bad, their work is quite good.

http://www.nytimes.com/2009/10/04/business/economy/04shelf.html?_r=1&ref=business

http://jessescrossroadscafe.blogspot.com/2009/10/feds-failure-as-regulator.html

Interest editorial in Jesse's Cafe Americain. They seem to paint the Ny Fed as Consigliere

he proposal put forward by the Obama Economic Team to expand the purview of the Federal Reserve as a regulator, perhaps even THE regulator, was always troubling for several reasons.

1. The Fed is in fact not a government institution, but owned by private and corporate banking interests. The failure of self-regulation and regulators who have been 'captured' by the corporations they regulate is one of the great lessons of this crisis.

2. The Fed is notoriously opaque, with the occasional gesture towards transparency, and is often resistant to releasing information to the public in a timely manner, claiming a sort of 'executive privilege.' The Fed is and should remain independent but accountable on review. This precludes them from acting fully and routinely as a government agency responsible to the voters for all of their actions.

3. The Federal Reserve of NY often acts as a member of the 'banking club' with very heavy ties to Wall Street. The objective of financial reform should be to insulate regulators from undue influence by the organizations which they regulate, and more influenced by the law and the public good first and foremost. This is a basic principle of the regulatory process. One cannot successfully regulate their peers when the tough decisions have to be made to uphold justice and expose corruption and conflicts of interest.

This latest incident with Goldman Sachs merely serves to illustrate the too often unilateral decision-making by the Fed in an ad hoc manner, without sufficient explanation.

What the United States needs to reform its financial system is a group of Untouchables who are not on the payroll of Wall Street, or regular participants in the revolving door between government and the industry it regulates. The failure to create this effective reform, and instead gravitate toward ineffective consolidation in one of the key actors in the failure of the system is an error that is as fundamental and basic as one can imagine. It strains credibility that this could merely the result of inexperience.

It was the appointment of Larry Summers that first put us off the Obama 'reform' message. Larry Summers is a holdover from the same team that brought us some of the worst Federal Reserve policy decisions and interference in the regulatory process ever seen.

The Administration needs to convert its vision into action, and stop playing to the Wall Street lobby which created and is still benefiting from this crisis. If that requires replacing the Chief of Staff, Rahm Emmanuel, who is a heavy recipient of Wall Street donations, then so be it.

Whoever is promoting the Fed as uber-regulator within the Obama Administration should be fired, immediately. We hear it is Larry Summers, and this sounds like the politically tone-deaf, impractical, arrogant, and conflicted solution which Larry or Rahm might promote.

Can you imagine what our crisis would have been like if Alan Greenspan had even more power, more control over the markets?

Obama, quite frankly, needs to demonstrate that he is a man of integrity and principled action, vision that is not confined to oratory. He must now demonstrate that he is his own man, and is not owned by powerful special interests that seem to be controlling the American political process in both major parties.

If even a mandate such as Obama received does not energize the Democrats, then the best hope for America is a third party, a Progressive / Libertarian party as was seen at the turn of the 19th century with the rise of Teddy Roosevelt.

Baseline Scenario
A Short Question for Senior Officials of the NY Fed
By Simon Johnson
October 3, 2009

At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve. It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) – hence the brouhaha over Steven Friedman’s shareholdings.

Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China. US banks or bank holding companies would not generally be allowed to undertake such transactions - in fact, it is annoyed bankers who have asked me to take this up.

Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion? If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category?

liar

Good piece on why morgage derivatives make no sense. I recall JP Morgan avoiding this one area years back saying that unlike corporate this market did not make sense either....

http://rortybomb.wordpress.com/2009/10/02/housing-derivatives/

Like oil. If the futures market spins out of control, you can always just buy the oil itself, store it, and deliver it in the future for the futures contract. That’s why there was all the drama with demand for oil tankers over the past year – people were hoping to buy the commodity now at the spot price and deliver it to futures customers. If these prices differ too much in equilibrium, we back out a “cost of carry” or a convenience yield. The prices are different because it costs some money to store that oil for the future, or because it is helpful to have in your pocket to deal with short-term fluctuations, etc.

