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Daily Digest - Mar 29

Sunday, March 29, 2009, 9:44 AM
  • Dylan Ratigan & Susan Krakower (Video)
  • Default Rate Rises for Student Loans
  • Weekend Video: A Conversation with Tim Geithner at CFR
  • Will Geithner and Summers Succeed in Raiding the FDIC and Fed?
  • Michigan Consumer Confidence (Chart)
  • Month over Month Personal Consumption Growth vs. Personal Savings (Chart)
  • Government Social Benefits to Persons vs. Personal Current Taxes (Chart)
  • Corporate Profits by Industry (Chart)
  • 'Give us a chance,' Biden tells G20 protesters
  • 2009 Outlook, Part 5: Commodities (H/T PineCarr)
  • The Fault Lines Emerge (H/T PineCarr)
  • 25 People to Blame for the Financial Crisis (H/T Christopher Peters)
  • FSN News Hour 1, 2 & 3 

Economy 

Dylan Ratigan & Susan Krakower (Video)

Default Rate Rises for Student Loans

from Bloomberg: Default Rate Rises for Student Loans, U.S. Government Reports (ht Anthony)

Student-loan default rates for people who recently left school rose to 6.9 percent from 5.2 percent a year earlier as a deteriorating economy weighed on borrowers, the U.S. government said.

... The rate is based on borrowers who were to begin making repayments between October 2006 and October 2007, and who fell at least nine months behind by late September 2008.

Almost 232,000 of those borrowers entered default, a 13 percent increase from the previous year and a jump of 43 percent from two years earlier, the department said.

Weekend Video: A Conversation with Tim Geithner at CFR

Will Geithner and Summers Succeed in Raiding the FDIC and Fed?

Geithner and Summers have now announced their plan to raid the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve (Fed) to subsidize investors to buy toxic assets from the banks at inflated prices. If carried out, the result will be a massive transfer of wealth -- of perhaps hundreds of billions of dollars -- to bank shareholders from the taxpayers (who will absorb losses at the FDIC and Fed). Soaring bank share prices on the morning of the announcement, and in the week of leaks and hints that preceded it, are an indication of the mass bailout at work. There are much fairer and more effective ways to accomplish the goal of cleaning the bank balance sheets.

A major part of the plan works as follows. One or more giant investment funds will be created to buy up toxic assets from the commercial banks. The investment funds will have the following balance sheet. For every $1 of toxic assets that they buy from the banks, the FDIC will lend up to 85.7 cents (six-sevenths of $1), and the Treasury and private investors will each put in 7.15 cents in equity to cover the remaining balance. The Federal Deposit Insurance Corporation (FDIC) loans will be non-recourse, meaning that if the toxic assets purchased by private investors fall in value below the amount of the FDIC loans, the investment funds will default on the loans, and the FDIC will end up holding the toxic assets.

To understand the essence of the giveaway to bank shareholders, it's useful to use a numerical illustration. Consider a portfolio of toxic assets with a face value of $1 trillion. Assume that these assets have a 20 percent chance of paying out their full face value ($1 trillion) and an 80 percent chance of paying out only $200 billion. The market value of these assets is given by their expected payout, which is 20 percent of $1 trillion plus 80 percent of $200 billion, which sums to $360 billion. The assets therefore currently trade at 36 percent of face value.

Investment funds will bid for these assets. It might seem at first that the investment funds would bid $360 billion for these toxic assets, but this is not correct. The investors will bid substantially more than $360 billion because of the massive subsidy implicit in the FDIC loan. The FDIC is giving a "heads you win, tails the taxpayer loses" offer to the private investors.

Michigan Consumer Confidence (Chart)

Government Social Benefits to Persons vs. Personal Current Taxes (Chart)

Corporate Profits by Industry (Chart)

'Give us a chance,' Biden tells G20 protesters

US Vice President Joe Biden on Saturday called for tens of thousands of protesters already on the streets of Europe ahead of a G20 summit next week to give governments a chance to tackle the economic crisis.
"I would hope that the protesters give us a chance, listen to what we have to say and hopefully we can make it clear to them that we're going to walk away from this G20 meeting with some concrete proposals," Biden said at a news conference after a meeting of center-left politicians in Chile.

