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Daily Digest - March 19

Thursday, March 19, 2009, 1:45 PM
  • "Recession"
  • The Pothole - HOLY COW!!!
  • The CEO's Guide to Jetting (2&3 are Funny)
  • Glad I'm Not a Politician: Taxpayers Gather To Protest Spending, Taxes, Growing Debt
  • Why We Need Criminal Investigations
  • Fed to pump another $1 trillion into U.S. economy
  • TALF-for-trash
  • US Dollar has 3rd Biggest One-Day Decline Ever
  • Gold Buying Opportunity of a Lifetime
  • China Isn't the Issue...
  • Major Foreign Holders of US Treasury Securities (H/T Ernie)
  • Foreign demand for t-bonds wanes
  • Capacity Utilization Slippery Slope
  • Housing Starts: Is this the Bottom?
  • New Home Sales, Monthly, NSA
  • Guest Post: Just Let It Go
  • IMF poised to print billions of dollars in 'global quantitative easing'(H/T David)
  • IMF funding a 'game-changer'
  • Why We Need Criminal Investigations
  • Charlie Rose: AIG and Meredith Whitney on Banks

Economy

"Recession"

The Pothole - HOLY COW!!!

[Jenna's Apartment: Bathroom]

Jerry is standing by the sink, preparing to brush his teeth. Jenna (his latest lady friend) enters.

Jenna leaves the bathroom. Jerry brushes his teeth. He clearly doesn't like the taste of the baking soda, and leans over the sink to spit. He puts his hand on the counter and knocks Jenna's toothbrush off the edge. The brush falls into the toilet bowl.

There is a shot from beneath the water in the toilet, looking up. Jerry's face looking down into the bowl, with an expression of shock and horror.

Jerry looks behind him, to see if Jenna has spotted him. He rolls up the sleeve of his dressing gown, grimaces, and plunges his hand into the toilet. He grabs the brush out, drops it on a shelf beside the mirror and immediately begins frantically washing his hands. As he completes this task, he raises his head and finds Jenna has returned. She is standing behind him, smiling as she brushes her teeth with the brush he just retrieved from the toilet.

JERRY: Ooh-ooh

In the last nine years U.S. financial institutions became extremely creative with their financial "products". They were encouraged by Federal Reserve Chairman Alan Greenspan who was sure that any regulation other than self-regulation would be counterproductive. In the bully pulpit was our first Harvard MBA President George Bush, proclaiming the benefits of free market capitalism while not being able to pronounce or spell derivative, let alone understand them.

Watching over the creative bankers was the eagle eyed SEC, which had just received accolades for the Enron and WorldCom scandals. This trusting bunch of morons, hoping to one day get cushy jobs on Wall Street, decided that the investment bankers should be allowed to leverage their assets 30 to 1, rather than the overly restrictive 12 to 1 that had been in place for decades. Their models, created by cock sure MBAs, assured them that nothing could go wrong. The final piece of the puzzle was obtaining a AAA rating for these new "products" from the staid old rating agencies Moody's and S&P. These two companies had a very predictable boring revenue stream. Their CEOs wanted a little excitement in their lives, and maybe just maybe, big bonuses and stock options. They decided to jump head first into rating the new indecipherable products. They also had their cock sure MBAs creating models which assured them that all was well. Surprisingly, after being paid billions in fees, the rating agencies provided AAA ratings across the board to all of the new investment products.

The Wall Street geniuses peddled MBSs, CDSs, and CDOs, to pension plans, cities, states, foreign banks, foreign villages, and anyone else who wanted to get in on the easy money. With AAA ratings, no one bothered to conduct due diligence and understand what could go wrong. The amount of derivatives outstanding rocketed from $40 trillion in 2000 to $684 trillion in 2008. It has been reported that 80% of all Credit Default Swaps outstanding in 2008 were speculative. There was no hedging going on. Wall Street had become a Las Vegas casino. Credit default swaps totaling $440 billion were written by AIG. These were pure speculative bets and the American taxpayer is still paying off. The bill is up to $160 billion so far. The executives at AIG must have exceeded their loss goals, because the American taxpayer is paying $165 million in retention bonuses to executives of the unit that nearly collapsed the worldwide financial system. Why would anyone want to retain these executives? If these people were asked, "How do you sleep at night?" they would respond, "On a big pile of cash".

The CEO's Guide to Jetting (2&3 are Funny)

Glad I'm Not a Politician: Taxpayers Gather To Protest Spending, Taxes, Growing Debt

Why We Need Criminal Investigations

Fed to pump another $1 trillion into U.S. economy

WASHINGTON: Saying that the recession continues to deepen, the U.S. Federal Reserve announced Wednesday that it would pump an extra $1 trillion into the economy by buying mortgage-backed securities and long-term Treasury issues.
"Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending," the Fed said, adding that it would "employ all available tools to promote economic recovery and to preserve price stability."

As expected, the Fed kept its benchmark interest rate virtually at zero. But in a surprise, it drastically increased the amount of money it will create out of thin air to thaw out the still-frozen credit markets that have cramped lending to consumers and businesses alike.

The Fed said it would purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities, on top of the $500 billion that it is currently in the process of buying. In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on loans of all types.

All of these measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. Since last September, the central bank has roughly doubled the size of its balance sheet to nearly $2 trillion from $900 billion - even before the action Wednesday - mainly because of its efforts to rescue credit markets.

Despite a trickle of encouraging economic data in the past few weeks, Fed officials have shown no readiness yet to cut back on their unprecedented measures to pump money into the economy.

Fed policy makers sharply reduced their economic forecasts in December, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment could approach 9 percent by the end of the year and that there was at least a small risk of an across-the-board drop in consumer prices akin to what Japan experienced for nearly a decade.

The Fed said Wednesday that the "near-term economic outlook is weak" but that it anticipated "that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth."

