Daily Digest - Apr 1

Wednesday, April 1, 2009, 9:52 AM
  • The Road Not Taken (in recent years)
  • My Manhattan Project
  • House Prices: Round Trip to 1990
  • Banks can do ‘You Walk Away' too
  • S.A.M.H.S.A. dot Gov
  • China and Argentina in $10bn deal (H/T Ruhh)
  • Recession Puts a Major Strain On Social Security Trust Fund (H/T JoeManC)
  • Dylan Ratigan GoldSeek Radio Interview.(Audio)
  • S&P/Case-Shiller Home Price Indices (Chart 2003 Levels)
  • Guest Post: Exxon Pension Fund Sues Northern Trust Alleging "Reckless, Massive Losses" 


The Road Not Taken (in recent years)

...The Fed can manipulate either the quantity of money (bank reserves) or its price (interest rates) - but not both. Mr. Bernanke is now trying to control both. I'm no economist, but this approach will only work if our creditors willingly suspend their disbelief. At some point the dollar might just cry "Uncle", or long term interest rates might inconveniently rise to the point of choking off whatever monetarily induced economic recovery has taken root. If the "dollar standard" is ever abandoned, then both could happen at once.

Then what? What is the policy prescription for a world in which THE reserve currency is no longer trusted? Let me say that this suboptimal scenario is not a prediction; it is only one possible outcome from our government's choice of the policy road "less traveled by". We should also remember that, against a very different global economic backdrop, Japan did indeed choose a similar path to the one we now seem to be taking. Given that land of the rising sun has seen many false dawns in almost two lost decades, the road of borrow-to-stimulate-then-monetize has indeed "made all the difference".

To avoid a depression, one that is either Great or long-lived, then the U.S. will have to be a bit more responsible (read: shared pain among stockholders and bondholders, management and labor - kind of like GM). Being the steward of the currency system known as the "dollar standard" demands that the U.S. encourages increased saving and a concurrent decline in borrowing and spending. The role played by China (and other Asian nations) should be an opposing one: Gradually reduce the hoarding of dollar assets, encourage domestic consumption, and let its currency rise over time. Rather than fixate over whether the road ahead will lead to either rising or falling asset prices, perhaps the best road to take would be the high one. It has certainly been less traveled in recent years.

My Manhattan Project

I have been called the devil by strangers and "the Facilitator" by friends. It's not uncommon for people, when I tell them what I used to do, to ask if I feel guilty. I do, somewhat, and it nags at me. When I put it out of mind, it inevitably resurfaces, like a shipwreck at low tide. It's been eight years since I compiled a program, but the last one lived on, becoming the industry standard that seeded itself into every investment bank in the world.

I wrote the software that turned mortgages into bonds.

Because of the news, you probably know more about this than you ever wanted to. The packaging of heterogeneous home mortgages into uniform securities that can be accurately priced and exchanged has been singled out by many critics as one of the root causes of the mess we're in. I don't completely disagree. But in my view, and of course I'm inescapably biased, there's nothing inherently flawed about securitization. Done correctly and conservatively, it increases the efficiency with which banks can loan money and tailor risks to the needs of investors. Once upon a time, this seemed like a very good idea, and it might well again, provided banks don't resume writing mortgages to people who can't afford them. Here's one thing that's definitely true: The software proved to be more sophisticated than the people who used it, and that has caused the whole world a lot of problems.

House Prices: Round Trip to 1990

The featured 2 BR 2 BA condo sold for just under $100 thousand new in 1990. It went into foreclosure during the early '90s California housing bust, and was resold in 1995 for $33,000.

Banks can do ‘You Walk Away' too

City officials and housing advocates here and in cities as varied as Buffalo, Kansas City, Mo., and Jacksonville, Fla., say they are seeing an unsettling development: Banks are quietly declining to take possession of properties at the end of the foreclosure process, most often because the cost of the ordeal - from legal fees to maintenance - exceeds the diminishing value of the real estate.

