Its that time of night and people in Scandinavia DO have a sense of humor so amidst this ripoff I found this sentence amusing:
She[Ms. Kuvaas, the mayor] disputed the suggestion that people here lacked the sophistication to understand what they were buying. Were not especially stupid because we live so far in the north, she said.
Well, the Icelanders certainly fooled you once upon a time didn't they ? By naming themselves ICELand and that godforsaken mass further north GREENland they got the Vikings off on the wrong track for looting and pillaging.
Yeah, stupid joke - that's the sort of stuff you learn if you research and invest in Norwegian and Icelandic currencies.
Well, my heart doesn't go out to the Norwegians as long as they are pulling billions of dollars of oil out of the North Sea. They're rich enough to handle this.
Nothing like enhancing the reputation of Uncle Gyp around the world. I wonder how much longer anybody will be foolish enought to want dollars or dollar investments?
Aren't these "bag-holders" the ultimate "owners" of all these crappy sub-prime and prime loans that are going in default, or will default, when resets hit? And aren't they the ones who will ultimately have to approve any modifications? How are all these legal contracts -- from loans to securitized financial instruments -- going to be modified to keep borrowers in their so called homes without the "bag-holders" being involved?
Where will we get funding after everyone realizes we screwed them? This will end badly for the USA when nobody trusts us anymore. It isn't like we have anyone who saves in this country full of 30000 dollar millionaires.
When you sell something that is not what you say it is, that is a lie, Ms. Kuvaas said. She disputed the suggestion that people here lacked the sophistication to understand what they were buying. Were not especially stupid because we live so far in the north, she said.
Herein lies the crux of the matter. What we have is not a crisis of credit, but a crisis of credibility. Trust in the system is gone, and no amount of Fed cuts or political spin can bring it back.
Keeping this bubble inflated took capital from all four corners of the globe. Revealing my nerdliness, I'm reminded of the process that leads to supernovae in stars. As the star becomes starved for easy-to-burn hydrogen fuel, it begins to burn heavier and heavier elements. It even burns brighter for a time, but eventually undergoes gravitational collapse and explodes.
Hey, c'mon! Nobody trust the US anymore? After the great job we're doing in Iraq?
Don't you guys remember the Coalition of the Willing?
Where's the American can-do ethic here?
You guys need to start listening to the President's Saturday radio addresses more often instead of trying to find out the "truth" in the left-wing New York Times.
It even burns brighter for a time, but eventually undergoes gravitational collapse and explodes.
Max,
But it's such a beautiful explosion. Can you imagine? All of that weight.. nothing to hold it up.. so it just collapses in on itself. And, then... it explodes outward in a magnificent supernova! It explodes simply because nature will not allow the atoms to be packed in any denser.
I wonder if there are rules like that that apply to our financial system...?
I'd guess we're a long way away from that point.. but... maybe not?
When I read stuff like this, I'm convinced deflation will win out over inflation. From the article:
In 2004, Narvik and a number of other towns took out a large loan, using future energy revenue as collateral. They invested the money, through Terra Securities, in the Citigroup debt vehicle, which offered a better return than traditional investments. In June 2007, as the subprime problems were brewing, Narvik shifted some money from that investment into an even more complex one, again through Terra Securities.
We have serious production over-capacity in Asia, and the whole world is about to undergo a belt-tightening exercise like we haven't seen in decades... How can price levels NOT go down as money disappears in bad debt?
I don't think the Fed is up to the task of keeping the money supply pumped up. Who's going to borrow to invest in new businesses when people are cutting back on spending everywhere?
"much against the council of the ultra right-wing World Bank"
well they can ask the nice chinese handing out help through out the world without any conditions i like the chinese way, "we are the good boys, see those bad boys are hurting everybody and we are helping everybody so we must be the good boys, please like us xD"
What happens to all the dollars.. once they are sold by major countries like China, India etc., ?
In the worst case, if they land up coming back to united states, what will be the effect on inflation, value of the dollar, political consequences etc ?
Any research papers dealing with this eventuality ?
"We have serious production over-capacity in Asia, and the whole world is about to undergo a belt-tightening exercise like we haven't seen in decades... How can price levels NOT go down as money disappears in bad debt? I don't think the Fed is up to the task of keeping the money supply pumped up. Who's going to borrow to invest in new businesses when people are cutting back on spending everywhere?"
Remains to be seen. The narrower money supply measures (M1 and monetary base) are already dropping. M2 is increasing at a bit faster rate than in past years, and reconstituted M3 (see Shadowstats.com) is skyrocketing.
Of course if you believe Doug Noland at PruBear, the FED is and has been impotent. His view is that all along (from the early 90s till now) it was not the FED....it was structured finance that was expanding credit. The FEDs crime was not THEIR credit pumping, but their failure to reign in the real credit creation mechanism.
Now that structured finance is imploding....well lets just say he thinks the effectiveness of FED based reliquification will be much less than is expected.
I wish I understood the dynamics non FED based credit expansion. Why is M3 surging? After all, the marginal items that differentiate M3 from M2 are: Large time deposits, deposits of Eurodollars and REPO agreements.
Any of you work for money center banks? Is it really possible for the FED to put REPOs out there secretely? Are they secretely monetizing debt already? Where is the M3 surge coming from? No vauge unproven conspiracy theories please... Inquiring minds want to KNOW.
Well, toxic financing from New Zealand to Norway, it's contained. Unless we hear bad news from the Antarctic scientists and Santa Claus. Man, it's going to be a grim Christmas if Santa's the ultimate bagholder.
I'm still looking for a way to boost returns without also boosting risk.
I'm also looking for a way to eat a piece of cake while also saving it for later.
I'm also looking forward to having a currency based on green beans instead of greenbacks. I'd just love to see the fractional reserve system attempt to loan out ten cans of green beans based solely on the one can I deposit (while simultaneously keeping a few cans for themselves). I think that would be a hoot!
I don't think the Fed is up to the task of keeping the money supply pumped up. Who's going to borrow to invest in new businesses when people are cutting back on spending everywhere?
Oh I think the they'll have no problem printing the money - seriously. Plus it isn't just the fed who'll be involved... all the CBs will get involved once war is declared on 'containment'.
And who is going to borrow? Just about anyone & everyone who is offered easy terms. Well except for a few savers in the bunkers & caves.
The bit about 'everyone' cutting back reminds me of a joke my father told me once.
Two old men are sitting on a park bench near a play ground where young families are playing... there are many small children. One old man turns to the other and says...
"Look at all those kids! I just can't understand where they are all coming from... there's nowhere near as much sex as there used to be."
Savers (like those on this forum) can't understand spenders - but give spenders money & they will spend. The challenge for the CBs & Treasuries around the world will be to create transmission mechanisms to do that. I have no doubt that gov'ts worldwide will be successful doing it. There are so many ways to do it.
Farm subsidies, military build up, direct market interventions, ramp op entitlements - all equate to an opportunity to mainline liquidity into sectors of the economy & facilitate money growth.
If that doesn't speed up spending, shift taxes more on savings & assets and cut taxes on spending & debt. Most people will think that's a great idea - most people spend more than they save.
And 'yes' it will cause problems but deflation won't be one of them.
I was thinking that freezing sub-prime rates will stop the defaults (we all focused for a year on the 'reset schedule') so my thinking is that freezing htese rates will cause ABX to climb since they are no longer subject to :' Who knows how many more will default as their rate reste higher"
but KD at the ticker think that ABX will colapse - I wonder what am I or him is missing:
"The entire "securitized structure" - the ABX and everything behind it - depends on the credit enhancement from the interest rate spread, and the reset process as loans age. This is where they get the protection that allows them to rate big parts of these tranches as "AAA".
If you remove that the entire collateral structure collapses. The result of this sort of thing, if it really is what people are claiming it will be, is going to be the following:
The ABX will collapse. All of it. Those who hold these pieces will see their actual realized losses go parabolic. This isn't a matter of models and what people think they're worth any more - now the last piece of rug left, the credit enhancement component, is being ripped out from under them.
You can forget about getting an ARM loan that could potentially be securitized in the future. Ain't gonna happen. There are literally several trillion dollars out there in this stuff, and you can forget about a market for them in the future."
Thank-you dryfly 3:02, for reminding readers here that any deflation will be short-term. And then will come inflation beyond our wildest dreams (although probably not as bad as Zimbabwe with its 15000% rate).
While this is a credit collapse, the fact that nobody will want to borrow is irrelevant. There are, as you say, many ways to re-inflate. And while our government is incompetent, I'm sure it will find some of those ways.
Plan for short-term deflation, then hyperinflation.
But if the Yellowstone caldera blows, all bets are off.
children children, you dont get it the governments all over the world have already tried to reinflate since 2001 and we are already at the abyss. war? government spending? i got some bad news, the addicts body is full of drugs and he cant take it anymore, one more shot and he is dead. the game is over.
the us can try to print but it will lead to 2 usd for 1 euro, 3 usd for 1 libra. you cant take painkillers forever.
The four northern townships Hattfjelldal. Hemnes, Narvik and Rana must provide NOK 150-160 million (USD 27.67-29.5 million) in guarantees to Citibank on Wednesday to ensure that the bank does not sell off their positions in the US securities market.
Terra Securities bankrupt
The Financial Supervisory Authority of Norway (Kredittilsynet) has revoked the license of brokerage Terra Securities, the company involved in selling disputed commercial papers to Norwegian townships.
Terra Securities filed for bankruptcy after the decision and its shares were immediately suspended for trading on the Oslo stock exchange.
Terra Securities is embroiled in a dispute where northern townships Rana, Hemnes, Hattfjelldal and Narvik claim they were systematically tricked and misled to pour public funds into high-risk bonds.
As more stories like this surface I think it will significanly affect the appeal Wall Street will have with foreigners. Our overseas friends trusted America because we were an image of stability: financially, legally and ethically. I think now that image is forever compromised.
Herein lies the crux of the matter. What we have is not a crisis of credit, but a crisis of credibility. Trust in the system is gone, and no amount of Fed cuts or political spin can bring it back.
BubbleGate !
The meme is born, and its time to commence prosecution of the guilty.
Now who do you think might have been interested in keeping that bubble alive as long as possible ?
While I recognize borrowing will remain an option for many during an economic contraction, the data so far suggest they will be neither so numerous nor so able to respond to the usual inducements as has been the case in recent decades. I don't deny the mechanism, but I question its effectiveness.
I think it's certain we'll see various efforts here and abroad to reinflate, and I believe they will meet with some success. But deflationary forces are of greater scope and depth than those we've encountered in my lifetime, and the domestic economy a softer target. So I'm hopeful, but wary.
"We have serious production over-capacity in Asia, and the whole world is about to undergo a belt-tightening exercise like we haven't seen in decades... How can price levels NOT go down as mone worly disappears in bad debt"
I dont know. Its not so clear to me. The overcapacity is for yesterdays demand. Tomorrows need in the Western world is for everything gerontology related. The government has put off infrastructure investments for the last 2 decades. We can expect huge investments in infrastructure worldwide, this will keep commodity prices up. This is inflationary.
Also, what old people need and want are services and less material goods. It`s much harder to get economies of scale in services. Our economy is built around retail square footage, something we will need less of as the population gets older!
A lot of the investments we`ve made over the last decades are for stuff where demand will be declining.
On top of this, a huge amount of people will be retiring in the next few years. As they start collecting SS, that will mean more money being printed and a downward push on production, especially if layoffs increase due to a slowdown! In the first few years of retirement, people don`t really cut down on their spending, so money will be coming out of the markets to support consumption.
To me it looks like deflation in assets and luxury goods and inflation in staples and gerontology goods and services.
Low yields in treasuries with high credit spreads in corporates will make it easy for governements to raise funds vs. corporations. And when government starts playing in the economy, it usally means inflation.
Questions i still haven't seen answered in the press:
Why is there such pressure for high returns on state/local/ (or pension for that matter) funds -whether American or Norweigian.
What kind of incentives are built into the salaries of these fund managers that encourage them to take risks for high returns?
What kind of lobbying (kickbacks? perks) can investment co. managers do with state officials to get them to take on these risky products?
And pls don't tell me the ultimate government buyer of these products did not know the risks -- they may have hidden the risks from their co-workers and from the govt entities who subsequently bought into them -- but someone in the govt knew well and good, and was deeply in on the scam.
The only way to solve this problem is to get rid of the Old Wall Street firms that created these problems. Let them all go bankrupt from their losses. They have been robbing the masses for years. Now is the time for them to have a turn at feeling the pain that the average person goes through each day just to make ends meet.
We must allow new and better institutions with fresh ideas to replace them.
Unfotunetley, the Fed has decided to institute policies to try to make the very companies that caused all of these problems more profitable again so the good old boys network can stay in power.
Our only true hope of seeing change will be coming up in the next several months as we begin the long election process.
We can only hope that someone will emerge from this process who will have the courage to try some new and innovative things to get our countries economic, social and foreign policies back on track.
Mortgage Observer i am with you. i believe that when Hillary wins the election we will see a great change, hell, they might even bring that Rubin guy back, who if i remember correctly was treasury secretary in Clinton administration. does anyone know where he is now?
"...countries economic, social and foreign policies back on track..."
Mortgage Observer | 12.02.07 - 9:12 am | #
I never thought I'd recommend this ticket: Kucinich/Paul. If nothing else, these guys have courage and integrity - as the campaign goes on, these two attributes become more and more attractive.
I'm a Portfolio Manager. Let me tell you that I have been predicting this fiasco since Greenspan kept the rate at 1% for too long.
I was ridiculed and told I should be a bond manager for being too negative.
I am still being ridiculed today for being too negative. According to most, our leaders will find a way to mitigate the losses. Capitalism has won and will keep on saving us.
This is an industry that attracts optimists. It's very hard to get in if you're not an optimist.
Most in the industry truly believe in American hegemony and that things will work out.
The simplest thing is either have the government buy financial instruments based on consumer debt or to guarantee them against default.
This Christmas, all the good folks whose credit cards I have, increase my credit limit by a couple of grand. And I got several solicitations for new ones. Meaning that I had an extra $10-15 grand to spend on Black Friday.
However, I think I will bunk with the Deflationists on this one, for a while. No real good reason, the particular episode of financial insanity has never happened before, and our elites are adverse to helping the common citizen by better paying jobs or additional government safety nets. So while inflation is a weapon, my bet is that they will point it in the wrong direction and misfire it.
Now if we end up with President Huckabee, Obama, or Edwards, then my opinion might change but at the moment, the likely candidates will pour money in to the hands of the already wealthy who will not spend it and things will dry up in a classic depression/recession.
The Norweigan people are victims and my heart goes out to them. They invested their hard earned money "in what they're now calling "high-risk structured products"" offered by Citibank. I'll bet they weren't called high risk products when they were offerred.
What makes this episode so insidious is that the traditional market rules for identifying true credit risk were blatantly changed on the sly.
For a century, the citizens of the US built up a system in which one could have faith, or a reasonable expectation, in the US tradition of fair, open, and honest credit ratings enforced by strong regulatory over-site. That's gone. The Fed sat on it's hands and watched, approvingly.
The reputation of Citigroup and the other large banks, AAA ratings, and the fudiciary qualifications of the US Federal Reserve system are gone.
The great depression resulted in sweeping bank regulation and reform because of the role the 20's debt bubble and shady practices, created by the wall street banks of the day, played in the collapse of the credit system. It is more than coincidence that the repeal of these regulation coincides with the current mess.
