Daily Digest - Jan 12

Monday, January 12, 2009, 8:30 AM
  • Can science help solve the economic crisis?
  • States with worst jobless rates share root causes 
  • Bad job news at the Jones house 
  • Obama weighs decision about bailout funds
  • Stimulus Projected to Save 3.675mm Jobs... 3mm Too Little? 
  • Christina Romer Video on Stimulus
  • The Fed's Bubble Trouble 
  • The layman's finance crisis glossary 
  • The World's Largest Hedge Fund is a Fraud, November 7, 2005 Submission to the SEC Madoff Investment
  • Business Risks and Costs of New Nuclear Power
  • It's Survival of the Weak and Scrawny 



The main cause of the financial crisis is instability in the financial sector including the firms, institutions and markets which comprise it. To understand this instability, we have to begin with the legitimate primary purposes of the financial markets. One is to provide capital, as equity and debt, to the goods and services economy to allow it to thrive and grow. A second is to provide a stable repository for our collective savings. And a third is to responsibly provide appropriate credit to individuals. These legitimate functions have been hijacked by speculative behavior that was unchecked by regulatory structures. The consequences of this threaten to disrupt the productive efforts of millions of ordinary people who go to work every day to make stuff and provide services to one another.

In the decades leading to this crisis, the shift in our economic thinking from the long-term view on Main Street to short-term speculation and gratification on Wall Street have not only brought us to the brink of economic collapse, but have also compromised a sufficient flow of capital to important long-term initiatives-economic sustainability, renewal of infrastructure, abatement of climate change, and development of alternative energy sources-all important to a vibrant and sustainable economy.

This has happened before in history-in Rome, in Spain, Holland and England. More recently, in America, there were smaller crises before to the present one, perhaps early warnings-Black Monday, Long Term Capital Management, the dotcom bomb, and others. Now that we live in a global economy, we cannot afford the next crisis, an order of magnitude larger, in which the world's governments themselves will have to be bailed out. Rather, we can only hope that these governments are collectively up to the task this time.

States with worst jobless rates share root causes 

Unemployment hot spots all over the map, but worst states share housing, manufacturing pain 

Unlike the last recession, today's unemployment hot spots are all over the map.
The five states with the highest unemployment rates -- Michigan, Rhode Island, South Carolina, California and Oregon -- all have something in common, though: a heightened exposure to the root causes of this downward spiral.

The collapse of housing. The implosion of the auto industry. The meltdown of financial services. The exodus of manufacturing.

All states are feeling the pain, but the worst are getting hammered on multiple fronts:

-- The rotten housing market has punished California lenders and builders, taken an ax to Oregon's timber industry and soured the prospects for construction workers in Rhode Island, where buyers from neighboring states helped drive up home prices.

-- The steady decline of the manufacturing sector has punished Rhode Island and South Carolina, where laid-off factory workers lack the training and job opportunities in an increasingly high-tech economy.

-- The auto industry's pain is Michigan's above all. But it is also being felt in states like South Carolina, where German automaker BMW has cut 500 temporary workers, and in California, where many of dealerships have shut down.

"What makes this a different recession," said Rebecca Blank, an economist at the Brookings Institution, "is that it is so widespread." 

Bad job news at the Jones house 

In almost six years of blogging I've never mentioned where my wife or I work, because I like to keep blogging and work separate. Now I can say that Melissa worked at ImagePoint, a Knoxville company that shut down today. 

It's still slightly mind-boggling. ImagePoint was founded in 1944 and as recently as last year had 600 employees. They make commercial signs, with clients that included McDonalds, KFC, and Walgreens. Even in Knoxville many people had never heard of them because they're a business to business company. Their headquarters was in an historical downtown building that was recently renovated to great fanfare, but most people didn't know they were there. Ironically, they were a sign company with no sign on their building. They were two doors down from the old Kresge building whose wig shop inspired the Simpsons episode about Knoxville and the Sunsphere.