S.A.M.H.S.A. dot Gov

This guide provides practical advice on how to deal with the effects financial difficulties can have on your physical and mental health -- it covers:

  • Possible health risks
  • Warning signs
  • Managing stress
  • Getting help
  • Suicide warning signs
  • Other steps you can take

China and Argentina in $10bn deal (H/T Ruhh)

China and Argentina have made a tentative agreement to swap $10bn (£7bn) worth of their currencies.

The move, which allows both countries to bypass the US dollar, makes it easier for Argentine businesses to buy Chinese imports directly in yuan.

It also gives Argentina hard cash at a time when its finances have been hurt by the global financial crisis.

The deal comes after China suggested that the world should create a new reserve currency to replace the dollar.

Recession Puts a Major Strain On Social Security Trust Fund (H/T JoeManC)

With unemployment rising, the payroll tax revenue that finances Social Security benefits for nearly 51 million retirees and other recipients is falling, according to a report from the Congressional Budget Office. As a result, the trust fund's annual surplus is forecast to all but vanish next year -- nearly a decade ahead of schedule -- and deprive the government of billions of dollars it had been counting on to help balance the nation's books.

While the new numbers will not affect payments to current Social Security recipients, experts say, the disappearing surplus could have considerable implications for the government's already grim financial situation.

The Treasury Department has for decades borrowed money from the Social Security trust fund to finance government operations. If it is no longer able to do so, it could be forced to borrow an additional $700 billion over the next decade from China, Japan and other investors. And at some point, perhaps as early as 2017, according to the CBO, the Treasury would have to start repaying the billions it has borrowed from the trust fund over the past 25 years, driving the nation further into debt or forcing Congress to raise taxes.

The new forecast is fueling calls for reform of the Social Security system from conservative analysts, who say it underscores the financial fragility of a system that provides a primary source of income for millions of Americans.

"It suggests we better get working on Social Security and stop burying our heads in the sand," said Sen. Judd Gregg (N.H.), the senior Republican on the Senate Budget Committee. "The Social Security trust fund, though technically in balance, is going to put huge pressures on taxpayers very soon."

Many liberal analysts reject the notion that Social Security needs fixing, arguing that the system is projected to fully support payments to beneficiaries through 2041 -- so long as the Treasury repays its debts. But they agree that the news is not good for the federal budget.

"This is not a problem for Social Security, it's a problem for fiscal responsibility," said Christian Waller, a public policy professor at the University of Massachusetts at Boston and a senior fellow at the Center for American Progress. He said the new estimates would force President Obama and his budget director, Peter Orszag, "to stay on track in what they have set out to do, and that is rein in deficits."

The CBO, Congress's nonpartisan budget scorekeeper, released its most recent estimates for the Social Security trust fund last week as part of its final budget projections for the fiscal year that begins in October.

The trust fund has long taken in more in revenue from payroll taxes and other sources than it pays out in benefits. Last August, the CBO predicted that surplus would exceed $80 billion this year and next, then rise to around $90 billion before slowly evaporating by 2020. But the rapidly deteriorating economy -- particularly the loss of more than 4 million jobs -- has driven those numbers much lower much faster, with the surplus expected to hit $16 billion this year and only $3 billion next year, then vanish entirely by 2017. 

Dylan Ratigan GoldSeek Radio Interview.(Audio)

S&P/Case-Shiller Home Price Indices (Chart 2003 Levels)

Exxon Pension Fund Sues Northern Trust Alleging "Reckless, Massive Losses"

The Exxon Mobil pension fund, which is represented in the lawsuit by Joseph Diebold, Jr., and is pursuing class action status, was worth $13 billion at the end of 2007, and states in the lawsuit that "defendants inappropriately invested the collateral in collateral pools that were illiquid, highly-leveraged, and unduly risky, containing mortgage-backed securities and other securitized debt instruments. These investments were inappropriately risky for retirement plan investments - especially when compared to the relatively small amount of gains that the plans could expect to receive from securities lending arrangements."