I went through the same thing in the homebuilding industry in the DC area. Interesting that I recently heard from the CEO of my former employer, and he told me that I was the only person who had given him unflinching, honest advice in the run up to the burst. He didn't offer me a position, and he's still surrounded by optimists (yes men), but the admission was nice to hear. Someday, I might offer him a job.
The optimists and the pessimists are seeing the world through colored glasses. Your realism and lack of wishful projection will serve you in the long run.
Candidates come and go, but good laws with teeth will outlast them all. This administration has made a fine craft of finding weak points in the law and exploiting them to its (and its sugar daddies') advantage.
And the prior one didn't do much good either by letting Greenspan knock the teeth out of glass-steagall.
We'll get better when we recognize as a nation, that the banking industry can never, ever, be trusted to regulate itself, and will never, ever put the greater good (or even its own long-term survival) over its blind lust for profit.
It's snowing today (NE). I guess we have something to blame for slow retail sales. Two months back it was not cold enough, this month its too cold. You know what, they should blame retail sales decline on global warming.
The "all regulation is bad" meme is a red herring. The reason we had all of those regulations is because our grandparents took the big hit, and tried to protect us from having the same experience. The meme is that regulations choke the life out of business. The truth is that regulations keep us from being ripped off.
Big Finance: "How the hell am I going to divert your money into my pocket if doing so is illegal, and you're watching me like a hawk?"
Public Interest: "Oh. Sorry!"
Regulations, a.k.a: Laws, are put in place to protect us, we relax or repeal them at our own peril.
Well those with the wealth that was buying these formerly high return securities that are now imploding can take their future oil revenues, manufacturing revenues and mineral extraction revenues and use them to buy up what is left of the deflated and devalued U. S. A.
Someday in the future maybe they will have a presentation with animated arrows showing the spread of toxic mortgage paper, just like when they model possible deadly virus outbreaks.
I would like to send a special T-shirt around the world with the caption:
Front:"I invested in US mortgage paper and all I got was this lousy T-shirt"
Back:"They shipped it COD due to problems with CDO's"
I thought the Norwegians started this whole credit problem. At least thats what I saw on TV. They were attacking us and only a credit card can save you. Whats in your wallet?. Back to the bunker...
Citibank, of course, used a local "investment group" to shield itself from any responsibility:
Citibank, seen as the only player that earned any money on the soured deal through its fee income, has blamed the financial woes on "weak markets" that have hit investors all over the world. Citibank has claimed it fully communicated the risk of its products to Terra, which in turn sold them to the townships.
Nothing like using their own countrymen to betray them. Greed has no bounds.
A 1/10oz. of gold, a wad of cash, a couple of credit cards that have a credit as a balance along with the usual stuff. As a side note a 1/10oz of gold and EKG machines don't go well with each other FYI.
Anonymous "To me it looks like deflation in assets and luxury goods and inflation in staples and gerontology goods and services."
you know, you're probably right. We may get a short period where deflation outwieghs inflation and then inflation takes over. The government will spend and spend hard. I think infrastructure spending and I believe there will be an enormous push for alternative energy in a Marshall Plan that will displace NASA and other research efforts for its share of spending. Massive. I have heard this from many politicians and I believe it will have plenty of public support. Just not from Bush/Cheney, let them rot in hell.
On another note - I get a sense of hope. My 11 year old kid told us yesterday she doesn't want any Christmas gifts or trinkets. I've been working her over for years, teaching her to examine labels and see where all the cheap shit in her room is made. She wants instead for us to donate a turkey to a homeless shelter and a bag of dogfood to the humane society. I think we may yet be surprised, and so may the Chinese. At least I still have hope. I like to think I am a skeptic rather than the bear I have become. I don't enjoy being bearish.
I'm seeing a lot of over-reaction here. All of these investment banks are backed by the full faith and credit of the American taxpayer and will never be insolvent.
I'm seeing a lot of over-reaction here. All of these investment banks are backed by the full faith and credit of the American taxpayer and will never be insolvent.
Observer | Homepage | 12.02.07 - 10:30 am | #
House whisperer, the more likely invective would be:
"Dra åt helvete, jävlarna!"
We can joke all we like (yet I am thankful I haven't seen a snide Edvard Munch reference), but this is not an isolated incident and it will affect the lives of ordinary people across the globe.
Citibank deserves to be dismembered for this and other of their offenses.
So do other financial institutions. They are rotten to the core.
This "too big to fail" nonsense needs to stop right now. When "too big to fail" means looking the other way while they rip off the entities that provide basic services to people, it's got to stop. Immediately. And the bastards responsible for the con MUST be held to account.
She wants instead for us to donate a turkey to a homeless shelter and a bag of dogfood to the humane society.
She's to be commended. Dressing with gravy makes a fine main course, followed by pumpkin pie (which is pretty cheap when you analyze it). You might even splurge a bit with some whipped cream on the pie.
The last time I did this, my wife and I signed a document 60 or 70 times. If anybody could understand every single one of those things, it ought to be me. Sixty-nine of them I understood, but the 70th one, I still signed, but I didn't understand it. It wouldn't be all that complicated to have a sheet that says on the front: "Here's your starting rate, here's your maximum rate. Here's your starting payment, here's your maximum payment."
All of these investment banks are backed by the full faith and credit of the American taxpayer and will never be insolvent.
Observer | Homepage | 12.02.07 - 10:30 am | #
Faith? As in "faith-based initiatives?" Credit? The American taxpayer has maxed-out the nation's credit (ever hear of deficit spending or "Greatest debtor nation in the history of the world"?). Hell, not only do we no longer have a reputation for fiscal conservatism and reliability (having replaced it with a Caveat Emptor disclaimer), we don't even have credibility.
If your statement were at all true, we'd hike taxes and start paying off some of the principal on our debt.
"full faith and credit of the American taxpayer..."
"Herein lies the crux of the matter. What we have is not a crisis of credit, but a crisis of credibility. Trust in the system is gone, and no amount of Fed cuts or political spin can bring it back."
Perfectly stated.
And kudos to whoever made the subtle, cleverly ironic reference to Robert Rubin and the prospect of a Clinton administration restoring that credibility.
The Norweigan people are victims and my heart goes out to them. They invested their hard earned money "in what they're now calling "high-risk structured products""
Their hard-earned money, plus a few billion of borrowed money:
To boost returns, the Norwegian townships also borrowed NOK 3.5 billion to invest in Citibank's products
So they levered up to chase yield and got burned? Sorry, but that just doesn't get my sympathy going...
"Nothing like using their own countrymen to betray them. Greed has no bounds." They're called Collaborators and let's hope the Norwegians deal with them in an exemplary fashion!
Warren Buffet's comments on Derivatives in Berkshire Hathaway's 2005 Annual report begins as follows:
"Long ago, Mark Twain said: "A man who tries to carry a cat home by its tail will learn a lesson that can be lerned no other way." If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats.
We lost $104 million pre-tax last year in our continuing attempt to exit Gen Re's derivative position. Our aggregate losses since we began this endeavor total $404 million."
You can finish reading his comments on page 11 (Adobe format) here:
Stiglitz has notable company, Patrick Artus of Natixis:
"Greenspan was an arsonist and a fireman combined. He derived all his glory from his reaction to the savings-and- loans crisis, to the collapse of Long-Term Capital Management LP, and to Sept. 11, 2001. But LTCM and the savings-and-loans crisis were his doing. He absolutely failed to see where the malfunctions in the U.S. economy were.
Greenspan came up with a phrase, ``irrational exuberance,'' in 1997, but he didn't do anything about it.
Nayeri: How would you sum up his track record, then?
Artus: He was a very bad Federal Reserve chairman. He created four major crises: savings and loans, LTCM, new-technology shares, and subprime mortgages.
Nayeri: But surely you will acknowledge that Greenspan saved the planet at crucial turning points?
Artus: Yes, but after the fact. He's congratulated for his role as fireman, but he's the one who started the fire.
I'm also in the deflationist camp, but prepping for hyperstagflation.
It's a bit of a "mug's game" to try to predict, too many variables. Lord knows I was way early with the recession prediction (unless you follow John Williams Shadow Stats) of March '06, back in '05.
But looking back, you called it for Jan 2006, even earlier -
My vote will only be for the candidate who I believe will cleanse this corrupt Wall street culture, force a true accounting of corporate and personal liabilities and make sure everyone on this whole planet knows names, lots of names. Time to stop the lies and put these bastards, greedy bastards behind bars with the public aware of their family names, after we the screwed over public have confiscated all their personal assets. It was stated else where that after you piss in the global punch bowl you don't get invited...true, sort of. The elitism powers to be across all nations serve at the pleasure of each other for the benefit of each other. The local powers to be will work cooperatively to maintain the status quo. Public anger is building as you can see. A day of reckoning approaches.
Neither does Chuck Prince, but they obviously forgot to ask. Obviously, anything without a Norwegian name must be evil:
The regulators' letter indicates, according to news service E24, that Hemnes Township, for example, had itself taken contact with Terra "with a desire to evaluate possibilities for higher returns on its financial investments." The township, claims Terra in correspondence cited by Kredittilsynet, took the initiative that resulted in its investment in the product that as yet doesn't even have a Norwegian name.
The question I am wondering about Now, as in DestroyHopeNow, is how the MBA & NAR plan to sabotage that fragile lame Paulson freeze effort. I'm sure they recognize this program puts another shovel-full of sand in the gears of the already frozen transaction mill. The MBA and NAR can hardly stand idly by and allow that to happen. Their interests stand to lose the most in this sham. They also have plenty of ammunition with a strong lobby and a legal wing ready to jump.
They also have plenty of ammunition with a strong lobby and a legal wing ready to jump.
barely | 12.02.07 - 12:23 pm | #
Correction: They also have plenty of ammunition and a noose around their necks, with a strong lobby and a legal wing ready to jump.
barely | 12.02.07 - 12:23 pm | #
Zinc. They borrowed money to invest. in these "safe securities." Look, I don't have to SEE the guy palm the queen to know that three card monte is a con. You don't have to be some kind of financial mentat to see that there's probably something sneaky behind the scenes with something that gives you returns that are significantly above market rates. It's like those faxes we used to get continously touting 1% mortgages. I didn't feel any need to get pages of fine print to figure that it was come-on. It failed a simple sniff test, as does the idea of borrowing money to invest in this stuff. If you can't afford to buy it, how can you afford to lose it? If it's such a good deal, why haven't the people lending me the money bought all of it?
Nemo - I could not agree more! In typical NY Times fashion, the front-page article makes you wade through about 20 paragraphs of fearful comments by the aggrieved mayor (accompanied by a sad, sad photo) and residents of the town until you get toward the end, where we find out:
1.) As you said, they were levered. Think about that - what if the Florida fund had not only invested in this stuff but had LEVERED UP? to do it!? The Florida fund also invested under 10% of its assets in these securities, Narvik sounds like it was a much higher percentage (pardon the shouting, but this stuff is insane)
2.) There is a mention of the fact that there were two prospectusesi(i?), one in English which revealed the full terms and a much shorter term sheet in Norwegian which didn't. I would think that is where Terra is most vulnerable.
3.) However, who cares about the stinking prospectus? The mayor admits she didn't even read the damn thing!
The whole thing is sickening. Citi is hardly innocent in this whole thing, but come on - this isbeyond fiduciary incompetence.
It's simply amazing how much the standing of the USA has degraded from 2000 - 2007. And we have 1 more year with these assclowns in charge for more destruction and looting of US treasury.
Long note on this fiasco in Wikipedia. Looks like Terra, associated with some rather problematic characters, is owned by a group of Norwegian Banks. These villages apparently involved themselves in a scheme to insure, with 10x leverage, US municipal bonds against default. It is alleged that Terra did not translate into Norwegian the part of the Citigroup prospectus that cautioned about risk. Interesting that one of these villages has acquired vacation homes in Montenegro for the use of its residents. Also that this investment scheme began in 2001.
I have been trying to get ready as fast as possible;-}
Today was funny about how our friends from s.o.t.b. are human too. Of course they are, and they are exporting the poverty form s.o.t.b. to here. I think we shall shortly see an exodus from Phoenix that is unprecedented. No jobs, no money, no surplus labor force.
The pension fund folks knew they were buying risky stuff, after all they can read the riskless tbond rate in the paper. They have to reach for return or their political master will crucify them when they ask for higher contribution rates. I wonder how New Jerseys bond rating is doing with their huge lever up bet from a few years ago;-}
Does anyone in Goldman (err. Government) see a potential problem when these firms are investing in the very markets they are supposed to be making? Has anyone picked up on how these firms are trying ot "market" small and institutional investors (less sophisticated) into taking on their own money-loosing investments?
I know I lack your level of sophistication in finance/accounting (I'm an engineer) but could someone explain why these firms should be trusted to give any sort of investment advice?
Marcus Aurelius - do you doubt that the MBA and NAR will help fund the efforts of the class action attorneys that call into question why special status is given to those that lied and are not in a position to pay their obligations as described in their signed legally binding rate increase mortgage documents. Without assurances that the rate-freeze is "contained" they whole mess falls apart.
Please. This is more doomed than MLEC with at least as many competing interests.
I'm sure Goldman would like to see everyone rich, including their clients. However if things start to go south, they will climb over widows and orphans to be the first on the lifeboats.
"they will climb over widows and orphans to be the first on the lifeboats."
offcourse only to make sure that the lifeboats fullfill the required safety standards
These villages apparently involved themselves in a scheme to insure, with 10x leverage, US municipal bonds against default.
So the poor innocent town of Narvik was writing CDS on US muni bonds? I was wondering why their first security started to go south when it had nothing to do with US subprime. Oy.
Usually the worst looting and stupidity occur the last few months of a failed regime. The real shinanigans will be toward the end of next year after the elections.
Well, my heart doesn't go out to the Norwegians as long as they are pulling billions of dollars of oil out of the North Sea. They're rich enough to handle this.
F Frederson, you are one of the problems of the world.
The American banks will be the most globally hated entities in history. Do they think anyone anywhere will ever trust them again? If they do, they are even dumber than their statisticians who can't create models that reflect reality.
Revolution is the only answer. End private banks forever.
We are all Goldman now. Time to act like them. First off it is time to show them the other side of the moral hazard coin. Every FB with a second lien and value near or less than their first loan balance needs to stop paying their second now. What can they do? They cannot foreclose, that would cost them even more.
AllenM
I think you are correct about Phoenix. The company I work for does a lot of business with home builders and car dealers locally, and I have been waiting for the hammer to drop.
Where was Jeb? From the aforementioned Forbes article on the FL State Board of Administration (SBA):
"A majority of this paper was sold to SBA by Lehman Brothers. Bush, as the state's top elected official, served on a three-member board that oversaw the SBA until he retired as governor in January. In August, Bush was hired as a consultant to the bank. Lehman spokesperson Kerrie Cohen, speaking on behalf of Bush, said they had no comment and would not say when the bank had sold Florida the paper. SBA did not return calls.
Fact 1: The Governor is on the oversight Board. Fact 2: Lehman has the lock on the Florida account. Fact 3: The Governor ends up on the Lehman payroll.
So does Jeb have immunity from the incompetence he exhibited as the chief oversight officer of the SBA ? Where was Jeb? Got to be some official agency minutes somewhere.
