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Wallpaper now on sale:
"[Treasury Department] Officials announced on Friday that starting next month, individuals will be able to buy Treasury securities in amounts as small as $100, down from the current minimum of $1,000."
Obviously DeLong doesn't know what he is taking about. Marketwatch is predicting a run of the bulls Monday! So things must be up and up. . . right. . . right?
Stocks look to strengthen gains after Bear Stearns drama - MarketWatch
If the government is going to intervene, then I want all benefits "sterilized" over time.
If the banks are getting bailed out, then they should have to repay the government out of profits & bonus money in the years ahead.
If homeowners are going to be bailed out, they should forfeit their interest rate deduction until they have payed the government back.
If investors are going to be bailed out, they should be required to pay the money back in the future as well, although I have a harder time figuring out how they could do something like that, since they might be overseas.
These are just general ideas for the "bailout penalty", and I'm open to other suggestions. I have no problems with "bailouts" if absolutely necessary, but there shouldn't be any free lunch.
I do not believe we've reached what Professor DeLong calls Stage III of a financial crisis...
No offense, CR, but one thing I feel sure of is that no one, no one, really knows where exactly we are in this mess, or how it will transpire.
Reuters reporting that BoE also denying it is in d/c to coordinate mbs purchases.
So, when we are to the point where we run out of solutions...we should start thinking of some solutions.
Conjure Bag says, "Welcome to the dawning of a new global financial landscape."
--
Time to avoid depression is long past, some 15 years ago. The build of debt, or Pushing of Debt, had to be kept in check and that meant having more frequent recessions. To postpone recessions is to make depressions more likely and more severe when they longer can be averted.
The only question is: Is it going to be fire (inflationary) or ice (deflationary)? Should savers be protected or should debtors be rescued that is the question.
Jas
PS: CR would continue to be optimistic until depression is here. He likes to be a cautious follower.
It scares me that so many think that the Govt buying MBS will avert a crisis.
How does this stablize house prices?
So the govt takes the loss and not the banks, it doesn't mean that the average joe can now pay 5x income for a home.
Fannie and Freddie are already willing to lend money at a loss, I doubt if you save the banks from a quick death through buying their bad debt, they will sign up for a slow death by lending money at artificially low rates on overpriced assets in a declining market.
House prices are coming down. Everyone says that the problems will persist until housing prices stabilize.
As I understand it (?) the last TIPS auction yielded negative interest rates. Will the Fed offer more TIPS, more often?
We have found our own version of the ZIRP trap. The divergence of Treasury bill interest rates and mortgage rates from the Fed rate says that the flight to safety is dominating the market. Once everyone's decided that a particular security is toxic, nobody wants to be left holding the bag. And so we're gradually watching that toxicity spread through the market.
In a way we should be glad that the bagholding is so opaque: if we knew who the real bagholders were, they would have collapsed already. We have the luxury of time, if we can make use of it.
We need a government agency that will confiscate foreclosed properties and convert them to cheap rental stock until the market stabilizes in, say, 2012. Once the market stabilizes, the government would gradually sell off the rental housing and any profits would be paid to the former mortgage holders.
CR -
With all due respect. Nearly ever major financial institution is insolvent. If this isn't Stage III, I have no idea what would be.
At least in California the problem isn't supply and demand in the traditional sense. Just eliminating the number of houses with bulldozers etc won't make them affordable. No matter how many houses there are, someone making 150 grand a year can't afford a $850,000 loan.
Like the old Ferrari example, if there are a thousand Ferrari's or 1 Ferrari on the lot, it doesn't matter if you are selling in an area where no one can afford Ferrari's. The Point of supply is only relevant if oversupply allows the price to drop to a level to meet an able and willing buyer.
Price drops are what the Fed fears...Price drops are the only solution.
This is why a bubble must be avoided.
Bank of America may write down $6.5 billion.
http://www.marketwatch.com/news/story/analyst-bove-tips-65-billion/story.aspx?guid={6042CBBB-0500-4853-A4D4-ABBD3FF8329E}&siteid=yahoomy
"figure out what kind of government action we want to see, and how we can set in in motion quickly if it becomes necessary."
I think we've seen most of the action already. Between the FHLB 50 billion in loans to Countrywide, and the hundreds of billions on offer to be lent out on problem paper through the alphabet soup of new "facilities", and the Fed soaking up 30 billion of BS's risky, what else is necessary?
Rolling loans gather no loss...let it roll! None of this will work in the long run, it's only postponing the unthinkable stage III.
In the theme of sounding the alarm, I believe Doug Noland at PruBear should be given a great deal of credit (no pun intended) for his analysis of the credit bubble in a weekly column titled "Credit Bubble Bulletin". Doug has correctly (IMO) analyzed the broad problems although very early in calling for the collapse now occuring (who could have known the system could levitate for so long?).
This weeks analysis is especially interesting and I highly recommend a read. The first part for his bulletin is a bunch of cut and paste factoids which can be skipped by non-data junkies. Skip down to the heading of "Nationalization" for commentary. As the title suggests, Doug believes that Fannie and Freddie (and by extension the mortgage industry) have now been effectively nationalized.
404 - Error: 404
Jim
Can anybody explain to me why these 3 scenarios are alternatives? All of them can happen at the same time. Especially "depression" and "inflation". There were dozens of such depressions in the history and Great Depression is an exception, not the rule. Is the memory of Great Depression so implanted in American economists' brains that they cannot imagine anything else? I thought that 1970s proved Phillips curve wrong.
Brad DeLong's Morning Coffee: NAFTA
YouTube - Brad DeLong's Morning Coffee: NAFTA
Bad luck on my part. My post on the previous thread took so long to assemble that a better topic-thread appeared. Here it is, and CR or Tanta, you're welcome to delete it from the "Predation" thread.
Here's my line of thought, along with data sources to recreate the chart I'm looking at.
Premise: When the economy is strong (low unemployment rate) and mortgage interest rates are relatively high in comparison (indicating restrictive credit conditions), that's a sign that the economic expansion is nearing its end and recession will soon begin.
Premise Two: When the economy is in recession (high unemployment) and mortgage rates are relatively low (indicating stimulative credit policy), the recession is nearly over and/or the expansion has begun.
For this exercise you'll need a spreadsheet program and some data. Here are the sources for the data:
Board of Governors of the Federal Reserve System
RE...15_MORTG_NA.txt
NBER lasted 6 months and that happened once
Notice: Data not available: U.S. Bureau of Labor Statistics
(The mortgage rate data goes back to 1971, so you'll need to adjust the "output options" on the BLS data-page to get unemployment rate data back to 1971.)
What you'll need to do first is get the unemployment rate data and conventional mortgage rate data into your spreadsheet, line up the dates, then adjust/format the two pieces so they both properly reflect % rates in the cells of your spreadsheet.
Now, divide the unemployment rate by the mortgage rate for the same month(s), all the way through the array (February, 2008 is the most-recent data available).
Chart this result.
Now you'll need to use the NBER recession dates to create the recession bars, like CR does with a lot of his charts.
Here's what you should see when you're finished.
First, that extremely low ratios indicate an economy nearing/in recession, with extremely high ratios indicating economic expansion.
Second, at some point before each of the last 5 recessions (typically within a few months, with the notable exception of the 1990-91 recession with a lead-time of a couple of years) the ratio of unemployment rate/30-year conventional mortgage rate drops down into the mid-50% area or lower.
The third thing you should see is that either near the tail-end of a recession or at the beginning of the post-recession expansion, the ratio rises at least into the mid- to high-70% area.
Finally, you should see that the most-recent lows in this ratio (approx. July, 2006-July 2007) didn't get any lower than about the 69% before it bounced up into the +80% area, a favorable level indicating an expanding economy.
The unemployment rate never got so low as to cause the economy to grow at an unsustainable, inflationary rate that would cause the Fed to slam-down hard on the brakes and sharply restrict credit. Just the opposite, actually.
So, no recession, only slower growth, and be skeptical of prophets who are making assumptions about recession based on data from a single economic sector, ignoring all other variables regardless of their importance.
Sebastia
They may be underestimating the "dumb" money. If the GSE's or FHA or FHLB or a new agency becomes the dumping ground, who's going to buy their paper, even with an explicit government guarantee? At that point, everyone will know that the US govt is hopelessly bankrupt.
While there is nothing in this morning coffee post to alarm me, that bugger is in Wall St.'s and the present elite's pocket - a true running dog of capitalism.. His post yesterday where he wanted punishment for the CDS "speculators" totally gave it away. He has camps of "good" capitalists and "bad" speculators and surprise.. the good capitalists are the shits in power at the moment and the bad speculators the ones outside looking in.
Interestingly, GM had a column on bad CDS speculators in tomorrow's New York TImes, today. Cue Tanta.
-K
It should be clear to all that drastic Fed actions have impacts to be felt and costs to be paid later.
We are now feeling impacts and paying costs for drastic Fed actions 6-7 years ago.
This time, the lag will probably be much shorter. I mean, we still don't know that part of the cause of Bear's demise wasn't the surprise Fed rate cut in January.
Yet, so many MSM writers have been giddy at the Fed's "brilliant" moves, as if they were creating prosperity out of thin air. The amount of short-sightedness is just mind-boggling.
The stock market has clearly lost its role as as a leading indicator. It's become a knee-jerk indicator to the winds of daily rumor, sentiment, leverage and manipulation. It's the worst possible environment for traders and timers, and I'll bet some hedge funds are getting slaughtered.
It wouldn't surprise me if major hedge fund blow-ups weren't the next leg of the story.
I'm struggling with the notion that there is a choice between inflation and government action. Unless that government is non-US whatever the government does is likely to result in more inflation. (TANSTAAFL Brad).
Its becoming painfully obvious that merely printing money won't work, because it changes nothing with regard to the mechanisms that brought us where we are today.
Unless goverment action also involves systemic reform, all we are doing is the same as printing more money: shifting the risk to those who did not cause the problem in order to prolong the same bubble-bust imbalances that brought us to this current phase of what is nothing more than a protracted credit bubble.
Federal Reserve governors reach for the printing press, and statists reach for the government. Its time we took some serious action and stopped this trend of bubble and bust, although it may already be too late to do it neatly.
Jesse's Café Américain: Moral Hazard
I tend to agree. Seems we have two choices ... deflation or currency destruction.
If we nationalize the GSE's, and we send out checks in the mail, why not just sent everyone with a mortgage the exact amount of money it would take to pay it off?
We would increase homeownership...not homeloanership. We would increase the amount of equity homeowners have. We would increase everyone's spending money since they wouldn't have a mortgage. Landlords could lower rent since they have no mortgage. Renters would have lower rent and thus more spending money. Banks would be solvent since all loans would be paid off. House prices would crash since rents would crash...but who cares? Banks are solvent, home owners are solvent, everyone wins!!!!
T-bills rate may be predictive of what to come in stock market. Here is a scary chart and some thoughts:
Interest Rate Roundup: How 'bout them T-bills
-Ray
Brad DL,
How about an apology?
You pooh poohed my comments about the housing bubble years ago, remember?
Who was right?
Inflation?
Check.
Housing crisis with tons of foreclosures?
Check.
Federal Reserve unable to affect the crisis with more than band-aids?
Check.
This is the equivalent of the Great Depression with a fiat currency- otherwise known as an Argentine style meltdown.
Now, go hoist my comments from the archives if you dare.
But you won't,
because the time to raise the cry was 2005, and everyone in power was content to let this keep going, until now it is broken.
Someday this war's gonna end...
Average Joe, you forgot that tax revenues would go up too since no one would have a mortgage interest deduction.
Sebastian,
What led you to use the unemployment rate/mortgate rate ratio to try to predict recessions? Do you think that using something with only 5 "data points" provides accurate forecasting ability?
Do you think the artificial distortion of mortgage rates due to the explosion of securitization and underpricing of risk affects the outcome recently at all, and if so, how would you compensate for it?
Do you think that the distortion of the unemployment rate due to more self-employed and undocumented workers should affect the outcome at all? And if so, how would you compensate?
BDL seems to have little or no concern for moral hazard and the creation of bubbles. Perhaps he believes the Great Greenspan that they can only be treated.
wsf: Brilliant!!! There really is no downside..unless you are a homebuilder to new buyers...but you can extend the program to them...or better yet, let the HB's fail...."afterall they are only 5% of the economy".
Garbage in, garbage out. This guy concludes that there are only three possible outcomes. There are many outcomes including a recession, a deep recession, stagflation, hyperinflation... to name a few. The only thing we really know is that tinkering with the laws of economics is what got us into this mess. We also know the world will not end, even with a depression (The U.S. still exists, Japan still exists). Let capitalism work and within our lifetime, our country will be the place to invest and do business again. All DeLong wants to do is privatize profits and publicize losses. That policy will destroy our taxpayers and allow the criminal CEO's like Angelo Mozilo and Henry Paulson to continue to make fees off worthless transactions like CDOs, SIVs and derivatives.
In Washington, a Split Over Regulation of Wall Street
Split Is Forming Over Regulation Of Wall Street - NY Times
As Congress and the Bush administration struggle to contain the housing and credit crises and prevent more Wall Street firms from collapsing as Bear Stearns did a split is forming over how to strengthen oversight of financial institutions after decades of deregulation.
"We also know the world will not end, even with a depression (The U.S. still exists, Japan still exists)"
Great point....bubbleheads or whatever we're called...are often derided and said to be proven wrong when the world doesn't end as we all "have been predicting for years."
As if when we all don't starve to death, or live in tent cities, then somehow we were wrong to point out the dangers of a housing bubble.
I do not believe we've reached what Professor DeLong calls Stage III of a financial crisis...
No offense, CR, but one thing I feel sure of is that no one, no one, really knows where exactly we are in this mess, or how it will transpire.
Sorry, I have no idea how I posted that twice...
Delong's "3 stages" seem rather ad hoc.
His first two stages fit the last couple years of this financial crisis. His third stage is no more than his guess of what happens next.
He seems to imply that his three stages are some kind of law of economic history, but they don't describe financial crises generally.
For example, Argentina didn't go through his three stages.
The public action is to quit pretending these securities are worth their current marks. It's laughable for the government to essentially state along with the financial institutions that the marketplace has it wrong.
Well guess what, we just got a mark on Bear's net assets and it's less than $2 considering the Fed support.
What we seem to have now is that no private entity is willing to step up and pay anything near par for paper backed by wildly overvalued real estate and horrible lending terms. And we have a mass of folks that refuse to believe it! I guess they're still groggy coming down from the huge dose of Kool-Aid.
What flabergasts me is the implicit belief so many experts have in the need of policy makers to "DO" anything at all. They may vehemently disagree on what forms of intervention central banks or governments need to take to avert financial crisis, but the talking heads seem to almost universally agree that we do need SOME form of policy intervention.
On the left, we hear talk about the government buying up toxic assets and bringing in a new era of tighter regulation. On the right, we hear people talk about just providing liquidity to investment banks, or guaranteeing re-financed mortgages (such as the BofA proposal being shopped on Capitol Hill).
Why isn't there anyone standing up saying that enough is enough, and it's about time we let the chips fall where they may, rather than embarking on some new massive bail-out attempt, leading to all sorts of unintended consequences later downn the road?
What's so terrible about a depression anyway? Wouldn't it be better to go through the gut wrenching collapse of asset prices, and morally bankrupt financiers, for a few years rather than saddle future generations with sub-standard growth, and a precarious financial system that continues to mis-direct investment?