Hours before the Fed announced its decision on Wednesday, the U.S. Labor Department reported that consumer prices climbed 0.4 percent in January, the second consecutive monthly increase. The news provided some relief from deflation worries, but most analysts still expect prices to remain nearly flat for the foreseeable future. In their most recent forecast, Fed policy makers predicted that consumer prices would rise 0.3 percent to 1 percent this year - well below the central bank's unofficial inflation target of nearly 2 percent.

The Federal Reserve reduced its benchmark interest rate to virtually zero in December, declaring that it would keep the rate at that level for "some time" and focusing its additional efforts to revive the economy on a wide range of new lending programs.

As expected, the Fed repeated on Wednesday that it would keep its benchmark rate, the federal funds rate, at zero for "some time." While the central bank had said for some time that it was considering the possibility of buying longer-term Treasury bonds, Fed officials had played down that idea in the past month as they focused their attention instead on more targeted intervention in the credit markets.

In their statement on Wednesday, however, the Fed policy makers offered little explanation for the decision to go ahead with the Treasury purchases after all, saying only that the move was intended to "improve conditions in private credit markets."

Starting last September, the new lending programs - including money for bailouts of individual companies like Citigroup, American International Group and Bank of America - have caused the Fed to print new money at the fastest pace in history. But much of that money has remained dormant, because the economic downturn has made banks reluctant to lend and businesses and consumers either reluctant or unable to borrow.

The Fed and the Treasury are in the process this week of starting a joint venture called the Consumer and Business Lending Initiative in their latest effort to revive the credit markets. The program will start out by offering $200 billion worth of financing for consumer loans, small business loans and some corporate purposes like equipment leasing.

Fed officials have said they hoped to expand the program next month, possibly to include the huge market for commercial mortgages, and both the Fed and Treasury hoped the program would eventually provide up to $1 trillion in total financing.

TALF-for-trash

I asked it jokingly, the treasury took it seriously.
As it's currently set up, the TALF may lend as much as $1 trillion to investors from hedge funds to pension funds and insurance companies to buy recently created securities backed by loans for car purchases, college education and real estate. Applications for its first loans are due tomorrow.

Broadening the TALF to include older, illiquid and lower- rated securities could allow the participants in the public- private investment funds to potentially repackage assets and sell them on to a wider group.

The TALF is supported with money from the $700 billion bank-rescue fund passed by Congress in October. The Bush administration originally set aside $20 billion to seed $200 billion in loans; Geithner has proposed raising the government contribution to $100 billion. The facility could need additional money to address so-called legacy assets.

US Dollar has 3rd Biggest One-Day Decline Ever

The US Dollar index had its third biggest one-day decline today since daily pricing begins back in 1970. After the Fed announced that they will be purchasing US Treasuries and other assets, the Dollar fell sharply and ended the day down 2.69%. As shown in the one-year chart below, the US Dollar index broke below its 50-day moving average today after breaking below its short-term uptrend a few days ago. The Dollar is still trading above its longer-term uptrend, but the technical damage done in recent days is not a good sign.
Below we highlight all one-day declines of 2% or more for the US Dollar index, along with the percent change on the following day and over the following week. As shown, the average return over the next day and week has been -0.18% following these big down days in the past.

Gold Buying Opportunity of a Lifetime

Opportunity and crisis are uneasy handmaidens in times of danger; and, while crises may increase, opportunities are always rare.
The world is in the grip of an unprecedented crisis. Unlimited credit has now turned into its deadly nemesis, unlimited defaulting debt; and whereas only some of us were its beneficiaries, all of us will be its victims-all of us, except the very few.

To heroin addicts, heroin is quite wonderful. Its effects mitigate and, indeed, obliterate the exigencies of modern life. Anxieties disappear as do the pressures of living in a derivative reality. The popularity of heroin lies in its ability to "solve" these problems, the same attraction as credit.

The problem of each lies in the conundrum of constant demand and inconstant supply; and, as the need for each increases, a self-reinforcing and deadly cycle is set in motion, a cycle that inevitably ends in disaster, physical collapse in the case of heroin and economic collapse in the case of credit.

The supply of heroin was originally sourced in the east, in Asia and Afghanistan. Credit began its journey in the west, in the City of London and New York's Wall Street then spreading through central banks to the rest of the world.

Credit's journey, however, is about to end, its extraordinary success the reason for its now imminent failure. The spread of credit was so successful that productivity, the host of credit, is now drowning under the tsunami wave of debt created by that credit; and when the host perishes, so, too, will the parasite.

CREDIT-A PARASITE ON THE BODY OF PRODUCTIVITY

Today, we are witness to the parasite's last struggle, credit's final attempts to resuscitate the host's ability to repay its debts and obligations. It is ironic-and perhaps appropriate-that the bankers' first victim, government, is its last and most important ally in its struggle to survive.

Were it not for government, credit could not have achieved its central position in today's world. The ability to imbue paper coupons with a value previously accruing only to gold and silver was accomplished solely by government decree at the behest of bankers.

What Professor Antal E. Fekete calls the modern tower of Babel, the quadrillion dollar skyscraper of debt built upon the false premise of bankers is now about to come tumbling down-on all of us.

TOMORROW WILL NOT BAIL OUT TODAY
ESPECIALLY WHEN ALREADY ENCUMBERED

Under the influence and encouragement of bankers, the US lived as if tomorrow would never come; for if it did, the debt accrued from today's expenditures would be due and owing, destroying what had been built on the bankers' false promise that that tomorrow could always be delayed.

TOMORROW ARRIVED
AND GUESS WHAT
WE'RE BROKE

Terms like "quantitative easing", "monetizing debt", and "the nationalization of banks" are actually socially preferable synonyms describing the collapse of credit , credit-based markets and credit-based paper money.