Where will we get funding after everyone realizes we screwed them? - 01/20/2009 end of an error
Herein lies the crux of the matter. What we have is not a crisis of credit, but a crisis of credibility. Trust in the system is gone, and no amount of Fed cuts or political spin can bring it back. - Max
Nice to see some of you folks are starting to get it.
The Revolution is here. It is merely waiting for participants.
Clyde
Hopefully he doesn't get away with it the way his brother did at Harkin Oil and uncle Neil did at Silverado. THese people need to be driven out of the public arena forever.
yikes, it really does look like fabric without rip stop...unraveling. thanks to derivatives based on derivatives based on derivatives on and on, it looks like few, if any, can truly plumb the depths of this mess.
You have to read it to believe it. Yosemite Sam is clearly in charge.
Here's an excerpt.
"A senior lawyer for the American government has told the Court of Appeal in London that kidnapping foreign citizens is permissible under American law because the US Supreme Court has sanctioned it. ... Until now it was commonly assumed that US law permitted kidnapping only in the 'extraordinary rendition' of terrorist suspects. The American government has for the first time made it clear in a British court that the law applies to anyone, British or otherwise, suspected of a crime by Washington."
Buscho to rest of world...
Only our laws matter; yours can be ignored or even violated. Good thing we are exporting democracy and freedom, or says our war criminal king.
Like I said it's amazing how much the standing of the USA has fallen from 2000 - 2007 and more importantly how long it will take to rebuild it.
Unfotunetley, the Fed has decided to institute policies to try to make the very companies that caused all of these problems more profitable again so the good old boys network can stay in power.
No, unfortunately the Fed is owned by the very criminal banks that you want to fail. Hard to believe it will happen. First, get rid of the private Federal Reserve. Then get rid of the criminal banks that are the root of all the world's problems.
money quote from John Mauldin's article at investor insight
"Unfortunately for our financial system, the magnitude of risk in corporate credit is a multiple of that in subprime mortgages. Each written CDS exchanges a risk that cannot be eradicated no matter how broadly aggregate risk is dispersed. Sinking valuations of CDOs and a commensurate leverage unwind could trigger a vicious cycle of financial losses. By implication, the problems that might ensue could make the subprime mortgage problem look like a walk in the park.
I cannot be sure these assertions are true, but I suspect that it would be just as difficult to provide evidence that they are not. I have listened to arguments against systemic risk, suggesting that the double counting of CDS, matched books of investment banks, and increasing sophistication of risk management techniques make the eye-popping numbers of notional risky debt larger than they seem. Nevertheless, I remain skeptical. We've seen similar movies before, and they don't end well."
I'm also in the deflationist camp, but prepping for hyperstagflation.
It's a bit of a "mug's game" to try to predict, too many variables. Lord knows I was way early with the recession prediction (unless you follow John Williams Shadow Stats) of March '06, back in '05.
Here's the deal - people are not distinguishing from deflationary pressures (economic forces tryring to destroy money supply & velocity) and deflation (the result of said if successful). I think that is a big mistake.
I believe in the deflationary pressure meme - that's pretty obvious. But until I see society embrace 'deflation' were going to continue to get 'inflation' in its purest form - gov't effort increase money supply AND velocity.
And they will be successful - there are too many ways a gov't via fiscal & monetary means can accomplish this. The fact that Japan's half assed effort was less than successful was in part because their population embraces deflation - they save like hell and if they spend at all are very price conscious.
That's not America.
I'm not saying we can't have deflation as there is no law of nature saying we can't just saying we won't have it until we embrace it at a societal level. Show me real signs Americans are saving and 'containing' and I might believe it... And I don't mean small declines from what is now world record setting consumption, I mean serious cut backs with real buyer & borrower strikes at the consumer level even in presence of easy money.
There just isn't any solid evidence for it. And especially no evidence that if cheap money is made available that people won't borrow & spend it. They won't have to 'push on a string'... If gov't pumps enough money out there it'll be more like 'hang on for dear life'... again.
mock turtle, or anyone. Why buy CDS without strict reserve requrements and a regulator to make certain the seller doesn't continue to SELL SELL SELL more CDS thus leaving your insurance to wilt with no prospect of coverage if the need arises?
Like I said it's amazing how much the standing of the USA has fallen from 2000 - 2007 and more importantly how long it will take to rebuild it.
km4 | 12.02.07 - 1:19 pm | #
It will take far less time to rebuild our reputation if we begin building our gibbets now.
Dryfly, IMO, is absolutely correct. There are serious deflationary pressures out there, but whether they will morph into deflation is another matter entirely.
At the moment, the odds weigh towards deflation. Americans' balance sheets are in serious need of repair. But, if Uncle Ben starts to flood the economy with money, all bets are off.
We could be in the nascent stages of yet another bubble. Only time will tell.
you are exactly right..this is insurance, without the standard insurance requirements and oversight.
John Mauldin makes points about underwriting and reserve requirements (capitalization) in his article.
But the larger issue seems to be, not only as Tanta says' "we are all subprime now"...but even more so that the complexity and lack of oversight and diligence that plagues the mortgage industry... has as well infected a larger portion of financial system AND everything is connected.
Oh, I almost forgot: most of the bonehead politicos who got the villages involved in this mess are associated with the Labor Party. Looks like they found a loophole in the laws designed to prevent such"pie in the sky" exercises.
FFDIC...yeah, i followed your link...disgusting, but what the hell else do we expect them to say.
This has been a CONFIDENCE game for quite some time now...and that's what they are selling.
I'm glad I've been reading CR for over a year...only posting recently...but imaging if 10 percent of the country...the middle class or heck even just the engineers, doctors, and lawyers etc... had been tracking this issue. we would have wall to wall "northern rocks" as far as the eye could see.
Lehman spokesperson Kerrie Cohen, speaking on behalf of Bush, said they had no comment and would not say when the bank had sold Florida the paper. SBA did not return calls.
errrr.. doesn't knowing the cusip #'s on the investments allow someone to lookup those dates ? really, I don't know, but it seemed like they are keys to the actual instruments. the cusip's are all listed on that "Holdings" pdf I mentioned yesterday.
Hope some people near the Wall St. crowd (and senior execs in LA, etc.) have the guts to start with Tar & Feathering. Should be some around the country who have the guts to pay the penalty for doing to them.
Strip them of bonuses & assets and
exile them to our needed Devil's Island.
There just isn't any solid evidence for it. And especially no evidence that if cheap money is made available that people won't borrow & spend it. They won't have to 'push on a string'... If gov't pumps enough money out there it'll be more like 'hang on for dear life'... again.
dryfly, isn't the decrease in securitization, and the overwhelming skepticism against it, going to squelch the supply? The Fed doesn't lend directly to the people. The credit crunch is real and unavoidable, even with all the Fed help there is.
Right now, I see cheap credit available still, but consumption slowing. Future consumption has many more headwinds than just cheap credit. Paydown of debt is just one more, but a big one. Cheap credit might allow some people to borrow more, but only to service their debts. House price declines will also stop credit access, and pressure those debts for further servicing, both literally and psychologically.
As for lower rates fueling housing, no chance. The products that fueled it beyond the 1% FFR push are gone and won't be back. They already used that card. The 1% refinancing push will again only be toward debt consolidation, not additional spending.
Actually, if oil didn't go this high, we would probably already have deflation. That energy costs have not spilled over much yet suggests that consumer prices have had downward pressure preventing price increases. Corporate earnings declines reflect this.
"As Executive Director of the State Board of Administration of Florida (SBA), Coleman Stipanovich serves as the Chief Investment Officer of the fifth largest pension fund in the United States."
Coleman Stipanovich is the brother of J.M. "Mac" Stipanovich, a highly influential Republican fundraiser and lobbyist who has been a political strategist for both Jeb Bush and former Florida Secretary of State Katherine Harris.
"He has a master of science degree in Criminal Justice Administration from Michigan State University and a bachelor of science in criminology from Florida State University."
Dot, they will keep the system afloat through massive monetization of defunct "assets" like these dead cdo's and junk housing bonds. All they will do is buy it just under par, like 90 cents on the dollar and viola- instant liquidity, otherwise known as pumping the money supply. It only is deflationary if they actually sell the assets for cash and take it out of the money supply.
Take stuff to the discount window, get cash (money blips on the computers)- mark to market solved, liquidity crisis averted, all is well and we go right on printing money through our huge fiscal deficits.
A slightly lower dollar is the price and couple of speculators on precious metals bank some nice profits and we go merrily on our way.
That is what the folks in charge hope happens, but I don't expect it to occur as scheduled. Too many varibles escaping our control and going wild.
"This is all 1990's stuff..." paraphrasing now...once the arabs got involved with citi i knew we had turned the corner)
What the hell his he saying?
Cramer ends the interview with the the observation that now we've figured out where the problem is and how big it is blha blha blha...
what a shill.
in an MIT periodical , Technology Review...Urstadt interviews and tells the story of how the quant's plans melted down. A facinating read especially if you stick with it.
Two important ideas...the modeling and hedge programs contorted the market
AND
even most of the best and the brightest minds don't fully understand the complexity of the investment strategies that have been devised.
a must read, that shows what a liar cramer is when he says the problem is understood. bull pucky
I guess I'm just stunned that such small communities had this much money. It dwarf's what my similar-size town could ever hope to muster, even with a prosperous nuc plant here in SW Michigan.
1)People barrow more than they can pay back and thier incomes shrink or do not grow.
2) Lenders do not get paid back
3) Lenders and debt/mortgage back paper holders lose money
4) Lenders and debt/mortgage back paper holders realize they are losing money
5) Lenders and debt/mortgage back paper holders try and get someone else to hold the bag
6)Lenders and debt/mortgage back paper holders admitt they are losing money
7) Lenders and debt/mortgage back paper holders change thier lending habits
8) Less money in consumer pockets
9) deflation
We have passed number one, consumer defaults can only increase from here and this will increase the pressure to get to number 7 faster. Once you get past number one there can be all sorts of twists and turns, but if consumers cant service thier debts, they wont, and lenders will have to change. You can only service debt with new debt for so long.
There are no victims here. Anyone stupid enough to buy American securities deserves what they get. This is the New World Order after all. They sell us their raw materials and manufactured goods and we pay for it with freshly printed paper. This paper may then be exchanged for Big Macs or worthless MBS and CDOs. What's not to like about that?
The scary thing is what the future could look like in an environment where the government opens all the hydrants to fight the deflationary fires.
Think about what would happen should the government exercise the options dryfly describes (assuming they can, and I do not)...
In a world of free money, is there such a thing as a credit rating? Does the term "moral hazard" become obsolete?
How do you distribute the money, and how much goes to whom?
If you can't tax spending, and no one's saving (at least as far as the IRS can determine), will all the taxes be levied on assets? Will the asset-rich stay in any country that taxes their assets away?
What's the point of banks when there are no time deposits and no lending, since the government is creating all the money and doesn't expect anything back?
Think it through, people, think it through. Sometimes the cure is worse than the disease.
p.s.: Already half the population is dependent on government money; how much farther can we really go?
Inflation, deflation, same old conundrum,
just like back in 1809-
"If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered."
Thomas Jefferson
The Debate Over the Recharter of the Bank Bill, 1809
The reason we had all of those regulations is because our grandparents took the big hit, and tried to protect us from having the same experience. zinc | - 9:38 am
Competition = Big fish eat little fish, resulting in a relative handful of whales and sharks, whose economic power allows them to dominate government policy, with the result that there are no effective curbs on anti-competitive activity.
It is December. Too much gloom here. Let me try and spread some cheer.
The problem (if it can be called that) is totally contained to a few towns in Norway, Florida's teacher fund, Citigroup, HSBC, RBS, MBSs, ..., well it is contained to the world ex-silicon valley. Well, at least let me spread some cheer to fellow denizens of silion valley.
Not worry, I just met a lot of brilliant Silicon Valley homeowner friends. They explained the whole thing to me very clearly. Silicon valley is going to remain unaffected and untouched by these problems. Silicon valley housing never drops and will continue going up 15% a year, because
Tech stocks have become the new "safe havens", since the issues are contained to the world ex-Tech.
Silicon valley is inhabited by Geniuses, who can easily create another Google or 2 or 3, which will result in more "Legal Wealth Creation".
Everyone in the world wants to immigrate to silicon valley because of our wonderful schools, climate, world class sights etc etc.
If you look around the room and cannot figure out who is holding the bag; it is you. If you look around the room and can figure out who is holding the bag; it is still you.
We're already in deflation. Credit deflation, as detailed here, is in the billions and estimated to be in the Trillions. Homeowner equity will deflate to the tune of a few trillions too.
If that aint deflation I don't know what is. Only thing left to frost the cake is generalized price deflation, which is in the cards with a consumer recession.
Saturday song? I would like to propose Big Yellow Taxi by Joni Mitchell - sums up the mood to me.
They paved paradise
And put up a parking lot
With a pink hotel, a boutique
And a swinging hot spot
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot
They took all the trees
Put em in a tree museum
And they charged the people
A dollar and a half just to see em
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot
Hey farmer farmer
Put away that d.d.t. now
Give me spots on my apples
But leave me the birds and the bees
Please!
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot
Late last night
I heard the screen door slam
And a big yellow taxi
Took away my old man
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot
"Like I said it's amazing how much the standing of the USA has fallen from 2000 - 2007 and more importantly how long it will take to rebuild it."
It could be done in a few years -- if the ruling oil/finance/old families oligarchy was swept aside. Don't know how long that would take, though.
One recovery scenario goes like this:
1) Reform the institutions and either punish or exile (from power) the involved parties, with appropriate publicity.
2) Apologize. To everyone. For every thing.
3) Throw 100 billion a year into a global R&D center for alternative energy and anti-global warming measures. Invite other countries in. Give the results away to the world, along with startup assistance.
4) Disavow pre-emptive action against other countries for any reason. Apologize again. Pledge military action overseas only in conjunction with UN mandates.
That'd probably do it.
The old saw says, "Don't listen to what he says, watch what he does." We've been saying the right things and doing the wrong ones for close on 30 years now. If we start doing the right things -- because they are the right things, not just because they're in our 'national interests'-- we'd get that respect back pretty fast.
The caveat, of course -- will we ever do any of this, or anything like this?
These people didn't "borrow" like a hedge fund. They borrowed against future oil revenues. I'm not saying they made a good decision but this isn't like the borrowing going on with all the really smart people on Wall Street. When the hedgies go bust there is nothing left. The vikings still have the oil money.
Sigh. Possibly, possibly. We'd have to go through a lot of painful cr*p as a nation to get to the point where we'd have the will to do that stuff. Pain is coming, no question, but what lies on the other side of that pain is uncertain.
You regularly use the "We are not Japan" argument, but I don't buy it.
It wouldn't be called a credit cycle unless things cycled back around. That includes US consumer habits. We were savers at one time, so what makes you think we will never return to being savers?
When people realize that something is hazardous to their well-being (like taking on more debt than they can handle), they usually stop doing it.
Besides, I think we Americans are going to have to face another reality here pretty soon -- our safetey nets have a lot of holes in them that will be exposed as the US dollar collapses, and as cities and states realize they cannot fund programs at current levels. That will help force folks to begin saving more too.
Sunday December 2, 4:41 pm ET
By Alan Zibel, AP Business Writer
Treasury Plan to Rescue Home Loan Borrowers Not a Solution for All, Experts Say
WASHINGTON (AP) -- If lenders temporarily freeze low introductory interest rates on home loans made to risky borrowers before they soar, it would be a modest fix for the country's fractured housing market.