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Vanityfox451's picture
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Re: Daily Digest - Apr 1

2 hours 20 mins ago. 1st April 2009 

At least 19 people have been held during G20 protests in the City of London which saw windows of a Royal Bank of Scotland office smashed.

Related photos / videos


Around 4,000 people had been demonstrating in the streets around the Bank of England and many were penned in as riot vans blocked off some roads.

At the junction of Threadneedle Street and Bartholomew Lane, masked and hooded men tried to breach police lines to get through to the climate camp in nearby Bishopsgate.

They were beaten back by police, who were pelted with empty beer cans, fruit and flour. At least one officer was seen with blood spurting from a cut on his forehead.

In Threadneedle Street, a line of police holding back protesters was overwhelmed by the demonstrators, who surged forward, briefly pinning officers against the wall. Police retaliated with a surge of their own as officers again repelled the crowd with batons.

Demonstrators continued to chant while officers held their batons aloft in front of three police vans blocking the road. Protesters then smashed windows in the RBS building off Threadneedle Street.

Smoke bombs were hurled into the building and some protesters entered, with Scotland Yard officers following around 15 minutes later "in support of building security".

Police in riot gear supported by mounted officers then forced the crowd out of Bartholomew Lane and into Threadneedle Street.

A police helicopter hovered overhead as officers tried to squeeze demonstrators back down the famous street. Protesters chanted "shame on you" and hurled missiles.

Elsewhere, protests were largely peaceful as several thousand people descended on the country's financial heart to challenge world leaders.

In a co-ordinated manoeuvre, groups of protesters headed to Bishopsgate from a neighbouring street and set up camp. Carrying tents, picnic blankets and wooden stalls, the campaigners closed off Bishopsgate.

The climate camp aims to stay at the City of London site for 24 hours and, later this evening, plans to have bicycle-powered cinema, workshops and a ceilidh.

One climate camper, Richard Howlett, said they had gathered to protest against carbon trading and G20 efforts to prop up the global economy.

He said the idea for the demonstration grew out of previous events that climate camp protesters had held outside Heathrow Airport and Kingsnorth power station in Kent.

Prime Minister Gordon Brown has warned protesters that violence and intimidation will not be tolerated.

Video links and main article :-



RubberRims's picture
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Re: Daily Digest - Apr 1

You should have seen what the bankers on the second floor of the banks were doing. They were photocopying ten pound notes leaning out of their windows and burning them in from of the crowed. And you thought bad behaviour was only on the part of the demonstrators. It was ashame no one got it on camera. Some of these cowboys working for the banks were having a good time mocking and tormenting the demonstrators from the confort of their office building. 

Max Keiser: ….they (Goldman Sachs, JP Morgan et al) are systematically undermining the entire system. They are creating a mechanism to carve out equity and capital for themselves at the expense of society at large.

Exclusive: AIG Was Responsible For The Banks' January & February Profitability


More people are about to become extremely angry about the conduct of our banking system.


FireJack's picture
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Re: Daily Digest - Apr 1

Anyone know if we are about to hit a breaking point? My impression is less than a year but more than 3 months. 


I can't help but notice we are a little less than halfway down that asset bubble and the bad news is just pouring in. I don't see the world shrugging off a collapse of the U.S. by starting a new reserve currency so I can only assume everyone will go down with the ship.

 The bigger problem is that the collapse of oil production due to the collapse of capital is also coming true. That means that when things start to get real bad it's going to get really REALLY bad. 

DavidC's picture
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Re: FireJack and RubberRims


No, no, you don't understand, we're into a new paradigm.

All Timmy's activities as Treasury Secretary are going to work. All of Benny's work and Hanky's preparations are going to work.

