"In the US today, as in many other countries in the past, confidence will return the first day an official statement about the economy proves to have been too pessimistic."
Bad news. No chance of any attempt at honest figures until at least January 2009 (and probably not then).
"The time for worrying about imprudent lending is past. The priority now has to be maintaining the flow of credit (etc, etc.)
"All of this may not be enough to avert a recession. But it is much more than is under way right now."
Hmm. Has anybody ever seen Larry Summers and Conjure Bag in the same room?
As was said on several other pages, so much for decoupling. The news just gets better and better. And such a surprise when I pick up the ole Tulsa World and see how things have been rocky but the worst is over.
It's beginning to sound like all the media have an approved list of confusion to spread. After all, we wouldn't want anyone to get over excited, now would we?
Question- why are the asian markets up so much when the Chinese government is trying to stop lending for the last month of the year???
I was bearish and held a short position in the stock market untill recently. Last week I closed all of them and now I am neutral and waiting a bottom pattern before opening a long position. Bearishness is high (but not so intense as it was on August low), seasonality is positive, the stock market endured a rushing stream of bad news and it seems that only a atomic bomb is capable to pull down prices further. It is only a tactical move and I dont expect a strong potential upside. My long term view is still bearish.
F. Frederson, Summers is definitely proposing to stimulate the demand side:
"What concrete steps are necessary? First, maintaining demand must be the over-arching macro-economic priority. That means the Fed has to get ahead of the curve and recognise as the market already has that levels of the Fed Funds rate that were neutral when the financial system was working normally are quite contractionary today. As important as long-run deficit reduction is, fiscal policy needs to be on stand-by to provide immediate temporary stimulus through spending or tax benefits for low- and middle-income families if the situation worsens."
Of course the horrible (and now worsening again) fiscal deficit is one of the problems - the fiscal hand is tied. Cutting rates too much will lead to more inflation - and probably eventually to another Volcker moment (with high interest rates in the future). So the monetary hand is somewhat tied.
If we are going to take fiscal action, we need to balance the cuts with increases. A possibility would be to reverse some of the tax cuts on high income earners, while cutting taxes on low and middle income earners - perhaps a credit on the payroll tax, offset by reversing the high income tax cuts would work. That would stimulate demand for the lower priced items, but allow price discovery to continue for housing.
"... there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible."
I don't see any way to maintain housing demand without serious problems elsewhere. We need to let price discovery work.
I see no reason to believe that there is any way to stop the Minsky deleveraging until it has run its course. It can be slowed, as the Japanese have shown, but they have been unable to reverse it.
Just to enlarge the big picture and include what is really at stake:
NEW BUCHANAN BOOK DECLARES 'END OF AMERICA'
Sun Nov 25 2007 20:40:15 ET
Exclusive
"America is coming apart, decomposing, and...the likelihood of her survival as one nation...is improbable -- and impossible if America continues on her current course," declares Pat Buchanan. "For we are on a path to national suicide."
The best-selling author and former presidential candidate is on the eve of launching his new epic book: DAY OR RECKONING: HOW HUBRIS, IDEOLOGY AND GREED ARE TEARING AMERICA APART.
This time, Buchanan goes all the way:
"America is in an existential crisis from which the nation may not survive."
The U.S. Army is breaking and is too small to meet Americas global commitments.
The dollar has sunk to historic lows and is being abandoned by foreign governments.
U.S. manufacturing is being hollowed out.
The greatest invasion in history, from the Third World, is swamping the ethno-cultural core of the country, leading to Balkanization and the loss of the Southwest to Mexico.
The culture is collapsing and the nation is being deconstructed along the lines of race and class.
A fiscal crisis looms as the unfunded mandates of Social Security and Medicare remain unaddressed.
All these crises are hitting America at once -- a perfect storm of crises....
I've noticed that annualized yields for mm accounts in conservative funds (TIAA-CREF, Vanguard, Fidelity etc) are now down 20-45 bp since Oct. I have a bad feeling about this.
"house price discovery" could be the New Ting. I wonder if it'll work like auto price discovery: you get the same price tag but incentivized to conceal the real devaluation. Maybe.
Is there a euphemistic slant to this "discovery"? Why can't we just say "house price decline" or "restoration of housing affordability"?
Attendant with "house price discovery" will be "investment banker salary discovery"?
I'm so new to this new Ting, house price discovery, you? You gonna pay That much for this little dog house...or wait for the house price discovery?
A possibility would be to reverse some of the tax cuts on high income earners, while cutting taxes on low and middle income earners - perhaps a credit on the payroll tax, offset by reversing the high income tax cuts would work.
That seems like it will work but unfortunately we have too many GOP Senators. Even if it would pass the Senate, Pres. Fredo would probably veto it.
F. Frederson, Summers is definitely proposing to stimulate the demand side.
No doubt he is, but it just isn't appropriate with the current fiscal situation and, more importantly, with this administration (as if the Bushies would try fiscal stimulus to help the poor). And would it really do much in the face of a couple of trillion dollars of assets being wiped out?
Anyway, any proposal he might make is moot. Nothing would get done on it until mid-2009, and who knows what the world will look like then.
"A possibility would be to reverse some of the tax cuts on high income earners, while cutting taxes on low and middle income earners"
I believe that's what the textbooks call a "balanced budget fiscal stimulus." Don't know if it's ever actually been tried outside the textbooks, though. Clinton talked about doing it very early in his first term (the Putting People First phase) but Rubin and "Eggs" Bentsen talked him out of it. Don't remember which side of the argument Summers was on then.
Conventional Keynesian stimulus (although not the fiscally balanced kind) WAS tried by the Carter administration and the Fed in '78-79 in response to the second oil shock -- the theory being that the tranfer of wealth to the oil producing countries was, in effect, a giant global shift in the savings function and easy money (plus aggressive recycling of petro-dollars to the heavy indebted countries) was necessary to offset it.
The experiment was not, to put it mildly, considered much of a success -- although who knows, maybe it warded off an even deeper global recession than the one we eventually got once Volcker reversed course.
But, given the similarities between then and now -- i.e. all the inflationary tinder lying around -- I can't help but wonder if the neo-Keynesians aren't panting to make the same mistake twice.