[snip]
"It's not the mortgage that's the problem" said Christopher Thornberg, a principal with Beacon Economics in Los Angeles.
While the market was soaring, he said, homebuyers simply paid far too much for their homes and are now facing the consequences.
So buying SIV etc. is sort of like going to grocery store with blindfold on to buy weekly food? Geez I hate rotten prunes.
3 cheers for fund manager experts with blindfolds. Great job.
Oh Bob, if only it were that simple. Your list is a good start but so much more is broken than just your economy. Let me preface by saying I lived in New York for many years back in the 80's / 90's. It was gritty before Guliani got in there and cleaned it up, but I felt proud to have lived there. And now? It breaks my heart to see the damage that can be inflicted in such a short period of time. America needs to sort out its foreign policy. Selling toxic crap to countries that it relys on to prop up its fraudulent financial system is merely one symptom of a much bigger failing.
I don't suppose it would be considered material that many of the largest foreign banks acquired or created subsidiaries in the US for the express purpose of trafficking in mortgages and suchlike. Or that they just may have overextended themselves on their home turf.
I often think about Japan like deflation happening here, but there are real cultural differnces that I think would keep that from happening. The US consumer is spending obsessed, its part of the culture. The US consumer sees no shame in bankruptcy, in fact it is a useful way to get new access to credit! To be blunt, I think the Japanese knew that things got out of hand and changes their spending/saving habits to reflect the prior excess. I do not see that happening here. Just my 2 cents (really 1.6 cents due to inflation)
the caveat, of course -- will we ever do any of this, or anything like this?
Bob Dobbs @ 5:41 pm |
Yes indeed. Bill Moyers gave us a 'heads up' over 3 yrs ago and as you know US middle class conditions today are much worse....
This is the Fight of Our Lives
by Bill Moyers
Keynote speech
Inequality Matters Forum
New York University
June 3, 2004
Abstract:
"The middle class and working poor are told that what's happening to them is the consequence of Adam Smith's 'Invisible Hand.' This is a lie. What's happening to them is the direct consequence of corporate activism, intellectual propaganda, the rise of a religious orthodoxy that in its hunger for government subsidies has made an idol of power, and a string of political decisions favoring the powerful and the privileged who bought the political system right out from under us."
Excerpts:
What they are doing to middle class and working Americans -- and to the workings of American democracy -- is no laughing matter.
Let's face the reality: If ripping off the public trust; if distributing tax breaks to the wealthy at the expense of the poor; if driving the country into deficits deliberately to starve social benefits; if requiring states to balance their budgets on the backs of the poor; if squeezing the wages of workers until the labor force resembles a nation of serfs -- if this isn't class war, what is?
It's un-American. It's unpatriotic. And it's wrong.
Shortcourage/Dryfly
re: US v.Japan savings prognosis
I think a lot of the blame heaped on the US homebuyer/consumer is misplaced. People, especially blue collar/middle/lower upper, generally follow their economic incentives. If you use real inflation statistics rather than the govt nonsense interest rates on savings have been negative. Conversely we had been through at least 10 years where an investment in real estate (primary residence) had been a far superior savings mechanism. I and many people on the blog had the foresight to jump off the bus before it went over the cliff, but there isn't any reason to believe that the average American will not change behavior to reduce debt and increase savings if returns become positive, and real estate returns to its role as a consumption expenditure rather than investment vehicle. Of course that implies a reduction in economic activity, but there is no way after all this (subject of the thread) that others will continue to lend us the money so cheaply that savings is unattractive. Am I making sense?
Whew! I was feeling worried. Sunnyvale has it all taken care of and dialed in. We dodged that bullet.
ShortCourage,
I respectfully disagree about our potentially newfound proclivity to save. I think we'll kind of save for a short while, especially in the midst of a recession, but I am convinced that many will abandon that habit once someone jumps the gun and signals that we are out of the woods. That sounds cynical (it is) but it's been many decades since we've behaved like savers. Our generation will take a while to acquire the saving mentality, especially with our modern society geared so much toward consumer spending.
The U.S. has a culture of spending, but never in its history have we spent as much. The pendulum swinging back is simply a function of higher perceived insecurity.
The inflation/deflation question boils down to the government's reaction to higher savings. The Fed seems willing to fight it tooth and nail by creating after-tax negative real rates. They will try to juice velocity, but they're playing with fire. They are simply too sure they can control the velocity so that we don't turn into Brazil, a country where supermarket shelves would be empty just days after payday -- such was the reluctance to hold currency for any length of time.
Where will the savings rate be in 2011? That question is almost impossible to predict given the fight between savers and the Fed. One will win, so the results are binary: deflation on one side, inflation on the other.
The policing innovations of the Giuliani administration were CompStat and the broken window/zero tolerance approach to minor street crime.
Giulianis critics note that these policies are generally credited to William Bratton, Giulianis first police commissioner, whom Giuliani pushed out after two years. They further note that crime decreased nationwide during that period, as a result of the reduction in unemployment due to the tech boom (for which the Clinton/Rubin crowd take credit), the shrinking of the street-crime-age demographic, and the waning of the crack epidemic.
We should also note that that millions of New Yorkers think that Giuliani is a racist. And that Giuliani is the favorite candidate of the same folks who cooked up these toxic derivatives, perhaps because he is counted on to continue and strengthen the Cheney-style police state.
One will win, so the results are binary: deflation on one side, inflation on the other.
David,
I just don't see this being black and white. Like the current situation, I see it more about them creating money and less about them controlling where it flows. Ultimately I see them powerless to fight deflation in some areas while creating immense unwanted inflation in others. As they say, "hyperstagflation".
You're saying it'll be more like a "mosaic". I think you're right at first, but having lived in hyper-inflationary countries, I also think you end up, eventually, at one extreme or the other. Most people don't understand that in most cases hyperinflation becomes a necessity. It exists because moving away from it causes unemployment to skyrocket. Again, inflation on one side, deflation on the other, and separated by a very thin line of government policy.
Good point. I've read (and it follows) that hyperinflation and deflation are usually paired. IOW, hyperinflation is usually a response to deflation, and hyperinflation often results in a deflationary collapse. Your take?
I would not be surprised to see various elements become more valuable from time to time. Rhodium has skyrocketed, Platinum is up there, and Uranium will likely climb for the foreseeable future.
Gold will rise and fall inversely to world political and economic stability. Silver? Same, plus some industrial spice with (IMO) bullish factors going forward.
...but I am convinced that many will abandon that habit once someone jumps the gun and signals that we are out of the woods.
Human nature never works that way. The bottom isn't in until everyone's convinced there's no hope, and we're far from there.
tj & the bear | 12.02.07 - 7:25 pm | #
tj,
I think I need clarification on that, or perhaps my wording was poor. I'm saying that people may or may not become the savers we once were, but even if we do regain this mythical discipline, we'll quickly revert back to our free-spending ways given half a chance. Is that not human nature?
You regularly use the "We are not Japan" argument, but I don't buy it.
It wouldn't be called a credit cycle unless things cycled back around. That includes US consumer habits. We were savers at one time, so what makes you think we will never return to being savers?
When people realize that something is hazardous to their well-being (like taking on more debt than they can handle), they usually stop doing it.
- Shortcourage
Yes we were savers once. Hell we lived in sod houses at one time too where the only 'safety net' was your Remington, the food you had grown & stashed and buffalo chips to burn for heat. Those people saved or died.
And credit cycles are for real - but that's a long way from deflation... especially considering the fed hasn't even become 'accommodative' yet... to use their own terminology.
Remember, in Japan they have almost no safety net - weak pensions and nothing even close to anything like our SS. They either save or become wards of their children or starve.
None of that describes America today. We definitely have issues but are a long way from living in 'soddies'... and whether you believe the safety net works or not most Americans believe it does and have made their plans accordingly - they don't save.
One more point - you said this...
BTW, I don't claim any amount of certainty that deflation is our fate. But the odds I assign it are much higher than yours (apparently zero?).
I do give deflation a skoshi better than zero probability... not because it isn't theoretically possible but because given the current social systems we have set up coupled to the public psyche - I see no way we don't get inflation instead (money supply growth driven by fiscal & monetary policy).
If we don't get inflation as fast as we expect (in the guise of 'economic stimulation' of course) - we'll kick those bums out and elect pols who know how to run printing presses, dammit.
And presented with that social stimulus, people will return the rational response - they will spend so the value of the 'gift' isn't diminished by time.
That isn't inconsistent with asset price declines occurring even in spite of 'liquidity injection' - individual price declines are NOT deflation... real declines in money supply & velocity is deflation.
Show me the societal paradigm shift where people stop buying & borrowing en masse and elect officials who think the same way and I'll give a deflationary outcome some due... So far its just noise.
I've read various accounts of the New Deal and Depression, but don't know of an authoritative account of what really happened.
In grade school, Roosevelt was the hero who fixed everything with the WPA etc, although it took a few years.
I don't remember then or later anyone saying there was a lot of inflation as a result of the New Deal. However, I have heard some claims that the US economy was still a pretty big mess until the start of WW2.
Can anyone recommend an authoritative book that doesn't have an ideological axe to grind?
Can anyone recommend an authoritative book that doesn't have an ideological axe to grind?
Billy Hill | 12.02.07 - 10:40 pm | #
Wow. That's a tall order. It seems everything comes with an agenda...but that's really unfair assessment since it implies intellectual dishonesty by everyone, and I'm not that cynical. In response to your question, just the other day at a halfprice bookstore, I came across an old economics textbook written by MIT professor Paul Samuelson. It was an early edition, circa 1955. Maybe I should have picked it up.
Can anyone recommend an authoritative book that doesn't have an ideological axe to grind?
Impossible. Anyone who cares enough to write a book is going to have a viewpoint. Your best bet is to try to get opposing views and see which sounds most reasonable. And I think that secondhand books are the best bet, no matter what the cover looks like, the thoughts inside are as fresh as ever.
To return to the supernova analogy made earlier, consider this: When the star that formed supernova 1987A blew up, it was still a blue star, not the stereotypical huge, dying red supergiant that one would expect.
Much the same is happening here in financial terms. The US economy can be compared to a huge, old, blue star - the most massive and powerful thing in its neighborhood by far. But not all is right here; the star pulses and wavers with instability, but since it is not yet a red supergiant, all must be well, "it can't happen here," and so on. But beneath those blazing hot outer layers that are spreading a lethal solar wind of toxic financial products around the globe lies a dead heart of iron... which ultimately leads to collapse.
Uff-Dah!
There will burning bags of this s*** on the front porches of many small towns here soon.
A cold winds blows.
The rock face is still...
Why does it not cry with me?
..with my sadness, with my empty..
heart..?
Why aren't they with...
...me?!
Why aren't they aware of my..
..alone?
Why do not they cure my..
..anti-grammar?
Interesting take by the reporter...
"That wealth is what got it into trouble."
Gee, no responsibility there by the good folks of Narvik.
and I sit here..
with you.. all.
Do we really see?
Is there import in our...
insight?
Can we save them? or...
do we..
simply..
....?
...??!
Its that time of night and people in Scandinavia DO have a sense of humor so amidst this ripoff I found this sentence amusing:
She[Ms. Kuvaas, the mayor] disputed the suggestion that people here lacked the sophistication to understand what they were buying. Were not especially stupid because we live so far in the north, she said.
Well, the Icelanders certainly fooled you once upon a time didn't they ? By naming themselves ICELand and that godforsaken mass further north GREENland they got the Vikings off on the wrong track for looting and pillaging.
Yeah, stupid joke - that's the sort of stuff you learn if you research and invest in Norwegian and Icelandic currencies.
-K
Well, my heart doesn't go out to the Norwegians as long as they are pulling billions of dollars of oil out of the North Sea. They're rich enough to handle this.
The consequences will be tragic for many,and will last for many years.The correction will be ugly,and no more just than the bubble.
Nothing like enhancing the reputation of Uncle Gyp around the world. I wonder how much longer anybody will be foolish enought to want dollars or dollar investments?
Oh wail!!! Wail, ye who holds the bag!
..the smoking bag of suckerdome..
..that bag which names you the underling!
Why do we! We! Insist! On! Be! Ing!
The Suck! Ers!!!
Oh how hath they suckered us!!! !
Oh! HOW! Hath!..
..they...
...suckered..
...us..
Aren't these "bag-holders" the ultimate "owners" of all these crappy sub-prime and prime loans that are going in default, or will default, when resets hit? And aren't they the ones who will ultimately have to approve any modifications? How are all these legal contracts -- from loans to securitized financial instruments -- going to be modified to keep borrowers in their so called homes without the "bag-holders" being involved?
Yep. I can hear Norway crossing the U.S. off of their Christmas list.
No way could this be a problem in Portland Oregon, since it's so different here.
Where will we get funding after everyone realizes we screwed them? This will end badly for the USA when nobody trusts us anymore. It isn't like we have anyone who saves in this country full of 30000 dollar millionaires.
eli, former
Norwegi
an...somehow
man
aged
to S-
cape...and land
here,
to the delight of some bug-eyed CR lurkers.
When you sell something that is not what you say it is, that is a lie, Ms. Kuvaas said. She disputed the suggestion that people here lacked the sophistication to understand what they were buying. Were not especially stupid because we live so far in the north, she said.
Herein lies the crux of the matter. What we have is not a crisis of credit, but a crisis of credibility. Trust in the system is gone, and no amount of Fed cuts or political spin can bring it back.
Keeping this bubble inflated took capital from all four corners of the globe. Revealing my nerdliness, I'm reminded of the process that leads to supernovae in stars. As the star becomes starved for easy-to-burn hydrogen fuel, it begins to burn heavier and heavier elements. It even burns brighter for a time, but eventually undergoes gravitational collapse and explodes.
Hey, c'mon! Nobody trust the US anymore? After the great job we're doing in Iraq?
Don't you guys remember the Coalition of the Willing?
Where's the American can-do ethic here?
You guys need to start listening to the President's Saturday radio addresses more often instead of trying to find out the "truth" in the left-wing New York Times.
Not.
RIP
United States Constitution.
1776-2000.
Died due to the inconveninces it caused the current regime.
It even burns brighter for a time, but eventually undergoes gravitational collapse and explodes.
Max,
But it's such a beautiful explosion. Can you imagine? All of that weight.. nothing to hold it up.. so it just collapses in on itself. And, then... it explodes outward in a magnificent supernova! It explodes simply because nature will not allow the atoms to be packed in any denser.
I wonder if there are rules like that that apply to our financial system...?
I'd guess we're a long way away from that point.. but... maybe not?
When I read stuff like this, I'm convinced deflation will win out over inflation. From the article:
In 2004, Narvik and a number of other towns took out a large loan, using future energy revenue as collateral. They invested the money, through Terra Securities, in the Citigroup debt vehicle, which offered a better return than traditional investments. In June 2007, as the subprime problems were brewing, Narvik shifted some money from that investment into an even more complex one, again through Terra Securities.
We have serious production over-capacity in Asia, and the whole world is about to undergo a belt-tightening exercise like we haven't seen in decades... How can price levels NOT go down as money disappears in bad debt?
I don't think the Fed is up to the task of keeping the money supply pumped up. Who's going to borrow to invest in new businesses when people are cutting back on spending everywhere?
Therefore, send not to know
For whom the bell tolls,
It tolls for thee.