ImagePoint was facing a tough row to hoe. Some of their bigger customers were restaurants, banks, and car makers and their dealerships. The company's history page proclaims that in 1975 "We were awarded the General Motors sign program, which is still our largest account." They also had a major account with Chrysler. With Chrysler and GM's problems, and the poor prospects for ImagePoint's customers in the banking and restaurant industry it isn't hard to imagine a difficult time ahead. Companies buy new signs when they're building stores, not closing them.

Today they're gone. Just like that. What's amazing is how quickly things went from bad to worse. Like a lot of companies they had a bad 2008. They closed a factory and had two rounds of layoffs equal to 10-20% of their workforce.

We hoped those layoffs would put them right. Then last week my wife's reimbursement check bounced. Four days ago ImagePoint had more layoffs of about 10% of remaining employees. After that we really thought Melissa had dodged the bullet. Her department was running on a skeleton crew that we didn't think could get any smaller. It never crossed our minds that it could get a lot smaller if the company liquidated completely.

Melissa is one of 50 people who will stay on a little while longer to wind things down. There's no telling exactly how long that will last, but we're not counting on her being employed at ImagePoint for more than a few weeks. Anything beyond that is luck. 

Obama weighs decision about bailout funds  

WASHINGTON (Reuters) - President-elect Barack Obama vowed to restructure a financial rescue plan to save more U.S. families from home foreclosures, as he considered on Sunday whether to seek additional funds from a $700 billion bailout program. 

Obama's aides have been in discussions with the White House over whether President George W. Bush should ask Congress for permission to use the remaining $350 billion of the funds, which are aimed at stabilizing the financial system.

The purpose of the request, which would be formally submitted by Bush, would be to have the funds in place soon after Obama takes office on January 20.

But it may prove difficult to get approval from Congress because the bailout program is unpopular with many lawmakers who feel too much of the money has already been given to Wall Street firms that have continued to pay huge bonuses to executives.

The legislators want to some of the remaining money to be used instead to help struggling homeowners.
Massachusetts Sen. John Kerry, after leaving a meeting with other senators and some of Obama's top aides, said the president-elect was close to a decision on the bailout fund, known as the Troubled Asset Relief Program, or TARP.

"It's my understanding that the president-elect is going to make a judgment somewhere in the next hours," Kerry told reporters. "I think the president elect will make known -- because he's the one who's going to be controlling that -- what he would like to see happen on that."

Top Obama aides Larry Summers and Jason Furman were holding closed-door meetings with Kerry and other senators to discuss, not only the bailout funds but also a proposed $775 billion stimulus package that Obama and the Democrats say is needed to pull the U.S. economy out of a deep slump. 

Stimulus Projected to Save 3.675mm Jobs... 3mm Too Little? 

Christina Romer and Jared Bernstein have released projected jobs created / saved due to the Obama stimulus plan... a cool 3.675 million. The charts below show where these jobs are projected to come, by sector and by method (i.e. direct or indirect). 

The most jobs, not surprisingly, are in construction. Other top sectors include retail (from stimulating consumption), leisure (gotta do something when laid off right?), and manufacturing. 

The Fed's Bubble Trouble 

A few weeks ago when the Fed announced a strategy designed to bring down long-term interest and home mortgage rates through unlimited Treasury bond purchases, government debt staged a spectacular rally. To the unschooled market observer, the spike may be difficult to understand. After all, why would the value of Treasury bonds rise while their underlying credit quality is deteriorating faster than Bernie Madoff's social schedule? The move is actually a perfect illustration of the tried and true Wall Street strategy of "buy the rumor and sell the fact". 

If it is well known that Fed will be a big purchaser of Treasuries, those buying now will be positioned to unload their holdings when the buying spree begins. If the Fed pays higher prices in the future, traders can earn riskless speculative profits. If the traders lever up their positions, as many are likely doing, even small profits can turn unto huge windfalls.