So if Depression is unthinkable, and inflation is best avoided, this leaves public action.
That may be harder these days in part because people and businesses with wealth, seeing this wealth about to be appropriated for public use, might decide to relocate it to foreign countries (i.e. invest there instead of here) in an effect similar to what we're seeing with wage arbitrage.
Public action might need to occur on a more global scale to be effective.
transient said: "What led you to use the unemployment rate/mortgate rate ratio to try to predict recessions? Do you think that using something with only 5 "data points" provides accurate forecasting ability?"
This is another indicator for predicting recessions. The fact that unrelated indicators confirm this one lends credibility to it (and the others), even though there are only 5 data points. Like multiple witnesses to a crime that all tell essentially the same story is stronger evidence that the accounts are true.
"Do you think the artificial distortion of mortgage rates due to the explosion of securitization and underpricing of risk affects the outcome recently at all, and if so, how would you compensate for it?"
I wouldn't. In looking at mortgage rates, especially on the monthly period I chose, they are much less "noisy" and much less prone to short-run manipulation than other rates, like Fed funds rates, T-bill rates, T-bond rates, etc.
"Do you think that the distortion of the unemployment rate due to more self-employed and undocumented workers should affect the outcome at all? And if so, how would you compensate?"
Also, I wouldn't compensate. I don't have any way of knowing for certain what, if any, distortion there is. Self-employed and/or undocumented workers are nothing new in the employment picture.
JMO, but I think the reason so many people are so far wrong on these issues is because they're trying to put too fine a point on indicators that are blunt to begin with.
Also, they're trying to do the same thing they claim the U.S. government is doing: Doctor the numbers so that they fit a certain predetermined point of view.
JMO.
Sebastia
"What's so terrible about a depression anyway?"
Epiphony.
Who said there was a problem? Why is everyone trying so hard to save us from something we aren't gonna have?
Like Sebastian, Kudlow, and others said....no recession, let alone a depression.
You'd think the bulls would be up in arms at the money and effort spent to solve a problem that isn't one.
Oh, and 2003 called asking about it's alarm back...
Scary graph, CR!
A rush to (pervieved) quality.
Perhaps the Fed should launch 5 day floatable notables that can be swapped in the market to prevent cascading, insolventt institutions at the end of every Q. At least it might help.
MONEY WILL BE PRINTED PLAIN AND SIMPLE. THE FED HAS 3 CHOICES:
1) Guarantee the bad debt
2) Inject equity into troubled institutions such as FNM, FRE, BAC, C, JPM, LEH , MS.
3) Buy the troubled companies outright.
ALL 3 INVOLVES PRINTING MONEY. As soon as they starting doing this the decline of the dollar will accelerate which means 1) higher interest rates 2) the cost of living skyrockets 3) China will be forced to break the peg.
Investors have 2 choices: start buying commodities(not commodity stocks such as Exxon) or start buying Chinese stocks as the Yuan will skyrocket in value.
Sebastian...
Do you believe that the Fed will at some point buy MBS or otherwise provide an explicit guarantee to the GSE's?
If so, is this an indication that things are worse than you expect?
Or, if we nationalize this problem and escape a recession are you gonna claim you were right all along while never acknowledging the enormous steps taken to socialize this problem and avoid the recession that never was.
If we have a recession you were wrong either way.
Arthur Cutten: I remember you from Galbraith's 1929 book!
CA wake up, call your friends in banks,
it's a bloodbath, we are in a very deep trouble, the insolvency crisis is
in full blown, the financial domino is one step away.
Average Joe asked: "Do you believe that the Fed will at some point buy MBS or otherwise provide an explicit guarantee to the GSE's?"
I don't know, or care. This is what I meant by "trying to put too fine a point on it."
The housing "bubble" hit its peak a couple of years back and has been "deflating" ever since. The first salvos of the "credit crunch" were fired a year or more ago.
CR forecast a target for job-losses in residential construction by last summer that hasn't been hit yet.
But the economy just sails along, at a slightly slower pace. That's a sign that either the bad news isn't so bad or there's good news that isn't appreciated. Both, IMO.
S.
Liquidity trap, Bah, have the fed buy glod.
Except the government doesn't have the ammunition to intervene. Due to our Idiot President and his misbegotten war, his uncalled for tax cuts and his general mismanagement, the only way for the government to have the money is to print more money, thereby incurring inflation, or greatly raising taxes in a recession.
In other words we can look forward to a lot of pain brought on by the WORSE PRESIDENT EVER!
Honestly, if the US Gov explicitly started buying MBS I think our foreign creditors would go into crisis mode and the dollar would tank even more.
And what would happen if the US had to raise interest rates quickly in order to slow inflation or retain the current level of foreign inflows?
With trillions of interest rates swaps lurking in the financial system can the counter parties really pony up the funds to pay these claims? Arent these counter parties the same banks/hedge funds that are currently being bled dry from the subprime mortgage disaster?
Sounds like a 3d crisis in the making ..
Professor DeLong isn't making sense here. It looks like the Depression has already begun. If the US has a severe recession while the middle class is deeply in debt, with no savings, and there are not enough manufacturing jobs to take advantage of a lower currency, we jump straight into Depression.
This is different from the last Depression, but that's a given. The world has changed too much for a second Big D to have the same details.
Futhermore, his ideas about intervention from the central government are based on the idea that the government has the power and the will to do anything. Although this may sound too extreme, I believe that Wall Street is using the Fed to drain money from the economy. The government (Fed and other institutions) are too beholden to the wealthiest people to actually change course.
Just look at Ben B. His job is to fix the mess, but he seems to be bailing out the rich. That isn't a fix at all. He's making it worse, trying to bail out Wall Street at any expense.
Folks, we are in deep, deep trouble.
Whew. The government really can save us. I was getting worried there for a minute.
I'm shocked that BDL didn't have a Starbucks cup in his hand.
Door #2 Print money, Inflation, every government in this situation does the same damn thing.
I think the various plans that are floating to the top - allowing bankruptcy cramdowns, Rep Frank's FHA refi plan, the Fed's Bear Stearns action, and further such plans for the Govt to buy up some of the CDOs or backstop them - are NOT plans to sustain current price levels.
Instead, I think they are plans to get markets unstuck or to keep them from freezing up entirely. The result will be price discovery that is quickened but also cushioned or buffered.
Look at Bear. The stock sold for $2 per share in the Fed sponsored deal.
Consider what happens if bankruptcy judges can do cramdowns. Values will be pushed down on the record as quickly as the cases can be processed.
Is it perfect? No, of course not. We shouldn't have ever gotten to this point. But none of these things is designed to sustain prices at current levels or close to current levels (Bear Stearns????), nor is that possible.
The challenges are to get markets unstuck and to prevent a crash.
Laissez-faire would leave things stuck until they crashed.
OT -- on Monday, I am going to take a hard look at selling my SDS. We have a nice big market correction coming, but the counterparty risk stuff is interfering with my sleep, now.
SDS uses repurchase agreements with UBS and Credit Suisse. The collateral underlying those repurchase agreements are FNMA and FHLB bonds.
Who knows when folks will run en masse from FNMA and FHLB loans, but it could be soon. That could mean a nice margin call for UBS and CS, and a fall in confidence in SDS. Poof, my security moves to zero.
Per MarketTicker, it appears that I can replicate much of SDS via shorting SSO (it doubles the movement in the S&P 500 index).
Good Easter Vigil to all!
My significant other wrote to DeLong a few years ago for his insight on a minor but definitely present inverted yield curve -- and his reponse? He didn't follow yield curves. Been kinda scared of him ever since.
Per MarketTicker, it appears that I can replicate much of SDS via shorting SSO (it doubles the movement in the S&P 500 index).
Also you could pick up some puts on SDS (or SSO for that matter) as a hedge -- I notice they're available on most of the ProShares funds.
I am getting about as tired as I can of hearing that we have to avert a financial "Crisis" at all costs. Japan had a "Lost Decade". But I do not think the populace burnt Tokyo for fire wood or resorted to cannibalism to survive the winter. Last time I checked, Japan seemed to be ok. If the current "Crisis" goes on, will Americans have to spend some time getting by on much less, or are we going to have to live in caves and eat our pets to survive? Who knows? The point is before the reins of finance are passed on to the government (Katrina response was soooo good right?) and we accept basic communism as a national goal, somebody needs to persuade me that we are indeed trying to avoid some terrible fate and not just trying to avoid poor bank earnings for a year or two. The time is up for using a term like "Crisis" without any meaningful idea what in fact is the crisis. Here is a challenge: explain in some basic detail what is in fact the crisis being averted at any cost without using terms with no meaning like "banking failure", "systemic meltdown", "depression" and the like. Are things indeed so bad? Not so bad? Acceptable or not?
And what would happen if the US had to raise interest rates quickly in order to slow inflation or retain the current level of foreign inflows?
Not to worry IMO.
The inflation rate and USD are not in Mr Bernanke's top 20 list of problems at the moment. To use a sailing analogy, they have been thrown overboard to lighten the load and save the ship. The global financial system came within 24 hours of a systemic meltdown last weekend from my understanding of news reports.
I smell panic. Screw the dollar.
Jim
ac, thanks much for the thought, sir.
I think a put still exposes me to counterparty risk, doesn't it? What is the seller of the put does not have the wherewithal or inclination to honor the contract when I attempt to exercise my put?
With a short, I get the gross proceeds now, and just have to buy the subject shares before the window expires. I am good for my debts!
Since this will be my first experience with shorting (or putting), I'm all ears.
goldilocks
soft landing
decoupling
all are dead! What is next?
It has been exciting to watch my countries economy roll over like a sinking ship since August 2007. People here are getting very nervous.
With wall st bank profits 50% in retreat the lay offs must be coming, we are yet to feel the sting in the tail. Cascading redundancies.
I don't think a global bail out will be big enough!
/extra layer of tinfoil added!
Whew. The government really can save us. I was getting worried there for a minute.
Just kick back and relax. The government and the Fed can do all our thinking for us, manage our businesses, take care of our finances.
There's a safety net under this tightrope. You can take whatever risks you want. Mismanage however badly you want.
We'll be there to clean up the mess.
That's the message of the last 10 years, isn't it?
Seb wrote: "CR forecast a target for job-losses in residential construction by last summer that hasn't been hit yet."
I can only speak to my local economy (Arizona), but job losses in residential construction are massively understated because of the number of illegals working in the business. I'm in construction and RE so I know the crews and the proportion of Mexican nationals is going down fast around here.
ac, I have an incomplete understanding of history, but that seems to be the message of America since the New Deal: we'll take care of your parents and grandparents if they won't or you won't. Compound with medical care, homeowner disaster insurance, etc.
We need to start anew, with a clean slate. It will take some years, but that is where we will arrive, I think.
Sebastian
Where is the "real" growth in your estimates?
What will bring us out of the "near-recession" in your view?
I think these two questions are extremely important since 1) pre-1995 inflation statistics put us in below 0 real growth and 2)our consumer economy has less than 15% manufacturing.
Our economy has been predicated on services, notably financial services. Growing from less than 5% of S&P profits to 40% profits in less than 15 years under easy money Al G. So, basically, what will the financial firms sell to generate profits?
I can't find any financial advisor that can answer the 2nd question.
Can you?
I vote for flation. The 'in' kind.
Inflation is slow theft by time. Given our current Government and the one we will probably get, I hope they keep their legistlation out of my wallet.
We didn't have a New Deal or a Fair Deal. We had a MISDEAL. I call a do-over.
Bob Mologna A question since you said:
"I'm in construction"
If the bus is soft, are you seeing raw prices fall in your neck of the woods (err sand)? Lumber, copper pipe, wage rates...et al.
jg asked: "...SDS uses repurchase agreements with UBS and Credit Suisse. The collateral underlying those repurchase agreements are FNMA and FHLB bonds.
Who knows when folks will run en masse from FNMA and FHLB loans, but it could be soon. That could mean a nice margin call for UBS and CS, and a fall in confidence in SDS. Poof, my security moves to zero..."
Just a word to the wise, but if you accept the concept that a good trade comes from knowing something of which most others are unaware and exploiting their ignorance or lack of understanding, what is it that you know that others don't about the market?
IOW, if everybody's scared-to-death bearish and there's already been a -17% correction in the SP500 (which is substantial), where's the logic in a short trade?
FWIW.
Sebastia
There are government actions available that, however unlikely, would be generally positive and quick acting. For instance, we could abolish the income tax and replace it with a simpler sales tax levy or true flat tax. The government could decrease it's size significantly by carefully re-thinking our commitments and how we spend money.
Cut back our military by altering strategic requirements while maintaining a high degree of readiness, equipment and focused rapid-response. Reduce our budget and debt by re-assessing the nature and structure of entitlements. Consider funding entitlements through a blind trust set aside for that purpose. Constitutional balanced budget amendments and term limit amendments could also be part of a comprehensive reform. It seems we are entering a period where people might support them. We could announce a gradual (say 5 year) transition back to an asset-backed currency, or at least competitive alternate currencies. Finally, we could re-vamp intellectual property, securities and banking laws and regulations to better reflect the 70-80 years since they were last subject to a radical overhaul.
These steps would work better than the presumed inflate-out, government buy-out, or regulate-out ideas that are the foundation of most public discussion these days. A set of principles revolving around transparency, simplicity and a realistic inclusion of the lessons we've learned over the last 100 years would work, and should be considered. Each of these ideas promotes the formation and development of capital, clear financial transparency and government, business and consumer accountability.
Perhaps we are entering a period where such approaches are no longer off the table?
odograph writes:
As I understand it (?) the last TIPS auction yielded negative interest rates. Will the Fed offer more TIPS, more often?
Not true. Every recent TIP is paying some real interest rate (CPI+) to the original holder who bought at auction. The negative real rate refers to pre-owned TIPs recently purchased in the open market. With the premium paid over its par value (current CPI adjusted face value), the coupon (the fixed interest rate, 2% on last 5 yr TIP) alone doesn't return sufficient interest for the remaining term to return the buyer's price by maturity. A resold TIP still will pay a CPI-based interest as well, so if that rises significantly, a "negative" real rate TIP could still be a good investment, compared to a vanilla fixed rate note of the same maturity. A negative real rate TIP held to maturity still has a positive yield (assuming CPI doesn't go negative), but less than CPI for the period.
Unlikely that the Treasury will change the offering dates (twice a year for each maturity), but the amount offered (number of bonds) is always unpredictable. Given sufficient demand, the fixed rate could auction out to 0 on future issues, but will not be negative. The Treasury's job is to get only the money needed on the auction date at the lowest yield demanded by the bidders.
Table of T note yields - * means TIP, "yield" is column of interest. Notice TIPs are low, because CPI portion can't be included.
Auction for 10 yr TIP is April 7, 5 yr on April 17.
Lots of us are just fine, thanks. Some of us are in trouble through no fault of our own. Many of us have been living high on the hog and now the hog is being slaughtered. My own choice is don't inflate the money supply and wipe out my savings, since I'm one of the few idiots who still has savings. Bail out those who didn't cause this mess and as for the rest, let them fall. I don't think it's any great crisis if the millionaires have to give up their mansions or yachts.
Of course, the trouble is they aren't willing to do that, since profits are never to be socialized, only losses.
