Links to important economic news

Formal debate on the Pros and Cons of Financial innovation..
wothh a view...

http://bookstaber.com/rick/ButtonwoodDebate.wmv

Ed Harrison of Credit Writedowns shares this thoughts on the huge disappointment of Obama Economic policy, in light of the pre-election support of Volcker & Buffet which turned out be a canard for public consumption, considering he's gone the Larry Summers Geithner route.

http://www.creditwritedowns.com/2009/11/the-less-optimistic-view-of-treasurys-handling-of-the-crisis.html

Change you can believe in

Think back some 18 months when Senator Obama was in a horse race with Hillary Clinton to see who would go up against John McCain in the Presidential election. If you asked any reasonable individual who had the least experience and the thinnest political resume of the three, he or she would have said Barack Obama. If Americans wanted someone long on inside-the-beltway experience, they would have chosen John McCain – or, at a minimum, Hillary Clinton, not Barack Obama.

So, Barack Obama did not best both Hillary Clinton and John McCain and get to the White House because Americans felt him more qualified for the job. Rather, Americans believed the U.S. was on the wrong path and wanted a qualified person to lead the country who would also change course. They believed that person was Barack Obama.

And when it came to the economy, the presence of two men, Paul Volcker and Warren Buffett, born some 80 years ago, gave one the sense that, despite Barack Obama’s perceived relative youth or inexperience, he had the ablest of wise old men who would be his and our counsel in resolving this crisis.

Bailing out the banks

So when Barack Obama took office, it came as a rude awakening for many that he chose to bail out the too big to fail institutions with little or no strings attached, allowing them to later make record profits and pay record bonuses, while the economy was in a deep slump and ordinary Americans were being bankrupted and losing their jobs and homes at record rates. This was not change you can believe in.

What could or should the Obama Administration have done?

If you had listened to the chatter inside the beltway early this year, you would realize that Obama’s team believed it was not politically feasible to ‘nationalize’ Citigroup or Bank of America and force top executives to resign as was done at RBS, Bradford and Bingley or Northern Rock in the UK. This was a blinkered view which can only be described as captured (if not outright disingenuous). We need look no further than Fannie Mae and Freddie Mac to see that nationalization was an option.

But this is not the kind of solution we needed. What we needed was a solution by the Administration to take prompt corrective action in seizing bankrupt institutions, dismissing management, punishing any misdeeds and setting up a timetable to sell off the institution’s assets. That is change you can believe in.
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The Cheney-Rumsfeld replay

Now, I am not writing off Barack Obama’s presidency. I do worry he still could see a recessionary relapse which would cause him to seem more Herbert Hoover than Franklin Roosevelt. But, despite his Nobel Prize, it is much to early to know what his legacy will be.

Nonetheless, I believe he has wasted a lot of political capital and this will make ushering through a meaningful legislative agenda very difficult.

Why did Obama throw it all away?

Here’s my answer: I call it the Cheney-Rumsfeld replay.

When historians look back at the Bush 42 presidency, it will be defined by 9/11 and the wars in Iraq and Afghanistan. While George W. Bush was politically pre-disposed to the Neo-con world view, it was really advice from Dick Cheney and Don Rumsfeld which made Afghanistan and Iraq possible. George W. Bush was famously not well-versed in foreign affairs, having almost never travelled abroad. He was completely dependent on Dick Cheney and Donald Rumsfeld to make foreign policy (although he could have listened more to Colin Powell, his actual Secretary of State; again it goes to predisposition).

So, I see George W. Bush’s presidency as having been defined by foreign policy and the War on Terror and, by extension, on Rumsfeld and Cheney.

Fast-forward to Barack Obama’s presidency and you have an almost identical situation, this time with the economy instead of foreign policy and Tim Geithner and Larry Summers instead of Donald Rumsfeld and Dick Cheney.

But, as with George W. Bush, it goes to pre-disposition. Paul Volcker was a critical member of the Obama 2008 campaign. He also was a key member of Obama’s economic policy team. But, he has been speaking a very discordant message that is not in sync with team Obama. So, as with Bush and his marginalization of Powell, one has to believe Barack Obama has chosen to side with Geithner and Summers over Volcker. Why anyone would do so given Volcker’s experience is beyond my comprehension.
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Is this change we can believe in? I will leave that for you to decide

http://www.ft.com/cms/s/0/af6e6b56-d01f-11de-a8db-00144feabdc0.html

Is Obama not being assertive enough in promoting Free Trade?
Surprising statement that Bush was better for American trade..
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Asian leaders on Friday called on President Barack Obama to reassert US leadership on global free trade before his Sunday meeting in Singapore with national leaders representing half the world’s economy.

Their statements focused on the need for the US to back aggressively the resumption of the Doha trade round but they also reflect underlying wariness about the rapid rise of China.

Lee Kuan Yew, Singapore’s first prime minister and a regional elder statesman, said the US risked economic exclusion from Asia unless it reversed its protectionist stance.

Mr Lee said Washington had been preoccupied for the past eight years by Iran, Iraq and Afghanistan, and had missed the opportunity to conclude a trade agreement with the 10 countries of the Association of South East Asian Nations.

Meanwhile, China had concluded a deal with Asean, and with other countries including South Korea and India.

A further eight years of protectionism, assuming Mr Obama won a second term and without a change of policy, and the US would be “out of the economic race, and if you are out of the economic race you will lose in the long run”, he said.

One of the strongest calls came from Najib Razak, Malaysia’s prime minister, who told the Asia Pacific Economic Cooperation summit in Singapore that progress on trade liberalisation was “imperative” for global recovery.