The downside of course, is that all of the demand for Treasuries is artificial. Treasuries are now in the hands of speculators looking to sell, not investors looking to hold. These players are analogous to the mid-decade condo-flippers who flocked to new developments for quick profits. They did not intend to occupy their properties, but rather flip them to future buyers. Once these properties came back on the market, condo prices collapsed, as developers were forced to compete for new sales with their former customers.

This is precisely what will happen with Treasuries. Just as the U.S. government issues mountains of new debt to finance the multi-trillion annual deficits planned by the Obama Administration, speculative holders of existing debt will be offering their bonds for sale as well. In order to prevent a complete collapse in the bond prices the Fed will be forced to significantly increase its buying.

However, since the only way the Fed can buy bonds is by printing money, the more bonds they buy the more inflation they will create. As inflation diminishes the investment value of low-yielding Treasuries, such a scenario will kick off a downward spiral. But the more active the Fed becomes in their quest to prop up bond prices, the bigger the incentive to hit the Fed's bid. The result will be that all Treasuries sold will be purchased by the Fed. But with the resulting frenzy in the Treasury market, and with inflation kicking into high gear, we can expect that demand for other debt classes that the Fed is not backstopping, such as corporate, municipal and agency debt, to fall through the floor, pushing up interest rates across the board. 

The layman's finance crisis glossary 

Here is a guide to many of the business terms currently cropping up regularly, as well as some of the more exotic words coined to describe some of the social effects of the credit crunch.
Readers can send any terms they need explaining using the form at the bottom. 

The World's Largest Hedge Fund is a Fraud, November 7, 2005 Submission to the SEC Madoff Investment



Business Risks and Costs of New Nuclear Power

Several U.S. utilities are now advancing proposals for a new generation of nuclear power plants.

Though massive cost overruns and construction delays in the 1970's and 1980's caused U.S.
utilities to cancel over 130 nuclear plant orders 1, the nuclear industry is now hoping to ride a
wave of concern over global warming. Can new nuclear power help the U.S. electric power
industry cut greenhouse gas emissions, at a reasonable cost? 

It has been an entire generation since nuclear power was seriously considered as an energy option in the U.S. It seems to have been forgotten that the reason U.S. utilities stopped ordering nuclear power plants was their conclusion that nuclear power's business risks and costs proved excessive.

With global warming concerns now taking traditional coal plants off the table, U.S. utilities are risk averse to rely solely on natural gas for new generation. Many U.S. utilities are diversifying through a combination of aggressive load reduction incentives to customers, better grid management, and a mixture of renewable energy sources supplying zero-fuel-cost kWh's, backed by the KW capacity of natural gas turbines where needed. Some U.S. utilities, primarily in the South, often have less aggressive load reduction programs, and view their region as deficient in renewable energy resources. These utilities are now exploring new nuclear power. Estimates for new nuclear power place these facilities among the costliest private projects ever undertaken. Utilities promoting new nuclear power assert it is their least costly option. However, independent studies have concluded new nuclear power is not economically competitive.  


It's Survival of the Weak and Scrawny 

Some of the most iconic photographs of Teddy Roosevelt, one of the first conservationists in American politics, show the president posing companionably with the prizes of his trophy hunts. An elephant felled in Africa in 1909 points its tusks skyward; a Cape buffalo, crowned with horns in the shape of a handlebar mustache, slumps in a Kenyan swamp. In North America, he stalked deer, pronghorn antelope, bighorn sheep and elk, which he called "lordly game" for their majestic antlers. What's remarkable about these photographs is not that they depict a hunter who was also naturalist John Muir's staunchest political ally. It's that just 100 years after his expeditions, many of the kind of magnificent trophies he routinely captured are becoming rare. 

