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Daily Digest - Nov 24

Monday, November 24, 2008, 12:29 PM

 

Economy

capt.8c7cb50efc1a4a17a3b17ae25d033ab4.citigroup_jobs_nysw101.jpg?x=217&y=345&q=85&sig=qeXJipkrU7d7MTSeXZcv0Q--

Fed Pledges Top $7,400,000,000,000.00 (trillion) to Ease "Frozen Credit" 

Nov. 24 (Bloomberg) -- The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago. 

The unprecedented pledge of funds includes $2.8 trillion already tapped...

..When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

"Whether it's lending or spending, it's tax dollars that are going out the window and we end up holding collateral we don't know anything about," said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. "The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones." 

Sherman's Comment: $24,000.00 per every man woman and child?! That might have stimulated the economy had it have been disbursed differently. In any event monetizing debt of this size will have far reaching ramifications.

Who Will Save Citi? 

As of June 30, Citigroup had a whopping $820 billion in total deposits -- but its estimated insured deposits were only $126 billion, and fully $554 billion -- yes, well over half a trillion dollars -- was held abroad.

 

Citi.png

Pandit Needs to Move His Assets 

Superstar stock analyst Meredith Whitney believes Citigroup is such a basket case that Stephen Hawking, the renowned physicist, lacks the brainpower to fix the stricken banking giant. 

.."Pandit is wrong, Citi will not be able to stay in its current form," she said, adding that the banking giant must break itself up and sell off the pieces to raise capital and reduce its size.

"Citigroup is in such a mess Stephen Hawking couldn't turn this company around," the money maven added. "It has lost the most money of all the banks, and has the greatest leverage." 

Citigroup seeks 'emergency cash' 

Chief executive Vikram Pandit told employees on Friday that the firm did not want to change its business model, Reuters reported, citing two employees.
He also reiterated that the firm had a robust capital position. 

Bernanke says he erred in gauging mortgage fallout

WASHINGTON (AP) - Federal Reserve Chairman Ben Bernanke acknowledges he was wrong in believing that there would be limited fallout to financial markets from risky mortgages that soured after the housing market's collapse.
"I and others were mistaken early on in saying that the subprime crisis would be contained," Bernanke said in an article in the Dec. 1 issue of The New Yorker magazine.

Sherman's Comment: I'm sure this will be one of many, the $7,400,000,000,000.00 being next.

 

LEI.png

 

Banking Regulator Played Advocate Over Enforcer 

When Countrywide Financial felt pressured by federal agencies charged with overseeing it, executives at the giant mortgage lender simply switched regulators in the spring of 2007. 

US officials flunk test of American history, economics, civics 

The question that received the fewest correct responses, just 16 percent, tested respondents' basic understanding of economic principles, asking why "free markets typically secure more economic prosperity than government's centralized planning?" 

Sherman's Comment: Kakistocracy: Government by the least qualified...

Worst of financial crisis yet to come: IMF chief economist

Withdrawals of capital leading to problems of liquidity "can be so significant that the IMF alone cannot counter them," he said, adding that massive withdrawals of investments from emerging countries could represent "hundreds of billions of dollars. 

"We do not have this money. We never had it," he said. 

Economy a hot topic for therapists

A therapy session

The economy is stressing enough for so many in the U.S. that many are bringing it up in therapy. Sean Cole visits several therapists and finds the crisis as a current event has had an impact akin to 9/11.

Week ahead: Hoping for Thanksgiving cheer

NEW YORK (CNNMoney.com) -- Wall Streeters returning to work Monday have at least one thing they can be thankful for: Thanksgiving is one less day the market is open 

....Economic news


Monday: October existing home sales are expected to have fallen to a 5.05 million unit annual rate from a 5.18 million unit rate in September, according to a Briefing.com survey of economists.

Tuesday: Third-quarter GDP is expected to be revised lower, showing that economic activity fell at a steeper rate than previously reported. GDP is expected to have fallen at an 0.6% annual rate from an initial drop of 0.3%. GDP grew at a 2.8% rate in the second quarter.

Also Tuesday, the Conference Board releases its November consumer confidence index. The index is expected to improve modestly to 39.5 from 38 in October.

Wednesday: Durable goods orders are expected to have fallen 2.5% in October after rising 0.8% in September. 

Sherman's Comment: The title of the article just screamed "post me." Sorry CNN, the market being closed on Thanksgiving is not hope!

No money, no inflation - the role of money in the economy 

Money and inflation: the evidence. Let me begin by looking at some of the historical
evidence. Chart 1, which extends the results of Candless and Weber (1995), shows the correlation between the growth of the monetary base and inflation over different time horizons for a large sample of 116 countries. Countries with faster growth rates of money experience higher inflation. It is clear from Chart 1 that the correlation between money growth and inflation is greater the longer is the time horizon over which both are measured. In the short run, the correlation between monetary growth and inflation is much less apparent. Understanding why this is so is at the heart of monetary economics and still poses
problems for economists trying to understand the impact of money on the economy. I shall return to this later. If history is a guide (and it is), then you can bet the farm that monetary inflation ALWAYS results in price inflation down the road. 