On the other hand, if the banking system really is fundamentally broken and a synchronized global recession looms, what's the alternative?
They even seem to think they know why the banking system is so broken, in stark contrast to the "And finally, monsieur, a wafer-thin mint." keynesian crowd.
NB: economic advice from a programmer. Caveat Emptor.
This piece by Summers is in my view an effort to prop up the portfolios of his friends (and his own?) in the investment world. The only other explanation is that someone hit him with the stupid stick. "Maintaining demand in the housing market"???...Every person in the USA who could "fog a mirror" has had plenty of opportunity to buy a home. There is very little real demand for additional supply of new homes at this point.
You forgot one. Most recent presentation by Matt Simmons, head of the largest energy-related investment bank.
Go to the link, click on the first 'Bermuda' PDF. It's slides, and graphics.. nicely done. A short read for another horror story. Peak Oil, of course. Simmons
Won't work. Shifting the tax cuts from the rich to the poor will increase net spending but it will still crash some element of the economy, i.e. the part that was counting on that money for retirement. So Nordstroms goes out of business instead of Walmart?
CR, instead of "housing price discovery", perhaps we can get "wage price discovery", since the bulk of wages in the US have only worked because they were supplemented with unpayable debts and government promises!
Freddie Mac (FRE.N), the No. 2 housing finance company, was reluctantly planning to issue new preferred stock to raise capital for money-making investments that would benefit all shareholders, executives said after the company's dismal results on Tuesday.
The J.C. Flowers proposal includes a "nominal" offer for the shares, Reuters reported earlier this week.
Another sticking point could be calls by the bank's top two shareholders, hedge funds RAB Capital and SRM Global, to scrap the auction.
Great link, Yossarian. The key to the current oil situation is that exploration companies and refiners had been burnt too many times in the last 25 years by short term leaps in oil prices that led to quick ramp ups of supply that tanked prices again. So very little in production and refining infrastructure was added. Demand jumps up and the world is against a production wall for the moment.
FT - 1000% hedge fund wins subprime bet - "Our entire banking system is a complete disaster. In my opinion, nearly every major bank would be insolvent if they marked their assets to market." FT.com / Financials - 1000% hedge fund wins subprime bet
I've noticed that annualized yields for mm accounts in conservative funds (TIAA-CREF, Vanguard, Fidelity etc) are now down 20-45 bp since Oct. I have a bad feeling about this
Was TIAA so "conservative?" It offered yields somewhat higher than the average as I recall. That is why I moved my money out (that and seeing that it was 80% invested in commercial paper) some time ago. I looked again recently and the percentage in commercial paper seems to have dropped.
Why should we put something on our balance sheet that is going to result in further writedowns?'' is how most contributors will respond, Bove said in an interview.The job of the Treasury isn't to go out and defraud investors.''
Yeah, but that it is the job of Wall Street, and Paulson is just faking the bit about working in the interests of American citizens.
Really interesting times in world stock markets. I moved some retirement money out of Fidelity China Region, just in time for a 4% bounce in Hong Kong. I'm buliish with index futures, bullish in retirement accounts (still heavy in foreign, gold and energy) but very short housing, banks and other financials with some calls on biotech and some hot stocks. Right now the market seems to be ignoring/not seeing the stuff that Roubini is seeing. The market is way over sold and December is usually one of the best months, but the "so-called" subprime mess seems likely, to me, to raise it's head again soon.
HSBC just announced that they will be taking $45 billion of SIV assets on balance sheet. Seems to me that this will put pressure on other banks to do the same and forget this SuperSIV b.s.
You couldn't tell anybody, i'll bet, what "the market is way oversold" means. Because it's meaningless.
Well it must mean the opposite of "the market is way overbought". Altho, come to think of it, I've never heard anyone say the market is way overbought. Wonder why.
I will regain confidence when those who rule us, or advise our rulers, revert to speaking English - no more "on a global basis" or "adverse impact" or all the other drivel that's meant to confuse us or, for heaven's sake, impress us.
Dollar Displaces Yen, [Swiss] Franc As Carry Trade Favorite
That was the headline on Boob-berg this morning. Another headline was:
DOLLAR NEW YEN
Do you need any better proof that the US is nearing deflationary depression?
For you Printing Money enthusiasts out there, in the financial wilderness, all that printed money is being used by financial institutions to buy the US Treasuries, which in turn pushed the rates down and the currency lower, two requirements for a currency to be attractive as an instrument of carry trade.
Yes, We are not Japan, I hear you, because we would have far worse deflationary depression.
--
None of the helicopter drops are reaching the households in financial distress, are they? They are all falling over bankrupters and fraudsters and not on their victims.
"... there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible."
You know econ101 was more than 20 years ago, but wouldn't lower prices raise demand? But of course what these people want to to keep nominal prices high even if the only way to do it to hide the depreciation behind dollar inflation.
And yeah, there's no surprise that the other banks have little enthusiasm for getting SIVed in the yard.
Just because it mightn't work won't stop the Govt trying to bail out the US financial system(GSE's and the banks). Because ultimately that is where this whole mess is clearly headed and that will be the only choice on offer from the US citizenry.This financial crisis is too big to be allowed to work itself out in a mish mash of market solutions- the risk of too much permanent damage to the US economy and society will become too great.It is at that point the financial world will have to decide whether they want the dollar to remain the world's reserve currency or not. Because the 2 situations are entirely incompatible with vastly diverging interests. The US must choose its own financial viability over all else, so the dollar will be abandoned by all others.
This was published in the Saturday Telegraph so apologies if I'm duplicating. Article about "tension" arising - not only in Europe but also China, Middle East - from USD weakness.
saw the CNBC news as well about Citi. Layoffs expected to be at least 17,000. Must be a buying opportunity for the stock as I expect a rally as a result. Actually, the bigger the layoffs the bigger the rally?
I haven't read the comments yet, but I have a very naive question to ask:
why can't the firms in need of cash simply borrow Japanese Yen????
If any old American Hedge Fund can do it and use the Yen as a carry trade, then why can't European Banks in need bypass the Eurozone system and borrow from the Japanese???
it would seem that currency fluctuations wouldn't harm them much, since it would be accessible and also since the banks aren't looking for a profit, only for lower cost of funds...