“The thing I liked about President Bush’s foreign policy is that he was very pro-free trade. I hope the same message will be repeated.”

Their statements were backed by a formal statement on Thursday from the foreign and trade ministers of the 21 Apec countries, which include China, Japan and South Korea, calling for urgent action on Doha.

http://www.washingtonpost.com/wp-dyn/content/article/2009/11/12/AR2009111210788.html

The Federal Reserve is still going through its "lessons-learned" exercise from the recent financial crisis, but there's one lesson it clearly has not yet absorbed -- the one about ignoring and enabling credit bubbles.

That's the only conclusion that can be drawn from the Fed's decision last week to not only keep its benchmark interest rates at zero but also let everyone know that it intends to leave them there for a good long time. In case anyone missed the message, Fed officials and other central bankers and finance ministers repeated their promise several days later at a meeting in St. Andrews, Scotland, where they vowed to not let up the gas pedals of fiscal and monetary stimulus. And on Tuesday, the point was driven home again by members of the Fed's policy panel in three separate speeches.

Not surprisingly, all of this sparked a week-long party in financial markets that had already experienced powerful rallies over the past six months. Even with Thursday's modest pullback on Wall Street, U.S. stocks are up 60 percent since March, and share prices in emerging markets have nearly doubled. Commodity prices are soaring once again, led by gold, which is now selling for more than $1,100 an ounce, and crude oil, which is up a whopping 126 percent since February. A rally in the junk-bond and third-world debt markets has driven interest rates back to where they were before the crisis. In urban China, India and Brazil, property prices have doubled in the past year.

"The markets are on a sugar high," Mohamed El-Erian, chief executive of Pimco, the giant money manager, told Newsweek's Rana Foroohar last week.

Judging from how sharply and quickly these prices have risen, it's a pretty good guess that most of the buying has not been done by long-term investors who are suddenly upbeat about the prospects of global economic growth. The better bet is all this is the handiwork of short-term speculation by banks, hedge funds, private-equity funds and other financial center wise-guys moving as a herd, financing their purchases directly or indirectly with some of that yummy zero-percent money provided courtesy of the Fed.

For many investors, in fact, the cost of money is effectively less than zero, as economist Nouriel Roubini likes to point out. If you borrow dollars at near zero percent interest in the United States, exchange the dollars for Thai bhat, and invest the bhat in government bonds paying 4 or 5 percent, you not only get the benefit of the interest rate arbitrage but you also gain when you sell the bond and exchange the bhat back into dollars that have since depreciated. Roubini calls it "the mother of all carry trades," and in recent months he calculates that it has been generating annualized returns for investors of 50 to 70 percent.

This carry trade is now so widespread that it has become a major factor driving down the value of the dollar against many other currencies and driving up the flow of hot money into a number of developing countries. Not only has it spawned stock, bond, or real estate bubbles in those countries, but it's also driven up the value of their currencies to the point that their exports are less competitive relative to countries, including China, that peg their currencies to the U.S. dollar. To counteract these trends, central banks in Thailand, South Korea, Russia and the Philippines have intervened in currency markets, buying up dollars and selling their own currencies. Hong Kong has tightened up on lending rules, while Brazil has put a 2 percent tax on capital inflows. Taiwan has banned foreigners from making certain types of bank deposits.
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There's no way to know how long all this can continue before one of these bubbles finally bursts, the dollar spikes upward and investors all rush to unwind their trades at the same time. But it is a good guess that it will last as long as the Fed and other central banks indicate there is no end in sight for the current cheap-money regime. The longer they wait, the bigger the bubbles, and the bigger the mess to clean up.

All of which is why the recent statements by policymakers were so disappointing -- and so dangerous.

Despite the junk-bond and real estate bubbles of the late 1980s, the tech bubble and Asian financial crises of the 1990s and the credit bubble of recent years, the Fed stubbornly clings to an outmoded way of thinking and talking about the economy and monetary policy. Fed officials tend to give little weight to such "extraneous" factors such as asset prices, currency movements and capital flow, at least in public, and fear that focusing on them will cause them to lose sight of their core inflation-fighting mission. Moreover, like his predecessor, Fed Chairman Ben Bernanke still believes central bankers aren't smart enough to tell when a bubble has developed -- and even if they could, it would probably cause more harm than good to try to do something about it.

Janet Yellen, the president of the San Francisco Fed, is one of a small number of Fed policymakers who have begun to question the Fed's bubble orthodoxy, but even she declined to stray this week from the official line that the economy and the banks remain so weak that it is premature to even think about raising rates. That might make some sense if all this credit was flowing to worthy households and businesses. The evidence, however, suggests that much of it is going toward short-term financial speculation that is great for boosting bank profits and fattening the bonuses of Wall Street wise guys -- but lousy at producing sustainable long-term growth.

If there is one lesson to be drawn from the recent crisis, surely that is it.

Insult to injury..
http://www.reuters.com/article/marketsNews/idUSN188108620091118

http://www.spiegel.de/international/world/0,1518,662822,00.html

When he entered office, US President Barack Obama promised to inject US foreign policy with a new tone of respect and diplomacy. His recent trip to Asia, however, showed that it's not working. A shift to Bush-style bluntness may be coming.

Pretty scary reporting by a former GS insider:

http://www.thedailybeast.com/blogs-and-stories/2009-12-01/worse-than-enron/?

Good piece Otto, with all this accounting opacity, we now have yet another reason why regulators won't do the right thing. Author is right, bring back glass stegal and create a situation where gov't is back-stop for the smallest amount of assets.