ShortCourage,
You are so very, very right. So very, very right.
The balance of power has gone so far over to the creditors that it will never come back. It's called the death of capitalism.
We are all bagholders now. We just don't realize which bag we're holding it in.
Im with you SC and arbo - deflation is a comin' to a theatre near you. Rated G, for everyone.
And then there's the interesting story in the left-wing New York Times about Malawi.
Turns out the Malawi government decided to subsidize fertilizer or its farmers...much against the council of the ultra right-wing World Bank etc.
Gosh. Now Malawi citizens aren't starving anymore.
Problem.
Fertilizer is dependent on natural gas and we're going to run out of natural gas in 2025. Eighteen years from now.
What happens to Malawi then?
The future is very, very bleak.
Learn Arabic.
"much against the council of the ultra right-wing World Bank"
i like the chinese way, "we are the good boys, see those bad boys are hurting everybody and we are helping everybody so we must be the good boys, please like us xD"
well they can ask the nice chinese handing out help through out the world without any conditions
"what good is all the money of world, when everybody hates you?"
The Nazis couldn't destroy Narvik, but perhaps we can. (If I remember right, it was the focal point of Norwegian fighting in WWII.)
What happens to all the dollars.. once they are sold by major countries like China, India etc., ?
In the worst case, if they land up coming back to united states, what will be the effect on inflation, value of the dollar, political consequences etc ?
Any research papers dealing with this eventuality ?
"We have serious production over-capacity in Asia, and the whole world is about to undergo a belt-tightening exercise like we haven't seen in decades... How can price levels NOT go down as money disappears in bad debt? I don't think the Fed is up to the task of keeping the money supply pumped up. Who's going to borrow to invest in new businesses when people are cutting back on spending everywhere?"
Remains to be seen. The narrower money supply measures (M1 and monetary base) are already dropping. M2 is increasing at a bit faster rate than in past years, and reconstituted M3 (see Shadowstats.com) is skyrocketing.
Of course if you believe Doug Noland at PruBear, the FED is and has been impotent. His view is that all along (from the early 90s till now) it was not the FED....it was structured finance that was expanding credit. The FEDs crime was not THEIR credit pumping, but their failure to reign in the real credit creation mechanism.
Now that structured finance is imploding....well lets just say he thinks the effectiveness of FED based reliquification will be much less than is expected.
I wish I understood the dynamics non FED based credit expansion. Why is M3 surging? After all, the marginal items that differentiate M3 from M2 are: Large time deposits, deposits of Eurodollars and REPO agreements.
Any of you work for money center banks? Is it really possible for the FED to put REPOs out there secretely? Are they secretely monetizing debt already? Where is the M3 surge coming from? No vauge unproven conspiracy theories please... Inquiring minds want to KNOW.
Well, toxic financing from New Zealand to Norway, it's contained. Unless we hear bad news from the Antarctic scientists and Santa Claus. Man, it's going to be a grim Christmas if Santa's the ultimate bagholder.
Santa's always holding the bag. It's full of wonderful presents for all the good boys and girls!
Sadly, the bag we're referring to here, is full of something else entirely.
What's in this bag is not wonderful at all. It's something quite offal.
Sorry. . .
To boost returns...
I'm still looking for a way to boost returns without also boosting risk.
I'm also looking for a way to eat a piece of cake while also saving it for later.
I'm also looking forward to having a currency based on green beans instead of greenbacks. I'd just love to see the fractional reserve system attempt to loan out ten cans of green beans based solely on the one can I deposit (while simultaneously keeping a few cans for themselves). I think that would be a hoot!
I don't think the Fed is up to the task of keeping the money supply pumped up. Who's going to borrow to invest in new businesses when people are cutting back on spending everywhere?
Oh I think the they'll have no problem printing the money - seriously. Plus it isn't just the fed who'll be involved... all the CBs will get involved once war is declared on 'containment'.
And who is going to borrow? Just about anyone & everyone who is offered easy terms. Well except for a few savers in the bunkers & caves.
The bit about 'everyone' cutting back reminds me of a joke my father told me once.
Two old men are sitting on a park bench near a play ground where young families are playing... there are many small children. One old man turns to the other and says...
"Look at all those kids! I just can't understand where they are all coming from... there's nowhere near as much sex as there used to be."
Savers (like those on this forum) can't understand spenders - but give spenders money & they will spend. The challenge for the CBs & Treasuries around the world will be to create transmission mechanisms to do that. I have no doubt that gov'ts worldwide will be successful doing it. There are so many ways to do it.
Farm subsidies, military build up, direct market interventions, ramp op entitlements - all equate to an opportunity to mainline liquidity into sectors of the economy & facilitate money growth.
If that doesn't speed up spending, shift taxes more on savings & assets and cut taxes on spending & debt. Most people will think that's a great idea - most people spend more than they save.
And 'yes' it will cause problems but deflation won't be one of them.
I was thinking that freezing sub-prime rates will stop the defaults (we all focused for a year on the 'reset schedule') so my thinking is that freezing htese rates will cause ABX to climb since they are no longer subject to :' Who knows how many more will default as their rate reste higher"
but KD at the ticker think that ABX will colapse - I wonder what am I or him is missing:
"The entire "securitized structure" - the ABX and everything behind it - depends on the credit enhancement from the interest rate spread, and the reset process as loans age. This is where they get the protection that allows them to rate big parts of these tranches as "AAA".
If you remove that the entire collateral structure collapses. The result of this sort of thing, if it really is what people are claiming it will be, is going to be the following:
The ABX will collapse. All of it. Those who hold these pieces will see their actual realized losses go parabolic. This isn't a matter of models and what people think they're worth any more - now the last piece of rug left, the credit enhancement component, is being ripped out from under them.
You can forget about getting an ARM loan that could potentially be securitized in the future. Ain't gonna happen. There are literally several trillion dollars out there in this stuff, and you can forget about a market for them in the future."
Thank-you dryfly 3:02, for reminding readers here that any deflation will be short-term. And then will come inflation beyond our wildest dreams (although probably not as bad as Zimbabwe with its 15000% rate).
While this is a credit collapse, the fact that nobody will want to borrow is irrelevant. There are, as you say, many ways to re-inflate. And while our government is incompetent, I'm sure it will find some of those ways.
Plan for short-term deflation, then hyperinflation.
But if the Yellowstone caldera blows, all bets are off.
children children, you dont get it
the governments all over the world have already tried to reinflate since 2001 and we are already at the abyss. war? government spending? i got some bad news, the addicts body is full of drugs and he cant take it anymore, one more shot and he is dead. the game is over.
the us can try to print but it will lead to 2 usd for 1 euro, 3 usd for 1 libra. you cant take painkillers forever.
The balance of power has gone so far over to the creditors that it will never come back.
Not so sure about this. After all, dogs to their vomit, you know. Very human, or rather doggy.
unirealist, dryfly, and others,
Plan for short-term deflation, then hyperinflation.
1970: The Year of the Hangover
Townships risk compulsory sale
The four northern townships Hattfjelldal. Hemnes, Narvik and Rana must provide NOK 150-160 million (USD 27.67-29.5 million) in guarantees to Citibank on Wednesday to ensure that the bank does not sell off their positions in the US securities market.
Terra Securities bankrupt
The Financial Supervisory Authority of Norway (Kredittilsynet) has revoked the license of brokerage Terra Securities, the company involved in selling disputed commercial papers to Norwegian townships.
Terra Securities filed for bankruptcy after the decision and its shares were immediately suspended for trading on the Oslo stock exchange.
Terra Securities is embroiled in a dispute where northern townships Rana, Hemnes, Hattfjelldal and Narvik claim they were systematically tricked and misled to pour public funds into high-risk bonds.
As more stories like this surface I think it will significanly affect the appeal Wall Street will have with foreigners. Our overseas friends trusted America because we were an image of stability: financially, legally and ethically. I think now that image is forever compromised.
Herein lies the crux of the matter. What we have is not a crisis of credit, but a crisis of credibility. Trust in the system is gone, and no amount of Fed cuts or political spin can bring it back.
BubbleGate !
The meme is born, and its time to commence prosecution of the guilty.
Now who do you think might have been interested in keeping that bubble alive as long as possible ?
The siren song of "a better return." When you hear that, it's time to sail in the opposite direction.
OT
Revro,
Have you seen my answer to your question?
While I recognize borrowing will remain an option for many during an economic contraction, the data so far suggest they will be neither so numerous nor so able to respond to the usual inducements as has been the case in recent decades. I don't deny the mechanism, but I question its effectiveness.
I think it's certain we'll see various efforts here and abroad to reinflate, and I believe they will meet with some success. But deflationary forces are of greater scope and depth than those we've encountered in my lifetime, and the domestic economy a softer target. So I'm hopeful, but wary.
yes poszi, thank you for information
"We have serious production over-capacity in Asia, and the whole world is about to undergo a belt-tightening exercise like we haven't seen in decades... How can price levels NOT go down as mone worly disappears in bad debt"
I dont know. Its not so clear to me. The overcapacity is for yesterdays demand. Tomorrows need in the Western world is for everything gerontology related. The government has put off infrastructure investments for the last 2 decades. We can expect huge investments in infrastructure worldwide, this will keep commodity prices up. This is inflationary.
Also, what old people need and want are services and less material goods. It`s much harder to get economies of scale in services. Our economy is built around retail square footage, something we will need less of as the population gets older!
A lot of the investments we`ve made over the last decades are for stuff where demand will be declining.
On top of this, a huge amount of people will be retiring in the next few years. As they start collecting SS, that will mean more money being printed and a downward push on production, especially if layoffs increase due to a slowdown! In the first few years of retirement, people don`t really cut down on their spending, so money will be coming out of the markets to support consumption.
To me it looks like deflation in assets and luxury goods and inflation in staples and gerontology goods and services.
Low yields in treasuries with high credit spreads in corporates will make it easy for governements to raise funds vs. corporations. And when government starts playing in the economy, it usally means inflation.
Questions i still haven't seen answered in the press:
Why is there such pressure for high returns on state/local/ (or pension for that matter) funds -whether American or Norweigian.
What kind of incentives are built into the salaries of these fund managers that encourage them to take risks for high returns?
What kind of lobbying (kickbacks? perks) can investment co. managers do with state officials to get them to take on these risky products?
And pls don't tell me the ultimate government buyer of these products did not know the risks -- they may have hidden the risks from their co-workers and from the govt entities who subsequently bought into them -- but someone in the govt knew well and good, and was deeply in on the scam.
The only way to solve this problem is to get rid of the Old Wall Street firms that created these problems. Let them all go bankrupt from their losses. They have been robbing the masses for years. Now is the time for them to have a turn at feeling the pain that the average person goes through each day just to make ends meet.
We must allow new and better institutions with fresh ideas to replace them.
Unfotunetley, the Fed has decided to institute policies to try to make the very companies that caused all of these problems more profitable again so the good old boys network can stay in power.
Our only true hope of seeing change will be coming up in the next several months as we begin the long election process.
We can only hope that someone will emerge from this process who will have the courage to try some new and innovative things to get our countries economic, social and foreign policies back on track.
When you take a dump in the world's punch bowl, you don't get invited back to the party for a loooooooooong time.
Mortgage Observer i am with you. i believe that when Hillary wins the election we will see a great change, hell, they might even bring that Rubin guy back, who if i remember correctly was treasury secretary in Clinton administration. does anyone know where he is now?
"...countries economic, social and foreign policies back on track..."
Mortgage Observer | 12.02.07 - 9:12 am | #
I never thought I'd recommend this ticket: Kucinich/Paul. If nothing else, these guys have courage and integrity - as the campaign goes on, these two attributes become more and more attractive.
Alo:
I'm a Portfolio Manager. Let me tell you that I have been predicting this fiasco since Greenspan kept the rate at 1% for too long.
I was ridiculed and told I should be a bond manager for being too negative.
I am still being ridiculed today for being too negative. According to most, our leaders will find a way to mitigate the losses. Capitalism has won and will keep on saving us.
This is an industry that attracts optimists. It's very hard to get in if you're not an optimist.
Most in the industry truly believe in American hegemony and that things will work out.
Dryfly
The simplest thing is either have the government buy financial instruments based on consumer debt or to guarantee them against default.
This Christmas, all the good folks whose credit cards I have, increase my credit limit by a couple of grand. And I got several solicitations for new ones. Meaning that I had an extra $10-15 grand to spend on Black Friday.
However, I think I will bunk with the Deflationists on this one, for a while. No real good reason, the particular episode of financial insanity has never happened before, and our elites are adverse to helping the common citizen by better paying jobs or additional government safety nets. So while inflation is a weapon, my bet is that they will point it in the wrong direction and misfire it.
Now if we end up with President Huckabee, Obama, or Edwards, then my opinion might change but at the moment, the likely candidates will pour money in to the hands of the already wealthy who will not spend it and things will dry up in a classic depression/recession.
"Impact of E*Trade Portfolio Sale"
"Goldman Sachs analysts said they were surprised ...."
The Norweigan people are victims and my heart goes out to them. They invested their hard earned money "in what they're now calling "high-risk structured products"" offered by Citibank. I'll bet they weren't called high risk products when they were offerred.
What makes this episode so insidious is that the traditional market rules for identifying true credit risk were blatantly changed on the sly.
For a century, the citizens of the US built up a system in which one could have faith, or a reasonable expectation, in the US tradition of fair, open, and honest credit ratings enforced by strong regulatory over-site. That's gone. The Fed sat on it's hands and watched, approvingly.
The reputation of Citigroup and the other large banks, AAA ratings, and the fudiciary qualifications of the US Federal Reserve system are gone.
The great depression resulted in sweeping bank regulation and reform because of the role the 20's debt bubble and shady practices, created by the wall street banks of the day, played in the collapse of the credit system. It is more than coincidence that the repeal of these regulation coincides with the current mess.
D. | 12.02.07 - 9:31 am | #
I went through the same thing in the homebuilding industry in the DC area. Interesting that I recently heard from the CEO of my former employer, and he told me that I was the only person who had given him unflinching, honest advice in the run up to the burst. He didn't offer me a position, and he's still surrounded by optimists (yes men), but the admission was nice to hear. Someday, I might offer him a job.
The optimists and the pessimists are seeing the world through colored glasses. Your realism and lack of wishful projection will serve you in the long run.
Candidates come and go, but good laws with teeth will outlast them all. This administration has made a fine craft of finding weak points in the law and exploiting them to its (and its sugar daddies') advantage.
And the prior one didn't do much good either by letting Greenspan knock the teeth out of glass-steagall.
We'll get better when we recognize as a nation, that the banking industry can never, ever, be trusted to regulate itself, and will never, ever put the greater good (or even its own long-term survival) over its blind lust for profit.
It's snowing today (NE). I guess we have something to blame for slow retail sales. Two months back it was not cold enough, this month its too cold. You know what, they should blame retail sales decline on global warming.
zinc | 12.02.07 - 9:38 am | #
The "all regulation is bad" meme is a red herring. The reason we had all of those regulations is because our grandparents took the big hit, and tried to protect us from having the same experience. The meme is that regulations choke the life out of business. The truth is that regulations keep us from being ripped off.
Big Finance: "How the hell am I going to divert your money into my pocket if doing so is illegal, and you're watching me like a hawk?"
Public Interest: "Oh. Sorry!"
Regulations, a.k.a: Laws, are put in place to protect us, we relax or repeal them at our own peril.
