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Daily Digest - March 15

Sunday, March 15, 2009, 10:55 AM
  • Letterman, Andy Kindler Visits Wall Street
  • Jim Cramer on CNBC: Any mention of Jon Stewart?
  • Financial Sense Newshour 3/14 (Please See My Notes In Comment Section) 
  • ABC 20/20 Crisis & Stimulus: If debt got us here how will more debt fix it? (H/T GregRoberts)
  • Don't touch the unsecured creditors! Clobber the tax payer instead
  • Calif. teachers see red over mass pink slips
  • A few thoughts about China and their bluff on treasuries
  • China's Wen Worries About Safety of Treasuries, Asks for Reassurance 
  • G-20: No Call for Stimulus
  • Steve Waldman Believes Banking Industry Sick Since At Least the S&L Crisis

Economy 

Letterman, Andy Kindler Visits Wall Street

Jim Cramer on CNBC: Any mention of Jon Stewart? 

No. Better to just forget about it, huh? 

No stock picks either. Instead he talks about recent statements by the Obama Administration. Hmm.

Is CNBC chastened?

ABC 20/20 Crisis & Stimulus: If debt got us here how will more debt fix it? (H/T GregRoberts)

Financial Sense Newshour March 14, 2009 (Please See My Notes In Comment Section)

Don't touch the unsecured creditors! Clobber the tax payer instead

Calif. teachers see red over mass pink slips 

SAN JOSE, Calif. (AP) - In a spring rite that has become as predictable as cherry blossoms in the nation's capital, public school employees throughout California warned of wrenching classroom cuts as local officials faced a deadline for issuing layoff notices to educators. 

The state Department of Education estimates that preliminary pink slips will have been handed to 26,500 teachers by the Sunday cutoff - two-and-a-half times as many as were issued last year. Another 15,000 bus drivers, janitors, secretaries and administrators also were expected to receive the written warnings, said Superintendent of Public Instruction Jack O'Connell.

Because of the state's less-than-rosy economic outlook, California's 1,000 K-12 school districts have been instructed to absorb more than $8 billion in funding cuts over the next year. To draw attention to the situation, teachers and parents wore pink clothes and waved pink protest signs for a day California's largest teachers' union dubbed "Pink Friday."

Rosemarie Ochoa, a fifth-grade teacher who's in her third year with the San Lorenzo Unified School District, said she was pulled out of class Monday by a district official bearing a pink slip.

"I smiled at her because I knew what she was there for," said Ochoa, 28, who was among 76 of the district's 640 teachers who got a notice this week. "Then I had to go back to my students and retain my composure."

But in another annual ritual, many, if not most, of the early layoff notices could end up being withdrawn by June, especially if the state can devote some of its federal stimulus money to education, officials said.
Six years ago, for example, all but 3,000 of the 20,000 teacher pink slips that went out statewide were rescinded.

O'Connell, who donned a pink tie for an appearance at Gianola's school Friday, allowed that tens of thousands of teachers were unlikely to be let go, but said that with so huge a budget gap to fill, schools would probably increase class sizes, reduce library hours and lose counselors.

Ochoa said officials in San Lorenzo, a working class suburb 15 miles east of San Francisco, told her that some of the cuts probably would be permanent as the district planned to increase primary grade class sizes to save money.

Another unknown is whether the state's financial picture will worsen in the months ahead. If voters do not approve the spending package that will be the subject of a special election in May, schools would have to cut even more deeply and be unable to avert mass layoffs, he said.

"The cuts we are experiencing in public education are debilitating. These cuts have real consequences for real students," he said.

O'Connell, a Democrat who is considering a run for governor next year, said the dispiriting cycle would continue until state officials find a long-term and reliable way to pay for schools.

W. Norton Grubb, the director of a principal training program at the University of California, Berkeley and the author of "The Money Myth: School Resources, Outcomes, and Equity," agrees that years of uncertainty take their toll on schools even when layoffs do not come to pass.

"What is happening in these schools when the pink slips go out is everything stops, everyone is discouraged, everyone is busy worrying whether the money will come through, and all the efforts to get schools going basically grinds to a halt and remains ground to a halt for the rest of the spring," Grubb said. "A state that has these kind of crises year after year is really doing a poor job of planning."

A few thoughts about China and their bluff on treasuries 

Here is my take on Chinese Premier Wen's recent statements. At the end of the day, too many people seem to be working on an old gold standard type of model in the sense that there are implied limits in terms of what the US can do as an issuer of a fiat currency. I have always seen this as relevant only to the extent that China insists on being paid back in another currency other than dollars. The irony is too wonderful here, for what China has become expert at is manipulating the Obama administration. Think from the Chinese perspective about the wonders of getting Secetary Clinton to grovel and thank them for buying our paper. 

The Chinese, in recent closed door meetings of which I am aware, have openly (albeit implicitly) threatened U.S. government officials about their future willingness to purchase our agency debt. This is a grand bluff, for China would suffer the greatest loss of (paper) wealth were it to attack the value of our paper. It is proving an effective bluff. I never thought Geithner's attack on China's efforts to hold down the exchange rate on the yuan made any sense from a U.S. perspective, so I don't waste my time bashing the administration on its 180 degree reversal of position on China "manipulating" the yuan. But we are being played successfully. China will conclude that they have leverage over us and will use it in future disputes that will be far more important.

In a pure operational sense, when China's US securities mature, the Fed debits their securities account at the Fed and credits their bank account at the Fed. So in theory no fuss. Of course, the real world is a bit more complicated, even when a sovereign currency is assumed (i.e. fixed exchange rate, no fixed gold conversion).

The limit to trade deficits is then the willingness of foreign investors to net save in your currency.