This pisses me off no end, but I'm not on the Fed, so I can't do much about it.
I feel very used for living within my means and trying to save for my retirement.
A Brief summation of the recession
Series: FF, Effective Federal Funds Rate
St. Louis Fed: Series: FF, Effective Federal Funds Rate
Latest Observations:
Date\t 2008-02-13\t 2008-02-20\t 2008-02-27\t 2008-03-05\t 2008-03-12
Value\t 3.00\t 2.98\t 2.96\t 3.00\t 2.97
Series: DFF, Effective Federal Funds Rate
St. Louis Fed: Series: DFF, Effective Federal Funds Rate
Latest Observations:
Date\t 2008-03-15\t 2008-03-16\t 2008-03-17\t 2008-03-18\t 2008-03-19
Value\t 2.99\t 2.99\t 2.69\t 2.16\t 2.08
Graph: Effective Federal Funds Rate (DFF) - FRED - St. Louis Fed
Series: DPCREDIT, Primary Credit Rate
St. Louis Fed: Series: DPCREDIT, Primary Credit Rate
Latest Observations:
Date\t 2008-03-13\t 2008-03-14\t 2008-03-17\t 2008-03-18\t 2008-03-19
Value\t 3.50\t 3.50\t 3.25\t 2.50\t 2.50
open and ready for the poor, poor rich hedge funds not facing a liquidity problem.
Source: The Federal Reserve Board
March 18, 2008\t
The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2.25 percent
Current Interest Rates
Primary Credit\t2.50%
Secondary Credit\t3.00%
Seasonal Credit\t2.95%
Fed Funds Target\t2.25%
Discount Window and PSR Collateral Margins Table
http://www.frbdiscountwindow.org/discountmargins.pdf
Brady Bonds .. great swap bait..LOL!
However: This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.
The Federal Reserve Board on Thursday approved action by the Board of Directors of the Federal Reserve Bank of Philadelphia, decreasing the discount rate at the Banks from 3-1/2 percent to 2-1/2 percent, effective immediately.
Series: DCPF3M, 3-Month AA Financial Commercial Paper Rate
Graph: 3-Month AA Financial Commercial Paper Rate (DCPF3M) - FRED - St. Louis Fed
Latest Observations:
Date\t 2008-03-13\t 2008-03-14\t 2008-03-17\t 2008-03-18\t 2008-03-19
Value\t 2.80\t 2.66\t 2.50\t 2.41\t 2.59
okay, Sebastian, I'll bite with a specific instance- homebuilders.
they were up around 10% on thursday- so should you go long and hope next week's actual data is going to be good, or, having read all the stats here and elsewhere short those stocks?
Real life choice time? Long or short?
I will be shorting on monday- real world data versus hope.
Someday this war's gonna end...
<i>the Fed may not actually be able to reduce short-term rates much from current levels</i>
Sounds like "out of ammunition" to me.
The powers that be will try to use a mix of all evils: a bit of inflation, quite a bit probably, a bit of a recession, quite a recession probably, and for the rest, why not sell a lot of our junk to the people in the world with the money to buy it? We can't be too picky about whom we sell to; we need their money. Just hold our noses and sell the stinky stuff and hope for the best. PS Don't think there will be some elegant solution. Washington doesn't do elegant.
Seb, the S&P is down nicely from the Oct. '07 peak, but for us 'doom and gloomers,' we know that it is just the start.
When the dust settles in a few years, the S&P will be 85-90% off of its peak.
The world as we know it is ending, and the endgame has just begun.
Thank goodness I have a nice Easter Vigil Mass to brighten my spirits this evening!
I was at the Mega store Sam's Club today and a gentleman was buying those huge packs of toilet paper rolls. He had about twenty packs in his oversize cart. I asked him what was with all the toilet paper and he said: "I saw on the news we are in a world of chit because of housing, so I am being proactive". Interesting take on things.
This is really scary thing. Yeild on 13-week treasuries is basically 0%.
I think the only thing what Fed and gov can do is to start shuting down insolvent banks in some kind of orderly fashion. One by one. BSC is first. Then probably cames WaMu, etc.
By proping up the insolvent institutions, Fed is just prolonging the pain for all of us.
JJL: well thank God he's buying. I was in a supermarket today and there was only one register operating and not too active either. I guess we are at the starvation stage of this recession, or somethin'.
JJL
Bathroom humor.
On CR.
Really?
Any humor is good. No takers on my serious question of what "crisis" needs to be avoided at any and all costs a few posts back so I resorted to a joke. Sorry.
JJL, your point about Japan was something I was telling a colleague the other day. While their stock market has gone nowhere, the people there seem to be doing fine.
I think the 'crisis' is that Boomers' retirement funds have become overly dependent on stocks. Wall Street is telling the Fed that they must save the stock market so Boomers can retire comfortably...since that was their promise if you invested with them.
So all those rosy scenarios we see on TV from all the investment companies helping you build your nest egg into a retirement of luxury may end up being a dream. Dennis Hopper says don't let your dreams die. They won't, they'll just stay dreams.
"This pisses me off no end, but I'm not on the Fed, so I can't do much about it."
Ditto
AllenM said: "Real life choice time? Long or short?"
You probably missed it, but I posted a while back that I had already moved some retirement money into an SP500 Index fund in the latter half of January.
I'll be buying a portfolio of a half-dozen growth stocks (my primary active-trading vehicle) next week. I'll post them after I buy-in, if you're interested.
Sebastia
EDT March 20, 2008
Print RSS Disable Live Quotes
WASHINGTON (MarketWatch) -- The Federal Reserve will auction off $75 billion of Treasurys for 28-day loans to its 20 primary dealers on March 27 in the first auction in its Term Securities Lending Facility announced a week ago. The Fed will accept mortgage-backed securities, including collateralized mortgage obligations (or CMOs), as collateral in the first auction. The second auction will take place April 3.
Fed's first auction to accept mortgage-backed securities
IIS 7.5 Detailed Error - 404.0 - Not Found
March 20, 2008) - Brascan Adjustable Rate Trust I (the "Fund") (TSX:BAO.UN), today announced recent initiatives undertaken by the Manager in response to the ongoing challenges in the credit and mortgage-backed securities markets. The Fund was established to provide unitholders with an investment in credit securities, primarily mortgage-backed securities, on a leveraged basis. At March 13, 2008, the Fund had total net assets of approximately $8.8 million or $6.06 per unit.
Portfolio Update
In accordance with its investment objectives, the Fund has exposure to an actively managed portfolio of primarily mortgage-backed securities held by a partnership ("the Partnership"). The market for asset-backed and mortgage-backed securities has experienced unprecedented disruption over the past 12 months. This disruption has been precipitated by a severe credit contraction that is presently occurring in the United States. As a consequence, many securities have fallen in value notwithstanding that they retain high quality ratings from the rating agencies.
In order to reduce leverage and protect asset values, the Partnership has sold all of its Agency mortgage-backed securities, which have the greatest amount of current liquidity, and used the proceeds to repay debt and reduce its leverage to approximately 1:1. This strategy of reduced leverage is expected to enable the portfolio to better withstand the severe price volatility characterizing current markets. The Manager believes this action is in the best interests of the Fund, given the illiquidity and very heavy penalty for sales in the non-Agency mortgage-backed securities markets. As such, the Fund's current holdings are 100% non-Agency mortgage-backed securities, with the majority of these holdings rated BBB. In light of these changes to the portfolio mix and the resultant weighted average rating factor, the Manager understands that the units of the Fund have been downgraded to 'BBBf' by Standard and Poor's.
JJL, there is no great crisis to avoid. We are blessed to have productive fields, so food production will not be a problem. Lords knows that there will be plenty of empty homes around for shelter.
The only tricky part is what happens when the Chinese, Japanese, and sheikhs understand that we are implicitly or explicitly defaulting on our debt. Good thing that we have two big oceans to our sides.
Social unrest and potential invasion, we can deal with it with a well armed milita, worst case.
Sebastian,
"Average recession" includes a drop in S&P of 27%. So the answer to shorting would be yes.
I happen to think that the recession is/will be much deeper due to the profits booked by financials from derivatives. So, if a deep recession occurs, a peak to trough of say 40% might be in order. That takes the S&P to around 940.
Since you like charts and history, run a 7% per year for S&P (historical average). I picked a random year, 1954 in Jan when the S&P was around 24.95. For 2008 - guess where that leaves the S&P? 963. That is how overextended the markets got in both the dot.com bubble and the latest housing/securitization bubble.
JJL said: "No takers on my serious question of what "crisis" needs to be avoided at any and all costs a few posts back so I resorted to a joke."
Defining the crisis, as you suggested, cuts it down to size. Reduced earnings for banks for a while, which is not a sector-wide or economy-wide problem.
S.
Thanks Econoclast, I was off surfing and found some of that, but not all.
Major Tom said: "Average recession" includes a drop in S&P of 27%. So the answer to shorting would be yes."
Well, as you may or may not be aware, I don't think there is or is going to be a recession any time soon.
If that's the case, a -17% correction in the SP500 is a huge buying opportunity.
S.
JJL, as one who has worked with Japanese companies and people, I can tell you that you are spot on. Even with the "financial crisis" most people over there are doing just fine. And just look around Tokyo to see the amount of luxury goods adorning the populace.
If you get out of the house instead of reading all the alamist people on blogs, we are doing fine too. Some people are goint to get creamed. Some businesses are going to vaporize (like Bear), and some people (like Bear stockholders and other investors and hedgies) are going to lose a lot. Boohoo. Welcome to capiralism. No one said you were entitled to double-digit returns or even ANY return. People around here don't get that.
At the end of this, as conjure is saying, there is going to be a new financial landscape. That's a good thing. Houses will return to being places to live. That's a good thing. And credit is going to be scarce forcing people to live within their means. That's also a good thing. Perhaps instead of focusing our collective American energies on $500 handbags and 8000 sq ft houses, we'll go back to being the global leaders in innovation and technology. And a better leader in finance too.
Sebastian,
We realistically have had two big failures already-
Countrywide and Bear Stearns.
Failure and forced mergers are not reduced earnings. That is like saying that Penn Square had a little problem.
Essentially, you are playing a very optimistic and conventional pathway. While that usually works, we, most of the readership of CR, believe that what is currently occuring is not normal, but instead an event that is unprecedented in recent history. History is all that you seem to know, and the fact that ECRI just called a recession means that you are taking the average of 6 months and positing it will all pass in the next five months. I think you are wrong, and if you are, your investments that you think will fund your retirement will fail you.
Think about your risk in the game, and how glibly you rely on models for your own future security.
Someday this war's gonna end...
"a -17% correction in the SP500"
The trend is your friend, Oh that only works when stocks are going up silly me.
Sebastian - you may have missed my post above. I asked 2 questions to you to try and understand why you think we are not in a recession and where the economic growth will come from. Take a peek at the previous post and try to answer the questions.
More than anything, just curious on your thought process.
I have read your posts and know that you do not believe we are in recession.
Cheers
Not a good idea to fight window-dressing week by being on the short side, in my opinion. Indices will want to go higher at the start of the week.
A lot of the best-performing groups last week were dead-cat bounces in various things the financials touch. Not touching any of these yet.
I have two buys in the transports. Already got one of them on last week.
So I guess Stage III is where we move from crony capitilsm to socialsim.
AllenM said: "...History is all that you seem to know, and the fact that ECRI just called a recession means that you are taking the average of 6 months and positing it will all pass in the next five months."
Well, actually, I'm taking the current conditions, comparing them to conditions over the past 40 years or so, and have seen that they're not all that bad by comparison to previous "bad" times.
Can't tell that from the bearish MSM and bloggers, though.
S.
Sebastian and ipodius,
exactly what I am saying. things are not so dangerous to freak out and resort to fast ill conceived plans. Stop and think would be my advice to the FED. Things will be ok.
I've listed in my mind the important trends now underway that I expect to continue at least into early 2009.
Home price declines
Home foreclosures high
New home construction down
Commercial real estate construction down
Consumer spending down
Business capital spending down
Government spending down
Higher unemployment
Corporate earnings down
The major unknowns are oil prices and inflation. But even if oil comes down some, any price over about $80 on average would still be negative.
I don't see much help from rebates, but lower interest rates should start to stimulate at some point in 2009. Also, new home construction and business capital spending could turn up in 2009.
But I see two new drags coming in 2009: Iraq War (military spending0 wind-down and higher taxes of several types.
Through all this, of course, a steady drip of defaults among homebuilders, construction loans, small and medium-size businesses, consumer finance and mortgage companies, and bank failures.
So, this scenario would probably put the darkest hour before the dawn around Q2 2009, without much light until then.
What am i missing?
The Social Democratic Party had been in power in Sweden since 1932, and Labour parties also held power in Australia and New Zealand. In Germany, on the other hand, the Social Democrats were defeated in Germany's first democratic elections in 1949.
Social democracy at first took the view that they had begun a "serious assault" on the five "Giant Evils" afflicting the working class, identified for instance by the British social reformer William Beveridge: "Want, Disease, Ignorance, Squalor, and Idleness."
Socialism - Wikipedia, the free encyclopedia
Banking Socialism
You know Sebastian, I do admire your fundamentalist type belief, but honestly, you're starting to sound like one of those people that try to argue that god put dinosaurs in rocks to fool us.
If you've paid any attention to what either mp/conjure have written or what I have been saying, you see some uncanny accuracy. Bear is the first, there will be others including a big bank or two. There will be no "bailouts" unless you think wiping out stockholders is a bailout. The fed will do what it has to do to make sure the great unwind is orderly. That is all. That is exactly what it is doing now, no more.
And DeLong is really as dogmatic as you. Three posibilities? Please. There are many. Again, most Japanese are fine, just like most Americans will be fine.
Depression or total destruction is not in the cards. A shallow recession and a lot of unwinding is, followed by a couple of years of very stangnant growth. RE is done for our lifetimes. And as for stocks, the Dow is going to kiss past 11,000 Sebastian because forward earning this year are going to suck big time. There is no uptick at all in Q3 and Q4 EVEN with the "stimulus" because it's going to people that are screwed by debt instead of to people like me that would actually spend it.
Why is The Fed saying they have no plans to buy MBS? This story clearly suggest they will be buying them, but maybe there is a difference between buying and holding, or exchanging??
The Federal Reserve will auction off $75 billion of Treasurys for 28-day loans to its 20 primary dealers on March 27 in the first auction in its Term Securities Lending Facility announced a week ago. The Fed will accept mortgage-backed securities, including collateralized mortgage obligations (or CMOs), as collateral in the first auction. The second auction will take place April 3.
Fed's first auction to accept mortgage-backed securities
Is that Obama on hsi T-shirt?
What is Fed saying??
The Fed will accept mortgage-backed securities, including collateralized mortgage obligations (or CMOs), as collateral in the first auction. The second auction will take place April 3.
Fed's first auction to accept mortgage-backed securities
Beijing tax move to boost ailing share prices
Beijing has temporarily suspended the collection of corporate taxes from Chinese mutual funds in an attempt to boost the country's slumping stock prices.
China's finance ministry and State Administration of Taxation announced the exemption in a brief statement carried by state media last night but did not say how long the measure would last.
The exemption applies to all income from investment funds from securities markets - including stock and bond trading, and interest or dividends from stock or bond investments - according to state news agency Xinhua.