Elk still range across parts of North America, but every hunting season brings a greater challenge to find the sought-after bull with a towering spread of antlers. Africa and Asia still have elephants, but Roosevelt would have regarded most of them as freaks, because they don't have tusks. Researchers describe what's happening as none other than the selection process that Darwin made famous: the fittest of a species survive to reproduce and pass along their traits to succeeding generations, while the traits of the unfit gradually disappear. Selective hunting-picking out individuals with the best horns or antlers, or the largest piece of hide-works in reverse: the evolutionary loser is not the small and defenseless, but the biggest and best-equipped to win mates or fend off attackers. 


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Davos's picture
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Re: Daily Digest - Jan 12


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Re: Daily Digest - Jan 12

Another nugget from regarding the ability of the U.S. to pay back it's debt:


Yes, default is unlikely. But it is no longer unthinkable. Thanks to
the advent of credit derivatives -- financial contracts that allow
investors to speculate on or protect against default -- we can now
observe how likely global markets think it is that Uncle Sam will
renege on America's mounting debts. Last week, markets pegged the
probability of a U.S. default at 6 percent over the next 10 years,
compared with just 1 percent a year ago. For technical reasons, this is
not a precise reading of investors' views. Nonetheless, the trend is
real, and it is grounded in some pretty fundamental concerns.


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Re: Daily Digest - Jan 12

i can't believe i sat through 9:11 of christina romer, at the very least i can say i know who she is. nothing more than that. i kept waiting for something to happen.... but nothing. but while this prof was rambling i couldn't help thinking that the egyptian pyramids might have been the result of an ancient economic stimulus package, the trade on the nile was contracting and king tut in an effort to keep the serfs happy with busy-work constructed this massive monolith. smarter people can expound on this (or find fault with it).

this ideology works for stonehenge as well....




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Mike Pilat
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Re: Daily Digest - Jan 12

I don't know if I can accept truth in that, kemosavvy, but that is hilarious notion!

Almost as unproductive (in my mind) as a pyramid are the synthetic islands of Dubai. Just think what the future will think of our society? I suppose they could be a lasting testament to the modern era. They certainly could be accepted as art by future civilizations. 

In Crash Course terms, try to imagine the number of Ancient Egyptian serfs it would have taken to dig the Bingham Canyon Mine! At least we're getting copper. Who knows what the future will think of our efforts 4,000 years from now?


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China heading for recession...?
Obviously if their power consumption fell 4% in October (yoy), and 9.6% in November,
their economy is shrinking ( in recession ), NOT growing at "only 9%".


from ASPO_USA Newsletter, 12 Jan 2009

By Wang Ying and Winnie Zhu
Jan. 12 (Bloomberg) -- Power demand and output in China, the world's second-biggest consumer of
energy, will continue to fall this year because of slower economic growth, said the State Electricity
Regulatory Commission. 
Power stations will operate at reduced rates, the Beijing- based commission said in a statement posted
on its Web site today. ``Unsolved problems'' in coal and power pricing will add to operational difficulties, it
Economic growth in China has slowed for five consecutive quarters and its 9-percent third-quarter
expansion was the weakest in five years. Power consumption is declining as companies in industries from
metals to toys reduce production or close down after the global recession cut demand for exports. 
``Affected by the changes in the international and domestic economies, China's electricity market has
made a significant shift from supply shortage to sluggish demand since October,'' the commission said. 
Power consumption fell 4 percent in October from a year earlier, the first decline since March 2005, and
9.6 percent in November, according to state data. The government has yet to release December figures. 
``The changes in market conditions have brought about new challenges to ensure the industry's stability,''
the commission said in today's statement. 
Shares Fall 
Shares of China's biggest electricity producers, Huaneng Power International Inc. and Datang
International Power Generation Co. declined in Hong Kong trading. Huaneng, the largest producer,
dropped 3 percent to HK$4.93 while Datang International fell 6 percent to HK$3.61. 
The country may face an energy oversupply within the next two years as the global crisis slows the
economy, Wang Siqiang, a deputy director at the National Energy Administration, said on Dec. 12. 
China Southern Power Grid Co., which transmits electricity in the five southern provinces, said power
demand in the region may ``recover gradually'' in the second half, helped by the government's economic
stimulus plan. Electricity demand growth will stay at a relatively low level this year, Southern Grid, the
smaller of China's two power distributors, said in a statement on its Web site today. 
Guangdong, the nation's manufacturing hub, may suffer power shortages when demand peaks in the
summer, said the company. Southern Grid will deepen cooperation with Vietnam, Laos, Hong Kong and
Macau to help meet a 5 percent annual power sales target, it said, without elaborating. 
Price Curbs 
China's power producers are also battling rising costs. The nation's government controls electricity prices
to moderate their impact on inflation. The curbs have prevented power suppliers from passing on rising
coal costs to consumers. 
Huadian Power International Corp., a unit of China's fourth-biggest power generator, said on Jan. 9 it may
have swung to a loss last year because of higher coal prices and lower demand. Huadian shares fell 1.7
percent to HK$1.75. 
The nation's five biggest power producers led by China Huaneng Group lost 26.8 billion yuan ($3.9 billion)
in the first 10 months of 2008 after raw material costs rose and a slowing economy curbed electricity
demand, a company official Dec. 5. Coal prices at Qinhuangdao port, a Chinese benchmark, rose to a
record of 1,080 yuan a metric ton in July. 
The country's electricity use rose 5.2 percent to 3.43 billion megawatt-hours last year, down 9.6
percentage points from 2007, the Beijing-based China Electricity Council, which represents the nation's
power producers said on Jan. 5. 
Mike Pilat's picture
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Re: Daily Digest - Jan 12