If foreigners perceive your productivity capacity is not growing fast enough, or the money value of those products is not growing fast enough, the only reason they net save in your currency (by holding assets in your currency) is to speculate on asset bubbles or engage in financial engineering or store value in the perceived reserve currency of the world.

Remember, foreign trading partners can demand settlement from a country in a different currency. There is a first mover disadvantage to exporters trying to enforce this, but we have seen currency conventions change, so we know it does happen. And I am presuming this is the implied threat from China.

All 3 of the above (asset bubbles, financial engineering, reserve currency status), one would think, are eventually constrained by the first two items, physical productivity of the country and the money value of that output. We've seen in a world of serial asset bubbles, with no country yet willing or able to replace the US as hegemon, that "eventually" can take a long time. Not every hegemon, however, can hold on to its "exorbitant privilege" for so long...and there is only one hegemon, so not every country has this privilege.

Similarly, a fiscal deficit is constrained by the willingness of the domestic and foreign private sector to net save in the deficit country currency. The private income is created by the purchases of products or labor from the private sector, so there is still production.

This circles back to our discussions about confidence and policy sequencing. Keynes, who was a policy maker and an investor, clearly recognized this and it is part of why he spilled so much ink against the Treasury View of fiscal responsibility. He wanted to change conventional views of the suitable role of government intervention. It is currently Obama's practical problem, as he does not seem to feel the need or ability to address the Treasury View. Instead, he has taken the tack that he will promise to reduce the deficit by the end of his term.

A lot of staunch Keynesians probably believe that Obama's problem goes away once the fiscal stimulus hits the real economy. Practically, we know investors here and abroad are skeptical of how this all gets financed (a non-issue in our friend Warren Mosler's model - government credits private sector as deficit spending proceed), and entrepreneurs and the wealthy are beginning to figure out the tax burden is being shifted on to them. So that might induce capital flight and tax evasion, which isn't something readily accounted for in a classic financial balances approach.

Reality is more complicated than the model, and that must be dealt with by practical policy makers.

China "Worried" - Issues not so veiled threat...  

You tell me, does this sound like a threat to you? "If the U.S. can make sure this won't happen, then China will continue to invest." 

Sounds like one to me.

A lot of thoughts come to mind, like how could we allow a situation to develop where they have or even think they have power over our country? You see, when you owe people money, you are surrendering your FREEDOM and you are ceding your control to those who you owe money. This is why I've been harping on the relationship of freedom and security. To be free and secure, you must practice fiscal discipline.

China's Wen Worries About Safety of Treasuries, Asks for Reassurance 

And if you don't buy the gold valuation (remember, it had been the value peg until broken), consider that the resulting floating rate regime saw a big depreciation of the greenback against most major currencies. 

In other words, the idea of a US partial default is far from a loony line of conversation; we did it less than 40 years ago.

And in light of that history, why is Wen asking for assurances? None can be made. So what concession might he be looking to extract instead? Now that China's trade surpluses have fallen sharply, it has no particular reason to buy Treasuries at anything like its recent volumes.

As we said, this message is most likely to be posturing for domestic consumption, but China could also be putting stakes in the ground. Watch for the next move in this gambit.

G-20: No Call for Stimulus 

From the WSJ: G-20 Won't Call for More Stimulus 

Finance ministers and central bank heads from the group of 20 leading economies won't make a joint call for further fiscal stimulus at the end of their two-day meeting here ...

Separately, officials will lay out a set of principles on how to address the toxic assets weighing on banks' balance sheets ... The person said the principles will likely be included in an annex to the communique officials will release after today's meeting.

The U.S. plans to release details of its plan to use public and private money to ease the burden of toxic assets in the coming weeks, but European governments are likely to want more detail even sooner ...
The G-20 Finance Ministers are meeting today in preparation for the April 2nd summit of national leaders in London. Geithner is expected to hold a briefing around mid-day ET after the G-20 talks.

It doesn't sound like there will be a coordinated fiscal stimulus policy as some had hoped for.

Steve Waldman Believes Banking Industry Sick Since At Least the S&L Crisis 

In two recent Surowiecki posts (here and here), Surowiecki points out that during the banking crises of the early eighties and early nineties, banks were arguably as insolvent as our banks are today, but hey, with a little time and without any radical changes, everything turned out great.... 

The fundamental difference between my perspective and Surowiecki's is that I don't think those previous recoveries were real. My view is that the crisis that we're in now is precisely the same crisis we've been in since at least the S&L crisis. We've had a cancer, with some superficial remissions, but fundamentally, for the entire period from the 1980s to 2008, our financial system in general and our banks in particular have been broken. They have profited from allocating capital poorly, from funneling both domestic loans and an international deficit into poor investments (current consumption, luxury housing) rather than any objective that might justify arduous promises to repay. We all got a reprieve during the 1990s, because internet enthusiasm persuaded many investors to fund our consumption via equity investment, which we could wash away relatively painlessly in a stock market crash. Debt investors don't go so quietly. Thanks to the cleverness of our banking system, we have a very great many lenders, both domestic and foreign, who've invested in trash but who demand to be made whole at threat of social and political upheaval. That is the failure of our banks. That they are insolvent provides us with an occasion to hold them accountable, and to reshape them, without corroding the rule of law or respect for private property...

There are profound economic problems in the United States and elsewhere that our financial system has proved adept at papering over rather than solving. Those of us who've played Cassandra over the years have been regularly ridiculed as just not getting it, as economic illiterates and trade atavists. Unfortunately, as Dean Baker frequently points out, the people who could never see the problems are the only ones invited to the table when the world cries out for solutions. The solutions on that table are those Surowiecki tentatively endorses, weather the storm, take some time to repair, the temple is structurally sound. But the temple is not sound. We either build a decent financial system, or suffer real consequences, in unnecessary toil and lost treasure, in war and conflict over false promises set down in golden ink.

