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Daily Digest - Nov 29

Saturday, November 29, 2008, 9:57 AM

Has the Fed mortgaged its own future?, AIG pays retention bonuses, Shiller and Davidowitz videos, formerly high paid turning to food banks, Marc Faber says "hold gold outside of US", Romer appointed to the council of economic advisers,  and bluefin tuna on the verge of collapse.

Economy

 

Has the Fed Mortgaged Its Own Future?

The Fed's highly leveraged balance sheet will make it hard to fight inflation.

IF THE FEDERAL RESERVE BANK WERE A COMMERCIAL LENDER, it would be a candidate for receivership, based on its capital ratios. Bank examiners generally view any lender with a ratio below 2% to be dangerously under-capitalized. The Fed's current capital ratio, or capital as a percentage of assets, is 1.9%.

The Fed has provided so many loans and emergency credits -- to banks, brokers, money funds and foreign countries -- that its balance sheet, viewed one way, is as leveraged as any hedge fund's: Its consolidated assets amount to 53 times capital. Only 11 months ago, its leverage on this basis was a more modest 25 times, and its capital ratio 4%. A caveat: Many of the loans are self-liquidating facilities that will disappear in a few months if the financial crisis eases.

 

AIG to pay retention bonuses to executives

One day after announcing strict limits on salaries and bonuses for its top tier of executives, AIG revealed that some of those executives will receive millions in "retention bonuses" next year.

In a regulatory filing on Wednesday, the insurance group disclosed that Jay Wintrob, an executive vice-president, had put off receiving the first installment of his $3m retention bonus from December to April 2009.

 

Shiller:  Crisis May Run for 'Years and Years' (part 2 of 3)

 

Davidowitz: 10% Jobless Rate, 'World of Liquidation'

 

The $100,000 Job Search: How the High-End Unemployed Cope 

The more you make, the more's at stake. People accustomed to six-figure salaries are increasingly among those seeking jobs, as the financial sector crumbles and takes with it thousands of related white-collar positions. When Citibank announced recently that it was showing some 50,000 employees - many of them highly paid executives - the door, the departing bankers joined more than 20,000 whom Citigroup had already laid off this year. Then there's the chorus of layoff announcements from other financial firms from Morgan Stanley to AIG and suit-count cuts at non-financial firms from GM to Boeing. Overall, more than 2,100 companies fired at least 50 people in October alone, leaving some 230,000 people suddenly out of a job. That's why so many $200 pairs of shoes are out pounding the pavement.

 

Ongoing Crisis Could Last Years, Says Robert Shiller 

Instead, Shiller blamed "group think" in part for the crisis, explaining that too few people challenged incorrect assumptions that were taken for granted as correct. "So few people predicted it - it came totally out of the blue," he said. Shiller added that an "inflation of confidence" took hold in the late 1990s with the dot-com bubble, and resumed with the housing bubble earlier this decade.

Shiller, who was once an adviser to Timothy Geithner, Obama's choice for Secretary of the Treasury, was critical of responses that appear to be only short-term solutions, such as bailout packages. He said such deals "offend the sense of justice of a lot of people," adding that "there doesn't seem to be any theory behind them - it's just patching holes in a ship."

 

More families turning to food banks

ELAINE: We really just don't know what's going to happen, but we've been in foreclosure 77 days now, so...

Elaine worked as a loan processor. Her husband was a mortgage broker. She says they cleared somewhere north of $100,000 a year and had no trouble supporting themselves and their two small children -- until the housing market crashed. And now?

ELAINE: We haven't had a real estate transaction since December, so we had to take all of our E-Trade accounts, close them out. You know, we had to juggle from paying electricity, gas. It's a humbling experience to go from making all this money and everything looks great and then all of a sudden just looking out and wondering where and when we'll have money to buy food.

They defaulted on their home loan in January and quickly burned through about $20,000 dollars in savings, so now most expenses are going on credit cards. Her husband is pounding the pavement for a new job while she stays home with the newborn. And so here she was at Foothill for a once-a-month supply of basic foodstuffs. 

 

Marc Faber: I advise every American to hold his gold outside of the United States (video at bottom of linked page) 

Marc Faber is a hard money, old school investor who thinks that the U.S. government is going to reflate in order to avoid depression and that means gold is more valuable. But, for those of you who don't know economic history, the fact is that this has been tried before, in the Great Depression in the 1930s and the result was that the government had to confiscate Americans' gold. It was Executive Order 6102 signed on 5 April 1933 right after Franklin Roosevelt came to office and it forbade all Americans from owning physical gold assets.