2009 Outlook, Part 5: Commodities (H/T PineCarr)

Inescapable Realities

$14 million, million, or stated another way $14 trillion. The annual GDP of the US is approximately $14 trillion or $46,666 for every man, woman and child in the US - either way you view it, this is the INCONCEIVABLE amount that has been spent, printed or guaranteed since January 2007 in the US; it does not include the government machinations in other G7 countries. And what have you and your family received from that $46,666 per person? MOSTLY nothing and you will get mostly nothing from the next $46,000 and the next $46,000; ut you will get one thing from it: the bill.

The greatest transfer of wealth from those who hold their money in paper to those who don't has commenced. A "Crack-up Boom" approaches.

So far, the governments and central banks of the US, UK and Switzerland have embarked upon QUANTITATIVE easing, aka "printing money out of thin air," to liquefy their financial systems, generate financial system bailout funds and devalue their currencies for competitive reasons. This is set to continue indefinitely as public serpents socialize the costs of their follies and transfer the benefits of it to their elite special interest campaign supporters.

The Euro zone shall soon be forced to do so in a defensive measure and as a practical response to the credit markets increasingly ceasing to function;and the bulk of the problems have not been addressed, so future efforts will dwarf what has gone before. The demise of the G7 financial and currency systems is, as some would say, "baked in the cake". The only thing we do not know are the various roads we will travel in reaching the ultimate destination. It is a battle between Mother Nature, the government and banking elites. I know who will win this battle, and it is not man.

The Federal Reserve balance sheet has expanded from under a trillion dollars to over $2 trillion since September, and with last week's announcement of an additional $750 billion MBS (mortgage backed securities) and $300 billion long-dated US treasuries in the next six months, it can be expected to rise to over $4 trillion during this period. Before this crisis is over, this balance sheet EXPANSION will probably approach $15 to 20 trillion. Bill Gross of Pimco estimates another $5 trillion is needed; unfortunately, that is just what is needed in the next two years;and they will tax you to death and print it to SAVE you.

The Fault Lines Emerge (H/T PineCarr)

For a few fleeting, horrifying moments this past week the fault lines that underlie the global economic crisis erupted into plain view. With deft and quick effort leaders in Washington, Europe and Asia papered over the fissures and fears largely subsided. But the shock of plain truths which resulted in violent currency movements are the latest reminder that the 21st century economic order will bear little resemblance to the world we now know.

The tremors began in Beijing, where a essay from the governor of the People's Bank of China seemed to favor the creation of an IMF currency to replace the U.S. dollar as the world's reserve. In Europe, the rotating president of the European Union, outgoing Czech Prime Minister Mirek Topolanek, characterized America's plan to combat the widening global recession as the "road to hell." At same time, British Member of the European Parliament Daniel Hannan made headlines the world over with his stinging rebuke of the inflationary and debt-focused policies of the current UK government.

As a result of these clearly voiced frustrations, the U.S. dollar suffered a drubbing. However, Treasury secretary Geithner and his ministerial counterparts in Berlin, Paris and London did their best to convince everyone that the world is pulling together as one to combat the economic crisis. The charm offensive was effective in restoring calm.

Given the size and scope of the remedies that the Obama Administration is cajoling the world to adopt, it is likely that the unease will grow until many countries emerge in open revolt to America's plans.

President Obama and the majority of our leadership on both sides of the aisle are confident that the right mix of monetary and fiscal policy can restart the spending party that defined America for a generation. And as the bleary-eyed revelers wisely reach for a cup of black coffee or stumble into a rehab center, Obama is pouring grain alcohol into the punch bowl hoping to lure the walking zombies back onto the dance floor. Europe and Asia fully understand that Obama will ask them to lend the booze.

Washington is telling us that our problems result from a lack of consumer spending. Therefore, the solution is for government spending to pick up the slack. However, if Americans are too broke to spend, then how can our government spend for us? The only money they have is taken from us through taxation. To postpone immediate tax hikes (adding interest for good measure), Washington plans to borrow more from abroad. However, if our foreign creditors refuse to pony up, much of the money will simply be printed instead.