The banking crisis and the high unemployment rate are not the crisis, they are symptoms. This is not "dynamo trouble", it is a progressive disease, and what is failing is the morphine. Those of us who believe that financial capitalism is a good idea, that it could be the solution, not the problem, do their cause no favors by resisting radical changes to a corrupt and dysfunctional facsimile of the thing. We need to approach financial capitalism as engineers, and to largely rearchitect a crumbling design. If we don't, we may be so unfortunate as to suffer yet another superficial remission. But error accumulates, and error on the scale now perpetrated by national and international financial institutions are unlikely to be without consequence.

I'd love him to tease this out further, and I am a bit too fried to give this a long form treatment, but let me volunteer a few thoughts:

A very short and grossly simplified history of banking in the last 40 years is banks used to be tightly controlled, profitable, and not (for the most part) able to do much damage. For instance, deposit rates were regulated. Nevertheless, very creative banks nevertheless managed to get themselves in lots of trouble (Citibank and its buddies in the sovereign lending crisis, for instance).

The inflation of the 1970s created a huge mess for this model. Even with regulated deposits (and depositors were very unhappy with negative real yields and aggressively sought other cash-stowage options), many banks also funded some of their balance sheet in the money markets. You had spectacles like banks bleeding on their credit card portfolios (and remember, those yielded a lot better than a lot of other types of loans) because short term rates shot up to 22%.

Various aspects of banking were deregulated (deposit rates, usury ceilings,interstate banking, the division between banking and securities was chipped away at over years, with the playing field pretty much open before Glass Steagall was formally abolished in the late 1990s).

But the interest rate volatility was and still is a real mess for banks. From what I can tell, the hedges (using product design to put more of the risk back on customers, explicit hedges, astute asset liability management) only partly remedy this problem. In an increasingly competitive environment, my impression is banks have not been able to extract enough additional margin for assuming this risk. Anyone know of any work in this area?

Second is that investment banks ate commericial banks lunches for a very long time. I read from time to time that the reason securitization became more prevalent was that banks felt it was less attractive to hold assets on their balance sheets, i.e., this was an opportunistic move.

While technically, that isn't wrong, that isn't how I'd frame it. I recall when I was at McKinsey in the mid 1980s and securitization was taking off that one of the standard charts showed banks that securitization was cheaper than on balance sheet intermediation due to the cost of bank equity and FDIC insurance. That was seen as a bad thing for banks back then because it meant they were losing market share big time to investment banks.

Third is bank consolidation proved to be a very bad idea, and I see NO ONE addressing this issue. It isn't simply because it created huge concentration and too many too big to fail banks (a lot of countries have highly concentrated banking systems, such as Canada and Australia, but their banks are kept on shorter leashes).

The reason is that bank consolidation delivers NO economic benefits. The big lie is big banks are more efficient. They aren't. Every study ever done of banks in the US has found that once banks reach a certain size threshold, they exhibit a slightly increasing cost curve, meaning they are more expensive to operate.

But you might protest, when those banks buy each other, they may big noises about cutting costs. Right. They could have taken those costs out without a merger. It just gave cover for measures that would be too painful to execute in stand-alone entities.

The real reason for bank mergers is CEO pay is highly correlated with a bank's total assets (and the CEO of the acquired bank is enriched sufficiently to get his acquiescence).

And worse, big banks have completely abandoned the notion that the knowledge that local managers have by virtue of being in a community (in terms of improving lending decisions) has value and can be leveraged. Instead, they all went full bore for FICO and other faux-science credit scoring models, and have perilous little to fall back on now that those have proven to be badly flawed.

I do think Waldman is on to something here, and hope his post elicits further comment. I'd be particularly curious to see John Hempton pick this one up, since he keeps defending the native earning power of US banks.


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33 Comments

Davos's picture
Davos
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Posts: 3620
Re: Daily Digest - March 15

Summary of the news: Yet again I see stellar financial information coming from the best comedy shows. Yesterday it was from Jon Stewart, today David Letterman. Krugman in the Letterman clip was, in my opinion, for once - candid. 

The rest of the news was more of the same. Now that California is letting out 57,000 prisoners (1/3rd of the prison population) to save money and is laying off cops it has begun pink slipping teachers. Too bad they didn't elect a Letterman, Stewart or Leno as governor.

There is still talk of good bank bad banks circulating the blogoshpere opinions stating that something has to be done with the bad assets, change the accounting, let the banks go or sell them is the mantra. More talk over China, is it posturing/sabre rattling or is it going to kick the dollar off the cliff? Who knows, but my thoughts are that something will, just a matter of time before Ben's ponzi scheme ends in total collapse, the more his voice cracks the closer to the cliff's edge I believe we are.

*****Financial Sense News Hour: 3rd hour had a good listen on this (China) topic. The tail end of the second hour had a great interview with John Williams of Shadow Stats. The information John provided on unemployment figures was some of the best stuff I have seen to date. Specifically with respect to the Birth Death adjustment, the Seasonal Adjustment and the U3/U6 figures. Also, in both the first, and 3rd hours (part a and d) there were several mentions on Bernanke and China's concern. Listening to these guys I'm less inclined to listen to the "this is sabre rattling" opinions of some of the best blogs I read.

Have a super weekend, I may price dish/cable just so I can watch the commedy shows so I can keep up with the economy some more! Lately they are as good as the best financial blogs, and IMHO - that is pretty awesome.

Take care

Mike Pilat's picture
Mike Pilat
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Re: Daily Digest - March 15

I nearly puked when I saw Cramers praise for Larry Summers' "government will take care of us" attitude. Cramer is still shameless, even after Stewart dissected him.