Well those with the wealth that was buying these formerly high return securities that are now imploding can take their future oil revenues, manufacturing revenues and mineral extraction revenues and use them to buy up what is left of the deflated and devalued U. S. A.
Someday in the future maybe they will have a presentation with animated arrows showing the spread of toxic mortgage paper, just like when they model possible deadly virus outbreaks.
I would like to send a special T-shirt around the world with the caption:
Front:"I invested in US mortgage paper and all I got was this lousy T-shirt"
Back:"They shipped it COD due to problems with CDO's"
I thought the Norwegians started this whole credit problem. At least thats what I saw on TV. They were attacking us and only a credit card can save you. Whats in your wallet?. Back to the bunker...
the_economist | 12.02.07 - 10:10 am | #
Selling worthless lutefisk futures. On credit, no less.
The Aftenposten has a ton of follow-up articles:
Greed gets the blame
Dark times up north
Townships risk compulsory sale
Citibank, of course, used a local "investment group" to shield itself from any responsibility:
Citibank, seen as the only player that earned any money on the soured deal through its fee income, has blamed the financial woes on "weak markets" that have hit investors all over the world. Citibank has claimed it fully communicated the risk of its products to Terra, which in turn sold them to the townships.
Nothing like using their own countrymen to betray them. Greed has no bounds.
Whats in your wallet?.
A 1/10oz. of gold, a wad of cash, a couple of credit cards that have a credit as a balance along with the usual stuff. As a side note a 1/10oz of gold and EKG machines don't go well with each other FYI.
Anonymous "To me it looks like deflation in assets and luxury goods and inflation in staples and gerontology goods and services."
you know, you're probably right. We may get a short period where deflation outwieghs inflation and then inflation takes over. The government will spend and spend hard. I think infrastructure spending and I believe there will be an enormous push for alternative energy in a Marshall Plan that will displace NASA and other research efforts for its share of spending. Massive. I have heard this from many politicians and I believe it will have plenty of public support. Just not from Bush/Cheney, let them rot in hell.
On another note - I get a sense of hope. My 11 year old kid told us yesterday she doesn't want any Christmas gifts or trinkets. I've been working her over for years, teaching her to examine labels and see where all the cheap shit in her room is made. She wants instead for us to donate a turkey to a homeless shelter and a bag of dogfood to the humane society. I think we may yet be surprised, and so may the Chinese. At least I still have hope. I like to think I am a skeptic rather than the bear I have become. I don't enjoy being bearish.
I'm seeing a lot of over-reaction here. All of these investment banks are backed by the full faith and credit of the American taxpayer and will never be insolvent.
I'm seeing a lot of over-reaction here. All of these investment banks are backed by the full faith and credit of the American taxpayer and will never be insolvent.
Observer | Homepage | 12.02.07 - 10:30 am | #
Is this snark?
Is this snark?
I doubt it, IMHOP he's right.
House whisperer, the more likely invective would be:
"Dra åt helvete, jävlarna!"
We can joke all we like (yet I am thankful I haven't seen a snide Edvard Munch reference), but this is not an isolated incident and it will affect the lives of ordinary people across the globe.
Citibank deserves to be dismembered for this and other of their offenses.
So do other financial institutions. They are rotten to the core.
This "too big to fail" nonsense needs to stop right now. When "too big to fail" means looking the other way while they rip off the entities that provide basic services to people, it's got to stop. Immediately. And the bastards responsible for the con MUST be held to account.
REBear in NE says:
You know what, they should blame retail sales decline on global warming.
I thought in NE it was always blamed on too stingy Government subsidies. LOL.
She wants instead for us to donate a turkey to a homeless shelter and a bag of dogfood to the humane society.
She's to be commended. Dressing with gravy makes a fine main course, followed by pumpkin pie (which is pretty cheap when you analyze it). You might even splurge a bit with some whipped cream on the pie.
Daniel Mudd interview:
The last time I did this, my wife and I signed a document 60 or 70 times. If anybody could understand every single one of those things, it ought to be me. Sixty-nine of them I understood, but the 70th one, I still signed, but I didn't understand it. It wouldn't be all that complicated to have a sheet that says on the front: "Here's your starting rate, here's your maximum rate. Here's your starting payment, here's your maximum payment."
Daniel Mudd / Fannie Mae president and CEO "Rates were low for a long period of time. Home prices accelerated for a long period. Both lenders and borrowers had a huge amount of confidence that ultimately led to overconfidence."
All of these investment banks are backed by the full faith and credit of the American taxpayer and will never be insolvent.
Observer | Homepage | 12.02.07 - 10:30 am | #
Faith? As in "faith-based initiatives?" Credit? The American taxpayer has maxed-out the nation's credit (ever hear of deficit spending or "Greatest debtor nation in the history of the world"?). Hell, not only do we no longer have a reputation for fiscal conservatism and reliability (having replaced it with a Caveat Emptor disclaimer), we don't even have credibility.
If your statement were at all true, we'd hike taxes and start paying off some of the principal on our debt.
"full faith and credit of the American taxpayer..."
What a hoot.
"Herein lies the crux of the matter. What we have is not a crisis of credit, but a crisis of credibility. Trust in the system is gone, and no amount of Fed cuts or political spin can bring it back."
Perfectly stated.
And kudos to whoever made the subtle, cleverly ironic reference to Robert Rubin and the prospect of a Clinton administration restoring that credibility.
Payrolls data could be deciding factor for Fed - MarketWatch
Payrolls data could be deciding factor for Fed
So we are going to AGAIN show official payroll to be negatve, do a 50 bps cut and then later revise the payroll numbers to +100K?
The Norweigan people are victims and my heart goes out to them. They invested their hard earned money "in what they're now calling "high-risk structured products""
Their hard-earned money, plus a few billion of borrowed money:
To boost returns, the Norwegian townships also borrowed NOK 3.5 billion to invest in Citibank's products
So they levered up to chase yield and got burned? Sorry, but that just doesn't get my sympathy going...
The operative words here as elsewhere are "a higher return"...so greed, well disguised, is really behind it all.
RBS to announce a 2 bn pound writeoff..
RBS to announce £2bn sub-prime write-off - Telegraph
"Nothing like using their own countrymen to betray them. Greed has no bounds." They're called Collaborators and let's hope the Norwegians deal with them in an exemplary fashion!
A Quisling?
Warren Buffet's comments on Derivatives in Berkshire Hathaway's 2005 Annual report begins as follows:
"Long ago, Mark Twain said: "A man who tries to carry a cat home by its tail will learn a lesson that can be lerned no other way." If Twain were around now, he might try winding up a derivatives business. After a few days, he would opt for cats.
We lost $104 million pre-tax last year in our continuing attempt to exit Gen Re's derivative position. Our aggregate losses since we began this endeavor total $404 million."
You can finish reading his comments on page 11 (Adobe format) here:
http://www.berkshirehathaway.com/2005arn/2005ar.pdf
Remember this was for their fiscal year 2004!!
This had already been posted at Mish's two weeks ago.
Although a judge could eventually find Citibank guilty of fraud, I see no victims here:
"To boost returns, the Norwegian townships also borrowed NOK 3.5 billion to invest in Citibank's products"
8:1 leverage
Correction: Remember this was for their fiscal year 2005!!
Stiglitz has notable company, Patrick Artus of Natixis:
"Greenspan was an arsonist and a fireman combined. He derived all his glory from his reaction to the savings-and- loans crisis, to the collapse of Long-Term Capital Management LP, and to Sept. 11, 2001. But LTCM and the savings-and-loans crisis were his doing. He absolutely failed to see where the malfunctions in the U.S. economy were.
Greenspan came up with a phrase, ``irrational exuberance,'' in 1997, but he didn't do anything about it.
Nayeri: How would you sum up his track record, then?
Artus: He was a very bad Federal Reserve chairman. He created four major crises: savings and loans, LTCM, new-technology shares, and subprime mortgages.
Nayeri: But surely you will acknowledge that Greenspan saved the planet at crucial turning points?
Artus: Yes, but after the fact. He's congratulated for his role as fireman, but he's the one who started the fire.
Greenspan Was `Very Bad' Fed Chairman, Says Artus of Natixis - Bloomberg.com
Alan "A. Gascan" Greenspan.
Dryfly et al.,
I'm also in the deflationist camp, but prepping for hyperstagflation.
It's a bit of a "mug's game" to try to predict, too many variables. Lord knows I was way early with the recession prediction (unless you follow John Williams Shadow Stats) of March '06, back in '05.
But looking back, you called it for Jan 2006, even earlier
-
Calculated Risk: The Mug's Game Challenge: Predict the Start of the Next Recession
My vote will only be for the candidate who I believe will cleanse this corrupt Wall street culture, force a true accounting of corporate and personal liabilities and make sure everyone on this whole planet knows names, lots of names. Time to stop the lies and put these bastards, greedy bastards behind bars with the public aware of their family names, after we the screwed over public have confiscated all their personal assets. It was stated else where that after you piss in the global punch bowl you don't get invited...true, sort of. The elitism powers to be across all nations serve at the pleasure of each other for the benefit of each other. The local powers to be will work cooperatively to maintain the status quo. Public anger is building as you can see. A day of reckoning approaches.
Used to be it was countries like Argentina that got in trouble for exporting bad debt. And the US was the white knight who bailed the system out.
Funny. 'Robert Citron' doesn't sound Norwegian.
Neither does Chuck Prince, but they obviously forgot to ask. Obviously, anything without a Norwegian name must be evil:
The regulators' letter indicates, according to news service E24, that Hemnes Township, for example, had itself taken contact with Terra "with a desire to evaluate possibilities for higher returns on its financial investments." The township, claims Terra in correspondence cited by Kredittilsynet, took the initiative that resulted in its investment in the product that as yet doesn't even have a Norwegian name.
The question I am wondering about Now, as in DestroyHopeNow, is how the MBA & NAR plan to sabotage that fragile lame Paulson freeze effort. I'm sure they recognize this program puts another shovel-full of sand in the gears of the already frozen transaction mill. The MBA and NAR can hardly stand idly by and allow that to happen. Their interests stand to lose the most in this sham. They also have plenty of ammunition with a strong lobby and a legal wing ready to jump.
They also have plenty of ammunition with a strong lobby and a legal wing ready to jump.
barely | 12.02.07 - 12:23 pm | #
Correction: They also have plenty of ammunition and a noose around their necks, with a strong lobby and a legal wing ready to jump.
barely | 12.02.07 - 12:23 pm | #
Zinc. They borrowed money to invest. in these "safe securities." Look, I don't have to SEE the guy palm the queen to know that three card monte is a con. You don't have to be some kind of financial mentat to see that there's probably something sneaky behind the scenes with something that gives you returns that are significantly above market rates. It's like those faxes we used to get continously touting 1% mortgages. I didn't feel any need to get pages of fine print to figure that it was come-on. It failed a simple sniff test, as does the idea of borrowing money to invest in this stuff. If you can't afford to buy it, how can you afford to lose it? If it's such a good deal, why haven't the people lending me the money bought all of it?
Where Was Jeb? - Forbes.com
Who could have known?
Nemo - I could not agree more! In typical NY Times fashion, the front-page article makes you wade through about 20 paragraphs of fearful comments by the aggrieved mayor (accompanied by a sad, sad photo) and residents of the town until you get toward the end, where we find out:
1.) As you said, they were levered. Think about that - what if the Florida fund had not only invested in this stuff but had LEVERED UP? to do it!? The Florida fund also invested under 10% of its assets in these securities, Narvik sounds like it was a much higher percentage (pardon the shouting, but this stuff is insane)
2.) There is a mention of the fact that there were two prospectusesi(i?), one in English which revealed the full terms and a much shorter term sheet in Norwegian which didn't. I would think that is where Terra is most vulnerable.
3.) However, who cares about the stinking prospectus? The mayor admits she didn't even read the damn thing!
The whole thing is sickening. Citi is hardly innocent in this whole thing, but come on - this isbeyond fiduciary incompetence.
OPEC Won't Boost Crude Output, Algeria's Khelil Says
It's simply amazing how much the standing of the USA has degraded from 2000 - 2007. And we have 1 more year with these assclowns in charge for more destruction and looting of US treasury.
Long note on this fiasco in Wikipedia. Looks like Terra, associated with some rather problematic characters, is owned by a group of Norwegian Banks. These villages apparently involved themselves in a scheme to insure, with 10x leverage, US municipal bonds against default. It is alleged that Terra did not translate into Norwegian the part of the Citigroup prospectus that cautioned about risk. Interesting that one of these villages has acquired vacation homes in Montenegro for the use of its residents. Also that this investment scheme began in 2001.
Tom, ready for this one yet?
I have been trying to get ready as fast as possible;-}
Today was funny about how our friends from s.o.t.b. are human too. Of course they are, and they are exporting the poverty form s.o.t.b. to here. I think we shall shortly see an exodus from Phoenix that is unprecedented. No jobs, no money, no surplus labor force.
The pension fund folks knew they were buying risky stuff, after all they can read the riskless tbond rate in the paper. They have to reach for return or their political master will crucify them when they ask for higher contribution rates. I wonder how New Jerseys bond rating is doing with their huge lever up bet from a few years ago;-}
Someday this war's gonna end...
Does anyone in Goldman (err. Government) see a potential problem when these firms are investing in the very markets they are supposed to be making? Has anyone picked up on how these firms are trying ot "market" small and institutional investors (less sophisticated) into taking on their own money-loosing investments?
I know I lack your level of sophistication in finance/accounting (I'm an engineer) but could someone explain why these firms should be trusted to give any sort of investment advice?
Marcus Aurelius - do you doubt that the MBA and NAR will help fund the efforts of the class action attorneys that call into question why special status is given to those that lied and are not in a position to pay their obligations as described in their signed legally binding rate increase mortgage documents. Without assurances that the rate-freeze is "contained" they whole mess falls apart.
Please. This is more doomed than MLEC with at least as many competing interests.
Russ...
I'm sure Goldman would like to see everyone rich, including their clients. However if things start to go south, they will climb over widows and orphans to be the first on the lifeboats.
"they will climb over widows and orphans to be the first on the lifeboats."
offcourse only to make sure that the lifeboats fullfill the required safety standards
sry i feel very sarcastic today xD
These villages apparently involved themselves in a scheme to insure, with 10x leverage, US municipal bonds against default.
So the poor innocent town of Narvik was writing CDS on US muni bonds? I was wondering why their first security started to go south when it had nothing to do with US subprime. Oy.
KM4,
Usually the worst looting and stupidity occur the last few months of a failed regime. The real shinanigans will be toward the end of next year after the elections.
Well, my heart doesn't go out to the Norwegians as long as they are pulling billions of dollars of oil out of the North Sea. They're rich enough to handle this.
F Frederson, you are one of the problems of the world.
The American banks will be the most globally hated entities in history. Do they think anyone anywhere will ever trust them again? If they do, they are even dumber than their statisticians who can't create models that reflect reality.
Revolution is the only answer. End private banks forever.
We are all Goldman now. Time to act like them. First off it is time to show them the other side of the moral hazard coin. Every FB with a second lien and value near or less than their first loan balance needs to stop paying their second now. What can they do? They cannot foreclose, that would cost them even more.
AllenM
I think you are correct about Phoenix. The company I work for does a lot of business with home builders and car dealers locally, and I have been waiting for the hammer to drop.