We are broke, literally and figuratively and the "we" is inclusive. Consumers cannot pay back what they owe, entrepreneurs cannot pay back what they owe, corporations cannot pay back what they owe, governments cannot pay back what they owe and bankers owe so much that not even governments can repay what bankers owe although governments are promising to do so while lying about the amounts actually owed.

We burdened tomorrow with today's expenditures and tomorrow has refused the bill. The response is understandable as tomorrow was never a party to the promises to pay and the expectations of such were as self-serving as they were unfounded.

The response of governments is clear:

Governments are using taxpayer money and future taxpayer obligations to bail out banks, a solution designed to perpetrate the bankers system of credit and debt, not to solve the problem or to fix its cause.

The foundation of the bankers' fraud has been their ability to issue paper coupons as money, an ability made possible by government fiat, i.e. decree. Paper coupons or "currencies" as bankers prefer them to be called are worthless without government legal tender laws, laws obligating debts to be liquidated by payment with their printed coupons

The charade of paper money began with the Bank of England's claim in 1694 that their paper notes were convertible to gold; and, as long as people believed that to be so, there was little need to exchange the more convenient paper for the more valuable gold which it represented.

Of course, over time, governments issued more and more paper notes and had less and less gold until there was no longer not enough gold to back the enormous amounts of paper currencies in circulation

This is where we are today and this is why bankers and governments are worried. Their fraud is becoming apparent because their game of credit and debt is collapsing and the system is being questioned as never before.

DON'T ASK DON'T TELL
THE FOUNDATION OF MODERN ECONOMICS

Now that their debt-based system of credit is collapsing, paper currencies are in upheaval as well. The fall of the US dollar and its subsequent rise even as its economy crumbles is absurdly matched only by the Japanese Yen which rallied as Japanese exports plunged 50 % in six months.

Powerful speculative forces were unleashed in 1973 when the US dollar was de-linked from gold as were all currencies as they had been linked to the US dollar. What are government coupons called money really worth? Ask the punters in the market.

The answer is no one knows. The value of currencies is subject to speculators wagering enormous sums in foreign exchange markets, markets which exploded from negligible amounts in 1973 to trillions now bet daily on what paper money may or may not be worth.

This is the one bet that bankers need to keep in play, the belief, however false it may be, that government coupons, printed in whatsoever denominations or amounts in whatever sizes and colors and not backed by anything of value, are actually money; an idea that becomes more and more absurd with each passing day and each new crisis.

THE OPPORTUNITY IN THE CRISIS

The need to maintain this charade in order to maintain the power of government and profits of bankers offers the one truly golden opportunity of this crisis-that of buying gold at below market prices.

Gold prices are manipulated by central banks. As the value of paper assets and paper profits fall, the lure of gold threatens the ability of bankers to keep investors believing their paper currencies, paper assets and paper promises are worth more than the paper they are printed on.

This is why bankers and governments "manage" the price of gold, i.e. manipulate gold. Gold is the one true measure of monetary distress and when gold prices quickly move upwards, it sends a powerful signal that investors no longer trust paper-based assets and it's time to sell.

This is the bankers' greatest fear and they will do anything to prevent the collapse of a system which allows them to profit from the risks and labor of others; and, to prevent this they sell central bank gold to drive down gold's price-and why wouldn't they? After all it's not their gold

WHEN GORDEN BROWN SOLD BRITAIN'S GOLD

In 1999, it was rumored that investment bank Goldman Sachs had a 1,000 ton gold short position in the markets. Goldman Sachs was betting that the price of gold would continue to fall and they would be amply rewarded for their apparent "risk".

Because of central bank manipulation, the price of gold had moved inversely to the rise of stocks for almost 20 years and bankers were making easy money on the bet gold would continue its downward spiral.

However, much to the shock of Goldman Sachs and the central bankers, in 1999 gold stopped falling; and, because Goldman Sachs' short position was so large, Goldman possibly could suffer catastrophic losses.

This is when England's then Chancellor of the Exchequer, Gordon Brown, on May 8, 1999 announced England would sell over 50 % of its gold reserves, 415 tons of the most precious metal on earth at the very bottom of the market.

The decision to sell England's gold thereby saved Goldman Sachs and insured the political future of Gordon Brown. Goldman Sachs' is still in business and Gordon Brown is now the Prime Minister of England-proving that good things come to those who do the bidding of the powerful (whether either outcome was worth 415 tons of England's gold is questionable)

Selling a nation's gold to save the bankers' parasitic system is now common practice as the banker's system continues to collapse and gold continues to rise. Since Gordon Brown sold England's gold, gold has risen from $275 dollars per ounce to its present price of over $900 despite the thousands of tons of central bank gold sold to prevent its inexorable movement higher.

China Isn't the Issue...

Reported with yesterday's industrial production, capacity utilization took a turn for the worse... worse since inception that is.
Capacity utilization also dropped to 70.9%, matching a December 1982 record low for the series which itself dates back to 1967. Capacity utilization was at 71.9% in January.

(Chart)

At least it's not a cliff dive. More like a slippery slope. A slippery slope in appearance and in the notion that if we don't do something soon, we're not going to be able to climb back up anytime soon.

Interest Rate Roundup reported:

"Chinese Premier Wen Jiabao said Friday that he is "worried" about the country's vast $1 trillion holdings in U.S. Treasuries and that China will pursue a policy of diversification when comes to its future foreign exchange holdings. "Wen's remarks, which were made at the close of the annual National People's Congress meeting in Beijing, echoed those that have been made by other high-ranking policymakers and bankers over the past year since the subprime crisis devastated the value of the mortgage-backed securities that made up a large chunk of China's U.S. holdings.