Keep Your Eye On The Prize!

If history is a guide (and it is), then you can bet the farm that monetary inflation ALWAYS results in price inflation down the road. 

Here is a partial listing of countries that have been down this road.

Angola 1991-1999
Argentina 1981 - 1992
Belarus 1993 - 2008
Bolivia 1984 - 1986
Bosnia - Herzegovina 1992 - 1993
Brazil 1986 -1994
Chile 1971 - 1981
China 1948 - 1955
Georgia 1993 -1995
Germany 1919 -1923
Greece 1943 - 1953 At the high point prices doubled every 28 hours. Greek inflation reached a rate of 8.5 billion percent per month.
Hungry 1944 - 1946
Israel 1971 - 1985 (price controls instituted)
Japan 1934 - 1951
Nicaragua 1987 - 1990
Peru 1987 - 1991
Poland 1990 - 1994
Romania 1998 - 2006
Turkey 1990 - 2001
Ukraine 1992 - 1995
USA 1773 - not worth a Continental
Yugoslavia 1989 - 1994
Zaire 1989 - present (now the Congo)
Zimbabwe - 2000 to present. November of 2008 - inflation rate of 516 quintillion percent 

Sherman's Comment: Not the name I would have selected for the article, inflation and hyperinflation are both ugly dates, not prizes.

Tracking the Bailout

Bailout

Environment

NBC Fires Weather Channel Environmental Unit 

NBC Universal made the first of potentially several rounds of staffing cuts at The Weather Channel (TWC) on Wednesday, axing the entire staff of the "Forecast Earth" environmental program during the middle of NBC's "Green Week," as well as several on-camera meteorologists. The layoffs totaled about 10 percent of the workforce, and are among the first major changes made since NBC completed its purchase of the venerable weather network in September. 

The Power of Green

 

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12 Comments

mred's picture
mred
Status: Bronze Member (Offline)
Joined: Apr 8 2008
Posts: 96
Re: Daily Digest - Nov 24

For those who are interested, we might as well try to introduce some definition for the word "inflation", as its use in the above articles obscures its meaning.

Mish describes the problems with the "monetary expansion CAUSES inflation" in

http://globaleconomicanalysis.blogspot.com/2006/02/inflation-what-heck-i...

Mish's arguments support the idea that the more rational (and honest) view is that "monetary expansion IS inflation". Here explained in Austrian terms:

http://mises.org/story/2525

DanS's picture
DanS
Status: Member (Offline)
Joined: Apr 6 2008
Posts: 21
Re: Daily Digest - Nov 24

Inflation is commonly understood as a rise in overall prices, not linked to economic scarcity (supply and demand).

There are different forms of "inflation," relative to each type's underlying cause.

Most readers of these forums, understand "inflation" as an expansion of fiat money, relative to GNP.  The adverse effects of monetary inflation occur when money expands in the face of declining productivity.

The central bank's of the world have recently expanded the supply of money on an unprecedented scale, in an effort to stave off a global collapse of trust and integrity.

The fundamental problem is that you can't put a price tag on integrity.  For over 500 years, Western civilization provided the world with a philosophic 'compass', which in turn provided society with a modicum of economic stability--more-or-less.

Both the integrity and compass have been 'blown away'.

As Chris recommends, each reader better do a risk assessment and have appropriate contingency plans in place.

PS.  I wouldn't hurt to have a stash of wine and some extra ammo to boot.  You'll need it!

Will's picture
Will
Status: Bronze Member (Offline)
Joined: Oct 27 2008
Posts: 81
Re: Daily Digest - Nov 24

After reading the top headline in today's 10/24 daily digest, I
recalled doing a calculation a while back on how much it would cost to
put a 10 KW solar system on every private residence in the United
States. 

The $7.4 trillion currently projected to be thrown at the
economic crisis in the US would be almost exactly enough to pay for a
10 KW system (not including installation) on ALL 129 million private
residences.  A 10 KW system is considered by most to be more than
enough to run pretty much everything in the average home except
heating.  A 10 KW system costs around $60,000.  Here is my math:

$60,000 X 129 million homes =  $7.74 trillion dollars.

Instead, we are wasting all of this money to try to save a doomed and dying financial system.  So very sad...

Michael Höhne's picture
Michael Höhne
Status: Silver Member (Offline)
Joined: Nov 16 2008
Posts: 119
How fast can you print money?