Where was Jeb? From the aforementioned Forbes article on the FL State Board of Administration (SBA):
"A majority of this paper was sold to SBA by Lehman Brothers. Bush, as the state's top elected official, served on a three-member board that oversaw the SBA until he retired as governor in January. In August, Bush was hired as a consultant to the bank. Lehman spokesperson Kerrie Cohen, speaking on behalf of Bush, said they had no comment and would not say when the bank had sold Florida the paper. SBA did not return calls.
Fact 1: The Governor is on the oversight Board. Fact 2: Lehman has the lock on the Florida account. Fact 3: The Governor ends up on the Lehman payroll.
So does Jeb have immunity from the incompetence he exhibited as the chief oversight officer of the SBA ? Where was Jeb? Got to be some official agency minutes somewhere.
Where will we get funding after everyone realizes we screwed them? - 01/20/2009 end of an error
Herein lies the crux of the matter. What we have is not a crisis of credit, but a crisis of credibility. Trust in the system is gone, and no amount of Fed cuts or political spin can bring it back. - Max
Nice to see some of you folks are starting to get it.
The Revolution is here. It is merely waiting for participants.
Clyde
Hopefully he doesn't get away with it the way his brother did at Harkin Oil and uncle Neil did at Silverado. THese people need to be driven out of the public arena forever.
It's called the death of capitalism.
arbogast
Wow, you guys are cheering me up this Sunday morning!!
Nice to see some of you folks are starting to get it.
Oh, we got it a long time ago. But since "we are all Goldman now", who should we revolt against?
a must read...hat tip big picture (ritholtz) who referenced and linked to this article about counterparty risk over at investor insight.
Page Not Found - InvestorsInsight.com | Financial Intelligence, Advice & Research / Investment Strategies & Planning for Individual Investors.
yikes, it really does look like fabric without rip stop...unraveling. thanks to derivatives based on derivatives based on derivatives on and on, it looks like few, if any, can truly plumb the depths of this mess.
mt
US says it has right to kidnap British citizens
US says it has right to kidnap British citizens - Times Online
You have to read it to believe it. Yosemite Sam is clearly in charge.
Here's an excerpt.
"A senior lawyer for the American government has told the Court of Appeal in London that kidnapping foreign citizens is permissible under American law because the US Supreme Court has sanctioned it. ... Until now it was commonly assumed that US law permitted kidnapping only in the 'extraordinary rendition' of terrorist suspects. The American government has for the first time made it clear in a British court that the law applies to anyone, British or otherwise, suspected of a crime by Washington."
Buscho to rest of world...
Only our laws matter; yours can be ignored or even violated. Good thing we are exporting democracy and freedom, or says our war criminal king.
Like I said it's amazing how much the standing of the USA has fallen from 2000 - 2007 and more importantly how long it will take to rebuild it.
most CR-er s will want to skip to the third section..cause you are in front of the curve with the earlier explanations
re the investor insight article
Unfotunetley, the Fed has decided to institute policies to try to make the very companies that caused all of these problems more profitable again so the good old boys network can stay in power.
No, unfortunately the Fed is owned by the very criminal banks that you want to fail. Hard to believe it will happen. First, get rid of the private Federal Reserve. Then get rid of the criminal banks that are the root of all the world's problems.
Revolution - sounding better every day.
Max,
I agree got it a long time ago. Also agree who do you revolt against when the walrus is you.
When you take a dump in the world's punch bowl, you don't get invited back to the party for a loooooooooong time.
Marcus Aurelius
So good, it needed to be reprinted.
money quote from John Mauldin's article at investor insight
"Unfortunately for our financial system, the magnitude of risk in corporate credit is a multiple of that in subprime mortgages. Each written CDS exchanges a risk that cannot be eradicated no matter how broadly aggregate risk is dispersed. Sinking valuations of CDOs and a commensurate leverage unwind could trigger a vicious cycle of financial losses. By implication, the problems that might ensue could make the subprime mortgage problem look like a walk in the park.
I cannot be sure these assertions are true, but I suspect that it would be just as difficult to provide evidence that they are not. I have listened to arguments against systemic risk, suggesting that the double counting of CDS, matched books of investment banks, and increasing sophistication of risk management techniques make the eye-popping numbers of notional risky debt larger than they seem. Nevertheless, I remain skeptical. We've seen similar movies before, and they don't end well."
mt
I'm also in the deflationist camp, but prepping for hyperstagflation.
It's a bit of a "mug's game" to try to predict, too many variables. Lord knows I was way early with the recession prediction (unless you follow John Williams Shadow Stats) of March '06, back in '05.
Here's the deal - people are not distinguishing from deflationary pressures (economic forces tryring to destroy money supply & velocity) and deflation (the result of said if successful). I think that is a big mistake.
I believe in the deflationary pressure meme - that's pretty obvious. But until I see society embrace 'deflation' were going to continue to get 'inflation' in its purest form - gov't effort increase money supply AND velocity.
And they will be successful - there are too many ways a gov't via fiscal & monetary means can accomplish this. The fact that Japan's half assed effort was less than successful was in part because their population embraces deflation - they save like hell and if they spend at all are very price conscious.
That's not America.
I'm not saying we can't have deflation as there is no law of nature saying we can't just saying we won't have it until we embrace it at a societal level. Show me real signs Americans are saving and 'containing' and I might believe it... And I don't mean small declines from what is now world record setting consumption, I mean serious cut backs with real buyer & borrower strikes at the consumer level even in presence of easy money.
There just isn't any solid evidence for it. And especially no evidence that if cheap money is made available that people won't borrow & spend it. They won't have to 'push on a string'... If gov't pumps enough money out there it'll be more like 'hang on for dear life'... again.
mock turtle, or anyone. Why buy CDS without strict reserve requrements and a regulator to make certain the seller doesn't continue to SELL SELL SELL more CDS thus leaving your insurance to wilt with no prospect of coverage if the need arises?
kidnapping foreign citizens is permissible under American law
Didn't we fight a war with them in 1812 about this? Only the positions were reversed.
Like I said it's amazing how much the standing of the USA has fallen from 2000 - 2007 and more importantly how long it will take to rebuild it.
km4 | 12.02.07 - 1:19 pm | #
It will take far less time to rebuild our reputation if we begin building our gibbets now.
Dryfly, IMO, is absolutely correct. There are serious deflationary pressures out there, but whether they will morph into deflation is another matter entirely.
At the moment, the odds weigh towards deflation. Americans' balance sheets are in serious need of repair. But, if Uncle Ben starts to flood the economy with money, all bets are off.
We could be in the nascent stages of yet another bubble. Only time will tell.
Conjure Bag says, "Either way, you lose."
barely,
you are exactly right..this is insurance, without the standard insurance requirements and oversight.
John Mauldin makes points about underwriting and reserve requirements (capitalization) in his article.
But the larger issue seems to be, not only as Tanta says' "we are all subprime now"...but even more so that the complexity and lack of oversight and diligence that plagues the mortgage industry... has as well infected a larger portion of financial system AND everything is connected.
open the pod bay door hal
Fucking pitiful FDIC Director Curry: Banking industry in a position to withstand turbulence (speaking in Naples, FL.)
FDIC director: Banking industry in a position to withstand turbulence» Naples Daily News
Oh, I almost forgot: most of the bonehead politicos who got the villages involved in this mess are associated with the Labor Party. Looks like they found a loophole in the laws designed to prevent such"pie in the sky" exercises.
FFDIC...yeah, i followed your link...disgusting, but what the hell else do we expect them to say.
This has been a CONFIDENCE game for quite some time now...and that's what they are selling.
I'm glad I've been reading CR for over a year...only posting recently...but imaging if 10 percent of the country...the middle class or heck even just the engineers, doctors, and lawyers etc... had been tracking this issue. we would have wall to wall "northern rocks" as far as the eye could see.
"...pitiful FDIC Director Curry: Banking industry in a position to withstand turbulence"
Then what is the FDIC preparing for in these extensive hiring announcements:
http://tinyurl.com/2l3rw4
Lehman spokesperson Kerrie Cohen, speaking on behalf of Bush, said they had no comment and would not say when the bank had sold Florida the paper. SBA did not return calls.
errrr.. doesn't knowing the cusip #'s on the investments allow someone to lookup those dates ? really, I don't know, but it seemed like they are keys to the actual instruments. the cusip's are all listed on that "Holdings" pdf I mentioned yesterday.
Cramer: Subprime Dragon's on the Run
http://www.thestreet.com/video/index.html?bcpid=1155328549&bclid=1137812485&bctid=1322221268
Whew, we are saved by those brilliant financial innovators! Is this guy serious?
Somewhere, deep in the core, our whole way of life is based upon trust.
this is bull shit
Hope some people near the Wall St. crowd (and senior execs in LA, etc.) have the guts to start with Tar & Feathering. Should be some around the country who have the guts to pay the penalty for doing to them.
Strip them of bonuses & assets and
exile them to our needed Devil's Island.
There just isn't any solid evidence for it. And especially no evidence that if cheap money is made available that people won't borrow & spend it. They won't have to 'push on a string'... If gov't pumps enough money out there it'll be more like 'hang on for dear life'... again.
dryfly, isn't the decrease in securitization, and the overwhelming skepticism against it, going to squelch the supply? The Fed doesn't lend directly to the people. The credit crunch is real and unavoidable, even with all the Fed help there is.
Right now, I see cheap credit available still, but consumption slowing. Future consumption has many more headwinds than just cheap credit. Paydown of debt is just one more, but a big one. Cheap credit might allow some people to borrow more, but only to service their debts. House price declines will also stop credit access, and pressure those debts for further servicing, both literally and psychologically.
As for lower rates fueling housing, no chance. The products that fueled it beyond the 1% FFR push are gone and won't be back. They already used that card. The 1% refinancing push will again only be toward debt consolidation, not additional spending.
Actually, if oil didn't go this high, we would probably already have deflation. That energy costs have not spilled over much yet suggests that consumer prices have had downward pressure preventing price increases. Corporate earnings declines reflect this.
"Who could have known?
Tom in AZ"
"As Executive Director of the State Board of Administration of Florida (SBA), Coleman Stipanovich serves as the Chief Investment Officer of the fifth largest pension fund in the United States."
The resource cannot be found.
Coleman Stipanovich is the brother of J.M. "Mac" Stipanovich, a highly influential Republican fundraiser and lobbyist who has been a political strategist for both Jeb Bush and former Florida Secretary of State Katherine Harris.
"He has a master of science degree in Criminal Justice Administration from Michigan State University and a bachelor of science in criminology from Florida State University."
Business: Pension board weighs options
Total assets under management at the SBA are in excess of $150 billion.
All I can do is laugh. Silverado lives again!!!
Dot, they will keep the system afloat through massive monetization of defunct "assets" like these dead cdo's and junk housing bonds. All they will do is buy it just under par, like 90 cents on the dollar and viola- instant liquidity, otherwise known as pumping the money supply. It only is deflationary if they actually sell the assets for cash and take it out of the money supply.
Take stuff to the discount window, get cash (money blips on the computers)- mark to market solved, liquidity crisis averted, all is well and we go right on printing money through our huge fiscal deficits.
A slightly lower dollar is the price and couple of speculators on precious metals bank some nice profits and we go merrily on our way.
That is what the folks in charge hope happens, but I don't expect it to occur as scheduled. Too many varibles escaping our control and going wild.
Someday this war's gonna end...
w, thanks for the link to the cramer interview
Cramers opening remark in the interview:
"This is all 1990's stuff..." paraphrasing now...once the arabs got involved with citi i knew we had turned the corner)
What the hell his he saying?
Cramer ends the interview with the the observation that now we've figured out where the problem is and how big it is blha blha blha...
what a shill.
in an MIT periodical , Technology Review...Urstadt interviews and tells the story of how the quant's plans melted down. A facinating read especially if you stick with it.
Technology Review: The Blow-Up
Two important ideas...the modeling and hedge programs contorted the market
AND
even most of the best and the brightest minds don't fully understand the complexity of the investment strategies that have been devised.
a must read, that shows what a liar cramer is when he says the problem is understood. bull pucky
I guess I'm just stunned that such small communities had this much money. It dwarf's what my similar-size town could ever hope to muster, even with a prosperous nuc plant here in SW Michigan.
I think we will see deflation:
1)People barrow more than they can pay back and thier incomes shrink or do not grow.
2) Lenders do not get paid back
3) Lenders and debt/mortgage back paper holders lose money
4) Lenders and debt/mortgage back paper holders realize they are losing money
5) Lenders and debt/mortgage back paper holders try and get someone else to hold the bag
6)Lenders and debt/mortgage back paper holders admitt they are losing money
7) Lenders and debt/mortgage back paper holders change thier lending habits
8) Less money in consumer pockets
9) deflation
We have passed number one, consumer defaults can only increase from here and this will increase the pressure to get to number 7 faster. Once you get past number one there can be all sorts of twists and turns, but if consumers cant service thier debts, they wont, and lenders will have to change. You can only service debt with new debt for so long.
I think that we are on the road to deflation.
There are no victims here. Anyone stupid enough to buy American securities deserves what they get. This is the New World Order after all. They sell us their raw materials and manufactured goods and we pay for it with freshly printed paper. This paper may then be exchanged for Big Macs or worthless MBS and CDOs. What's not to like about that?
Deflation? Happening! Inflation? In spades!!!
The scary thing is what the future could look like in an environment where the government opens all the hydrants to fight the deflationary fires.
Think about what would happen should the government exercise the options dryfly describes (assuming they can, and I do not)...
Think it through, people, think it through. Sometimes the cure is worse than the disease.
p.s.: Already half the population is dependent on government money; how much farther can we really go?
Inflation, deflation, same old conundrum,
just like back in 1809-
"If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered."
Thomas Jefferson
The Debate Over the Recharter of the Bank Bill, 1809
I'm sticking with hyperstagflation.
The reason we had all of those regulations is because our grandparents took the big hit, and tried to protect us from having the same experience. zinc | - 9:38 am
Competition = Big fish eat little fish, resulting in a relative handful of whales and sharks, whose economic power allows them to dominate government policy, with the result that there are no effective curbs on anti-competitive activity.
It is December. Too much gloom here. Let me try and spread some cheer.
The problem (if it can be called that) is totally contained to a few towns in Norway, Florida's teacher fund, Citigroup, HSBC, RBS, MBSs, ..., well it is contained to the world ex-silicon valley. Well, at least let me spread some cheer to fellow denizens of silion valley.
Not worry, I just met a lot of brilliant Silicon Valley homeowner friends. They explained the whole thing to me very clearly. Silicon valley is going to remain unaffected and untouched by these problems. Silicon valley housing never drops and will continue going up 15% a year, because
I could go on and on...
The new paradigm:
If you look around the room and cannot figure out who is holding the bag; it is you. If you look around the room and can figure out who is holding the bag; it is still you.
We're already in deflation. Credit deflation, as detailed here, is in the billions and estimated to be in the Trillions. Homeowner equity will deflate to the tune of a few trillions too.
If that aint deflation I don't know what is. Only thing left to frost the cake is generalized price deflation, which is in the cards with a consumer recession.
Saturday song? I would like to propose Big Yellow Taxi by Joni Mitchell - sums up the mood to me.
They paved paradise
And put up a parking lot
With a pink hotel, a boutique
And a swinging hot spot
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot
They took all the trees
Put em in a tree museum
And they charged the people
A dollar and a half just to see em
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot
Hey farmer farmer
Put away that d.d.t. now
Give me spots on my apples
But leave me the birds and the bees
Please!