The exemption also applies to investors who receive income from such funds, the notice said.
The move is aimed at shoring up a market that has dropped almost 40 per cent since the historic peak it reached in October and contrasts with the situation a year ago, when officials were casting around for a way to slow a raging bull market
FT.com / UK - Beijing tax move to boost ailing share prices
Just buy china, they have a currency that is appreciating and at least they are straight up about goosing their markets. Capital flight.
March 22 (Reuters) - The U.S. Federal Reserve is not engaged in talks with other central banks about the possibility of purchasing large amounts of mortgage-backed securities to stem the credit crisis, a senior Fed official said on Saturday.
"The Federal Reserve is not involved in discussions with foreign central banks for coordinated buying of MBS," the official said, disputing an account in the Financial Times that central banks were "actively engaged" in discussions on that possibility.
However/
The Fed will accept mortgage-backed securities, including collateralized mortgage obligations (or CMOs), as collateral in the first auction. The second auction will take place April 3.
Fed's first auction to accept mortgage-backed securities
Amen ipodius - "because forward earning this year are going to suck big time"
Kind of what I am getting at Sebastian. Care to refresh last year's projected earnings? Yeah, stock's were cheap in October because forward p/e was 15... Guess how cheap the dow is now? trailing P/e in Jan of 46... Doesn't sound as cheap as 15 does it. That simply meant either the dow will be cut in half to bring earnings in line, or we will have many years of no growth.
The real comical thing is that financials are projecting a 60% increase in earnings in Q3 and Q4... How realistic is that?
Again, for anyone out there - what sector(s) of the economy will bring us out of this recession?
Why is The Fed saying they have no plans to buy MBS? This story clearly suggest they will be buying them, but maybe there is a difference between buying and holding, or exchanging??
I'll say this again slowly in case someone needs to lip read: this paper isn't worthless. The Fed overcollateralizes the loans. It will hold it until everyone stops freaking out and the market settles down, at which time its worth will be more apparent. Just like all of you are freaking out now. What the markets don't need is a lot of people like some that post on here. It's like that old scene from Airplane when the woman is screaming and everyone is lined up to slap her.
ALL mortgages will not fail. ALL subprime will not fail. ALL AltA and prime will not fail. Some will. How many? Who knows...and that is the issue. In fact, I'd wager there's a huge amout of money to be made picking up assests now at freak-out firesale prices. Just ask JPM.
The Federal Reserve is not involved in discussions with foreign central banks, because it is already decided they will buy them, however, that discussion already took place, and, thus:
The Fed will accept mortgage-backed securities, including collateralized mortgage obligations (or CMOs), as collateral in the first auction. The second auction will take place April 3.
Fed's first auction to accept mortgage-backed securities
"we'll go back to being the global leaders in innovation and technology. And a better leader in finance too."
I hope so but it is only possible if you reward savings more than $500 handbags.
Re: What the markets don't need is a lot of people like some that post on here.
So, why are you here pumping up worthless chatter about the value of something you and The fed know nothing about? Why would The Fed, or you buy or exchange something that is highly risky in order to provide someone like you with a backdoor to taxpayer cash?
What the taxpayers don't need is a lot of people like some that post on here, like you!
What ipodius said, in spades.
Seb, once again, you are looking backwards with data that has been comprehensively shown to be manipulated over the last four decades, and arguing the situation is just fine.
I would argue that the common man is leading the msm, which just follows trends like most of wall street.
The herd is nervous, and the reason why is because they are worried.
Our economic leadership has pushed us into a cul de sac that has no easy and convenient pathway out.
If you don't see that, you are simply parroting Kudlow, and are operating on his level. For instance, where is the massive amount of financing going to come from to maintain the current level of real estate pricing? Wall Street and the international investors that bought all that crap paper have already begun puking up all of their putative profits, and losing even more. Now, you can posit the GSE's are going to step into the breach, but only for the truly innocent with bona fide earnings and paperwork from their initial loan, and ability to repay to some extent.
So that leaves a ton of folks who are just going to walk rather than even attempt to work out their houses, speculators or just subprime borrowers, I don't care which. The end result is a huge amount of housing with no viable purchaser waiting- gee you think that 9 plus months of inventory is sitting there appreciating?
Next shoe to drop is commercial real estate- you should see the numerous buildings here in Phoenix, and all throughout the Southwest that are new and empty.
After that you have retail falling on top of the other two sectors.
http://www.azdor.gov/Newsroom/TaxFacts/2008/0108Taxfact.pdf
Just follow the link and read the facts for one state, admittedly, one that had a huge boom.
Those are YOY drops Seb, huge drops.
Not inflation adjusted, not seasonally adjusted, just hard hard hard data.
That is what I see.
Someday this war's gonna end...
"If you don't see that, you are simply parroting Kudlow"
Maybe Sebastian is Kudlow.
In drag of course.
I hope so but it is only possible if you reward savings more than $500 handbags.
Saving is its own reward, but we forgot that. The reward is you can retire. And we forgot the goal was to stay ahead of inflation and perhaps make a little more, not to invent ways to falsely get double-digit returns for years, or sell people on the fact that it is possible. For a few yes, as a matter of course no.
And when we remember why buying a house is a good idea, we'll be better off too. The reason is that your housing cost DOESN'T rise with inflation, as your wages do. It's also because, when you retire and move to a place where you have less income, you have much smaller housing expense. And you can sell it if you need to and downsize. That's why. Try getting that benefit as a renter. I pay the same for my house as I did in 1996. No one around here pays 1996 rents. I will pay only taxes and maintenance when I retire. THAT's the benefit full stop.
"The herd is nervous, and the reason why is because they are worried."
Lol.....
George Bush, Warsh, or Ben is here tonight....LOl bawhahahahahahahaa
Why would The Fed, or you buy or exchange something that is highly risky in order to provide someone like you with a backdoor to taxpayer cash?
Very simple - to control the unwind. Period.
Tanta, Tanta,
Get the tranquilizer guns out.....
Re: "The herd is nervous, and the reason why is because they are worried."
Bawhahahaaaahahahaha
On Tanta's Predation article down below...the next door neighbor at 104 E Reed Avenue who bought in December 2007 is also named Salgado. Coincidence?
ipodius,
nobody said MBS were worthless.
But even formerly AAA rated paper is worth around 60-70c on the dollar. Acknowledging that price makes banks insolvent. Fed holding this paper for them doesn't make them solvent, only adds liquidity.
The real game is, can Fed hold this marked-to-fantasy paper long enough for banks to raise sufficient extra cash to absorb the losses?
Now comes a trillion dollar question:
who will give banks cash to absorb the losses? They ain't getting mine.
What the hell are we all waiting for the Fed to do? Serve the interests of Americans?
While it might sound a bit like a gold-bug whacko ranting, the Fed is a fabrication created to keep us from facing the music after our last brushes with national bankruptcy.
Our forefathers, who were perhaps by the luck of time and place, much more competent and thoughtful than us, set our country on the road to permanent prosperity by rejecting the idea of a central bank. You might be able to argue with my opinions on the subject, but it's very difficult to argue with theirs.
A fellow on another blog spent quite a bit of time compiling quotes from our forefathers and others regarding CBs. I'll post them in my next comment. Be forewarned, they are lengthy, and it is a cut and paste job. If you don't like it, please skip my next post.
These ideas are worth digesting.
Re: "The herd is nervous, and the reason why is because they are worried."
The MBS myth was popularized by a Disney nature film, MBS White Wilderness, made in 1958 by director James Algar and filmed by photographer James R. Simon. And most of it -- the lemming sequence, at any rate -- was faked.
The film was made in the province of Alberta. Lemmings don't live in Alberta. They had to be flown in from Manitoba, where they had been captured by Inuit schoolchildren and sold to the Disney people, who had put a bounty on the little fellows' heads.
There's no sea in Alberta, either; it's an inland province. No problem -- Simon just used a river. It would look like the ocean on film.
Actually, there weren't thousands of lemmings in the film. There were a few dozen. Simon really did a remarkable job of special effects, filming the lemmings from various angles, using turntables and various camera effects to make that handful of lemmings look like a whole herd.
How did they get them to stampede off the cliffs? They herded them. Remember, this was 1958; there weren't as many animal protection laws then as there are now.
Ya gotta love the American public.
Various versions of bear stearns billionaires whose investment went from 900 million to 12 million.
Oh to eeek out an existance on 12 million.
Woman I work with opposes nationalized health insurance because: "Why should Bill Gates be forced to pay for health insurance."
Who can argue with that logic?
AllenM, Seb is sort of like the weather guy that is telling you it's not going to rain while you see it. You want to scream "LOOK OUT THE WINDOW INSTEAD OF AT THE COMPUTER!".
The same applies to these people. Just look out the window and you'll see everything grinding to a halt. I have tons of respect for people that just call it as it is. People who wave about dogmatic assertions, I have no use for. No matter what the past data says cause, you know, like the prospectus...past performace is not an indicator of future returns.
AllenM, your mention of Penn Square Bank brings back memories! I was in OKC when that grenade went off. That was the first signal of the coming S&L crisis. The president of that bank reminds me of Cayne at Bear Stearns.
Marcus,
How about a short version?
--
Depressions happen because of bankers' mischief, i.e., bad lending and securitization of bad debt in the present case. Why was it allowed in the first place? In the name of innovation and flexibility or to defraud millions?
Economists are disgusting human beings with no moral compass. They just believe in govt, including the Fed, coming to the aid of crooks and morons. What part of free market they do and don't subscribe to? Bailouts of any kind mean feeding corruption and immorality. All the problems now surfacing were fully predictable, no? And we have so many crooks that come out sand say that no one could have foreseen these problems. What a bunch of liars.
America is full of rogue economists and they are as guilty as some of the bankers because of what they support and what they oppose, or don't oppose.
Americans are screwed because everyone in the position of power or authority is trying to screw them. They will be the best-screwed population and sore all over.
Future of a nation of born-and-bred dopes (voting for Crooks agents) led by Crooks, including some economists, is not too bright. One day this system must collapse. And it will within the lifetime of most here.
Jas
The real game is, can Fed hold this marked-to-fantasy paper long enough for banks to raise sufficient extra cash to absorb the losses?
That is the truest statement in this whole thread. But remember they don't have to raise anything, they have to be able to hold this such that earnings offset these losses. One thing everyone glosses over is that most institutions were PROFITABLE last year even with the losses. You will only pull a Bear Stearns IF a panic ensues and there is a run (money pulled and credit withdrawn) or there is massive counterparty default.
So the game is to dribble out the losses quarter by quarter offsetting with profits. Which is why, incidentally, Seb is so wrong about forward earnings in the financial sector. This is going to go on until at least Q2 of next year.
"Future of a nation of born-and-bred dopes (voting for Crooks agents) led by Crooks, including some economists, is not too bright. One day this system must collapse. And it will within the lifetime of most here."
And then you will switch sides and continue bitching.
what I find ludicrous is that people keep saying Fed Fed Fed Fed.
What is Fed supposed to do, magically transform us all into better people?
What is happening right now is this:
say I owe my neighbor 100 bucks but only have an old bicycle in my garage and no money. But I think it could fetch 100$ on garage sale - but then again, maybe not, maybe noone will want a rusty bicycle. But helpful Fed takes my bicycle and gives me a 100$ loan, so I pay my neighbor. Now I am sitting here scratching my ass waiting for someone who will buy my bicycle. Note that Fed wants 100$ back eventually.
This is where we are right now. So how exactly is Fed supposed to help me further? huh?
This is where we are right now. So how exactly is Fed supposed to help me further? huh?
Your analogy is incorrect. The Fed will ask you to pledge your bike AND your garage as collateral for that $100. Now you are scratching your ass trying to figure out how not to lose your garage to the Fed because, if you don't pay, the Fed it going to take it and your bike and sell them both for $200 and stuff the money back into the general fund.
There was a comment on a pevious thread that the Roubini blog equivalent of conjure predicted that banks will be allowed to stabilize and THEN the market will be allowed to fall.
I guess this would coincide with the "out of ammunition" attribution Delong sees coming.
I guess this would coincide with the "out of ammunition" attribution Delong sees coming.
Not at all. It's very orderly which is all the Fed cares about...saving the financial system from a panic destruction. It does not care if a lot of people lose their shorts in the markets. And that is where everyone is wrong. This isn't about a bailout. It's about saving the biggest part of the global financial system to life to fight another day. The Fed is NOT Wall Street's bitch, no matter how much they think it is. They will stand by while the Dow re-adjusts to reality AFTER the system is stable.
Re: ...... The real game is, can Fed hold this marked-to-fantasy paper long enough for banks to raise sufficient extra cash to absorb the losses
Ok, we have a liquidity trap and banks are not going to be making money!
Is that possible? Meaning is it possible to decouple the bank solvency problem from the overall market.
"The Individualistic Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient--perhaps cannot survive--without one."
INO Equities Stocks Indexes - U.S $ INDEX (NYBOT:DX) Price Chart and Quote
Case closed!
ipodius,
The FED is taking the MBS as collateral.
The analogy should be - you never built the garage, but pledged it as collateral and the bank took it without regard to the structure being in place.
All the financials pledging their "garages" do not care if the fed comes to claim it, since it doesn't exist.
I've been reading the Delong Blog for a few years, and he has never met a central bank action that he didn't like. While he didn't get up on a chair and applaud, he wad quite supportive of Greens'an's early 2000s interest rate policies. While Delong, of course, is more learned that I am about economics, what is the name of the situation where the less informed could see the mistake building while the greater informed carries out the mistaken act? The more I read over there at Gasping Reality, the more I'm scared of contemporary American consensus economic thinking
No Major Tom, that is not correct. The Fed is taking Aaa rated MBS as collateral, and OVER-collateralizing. The garage exists. The MBS is real. What you are arguing about is the value on the tranche versus the value in reality. And if it is going at .60 on the dollar, then the Fed takes that into account. So I'm not sure what the point is. The Fed would have given you $60 bucks unless you came up with another bicycle.
Your assumption about what the Fed is taking is wrong. It isn't taking the collateral pledged at face. So the Fed is now the pawnbroker of last resort. In fact, I'd tell the Fed to even discount the MBS further so that in the case of default, we could use the difference to fund Social Security.
Investors are looking for new hives.
Re: White Wilderness may have popularized the notion of lemming suicide, but it didn't originate it. The story had been popular lore for some time. Lemmings are cute little rodents, somewhat resembling hamsters, who live in arctic areas. Their population growth has a cycle, and every four years or so it grows to a huge level, and lemmings set out in a mass migration to find new places to live. And, since there are so many of them, there are sure to be mishaps -- the guys on the outside of the herd are pretty susceptible to getting pushed off a cliff or two. This means that for centuries, people have been seeing huge masses of lemmings traveling across the wilderness, often leaving a significant number of little lemming bodies behind. It's easy to see where the rumors got started.
"They will stand by while the Dow re-adjusts to reality AFTER the system is stable."
That's what I assumed/hoped would happen.
I was just thinking when CNBC has to come up with a sound bite reason for the drop it would be yep, looks like "the fed ran out of ammunition."
Economist
Wall Street - What went wrong
Premium content | Economist.com
where is the massive amount of financing going to come from to maintain the current level of real estate pricing?
AllenM, this chart that I made from the most recent Fed Flow of Funds report is IMV most descriptive, if you know what these particular "flow of funds" meant to the economy, 2003-2006.