Is it just me or are E*Trade's writedowns woefully inadequate?
As of Sept. 30, the company's mortgage portfolio, including home loans and home-equity lines, was valued at $29.3 billion, and the company owns mortgage-backed securities valued at $12.4 billion. To date, it has announced $197 million in pretax write-downs on its securities portfolio, and it has set aside $237.8 million in loan-loss provisions.
Citi layoffs could be as high as 45,000. Great news obviously. The stock is going to soar!
What does this mean for the consumer? Lets just ignore that until we can find some other good news to hype up the market.
I'm not sure Summers' proposal that the Fed should get ahead of the curve is going to achieve much if the dollar is indeed the new carry trade favorite. The `helicopter drop' would be scooped up by the nimble and used to buy higher yielding assets overseas. CR's fiscal stiumulus proposal by varying tax rates would be closer to the correct recipe, putting more money into the hands of those who need it. Here's another idea: a government-led mega-infrastructure upgrade. Highways, airports etc.
When we talk of being less generous to one part of the population while being more generous to another as a means of stimulating the economy, we need to keep our goals straight. The low end of the income spectrum has had a raw deal lately, largely due to global economic factors. No question. The tax system has been jiggered, at the same time, to benefit those who have already benefited from global economic factors. So it makes sense, from an economic equity point of view, to shift the rules back the other way.
There is no guarantee such a shift would do anything toward stimulating the economy. We got Keynesian multiplier analysis for that sort of question. This is not a question on which a bunch of personal opinion is going to shed a lot of light. Does anybody know what the numbers say?
Once we know what the numbers say, we can understand the policy trade-offs. Only if we are very lucky will we find that our preferred policy based on social concern is also optimal for stimulating the economy.
Given the politics involved, these are a mostly academic issues. However, given the politics involved, we are sure to hear lots of politicians and other interested types claiming that their own pet interest is the interest most likely to help the economy. At least we could educate ourselves in order to know which claims have merit.
As to the Summers proposal, when your only tool is a hammer...
When liquidity is a problem, you pay higher rates and that has a 'magical' effect of coaxing out more money. However, that is not happening today because the Fed has induced the expectation of lower rates. To that extent the Fed is worsening, not helping, when it lowers the rate. Cash should be king at the moment, but it is not and this indicates a fundamental problem.
NOTE: All commentaries on economics and politics are about people, i.e., their beliefs and habits.
"... there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible."
Does this level of idiocy still exist in America?
Please don't answer. Vast majority of Americans ARE bred (via brainwashing) to be dupes in economic and political matters. They are well-trained slaves (as doctors, lawyers, economists, engineers, for example), to be sure, to serve their capitalist masters.
Under capitalism capitalists rule! In Goldman Sachs We Trust! More than in God, if I may say so. Do "we" have a choice?!
I've read quite a bit about optimism towards year-end performance, not the economy overall however. I could think of more than a few things that could derail any hope of a rally, not the least of them being tax-loss selling. As we head into a recession and we face a steady stream of economics reports I just don't see a catalyst.
Please suggest something other than, "seasonality". I am willing to listen.
The NY Fed said that "in response to heightened pressures in money markets for funding through the year-end, the Federal Reserve Bank of New Yorks Open Market Trading Desk plans to conduct a series of term repurchase agreements that will extend into the new year." The first such operation will be arranged and settle on November 28, and mature on January 10, 2008, for an amount of about $8B. The timing and amounts of subsequent term operations spanning the year-end will be influenced by market and reserve developments.
I have a Citi checking and savings account that is set up to pay bills online. Citi says to give them 2 business days to transfer funds.
I typically perform the electronic payment 3 business days prior to the due date to avoid any complications - yet I just received notification of past due charges being applied to my accounts by one payee. Apparently Citi took 5 business days (note they said it takes 2) to post the payment as instructed.
This wasn't a situtaion where they had to wait for funds to clear - money well in excess of the required amount had been in the account for a long (as in months) time. Methinks Citi is having serious liquidity issues...
Every politician, and that includes Larry Summers, that proposes lower rates as a solution to our problems is really proposing to transfer wealth from elderly savers to home owners.
Higher inflation, Boskin-Greenspan COLA increases, lower interest income.
That's the reward to our elderly for their savings. Where is the AARP? Presumably they only represent second home-owning retirees with big equity portfolios.
I just received notification of past due charges being applied to my accounts by one payee. Apparently Citi took 5 business days (note they said it takes 2) to post the payment as instructed.
Living off the float and charges. I had the same problem the other day with a different bank. If they aren't careful some enterprising DA is going to investigate the difference between the time necessary to process credits v. debits.
You're one of my favorites on this blog... but the AARP is all about transferring wealth the other way as well. How about that awesome bribe they forced on a Bush/Kerry during the last election. Whoever can out-promise and outspend the other gets the votes. Nevermind whether or not our country could afford it, or whether it was actually needed... they just used their power to get it done. What a joke!
And I wouldn't assume that every retiree is such a saver. I'm sure a good number of them need to be bailed out of mortgages too.
I have my own economic indicator. It's called the cheap neighbor/relative index. It represents the amount of borrowing from me in an obvious attempt to save an insignificant amount of money. It's in unchartered territory now.
Recent activities include a neighbor trying to save a $40 delivery fee by borrowing my pickup and burning $50 of gas in the process. Of course, they didn't replenish the gas or offer me any money for it.
Another neighbor (Owns 2 mercedes. One of which has been broken for 3 months.) has decided to paint the house themselves and borrows my ladders to do the work. I don't think this neighbor knows how to start a lawn mower. I expect my ladders (and probably some of his bricks and siding) to be coated in paint before all is done.
Other things are a relative driving 50 miles to my house and back to borrow a bissel carpet cleaner 3 times in the past few months. On top of it, they didn't want to buy detergent. They insist on taking one of my bottles with them.
One of my neighbors wont buy a $10 piece of hardware to fix their fence. They rig it with twine, which doesn't work and frequently their dog and sometimes their toddlers wander around the neighborhood. I would just go buy it for them, but I think it would make them mad.