Major Foreign Holders of US Treasury Securities (H/T Ernie)

Foreign demand for t-bonds wanes

Capacity Utilization Slippery Slope

Brad Setser again:
What have foreign investors been buying? Short-term Treasury bills. In huge quantities. However, that surge in demand for bills now seems to be fading.

The fall off in total TIC flows in January reflected private bill sales. The official sector is still buying - $100 billion in bill purchases over the last 3 months of data only seems small relative to the post Lehman peak. But with global reserve growth slowing (even China doesn't currently seem to be adding to its reserves), central banks won't be as large a source of demand for Treasuries going forward as they have been in the past.

That means a fall off in central bank demand for Treasuries wouldn't necessarily be a sign that central banks have lost confidence in the US Treasury market. It could equally be a sign that a lot of central banks no longer have any new funds to invest.

Again, the contraction in global trade volumes is rapidly downsizing both export and import volumes, with the net effect of a smaller trade deficit for the united states and smaller surpluses (even moves to deficit) elsewhere. this should not be a surprise, nor should it be surprising if it continues.

And if - as seems likely - foreign demand for Treasuries fades long before the US fiscal deficit, the US Treasury will need to sell an awful lot of Treasuries to American investors. For the past several years I have argued that it was almost impossible to overstate the impact of central bank demand on the Treasury market.

That may no longer be the case going forward.

The world is changing. Global reserves aren't growing. The echo from their past peak that we observe in the current Treasury data will fade.

Yet China continues to buy U.S. Treasuries...

While China may in theory be "worried" about their exposure, they have minimal flexibility with what they can do as long as the U.S. consumer remains so vital to their economy. If China stops buying U.S. denominated assets, their currency will gain in value, thus making their products less desirable to the U.S. consumer.
The bigger issue with U.S. Dollar denominated assets are all those investors that flocked to the assets in the Fall due a the flight to quality or unwind of shorts. The Financial Times reports:

Foreign investors cut their holdings of US long-term securities in January although China and Japan purchased more Treasury bonds, according to Treasury data issued Monday. The latest Treasury International Capital report, known as TIC, revealed net sales of $43bn in long-term US securities in January, following purchases of $34.7bn in December. US residents purchased a net $24.2bn of foreign securities, the first net buying since last June as repatriation flows halted.

Brad Setser (i.e. "Mr. TIC") follows:

Banks stopped piling into US assets. In October - at the peak of the crisis - private investors abroad bought $64 billion US T-bills and increased their dollar deposits by $196 billion dollar-denominated liabilities. In January, credit conditions eased a bit, and private investors reduced their t-bill holds by $44 billion and the banks reduced their (net) dollar deposits by $119 billion.

Looking at net purchases of U.S. Long-Term Securities for both China (the headline risk) and banks / investors (the actual risk) as defined by the Cayman Islands (the largest portion of the Caribbean Banking Centers in the chart above... I'll explain more below) we see a massive sell-off.

So... why should we be worried about the Cayman Islands? Because the Cayman IS the banking community. According to Wikipedia: The Cayman Islands are a major international financial centre. With the biggest sectors being "banking, hedge fund formation and investment, structured finance and securitization, captive insurance, and general corporate activities." Regulation and supervision of the financial services industry is the responsibility of the Cayman Islands Monetary Authority (CIMA).

The Cayman Islands are the fifth-largest banking centre in the world; with $1.5 trillion in banking liabilities. They are home to 279 banks (as of June 2008), 19 of which are licensed to conduct banking activities with domestic (Cayman based) and international clients, the remaining 260 are licensed to operate on an international basis with only limited domestic activity.

One reason for the Cayman Islands' success as an offshore financial centre has been the concentration of top-quality service providers. These include leading global financial institutions (incl. UBS and Goldman Sachs), over 80 administrators, leading accountancy practices (incl. the Big Four auditors), and offshore law practices (incl. Maples & Calder and Ogier).
To summarize... we should be less concerned with China (they NEED to buy) and more concerned that major investors continue to pile out.

Housing Starts: Is this the Bottom?

Update: Please don't confuse a bottom in single family housing starts with a bottom in house prices! See next post: Housing: Two Bottoms.
The title to this post would have been laughable in 2008 or 2007, but as I noted in Looking for the Sun, there is a reasonable chance housing starts will bottom sometime this year - so I suppose it is not too early to start looking.
A few key points:Single-family starts may still fall further. Although I've started looking for the bottom for housing starts, this seems a little early in the year.

Focus on single-family starts. Ignore total housing starts. Multi-family starts are very volatile. Single family starts increased by 1.1% in February - not much.

One month does not make a trend, and housing data is revised significantly. The slight increase in February might just disappear.

Permits for single-family housing units jumped to 373,000 SAAR (starts were 357,000 in February). This suggests starts will probably be higher in March.

Supply is still too high. Months of supply was at an all time record high 13.3 months in January.

Click on graph for larger image in new window.

From the Census Bureau: "The seasonally adjusted estimate of new houses for sale at the end of January was 342,000. This represents a supply of 13.3 months at the current sales rate."

But the increase in Months of Supply has been driven by the denominator (sales), even though the numerator (inventory) has been falling steadily. note: Months of supply = inventory / sales.

The second graph shows the level of hard inventory for new homes (completed plus under construction). With starts below sales, hard inventory has been falling for some time.

Unless sales fall further, the months of supply should start to decline even with the current level of starts.

And this brings up a key point:

It is incorrect to directly compare monthly housing starts to monthly new home sales. The monthly housing starts report from the Census Bureau includes apartments, owner built units and condos that are not included in the new home sales report.

However it is possible to compare "Single Family Starts, Built for Sale" to New Home sales on a quarterly basis. The quarterly report shows there were 65,000 single family starts, built for sale, in Q4 2008 and that is less than the 82,000 new homes sold for the same period. This data is Not Seasonally Adjusted (NSA). This suggests homebuilders were selling more homes than they are starting - but not by much.