How is this supposed to work with housing? What’s the “cost of carry” on a unit of housing in Los Angeles? Taxes, repairs, maintenance, insurance, etc. all add up really quick. What’s the transaction costs in quickly buying and selling a unit of the underlying? Brokers fees add up even faster. The fact that quickly buying and then dumping $1m in the underlying is very costly and takes a large amount of time – unlike oil – makes me think that there’s no way for this to ever take off as a real derivative market. And more generally, how could you ever have a net short position?

Baseline scenario on Goldman Sachs...Correction I think he wants there to be a Goldman AND a Sachs.

http://baselinescenario.com/2009/10/03/a-short-question-for-senior-officials-of-the-new-york-fed/

At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve. It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) – hence the brouhaha over Steven Friedman’s shareholdings.

Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People’s Daily; CNBC). US banks or bank holding companies would not generally be allowed to undertake such transactions - in fact, it is annoyed bankers who have asked me to take this up.

Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion? If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category?

Given that the Fed has slipped up so many times and in so many ways with regard to regulation over the past decade, and given the current debate on Capitol Hill, now might be a good time to get ahead of this issue.

In addition, there is the obvious carry trade (borrow cheaply; lend at higher rates) developing from cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China. Are we heading for another speculative bubble that will end up damaging US bank balance sheets and all American taxpayers?

http://www.nakedcapitalism.com/2009/10/why-is-goldman-allowed-to-game-the-system.html

Good questions about Regulator Treatment of Goldman Sachs.

Just in case it’s not obvious, Goldman Sachs was a major beneficiary of the government’s bailout of the financial services industry, not only through the bailout of AIG but also through its ability to fall under the regulatory umbrella as a bank holding company (technically Goldman became a financial holding company but the distinction is relatively minor. see definition here). – something which made it eligible for debt guarantees and other government backstops.

Late last year, every financial services company on earth wanted to become a bank and line up for the handouts coming from Washington – American Express (a credit card company), GE Capital (basically a hedge fund), GMAC (a car financing company), Genworth Financial (an insurance company), Aegon (a Dutch company), even Willem Buiter, a former central banker, wanted to become a bank.

This is why Goldman became a bank too. Now, Goldman was in a more precarious position than bank holding companies because of the vulnerabilities of being a broker-dealer. Nouriel Roubini warned repeatedly before Leman’s collapse that the large full services broker-dealer model was broken. Here, just before Lehman failed, he talks about Goldman, Morgan Stanley and Merrill’s demise if Lehman collapses:

Goldman gets to game the system

These conflicts of interest has everyone up in arms about Goldman, dubbed “Government Sachs” by its haters (see here, here, and here). That is why the face-sucking squid polemic by Matt Taibbi was a zeitgeist piece.

I think eyes should be focused firmly on the government’s responsibility and not Goldman when it comes to these issues. Which is why the issues that Simon Johnson raises are important. They go to the core of the regulation of banks.

Here are four questions we should be asking regulators:

Why is Goldman Sachs allowed to maintain leverage ratios significantly higher than the large legacy bank holding companies like Wells Fargo, Bank of America, JPMorgan and Citigroup?
Why is Goldman allowed to operate like a private equity company, holding large stakes of foreign non-financial corporations? (I should note that Financial Holding Companies do have ten years in which to sell their stakes)
Why is Goldman (and other large banks) allowed to operate like a hedge fund and take outsized risks with capital via large proprietary trading operations. Most of Goldman’s profits are coming from this area. At least Deutsche Bank has offloaded these bets onto hedge funds in which it invests. Given the fact that the large too-bog-to-fail financial institutions have received a large backstop from the taxpayer, the fact that they are loading up in prop trading shows that regulation in the U.S. is non-existent.
Why is Goldman allowed to have an interest in the failure of other financial firms? We now hear that Goldman has an interest in the failure of CIT, a major lender to small-and medium-sized businesses. These perverse incentives are everywhere in the derivatives world and were an enabler of the financial meltdown and the principal reason AIG was bailed out with taxpayer money.
Clearly, regulators are not serious about regulating or they would correct these problems. MarketWatch reported on this as far back as July and nothing has happened.

When Goldman switched to a bank holding company, such big profit seemed unlikely as analysts worried the firm would face stricter regulatory oversight from the Federal Reserve, with limits on risk-taking and higher capital requirements. See story Wall Street changes.