Today, one of the talking heads on Bloomberg TV and one of the pit traders (sorry, don't recall their names but it doesn't matter when we're into a new paradigm) said that we're in a U recession (no depression) and the rally of the last week or two (confirmed by the big moves up yesterday and today in the UK, today in the USA) show it.

We've bottomed. Things are on the up. Forget about the car manufacturers. Forget about the bankruptcy of various states. Forget about the unemployment figures. Forget about the printing of dollars (they're not printng by the way, it's only pressing keys on a keyboard, doesn't mean a thing). Everything's going to be OK. House sales were up today. And the G20 is on the case.

Did I tell you about the English sense of humour and sense of irony?


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Re: Daily Digest - Apr 1

Economist Ravi Batra. (Photo: Vishal Malhotra)

    Maverick Southern Methodist University economics professor Ravi Batra says the financial crisis is just one symptom of a long-festering economic disease - a disease caused by neglecting basic economic principles over the past 30 years. Comments made by President Obama seem to echo Dr. Batra's understanding of a domestic economy choked by consumer debt.

    "Even as we're focused on the financial system and the credit markets, we are laying the foundation for what I'm calling a post-bubble economic growth market," Obama said Friday afternoon, adding "the days when we are going to be able to grow this economy just on an overheated housing market or people spending - maxing out on their credit cards, those days are over."

    Dr. Batra insists that pursuing economic policies that begin to reverse a decline in the real wages of individual consumers is the only way to heal the limping economy. Changes in the "wage-productivity gap" - or the difference between how much consumers earn and the value of goods and services an economy produces - can explain the current situation and can help guide policy-makers out of it.

    I spoke with Professor Batra about the current meltdown and how it can be viewed through the lens of the wage-productivity gap.

    Matt Renner: What is the wage-productivity gap and how does it affect the health of an economy?

    Dr. Ravi Batra: The wage-productivity gap is the gap between the real wage and labor productivity. The real wage is the purchasing power of the average salary. If productivity rises fast and the real wage rises slowly, then a wage-productivity gap develops and grows.

    MR: When there is production and wages don't keep pace, what is the result?

    RB: Productivity is the main source of supply, whereas wages are the main source of demand. If this wage-productivity gap keeps rising over time, supply will rise faster than demand and then we face the problem of overproduction.

    Many like [former Federal Reserve Chairman Alan] Greenspan and other economists love the productivity rise, but if it leads to overproduction, that leads to high unemployment such as we are seeing now. Overproduction is a disaster and it leads to depressions.

    If businesses don't sell what they produce, they lose money, and when they lose money, they have to lay off people.

    MR: In the United States, how did the recent wage-productivity gap begin to rise?

    RB: It started off with [President Ronald] Reagan. The wage-productivity gap started to develop in 1981. Reagan's economic policies increased productivity while restraining wages. One example is "free trade," which increased productivity but also reduced the real wage in the United States.

    Also, the policy of regressive taxation. Reagan raised every tax that burdens the poor, but sharply reduced the income tax; all this caused a fall in consumer demand. Economic growth fell after Reagan's policies were introduced. Slow economic growth leads to pressure on wages because low growth means low demand for labor relative to labor's supply, so wages fall.

    The third reason the wage-productivity gap grew as a result of Reagan was the "merger mania." Big firms were permitted to merge with each other. Each time there was a merger, there were layoffs, which also exerted downward pressure on wages. Mergers also increase productivity, further widening the gap. Reagan's anti-union policies were also responsible for the falling wages.

    MR: If the wage-productivity gap was widening, how did policy-makers prevent the inevitable overproduction and economic contraction?

    RB: Each time the wage-productivity gap goes up, the economy will contract because of overproduction. What they did was come up with a scheme to create debt in the economy because, by creating debt, they could raise demand to the level of supply.