I don't know if all of this money if really printed, or if it's just "transferred" magically. Anyway, I think of a machine that you turn on and it creates a bunch of 1,000 Dollar notes. Lets say that such a machine is fast and prints a 10x10 matrix of 1,000 Dollar notes, cuts and bundles them in a single second. That means $100,000 per second. Sounds great, because every 10 seconds we could make someone a millionare.

But what about 7 trillion dollars?

1 Million = 10 seconds
1 Billion = 1000 x 10 seconds = 10,000 seconds = 2 hours 47 minutes
1 Trillion = 1000 x 10,000 seconds = 10,000,000 seconds = 166,667 minutes = 2,778 hours = 116 days
7 Trillion = 2.2 years

So here's today's math. How many machines do you need to provide 7 trillion Dollars cash in the next 6 months?

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Nov 24

Will: Imagine the jobs, factories and taxes that your idea would create! Not to mention less dependance on coal.

Instead they try to prop up a 60 trillion CDS BUBBLE another with yet another 7 trillion more Fiat dollars backed with our taxes.

As one article I read today so elequently put it, "In the space of two months, Ben Bernanke has doubled the balance sheet of the Federal Reserve. He is accepting bubble gum wrappers, old shoes, and Dick Cheney's defaced copy of the Constitution as collateral for loands from the Fed." I'll be posting this article tomorow once I'm done reading it all.

Take care. 

 

mred's picture
mred
Status: Bronze Member (Offline)
Joined: Apr 8 2008
Posts: 96
Re: How fast can you print money?

Well, the money is not literally "printed", it just comes into existence as entries in diverse balance sheets in computers. The amount of hard cash (paper notes) around is actually quite tiny.

gyrogearloose's picture
gyrogearloose
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 546
Re: How fast can you print money?
Michael Höhne wrote:

I don't know if all of this money if really printed, or if it's just "transferred" magically. Anyway, I think of a machine that you turn on and it creates a bunch of 1,000 Dollar notes. Lets say that such a machine is fast and prints a 10x10 matrix of 1,000 Dollar notes, cuts and bundles them in a single second. That means $100,000 per second. Sounds great, because every 10 seconds we could make someone a millionare.

But what about 7 trillion dollars?

1 Million = 10 seconds
1 Billion = 1000 x 10 seconds = 10,000 seconds = 2 hours 47 minutes
1 Trillion = 1000 x 10,000 seconds = 10,000,000 seconds = 166,667 minutes = 2,778 hours = 116 days
7 Trillion = 2.2 years

So here's today's math. How many machines do you need to provide 7 trillion Dollars cash in the next 6 months?

Subcontract the job to Mugabe, he can provide 100,000 Trillion per day Laughing

 

( admitedly not in only $1000 bills..... )

capesurvivor's picture
capesurvivor
Status: Platinum Member (Offline)
Joined: Sep 12 2008
Posts: 963
Re: Daily Digest - Nov 24

Hey Davos, 

OT but you'll like this. when I told my 26 y.o. son yesterday that I was thinking of using my economic stimulus check (arriving this week) to buy as much LT freeze-dried food as I could, he thought about it and called me back today and said he thought I was mentally ill!

LOL. His mother's son.

 

SG

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - Nov 24

Hello SG/CapeSurvivor>

LOL!!!!

I can SO relate! 

My 16 yo daughter in AP history won't ask her teacher any questions about the Constitution and how it says money shall be made of gold or silver. She has told me I'm nuts. Funny, if the TV tells them the economy is circling the toilet then they believe it.

Take care. 

drb's picture
drb
Status: Bronze Member (Offline)
Joined: Oct 11 2008
Posts: 95
Re: Daily Digest - Nov 24 - CDS 'Good' (Not Our Fault)
Davos wrote:

..Instead they try to prop up a 60 trillion CDS BUBBLE another with yet
another 7 trillion more Fiat dollars backed with our taxes...

In the same WSJ that from which CM posted 'The Fed is Out of Ammunition' I came across <a href="http://online.wsj.com/article/SB122748900624151997.html">this</a> article wherein Credit Default Swaps have been deemed one of the bright spots in the economic news

Quote:

Transactions in this market have been orderly, and the losses have been modest...Credit default swaps ... stabilize markets. Indeed, these swaps are now the best way to price
credit. Making the level of corporate credit risk clear is key to
getting lending back into the system.

Instead of demand and greed (for investment securities yielding (it was hoped) high returns) driving the housing bubble which could only be sustained by providing mortgages to more and more people, some segments of the industry want to put the blame on the Government 'pushing' them to make riskier and riskier mortgages.

Quote:

Congress has still not focused on how its policy of making mortgages
too available led to unsustainable mortgage loans through Fannie Mae,
Freddie Mac and the Community Reinvestment Act that were the proximate
cause of the credit collapse.