But almost 10 months later, nothing much appears to have changed, some analysts said in the wake of the firm’s second-quarter results.

After two quarters as a bank holding company, Goldman is still "not reporting like a bank and not acting like one either," said David Hendler, Baylor Lancaster, Pri de Silva and Kristine Lanspa, analysts at CreditSights, an independent fixed-income research firm.

Given Goldman’s spectacular results so far this year, "the company has basically been given a green light to continue operating in a ‘business as usual’ fashion," they wrote in a note to investors after Goldman’s latest earnings report. "Bank regulators have their hands full with other deteriorating bank situations and, for the time being, seem content to let Goldman do what it’s always done."

Tier 1
Goldman still doesn’t report quarterly results like other large bank holding companies. For instance, the firm doesn’t disclose a full balance sheet in its earnings release or provide detailed information on revenue and valuation marks on exposures, the analysts noted…

"Our sense is that Goldman’s switch to bank holding company status was basically a security blanket in the worst of last fall’s troubles, and the company would be happier today if it could let it go," they added. "We also sense that Goldman Sachs many not yet have the same level of regulatory scrutiny that many banks routinely live with."

And CreditSights is right. Goldman have no intention of changing anything at all.

“Our model really never changed,” Goldman Sachs Chief Financial Officer David Viniar said yesterday in an interview. “We’ve said very consistently that our business model remained the same.”

More on Sheila Bair and the FDIC
http://www.bloomberg.com/apps/news?pid=20601103&sid=aXZpGPJZJa0Y

ct. 5 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said regulators should consider making secured creditors carry more of the cost of bank failures.

“This could involve potentially limiting their claims to no more than, say, 80 percent of their secured credits,” Bair said yesterday in a speech to a banking conference in Istanbul. “This would ensure that market participants always have some skin in the game, and it would be very strong medicine indeed.”

Bair’s comments go beyond any of her previous proposals for changing the way large and so-called systemically important financial institutions are regulated. She has long supported broadening the government’s powers in order to limit the impact on the financial system of an event such as last year’s bankruptcy of Lehman Brothers Holdings Inc.

It would rewrite the rules of financing,” said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington-based industry group. “It would cast doubt over existing financing arrangements from auto dealers and AIG to mortgages. Ultimately, it could weaken the recovery efforts.”

http://www.rgemonitor.com/us-monitor/257789/why_sheila_bairs_remarks_about_repos_are_really_really_important

While much is being made of Sheila Bair’s recent comments on haircuts to secured lenders, the Chair of the FDIC seems, to me, to be trying to expand the discussion of problem bank resolution in a constructive manner. Other regulators, so far, have shied away from real policy reforms that deal with too-big-to-fail in any meaningful economic sense. The FDIC, however, is trying to eviscerate some old policies that have been more and more troublesome with each passing crisis and at the same time lay down some resolution principals that can carry over to the next crisis. Let’s take a hard look at what she may really be proposing in more detail.

Bair calls Pandit out!

http://online.wsj.com/article/SB125504371565574655.html

The Federal Deposit Insurance Corp. is questioning the generally positive conclusions in a government-mandated review of Citigroup Inc.'s top management, according to people familiar with the situation.

The review, conducted this summer for Citigroup's board by recruiting and consulting firm Egon Zehnder International, was triggered by the government's stress tests of top U.S. banks last spring.

The report awarded strong overall marks to Citigroup's management team and to Chief Executive Vikram Pandit in particular, according to people familiar with the matter. The report provided less-favorable assessments of at least two of Mr. Pandit's lieutenants, Vice Chairman Lewis Kaden and Chief Administrative Officer Don Callahan.

...FDIC officials are skeptical of the findings. One person close to the agency described the outside report as "a total whitewashing." Some agency officials also are having second thoughts about the qualifications of Egon Zehnder, which largely runs executive searches for clients.

http://www.nakedcapitalism.com/2009/10/the-fdic-is-not-buying-what-citi-is-selling.html

As we remarked yesterday, “Stress tests redux. If this is the conclusion, clearly there is something wrong with the scorecard.”
It’s pretty obvious what happened here. Egon Zehnder is a search firm. Search firms have recently gotten into the very curious business of doing senior management assessments in recent years. No one would deem it logical to engage a mergers and acquisitions banker to evaluate how well a business was performing, yet we have people with similarly narrow competence making broad judgments that are beyond their expertise, their claims to the contrary. But this shamanism is well accepted in boardrooms these days, since having outside parties vet decisions is yet another way to shed responsibility.