I have a lot of other instances of people borrowing things from me. Too many to list.
I live in a good neighborhood. Houses, according to zillow (for what it's worth), are worth $500k-$600k. I live in an affluent area with a very low unemployment rate. I suspect most people look at the surface of things and think all is well, but behind the scenes, there's a disaster in the making.
"Once we know what the numbers say, we can understand the policy trade-offs. Only if we are very lucky will we find that our preferred policy based on social concern is also optimal for stimulating the economy."
Oh please. As if the super rich stoically accept tax cuts for the purely philanthropic purpose of "helping the economy."
That's the reward to our elderly for their savings. Where is the AARP? Presumably they only represent second home-owning retirees with big equity portfolios.
The elderly in the US are the recipients of the largest demographic dividend in the history of the world. A huge generation of children after them (Boomers), a higher percentage of those children in the work force (two-income households), and a lower percentage of children in the population to support (boomers had few kids).
With such a large demographic dividend they handed themselves lucrative pension, Medicare, and Social Security benefits. That generation created the whole notion of "retirement."
Funny thing is, it was a demographic aberration. There is no way to support it for more than a single generation. The only way to save services (which is what the majority of retirees demand) is by having lots of kids or allowing massive immigration.
Uh, Doug, you missed the part where I said that politics made this whole thing academic? The point to knowing where optimal policy lies is to know who is lying about policy. And because when you hang out on economic blogs, there is some assumption that you find economics interesting.
No doubt "seniors" are recipients of government largess. I contrast "seniors", which is anyone over 65, with "elderly", which are people that live on fixed incomes, usually have sold their homes and now rent, and they consume inflation-prone items like food, rental housing, medical services and heat.
My point is that there is a cost to loud, ubiquitous call for lower interest rates. There is no free lunch, and any rate decrease comes out of the elderly's pocket. I'd like to see just one politician, economist or housing advocate acknowledge this. Certainly Ben Bernanke never will.
Good distinction you make between elderly and seniors. Seniors are the entitlement-driven, spoiled-brat children of the elderly. They have tried to pass this thinking on to their childern. Some have accepted it and practice it, and others see if for the shallow, empty promise that it is.
Nice note about AARP, David Pearson, and how vested interests (the wealthy retired) speak for a much larger group (the retired, even the non-retired still working elderly). A little microcosm of the larger political landscape, yes?
dc1000 - good point on the crowding out issue. Personally I think that may become an increasing issue as less and less of the twin deficits are funded by foreign cash flows, reducing the available pool of funds available for borrowing.
In addition, I thought this was interesting from Summer's article. Looks like we may be in danger of turning Japanese.
"The current main policy thrust the so-called super conduit, in which banks co-operate to take on the assets of troubled investment vehicles has never been publicly explained in any detail by the US Treasury. On the information available, the super conduit has worrying similarities with Japanese banking practices of the 1990s that aroused criticism from American authorities for their lack of transparency, suppression of genuine market pricing of bad credits, and inhibiting effect on new lending."
Has anybody sen any evidence of there being a true shortage of credit for real productive investment? For example, Summers says that to support demand for housing creditworthy borrowers need loans at reasonable prices, but as far as I can tell prime borrowers can still get conforming loans at very good rates with little problem. There are problems in in the commercial paper market, but it appears to affect mainly those who were borrowing short in the CP market to lend long in obscure debt instruments, and not those who used it to fund ongoing operations. A huge amount of credit in the last couple of years funded LBOs, private equity deals, and share buybacks. To describe that credit as fueling the expansion of the real economy seems to be stretching a point, as would lending ever more money against a rapidly appreciating housing stock. Huge amounts were being lent and spent, but much was actually invested in new productive capacity, and can't most firms still making actual investment able to borrow, much as real creditworthy borrowers are still able to get mortgages. Except for a couple of stories out of of Canada, and of course home builders, how much are we hearing about new investments, (versus acquisitions) being halted because of the credit squeeze?
From the Summers article:
"In the US today, as in many other countries in the past, confidence will return the first day an official statement about the economy proves to have been too pessimistic."
Bad news. No chance of any attempt at honest figures until at least January 2009 (and probably not then).
"The time for worrying about imprudent lending is past. The priority now has to be maintaining the flow of credit (etc, etc.)
"All of this may not be enough to avert a recession. But it is much more than is under way right now."
Hmm. Has anybody ever seen Larry Summers and Conjure Bag in the same room?
Summers seems to take the line that some kind of Keynesian pump-priming is appropriate at this moment (and that it will work).
The time for worrying about imprudent lending is past. The priority now has to be maintaining the flow of credit.
Um, no. Some lessons really do need to be learned, and lumps taken.
He does come down on the Super-Sewer, though, if mildly.
As was said on several other pages, so much for decoupling. The news just gets better and better. And such a surprise when I pick up the ole Tulsa World and see how things have been rocky but the worst is over.
It's beginning to sound like all the media have an approved list of confusion to spread. After all, we wouldn't want anyone to get over excited, now would we?
Question- why are the asian markets up so much when the Chinese government is trying to stop lending for the last month of the year???
I was bearish and held a short position in the stock market untill recently. Last week I closed all of them and now I am neutral and waiting a bottom pattern before opening a long position. Bearishness is high (but not so intense as it was on August low), seasonality is positive, the stock market endured a rushing stream of bad news and it seems that only a atomic bomb is capable to pull down prices further. It is only a tactical move and I dont expect a strong potential upside. My long term view is still bearish.
EWZ
His complaint about the super-sewer seems to be that it doesn't involve direct helicopter drops.
Summers and Roubini both sound near panic. Maybe I will get to play the Cramer dance remix on endless loop tomorrow afternoon.
"They're NUTS! They know NOTHING! This is a DIFF'RENT kind of market! Bill Poole is a SHAME! He's SHAMEFUL!"
So Summers's prescription is to print more dollars?
Terrific.
F. Frederson, Summers is definitely proposing to stimulate the demand side:
"What concrete steps are necessary? First, maintaining demand must be the over-arching macro-economic priority. That means the Fed has to get ahead of the curve and recognise as the market already has that levels of the Fed Funds rate that were neutral when the financial system was working normally are quite contractionary today. As important as long-run deficit reduction is, fiscal policy needs to be on stand-by to provide immediate temporary stimulus through spending or tax benefits for low- and middle-income families if the situation worsens."