However starts have fallen much further in Q1 (almost 25% from Q4) although sales have fallen too (we only have January data for sales so far).

Note: new home sales are reported when contracts are signed, so it is appropriate to compare sales to starts (as opposed to completions), although this isn't perfect because homebuilders have recently been stuck with "unintentional spec homes" because of the high cancellation rates.

This graph provides a quarterly comparison of housing starts and new home sales. In 2005, and most of 2006, starts were higher than sales, and inventories of new homes rose sharply. For the last several quarters, starts have been below sales - and new home inventories have been falling - but it continues to be a race to the bottom between starts and sales.

Of course, unless sales stabilize soon, starts might have to fall further.

The housing market is still very weak. The NAHB homebuilder index was near the record low this month. Housing starts are just off the record lows of last month. New home sales were at a record low in January. And sales and starts are nominal numbers - not adjusted for changes in population!

Do not expect a sharp rebound in housing starts. Even if this is the bottom in starts (or close to the bottom), there is still too much inventory - especially distressed existing home inventory - for a meaningful rebound in housing starts.

Impact on the economy: If this is near the bottom for housing starts, then the drag on GDP from Residential Investment (RI) will subside (new construction is usually the largest component of RI). As completions fall to the level of starts, the drag on residential construction employment will also ease. And finally, in the temporal order of a business cycle recovery, usually RI has to bottom first ...

New Home Sales, Monthly, NSA

Guest Post: Just Let It Go

Meredith Whitney - on Financials...

Conventional wisdom says that financial companies are having trouble borrowing because credit markets are "broken." This is wrong. The credit market itself is fine. It's the financials' balance sheets that are broken. They have so little equity relative to their assets, there's no cushion to protect creditors from losses on the asset side of the balance sheet. So of course private investors have no inclination to lend. Unfortunately, the "solution" being sold by Washington is to guarantee all manner of risky investments. In effect, using the public's balance sheet to absorb trillions of dollars worth of private sector losses. This is likely to end more catastrophically than if we'd simply let the system crash in October, which is probably what we should have done.

When financial companies lose access to credit, they are put out of business very quickly. See, for instance, Bear Stearns, Fannie Mae, Freddie Mac, and Lehman Bros.
The losses from such failures are huge and undesirable so the government is seeking to avoid them, offering various guarantees to encourage creditors to keep funding failed financials. And boy are creditors getting lots of protection: TARP, TSLF, TALF, TGLP, CPFF, MMIFF, not to mention FDIC raising the deposit insurance limit to $250,000.

But allowing failed financials to nurse the public breast is also undesirable since it rewards failure. The government's compromise is to make its guarantee programs "temporary." And yet, nothing about them seems very temporary. Remove the guarantees and you'd see highly-destabilizing, panic-induced capital flight away from supposedly "safe" assets like bank deposits.

With that in mind, it's no surprise that FDIC two days ago extended its Temporary Liqudity Guarantee Program. The TLGP has a complex name, but it's not a complex program. Effectively, FDIC agrees to backstop the debt of certain systemically important financial companies who otherwise couldn't access the credit markets...not inexpensively anyway.

Therein lies the insanity of such programs. If borrowers are having trouble accessing credit markets, the government has no business lending to them at subsidized rates. Fannie and Freddie were just the most obvious examples of how terribly this can backfire. Perhaps trillions of dollars flowed through Fan/Fred into the mortgage market as a result of the government's implicit (now explicit) guarantee of their debt. This helped inflate a bubble that is now bursting spectacularly.

An even more insidious guarantee is FDIC deposit insurance, the "crack cocaine of American finance" as Martin Mayer put it in his definitive book on the S&L crisis. He showed how deposit insurance was to blame for that episode as risky bankers leveraged FDIC insurance to attract funding to finance ill-conceived investments.

Depositors didn't care how much risk bankers took with their money. It was federally-insured. Might as well go with the bank offering the highest interest rate. One of my favorite contemporary examples is the ad I see for GMAC's above-market CD rates in WSJ's A section every week. GMAC is insolvent. It's asinine to encourage depositors to keep funding them.

But that's exactly what happened when the government gave GMAC $5 billion of TARP bailout money to go with the protective wrap of FDIC deposit insurance. GMAC now operates courtesy of the government's promise to insure its creditors.

The dirty little secret, of course, is that the government has no reserves with which to fund its guarantees. Take the Deposit Insurance Fund, with $19 billion of capital backstopping over $5 trillion of potential liabilities, its leverage is nearly identical to Fannie+Freddie before they went under. And like Fan and Fred, the DIF continues to draw breath only because government bailouts have kept it afloat, preventing failed banks from falling into its lap.

This guarantee shell game---shifting liabilities from one part of the federal balance sheet to another---continues only because Uncle Sam has borrowing capacity to keep it going. That capacity derives not from balance sheet strength (again, no reserves) but from the dearth of investors' options. Everyone worldwide knows Uncle Sam is broke. But government-insured accounts remain the last refuge for their accumulated paper wealth, which---in a fractional reserve banking system---is largely an illusion to beging with. In such a system, paper wealth exists only to the degree that debts are serviced.

This is not hard to grasp, actually. And it explains why unfunded government guarantee schemes are destined to fail catastrophically.

The vast majority of the economy's wealth exists only on pieces of paper, primarily bank statements that record the accumulated funds stored in financial accounts. Contemplate your own bank statement for a moment: what does the balance figure at the bottom represent? ...........

Banks don't actually have any of your money in the vault The mirror image of expanding credit is expanding paper wealth. Every dollar of borrowed money pumps up someone's bank account. But since the majority of this wealth exists only on paper

A bank run can be a healthy thing on occasion as it discourages investors and depositors from allocating too much cash to unstable institutions. Unfortunately, allowing our financial institutions to grow so large, unchecked as they are by the threat of bankruptcy, means we've removed all discipline that the possibility of failure provides.