So how does this look from the Egon Zehnder end? Follow the money. Citi is a big meal ticket. The FDIC, who asked for this review, is in no way, shape, or form the client. The purpose of this exercise is to deliver a credible sounding report without annoying Citi so Zehnder can use this entree to deepen its relationship and win search mandates, or at least more management reviews

NO WORRIES I'M SURE VIC WILL CALL TIMMY!!!!
http://dealbook.blogs.nytimes.com/2009/10/08/a-look-inside-geithners-appointment-book/

An analysis of Mr. Geithner’s calendars, which the Associated Press obtained through the Freedom of Information Act, shows that Mr. Geithner had contact with top executives at Citigroup, Goldman Sachs and JPMorgan Chase more than 80 times during his first seven months at Treasury — while the heads of Bank of America and Morgan Stanley appeared on his calendars a total of just six times.

In general, the Associated Press reports, his calendars suggest he has been in close contact with a relatively small group of top bankers as the Obama administration and Congress have worked to ease the fallout from the financial crisis and create new rules that might prevent another catastrophe.

For example, he had more frequent contact with executives from Citi — the banking giant in which the Treasury now owns a one-third stake — than with Barney Frank, the Democratic representative who chairs the House Financial Services Committee, the report says. The name of Lloyd Blankfein, the chief executive of Goldman, appears more often in his calendars than Christopher Dodd, the Democrat who leads the Senate Banking Committee.

Interesting piece on Brandeis
http://economix.blogs.nytimes.com/2009/10/08/big-is-bad-again/
But Brandeis was right on the politics of size and what that meant in turn for the American economy — and he is very much in tune with the cutting edge of modern economics. When large companies can 1) shape their regulatory environment, 2) take advantage of lax regulation to take on more risk than they can manage, and 3) “put” the downside losses onto the taxpayer, we should be very afraid.

This exact problem has repeatedly slapped us in the face over the past 12 months with almost every development in the financial sector, and it remains inherent in every “too big to fail” bank. Brandeis was exactly right on the dangers that could arise from the financial system — even though he could not foresee how the creation of the Federal Reserve would, when combined with weak regulation, lead to even worse outcomes.

But we should not suffer another failure of imagination or apply Brandeis to our modern circumstances too narrowly. The problems before us now are not limited to the financial sector. Just as Brandeis argued, beginning with a piece titled “Our Financial Oligarchy” in Harper’s Weekly in November 1913, we have allowed other parts of our economy to become “too big to regulate.” Any company that can set its own rules and then behave in a reckless fashion is potentially damaging to prosperity and democracy.

Why nothing will get done...
http://blog.sunlightfoundation.com/2009/10/09/top-financial-services-committee-members-rely-heavily-on-finance-campaign-contributions/

One year after the biggest economic collapse since the Great Depression, Congress is still debating new financial regulations to protect consumers and prevent risk-taking in the financial sector. The House Committee on Financial Services is currently undertaking the important first step of writing, amending and voting on some of the pieces of the long-proposed financial regulatory reform. While debating these issues top committee members have been the recipients of disproportionate campaign contributions from the very industry that they are tasked with regulating.

Twenty-seven committee members have so far received over one-quarter of their contributions from the finance, insurance and real estate (FIRE) sector. This includes Chair Barney Frank, Ranking Member Spencer Bachus, four subcommittee chairs and four subcommittee ranking members. Of the twenty-seven, twelve committee members received over 35% of their contributions in 2009 from the FIRE sector.

Ranking Member Bachus, a crucial decision maker on the committee, received 71% of his campaign contributions from the finance, insurance and real estate (FIRE) sector so far this year. (These numbers run from January 1-June 30.) For his career, the Alabama congressman receives 45% of his contributions from the FIRE sector. Bachus leads the committee in his reliance on FIRE sector campaign contributions. Bachus has taking a position in opposition to most of the regulatory reforms. Bachus recently stated in a hearing, “this is absolutely the wrong time to be creating a new government agency empowered not only to ration credit, but to design the financial products offered to consumers.”