Gadfly's picture
Gadfly
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Re: Daily Digest - March 15

Davos;

Cramer is not the only one silent about the Stewart-Cramer confrontation.

http://www.dailykos.com/story/2009/3/13/182441/605/592/708251

 

Your buddy KO is towing the company line. You may want to try to get the whole story when you link this stuff.

P.S. Cramer was surprisingly docile in the interview, even before the stock footage was shown. It was almost like it was scripted. Curious.

PCars58's picture
PCars58
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Re: Daily Digest - March 15

 

Thanks Davos. I look forward to your post every day, even though it is mostly bad news.

 

At the very end of the FSN second hour, John Williams mentions a special subscriber report on hyper-inflation "which we think will happen."  Even though I would like to hear his reasoning (non-subscriber) that says a lot about how seriously to take my self assessment/action plan. It is now jacked up another notch.

 

Regards,

Paul

 

Davos's picture
Davos
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Re: Daily Digest - March 15

Hello GadFly: Thanks for the link, I'm not really a BIG Obermman fan, just post some of his things when I think they are pertinent.

Hello PCars58: It is a pleasure to contribute to this fine site Chris has created. I'm also a non subscriber to the Williams/ShadowStats news letter/site. At 180 a year I just pick up bits and pieces from a lot of FSN articles. Basically from Chris's Fuzzy Math and from FSN I know that every number the BEA or BLS put out is likely off by 40-50%.

One thing that really jumped out at me was Williams pointing out not to think we went from 4.5% to 20%, he emphasized once or 2x that we really went from 10% to 20%. I thought that said that he is not an alarmist. He also said we are nearing a depression based on that but he still used the recession word. I think his mention of non farm labor now vs the depression was also of great interest. 

Take care 

Nichoman's picture
Nichoman
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Re: Daily Digest - March 15

Agree on your take on the Financial Sense Newshour.  Find every week overall worthwhile, especially 3rd hour which often is quite thought provoking, if not educational as well.

BTW...suggest consider watching or reading Former Treasury Secretary Paul O'Neill comments on GPS (Fareed Zakaria) today on CNN.   Makes good case with pragmatic suggestions Geitner/Obama should be doing on financial situation.   His methodology of transparency and accountability on 19 major financial institutions appears sound and worth pursuing.   Will our government listen?

If haven't seen it...will reair at 5 PM EDT (~ 40 minutes in).

 

Nichoman 

 

Aaron M's picture
Aaron M
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Re: Daily Digest - March 15

From the "China" link;

Quote:

“We have lent a huge amount of money to the United States,” Wen said at a press briefing in Beijing today after the annual meeting of the legislature. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

This passage is especially concerning - though I don't see the "threat" mentality that was mentioned by the author. It's a very honest statement by my approximation.

We've taken the "rob Peter to pay Paul" approach to macro-economics and when these debts get called in, will we have the capital to honor our obligations?
Or will our international debts be as Chris said; "A claim on future labor".

This is troubling to me. China's ability to wage an intercontinental war may or may not be "adaquete", but they are a nuclear power, and that does present a unique set of challenges and questions;

For example, who will our debts be repaid by?
Our Government? Not likely.
Who does our government oblige to? The People of America, or a nuclear armed China? Who will take priority? Will our leadership just quietly steal the life-rafts while the rest of us sink on the titantic?

This is a situation with massive gravity, and it's difficult for me to wrap my mind around.
I can see how entangled we are with China and our foreign debt market in general, but I cannot guess as to the results of a defaulted America.

Any thoughts?

Aaron

Davos's picture
Davos
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Re: Daily Digest - March 15

Hello Nichoman:

Yeah, I always listen to hour 3 first, then when I can make time I work backwards...

I, myself, don't have cable/dish but will look for it online. Last night we just realized NBC Nightly News went digital (So sad, too bad no more TV ).Smile

O'Neill's book was great. I really respect him when Cheny told him to resign and he flat out told the world he was canned. I like O'Neill a lot. I like the way he looks at debt.

Take care 

VeganDB12's picture
VeganDB12
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Re: Daily Digest - March 15

Davos

Thank you as always.  I am deeply grateful for the information you have provided and it is always enlightening and on topic.  re: the comedians,  I think Stewart has done a good thing, but I still have to ask, where was he when the Cramer tape was first broadcast in 2006?   Suddenly Cramer has become a huge Obama supporter. I think the feds got to him in some way and now he is being a good boy.  He is the one who brought this short selling issue to light, not Stewart.  It is just that we were too naive to see the implications I am sorry to say.

 

Best wishes and many thanks and gratitude

Denise

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kemosavvy
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Re: Daily Digest - March 15

i know down deep that the cramer-stewart showdown is just 'noise' and i shouldn't be wasting my precious time but it's been terrific and very satisfying

i don't know if anyone has posted the entire episode where cramer appears on the daily showdown and gets anhiliated... but here it is, 21 minutes

http://www.thedailyshow.com/full-episodes/index.jhtml?episodeId=220533

soooo good

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Ragnar_Danneskjold
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Re: Daily Digest - March 15

I think Wen's request to guarantee China's asset is really code to the Fed for "Buy back all the Treasuries we bought from you before you print money for anyone else".  The Fed would have to print money to buy back Treasuries, and China would immediately put that money into commodities or toward more production capacity.  China doesn't want the Fed printing money and giving it to anyone else because doing so devalues what Treasuries China has. China is more or less whole as long as they are the first in line in for any new money being printed....everyone else would be left holding the bag ($$$).