The counter-argument here is that government guarantees have actually prevented capital flight. Without all these new guarantees, the system would have crashed back in October as investors and depositors raced to cash out simultaneously. Yeah, that's probably what would have happened. But have the guarantees we've extended prevented that or merely delayed it? What happens when these "temporary" guarantees live up to their modifier? Eventually the government will have to remove them from the equation or face a run on Treasuries and the dollar.

But by that point so much risk-averse capital will have already flowed to "guaranteed" investments, that the unwind risks being far uglier than if we had just let the system go down in October. Sounds crazy, right? A bit like Andrew Mellon's advice to Hoover perhaps?** True, liquidating the financial sector would bring about the largest depression since the 30s. But follow the path we're on today, absorbing all of the private sector's losses onto the public's balance sheet, and we risk a far nastier liquidation---out of Treasurys and the dollar.

The writing is already on the wall. The Chinese are reading it. Will we?

IMF poised to print billions of dollars in 'global quantitative easing'(H/T David)

IMF funding a 'game-changer'

Via Ft. Alphaville -- Stephen Jen cites the g20 move to bolster the IMF has removed euro risk by clearing a path to stave off contagion emanating from eastern europe.
$850 billion is a massive amount of liquidity, particularly because none of the AXJ economies will likely access funds from the IMF, and only a couple of LatAm economies could turn to the IMF. This leaves most of the US$800 billion or so of resources available to the EE - an amount equivalent to roughly 60% of EE GDP (not including Russia).
Fears of eastern european collapse, then, are being addressed.

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17 Comments

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - March 19

Recession my @$$!

ICBM Ben: recovery this summer, QE, TALF for trash.

I'd have optimism if these momos could even identify the problem, making the s in systemic a capital letter is not a fix.

r16_18208363.jpg

r04_18186213.jpg

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jhelge's picture
jhelge
Status: Bronze Member (Offline)
Joined: Jan 7 2009
Posts: 43
Re: Daily Digest - March 19

Thanks as always Davos.

Liddy's response to Grayson reminds me of Bernanke's reply to Sander's the other day.That is to say, "You elected leaders are of no consequence. We have no respect, not even a passing acknowledgement, for any ethical standard. We are above the law. We will do as we please. We will rob you of your wealth and that of your constituants. And you can do nothing to stop us."

That they can behave this way without existential fear is impressive. It speaks to the level of hubris they exude. When justice finds them, God have mercy. I doubt the people they so contempt will have much at all.

Mike Pilat's picture
Mike Pilat
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 929
Re: Daily Digest - March 19

Look at #3 on the list of Major Foreign holders of US Debt...

Davos's picture
Davos
Status: Diamond Member (Offline)
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Posts: 3620
Re: Daily Digest - March 19

Hello JHelge: They should declare them financial terrorist, drop them off in Tora Bora with a 3 minute head start. Take care

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Daily Digest - March 19

Struggling Americans fear doorknock evictions

By North America correspondent Kim Landers


As people in the US struggle to pay their mortgages or
rent, ABC correspondent Kim Landers reports from North Carolina as a
sheriff's deputy goes door-to-door evicting people.

People who can no longer pay their mortgage or their rent dread a
knock on the door from the police or the local sheriff's department.

In Durham County in North Carolina the doorknockers are a special
group of sheriff's deputies, who see first-hand the impact of the tough
economic times on families.

When people lose their jobs, their home, a sheriff's deputy like Scott Oakley comes knocking.

Here, evictions and property seizures are becoming more common.

Much of the time the renters or the owners are already gone, but not today.

At one house on a busy highway, Sadie Wright waits with her one-year-old daughter.

"My name's Sadie Wright and this is Serenity Gaskin. She's a good girl," she said.

"We were in the middle of taking a nap. We knew they were coming, but you know."

Ms Wright says she does not blame the sheriff's deputy.

"Oh, they can't do nothing. They doing what they're paid to do. You
can't ask no extra of them. Doesn't matter if they have a heart or not,
there's nothing they can do," she said.

She calls her husband and tells him to come home but she is not surprised at what is happening to her.

"Oh no, I knew they were coming. We were warned, but we just couldn't do nothing," she said.

"We wanted to clean it out and be right people; coming from Minnesota, that's what you do.

"But I guess in Durham, you know they don't, you know how it is down
here. There's no southern hospitality, that's what I guess."

Her husband does not want to give his name. And although they are
months behind on their rent, he tells me he thought they would have
more time before getting evicted.

"Oh yes ma'am, I thought we had till the 26th, 30 days, but I guess
that's not the case. So I'm getting the landlord to help me out here,"
he said.

"She's a real nice lady. I've done a lot of work for her already, tree work, so hopefully she helps me."

But the landlord will not help and Deputy Oakley goes ahead with the eviction.

"Everybody's got an excuse and wants to blame everybody for everything," he said.

"There's nothing I've never heard before. And a lot of what they're
saying is excuses, but you know, they're blaming everything on Durham
and the economy around here but you know, a lot of people bring things
on themselves and put the blame somewhere else."

This family has been sleeping on mattresses on the floor. The fridge
is broken, the stove too. It seems hard to believe they should have
been paying more than $US1,000 a month in rent.

Before the doors are padlocked they pile a few things outside the
front door; a bag of nappies, one suitcase stuffed with clothes, a
vacuum cleaner.

Forty-five minutes later, as the sheriff's deputy drives away, the
family is left sitting on an old car seat on the front verandah.

This is just one of 30 evictions being done today by the Durham Country sheriff's office.

Next stop is a home that has been foreclosed on. Here the locks have
to be drilled out. New ones are put on and the sheriff's deputy puts a
bright orange notice in the window.