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot
Late last night
I heard the screen door slam
And a big yellow taxi
Took away my old man
Dont it always seem to go
That you dont know what youve got
Till its gone
They paved paradise
And put up a parking lot
"Like I said it's amazing how much the standing of the USA has fallen from 2000 - 2007 and more importantly how long it will take to rebuild it."
It could be done in a few years -- if the ruling oil/finance/old families oligarchy was swept aside. Don't know how long that would take, though.
One recovery scenario goes like this:
1) Reform the institutions and either punish or exile (from power) the involved parties, with appropriate publicity.
2) Apologize. To everyone. For every thing.
3) Throw 100 billion a year into a global R&D center for alternative energy and anti-global warming measures. Invite other countries in. Give the results away to the world, along with startup assistance.
4) Disavow pre-emptive action against other countries for any reason. Apologize again. Pledge military action overseas only in conjunction with UN mandates.
That'd probably do it.
The old saw says, "Don't listen to what he says, watch what he does." We've been saying the right things and doing the wrong ones for close on 30 years now. If we start doing the right things -- because they are the right things, not just because they're in our 'national interests'-- we'd get that respect back pretty fast.
The caveat, of course -- will we ever do any of this, or anything like this?
The caveat, of course -- will we ever do any of this, or anything like this?
Rhetorical question, right?
These people didn't "borrow" like a hedge fund. They borrowed against future oil revenues. I'm not saying they made a good decision but this isn't like the borrowing going on with all the really smart people on Wall Street. When the hedgies go bust there is nothing left. The vikings still have the oil money.
"Rhetorical question, right?"
Sigh. Possibly, possibly. We'd have to go through a lot of painful cr*p as a nation to get to the point where we'd have the will to do that stuff. Pain is coming, no question, but what lies on the other side of that pain is uncertain.
dryfly,
You regularly use the "We are not Japan" argument, but I don't buy it.
It wouldn't be called a credit cycle unless things cycled back around. That includes US consumer habits. We were savers at one time, so what makes you think we will never return to being savers?
When people realize that something is hazardous to their well-being (like taking on more debt than they can handle), they usually stop doing it.
Besides, I think we Americans are going to have to face another reality here pretty soon -- our safetey nets have a lot of holes in them that will be exposed as the US dollar collapses, and as cities and states realize they cannot fund programs at current levels. That will help force folks to begin saving more too.
Does this seem similar to how the MLEC bailout proposal unfolded...only this time its the teaser-freezer.
Experts: Bailout Not Complete Solution
Sunday December 2, 4:41 pm ET
By Alan Zibel, AP Business Writer
Treasury Plan to Rescue Home Loan Borrowers Not a Solution for All, Experts Say
WASHINGTON (AP) -- If lenders temporarily freeze low introductory interest rates on home loans made to risky borrowers before they soar, it would be a modest fix for the country's fractured housing market.
[snip]
"It's not the mortgage that's the problem" said Christopher Thornberg, a principal with Beacon Economics in Los Angeles.
While the market was soaring, he said, homebuyers simply paid far too much for their homes and are now facing the consequences.
So buying SIV etc. is sort of like going to grocery store with blindfold on to buy weekly food? Geez I hate rotten prunes.
3 cheers for fund manager experts with blindfolds. Great job.
dryfly,
BTW, I don't claim any amount of certainty that deflation is our fate. But the odds I assign it are much higher than yours (apparently zero?).
RE: Bush brothers
Neil wasn't the only savings and loan bailout beneficiary.
Jeb defaulted on a $4.5 million dollar commercial real estate loan, and later bought the property back from the RTC for 11 cents on the dollar.
Jeb won't have any problem covering his rear on this caper.
Oh Bob, if only it were that simple. Your list is a good start but so much more is broken than just your economy. Let me preface by saying I lived in New York for many years back in the 80's / 90's. It was gritty before Guliani got in there and cleaned it up, but I felt proud to have lived there. And now? It breaks my heart to see the damage that can be inflicted in such a short period of time. America needs to sort out its foreign policy. Selling toxic crap to countries that it relys on to prop up its fraudulent financial system is merely one symptom of a much bigger failing.
I don't suppose it would be considered material that many of the largest foreign banks acquired or created subsidiaries in the US for the express purpose of trafficking in mortgages and suchlike. Or that they just may have overextended themselves on their home turf.
I often think about Japan like deflation happening here, but there are real cultural differnces that I think would keep that from happening. The US consumer is spending obsessed, its part of the culture. The US consumer sees no shame in bankruptcy, in fact it is a useful way to get new access to credit! To be blunt, I think the Japanese knew that things got out of hand and changes their spending/saving habits to reflect the prior excess. I do not see that happening here. Just my 2 cents (really 1.6 cents due to inflation)
the caveat, of course -- will we ever do any of this, or anything like this?
Bob Dobbs @ 5:41 pm |
Yes indeed. Bill Moyers gave us a 'heads up' over 3 yrs ago and as you know US middle class conditions today are much worse....
This is the Fight of Our Lives
by Bill Moyers
Keynote speech
Inequality Matters Forum
New York University
June 3, 2004
Abstract:
"The middle class and working poor are told that what's happening to them is the consequence of Adam Smith's 'Invisible Hand.' This is a lie. What's happening to them is the direct consequence of corporate activism, intellectual propaganda, the rise of a religious orthodoxy that in its hunger for government subsidies has made an idol of power, and a string of political decisions favoring the powerful and the privileged who bought the political system right out from under us."
Excerpts:
What they are doing to middle class and working Americans -- and to the workings of American democracy -- is no laughing matter.
Let's face the reality: If ripping off the public trust; if distributing tax breaks to the wealthy at the expense of the poor; if driving the country into deficits deliberately to starve social benefits; if requiring states to balance their budgets on the backs of the poor; if squeezing the wages of workers until the labor force resembles a nation of serfs -- if this isn't class war, what is?
It's un-American. It's unpatriotic. And it's wrong.
We were savers at one time, so what makes you think we will never return to being savers?
This point begs further questions:
How much of USofA's 230+ years (not to mention the nearly 300 colonial years prior to that) have been characterized by savers vs. spenders?
Put another way, how much of our economic history has been dominated by consumption?
The US consumer is spending obsessed, its part of the culture.
Replace the word "spending" with "housing". OOPS! Deflation still happened.
Shortcourage/Dryfly
re: US v.Japan savings prognosis
I think a lot of the blame heaped on the US homebuyer/consumer is misplaced. People, especially blue collar/middle/lower upper, generally follow their economic incentives. If you use real inflation statistics rather than the govt nonsense interest rates on savings have been negative. Conversely we had been through at least 10 years where an investment in real estate (primary residence) had been a far superior savings mechanism. I and many people on the blog had the foresight to jump off the bus before it went over the cliff, but there isn't any reason to believe that the average American will not change behavior to reduce debt and increase savings if returns become positive, and real estate returns to its role as a consumption expenditure rather than investment vehicle. Of course that implies a reduction in economic activity, but there is no way after all this (subject of the thread) that others will continue to lend us the money so cheaply that savings is unattractive. Am I making sense?
ba_lurker | 12.02.07 - 5:21 pm | #
ba_lurker,
Whew! I was feeling worried. Sunnyvale has it all taken care of and dialed in. We dodged that bullet.
ShortCourage,
I respectfully disagree about our potentially newfound proclivity to save. I think we'll kind of save for a short while, especially in the midst of a recession, but I am convinced that many will abandon that habit once someone jumps the gun and signals that we are out of the woods. That sounds cynical (it is) but it's been many decades since we've behaved like savers. Our generation will take a while to acquire the saving mentality, especially with our modern society geared so much toward consumer spending.
...but I am convinced that many will abandon that habit once someone jumps the gun and signals that we are out of the woods.
Human nature never works that way. The bottom isn't in until everyone's convinced there's no hope, and we're far from there.
Spenders vs. savers: its all relative.
The U.S. has a culture of spending, but never in its history have we spent as much. The pendulum swinging back is simply a function of higher perceived insecurity.
The inflation/deflation question boils down to the government's reaction to higher savings. The Fed seems willing to fight it tooth and nail by creating after-tax negative real rates. They will try to juice velocity, but they're playing with fire. They are simply too sure they can control the velocity so that we don't turn into Brazil, a country where supermarket shelves would be empty just days after payday -- such was the reluctance to hold currency for any length of time.
Where will the savings rate be in 2011? That question is almost impossible to predict given the fight between savers and the Fed. One will win, so the results are binary: deflation on one side, inflation on the other.
Re Giuliani cleaning up NYC:
The policing innovations of the Giuliani administration were CompStat and the broken window/zero tolerance approach to minor street crime.
Giulianis critics note that these policies are generally credited to William Bratton, Giulianis first police commissioner, whom Giuliani pushed out after two years. They further note that crime decreased nationwide during that period, as a result of the reduction in unemployment due to the tech boom (for which the Clinton/Rubin crowd take credit), the shrinking of the street-crime-age demographic, and the waning of the crack epidemic.
We should also note that that millions of New Yorkers think that Giuliani is a racist. And that Giuliani is the favorite candidate of the same folks who cooked up these toxic derivatives, perhaps because he is counted on to continue and strengthen the Cheney-style police state.
Big differences with Japan - and the jury's still out 15 years later whether they've really "recovered"
One will win, so the results are binary: deflation on one side, inflation on the other.
David,
I just don't see this being black and white. Like the current situation, I see it more about them creating money and less about them controlling where it flows. Ultimately I see them powerless to fight deflation in some areas while creating immense unwanted inflation in others. As they say, "hyperstagflation".
BTW, check this out:
Market Observations
tj,
You're saying it'll be more like a "mosaic". I think you're right at first, but having lived in hyper-inflationary countries, I also think you end up, eventually, at one extreme or the other. Most people don't understand that in most cases hyperinflation becomes a necessity. It exists because moving away from it causes unemployment to skyrocket. Again, inflation on one side, deflation on the other, and separated by a very thin line of government policy.
David,
Good point. I've read (and it follows) that hyperinflation and deflation are usually paired. IOW, hyperinflation is usually a response to deflation, and hyperinflation often results in a deflationary collapse. Your take?
"One will win, so the results are binary: deflation on one side, inflation on the other." - David Pearson
What if say what happened to aluminum in the 1880's happened to gold or even just silver?
C'mon, RC -- alchemy?
I would not be surprised to see various elements become more valuable from time to time. Rhodium has skyrocketed, Platinum is up there, and Uranium will likely climb for the foreseeable future.
Gold will rise and fall inversely to world political and economic stability. Silver? Same, plus some industrial spice with (IMO) bullish factors going forward.
...but I am convinced that many will abandon that habit once someone jumps the gun and signals that we are out of the woods.
Human nature never works that way. The bottom isn't in until everyone's convinced there's no hope, and we're far from there.
tj & the bear | 12.02.07 - 7:25 pm | #
tj,
I think I need clarification on that, or perhaps my wording was poor. I'm saying that people may or may not become the savers we once were, but even if we do regain this mythical discipline, we'll quickly revert back to our free-spending ways given half a chance. Is that not human nature?
You regularly use the "We are not Japan" argument, but I don't buy it.
It wouldn't be called a credit cycle unless things cycled back around. That includes US consumer habits. We were savers at one time, so what makes you think we will never return to being savers?
When people realize that something is hazardous to their well-being (like taking on more debt than they can handle), they usually stop doing it.
- Shortcourage
Yes we were savers once. Hell we lived in sod houses at one time too where the only 'safety net' was your Remington, the food you had grown & stashed and buffalo chips to burn for heat. Those people saved or died.
And credit cycles are for real - but that's a long way from deflation... especially considering the fed hasn't even become 'accommodative' yet... to use their own terminology.
Remember, in Japan they have almost no safety net - weak pensions and nothing even close to anything like our SS. They either save or become wards of their children or starve.
None of that describes America today. We definitely have issues but are a long way from living in 'soddies'... and whether you believe the safety net works or not most Americans believe it does and have made their plans accordingly - they don't save.
One more point - you said this...
BTW, I don't claim any amount of certainty that deflation is our fate. But the odds I assign it are much higher than yours (apparently zero?).
I do give deflation a skoshi better than zero probability... not because it isn't theoretically possible but because given the current social systems we have set up coupled to the public psyche - I see no way we don't get inflation instead (money supply growth driven by fiscal & monetary policy).
If we don't get inflation as fast as we expect (in the guise of 'economic stimulation' of course) - we'll kick those bums out and elect pols who know how to run printing presses, dammit.
And presented with that social stimulus, people will return the rational response - they will spend so the value of the 'gift' isn't diminished by time.
That isn't inconsistent with asset price declines occurring even in spite of 'liquidity injection' - individual price declines are NOT deflation... real declines in money supply & velocity is deflation.
Show me the societal paradigm shift where people stop buying & borrowing en masse and elect officials who think the same way and I'll give a deflationary outcome some due... So far its just noise.
I've read various accounts of the New Deal and Depression, but don't know of an authoritative account of what really happened.
In grade school, Roosevelt was the hero who fixed everything with the WPA etc, although it took a few years.
I don't remember then or later anyone saying there was a lot of inflation as a result of the New Deal. However, I have heard some claims that the US economy was still a pretty big mess until the start of WW2.
Can anyone recommend an authoritative book that doesn't have an ideological axe to grind?
Can anyone recommend an authoritative book that doesn't have an ideological axe to grind?
Billy Hill | 12.02.07 - 10:40 pm | #
Wow. That's a tall order. It seems everything comes with an agenda...but that's really unfair assessment since it implies intellectual dishonesty by everyone, and I'm not that cynical. In response to your question, just the other day at a halfprice bookstore, I came across an old economics textbook written by MIT professor Paul Samuelson. It was an early edition, circa 1955. Maybe I should have picked it up.
Fair enough dryfly, we'll just have to watch it unfold.
FWIW, to me it's a coin flip whether we get inflation or deflation. Or in other words, I have no effing idea!
What do people mean by deflation?
Do they really expect food prices to fall in the US?
Do they really expect monetary discipline?
Or are people talking about a situation where house prices rise but dont keep pace with the cost of living so that there is a deflation in real terms?
I just cannot see deflation as in house prices actually falling without them bouncing back relatively quickly inside a few years.
But if people mean many Americans getting poorer then i can buy that.
But i just cannot see a contraction in the money supply. That is kind of unthinkable surely??
Can anyone recommend an authoritative book that doesn't have an ideological axe to grind?
Impossible. Anyone who cares enough to write a book is going to have a viewpoint. Your best bet is to try to get opposing views and see which sounds most reasonable. And I think that secondhand books are the best bet, no matter what the cover looks like, the thoughts inside are as fresh as ever.
To return to the supernova analogy made earlier, consider this: When the star that formed supernova 1987A blew up, it was still a blue star, not the stereotypical huge, dying red supergiant that one would expect.
Much the same is happening here in financial terms. The US economy can be compared to a huge, old, blue star - the most massive and powerful thing in its neighborhood by far. But not all is right here; the star pulses and wavers with instability, but since it is not yet a red supergiant, all must be well, "it can't happen here," and so on. But beneath those blazing hot outer layers that are spreading a lethal solar wind of toxic financial products around the globe lies a dead heart of iron... which ultimately leads to collapse.