Oh they'll think of something anon. Don't worry. And they'll be screaming for the Fed to do something, but there is nothing the Fed can do. Does anyone think they are so stupid that they don't see that there is nothing to be done about house prices? If you listen closely, all the suggestions point to stabilization, NOT to keeping prices afloat.
And if it is going at .60 on the dollar, then the Fed takes that into account.
no, Fed is giving 90c for MBS that market says costs 60c on a dollar.
"we could use the difference to fund Social Security."
A lot of people in America think there is a trust that we take your money in payroll taxes and then we hold it for you, and then when you retire, we give it back to you .but thats not the way it works. There is no trust fund just IOUs.
George W. Bush , University of West Virginia, April of 2005
The only honest thing he has ever said and why inflation will be the chosen way out.
no, Fed is giving 90c for MBS that market says costs 60c on a dollar.
Really? And your source is?
The only honest thing he has ever said and why inflation will be the chosen way out.
Actually, that's not even honest. It's a "pay as you go" program where the current payments are used to pay out the current recipients. The surplus is supposed to be put into a trust, but is always raped to pay for, well you know, to pay for things like a stupid, unnecessary quagmire of a war. But he left that part out because he went to HBS and that's what they teach you to do there.
Your assumption about what the Fed is taking is wrong. It isn't taking the collateral pledged at face.
ipodius
There's a subtlety here that I note; from the NYFED website FAQ on the PDCF:
How will collateral be valued?
The collateral will be valued by the clearing banks based on a range of pricing services.
The Fed is relying on the clearing bank ( of the primary dealer) to value the collateral. The potential for collusion is enormous - given all that we know about these greedy a*holes its gonna happen.
-K
Really? And your source is?
ABX-HE-AAA-07-2
Calculated Risk: Cliff Diving
Ipodius,
The problem with the MBS is that they were seized up, no one was trading them. They could be worth .10 on the dollar, but no one was trading them. So, in that light, how do you know what the fed has given for the "AAA" paper that we know is not AAA?
You say the FED is over collateralized, but to what price? Because if the FED actually priced these at .60 on the dollar, then the firms would be bankrupt predicated on the tradeable value (hence level III assets).
No, I posit that the FED will accept a 1 for 1 trade from MBS (or whatever the financial firms "value" the MBS).
If someone has definitive proof of what number the FED trades - please bring forward.
I do understand that the MBS will have a value, but not at a AAA rate. In effect, the government is trading AAA treasuries into possible junk rated MBS.
AAA rating used to mean something, now we all know that S&P, Fitch, Moody's, et al... are likened to the appraisers hired by lenders to complete the appraisal.
... and then when the Fed or no one is able to keep the housing values up... everyone walks, right?
It seems like we are just waiting for the endgame...
Fed said in their press release they take any AAA rated asset at 90% value.
So we now exactly what they are taking and for how much.
There will be, already is, a recession, probably quite severe. Then there will also be inflation as the other part of the solution. Inflation is the easiest thing for the government to engineer and consequently the preferred solution. You don't need Congress or any other entity's permission to inflate.
No Missed Information, see Major Tom's post above on MBS, which isn't the same thing as AAA rated securities.
Major Tom, again, the Fed is only taking the paper to provide liquidity that the firms need to settle their obligations because this paper can't be sold as the market is seized. At some point the Fed will want the money back and the firm will pay it. We're talking about BIG BIG instutions here, not a garage sale.
Let me put this another way. You lend your cousin money to open a pizza shop. He's having trouble but his business model is basically sound. He's made some bad decisions and now he needs cash. Since he already owes you money, do you let him implode and never get it back, or do you make him sign a note pledging the ovens now to you and give him the value of the ovens? What are they worth? Well, they're worth as much as he needs because if you don't give it to him, you'll get nothing back. He pays his bills and over six months gets the money and you're paid back. So in the end who cares what the ovens were worth?
Now multiply that into a chain of pizza shops that are integral to the local economy where other businesses you loaned money to won't be able to pay you back if that one pizza franchise fails and you'll see what the Fed is doing.
Sebastian writes:
IOW, if everybody's scared-to-death bearish and there's already been a -17% correction in the SP500 (which is substantial), where's the logic in a short trade?
FWIW, P/E ratios for the S&P500 have gone UP from last year... yes UP.
What does that say??
Seb,
Thanks for letting us know that you are backing up your projections with your money. We will be interested to see how it works out. May you make a ton of money.
Jim writes: "JJL: well thank God he's buying. I was in a supermarket today and there was only one register operating and not too active either. I guess we are at the starvation stage of this recession, or somethin'."
Where on earth do you live? Our real estate market is not the greatest - but we were in Publix (northeast Florida) this afternoon - and it looked like the locusts had picked the place clean (tomorrow is Easter - and - apart from holiday dinners - Publix is closed). Roby
Sebastian writes:
"CR forecast a target for job-losses in residential construction by last summer that hasn't been hit yet."
And a year ago, Paulson, Bernanke, and just about everyone else was saying that subprime was "contained". Actually, they were saying that last summer too.
But I'm still curious why you think the ratio you were indicating above is useful, other than the fact that it has coincided with 5 data points. i.e. what does it mean?
Ralph Cramdown wrote:
Wallpaper now on sale:
"[Treasury Department] Officials announced on Friday that starting next month, individuals will be able to buy Treasury securities in amounts as small as $100, down from the current minimum of $1,000."
So why is the Treasury Department seeming changing its course? On 1/1/08 they lowered the limit on purchases of US EE savings bonds to $5,000 per person per year from $30,000; now they are making these amall Treas demoninations available. I do know this, that the savings bond had in 2007 and still have now a 3% rate, which is pretty darn good compared to the short term Treasuries.
Why does everybody, including respected economists like Dr DeLong, assume deflation=depression? We can have two variants, yes the great depression was the bad sort (deflation of deficient demand), but previously we had the mild deflation of excess supply
Sorry, but you folks are re-arranging deck chairs again. Mortgage Backed Securities are yesterday's news.
So what does the new world economic order look like mp?
You don't need Congress or any other entity's permission to inflate.
$5.3T in rather short-term government debt issues says otherwise.
Conjure and I think we'll eventually return to core competencies. Branch managers, for example, will know the difference between the words "customer" and "custodian." Bankers will be recruited and trained in the traditional way, instead of being recruited from used car lots. All aspects of the financial system will be tightly regulated. Banking will eventually be held in high regard--a position of public trust--as it was once.
Brad DeLong, as usual, is full of it. The financial system is in grave danger, and only genuine leadership can prevent a total systemic failure. Credit facilities alone are of no help now. The numbers are too big, even for the Federal Reserve System.
--
And then you will switch sides and continue bitching."
Anon,
I dont take any side and I dont bitch. I tell the harsh truth about a corrupt system supported by a corrupted (and doped) population. Monarchy corrupts the monarchs and democracy corrupts the people! Impotence of the American People has been exposed by the current crisis because they are powerless to stop the Fed or the USG from doing whatever they are already doing and want to do. No?
Yes, economists played a role in corrupting the population and the system by bad theories of how Fed and the USG should intervene when common people do stupid things and those with economic power do crooked things. I say, let the latter rot in hell. Better yet, let them rot right here on earth while they are nailed to the cross. These financial Nazis of New York City will make German Nazis look good as rulers of a powerful nation. Just wait for few years and see what transpires. These crooks will be running for their lives.
Jas
mp is right (and my favorite commenter here by far)
Welcome to a world where the Fed has no power and public spending to recharge this economy will only come with significant tax increases or helicopter drops.
Your money is now officially taxed. If you don't spend it soon, your purchasing power will drop.
But on the bright side, houses will be cheaper... and prices will continue to drop, so why buy in the first place? This is the deflation part. As is the decrease in available credit. (remember credit = money) What is money; but a promise note that you can use to pay your taxes with? There is nothing else backing it... nothing.
Commodities... some prices will stay high... some won't. That's the best I can say right now. Personally I want gold and oil to triple by years end. We'll see after all these margin calls are done.
Equities... lol. Most are a joke now. Completely useless. I'd rather go to Vegas.
Its interesting all the great cheerleaders for free markets and globalization are really socialists when it comes to their own book. From Bob Rubin who championed the repeal of Glass-Steagall during the Clinton administration to Bill Gross at PIMCO- now want taxpayers to bailout all those that happily made billion dollar compensation packages when the sausage machine was running at full clip. Now that all the sausage has turned rancid they want to drop it in the lap of poor middle class JoePublic.
Unfortunately unless our government decide to use our money to make sure our incomes are sufficient to afford housing prices circa 2005-2006 all these taxpayer funded bailouts of wealthy Wall Streeters is unlikely to resolve the underlying issues.
Gretchen Morgenson: In the Fed's Cross Hairs: Exotic Game(Countrywide & Bear Stearns credit default swaps)
"Yet an effect of both deals, should they go through, is the elimination of all outstanding credit default swaps on both Bear Stearns and Countrywide bonds. Entities who wrote the insurance and would have been required to pay out if the companies defaulted are the big winners. They can breathe a sigh of relief, pocket the premiums they earned on the insurance and live to play another day."
FAIR GAME; In the Fed's Cross Hairs: Exotic Game - NY Times
--
Seb, Thanks for letting us know that you are backing up your projections with your money. We will be interested to see how it works out. May you make a ton of money.
Seb is a born loser. Some years ago he had bought the bear case lock-stock-and-barrel. He must have lost or missed the bull gains so he became a bull with a vengeance. Now he will not buy into a bear case until he has lost lot of money for years at end. That is what born losers do. They have a knack for it.
Other than his losing money ways Seb is quite harmless. He is entertaining too.
Jas
This is anecdotal (and probably irrelevant - sorry), but I had a few balance transfers soar through in 48 hours or less this week.
Before this I actually thought that the banks had gamed the system where they'd book the transfer to start the clock running and then sit on the cash for ten days before they sent the payment. That was my experience over the past few years anyway.
I still don't know where the cash for the 0% offers is coming from. Shouldn't this have disappeared by now?
Yeah, but
SpringerLink - Journal Article
And that was less than eighty years ago.
Who was it who pointed out that capitalism survived the Depression, but it wasn't the old individualistic form of capitalism that survived?
ipodius,
The first, and most obvious, retort to your 9:47 post is that Bear Stearns was one of the "BIG BIG institutions" a couple of weeks ago.
I haven't yet seen spelt out what happens when some the AAA paper is downgraded while the Fed is holding it. Presumably the Fed will not roll that stuff over, so come the end of the loan period the bank is going to have to redeem it with real dollars.
Which they might not have.
Transient at 6:14 quotes a NYTimes article on increasing regulation.Especially for IB's
But it occurred to me that by extending its credit to the IB's Bernanke has de facto removed the distinction between commercial and investment banks. The IBs literally took the kings schilling. This will make it more difficult for the IB's not to accept regulation from the Fed.
And arguably the same regulatory standards.
Telegraph UK
Spectre of Depression haunts Federal Reserve
Spectre of Depression haunts Federal Reserve - Telegraph
I forgot who mentioned it earlier, but it bares re-paraphrasing:
Deflation does not make a great depression.
At least not exactly like the previous one. Too many structural changes have been made since then. We won't see one day drops of 20% in the S&P anymore is a clear example. The markets will halt way before that. Unemployment will lag, but it will get there.
This new type of deflationary period will have inflation in significant parts of the economy. Corn, wheat, milk, transportation costs/prices will all go up faster than median incomes (well faster than before) ... and yet... Deflation will be (or is already) seen in credit markets, housing, equities and the value of US currency with respect to other currencies.
My guess is oil will continue to rise (relative to US
even if demand drops in the US... demand will not fall faster than the falling value of the US dollar. That's my take.
What I am interested in right now, is whether Fed can inflate without Congress explicitly asking for it.
Fed already has the power to buy Treasury securities outright, permanently increasing money supply. Presumably this does not count towards govt debt, because these treasuries are never redeemed.
Does it mean that if they wanted to, Ben&Paulson could suddenly make all government spending come from printed money? This could generate quite a bit of inflation, without need for a Congress session. Is this what helicopter speech was about?
WASHINGTON: Former Treasury Secretary Robert Rubin called Friday for quick government action to tackle the rising level of U.S. home foreclosures and he indicated that taxpayer money would have to be used.
"There is a strong need for urgent action," Rubin, who is chairman of Citigroup's executive committee, said. "I would be very, very seriously considering the possibility of using public funds in one form or another."
Search - Global Edition - The New York Times
Please stick the taxpayers with the bill and bailout my insolvent bank.
"Fed already has the power to buy Treasury securities outright, permanently increasing money supply. Presumably this does not count towards govt debt, because these treasuries are never redeemed."
But the treasuries are redeemed, aren't they? It's my understanding that every year the U.S. government pays the interest and principal due, the Fed collects said cash owed on the treasuries they own, and turn their net profits back over to the U.S. Treasury.
Missed Information
It's all about treasuries...
The government can write as many promise notes as it wants.
T-bills = Dollar bills now....
"What is money"
Money = Debt
Federal Reserve NOTE
Telegraph UK
Fed's rescue halted a derivatives Chernobyl
"There was the risk of a total meltdown at the beginning of last week. I don't think most people have any idea how bad this chain could have been, and I am still not sure the Fed can maintain the solvency of the US banking system."
Fed's rescue halted a derivatives Chernobyl - Telegraph
" Barley writes:
Bob Mologna A question since you said:
"I'm in construction"
If the bus is soft, are you seeing raw prices fall in your neck of the woods (err sand)? Lumber, copper pipe, wage rates...et al.
Barley | 03.22.08 - 7:55 pm | # "
I'm seeing lumber prices come down a bit. Copper we use sparingly in our plumbing these days. Concrete costs have been pretty steady. As for labor costs, I've been able to get better crews these days and they're sharpening their pencils a bit, but no big drop in bids.
"Fed's rescue halted a derivatives Chernobyl"
We're all Chernobyl now....
Mayan calender ends on December 21st, 2012 A.D
Tic-Tock-Tic-Tock
I've been able to get better crews these days and they're sharpening their pencils a bit, but no big drop in bids.
Bob Mologna
Thx Bob
1) I would not underestimate the troubles Japan has weathered over the past 18 years.
2) However well Japan has survived its troubles, I wouldn't be too quick to assume that what is going on today does not have the potential to be far, far worse. Just keep in mind that the bursting of japan's bubble had little in the way of international repurcussion. In fact, it probably fed the US boom of the later 1990s.
3) And I would not assume the US could weather anything as well as Japan, for a host of reasons. Japan is a better educated country than the US, doesn't support a mega-defense budget, had a better infrastructure in 1990 that is even better now, has spent buckets of money on public works, doesn't have our crime rate, has greater sense of community, etc, etc, etc
4) Japan did not have the Iraq War tos uck another $1Trillion out of its veins, nor did have the array of enemies and jealous rivals the US has now, waiting to pounce and to tell the US to go F itself when hard times hit.
5) When Japan's bubble popped there was neither a economic giant in Giant nor a Eurozone.
The US might just ride things out well enough. But I would not be so sure, and there are plenty of smart folks saying they are scared. This is not like the Bush Admn in 2002-03 running around about Iraqi WMDs. I would not ignore the warnings of people like Krugman, Rubin, Gross and many many more. Especially when you know that there is indeed a house of cards tha is collapsing.