FireJack's picture
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Re: Daily Digest - March 15

I was going to do some research on how a continuasly growing US debt will end especially for place like china. When I googled "buyers of US debt" the first site you get is The Skeptical Optimist. According to him everything is going great and there is no problem. Reading some of his stuff it's like ohhh is that why Obama thinks they can buy themselves out of debt.

 

From The USA's debt burden

"Anyway, I think I've come up with a simple little number that could
help steer the conversation away from hysteria, back towards
objectivity: I call it the "TIT Ratio," which stands for "Times
Interest Taxed. It's simply the number of times our federal tax receipts covered the interest obligations on the publicly-held federal debt."

"Federal tax receipts grow when the economy grows, even when tax rates do
not change at all. That's why "growing the economy" is so important for
our future, and why getting it back on track is so much more important
than worrying about short-term increases in the debt level."

 

Here's a chart of a TIT ratio

the TIT ratio

 

According to him Britain is the number 1 holder of US debt. Realitically all his optimism is based on a forever growing US economy but it's like an insite into how one can ignore the massive debt. 

 

Davos's picture
Davos
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Re: Daily Digest - March 15

Hello Denszcz: A pleasure to contribute. I also wonder where everyone was when he came around, or CNBC for that matter.

So much of the news I feel is just one person speaking and being repeated.Perfect example, http://www.bloomberg.com/apps/news?pid=20601087&sid=ahtaIU1S0JQY&refer=home an advisor to the president.

Unemployment is really neat 20% and she thinks we are going to have an economy without the consumer and that is a good battle? Okay, sounds like change to me: Bad to worse. 

Take care 

Damnthematrix's picture
Damnthematrix
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Re: Daily Digest - March 15

Bailout King AIG Still to Pay Millions In Bonuses
Geithner Gets Firm To Make Revisions
By David Cho and Brady Dennis
Washington Post Staff Writers
Sunday, March 15, 2009; Page A01

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/14/AR2009031401394_\
2.html

( http://preview.tinyurl.com/afmae3 )

Insurance giant American International Group will award hundreds of
millions of dollars in employee bonuses and retention pay despite a
confrontation Wednesday between the chief executive and Treasury
Secretary Timothy F. Geithner.

But the company agreed to revise some executive payments after what
AIG's leader, Edward M. Liddy, called a "difficult" conversation.

The bonuses and other payments have been exasperating government
officials, who have committed $170 billion to keep the company afloat --
far more than has been offered to any other financial firm.

The issue came to a head when Geithner called Liddy and told him the
payments were unacceptable and had to be renegotiated, said an
administration official who was not authorized to comment on the
Geithner conversation.

SkylightMT's picture
SkylightMT
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Re: Daily Digest - March 15
FireJack wrote:

When I googled "buyers of US debt" the first site you get is The Skeptical Optimist. According to him everything is going great and there is no problem. Reading some of his stuff it's like ohhh is that why Obama thinks they can buy themselves out of debt.

Steve Conover (writer at The Skeptical Optimist) thinks inside the mainstream paradigm of economics and financing. Most CM supporters think outside that paradigm. Its hard for the two very different viewpoints to communicate and express the values and beliefs associated with each mindset. Its kind of like atheists debating with Baptists - the conversation is never-ending and no one ever "wins" because to do so would require one side to make profound, fundamental shifts which would shake up their world.

Steve does NOT think things are great and there is no problem. Check out his take on the Kanjorski relevation (the run on the money markets last Sept): "We came within a few hours of financial collapse, which would have been followed quickly by the collapse of our political system. If more than just a handful of politicians understood that they were almost fired en masse five months ago, I bet today's conversation would not be about the Titanic's deck chairs. But that's just my educated guess; I have a history of overestimating politicians."

He is in favor of stimulus, correctly applied, with the admonition to: "Sunset provisions on government stimulus spending. When the stimulus has stimulated, stop stimulating. A healthy private sector is the most effective engine for increasing our standard of living; but a permanent takeover of too large a portion of GDP by government is the surest way to retard the growth of our standard of living."

He thinks the government intervention is misapplied in many areas: "The Fed has been "printing money" (purchasing assets from the public with money it has the power to create from so-called thin air) at an unprecedented pace in recent months, as we've discussed before. The objective is to stimulate lending and borrowing, which is the heartbeat of the economy. But all that new (base) money hasn't been doing much stimulating so far."

He does seem to believe our economic system is fundamentally healthy and mainly needs major tweaking but does not seem to believe a complete overhaul is needed - his beliefs lie within the current paradigm, as mentioned.

He does NOT support a gold standard (and as much as I admire and support CM, that is the one area I also disagree with Chris on):

(The gold bugs, and those who say *any* increase in the money supply is "inflation," assert that wages and prices will fall as the real economy grows -- but I've never heard any of them propose a plan to convince the voting public that falling wages are a good thing, not a bad thing; they therefore naively ignore Lincoln's observation, "With public sentiment, nothing can fail; without it, nothing can succeed." Maybe brain-teaser buffs can envision a future economy in which the hourly wage is 8 cents and the price of a loaf of bread is two cents, but I can't. After reading Atlas Shrugged, I always wondered how tiny John Galt's little gold coins would have to get before the utopians would admit that the money supply must grow with the real economy -- but Ayn Rand never got around to explaining that, so it will just have to remain a mystery.)

As a result, I conclude that, in the real world, new money creation is required to match the rate at which new real wealth is created. Too much new money is undesirable; too little is also undesirable.

The Fed is not perfect, but they have been improving over the decades. And, in any case, our money supply is in far, far better hands with the Fed board of governors than, say, the Russian and South African gold-mine owners."

 He believes that: "Hoover accelerated the fall into the Great Depression by being more concerned with not rewarding the undeserving than with saving the system from collapse" and I agree with him that we are in danger of repeating the same thing this time around by being too focused on punishing the ones who got us into this mess rather than figuring out how the hell we get out of this disaster with the least amount of suffering.  