The lights are on, someone has done the dishes, there is a smell of cigarette smoke, but the owner is not there.

In these evictions some things remain behind, but the people vanish.

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Daily Digest - March 19

US prints money to stave off deflation
Clancy Yeates
March 20, 2009 - 7:25AM

THE US has resorted to printing money in a desperate attempt to
resuscitate its economy and ward off growing concerns over its foreign debt.

Yesterday the US Federal Reserve said it would buy $US300 billion ($453 billion)
worth of bonds issued by another branch of government: the Treasury.

The unprecedented move follows similar efforts in Britain and Japan and is an
attempt to encourage inflation to prevent a bigger threat: deflation, or a
sustained fall in prices.

The central bank will also buy $US750 billion in mortgage-backed securities from
troubled lenders, taking total purchases of toxic assets to $US1.25 trillion.

Amid what could be the steepest US economic decline in 50 years, economists said
the Fed was also attempting to reassure the the world's biggest saving nations,
which fund the US budget deficit, by buying Treasury bonds.

Figures this week showed that growth in Beijing's US bond purchases slowed to
$US12.2 billion in January, from $US14.3 billion in December.

A senior economist at Westpac, James Shugg, said the Fed's move was the digital
equivalent of printing money. "They're creating money to purchase assets off
banks and the quasi-housing authorities in the US," he said.

In February, the global supply of US dollars was $US8275.5 billion, so
yesterday's new measures increase the total supply of greenbacks by nearly 13
per cent.

Economists say the new cash will encourage price rises as economic conditions
improve, unleashing inflation. But by the Fed's admission, this is better than
the alternative: deflation.

"The committee sees some risk that inflation could persist for a time below
rates that best foster economic growth and price stability in the long term,"
the central bank said.

An investment manager at Supervised Investments, Phil Carden, said the move to
create money "out of thin air" was "hugely inflationary".

"It's a direct and blatant attempt to ignite inflation because they're scared of
deflation," he said.

He said it was the lesser of two evils, as deflation was a bigger menace to the
US than inflation. If asset prices started to fall across the economy, it would
threaten the country's ability to pay back $US11 trillion in national debt, he
said.

This story was found at:
http://business.smh.com.au/business/us-prints-money-to-stave-off-deflation-20090\
319-93bl.html

pir8don's picture
pir8don
Status: Gold Member (Offline)
Joined: Sep 30 2008
Posts: 456
Re: Daily Digest - March 19

Ran Prieur http://www.ranprieur.com/ has a link to

Money and the Turning of the Age

Charles Eisenstein

http://www.realitysandwich.com/money_and_turning_age

Charles Eisenstein wrote:

To maintain the exponential growth of money, then either the volume of
goods and services must be able to keep pace with it, or imperialism
and war must be able to escalate indefinitely. All three have reached
their limit. There is nowhere to turn.

Although a lengthy read it is well worth it, as are Ran's comments in disagreement with Charles prescription for the future.

Don

________________________________________

still ...
here  ...
still here
still here?

SagerXX's picture
SagerXX
Status: Diamond Member (Offline)
Joined: Feb 11 2009
Posts: 2237
Re: Daily Digest - March 19

"Money and the Turning of the Age"

Thanks for posting this link Pir8don.  I'm only 1/2way through and must get some shuteye, but it's very well-written and informative.  

Viva -- Sager 

bikemonkey's picture
bikemonkey
Status: Bronze Member (Offline)
Joined: May 17 2008
Posts: 45
Re: Daily Digest - March 19

Today, I read 4 or 5 posts suggesting an ex military coup / break with our government is forming.  then I saw this posting in comments on marketwatch.com general forums

"This is not a market based comment. However, if you, a friend or a relative is in law enforcement or the military, you may want to look at this or pass it along:


http://www.oath-keepers.blogspot.com/                  "

This is a scary new development, that if true, makes me think I may have placed my personal fear marker that Chris taught us about a little too far away from the "danger" end of the scale.

I recently warned a few people to stay out of the military and police forces, but I pictured genreal civil unrest/ protest akin to the universty shootings of the 1960's. 

This is something totally different than I had expected.  Looks like Chris is right, and the people at the bottom end of the income curve may have reached that desperate, all too human breaking point.

I'm not really sure about organized religion, but nights like tonight, I do pray.

fujisan's picture
fujisan
Status: Gold Member (Offline)
Joined: Nov 5 2008
Posts: 296
Re: Daily Digest - March 19

Output, prices and jobs | The Economist

 

fujisan's picture
fujisan
Status: Gold Member (Offline)
Joined: Nov 5 2008
Posts: 296
Re: Daily Digest - March 19

Humor...

FED: Collateral for TALF Expanded - The Market Ticker

Karl Denninger wrote:


* DIRTNEWS: The Fed announced today that TALF collateral has been expanded to include bags of dog squeeze, used condoms and plasma.

** ADDENDUM: Fed considering accepting barf from pubs; determining the viability of collection devices in bar restrooms. 

 

fujisan's picture
fujisan
Status: Gold Member (Offline)
Joined: Nov 5 2008
Posts: 296
Re: Daily Digest - March 19

China backs talks on dollar as reserve -Russian source | Currencies | Reuters

Quote:


MOSCOW, March 19 (Reuters) - China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.

Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decisionmaking globally. Their first ever joint communique did not mention a new currency but the source said the issue was discussed.

"They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency)," the source told Reuters, speaking on condition of anonymity.

The source said the Chinese paper envisaged the International Monetary Fund's Special Drawing Rights (SDRs) being first assigned a role of a clearing currency on some transactions and then gradually becoming the main global reserve currency. "They said that the role of reserve currency should be given to SDR," the source said.

A U.N. panel of experts is also looking at using expanded SDRs, originally created by the International Monetary Fund in 1969, but now used mainly as an accounting unit within similar organisations as a new reserve currency instead of the dollar.