Printing money is merely taxation in another form. Rather than robbing citizens of their money, government robs their money of its purchasing power. Many people assume that if government provides the funds we can spend our way back to prosperity. However, it's not money we lack but production. If the government simply prints money and doles it out, we will not be able to buy more stuff; we will simply pay higher prices. The only way to buy more is to produce more. It is production that creates purchasing power, not the printing press!

Our current predicament resulted in part from our efforts to maintain consumer spending at unsustainable levels, primarily by the reckless extension of consumer credit. Pushing up consumer credit to levels not supported by market realities required government subsidies and guarantees. In addition, Wall Street pitched in with securitization and credit default swaps, which created a false sense of confidence among our creditors that high risk consumer loans could actually be repaid. However, now that all those gimmicks have blown up, the entire farce has been exposed. There is simply no way to sustain an economy based on consumer credit.

The Administration argues that more debt will restore growth which will then allow the repayment of borrowed money. First, our government has never, and will never, repay anything. Second, the assumption that additional borrowing and spending will restore growth is flawed. In fact, more consumer debt and government spending will undermine our economy and restrain growth.

To solve our problems we must first come to terms with their source. That is what the voices from abroad are telling us. We borrowed and spent ourselves to the brink of bankruptcy, and now we must save and produce ourselves back to prosperity.

Of course, this simple solution is rejected by Keynesian economists who insist that we must keep spending. The "paradox of thrift," as they call it, holds that if we stop spending the recession will worsen. While this is true, it is hardly a paradox. As they say in the fitness game, "no pain, no gain." No one said this was going to be easy, but the only way to rebuild a viable economy is to let the phony one collapse. If we follow the Keynesians, the fault lines will continue to widen until our wealth, our lifestyle, our very ability to prosper is swallowed up. The calls from abroad will only get louder until we face this ugly truth.

25 People to Blame for the Financial Crisis (H/T Christopher Peters)

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16 Comments

Davos's picture
Davos
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Re: Daily Digest - Mar 29

Last night I fell asleep around 1 AM watching Frontline. I need to finish that.

Also this weekend while I garden I'll be catching the FSN News Hour and will elaborate some on that.

 

Take care

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yoshhash
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Re: Daily Digest - Mar 29 - 25 people to blame

Thank god this one was written with some wisdom.  Yesterday I read a similar article (unfortunately I cannot remember where, I think it was yahoonews) on people to blame for the economic crisis.  They also named the consumer- for saving too much and not spending enough.  Good Lord.

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Re: Daily Digest - Mar 29

Yoshash, thanks; first gut-laugh of the day!

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pinecarr
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Re: Daily Digest - Mar 29

sorry  -duplicate post

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suesullivan
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Re: Daily Digest - Mar 29

This American Life's current episode has a fascinating exploration of what happens when a bank fails and is seized by the FDIC. The piece follows a Washington State bank, I believe, over the MLK day weekend when it is seized and how much work they go through to turn it over to the new owner). I tried to find a link to it on their site, but only the previous week's episode is currently available.

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The.Techno.Luddite
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Re: Daily Digest - Mar 29

I caught that "This American Life" episode and it was riveting!  The first person account of the process from a bank employee (former now?) really made the FDIC bank transfer team seem perhaps the most effecient government group I've ever heard of!

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bikemonkey
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Re: Daily Digest - Mar 29

Rick Wagner is stepping down from GM, rumors of GM bankrupcy immenent...

 http://www.bloomberg.com/apps/news?pid=20601087&sid=a1BaGmyUoHgA&refer=home

 

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Farmer Brown
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Re: Daily Digest - Mar 29

Not stepping down, he was fired by the new owner, Uncle Sam, as a condition for receiving more Uncle Sam aid. 

 

GM CEO resigns at Obama's behest

showInitialOdiogoReadNowFrame (_politico_odiogo_feed_ids, '0', 290, 0);
Text Size:   

Rick Wagoner gives a speech.

The White House confirms Wagoner is leaving at the government's behest.
Photo: AP
adsonar_placementId=1384068;adsonar_pid=1201767;adsonar_ps=-1;adsonar_zw=274;adsonar_zh=170;adsonar_jv='ads.adsonar.com';

The
Obama administration asked Rick Wagoner, the chairman and CEO of
General Motors, to step down and he agreed, a White House official said.