Of course the horrible (and now worsening again) fiscal deficit is one of the problems - the fiscal hand is tied. Cutting rates too much will lead to more inflation - and probably eventually to another Volcker moment (with high interest rates in the future). So the monetary hand is somewhat tied.
If we are going to take fiscal action, we need to balance the cuts with increases. A possibility would be to reverse some of the tax cuts on high income earners, while cutting taxes on low and middle income earners - perhaps a credit on the payroll tax, offset by reversing the high income tax cuts would work. That would stimulate demand for the lower priced items, but allow price discovery to continue for housing.
"... there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible."
I don't see any way to maintain housing demand without serious problems elsewhere. We need to let price discovery work.
Best Wishes.
I see no reason to believe that there is any way to stop the Minsky deleveraging until it has run its course. It can be slowed, as the Japanese have shown, but they have been unable to reverse it.
albrt- "Has anybody ever seen Larry Summers and Conjure Bag in the same room?"
Conjure Bag says, "No, and you won't, because Summers and I move in different circles."
Conjure again re-affirms his long-standing forecast:
Recession Q1-08
Just to enlarge the big picture and include what is really at stake:
NEW BUCHANAN BOOK DECLARES 'END OF AMERICA'
Sun Nov 25 2007 20:40:15 ET
Exclusive
"America is coming apart, decomposing, and...the likelihood of her survival as one nation...is improbable -- and impossible if America continues on her current course," declares Pat Buchanan. "For we are on a path to national suicide."
The best-selling author and former presidential candidate is on the eve of launching his new epic book: DAY OR RECKONING: HOW HUBRIS, IDEOLOGY AND GREED ARE TEARING AMERICA APART.
This time, Buchanan goes all the way:
"America is in an existential crisis from which the nation may not survive."
The U.S. Army is breaking and is too small to meet Americas global commitments.
The dollar has sunk to historic lows and is being abandoned by foreign governments.
U.S. manufacturing is being hollowed out.
The greatest invasion in history, from the Third World, is swamping the ethno-cultural core of the country, leading to Balkanization and the loss of the Southwest to Mexico.
The culture is collapsing and the nation is being deconstructed along the lines of race and class.
A fiscal crisis looms as the unfunded mandates of Social Security and Medicare remain unaddressed.
All these crises are hitting America at once -- a perfect storm of crises....
Wow! Roubini is really going bananas.
I've noticed that annualized yields for mm accounts in conservative funds (TIAA-CREF, Vanguard, Fidelity etc) are now down 20-45 bp since Oct. I have a bad feeling about this.
CR- "We need to let price discovery work."
Conjure Bag says, "You might discover that the price is lower than you think it is."
"house price discovery" could be the New Ting. I wonder if it'll work like auto price discovery: you get the same price tag but incentivized to conceal the real devaluation. Maybe.
Is there a euphemistic slant to this "discovery"? Why can't we just say "house price decline" or "restoration of housing affordability"?
Attendant with "house price discovery" will be "investment banker salary discovery"?
I'm so new to this new Ting, house price discovery, you? You gonna pay That much for this little dog house...or wait for the house price discovery?
A possibility would be to reverse some of the tax cuts on high income earners, while cutting taxes on low and middle income earners - perhaps a credit on the payroll tax, offset by reversing the high income tax cuts would work.
That seems like it will work but unfortunately we have too many GOP Senators. Even if it would pass the Senate, Pres. Fredo would probably veto it.
F. Frederson, Summers is definitely proposing to stimulate the demand side.
No doubt he is, but it just isn't appropriate with the current fiscal situation and, more importantly, with this administration (as if the Bushies would try fiscal stimulus to help the poor). And would it really do much in the face of a couple of trillion dollars of assets being wiped out?
Anyway, any proposal he might make is moot. Nothing would get done on it until mid-2009, and who knows what the world will look like then.
Conjure Bag says, "Consider a possible alternative."
YouTube
- Three Days of the Condor (1975) movie trailer
"Consider a possible alternative."
That the future will be dominated by pop-culture references no one under the age of 40 will get?
Tell conjure I mean that in the nicest way possible.
Cheers,
prat
Conjure Bag says, "Meet my friend, Mr. Higgins. He has a way out."
YouTube -
"A possibility would be to reverse some of the tax cuts on high income earners, while cutting taxes on low and middle income earners"
I believe that's what the textbooks call a "balanced budget fiscal stimulus." Don't know if it's ever actually been tried outside the textbooks, though. Clinton talked about doing it very early in his first term (the Putting People First phase) but Rubin and "Eggs" Bentsen talked him out of it. Don't remember which side of the argument Summers was on then.
Conventional Keynesian stimulus (although not the fiscally balanced kind) WAS tried by the Carter administration and the Fed in '78-79 in response to the second oil shock -- the theory being that the tranfer of wealth to the oil producing countries was, in effect, a giant global shift in the savings function and easy money (plus aggressive recycling of petro-dollars to the heavy indebted countries) was necessary to offset it.
The experiment was not, to put it mildly, considered much of a success -- although who knows, maybe it warded off an even deeper global recession than the one we eventually got once Volcker reversed course.
But, given the similarities between then and now -- i.e. all the inflationary tinder lying around -- I can't help but wonder if the neo-Keynesians aren't panting to make the same mistake twice.
On the other hand, if the banking system really is fundamentally broken and a synchronized global recession looms, what's the alternative?
"Meet my friend, Mr. Higgins. He has a way out."
Preposterously high jacket collars worn aces-up and, one must remark, sumptuous, amazing piles of hair?
(Look, I'm not very smart, and all I do for a living is program and make sarcastic remarks. This is all I can add for this site.)
Cheers,
prat
On the other hand, if the banking system really is fundamentally broken and a synchronized global recession looms, what's the alternative?
Again, I'm a bear of very little brain, but these guys seem reasonable enough:
Ludwig von Mises Institute - Homepage
They even seem to think they know why the banking system is so broken, in stark contrast to the "And finally, monsieur, a wafer-thin mint." keynesian crowd.