    Initially they started off with increased government debt. The deficit went up under Reagan, which raised demand to the level of supply. Then Greenspan took over as Federal Reserve chairman and whenever there was the threat of overproduction, like when the stock market crashed in 1987, he brought interest rates down sharply. By bringing interest rates down, he lured people into borrowing. This began to create private debt on a larger scale.

    This really postponed the wage-productivity gap problems for the future because under these policies, productivity rose every year, so debt had to increase every year unless wages were to rise. Since productivity rises exponentially, debt had to rise exponentially as well. In such a situation, it is not hard to imagine a day when the credit system would simply explode. That's what happened starting in 2006 or 2007.

    MR: The financial emergency, or the freeze in lending, is being touted as the most pressing aspect of the crisis. Why are banks unable or unwilling to lend?

    RB: The biggest problem is that consumer debt is so high and the public has used up all its collateral. The banks don't feel confident enough to lend to anybody. The banks have lost so much money that they are feeling gun-shy now.

    What we are seeing now is called "debt-unraveling" which is the biggest pain in the world. The potential for this scenario is worse than what happened in the Great Depression. During the Great Depression, consumers did not have that much debt.

    The situation could be as bad as the Great Depression because, while banks are protected by the government, the 401ks and other investment plans are not protected. People are losing their savings through the fall in stock prices. The end result is the same: their savings are disappearing - the same thing that happened in the Great Depression.

    MR: What policies close a wage-production gap?

    RB: We should be following policies that close a wage-production gap, but that means you have to go against policies that created it: free trade, regressive taxation, and merger mania. This is not going to be easy and it will require a revolution in thinking.

    This will entail breaking up companies, raising taxes on the rich and lowering them for the poor. I'm not sure the country is ready for this yet, but it will be once we fall deeper into the abyss.

    MR: What do you think about the current steps the Obama administration is taking to address the economy?

    RB: First of all, they are confusing cause with effect. They think the cause is the financial crisis, but actually that is the effect. The cause is the rise in the wage-productivity gap. The gap between supply and natural demand [as opposed to artificial demand created by easy access to debt] is so vast now. That gap cannot be plugged easily, especially if you're not looking in the right place.

    Freeing the credit markets won't end the recession, because why would a bank lend money when it's afraid that it won't come back? When the borrowers are not creditworthy and have no collateral, why would a bank want to lend them money?

    The Obama administration should focus on trying to help the economy grow. The stimulus package will help in the sense that it will slow down the bleeding, but it won't stop it. If all the policies that led to the growing wage-production gap remain in place, the stimulus package will not end the recession. Balancing trade - reducing the trade deficit to zero - would be a huge step in the right direction.

    Look at the economic policies of the 1950's and 1960's - balanced trade, breaking up monopolies - for example, Exxon-Mobil will have to become Mobil and Exxon; raise taxes on the wealthy and cut them on the poor. Those economic policies will close the wage gap. Those were the decades in which growth was very strong, between four and four and a half percent every year. Since Reagan took over, growth has been three percent or less.


vvolf's picture
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Re: Daily Digest - Apr 1

I don't understand. People are living in tent cities, and there are houses sitting vacant that no one wants to take care of??? Empty houses and homeless could we solve both problems??? I don't know I give up.

People know the banks are 'walking away' from houses and yet they still move out??  If I were in a situation where I was living in a tent city, or in the foreclosure process I would keep an eye on my house and if it was just going to be abandoned I would just stay.  If not the house I moved out of then another house that was just being neglected and abandoned.

If things are going to get worse, no one is going to bother with trying to kick you out and if it gets better....possession is 9/10ths of the law! :)

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Stephen Lark
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Re: Daily Digest - Apr 1

In the documentary The Corporation the argument is made that corporations are, for the most part, psychopaths. The following radio documentary shows how the MBA culture instills psychopathic behaviour in the people who run these corporations into the ground (streaming audio and transcript available):

Radio National Background Briefing


MBA: Mostly bloody awful

Something happened to management culture decades ago and now being a Master of Business Administration, especially from Harvard, is rather on the nose. MBA, it's being said, can also stand for 'Mediocre but Arrogant', or 'Management by Accident'.