On Monday, President Obama is to unveil his plans for the auto
industry, including a response to a request for additional funds by GM
and Chrysler.

Wagoner’s resignation was one of the remarkable strings attached to
the new aid package the administration is offering GM, based on
recommendations from the Presidential Task Force on the Auto Industry,
headed by the Treasury Department.

The White House confirmed Wagoner was leaving at the government's
behest after The Associated Press reported his immediate departure,
without giving a reason.

The surprise announcement about the classically iconic American
corporation is perhaps the most vivid sign yet of the tectonic change
in the relationship between business and government in this era of
subsidies and bailouts.

Wagoner has been CEO for 8 years and at GM for more than 30. The
company has not said who will replace him.  GM has received $13.4
billion in government aid, and has been seeking $16.6 billion more.

Industry sources had said the White House planned very tough
medicine in Monday's announcement, which turned out to be an
understatement. And it went to the very top. The measures to be imposed
by the government will have a dramatic effect on workers, unions,
suppliers, bondholders, shareholders, retirees and the communities
where plants are located, the sources said.

GM and Chrysler have to prove their viability as a condition of a
federal bailout released under former President George W. Bush, and
both have asked the current administration for more money.  Ford has
not sought federal funds because it had secured a line of credit just
before money dried up.

Obama said Friday in an interview with CBS’s “Face the Nation,”
broadcast Sunday, that the carmakers were going to have to do more.

“There's been some serious efforts to deal with a combination of
long-standing problems in the auto industry,” the president told host
Bob Schieffer. “What we're trying to let them know is that we want to
have a successful auto industry, U.S. auto industry. We think we can
have a successful U.S. auto industry. But it's got to be one that's
realistically designed to weather this storm and to emerge at the other
end much more lean, mean and competitive than it currently is.

“And that's gonna mean a set of sacrifices from all parties involved
— management, labor, shareholders, creditors, suppliers, dealers.
Everybody's gonna have to come to the table and say it's important for
us to take serious restructuring steps now in order to preserve a
brighter future down the road."

Schieffer followed up: “But they're not there yet.”

Obama added: “They're not there yet.”

The administration calls the task force “a cabinet-level group that
includes the secretaries of Transportation, Commerce, Labor and Energy.
It will also include the chairman of the President’s Council of
Economic Advisers, the director of the Office of Management and Budget,
the EPA administrator, and the director of the White House Office of
Energy and Climate Change. The Task Force will be led by Treasury
Secretary [Tim] Geithner and [National Economic Council] Director Larry
Summers.”

The panel’s chief adviser is Steven Rattner, a well-known investment banker and former New York Times reporter.

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Re: Daily Digest - Mar 29

Obamonolopy!!

 

http://www.alternet.org/workplace/133438/obama%27s_economic_plan%3A_a_ve...

 

Sounds like fun

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Re: Daily Digest - Mar 29 - Latest "This American Life" Episode

 

The latest "This American Life" episode will be available tomorrow from this site for a week:

http://www.thisamericanlife.org/Radio_Episode.aspx?episode=377

I listened to this episode as well.  Since the FDIC knew these banks were insolvent and prepared very efficient process to close these banks according to a rule book without hurting depositors, I thought the FDIC and the Treasury Dept. must have known some of big banks are insolvent, but have been propping them up at the expense of tax payers.  I wondered why rules apply to these small banks, but not to these big banks, which have been able to hold our government and American tax payers hostages?  Is it because the consequences of cleaning up these banks would be too painful or these bankers control our politicians?  I think it is both, but I wonder which one is a true main reason.

 

 

 

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Re: Daily Digest - Mar 29

Interesting artilce in the Market Ticker: Three Month Wrap Up

 Treasury could have conditioned the receipt of money by AIG originally
on the haircutting of these contracts and could have conditioned the
second "slug" of it as well.  It also could, right here and now, today,
use its 79.9% ownership stake in AIG to fire the entirety of the board
and management in AIG, nationalize the firm entirely, and refuse to put
one more dollar into the company until these contracts are
renegotiated, forcing immediate defaults by putting the firm into
receivership if the counterparties refuse.