No doubt 'some' very small fraction of the current problem could be attributed to the mistaken belief of a very few mortgage lenders that the CRA required they give loans to people who could not afford them .. but the CRA first came into existence during the Carter era a lonnnnnng time ago.   Even after numerous updates to the act over the years the act still mandates that due prudence be applied to extending loans (the bottom line for this act was to ensure lenders did not discriminate against or neglect the investment needs in the poorer communities).  I find this denial of responsibility infuriating in light of how much debt we are accruing to bail out the mess for which the 'proximate cause' view was pure greed from my point of view.

Daniel (ready to march on Wall street - who's coming with me?)

 

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
commentary from Australia...
Alan Kohler
25 Nov 2008

Keys to the Citi

The government
bail-out of Citigroup takes the financial crisis to a new level, but it
is an outrage that cannot be seen as a template for future action.

The
US authorities, outgoing and incoming, are plainly taking it one crisis
and one fumble at a time; the scale of the official ineptitude up to
this point is staggering. It almost matches the banking incompetence
that led to the problem.

In a matter
of months Citigroup has gone from rescuing Wachovia and claiming to be
in excellent shape – one of the survivors – to sacking 52,000 people
and identifying a pool of $US306 billion in problem assets that need to
be 90 per cent guaranteed for 10 years by the government if the company
is to survive.

Along the way it
picked up $US25 billion in government cash on what looks now to be
pretty good terms. Certainly the terms for the $US20 billion as part of
yesterday’s bail-out are much worse.

And
yet the Citibankers keep their jobs, although according to the term
sheet of the bail-out their salaries “must be submitted to, and
approved, by the USG” (US government).

This
is not a “good bank, bad bank” rescue. It’s true that $306 billion in
bad assets have been “bagged and tagged”, as Mark Thoma of
Economist’s View put it, but they will remain on Citigroup’s balance sheet.

The
first $US37-40 billion of losses will go to Citigroup shareholders, the
next $US5 billion go to Treasury, the next $US10 billion to the Federal
Deposit Insurance Corporation, and the rest go to the Fed.

But
Citigroup has more than $US3 trillion of assets – only $US2 trillion of
which are on its balance sheet with at least $US1 trillion off balance
sheet.

Will a bail-out that provides
a specific government guarantee for just $US15 billion – or 0.5 per
cent of total assets – and a general provision against 10 per cent of
total assets prove to be adequate? Unlikely. How long before Citigroup
will be back for more?

But at least the 'USG' did not repeat its first big mistake of letting Lehman Brothers fail in September.

Lehman
seems to have been similar to an outfield catch in cricket or baseball,
where two fielders call for each other to go for it and the ball falls
between them. In this case the two fielders were Federal Reserve Board
chairman Ben Bernanke and US Treasury Secretary Henry Paulson. Over the
weekend of September 14, it was a matter of “yours…yours…oh, whoops”.

Then as the financial crisis became catastrophically worse as a consequence, Paulson and President Bush refused to contemplate an all-encompassing Swedish model of nationalising the banks and quarantining their bad assets, so the “good banks” could get on with lending.

Instead
they flip-flopped around with the Troubled Asset Relief Program (TARP),
eventually investing $US250 billion into the banks, which instantly
disappeared with a slurping sound.

They
then failed to use the money to buy mortgage securities, which led to a
collapse in the market prices of those securities and with it a
collapse in the prices of bank shares.

That,
in turn, led to Citigroup’s share price falling 60 per cent last week
because of concerns about its massive exposure not just to mortgage
securities, but also to over-the-counter derivatives and emerging markets.

And
suddenly, as a result of its own mistakes, the Bush Administration
became the one over a barrel. Because it is “too big to fail” Citigroup
gets 10 per cent of its $US3 trillion assets guaranteed by the
government plus another $US20 billion in new preferred equity with very
few string’s attached.

It is hugely favourable to Citigroup, not transparent and probably unrepeatable.

Can the already-indebted
US government really just keep guaranteeing hundreds of billions in bad
bank assets, recapitalise the banks on favourable terms and leave
management in place?

Then again,
maybe they will simply have to. Two IMF staffers, Miguel A Segoviano
and Manmohan Singh, this month published a staff working paper entitled
Counterparty Risk in the Over-The-Counter Derivatives Market
in which they attempt to scope the cascade effects of counterparty risk
in the OTC derivatives market (mainly credit default swaps and CDOs).

They
conclude: “In the case of a single institution failure, the total loss
could be as high as $300–$400 billion depending on the FI; but when
cascade effects are taken into account, the total loss could rise to
over $1,500 billion.”

We got a taste
of that with the collapse of Lehman and the effects of it are still
cascading. Citigroup’s collapse would be a multiple of that.

joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
Re: Daily Digest - Nov 24

glad to see you posting here again dan

i always gain insight into our situation from your contributions.

joe

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