A second Great Depression is still possible

October 11, 2009 4:37pmby FT
By Thomas Palley

Over the past year the global economy has experienced a massive contraction, the deepest since the Great Depression of the 1930s. But this spring, economists started talking of “green shoots” of recovery and that optimistic assessment quickly spread to Wall Street. More recently, on the anniversary of the Lehman Brothers crash, Ben Bernanke, Federal Reserve chairman, officially blessed this consensus by declaring the recession is “very likely over”.

The future is fundamentally uncertain, which always makes prediction a rash enterprise. That said there is a good chance the new consensus is wrong. Instead, there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the second Great Depression. Some indications to this effect are already rolling in with unexpectedly large US job losses in September and the crash in US automobile sales following the end of the “cash-for-clunkers” programme.

That rosy scenario thinking has returned to Wall Street should be no surprise. Wall Street profits from rising asset prices on which it charges a management fee, from deal-making on which it earns advisory fees, and from encouraging retail investors to buy stock, which boosts transaction fees. Such earnings are far larger when stock markets are rising, which explains Wall Street’s genetic propensity to pump the economy.

As for mainstream economists, their theoretical models were blind-sided by the crisis and only predict recovery because of the assumptions in the models. According to mainstream theory, it is assumed that full employment is a gravity point to which the economy is pulled back.

Empirical econometric models are equally questionable. They too predict gradual recovery but that is driven by patterns of reversion to trends found in past data. The problem, as investment professionals say, is that “past performance is no guide to future performance”. The economic crisis represents the implosion of the economic paradigm that has ruled US and global growth for the past thirty years. That paradigm was based on consumption fuelled by indebtedness and asset price inflation, and it is done.

There is a simple logic to why the economy will experience a second dip. That logic rests on the economics of deleveraging which inevitably produces a two-step correction. The first step has been worked through, and it triggered a financial crisis that caused the worst recession since the Great Depression. The second step has only just begun.

Deleveraging can be understood through a metaphor in which a car symbolises the economy. Borrowing is like stepping on the gas and accelerates economic activity. When borrowing stops, the foot comes off the pedal and the car slows down. However, the car’s trunk is now weighed down by accumulated debt so economic activity slows below its initial level.

With deleveraging, households increase saving and re-pay debt. This is the second step and it is like stepping on the brake, which causes the economy to slow further, in a motion akin to a double dip. Rapid deleveraging, as is happening now, is the equivalent of hitting the brakes hard. The only positive is it reduces debt, which is like removing weight from the trunk. That helps stabilise activity at a new lower level, but it does not speed up the car, as economists claim.

Unfortunately, the car metaphor only partially captures current conditions as it assumes the braking process is smooth. Yet, there has already been a financial crisis and the real economy is now infected by a multiplier process causing lower spending, massive job loss, and business failures. That plus deleveraging creates the possibility of a downward spiral, which would constitute a depression.

Such a spiral is captured by the metaphor of the Titanic, which was thought to be unsinkable owing to its sequentially structured bulkheads. However, those bulkheads had no ceilings, and when the Titanic hit an iceberg that gashed its side, the front bulkheads filled with water and pulled down the bow. Water then rippled into the aft bulkheads, causing the ship to sink.

The US economy has hit a debt iceberg. The resulting gash threatens to flood the economy’s stabilising mechanisms, which the economist Hyman Minsky termed “thwarting institutions”.

Unemployment insurance is not up to the scale of the problem and is expiring for many workers. That promises to further reduce spending and aggravate the foreclosure problem.

States are bound by balanced budget requirements and they are cutting spending and jobs. Consequently, the public sector is joining the private sector in contraction.

The destruction of household wealth means many households have near-zero or even negative net worth. That increases pressure to save and blocks access to borrowing that might jump-start a recovery. Moreover, both the household and business sector face extensive bankruptcies that amplify the downward multiplier shock and also limit future economic activity by destroying credit histories and access to credit.

Lastly, the US continues to bleed through the triple haemorrhage of the trade deficit that drains spending via imports, off-shoring of jobs, and off-shoring of new investment. This haemorrhage was evident in the cash-for-clunkers program in which eight of the top ten vehicles sold had foreign brands. Consequently, even enormous fiscal stimulus will be of diminished effect.