If you accept him for what he is (an analyst working within the current paradigm), his insights are thoughtful and intelligent and far superior to most working within that worldview. But you can't take him as more than that, or you'll be as frustrated as an atheist trying to convert a Baptist. 


 

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Re: Daily Digest - March 15

From the "China" link;

[ For example, who will our debts be repaid by?
Our Government? Not likely.
Who does our government oblige to? The People of America, or a nuclear armed China? Who will take priority? Will our leadership just quietly steal the life-rafts while the rest of us sink on the titantic?

 Aaron...I think the answer is a fore-gone conclusion.  My advice is to buy your own life-raft now and hide it..you will most certainly need it.

Jim 

 

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Re: Daily Digest - March 15

Jim,

We're in agreement. Severity will be the variable.

Everything's eventual.

Cheers!

Aaron

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Re: Daily Digest - March 15

I feel apprehensive about news reports regarding CEO criticism and anchor bashing (Jim Crammer).

If we are assuming CEOs are being compensated unfairly, why don't we invest or create equivalent companies that pay CEOs less and we can rake in the profit ourselves? Perhaps the premise should be reconsidered. 

News anchors or other info-tainment "opinion givers" are part of massive news conglomerates. It is a huge system wide problem. If there is a systemic problem does it make sense to pick out a few people to demonize?

Even a person as corrupt as Madoff is a psychology I can appreciate. He was acting in his own self interest. He was a power player in a very broken system. Does that make him the cause of the problem? Would the same person act differently in a different system?

I prefer to put the blame on those who have shaped our economic taxes, rules, and regulations rather than those who are subject to and try to profit from within those rules. 

Am I way off target? I would like your feedback.

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Re: Daily Digest - March 15

Well after thinking about what I read there at the skeptical optimist I can come to a couple of conclusions.

a. He laughs at the debt problem because he seems to think it will be rendered obsolete by increased tax revenue. It won't happen and he seems to conveniently ignore the peak oil/resource problem. A growing economy requires increasing energy and resources both of which are about exhausted. The GDP will NOT grow and the fact that all his arguments are based on this renders everything he says obsolete.

 

His articles are quite good, but if you look at his energy series its obvious he believes technology will solve our energy problems, and as far as resources there is no problem as far as I can tell. 

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Re: Daily Digest - March 15

ilphae:

bernie madoff is a criminal plain and simple. he's going to jail. he was running a ponzi scheme. that is not a profit making operation or a legitimate business.

while it's true that the regulatory system is badly broken, it has been intentionally broken through the huge amounts of monies paid to politicians (from both parties) by industry conglomerates in order to influence the outcomes of legislation. this is well documented and incontrovertible. all you have to do is start googling and reading.

on a related topic, there is a fascinating article in this month's Harpers Magazine on how the legalization of usury was a fundamental factor in getting us into the mess we're now in. 

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Ben Bernanke

I just finished watching Ben Beranke being interviewed on 60 Minutes and was wondering if anyone had any thoughts to this first ever interview of the Chairman of the Federal Reserve? 

They never once mentioned that the Federal Reserve is not part of the government. 

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Re: Daily Digest - March 15

ilphae:

 Just a through on the 'it's the system, so why focus on just one anchor' question.  If you watch the Stewart/Cramer interview, Jon Stewart says that it is unfortunate and unfair that it has focused so much on Cramer because it is a systemic problem.  

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Re: Daily Digest - March 15

7:35 AM, 16 Mar 2009

Alan
Kohler

Statesmanlike
stooges

TOP
News

The
G20 meeting failed dismally to produce agreement on anything that will make any
difference, not that such a result would have been intended, or even possible.

The purpose of
the meeting was spin. The intention was for the finance ministers to co-operate
in appearing statesmanlike and in control, ahead of the meeting in two weeks at
which their leaders will do the same.

In that limited
aim, the meeting was a success. This is not totally meaningless: confidence in
our political leadership is definitely a key ingredient to economic recovery,
and seeing each of them emerge from high-level talks in a magnificent English
hotel and conduct reassuring doorstop press conferences and pose for a group
photo was, well, reassuring.

The so-called
battle between the US and Europe over fiscal expansion is a furphy: does the US
seriously think it can borrow much more money from China?

There was no
sophisticated analysis of the causes of the crisis, no realistic assessment of
what can be done to fix it, and certainly no agreement about specific actions,
beyond stating blandly that there is “resolve”.

The fact is
that governments are primarily responsible for this crisis, and there is no
reason to think they can solve it.

The
super-abundance of liquidity that resulted in a structural decline in saving,
as well as housing and equity bubbles, was caused by loose monetary policy,
irresponsible fiscal deficits, the recycling of Chinese trade surpluses into US
treasury bonds and weak banking regulation. It was not caused by bankers
– they were symptom, not the cause.

Some of those
assembling in West Sussex were part of this, such as Gordon Brown, and some
were elected in the past 18 months.

But the
disastrous monetary and fiscal policies of the past decade are now being
aggravated by chaotic mishandling of their consequences.

The G20 agreed
to take “all necessary actions to ensure the soundness of systemically
important institutions”, without saying what, and they agreed to take
“decisive, coordinated and comprehensive action to boost demand and
jobs”, without saying how.

The unfortunate
truth is that few governments are able to do much more than they have already.
Very few have the capacity to borrow any more to finance larger fiscal
deficits, and even fewer can reduce interest rates much further.

The UK is now
monetising its deficit (printing money). The US says it is going to, but
hasn’t had to yet because China is still buying treasuries (while now
worrying aloud about it).