The conventional wisdom among the elite is still that the current slump
“cannot be as bad as the Great Depression.” This view is wrong. What we
face now could, in fact, be worse than the Great Depression—because the
world is now so much more interconnected and because the banking sector
is now so big. We face a synchronized downturn in almost all countries,
a weakening of confidence among individuals and firms, and major
problems for government finances. If our leadership wakes up to the
potential consequences, we may yet see dramatic action on the banking
system and a breaking of the old elite. Let us hope it is not then too
late.

 

I like how denninger thinks but will the U.S. government  really start to do what need to be done. They seem desparate to make everything the way it was before and I get the feeling the will continue to do so until everything fall apart.

 

 

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Damnthematrix
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Re: Daily Digest - Mar 29

http://www.telegraph.co.uk/finance/financetopics/g20-summit/5072484/Russia-backs-return-to-Gold-Standard-to-solve-financial-crisis.html

Russia backs return to Gold Standard to solve financial crisis

Russia
has become the first major country to call for a partial restoration of
the Gold Standard to uphold discipline in the world financial system.

By Ambrose Evans-Pritchard
Last Updated: 10:05PM BST 29 Mar 2009

Arkady Dvorkevich, the Kremlin's chief
economic adviser, said Russia would favour the inclusion of gold
bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.

Chinese and Russian leaders both plan to
open debate on an SDR-based reserve currency as an alternative to the
US dollar at the G20 summit in London this week, although the world may
not yet be ready for such a radical proposal.

The Gold Standard was the anchor of
world finance in the 19th Century but began breaking down during the
First World War as governments engaged in unprecedented spending. It
collapsed in the 1930s when the British Empire, the US, and France all
abandoned their parities.

bikemonkey's picture
bikemonkey
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Re: Daily Digest - Mar 29

Yes Patrick, you are right.  This news piece initially appeared as "rumor" and then was clarified and confirmed.

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Re: Daily Digest - Mar 29

Davos - thanks for bringing us the news.  One of your posts in particular -  "Weekend Video: A Conversation with Tim Geithner at CFR" makes me wonder - he was talking at the CFR (Council of Foreign Relations).  This is a group of billionaires who own our banks (including the Federal Reserve), policy makers, the media and other concerned international corporations.  But, no transparency - no accountability - no access - which is contrary to a republic.

At the core, isn't this a conflict of interest for these groups to meet together in private?  

Larry

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Re: Daily Digest - Mar 29

Why isn't ACORN on the Top 25 people to Blame?

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Baltic Dry Index Down 20% in 5 Days:

Baltic Dry Index Down 20% in 5 Days: This Clearly Signals the End of Days

http://seekingalpha.com/article/127427-thesis-trading-ignores-the-data

That headline might seem facetious but just a month ago we heard the exact opposite conjecture about a spike in the Baltic Dry Index and all that it "implied". I call this "thesis" trading... hedge funds, traders, and pundits seize upon any glimmer of hope - any atypical data point that does not agree with the other 47 data points in a series to create "thesis". Now, when the Baltic Dry Index was "surging" (from a historical rock bottom low) - jumping from scary awful to just awful we were told it was clearly signaling the globe would be recovering. CNBC would run reports every 2 hours about how the recovery was being signaled and how mustard seeds were in the air. I don't watch CNBC during the day but I can tell from my inbox (anxious people afraid they are missing "the recovery") and watching video in the evening. However, when the inverse happens (a 20% drop in said index in 5 days) the "fair and balanced" pom pom channel does not seem to be reporting about this ketchup seed. Instead I hear: crickets chirping. Other non TV financial pundits who have the same thesis appear to be.... silent. Perhaps they just missed looking at the chart the past few days (ahem).

So let's review : when 1 data point out of 50 agrees with the cheer leading aspect of coming recovery: report it, have the pundits latch on to it, have all the "you should never sell, buy and hold, average down, stick to the long run even when you are down 50% due to my acumen" mutual fund managers talk up said solo data point, and dismiss the other 49 data points that speak to the opposite. Weave magical tails about China being the economic growth engine of the world that will bring us all to nirvana (in "6 months" of course) - as the shipping index CLEARLY showed back then.

BUT... when this data point reverses? Shhh.... don't talk about it. That ruins story time.

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