NB: economic advice from a programmer. Caveat Emptor.
Cheers,
prat
This piece by Summers is in my view an effort to prop up the portfolios of his friends (and his own?) in the investment world. The only other explanation is that someone hit him with the stupid stick. "Maintaining demand in the housing market"???...Every person in the USA who could "fog a mirror" has had plenty of opportunity to buy a home. There is very little real demand for additional supply of new homes at this point.
You forgot one. Most recent presentation by Matt Simmons, head of the largest energy-related investment bank.
Go to the link, click on the first 'Bermuda' PDF. It's slides, and graphics.. nicely done. A short read for another horror story. Peak Oil, of course.
Simmons
Be good.
what's the alternative?
Won't work. Shifting the tax cuts from the rich to the poor will increase net spending but it will still crash some element of the economy, i.e. the part that was counting on that money for retirement.
So Nordstroms goes out of business instead of Walmart?
CR, instead of "housing price discovery", perhaps we can get "wage price discovery", since the bulk of wages in the US have only worked because they were supplemented with unpayable debts and government promises!
Here's a late-night chuckle: Yahoo! 404 - Page Not Found
Freddie Mac (FRE.N), the No. 2 housing finance company, was reluctantly planning to issue new preferred stock to raise capital for money-making investments that would benefit all shareholders, executives said after the company's dismal results on Tuesday.
Oh, and the NR saga continues: Yahoo! 404 - Page Not Found
The J.C. Flowers proposal includes a "nominal" offer for the shares, Reuters reported earlier this week.
Another sticking point could be calls by the bank's top two shareholders, hedge funds RAB Capital and SRM Global, to scrap the auction.
Hedge funds as bagholders? So sad.
Great link, Yossarian. The key to the current oil situation is that exploration companies and refiners had been burnt too many times in the last 25 years by short term leaps in oil prices that led to quick ramp ups of supply that tanked prices again. So very little in production and refining infrastructure was added. Demand jumps up and the world is against a production wall for the moment.
I hear Bernanke rotoring up the choppers now. LOTS of choppers.
And it still won't work.
I wonder if he reads stuff like Summers and thinks about dropping rates to 1% again.
Bernanke and Paulson confronting the Debt monster....
http://miscellany.lolthulhu.com/wp-content/uploads/2007/11/cleveland-do_not_want.jpg
Yikes!
FT - 1000% hedge fund wins subprime bet - "Our entire banking system is a complete disaster. In my opinion, nearly every major bank would be insolvent if they marked their assets to market."
FT.com / Financials - 1000% hedge fund wins subprime bet
I've noticed that annualized yields for mm accounts in conservative funds (TIAA-CREF, Vanguard, Fidelity etc) are now down 20-45 bp since Oct. I have a bad feeling about this
Was TIAA so "conservative?" It offered yields somewhat higher than the average as I recall. That is why I moved my money out (that and seeing that it was 80% invested in commercial paper) some time ago. I looked again recently and the percentage in commercial paper seems to have dropped.
Super-Sewer still not flowing: Bank of America Takes Lead in Backing `SuperSIV' Fund (Update3) - Bloomberg.com
Why should we put something on our balance sheet that is going to result in further writedowns?'' is how most contributors will respond, Bove said in an interview.The job of the Treasury isn't to go out and defraud investors.''
Yeah, but that it is the job of Wall Street, and Paulson is just faking the bit about working in the interests of American citizens.
Really interesting times in world stock markets. I moved some retirement money out of Fidelity China Region, just in time for a 4% bounce in Hong Kong. I'm buliish with index futures, bullish in retirement accounts (still heavy in foreign, gold and energy) but very short housing, banks and other financials with some calls on biotech and some hot stocks. Right now the market seems to be ignoring/not seeing the stuff that Roubini is seeing. The market is way over sold and December is usually one of the best months, but the "so-called" subprime mess seems likely, to me, to raise it's head again soon.
Gold/Oil ratio in focus this am...
two historic price points will be tested this am!
Wind Power, and Resistance - NY Times
HSBC Will Take on $45 Billion of Assets From Two SIVs (Update8) - Bloomberg.com
crunch crunch crunch
Ayeee! It's Swanzilla!
HSBC just announced that they will be taking $45 billion of SIV assets on balance sheet. Seems to me that this will put pressure on other banks to do the same and forget this SuperSIV b.s.
Bill D,
You couldn't tell anybody, i'll bet, what "the market is way oversold" means. Because it's meaningless.
Stop repeating cliches on this board.
Summers recipe:
Put on blinders, open the low interest rate spigot, and pretend it's October 2001 again.
You couldn't tell anybody, i'll bet, what "the market is way oversold" means. Because it's meaningless.
Well it must mean the opposite of "the market is way overbought". Altho, come to think of it, I've never heard anyone say the market is way overbought. Wonder why.
I will regain confidence when those who rule us, or advise our rulers, revert to speaking English - no more "on a global basis" or "adverse impact" or all the other drivel that's meant to confuse us or, for heaven's sake, impress us.
Last week it was M&G, this week Scroders. Another UK real estate fund in the news...
Volatility set to delay Schroders' payments - Telegraph
--
November 26, 2007
Dollar Displaces Yen, [Swiss] Franc As Carry Trade Favorite
That was the headline on Boob-berg this morning. Another headline was:
DOLLAR NEW YEN
Do you need any better proof that the US is nearing deflationary depression?
For you Printing Money enthusiasts out there, in the financial wilderness, all that printed money is being used by financial institutions to buy the US Treasuries, which in turn pushed the rates down and the currency lower, two requirements for a currency to be attractive as an instrument of carry trade.
Yes, We are not Japan, I hear you, because we would have far worse deflationary depression.
Jas
--
None of the helicopter drops are reaching the households in financial distress, are they? They are all falling over bankrupters and fraudsters and not on their victims.
Jas
"... there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible."
You know econ101 was more than 20 years ago, but wouldn't lower prices raise demand? But of course what these people want to to keep nominal prices high even if the only way to do it to hide the depreciation behind dollar inflation.
And yeah, there's no surprise that the other banks have little enthusiasm for getting SIVed in the yard.