One of the key
problems with globalism, pointedly ignored by the G20, is the strain on the
European Union. Spain, Ireland, Portugal, Austria and Greece are in an
appalling mess, but they can’t reflate their economies because they all
outsourced monetary policy to the European Central Bank – unlike the UK.

But the ECB
remains intent on “anchoring” inflation expectations, which means
the basket cases of Europe are in a terrible spot. And Germany is refusing to
provide further fiscal support for its own economy, let alone anyone
else’s.

Basically, the
G20 meeting left Spain, Ireland, Portugal, Greece and Austria to their fates,
along with Eastern Europe and the Asian nations dealing with catastrophic
declines in exports and industrial production.

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Re: Daily Digest - March 15

Hi Aaron,

 

You may not see the threat in Wen`s remarks if you don´t consider asian mentality.  

 “We have lent a huge amount of money to the United States,” 

To speak that out so publicly as he did in itself is a very blunt statement from their point of view.

For them, the americans already lost their face `cause not only did the chinese lent you lots and lots of money,

but also Ms Clinton herself came over only to beg for more! That is not a good thing, because now

the chinese are starting to play their cards. 

 

Michael 

 

 

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Re: Daily Digest - March 15

I agree with Michael when he says,

 "You may not see the threat in Wen`s remarks if you don´t consider asian mentality."

 I say this as I post from my island "hideout" in the Yellow Sea using an errant wireless signal that I get once in a while...

 For the Chinese to say what they've been saying, given the Asian tradition of "beating around the bush" until someone is so embarrassed that they do the right thing or until you just have to step on them, I'd say America has been warned...

 Lee

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Re: Daily Digest - March 15

Seconded. This is very bad given Chinese culture.

It is especially worrying considering the recent aggression on US ships. First the Chinese flew a bomber within a few hundred feet above the deck of a US ship. They blamed it on a rogue pilot ignoring orders. Second they had several vessels surround and block another US ship. The Chinese pulled down their pants and the US ship had to retreat. Again they said it was unintentional.

Chinese citizens rarely act autonomously. Chinese military never act autonomously. 

They have a huge advantage over the States. Scary times. 

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Re: Daily Digest - March 15

Damnthematrix,

 Thanks for a great post!

presentmoment

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Re: Daily Digest - March 15

I have several friends, who are 1.5 generation Chinese Americans.  I would agree that it takes a lot for Chinese to make this kind of public statement. 

presentmoment

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Re: Daily Digest - March 15

Michael and Lee,

Thank you for the clarification on the Asian mentality.

It does make a lot of sense now that you mention it.

Considering how badly we've mismanaged our business with China, I hate to say we are in the "wrong" on this one, but it appears as if we are. The idea that they will probably collapse with us has got to piss them off, and it seems that it leads into one of two lines of logic:

1. They "understand" that America was selling them high risk debt based on economic production and integrity and are willing to use this as a method of 'conquest' (perhaps the wrong word) against the states, or;

2. They exercized terrible judgement, and are now in crisis management mode.

Any thoughts on this? Am I mis-understanding the situation?

Thanks again gents - I appreciate the perspective and info!

Aaron

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Re: Daily Digest - March 15

Double Post. Apologies.

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Re: Daily Digest - March 15

Excerpt from a discussion of China and the dollar from the Asia Times:

 http://www.atimes.com/atimes/China_Business/KC17Cb02.html

Quote:

DOLLAR CRISIS IN THE MAKING, Part 2
The not-so-safe haven
By W Joseph Stroupe
This is the second article in a three-part report.
PART 1: Before the stampede

Official and popular analysis of the predicament facing the US dollar has for the most part been distinctly unwilling to come fully to grips with the stark truth about the real nature of this deepening crisis and the escalating risks that are surfacing. Far too much optimism and wishful thinking, and scarce courageous realism, is a recipe for an even worse disaster than the one we're suffering at present.

We have seen in Part 1 the profound risks of a dollar crisis being triggered if global demand for US Treasuries remains high and that the debt bubble persistently and destructively sucks all the air out
of the global credit markets. However, if global demand for Treasuries is not sustained at a very high level, there exists an entirely different, yet equally destructive set of impending and mounting risks that a dollar crisis might be triggered.

Like it or not, the US dollar still constitutes the de facto central framework of the present global financial order - the dollar is its fundamental support structure, much like the steel framework that supported the Twin Towers in New York. The global crisis is sending shockwaves of ever increasing intensity throughout the present order. Few thought the shaking would reach its present intensity and scope, and no one really knows how powerful and destructive the shaking might get before the crisis is over.

The initial, knee-jerk reaction in this situation has been to reach out and grab tightly onto the framework with both hands (that is, in an exceptionally risk-averse reflex, flee into the dollar for relative safety) and hold on for dear life. This reaction of global investors is motivated partly by logic but also in large part by the strong psychological components of uncertainty, fear and even panic.

As China Banking

Regulatory Commission deputy head Luo Ping stated on February 12, in his own reactive-style retort to the unfolding crisis, Treasuries are just about the only safe-haven option in perilous times. However, his clarification on the next day appeared a bit less knee-jerk and more rational, stating that gold and selected government bonds (but not those of the US) look more attractive to China from a risk assessment standpoint, because China rightly fears its dollar-denominated holdings will almost certainly be inflated away over time by the US policy of issuing huge new sums of dollar-denominated debt in the form of Treasuries.

This brings us to the crux of the matter of escalating risks for the dollar. In the current fiscal year alone, the US is expected to issue somewhere between US$2 trillion and $2.5 trillion in new debt. It could conceivably exceed that amount if the crisis worsens and more money than anticipated is required to rescue the financial and economic sectors from ruin, or if virtually the entire financial sector has to be nationalized to prevent a total collapse. That is a prospect that is swiftly becoming more and more likely. A running estimate by Bloomberg News recently put the total so far of all the new sums of dollars the US government has spent, lent and/or committed to spend due to this crisis at about $9.7 trillion and counting!