Yep, energy is the most fundamental asset that anyone could possibly have on this earth. Without, things don't happen. Period. Significant and rapid reductions in energy consumption are proof enough for me that there is a recession.

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Re: Daily Digest - Jan 12

kemosavvy said,

"...but while this prof was rambling i couldn't help thinking that the egyptian pyramids might have been the result of an ancient economic stimulus package."

Thank you! At my house we'll probably be laughing about that for a week! Picture passing your spouse in the hallway and he or she does this pyramid motion with his or her hands, then yells out "Problem solved!"

Oh that was funny!

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Re: Daily Digest - Jan 12

I love how Obama first said he was going to create 2 million new jobs. Then he said he was going to create or save 2 million jobs. Now according to Ms. Romer he is going to create or save 3 million jobs. Ya know, why doesn't he just say he is going to create or save 20 million jobs, since it is impossible to prove. All he has to do is say, "You're still working, I guess I saved your job just like I promised."

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Re: Daily Digest - Jan 12

I'm wondering if Christina has factored in the added oil demand that the infrastructure side if the "stimulus" will impose.

I haven't had but a few minutes to research it, but from what I can tell 1 mile of road uses 5,500 barrels of liquid asphalt and we get 1.3 gallons of asphalt/road oil from 1 barrel of oil. How many of those gallons are needed to make the 5,500 barrels of liquid asphalt I do not know.

I don't know the actual demand it will impose on oil but I can't help but wonder if it won't drive gas prices north again - which could, once again, simmer the economy and negate any positive effects that their "stimulus" has.

I know in 2007 the road association for our private road got a quote, they did the work in 2008 and got 1/3rd of the road done for the same price. That said, I could see the amount of infrastructure that actually gets repaired lessoned if my assumption is correct. 



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Mike Pilat
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Re: Daily Digest - Jan 12

Davos: That's a really good point!

No matter what we do in turns of stimulus, it will require oil. Since our economy is run on oil, we'll need it to make the transition away from fossil fuels. It would be near impossible to make the transition on renewables because we don't have them now. But that pretty much makes the case for investing all of the stimulus (and therefore all of the oil the stimulus will consume) on infrastructure that provides non-fossil fuel energy.

I truly doubt it's going to play out this way and that would require a great deal of discipline. Unfortunately, I think Obama and the media view him as FDR. The critical difference is FDR had a sea of oil under America. Obama is nearly at the point where there isn't quite a sea of oil anywhere on the globe.


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