I hope the worst does not happen. There is a decent chance it won't, more so with some smart action by the Fed and new Administration with a brain. But there is far too nig a risk right of a real catastrophe.
NY Times - What Created This Monster?
(Another Texan, Phil Gramm. His wife, Wendy Gramm, was an Enron board of director)
What Created This Monster? - NY Times
That was, no economic giant in China for the Japanese bust.
And the international effects of the US credit meltdown are plainly visible. Unlike the Japan bust, this one already looks pretty global.
Well, I started this thread; I might as well end it.
One danger is people who say "what's wrong with a little deflation, or a little more inflation?" The problem is, a little turns into a lot. They tend to be self-reinforcing. At least US debt is denominated in dollars, which Argentina and Mexico didn't have going for them. What would a depression do? Well, maybe people who are five years old today will have basements full of glass jars and metal and sundry items too good to throw out 80 years from now, just in case. That's what the last one did.
Two things which have supported the US economy of late were consumer spending and net capital inflows. But every time foreigners from places with cash flow have tried to buy equity stakes, they've been rebuffed on grounds of national security. And if they get a whiff of depreciation, they're not going to want the bonds, either. Consumer spending has been done to death, so I won't address it.
There is a danger that current conditions could provide opportunity for the last gasp of the neocons, them of the "We hope to get the federal government small enough so we can strangle it in the bathtub" ilk. At this juncture, this counter-Keynesian, cycle-reinforcing move would have similar effects as the decision to dismiss the entire Iraqi army: Large bands of well armed unemployed roaming the country looking for a way to feed themselves and their families.
The difference between Japan's ten lost years and a possible similar period in America is that the Japanese citizens were poorly armed, but diligent savers with money in the bank.
Some think that this comeuppance could see America "go back to being the global leaders in innovation and technology." I don't think so. Having gone from a pioneer in public education for all, through Uncle Milty Friedman's disavowal of the utility of public schools to current times, where congressmen and the rich send children to private schools, the affluent live in areas with good public schools, and everyone else gets the schools which don't instill basic literacy, never mind critical thinking or a knowledge of history. Universities, likewise, in the post-9/11 crackdown, have ceased being the magnet for the brightest from around the world.
The manufacturing got offshored and replaced by the rise of the service economy: Accountants, lawyers and investment bankers to be sure, but also telephone sanitizers, manicurists and baristas. I think some of these services represent the gap between the previously believed lower bound on non-inflationary unemployment and the levels seen since -- in an affluent society living beyond its means, there's a lot of room for pamperers and personal servants; unskilled labor which will become surplus very quickly as discretionary spending shrinks.
I don't see easy credit solving a lot, because it presupposes that there's entrepreneurs with good credit, skilled labor and markets which, for want of investment capital, aren't being brought together. I don't see that as the current situation, but maybe I'm wrong.
If one in fifty homes goes FC, but in varying geographic concentration, what happens to the places where it's 1:20 or 1:10? Is America really prepared to write off Cleveland, Detroit and other cities as it wrote off New Orleans? Will entire states go by the boards?
A lot of the problems I've highlighted aren't the sort that get fixed in one credit cycle or one election cycle, they're the sort that take a generation. I don't see the type of leadership, the visionaries, or the dollar-a-year men who are even grasping the scope of the problem. Public service sure isn't attracting great talent, at the municipal, state or federal level.
I have no idea how bad things are going to get. I'm pretty sure it isn't going to be a short, sharp recession. Maybe things will start improving by sometime in 2009, maybe they'll just keep going East for a few years before the turnaround, and maybe things will get really bad, and this is the end of the whole Pax Americana thing. One thing's for sure. I didn't even address international implications but, outside of the money centers, there are very few people in the world right now wishing America a speedy recovery, and quite a few states who will use any opportunity to increase their spheres of influence.
NY Times - What Created This Monster?
(Another Texan, Phil Gramm. His wife, Wendy Gramm, was an Enron board of director).
The Enron idea was just too effective.
It had to be applied to the entire economy.
I made that argument back in 2003 after reading a book on the dot com bust.
Maybe the author made it.
The point is if you can screw a few thousand people out of their hard earned wealth with a ponzi finance scheme, then why not an entire country?
With Alan Q. Greenspan's cooperation in the bag, it was almost a guaranteed outcome.
Im seriously considering renting a billboard sign on I-75 through Cobb County GA. I want it to read.
How many hours and dollars have you spent in traffic this week?
Lets build more houses so we can bail out more homeowners & banks.
Call your County Commissioners to rezone to higher density living.
Keep Cobb beautiful. Its a great place to live!
Only read through about half the comments, but has anybody suggested abolishing the federal reserve and going on a precious metal standard?
Ralph Cramdown
1) Great name
2) Excellent post
3) The US abandoned Detroit a long time ago . . . Cleveland has been off and on.
Bear Stearns should have been nationalized rather than gifted to Morgan Stanley by the Fed. Likewise, future large bank failures should be dealt with as nationalizations.
Nationalizing failed banks would result in more international confidence in the US banking system, rather than less, and more confidence in the dollar.
Once the system is stabilized in ten years or less, the nationalized banks can be sold back into the private sector.
The private sector has failed in it's management of capital. Government should not spend taxpayers' money bailing out the wealthy, it should those funds in a way that keeps the basic economy functioning while maintaining social stability. Bailing out one defunct speculative banker after another does not accomplish this.
My viewpoint in a nutshell is, let the chips fall where they may but nationalize, don't bailout.
FTR,
If any AAA-rated paper held as collateral at the Fed is downgraded, or even placed on watch for a possible downgrade, then it is put back immediately.
Therefore, the key issue regarding the quality of the paper doesn't involve the Fed so much as the rating agencies. Of course, if the rating agencies did their job, the banks wouldn't have any collateral.
p.s.: mp's right, though. MBS are yesterday's news.
Gareth,
It's JP Morgan, not Morgan Stanley.
tj & the bear writes:
Gareth,
It's JP Morgan, not Morgan Stanley.
Thanks for the correction. I've been watching too much basketall and drinking too much boxed wine.
NBD,
Give it another month, it might just be JP Morgan Stanley.
Seriously, MS is at the top of many "next to fail" lists.
The next to fail list is quit long. My medium sized city if riddled with failed "luxury" condo projects finaced by local banks and kick-started with TIF money.
TIF (tax incremental financing) is one of the greatest real estate scams of all time. Originally TIF money was meant to subsidize development of blighted areas in a city. Eventually, in my town developers expected to receive TIF as an entitlement. These same developers contributed heavily to local political campaigns.
In all modesty I ask, can Tanta or CR please analyze the issue of TIF money?
Ralph Cramdown, most excellent post! I wish I had written it. And to contrast this 'soft patch' with prior recessions, we can't depend on the manufacturing jobs to rebound, since they're long gone. Housing usually leads a recovery, but we already have an oversupply of overpriced homes. Service jobs...that don't pay a living wage are still hiring, for now. I read today that more and more boomers are moving in with their 80-year old parents...due to job loss/foreclosure. It's becoming a trend!
I truly wonder how long Americans will continue to be mislead by all these 'crises averted' and 'the bottom is in' headlines. Take MarketWatch for example...what a horrible source for financial news. Bloomberg TV is only slightly better, but they get caught up in the cheerleading too.
Meanwhile, headline writers and financial news always put the best spin on it, rather than sobering truth. It's all about the stock market (or saving it)...it rallies on bogus economic data from the BLS, and everyone pretends it's factual. If it closes down 200 points rather than 250 points, the CNBC lead is "Dow Rebounds from its Low." Or if a 200 point rally reverses, but closes up slightly, you'll mainly read that "Dow Closes Higher."
However, today there was an inkling that some people may finally be catching on. According to a NYT story, people are wondering if the last few years of this supposed economic boom (the greatest story never told according to Kudlow) was just a mirage. It was the weakest economic recovery in terms of quality jobs, standard of living, and increased wages, and now it's about to worsen.
After the system is cleansed of most of the crap, like taking Fleet laxative the night before a colonoscopy, then I'll turn bullish.
I have come to the conclusion that Sebastian is nothing more than an irritating troll. Pick an outcome and use some silly statistics to validate it. Never mind that unemployment is understated and inflation as reported is grossly manipulated and underreported.
Sebastian - Why is the entire government in a state of panic? Do you and the Wright B have a better read on the economy than them?
2 Visitors Online
me and you
2:40 am
I remember reading that during the Depression, interest rates on Treasuries were negative since people were so afraid to put their money into banks.
why is the video no longer available?
Great. 2 People online. . . one's a turtle and the other is a chicken.
And we are waiting for the Bunny!
Happy Easter!!
last?
Japan is a better educated country than the US
having lived in Japan for most of the 90s I find the contrast interesting, but this is kinda wrong.
Japan basically has the higher academic support structure on the scale of, say, California.
Japan has its own vast mass of diffidently-educated young adults, too.
We may spend/waste a lot of money on "Defense", but at least it's one helluva jobs program.
Happy Easter
"My significant other wrote to DeLong a few years ago for his insight on a minor but definitely present inverted yield curve -- and his reponse? He didn't follow yield curves. Been kinda scared of him ever since."
I agree, DeLong is an idiot, and probably the worst kind of idiot - one who thinks he's actually one of the smartest people in the room.
From the "What Created This Monster" article:
Whats more, these exotic investments have been exported all over the globe, causing losses in places as distant from Wall Street as a small Norwegian town north of the Arctic Circle.
If anyone is wondering why international SWF have dried up in the US, this is it. This is far more dangerous than the housing bubble and it was created by this:
In the past decade, there has been an explosion in complex derivative instruments, such as collateralized debt obligations and credit default swaps, which were intended primarily to transfer risk.
They actually touted this as a feature to downplay the risk in that spreading the losses wouln't hurt as much, which led to this:
Today, the outstanding value of the swaps stands at more than $45.5 trillion, up from $900 billion in 2001.
Now just try to get your head around how many people are going to actually lose money and you begin to get the picture the Sam is painting. Or to put in another way:
Mr. Grantham agrees. There is just a terrible risk created when you can underwrite a piece of junk and simply pass it along to someone else, he says.
When investors get the impression of a pyrmiad scheme the money will change direction. That's what's causing the panic not overpriced houses.
thought I'd peep in and say thanks to everyone who comments - I started learning about all this and I'm just sucking up everything I can get my hands on - having hundreds of comments talking about and explaining different opinions is very helpful.
=) I say thinks look ugly and do not look like they are going to recover any time soon, no matter how optimistic Bush tries to be.
The pending Govt bailout of the banks is without question the most corrupt and evil, anti capitalist move ever in the history of the US. It is shameful and disgraceful.
If this happens, the investors must be wiped out, and the bank officers must go to prison for life as the precondition. What they did was cause the greatest theft in the history of the world. If this doesnt happen the banks will do this all over again.
How I wish I could find a country that I could emmigrate to. Im ready to give up my citzenship and leave this disgraceful place.
DeLong posits that economic crises emerge in three stages and that there are three possible outcomes, one of which is dismissed out of hand.
That's a pretty good open in debate - aggressive and limiting to the discussion.
But it's a hypothetical, and indications are it resembles neither the circumstances of the moment nor does it admit to the behavior of complex systems.
[apologies to E.B. White for that last sentence]
So the game is to dribble out the losses quarter by quarter offsetting with profits. Which is why, incidentally, Seb is so wrong about forward earnings in the financial sector. This is going to go on until at least Q2 of next year.
ipodius | 03.22.08 - 9:04 pm
Respectfully disagree.
The plan(for the big banks, anyway) is to write this stuff off as quickly as capital levels allow, hence the selling of the family silver(Visa IPO) and Citi unloading assets.
Even with a steepening yield curve the previously succesful biz model is no longer valid going forward. Only JPM & BofA can thrive in the new environment immeadiately(unless of course depositors open up a mattress account, then they're all doomed.)
The upcoming announcement season should provide the bulk of the writedowns, Citi excepted.
--
" There is a decent chance it won't, more so with some smart action by the Fed and new Administration with a brain."
LOL!
The new administration is guaranteed to be controlled by banking and finance Crooks, Anyone has any doubt about that?
Blind faith in the corrupt system, controlled by Crooks, must survive. Americans are very bad losers; they can't see when they are losing and keep denying it until they can't. That is what is going on here.
We got a f***ed up econo-political system. Politically impotent population and democracy, how did it come to be?
America is going down and down big because of the abuses of the banking and finance Crooks.
Jas
burnside,
"But it's a hypothetical, and indications are it resembles neither the circumstances of the moment nor does it admit to the behavior of complex systems.'
Exactly. Further, if inflation is off the table, what exactly is the gov't to do. Gov't is the ultimate parasite. It produces nothing, and has no income. The money it has is through theft or counterfeit. So no inflation, no gov't.
Delong is a nutter.
Cheers,
--
"My viewpoint in a nutshell is, let the chips fall where they may but nationalize, don't bailout."
Gareth,
You don't see any inconsistency here? If the chips are to fall let them fail, not nationalize.
Let everyone who made a bad decision pay for it, but we can't have that in America of: Private Gains and Socialized Risk. Crooks had known this game all along. They also know that "educated" Americans are the biggest suckers. Do you know why they know this? They brainwashed the educated Americans in the first place. A thorough brainwashing is a must for economists.
People here are having trouble in coming to terms with the fact that we have a crooked system protected by the Fed & the USG and it will be so until people suffer greatly and revolt. No f-in way that depression can be avoided in America. Only econ-morons think that it can be. Seeds of depression were shown with bad lending and it never fails to produce the result catastrophe (a term Schumpeter used for depressions).
Jas
--
"So no inflation, no gov't."
We have had deflation in the US and in Japan in recent years with a govt, no?
I guess history must be irrelevant.
Jas
Jas,
Dammit! "People here"
Prove it!
Man I'm getting sick of you. Moderate your fricking position to the audience or go f yourself.
Oh yeah, Happy Risen Lord Day.
Cheers,
Jas,
""So no inflation, no gov't."
We have had deflation in the US and in Japan in recent years with a govt, no?
I guess history must be irrelevant."
Huh?
You want to add some analysis, ie wtf do you mean?
Cheers,
Misean,
I don't know if Delong is a nutter, but he doesn't give me anything to work with here.
I take his premises to be false so, regardless of the elegance or validity of his arguments, I'll necessarily see his conclusions as false also.
We're not at the level of Galois Theory here (though we should be). It's introductory Aristotelian logic.
burnside,
"It's introductory Aristotelian logic."
That's why he is a nutter.
Happy Easter.
Cheers,
--
"You want to add some analysis, ie wtf do you mean?"
I am quite clear in what I mean -- We have had deflation and the govt in power here in the US (deflation was quite common before 1950, no?) and in Japan. Therefore, your comment implies that history is irrelevant because as long as there is a govt in power there must be inflation. Or, are you implying something different?
As to "people here" comment I don't read too many people here who comment on the criminal nature of the Fed and the USG, making rules, or bailouts, after the fact. Their powers may be legal because of the crooked system, but they are doing what is clearly immoral. Every time the Fed and USG intervene they create winners and losers! By what moral right?
Jas
Misean
Inflation in the US is very high.
I get the impression that you imagine the only way for money to enter a system is by the creation of debt.