The financial crisis created an adverse feedback loop in financial markets. Unparalleled deleveraging and the multiplier process have created an adverse feedback loop in the real economy. That is a loop which is far harder to reverse, which is why a second Great Depression remains a real possibility.

Thomas Palley is former chief economist of the US-China Economic and Security Review Commission and is currently Schwartz Economic Growth Fellow at the New America Foundation

http://blogs.ft.com/economistsforum/2009/10/a-second-great-depression-is-still-possible/

Simon Johnson on an administration admission that 'we created the big four banks"

http://baselinescenario.com/2009/10/13/diana-farrell-and-the-white-house-theory-of-bank-size/#more-5224

n Friday morning, Diana Farrell – a senior White House official – made a significant statement on NPR’s Morning Edition, with regard to whether our largest banks are too big and should be broken up.

“Ms. DIANA FARRELL (Deputy Assistant for Economy Policy): We understand Simon Johnson’s views on this, and I guess the response is the following….

“Ms. FARRELL: We have created them [our biggest banks], and we’re sort of past that point, and I think that in some sense, the genie’s out of the bottle and what we need to do is to manage them and to oversee them, as opposed to hark back to a time that we’re unlikely to ever come back to or want to come back to.” (full transcript)

Ms. Farrell is Larry Summers’s deputy on the National Economic Council and the former director of McKinsey Global Institute, and she has a strong background on banking issues – based on extensive professional experience with global financial institutions.

Her statement contains three remarkable points.

First, “we have created them” is exactly right. Today’s mega-banks were not created by any market process. They are the result of a series of government actions and inactions, particularly over the past 18 months. Banks failed due to their own mismanagement but how those failures were handled – bankruptcy vs. bailout – was a conscious official decision. This administration deliberately chose to be very nice to the biggest banks and to the people who run them.

Second, “we need to… manage them and oversee them”. Here she is presumably referring to the administration’s regulatory reform plan, which does not appear to be going well. Once the massive banks were created, and implicitly backed by the government, it became (already by April or May of this year) very hard to reregulate them. As Joe Nocera pointed out on Saturday, the biggest banks have essentially bitten the Obama administration hand that fed them – most obviously by opposing the new Consumer Financial Protection Agency. It is already abundantly clear that the White House cannot control our big banks. What hope do mere regulators have?

Third, “we’re unlikely to ever … want to come back to”. Ms. Farrell’s specifics on this point were summarized by the interviewer, Alex Blumberg, “The problem with Johnson’s approach, [the administration] decided, is that bigness also has its benefits. Sure, the economy used to be simpler and financial institutions weren’t so big and dangerous, but GDP was smaller then, too, and people were poorer.”

Felix Salmon piece suggesting tax rates encouraging Corporate America to issue too much debt. Hmm maybe the same thing happened with Residential Mortgaes....\
(By the way Paul Volcker was appointed by DEMOCRAT JIMMY CARTER)

http://blogs.reuters.com/felix-salmon/2009/10/21/the-importance-of-volcker/

Tax experts for decades have bemoaned the tax code’s bias toward debt over equity: Interest on most corporate debt is tax deductible, while dividend payments are not.

http://www.forbes.com/feeds/afx/2009/10/20/afx7018936.html

PARIS, Oct 20 (Reuters) - The United States is pumping out liquidity to try to inflate away its debt, leading to the depreciation of the U.S. dollar, Henri Guaino, a top advisor to French President Nicolas Sarkozy said on Tuesday.

Guaino worried about a risk of an inflationary cycle.

'Historically, we have only ever got out of such situations with inflation. We can also get out with deflation, but it's much more painful politically, socially,' he said.

Is Administration leading us to another trade war?

http://online.wsj.com/article/SB125602435738496081.html

John Reed former head of Citi says bring back Glass Stegal

http://www.nytimes.com/2009/10/23/opinion/l23volcker.html?_r=2

As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense.

This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.

John S. Reed
New York, Oct. 21, 2009

Tavakoli on Goldman Sachs....

http://www.tavakolistructuredfinance.com/GS.pdf