To deal with a crisis that fundamentally arose, at length, out of the escalating risks of shortsightedly spending in colossal sums of dollar-debasing debt, the US government is attempting to "solve" the crisis by frantically spending gigantic additional sums of new dollar-debasing debt. Before this crisis spending binge was undertaken, the dollar's strength had already been greatly undermined over the past four decades by a combination of shortsighted dollar-debasing government policies and the accumulation of huge sums of debt since the 1980s.

According to official calculations, it required $5.54 in 2008 to equal the purchasing power of just $1.00 in 1970. This comparison illustrates the potency of inflation in undermining the value of a mere fiat currency such as the dollar.

But now, the US government is risking setting in motion inflationary forces that are profoundly more potent and difficult to manage. Virtually every economist on the planet calls this situation one that has the real potential for seriously and permanently damaging the dollar by inflating away too much of its remaining value not very far down the road. They also warn that, specifically due to the extremely risky monetary and budgetary policies now being embarked upon, the timing will be absolutely crucial for future Fed watchfulness and actions aimed at preventing a catastrophic, uncontrolled rise in dollar inflation.

They further warn that the severely weakened US financial and economic systems will be very slow to recover strength and stability and will likely be unable to withstand the tightening measures that will be needed further down the road so as to keep inflation from running out of control. The US may therefore be condemning its own currency to collapse by enacting such shortsighted policies.

......................


As for the answers to the remaining questions posed above, even before Premier Wen Jiabao last week publicly warned the US of his government's concern about the safety of China's US holdings (see Wen puts US honor on the debt line, Asia Times Online, March 14, 2009) consider the recent comments of Luo Ping, China's Banking Regulatory Commission deputy head, referred to above:

"We hate you guys. Once you start issuing $1 trillion-$2 trillion ... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do."

Also note the recent comments of Yu Yongding, a prominent former advisor to China's central bank, as reported by Bloomberg News on February 11, 2009:

China should seek guarantees that its $682 billion holdings of US government debt won't be eroded by "reckless policies", said Yu Yongding, a former adviser to the central bank. The US "should make the Chinese feel confident that the value of the assets at least will not be eroded in a significant way," said Yu, who now heads the World Economics and Politics Institute at the Chinese Academy of Social Sciences

Also, as reported by Bloomberg News on February 11, 2009:

China may voice its concerns over US government finances and the potential for a weaker dollar when Secretary of State Hillary Clinton visits China on February 20, according to He Zhicheng, an economist at Agricultural Bank

of China, the nation's third-largest lender by assets. "In talks with Clinton, China will ask for a guarantee that the US will support the dollar's exchange rate and make sure China's dollar-denominated assets are safe," said He in Beijing. "That would be one of the prerequisites for more purchases."

Now, note the clarification offered by Luo Ping on the next day, as reported by Reuters News Service:

Buying US Treasury bonds is an option - but not the only option - for China, which is aware that huge debt issuance by Washington would reduce the value of China's existing portfolio, a banking regulator said in remarks published on Friday. In an elaboration of his remarks, the China News Service paraphrased Luo as saying: "Compared with gold or bonds issued by other countries and regions, US Treasury bonds are still an option (for China). But if the US government issues a large amount of Treasury bonds amid efforts to deal with the economic crisis, all investors who hold US Treasuries will suffer losses."

Now, note these statements made by Chinese officials, advisors and experts as reported by the official Xinhua News Agency on February 18, 2009:

"To rescue the ailing US economy by increasing government borrowing will create a record-high federal deficit," said Yu Zuyao, economist with the Chinese Academy of Social Sciences, a government think tank. "This can further lead to catastrophic consequences such as serious inflation and US dollar depreciation," he said Tuesday. China faced high depreciation risk to its foreign exchange reserves, US Treasury bonds and other US dollar-denominated assets, Yu said.

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Re: Daily Digest - March 15

Hi Aaron,

 

i don´t want to claim any expert knowledge of asian mentality, but i would state that americans, and i know this maybe a prohibitive and from an intellectual point of view unacceptable generalisation, have a tendency to overlook other culture´s mentality.

--They "understand" that America was selling them high risk debt--

to say that is not quite right I think. The dollar was" and is" a reserve currency where countries like china found a save haven for their sofar " 3 world currency".  Nothing wrong with that I suppose!!

Unfortunatley the size of that operation coincided unhappily with the burst of the cds bubble which, for better or worse, and to make my personal standpoint clear, i also think for worse, put the chinese in a position which one could describe as" one up". America was selling something which everybody wanted, but that may change now that Bernanke and Geithner are debasing the US Dollar.It may have unwanted consequences, but it´s not a reason to denounce everything the west and off course in particular America stands for.

But, set the  powergames and struggles aside for a moment, from what i´ve learned from Chris`s Crash Course is that those things become of minor importance soon anyway once oil runs out and water, for an unsustainable population on planet earth, becomes the new " gold".

Anymore worries about the financial market´s and the people running it? 

 

Anyway i´m thankful i found this site and i can participate in this discussion.

kind regards from duesseldorf (germany)

Michael 

 

 

 

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Re: Daily Digest - March 15

Michael,

Thank you for your reply!
I agree - Americans have an uncanny ability to be shortsighted with regards to others' cultures, but there has been some amazing prosperity due to the affluency the west has brought around.

My main concern is that we were fixated on the "wants" not the "needs" with our productivity.

Had we focused on more prosperity (and science) instead of growth, we might be having entirely different conversations right now!

Cheers, and welcome!

Aaron

 

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