Just because it mightn't work won't stop the Govt trying to bail out the US financial system(GSE's and the banks). Because ultimately that is where this whole mess is clearly headed and that will be the only choice on offer from the US citizenry.This financial crisis is too big to be allowed to work itself out in a mish mash of market solutions- the risk of too much permanent damage to the US economy and society will become too great.It is at that point the financial world will have to decide whether they want the dollar to remain the world's reserve currency or not. Because the 2 situations are entirely incompatible with vastly diverging interests. The US must choose its own financial viability over all else, so the dollar will be abandoned by all others.
CNBC Gasparino just reported that CitiGroup will be having massive layoff
This was published in the Saturday Telegraph so apologies if I'm duplicating. Article about "tension" arising - not only in Europe but also China, Middle East - from USD weakness.
Bet your bottom dollar tensions will follow - Telegraph
saw the CNBC news as well about Citi. Layoffs expected to be at least 17,000. Must be a buying opportunity for the stock as I expect a rally as a result. Actually, the bigger the layoffs the bigger the rally?
I haven't read the comments yet, but I have a very naive question to ask:
why can't the firms in need of cash simply borrow Japanese Yen????
If any old American Hedge Fund can do it and use the Yen as a carry trade, then why can't European Banks in need bypass the Eurozone system and borrow from the Japanese???
it would seem that currency fluctuations wouldn't harm them much, since it would be accessible and also since the banks aren't looking for a profit, only for lower cost of funds...
I know there's something simple I'm missing...
TIA
Is it just me or are E*Trade's writedowns woefully inadequate?
As of Sept. 30, the company's mortgage portfolio, including home loans and home-equity lines, was valued at $29.3 billion, and the company owns mortgage-backed securities valued at $12.4 billion. To date, it has announced $197 million in pretax write-downs on its securities portfolio, and it has set aside $237.8 million in loan-loss provisions.
E*Trade Sale May Hinge On Mortgage Portfolio - WSJ.com
Timber !!
Citi layoffs could be as high as 45,000. Great news obviously. The stock is going to soar!
What does this mean for the consumer? Lets just ignore that until we can find some other good news to hype up the market.
I'm not sure Summers' proposal that the Fed should get ahead of the curve is going to achieve much if the dollar is indeed the new carry trade favorite. The `helicopter drop' would be scooped up by the nimble and used to buy higher yielding assets overseas. CR's fiscal stiumulus proposal by varying tax rates would be closer to the correct recipe, putting more money into the hands of those who need it. Here's another idea: a government-led mega-infrastructure upgrade. Highways, airports etc.
CR:
Aren't fiscal deficits classically considered a problem due to crowding out?
is there any evidence of that occurring?
what are the prospects for that?
When we talk of being less generous to one part of the population while being more generous to another as a means of stimulating the economy, we need to keep our goals straight. The low end of the income spectrum has had a raw deal lately, largely due to global economic factors. No question. The tax system has been jiggered, at the same time, to benefit those who have already benefited from global economic factors. So it makes sense, from an economic equity point of view, to shift the rules back the other way.
There is no guarantee such a shift would do anything toward stimulating the economy. We got Keynesian multiplier analysis for that sort of question. This is not a question on which a bunch of personal opinion is going to shed a lot of light. Does anybody know what the numbers say?
Once we know what the numbers say, we can understand the policy trade-offs. Only if we are very lucky will we find that our preferred policy based on social concern is also optimal for stimulating the economy.
Given the politics involved, these are a mostly academic issues. However, given the politics involved, we are sure to hear lots of politicians and other interested types claiming that their own pet interest is the interest most likely to help the economy. At least we could educate ourselves in order to know which claims have merit.
As to the Summers proposal, when your only tool is a hammer...
When liquidity is a problem, you pay higher rates and that has a 'magical' effect of coaxing out more money. However, that is not happening today because the Fed has induced the expectation of lower rates. To that extent the Fed is worsening, not helping, when it lowers the rate. Cash should be king at the moment, but it is not and this indicates a fundamental problem.
NOTE: All commentaries on economics and politics are about people, i.e., their beliefs and habits.
"... there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible."
Does this level of idiocy still exist in America?
Please don't answer. Vast majority of Americans ARE bred (via brainwashing) to be dupes in economic and political matters. They are well-trained slaves (as doctors, lawyers, economists, engineers, for example), to be sure, to serve their capitalist masters.
Under capitalism capitalists rule! In Goldman Sachs We Trust! More than in God, if I may say so. Do "we" have a choice?!
Jas
EZW, "seasonality is positive".
I've read quite a bit about optimism towards year-end performance, not the economy overall however. I could think of more than a few things that could derail any hope of a rally, not the least of them being tax-loss selling. As we head into a recession and we face a steady stream of economics reports I just don't see a catalyst.
Please suggest something other than, "seasonality". I am willing to listen.
The NY Fed said that "in response to heightened pressures in money markets for funding through the year-end, the Federal Reserve Bank of New Yorks Open Market Trading Desk plans to conduct a series of term repurchase agreements that will extend into the new year." The first such operation will be arranged and settle on November 28, and mature on January 10, 2008, for an amount of about $8B. The timing and amounts of subsequent term operations spanning the year-end will be influenced by market and reserve developments.
I have a Citi checking and savings account that is set up to pay bills online. Citi says to give them 2 business days to transfer funds.
I typically perform the electronic payment 3 business days prior to the due date to avoid any complications - yet I just received notification of past due charges being applied to my accounts by one payee. Apparently Citi took 5 business days (note they said it takes 2) to post the payment as instructed.
This wasn't a situtaion where they had to wait for funds to clear - money well in excess of the required amount had been in the account for a long (as in months) time. Methinks Citi is having serious liquidity issues...
Every politician, and that includes Larry Summers, that proposes lower rates as a solution to our problems is really proposing to transfer wealth from elderly savers to home owners.
Higher inflation, Boskin-Greenspan COLA increases, lower interest income.
That's the reward to our elderly for their savings. Where is the AARP? Presumably they only represent second home-owning retirees with big equity portfolios.
ah, the new corporate summers.
Anonymous, If it takes them more than a second to transfer the funds then they are taking you for a ride.