Davos's picture
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Re: Daily Digest - Apr 1

Hello Stephen: The Corporation was a SUPER watch!

joemanc's picture
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Re: Daily Digest - Apr 1

I don't know if this is good news, but I'll consider it is.

Recession gardens trim grocery bills, teach lessons


As American families try to stretch their food budgets during the
recession, some are turning to the backyard, rather than the grocery
store, as the place to look for produce.


Recession gardens are catching on with many first-time planters who want a healthy meal at an affordable price.


W. Atlee Burpee & Co., the largest seed and gardening supply store in the country, says it has seen a 25 to 30 percent spike in vegetable seed and plant sales this spring compared with last.


"I've been in the business for 30 years, and I've never seen anything
like it -- even remotely like it," said George Ball, chairman and CEO
of the company.


DurangoKid's picture
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Re: Daily Digest - Apr 1

Two things.

One.  People without money cannot afford houses.  Houses are a money sink.  There's always something that needs fixing.  Modern houses don't run well without fuel for heat and electricity to run all the gadgets and water to flush the toilets.  All that costs money.

Two.  If the bank threatens forclosure, stay put.  First, have them produce the note that says exactly who holds the debt.  If they can't produce, don't pay.  Next, if the chances are likely that the bank will turn its back on the property, you can squat or increase your rights to the property by offering rent.  The bank becomes your landlord.  Not great, but better than a tent.  Don't give up until the very last second.

ccpetersmd's picture
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Re: Daily Digest - Apr 1
DurangoKid wrote:

Two things.

One.  People without money cannot afford houses.  Houses are a money sink.  There's always something that needs fixing.  Modern houses don't run well without fuel for heat and electricity to run all the gadgets and water to flush the toilets.  All that costs money.

Two.  If the bank threatens forclosure, stay put.  First, have them produce the note that says exactly who holds the debt.  If they can't produce, don't pay.  Next, if the chances are likely that the bank will turn its back on the property, you can squat or increase your rights to the property by offering rent.  The bank becomes your landlord.  Not great, but better than a tent.  Don't give up until the very last second.

I've been wondering, who is the DurangoKid? Is this someone from Durango, Colorado, where I used to live? I thought it might be my friend, Marc, but the wording in your posts don't seem to fit him. Any hints? 

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Durango Kid

Charles Starrett (March 28, 1903 - March 22, 1986) was an American actor best known for his starring role in the Durango Kid Columbia Pictures western series. He was born in Athol, Massachusetts.


Durango Kid

Davos's picture
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Re: Daily Digest - Apr 1

Hello DurangoKid:

Could it be that they simply didn't know who the investor were?

Martin references numerous cases nationwide where judges threw out foreclosures where lenders had brought action against "illegally securitized loans and are no longer current holders of the notes."

Martin sees another problem where homeowners have a defense against foreclosure or avenues for redress when they have already lost their homes.  These cases would be based on the more familiar type of mortgage fraud, predatory lending.  She quotes one litigator from California who states that predatory lending claims, which can not only free the homeowner from the mortgage but result in substantial damages, can be won if the homeowner can provide that the loan was made purely for the lender's sole benefit.

ccpetersmd's picture
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Re: Durango Kid
Jarhett wrote:

Charles Starrett (March 28, 1903 - March 22, 1986) was an American actor best known for his starring role in the Durango Kid Columbia Pictures western series. He was born in Athol, Massachusetts.


Durango Kid

Well, I guess that rules out Charles Starrett as our Durango Kid!

DurangoKid's picture
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Re: Daily Digest - Apr 1

In the military the first question anybody asks you is, "Where y' from?"  I answered.  "IT'S THE DURANGO KID!!", came blaring back at me.  It stuck.

And yes, I am proficient with a six-shooter.

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