Currency specialist Avinash Persaud, a member of the U.N. panel, told aReuters Funds Summit on Wednesday that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket.

The SDR and the old Ecu are essentially combinations of currencies, weighted to a constituent's economic clout, which can be valued against other currencies and against those inside the basket.

The Russian source said Moscow was aware that the emergence of the new global currency would not happen overnight and said its goal was to initiate a discussion about it at the G20 summit in London on April 2.

... 

 

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Daily Digest - March 19
French march over economic crisis
The largely peaceful protests were marred by violence between mostly youths and police [AFP]

20 March 2009

More than three million people have taken to the streets across
France to protest against the government's handling of the economic
crisis.

Thursday's protests were largely peaceful but were marred by
violence when hundreds of demonstrators, mostly youths, clashed with
police in several locations, throwing stones and bottles, and setting rubbish bins and bicycles on fire.

Riot police used tear gas and batons to disperse hundreds in Paris, Toulouse in the southwest and Rouen in the north.
 
About
10 police officers were injured, while around 300 people were briefly
detained and police said 49 of those would face charges.

Around one million civil servants were joined by two million members
of the public across France in more than 200 protest marches, officials
said.

The second such protest in under two months was directed at the
policies of Nicolas Sarkozy, the French president, and the latest sign
of social unrest due to the global economic downturn.

A similar day of action at the end of January saw an estimated 2.5 million people involved.

Wages and protection

With the cost of living rising, strikers called for higher wages,
better methods for protecting employment and higher taxes for high
earners.

"The crisis is not the fault of the workers," one banner read at
the biggest rally in Paris, where 85,000 people marched through the
city, according to police.

Public transport and schools, hospitals and the postal service were
affected by the strikes, which were supported by around 75 per cent of
the population, according to opinion polls.

About one third of schoolteachers took part in the strike on
Thursday, along with a quarter of employees at France Telecom and one
in five postal workers, officials said.

Private sector workers also participated in the protests, including employees of Air France and oil company Total.

In Clairoix, a town in France's north, about 10,000 people protested
over the closure of a Continental tyre plant, which has meant a loss of
1,120 jobs.

Al Jazeera's Estelle Youssouffa, reporting from Paris, said Sarkozy
had already explained that he could not do much for the workers as the
government's coffers were empty.

No more measures

The French president had already said that nothing more could be
done beyond previously announced measures including a $34bn stimulus
plan, but many are complaining that the package will not benefit them,
our correspondent said.

Agnes Poirier, a French political commentator, told Al Jazeera that people are "very disillusioned" with Sarkozy's government.

"Every single corporation in France has a motive, a reason to
demonstrate today. The French in their majority are protesting against
a string of what they considered as ill-advised and rushed reforms that
President Sarkozy wants to implement," she said.

She added that despite the majority of the population supporting the demonstrations, Sarkozy was unlikely to back down.

"The government is very cautious because it knows that there is popular support for these demonstrations, and yet Nicolas Sarkozy said yesterday that he wouldn't back off and he would actually press on with his reforms," she said.

Jean-Claude Mailly, head of the Force Ouvriere Union, told the
Reuters news agency that "the government will find it hard to ignore
us".

"A very strong sense of injustice is building up," he said.

The government has already introduced a $34bn stimulus plan aimed at
business investment, and after the January 29 strike Sarkozy offered
more money to help vulnerable households weather the crisis.

But ministers say there will be no more concessions, explaining that
the previous measures had not yet taken effect and warning that the
heavily-indebted nation could not afford more handouts.

Underscoring the tensions, workers at a tyre factory in northern
France recently pelted managers with eggs after they were told it was
closing and, last week, staff at a Sony plant locked up their bosses
for a night to demand better redundancy cover.

With its large public sector and welfare system, France is better
placed than many to ride out the economic storm, but it is still being
affected, with some analysts predicting the economy will contract by
two per cent this year and unemployment jump to almost 10 per cent.

Aurum Vir's picture
Aurum Vir
Status: Member (Offline)
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Posts: 13
Re: Daily Digest - March 19

bikemonkey--thanks for the oath-keepers blog link.

I shared it with an ex-millitary buddy who said, 'yes, i swore to uphold the Constitution, but it's a little more complex than that." 

Here's the oath he says recruits take:

"I, _____, do solemnly swear (or affirm) that I will support and defend the Constitution of the United States against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; and that I will obey the orders of the President of the United States and the orders of the officers appointed over me, according to regulations and the Uniform Code of Military Justice. So help me God."

 

Mike Pilat's picture
Mike Pilat
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 929
Re: Daily Digest - March 19

The oath is not very clear on what happens if the orders of leaders are in conflict with the Constitution. I personally don't view this as complicated, having an appreciation and respect for both history and human nature. But I'm sure that many would be confused at best or resolved in a bad way at worst.

The very fact that our Constitution is under such attacks from nearly all administrations just makes me appreciate what a great document it is and what foresight the founders had.

A. M.'s picture
A. M.
Status: Diamond Member (Offline)
Joined: Oct 22 2008
Posts: 2368
Re: Daily Digest - March 19

Mike, well said brother!

Those men had a clarity of vision unique to men of both knowledge and experience.

Had we worried more about them, and less about harassment, diversity and how to stop your buddy from suicide, we'd have a culture more rooted in history and tradition than superficial sweetness masquerading mounting tensions.

America is a business who's lost it's way through decades of poor management.

Cheers!

Aaron

bikemonkey's picture
bikemonkey
Status: Bronze Member (Offline)
Joined: May 17 2008
Posts: 45
Re: Daily Digest - March 19

Hmmm...the first part of the statement is very clear.  The second part is too.  It's only when they are in conflict with each other that we are left with an ambiguous statement. We are living in interesting times indeed.

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