I just received notification of past due charges being applied to my accounts by one payee. Apparently Citi took 5 business days (note they said it takes 2) to post the payment as instructed.
Living off the float and charges. I had the same problem the other day with a different bank. If they aren't careful some enterprising DA is going to investigate the difference between the time necessary to process credits v. debits.
You're one of my favorites on this blog... but the AARP is all about transferring wealth the other way as well. How about that awesome bribe they forced on a Bush/Kerry during the last election. Whoever can out-promise and outspend the other gets the votes. Nevermind whether or not our country could afford it, or whether it was actually needed... they just used their power to get it done. What a joke!
And I wouldn't assume that every retiree is such a saver. I'm sure a good number of them need to be bailed out of mortgages too.
Wow, too much Scotch this weekend I guess. That was me that wrote the last post.... it was supposed to be wrtten to David Pearson.
Where I bank I typically pay bills (electronically) the day they are due - I've never had late fees as a result.
I have my own economic indicator. It's called the cheap neighbor/relative index. It represents the amount of borrowing from me in an obvious attempt to save an insignificant amount of money. It's in unchartered territory now.
Recent activities include a neighbor trying to save a $40 delivery fee by borrowing my pickup and burning $50 of gas in the process. Of course, they didn't replenish the gas or offer me any money for it.
Another neighbor (Owns 2 mercedes. One of which has been broken for 3 months.) has decided to paint the house themselves and borrows my ladders to do the work. I don't think this neighbor knows how to start a lawn mower. I expect my ladders (and probably some of his bricks and siding) to be coated in paint before all is done.
Other things are a relative driving 50 miles to my house and back to borrow a bissel carpet cleaner 3 times in the past few months. On top of it, they didn't want to buy detergent. They insist on taking one of my bottles with them.
One of my neighbors wont buy a $10 piece of hardware to fix their fence. They rig it with twine, which doesn't work and frequently their dog and sometimes their toddlers wander around the neighborhood. I would just go buy it for them, but I think it would make them mad.
I have a lot of other instances of people borrowing things from me. Too many to list.
I live in a good neighborhood. Houses, according to zillow (for what it's worth), are worth $500k-$600k. I live in an affluent area with a very low unemployment rate. I suspect most people look at the surface of things and think all is well, but behind the scenes, there's a disaster in the making.
"Once we know what the numbers say, we can understand the policy trade-offs. Only if we are very lucky will we find that our preferred policy based on social concern is also optimal for stimulating the economy."
Oh please. As if the super rich stoically accept tax cuts for the purely philanthropic purpose of "helping the economy."
That's the reward to our elderly for their savings. Where is the AARP? Presumably they only represent second home-owning retirees with big equity portfolios.
The elderly in the US are the recipients of the largest demographic dividend in the history of the world. A huge generation of children after them (Boomers), a higher percentage of those children in the work force (two-income households), and a lower percentage of children in the population to support (boomers had few kids).
With such a large demographic dividend they handed themselves lucrative pension, Medicare, and Social Security benefits. That generation created the whole notion of "retirement."
Funny thing is, it was a demographic aberration. There is no way to support it for more than a single generation. The only way to save services (which is what the majority of retirees demand) is by having lots of kids or allowing massive immigration.
Uh, Doug, you missed the part where I said that politics made this whole thing academic? The point to knowing where optimal policy lies is to know who is lying about policy. And because when you hang out on economic blogs, there is some assumption that you find economics interesting.
Regarding AARP........One year they chose harry belafonte as their man of the year.
Nuff said.
Well said Kicker
No doubt "seniors" are recipients of government largess. I contrast "seniors", which is anyone over 65, with "elderly", which are people that live on fixed incomes, usually have sold their homes and now rent, and they consume inflation-prone items like food, rental housing, medical services and heat.
My point is that there is a cost to loud, ubiquitous call for lower interest rates. There is no free lunch, and any rate decrease comes out of the elderly's pocket. I'd like to see just one politician, economist or housing advocate acknowledge this. Certainly Ben Bernanke never will.
Good distinction you make between elderly and seniors. Seniors are the entitlement-driven, spoiled-brat children of the elderly. They have tried to pass this thinking on to their childern. Some have accepted it and practice it, and others see if for the shallow, empty promise that it is.
Nice note about AARP, David Pearson, and how vested interests (the wealthy retired) speak for a much larger group (the retired, even the non-retired still working elderly). A little microcosm of the larger political landscape, yes?
dc1000 - good point on the crowding out issue. Personally I think that may become an increasing issue as less and less of the twin deficits are funded by foreign cash flows, reducing the available pool of funds available for borrowing.
In addition, I thought this was interesting from Summer's article. Looks like we may be in danger of turning Japanese.
"The current main policy thrust the so-called super conduit, in which banks co-operate to take on the assets of troubled investment vehicles has never been publicly explained in any detail by the US Treasury. On the information available, the super conduit has worrying similarities with Japanese banking practices of the 1990s that aroused criticism from American authorities for their lack of transparency, suppression of genuine market pricing of bad credits, and inhibiting effect on new lending."
crowding out is a fancy term for taking away available credit from the private sector
but i guess today there is still an unlimited amount of credit available
ten year at 4.0%
nutso
Has anybody sen any evidence of there being a true shortage of credit for real productive investment? For example, Summers says that to support demand for housing creditworthy borrowers need loans at reasonable prices, but as far as I can tell prime borrowers can still get conforming loans at very good rates with little problem. There are problems in in the commercial paper market, but it appears to affect mainly those who were borrowing short in the CP market to lend long in obscure debt instruments, and not those who used it to fund ongoing operations. A huge amount of credit in the last couple of years funded LBOs, private equity deals, and share buybacks. To describe that credit as fueling the expansion of the real economy seems to be stretching a point, as would lending ever more money against a rapidly appreciating housing stock. Huge amounts were being lent and spent, but much was actually invested in new productive capacity, and can't most firms still making actual investment able to borrow, much as real creditworthy borrowers are still able to get mortgages. Except for a couple of stories out of of Canada, and of course home builders, how much are we hearing about new investments, (versus acquisitions) being halted because of the credit squeeze?