And from that view you then abuse Jas Jain
Instead you should i believe let go of your beliefs and then discover for yourself how it is easily possible for inflation to remain very very high even as demand for debt falls.
Jas can be a bit twisted. For example it is no better any place else and never has been. The only difference is the mythology that suggested it was different.
Jas, worried,
Perhaps I'm being technical, 'flation is a monetary thing. M1 is esentially stable. Sorry if I missed something.
And By the By, Jas could stand my grandfathers policy: You catch more flies with sugar than vinegar.
Cheers,
We are all Benny's bitch now.
Jas,
What you said about S earlier is very interesting.
I've had a hard time reconciling the benighted arguments with the otherwise attractive character. Didn't add up to 'troll'.
Of course I have no idea if you are right, but it would explain a great deal.
"How sovereign wealth funds were left nursing multibillion losses"
A nice recap in the Guardian of how far underwater the various sovereign wealth funds are on their investments in large Western financial institutions. The tally is not pretty.
It isn't simply that the losses are large in percentage terms, but the falls came fast, making the buyers look like chumps. And these were high profile deals by funds that are very visible in their home countries.
Thus, even if the fund managers can be persuaded that further investment in damaged financial firms would be a winner, the domestic politics make it a non-starter. It's highly unlikely they will make another high profile deal (save perhaps those funds that have not yet been burned) until a bottom has clearly been reached. But by then, the urgent need for capital will also have passed.
From the Guardian:
The financial crisis enveloping the world banking sector has left the sovereign wealth funds, controlled by governments from Singapore and China to Abu Dhabi and Kuwait, nursing multibillion-dollar losses after helping to bail out major western banks.
In recent months, banks including Citigroup, Morgan Stanley and UBS have turned to investment funds, including the Government of Singapore Investment Corp (GIC), its sister fund, Temasek, and China Investment Corp, for funding that western investors were unwilling to give as stockmarkets plunged.
But the dramatic fire sale of the US investment bank Bear Stearns and subsequent stockmarket run on HBOS this week have depressed banking stocks further and deepened the climate of fear in the world's stockmarkets.
Singapore's GIC, for example, which with funds of more than $330bn (£166bn) is one of the world's largest sovereign wealth funds, spent more than £5.5bn on a 9% stake in UBS last year. Shares in the Swiss bank are down 46% so far this year. It spent a further $6.88bn in January as part of a $14.5bn funding round for the embattled US bank Citigroup,
Two months before, the Abu Dhabi Investment Authority (ADIA), which with assets estimated at up to $900bn is reckoned to be the world's largest sovereign wealth fund, invested $7.5bn in Citigroup bonds that will convert to shares in 2010 and 2011 at prices from $31 to $37.
But since then Citigroup has become one of the most high-profile casualties of the sub-prime mortgage crisis in the US, and its share price has plunged as low as $20 - nearly 40% lower than when the ADIA made its investment.
The pain shows no sign of letting up. Two months ago, Citigroup announced it had plunged into the red over the past three months of 2007 and sliced its dividend almost in half as it wiped more than $18bn off the value of its assets because of exposure to sub-prime mortgages. But Wall Street analysts reckon the firm could record a further $15bn write-down for this financial quarter.
China Investment Corporation's investment in Morgan Stanley, made just before Christmas, is also facing a significant loss. The securities it picked up for $5bn will convert to stock at $48 to $57 a share in two years' time. At present, however, Morgan Stanley's share price is closer to $42.
Another Beijing-backed money manager, China Development Bank, has also suffered as the stake in Barclays it bought in July has plunged in value. When it acquired the 3.1% shareholding, the bank's shares were trading at about 680p each. On Thursday, they were at 429p.
The Singaporean fund Temasek is also nursing losses on the 2.1% Barclays stake it bought last year, although its investment in the London-listed bank Standard Chartered has fared better. The bank, which has little involvement in the US sub-prime crisis, has weathered the storm better than many of its peers.
The losses sustained by sovereign wealth funds are relatively insignificant when compared with the $3.2tr they are believed to have at their control. Morgan Stanley reckons that with the price of commodities such as oil set to remain high, this amount will balloon to $12tr by 2015. But the losses may dampen their appetite for further involvement in bailing out western banks
I say.
We can forget about them. Who do we go to next, Russia with largest gas reserves and 2nd only to the Saudis In oil reserves? They love this. Who really won the cold war? I tlooks like Russia did.
Misean
In a contracting economy i can imagine that savings are drawn down and money in wallets spent faster than in other times.
Even so the supply of money can still be increasing - it just does not get accumulated as savings dissapear and prices increase.
M3 is very high and has been for years.
Either way I believe there will be tremendous inflation in coming years and it is very unlikely/impossible that prices will fall when money is not tied by any mechanism to a thing of value.
We can find out soon enuf
Worried,
I'm not debating. Just stating facts.
https://federalreserve.gov/releases/h6/current/
Find some 'flation in there.
Cheers,
Misean
Are you saying you rely on these figures for the basis of your thinking?
How do you define a fact?
--
Worried,
Thanks. My beef is with false beliefs, especially, with the efficacy of the system.
Any system, or human institution, is only as good as the men that control it, or administer it. Regrettably, we have Crooks firmly in control of the econo-political system and their agents administer the system. Nowhere is it clearer than at the Fed.
The other side of the coin of the Crooks is the American People. They have been rendered powerless as a result of the propaganda about the goodness of the system. Bad people who control the system today tell American People that their system is good fully knowing that they control all the important elected and appointed officials. I am sorry, but I see no way out for Americans than prolonged misery. Blind faith always ends in misery!
A historical example: In the most prosperous part of India, when India was relatively prosperous, during the raids of Muhammad of Gazni the locals had full faith in their god Somnath to protect them. Since they were prosperous for so long they had all the reasons for that faith. We do know what did happen. The same is the case with Americans of today in terms of their faith in the current system.
The problems facing Americans are deep and fundamental in nature. No manner of interventions will do anything meaningful to avoid the unavoidable depression. Economists who say that they have a plan to avoid depression are liars without knowing that they are lying. Can they control the actions of hundreds of millions of Americans and millions of businesses for a long time? Economics is all about human behavior and there are limits to how and how much it can be controlled.
How do you arrest the decline in the aggregate demand after a long period of over-consumption (consuming more than one produces)?! Americans need to reduce consumption at least for few years and that by definition would mean a depression, no? USG footing the bill for the over consumption?! I doubt that that can be done with what is going on with housing prices (I check the daily data from Radar Logic and prices are falling 2% a months for all metros and 5-8% for the Bay Area in CA).
I hope that this clarifies my position and comments.
Jas
Jas
A little bit of inflation and a few years and a supply of cash will probably make this all seem much better by the next decade.
The question is what comes next.
WW1 began in 1914.....it is all getting a bit spook to my way of thinking.
Hopefully there will be an adjustment and some of that outsourced industry will be encouraged to come back home. Billionaires will be encouraged to be a bit poorer and workers making something given a bit of self respect in some kind of adjustment of reality to the status quo that nobody wants to live in a country where the other side of the armed gate are desparate hungry people with no hope.
It can be done somehow.
Misean,
I see deflation in M1, inflation in M2. What was the point?
--
"I'm not debating. Just stating facts. Find some 'flation in there."
Misean,
You really have a problem with language.
THE FACT IS THAT DEFLATION WAS FREQUENT IN THE US WHILE THE US HAD A GOVT IN POWER AND THAT REMAINED IN POWER.
The last time that there was an outright deflation in the US was during 1949-50 (only very briefly in 1955) when the YoY CPI change was below -2%. BTW, the US govt in power during the past bouts of deflation was democratic, no?
Didn't Japan have deflation and a democratic govt in power in recent years?
Your facts don't cover historical period that I spoke of; hence, I said that history must be irrelevant TO YOU. Got it?
Jas
"Didn't Japan have deflation and a democratic govt in power in recent years?"
Hmmmm. maybe they had some powerful savers!
Worried,
It shows a stable, to mildly declining M1. Clearly no inflation. M1 is where to look for inflation, as that is what monetization of US Treasury occurs.
Jas,
Do you NEED to yell! "The last time that there was an outright deflation in the US was during 1949-50"
So? Point? There was also a nasty deflation 1929-1940.
We are likely heading towards another deflation. It will likely be fugly.
My bitch with you is attitude, not prognostication.
Cheers,
Jas Jain
superb posting. thank you. You sound a bit upset and you should be. I am beyond upset. I am sickened. Every day anothe bombshell. Again ,thsnk you
Missed,
I see a reduction of cash in circulation (M1) as you do and a rise in instruments of credit (M2) also as you do.
The difference between your view and Misean's is what this means in terms of deflationary trends.
There has been price inflation here, obviously. That tends to mask what some are most concerned about - that reduction of currency in circulation.
--
"Hopefully there will be an adjustment and some of that outsourced industry will be encouraged to come back home."
Worried,
Crooks are in the business of making money and they have no interest in bringing outsourced industries back here. They will take there capital there!
"Billionaires will be encouraged to be a bit poorer and workers making something given a bit of self respect in some kind of adjustment of reality to the status quo that nobody wants to live in a country where the other side of the armed gate are desparate hungry people with no hope."
Please read the detailed history of the Great Depression. By early 1939 the entire New Deal stimulus had run its course and the economy was back to where it was in 1933. The capitalists weren't very keen on putting people to work (they became very much anti FDR and became more strident Republicans) . It was the beginning of the WW II (the best thing that ever happened to the US economy and later American power) that saved the economy from the depression. It took 6 years after the war for people's psychology to change from the depression-ear psychology.
Jas
Misean
If there were deflation with so much debt it would be catastrophic. The opposite is needed and will arrive.
Perhaps we are talking about technical things and therefore appearing to be talking about something different?
Are you saying prices will fall when it gets fugly?
Somehow someway prices and wages will fall and existing debt will become cheaper.
And sooner rather than later we can find out so lets be cool about if for now!
Cheers
Jas
In GD 1.0 because money was still tied to value the idea it was possible to create money was perhaps hard to grasp? For whatever reason money was not created and nobody wanted to spend what they had for any reason as it was regarded as money lost.
This time is different. At least to begin with. It is the next part which is unknown.
"Somehow someway prices and wages will fall and existing debt will become cheaper."
Doh!!
I meant wages and prices will rise:-)
Today's NYT says there are two sides in the political debate: Democrat, and Wall Street.
This raises two questions.
1) What became of the Republic Party?
and
2) Where they NYT writes:
Which party wants to continue with more decades of "exotic new services and new players" -- is that the conservative position these days, or the liberal?
I'm so confused.
--
Misean,
I don't have any problem with your attitude! If my attitude bothers you, just focus on my facts and I am very happy to debate them. I am polite to those who are polite to me. Please don't tell me that you have been behaving like a gentleman when addressing me. We are even and I don't carry things from one day to the next.
I do have few insights for those who have an open mind. I am a self-avowed critic and I will keep criticizing Crooks who have been systematically destroying America. And there is nothing to stop these Crooks as they have an iron grip on the USG and the Fed. Most of the economists are their agents. Crooks have fame and fortunes to disburse to those who serve them.
Our views and comments are more important than our personalities.
Jas
"It was the beginning of the WW II (the best thing that ever happened to the US economy and later American power)"
Prior to WW2 i think it is true that America was already tooling up to produce munitions and materials for the British empire. Certainly once the war was under way the American industrial base was flat out suppling The British empire, China, and Russia with materials under the lend lease program.
At that time the US had wealth I think? Even so they built all of that stuff for some kind of compensation no matter how generous the terms were.
Prior to WW2 The British empire was still the effective world power. After that Britian declined.
To my way of thinking the current situation goes back to decisions made in the 1950's to strut around the worlds stage in a way that was not sustainable unlike the manner in which Britain achieved world domination by enforcing trade on countries even if they did not like it in return for 'her protection'. The American way was to convince people that hollywood and hamburgars and rock music and american products were good for you.....or else.
The US though decided to print its way to glory by progressively coming off the gold standards of the day rather than relying on trade alone.
But what do i know?
What does anybody know today?
The guys who know are mostly dead!
And hence we are all here today looking a bit stupid:-)
.
When are Saudi Arabia and China going to unpeg?.
--
"For whatever reason money was not created and nobody wanted to spend what they had for any reason as it was regarded as money lost."
Worried,
As I said, you do need to read the detailed history of the GD. FDR did devalue gold and created money and inflation for few years, but it all ran its course. With gold standard it was easier to create inflation -- by simply changing the price of gold at which the govt will buy/sell gold! Creating inflation was the easiest thing for FDR to do and he did it like an amateur, or a kid with a new toy!!
After few years of govt created inflation, by spending as well as currency devaluation, deflation was back with a vengeance in 1938. A nasty one. Americans can thank God for Hitler (I only mean in a narrow sense here).
Jas
I wonder if the Fed governors do not in fact believe we are on course for a deflationary contraction - call it what you will.
One of the dangers in that scenario is that those who have got savings or investments might not able to access them if steps aren't taken to ensure that the depository banks, or the depository divisions of brokerages, are still functioning.
There's been a tendency among some here to read every move the Fed makes which is protective of banking or investing to be an investment bank or hedge fund bailout. My understanding is this is probably either wholly incorrect or that it's correct only to the extent it's unavoidable where protection of savings, checking, money markets, retail investing - the whole panoply of instruments used by mainstream Americans to conduct their everyday affairs - are the real object of Fed activities.
Not every move the governors make has as its intent the protection of depositories - they've got other concerns, particularly those connected with the credit markets and velocity. But it's tiresome to hear that inevitable chorus of accusations arise every, every time Bernanke and Company acts.
If you want to have the use of your checkbook next year, I imagine you'd best let them get on with protecting it.
"Americans can thank God for Hitler"
Ah but who created him?
Worried writes:
"Americans can thank God for Hitler"
Ah but who created him?
Worried | Homepage | 03.23.08 - 11:31 am |
The answer to that question is scary to people. Don't go looking for it!
--
Correction: With gold standard it was easier to create inflation and money.
BTW, FDR stopped devaluing dollar because he was afraid of doing more harm than good to over-do something and he was losing more and more support from businessmen. If enough businessmen withdraw their capital and investments the US economy sinks naturally. That, BTW, is what is ahead.
Jas
"If enough businessmen withdraw their capital and investments the US economy sinks naturally. That, BTW, is what is ahead."
The US remains undisputed world power number one. That is not likely to change so soon. The US still has many of the most powerful corporations in the world. Even if they are employing chinese profits still belong to Americans.
What is needed to keep the wheels turning on the wagon is an adjustment and i think then that the thing will keep on trundling along for a few more years yet.
Other stars are rising but i dont see the end of empire so soon.
Dream on!
The Chutzpah of economists.
It is not just DeLong, it is the whole field of economics which has puffed itself up. And when theory has been put into practice, it has both been helpful but also done considerable harm (think IMF.)
In Medicine there is the part that does research to establish facts and the clinical part that applies the research. The latter is held to a certain standard of familiarity with the research and can be penalized if judgment or knowledge is faulty.
A similar situation holds in certain types of engineering. Where a body of knowledge say metallurgy is/not correctly applied to a bridge or airplane wing.
Economics is clearly not at that stage. I think as a profession the used of complicated mathematics deludes many in the field. They believe that they are a "hard" science rather then a social science. But the is little hard research upon which a standard of practical application can be based. So in effect it is still an art.