 

Obama Appoints Berkeley Professor Christina Romer to Chair Council of Economic Advisers

Christina Romer, of UC Berkeley, has been appointed to Chair President Elect Obama's Council of Economic Advisers. Romer wrote, if not the book, at least the chapter for Encyclopedia Britannica on the Great Depression [pdf]. News of her appointment should make liberals and women who opposed the appointment of Lawrence Summers, who many predicted (including today's Wall Street Journal) would get this job, somewhat happy, though it looks like Summers will be named White House economic director. Professor Romer and her husband David were both advisers to the Obama campaign and they hold two seats on the committee which decides when the U.S is officially in a recession.

 

Berkeley Couple Tackle Top Fiscal Issues of the Day

The husband-and-wife team has studied the history of U.S. monetary policy from the Great Depression to today, looking at why it has sometimes gone wrong-as in the 1970s, when it produced a decade of high inflation-and sometimes gone right-as in both the 1950s and the 1990s, when inflation was low and the economy stable. They have also studied whether tax cuts can provide stimulus to a depressed economy, a timely topic if there ever was one. 

In addition to doing research, Romer and Romer have consulted with Barack Obama's presidential campaign. They also hold two seats on the committee that decides when the U.S is officially in a recession. In spite of plummeting global stock markets and the U.S. bailout, that committee has made no recent declaration.

 

Great Depression Christina D. Romer

Given the key roles of monetary contraction and the gold standard in causing the Great Depression, it is not surprising that currency devaluations and monetary expansion became the leading sources of recovery throughout the world. There is a notable correlation between the time countries abandoned the gold standard (or devalued their currencies substantially) and a renewed growth in their output. For example, Britain, which was forced off the gold standard in September 1931, recovered relatively early, while the United States, which did not effectively devalue its currency until 1933, recovered substantially later. Similarly, the Latin American countries of Argentina and Brazil, which began to devalue in 1929, had relatively mild downturns and were largely recovered by 1935. In contrast, the "Gold Bloc" countries of
Belgium and France, which were particularly wedded to the gold standard and slow to devalue,
still had industrial production in 1935 well below its 1929 level. 

 


Environment

 

Bluefin Tuna On Edge Of Collapse, Scientists Say 

All Things Considered, November 28, 2008 · Many of the world's fish are heading toward commercial extinction. The next one to go could be the majestic Atlantic bluefin tuna.

This week, an international committee meant to protect the species approved fishing levels that far exceed what scientists say is sustainable.

Conservationists fear that in just a few years, the remaining stocks of bluefin tuna in the Western Atlantic and Mediterranean could collapse completely.

Carl Gustaf Lundin, of the International Union for the Conservation of Nature in Switzerland, says that over the past few decades, tuna stocks have declined by well over 90 percent. The latest decision, he says, pushes the tuna much closer to commercial extinction.

 

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3 Comments

joe2baba's picture
joe2baba
Status: Martenson Brigade Member (Offline)
Joined: Jun 17 2008
Posts: 807
Re: Daily Digest - Nov 29

for those of you who have not read naomi kleins book "shock doctrine" disaster capitalism what we are witnessing is the ultimate experiment. we are seeing the chicago school of economics theories being used on the usa. these theories have led to much havoc around the world

it is a shame uncle miiltie is not here to witness it. he did get to rejoice over hurricane katrina and the destrucion it caused leading to the implementation of many of his policies, including doing away with public education.

the uc berkeley branch was responsible for the devastation of indonesia.

i dont know why this book is not on chris's list of essential books but it should be.

read alongside jim kuntsler it is a sobering account of what is really in store for us. sobering especially for those who have gotten drunk on obama koolaid. 

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: Daily Digest - Nov 29

Davos,

You teased me with only part 1 of the Shiller talk yesterday, so I went ahead and saw the rest on youtube!

BN37's picture
BN37
Status: Bronze Member (Offline)
Joined: May 17 2008
Posts: 39
Re: Daily Digest - Nov 29

If you follow Marc Faber's advice and hold your gold outside the US where do you put it? In a Swiss account, The Caribbean, Mexico, ??????? What affect did foreign versus domestic holding have on Roosevelt's order?

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