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Daily Digest - Dec 16

Tuesday, December 16, 2008, 9:08 AM

Fed readies to trash balance sheet further, ALT-A mortgages deteriorating "faster than expected" (edit: not by me), mortgage racket, Financial Sense energy roundtable, big oil project in jeopardy, Russia devalues Ruble (let the games begin!).

Economy

Fed Readies for Balance Sheet Tool as Rate Nears Zero  

Dec. 16 (Bloomberg) -- The Federal Reserve may today reduce its main interest rate to the lowest level on record and prepare for one of the boldest experiments in its 94-year history: using its balance sheet as the key tool for monetary policy.

The Fed's Open Market Committee will probably cut the benchmark rate in half, to 0.5 percent, according to the median of 84 forecasts in a Bloomberg News survey. The central bank may also signal plans to channel credit to businesses and consumers by further enlarging its $2.26 trillion of assets.

Chairman Ben S. Bernanke plans new steps to combat the credit crunch and prevent the worst recession in a quarter century from turning into a depression. The danger is the Fed's credibility could be hurt if policy makers don't clearly communicate a new strategy of manipulating the supply of money, at a time when FOMC members have diverging views on the subject.

Fitch: Alt-A Mortgages Deteriorating More Rapidly than Expected

The rating agency said it now expects average cumulative losses om 2005, 2006 and 2007 vintage Alt-A transactions to hit 2.72, 6.78 and 9.58 percent, respectively, up dramatically from expectations at the agency earlier this year.

Repost (for those who missed it) 60 Minute Video 50% More to Go (Alt-A's, NiNjA's and Option Arms)

Exec had mortgage racket down to an art

Orson Benn, once a vice president at the nation's
largest subprime lender, spent three years during the height of the
housing boom tutoring Florida mortgage brokers in the art of fraud.

Financial Sense Newshour Energy Rountable (long but integrally related to economic recovery)

Big Oil Projects Put in Jeopardy by Fall in Prices

In the short run, falling oil prices are leading to welcome relief at the pump for American families ahead of the holidays, with gasoline down from its summer record of just over $4 to an average of $1.66 a gallon, and still falling.

But the project delays are likely to reduce future energy supplies - and analysts believe they may set the stage for another surge in oil prices once the global economy recovers..

Russia Devalues 2nd Time in Week, Lets Ruble Fall Total 8.7% 

Prime Minister Vladimir Putin's pledge to avoid a "sharp" devaluation of the ruble and let the currency fall gradually has dissuaded citizens from storming banks to remove deposits as they did in 1998, when many lost life savings as the ruble plunged 71 percent versus the dollar and the government defaulted on $40 billion of debt.

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3 Comments

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Daily Digest - Dec 16
Stealing America
Plan to limit executive pay stymied
Amit Paley in Washington
December 16, 2008

http://www.smh.com.au/articles/2008/12/15/1229189534236.html

THE United States Congress wanted to guarantee that the $US700 billion
(AU$600 billion) financial bail-out would limit the pay of Wall Street
executives, so politicians included a way to review their pay and
penalise firms that break the rules.

But at the last minute the Bush Administration insisted on a
one-sentence change to the provision, congressional aides said. The
change stipulated that the penalty would apply only to firms that
received bail-out funds by selling troubled assets to the Government in
an auction. That small change now looks more like a giant loophole, say
politicians and legal experts. The Bush Administration has not used
auctions for any of the $335 billion committed so far from the rescue
package, nor does it plan to use them.

Legal experts say this has effectively stymied the only enforcement
mechanism in the law dealing with lavish pay for top executives.

"The flimsy executive compensation restrictions in the original bill are
now all but gone," Senator Charles Grassley said.

The modification reflects how the rapidly shifting nature of the crisis
and the Government's response to it have led to unexpected results that
are just now beginning to be understood.

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Dead Heat

Commentary

7:35 AM, 16 Dec 2008 

Alan
Kohler http://www.businessspectator.com.au/bs.nsf/Article/Dead-heat-$pd20081216-MCRT7?OpenDocument&src=ei

Dead
heat

Unfortunately
the world has been caught in a double bubble deflation – we have to
deflate the carbon bubble at the same time as a deflating credit bubble is
forced upon us.

The good news,
if it can be called that, is that the collapse of the credit bubble will do a
lot of the work of reducing carbon emissions. As a sign of that, China
yesterday reported a 9.6 per cent fall in electricity production over the past
year as its economy slips towards recession; carbon emissions there are
collapsing without the government doing a thing.

The world
economy has expanded at a greater pace than it would have done naturally for
about two decades because of the overuse of cheap carbon and cheap credit,
leading to toxic bubbles in both.

Cheap oil and
coal have underpinned massive expansions of global industry, including in
China, and cheap debt has financed it, especially through the use of credit
derivatives.

Both of these
excesses must now be reversed together because, unhappily, carbon turns out to
be toxic to the earth and threatens our children with a much less pleasant
existence than we’ve been having, while the maintenance of a credit
bubble requires confidence, which has now evaporated.

And no country
has benefited more from the double bubbles of carbon and credit than Australia.
Australia’s households are the world’s most indebted and Australian
industry is the most reliant on cheap energy from coal-based power generation.

The effect of
these twin deflations is largely a generational issue – it’s all
about the extent to which the current generation borrows from the future to
soften the impact now.

The Rudd
government is no different to any other group of politicians in the world
– the people who matter to them are alive and voting today, so there is a
great incentive to borrow from those not yet born, who will vote for some
future bunch of politicians.

So the
government’s White Paper lets the present generation off the hook.
Households are to be overcompensated for loss and power generators that use
coal will be allowed to keep doing it.

Next
year’s Copenhagen conference on climate change will be held in the midst
of a major global recession and those attending it will be politically
embattled, besieged by high, and probably still rising, unemployment.

They will be in
no position to burden their citizens with onerous reductions in carbon
emissions and expensive mandatory renewable energy targets. It will be left to
the next generation.

In any case,
carbon emissions will fall naturally because both electricity production and
transport will decline.

The politicians
who replace the current group in the recession elections that will take place
over the next couple of years will be able to point to meaningful reductions in
carbon emissions and take credit for them, while blaming their predecessors for
the recession. Oh happy day.

As for the
credit bubble – about $US500 billion worth of credit derivatives need to
removed from the system.

This will
require the financial system to marshal capital for several years, which in
turn means cutting back on lending and imposing slower growth on the industrial
system, which has had faster than normal growth financed by the credit
derivatives bubble.

Yesterday the
head of the IMF, Dominique Strauss-Kahn, said the downturn will last beyond
2010 unless governments take more fiscal policy action. He urged them to spend
a combined 2 per cent of GDP, or $US1.2 trillion, on boosting growth now.

"If we are
not able to do that, then social unrest may happen in many places, including
advanced economies," he said.

Most of these
countries’ budgets are already in deficit. More government spending now
essentially involves borrowing more from the future to smooth things over in
the present.

I’m not
saying fiscal policy shouldn’t be used to keep down unemployment now, or
that carbon reduction policies should be so tough that they fight against
fiscal policies by increasing unemployment.

But my
grandchildren will be paying the bill in a hot world.

At least you
and I will be dead.

stan.chucks's picture
stan.chucks
Status: Member (Offline)
Joined: Sep 2 2008
Posts: 21
Re: Dead Heat

It may be worse, they might be paying the bill in a freezing cold world! 

Stan 

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