LTCM was the Tacoma Bridge, the Thalidomide of economics. But there was no systematic way in which that event was made to change practice.
A friend of mine, an independent international portfolio manager said
that "Roubini's theory is all very well . But at the end of the day I have peoples welfare in my hands. And theory does me little good. I must use my judgement and experience."
He understands the age-old idea "First do no harm"
If you want to have the use of your checkbook next year, I imagine you'd best let them get on with protecting it.
hey I am not against them saving the functionality, I am against giving free gifts from taxpayers to JPM and the like. Without taxpayer authorization, no less.
If you are gonna use money out of my pocket to keep institution functional, then nationalize them, don't take my money and give it to someone else!
Jas,
Your message would be better with a few sugar sticks, as I try to make mine...(Super Colander Tin Foil Hat)...self deprecating so those that don't shar3e my point of view aren't off-put.
Worried,
It seems were on the same page but seeing different things. Which is not unnussual.
Off to church now,
Happy Easter All!
Cheers,
Missed,
Believe me, we are all watching the guvs - to say nothing of our spendthrift legislature - for evidence they've crossed that line.
There may come a point (soon) when we all have to consider whether or not to accept propping up wastrels to some extent in order to avoid some severe problems for ourselves. Spencer will twirl in his grave.
Wish this were all much tidier.
But it isn't.
--
"Ah but who created him [Hitler]?"
Moneybags of London and later New York City. The same old Crooks! Americans really need to study The Boer War when the seeds of the future unfortunate Holocaust were sown.
"People here" don't know the accurate version of the Anglo-American capitalism couched in popular democracy after the Cromwell Revolution (before the "Glorious Revolution," glorious for whom?), which was a coupe by the moneybags.
Brainwashing has been the most important aspect of Britains and America's capitalist rulers by use of the flag, something very similar to the nationalism of the Nazis.
Jas
Plschwartz
You seem a bit confused.
But you say economics is different?
and
Thalidomide???
The age old practice of medicine was that the Doctor treats and nature heals.
This has been replaced with the economicly successful marketing ploy that that the human body is a totally useless pile of genetically deficient material that is unable to recover from anything at all without some product by some multi billion dollar company doing very well economicly whos owners fund medical schools and universities and research and have a finger in pretty well every medical pie going
Everything is economics these days
Americans can thank God for Hitler (I only mean in a narrow sense here).
There is no "narrow sense"in which any American would "thank god for Hitler". None. Zero.
You have an avowed affection for the old Reich.
Why haven't exported your twisted self to Germany?
--
"It is not just DeLong, it is the whole field of economics which has puffed itself up."
Bravo, plschwartz!
In America, economists do lot more harm than lawyers!
CR will continue to peddle "no depression" until after the depression can't be denied. If the economy is in a recession, as CR agrees, what will happen if the housing prices fall another 15% nationally and 30% in CA and other bubble areas? No depression? Maybe, CR is better at arithmetic than I am.
Jas
Dear World at large,
Please follow my lead :
Say price-inflation when you mean that and say monetary-inflation when you mean that.
Then, this endless argument between people who are almost on the same side will be clear to all, perhaps even end.
For the record, my view is :
there is no monetary-inflation at the moment or has been for some time. I can do present value calculations on the future values of the "sterilization" operations of the Fed to claim there IS monetary inflation and do actually trade on that basis but that's strictly for traders.
There is price-inflation significantly higher than stated by the CPI.
Thanks for paying some attention to this matter.
-K
--
Misean,
OK, I will buy some sugar sticks.
Is America a great country or what? It really is, but I can't say the same for the current system. We can't rest on out past success and enormous advantage bequeathed at the end of the WW II. Americans have been spending the inheritance, IMO, since the Baby Doomers, I mean baby boomers.
Jas
Jas, the history of conflict is written by the victor.
You need only look as far as the nearest American history texts to note glaring omissions (Chepultapec?) or consider how the former Soviet Union presented its past to see the point.
Bernard Berenson called it the agreed-upon lie.
Rather than accept the editorial distillations of editorial committees, I'd sooner have a look at the source materials myself. Collections of letters, autobiographies, journals put one 'in the picture' and inevitably tell a different tale.
Your views are not mine, which is not to say you're mistaken. But don't insult me (by proxy) by presuming I, an American after all, don't know anything or am the uncritical receptacle of predigested history.
--
spike66,
My God, references to and comparisons with Nazis are quite common in America. The context in which I said, pulling the US economy out of deep depression of 1938 and early 1939, it was quite appropriate because who started the WW II.
Who ended up as the biggest beneficiaries of Hitlers rogue regime? Not America and Americans? I hate America's Crooks as much as I hate Hitler and Nazis, because both will cause enormous harm of life in pursuit of power. Their victims may be different.
Jas
Checking in on this thread,
looking to see
if there is something to learn,
about a coming crash,
or a rebounding bash,
or this country going to trash . . .
instead what I find is a gaggle of very well fed trolls.
Don't feed the trolls.
But be compassionate and offer them AlkaSeltzer.
Worried:
Like every other profession medicine has good and bad practitioners. There are those who have chosen medicine over an MBA for a better future income stream.
But there are still many who genuinely was to help others and do the best they can.
But at least some of what you accuse the profession of, has actually been driven by malpractice suits holding physicians to a dubiously high standard of judgment. Law is another area in our society which has gotten out of control.
And of course lawyers should be open to malpractice suits as well
Although a little off topic, I would suggest that the first step in people getting control of our country again is to start from the top with Campaign Finance reform.
--
burnside,
I have NEVER implied all Americans when I use the general term. I thought that it was understood to be a comment applicable to most but by no means all.
I stand by my conclusion: The biggest problem facing America is American People. Who support the system that allows Crooks to control the economy and society for their own ends. Ignorance is at the root of it. The bubbles beyond any historical bubbles of their kind attest to American ignorance of the process of the stock market and the lending business. Home-debtors pandered to as homeowners?
Sorry, if anyone takes offense. I could be wrong, you know.
Jas
transient said: "But I'm still curious why you think the ratio you were indicating above is useful, other than the fact that it has coincided with 5 data points. i.e. what does it mean?"
I'll try again.
The economy can only grow so fast without triggering widespread inflation. The unemployment rate is an indicator of economic strength (lower=stronger). If it gets too low and the labor market gets too tight, however, that causes wage inflation, considered to be the "worst" kind because it can drive inflation higher in lots of areas all at the same time...which is "very bad."
Interest rate levels and directions are a measure of monetary tightness (or easing). When the unemployment rate is extremely low (near the end of a business cycle after a long expansion) interest rates become restrictive (high and/or rising), slowing down the unsustainable economic growth.
At these times the low unemployment rate and the relatively high interest rate cause the ratio to be extremely low, indicating a coming recession.
In April of 2000, the unemployment rate was extremely low, 3.8%. In the same month, conventional 30-year mortgage rates were 8.15%. 3.8% divided by 8.15% is a ratio of 47%, suggesting that the economy was going to be weakening sharply. We were in recession a year later.
On the other end, in June of 2003 that ratio was just over 120%, a very favorable level suggesting solid economic growth ahead. The unemployment rate was high at 6.3%, with conventional mortgage rates very low at 5.23%. This was just before we had a multi-year period of both solid economic growth and stock market returns.
Currently, the ratio is at about 81%, indicating continuing economic expansion because the combination of unemployment rate and interest rates is favorable. Unemployment isn't so low that the Fed has to be sharply restrictive to deliberately slow a runaway economy. Just the opposite, in fact.
Sebastia
--
joe shmoe,
Thanks for reminding us of what a troll looks like, I mean trolls like. If it quacks like a...
Jas
Yes, Jas, but I don't see the emergence of an informed public either here or elsewhere. Everything argues against it, history not the least.
We've suffered under poor leadership a number of times in our history. Today's circumstances are not different in that respect at least.
And it has been the underlying character of that general public which, once it understood the difficulties, is why we're still here. I'd have said it didn't exist any longer had I not seen the domestic (and worldwide) response to Sept 11.
Uninformed or mistaken they may be but, in the aggregate, they're pretty terrific in the ways that ultimately count.
As I mentioned above, I do wish things were tidier. But they're not.
I
Jas,
That was some nice posting.
Surely you must admit that BB is uniquely equipped to buy the "crooks" time. Unlike FDR, he is not an amateur inflationist.
Your tone IS annoying. You are not the first person to come to the realization that the USA has done far more harm than good.
I started Googling SEC requirements for traders and came across this from a college blogsite which answered my question
"Hey all
Is taking the SEC license (being a licensed broker) at the age of 18 a good hook?"
So much for professionalism.
Is anyone in the whole financial structure required to have any better training then this?
I am seriously thinking of attending ths event so I can learn how to live off the grid.
WordPress.com
Adolf H. was a product of corporations who did a handsome profit of his war.....
Will Wall Street go to War too???
)))
Bush/Cheney are still there till jan 2009
--
burnside,
We are pretty much in agreement.
As it must be obvious, you are NOT included in my general reference to Americans.
BTW, there are even some good economists, e.g., David Rosenberg and Paul Kasriel. I read them regularly for good data presentation as well as honest commentaries. I am sure that Seb avoids them religiously.
Jas
Jas,
I suspect we are, mostly.
Kasriel has a slot in my Pantheon. Thanks for the Rosenberg tip. I'll have a look.
--
"You are not the first person to come to the realization that the USA has done far more harm than good."
squeezed,
I know that but they are in a tiny minority, % wise, No? I observe that there is lot of faith in the system. And I equate it to blind faith based on my knowledge of blind faiths thru history.
Thanks, I will work on my tone. I promise.
Jas
plschwartz said: "...Is anyone in the whole financial structure required to have any better training then this?"
I'm not sure they do. I studied for, sat for, and passed my Series 7 exam 20+ years ago, and did very well. The study materials are largely about the mechanics and rules under which markets operate, some common math applications (calculating bond yield-to-maturity), along with the rules regarding your obligations as a broker to your client.
But nothing on how to trade profitably, how to know when the stock market is "expensive" or "cheap", the impact of monetary/taxation policy, whether the economy is going to be expanding or contracting, etc.
Brokerage houses have "strategists" at the home office for that. The job of a broker is sales.
S.
yoringe.
this will surely take our minds off the economic mess we are in.
6 Signs the U.S. May Be Headed for War in Iran - News Desk (usnews.com)
what do you make of this article
Already we have riots, hoarding, panic: the sign of things to come? - Times Online
all Sebastian and Jas Jain
This merry-go-round is starting to make me sick.
[Wretch!]
Jas Jein et al.
Is America a great country or what? It really is, but I can't say the same for the current system. We can't rest on out past success and enormous advantage bequeathed at the end of the WW II. Americans have been spending the inheritance, IMO, since the Baby Doomers, I mean baby boomers.
What made America strong isn't the Bushes or even helicopter Ben, but people like Edison, Shockley, Bardeen, Brattain, Percy Spencer and many others. I mean electricity, transistors, micro oven ...
It's Easter time, time to rise up from ashes and see the demon one created for oneself to work and have a meaningful life: money and financial instruments.
Let's take the case of Vietnam, 30 years later, after all the real destruction of bombs and people it's still there. So I mean relax, and don't push that read Lauch button
All is papers IOUs, illusion for short.
Vietnamese demonstrate how to recover from atrocity - The New York Times
Be happy...
No real, useful info here, but interesting.
Yes, WWII resulted in the US having a definite advantage. And yes, we have an increasingly larger population that are a net, negative value add as it were.
One American virtue not covered here is technological prowess. Without the real inventors, innovators, entrepreneurs, and producers, the BS wouldn't have prospered to this extent. The wonderfully productive folks in America need to stand up and SCREAM ENOUGH!
"I, an American after all, don't know anything or am the uncritical receptacle of predigested history."
That was fantastic...
Jas, You provide a good perspective, but it clearly lacks the positive colors that really do exist.
--
"One American virtue not covered here is technological prowess."
Allen C, you are living in the past. That seems to be a common problem.
"The wonderfully productive folks in America need to stand up and SCREAM ENOUGH!"
You forget even more "wonderfully productive folks", volk?, in Germany. America's capitalists Crooks stole a lot of technology from Germans after the WW I and WW II. Why do you think that the US entered WW I? (The WW II was an entirely different matter).
There are LOT MORE productive folks in China that are leaner and hungrier than America's. Wake up and see the current reality of America and American relative advantage and not what WAS in the past.
Sorry,
Jas
"No real, useful info here"
Sorry...loved the links.
m writes:
I am seriously thinking of attending ths event so I can learn how to live off the grid.
http://offthegridgirls.wordpress.../april-meet-up/
Thank you for the link. I still have alot of canned goods, etc in the basement from the Y2K scare, but this no longer a scare. This is reality. It would take a mob maybe 10 minutes to clean out your local grocery store. I am going to give those girsl a call for the April meetup.
"There are LOT MORE productive folks in China that are leaner and hungrier than America's. Wake up and see the current reality of America and American relative advantage and not what WAS in the past."
Oh come on Jas...Do you conclude we lead in multiple industrial segments because we effectively force everyone to buy our wares? We attract the hungry, leaner, and productive. That is a strength of ours.
Can we maintain our lead? It's going to be tough. The Japanese and German auto manufacturers forced everyone to build better cars. China and India will likely have their day. Good for them. Do you conclude the best and brightest in America will sit idly by on the couch? Not a chance!
There is positive beyond the BS artists and fools gold alchemists!
--
"Jas, You provide a good perspective, but it clearly lacks the positive colors that really do exist."
Allen C,
Thanks, but most people know the positive colors. I focus on what most people don't focus on. Is that explanation OK?
Look, people, I am a self-professed critic and I am not bad at it. Most of the problems that I foresee do seem to materialize based on past record. I realize that I only have a short-term record here, but in three years more people will have better idea.
I do acknowledge that I am early in my negative forecasts, but so far never have been wrong. I thought that the recession would begin no later than May07 and that would prove to be early by 5-6 months. I admit being early in time. But, that is far preferable to forecasting recession date after the recession is here already, no?
People who complain about Seb have a problem. The guy is simply wrong and when it comes to investing he has the mindset of a born loser. Hey, when it comes to investments there are lots of losers, here as well as elsewhere. So, please give Seb a break. Like most here, he is a nice person. Lot of nice people are wrong most of the time. If you want truth you are more likely to get from a not-so-nice person. Nice people avoid telling unpleasant truths!
BTW, is is all business for me and nothing personal against anyone on this blog.
Jas
jas
Bravo. you have spirit
"I thought that the recession would begin no later than May07"
My call was no later than Q1/08 and my portfolio is the beneficiary of this call.
My suggestion to you is to temper your doom and gloom with some of the real, positive factors.
My suggestion to you is to temper your doom and gloom with some of the real, positive factors.
Allen C | 03.23.08 - 2:24 pm | #
what are some of the positive factors? Help me out hear 'cause I have the dry heaves daily.
We have a terribly global world and, over all, financial regulation has not kept up with that, Mr. Dimon said in an interview on Monday, the day after his bank agreed to take over Bear Stearns at a fire-sale price. I cant even describe the seriousness of that. I always talk about how bad things can happen that you cant expect. I didnt fathom this event.
"what are some of the positive factors?"
Read my comments above.
The real issue here is that we allow financial services to imperil the economy and force bailouts. It's pathetic to anyone having to slug it out in the real world of competition.