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    Daily Digest – Apr 20

    by Davos

    Monday, April 20, 2009, 2:59 PM

  • The End Is Near! (Yay!) (H/T Suzie)
  • Volcker Knows – Kohn is Conning Inflation
  • The Trend May Not Be Your Friend
  • Stress Test: Debating How and What to Release
  • On Good and Bad Financial Innovation
  • Citi losing foreign deposits
  • US to put conditions on Tarp repayment
  • Bank bailout plan’s ‘stress tests’ already causing stress
  • Economic Cliff Diving – By the Charts…NO Bungee Cord
  • Sunday Funnies (Humor, YouTube Video at bottom makes me happy I’m not a Congressman)
  • Larry Summers: "Substantial risks; issues in the global economy, commercial real estate"


The End Is Near! (Yay!) (H/T Suzie)

The Transition movement was started four years ago by Rob Hopkins, a young British instructor of ecological design. Transition shares certain principles with environmentalism, but its vision is deeper – and more radical – than mere greenness or sustainability. "Sustainability," Hopkins recently told me, "is about reducing the impacts of what comes out of the tailpipe of industrial society." But that assumes our industrial society will keep running. By contrast, Hopkins said, Transition is about "building resiliency" – putting new systems in place to make a given community as self-sufficient as possible, bracing it to withstand the shocks that will come as oil grows astronomically expensive, climate change intensifies and, maybe sooner than we think, industrial society frays or collapses entirely. For a generation, the environmental movement has told us to change our lifestyles to avoid catastrophic consequences. Transition tells us those consequences are now irreversibly switching on; we need to revolutionize our lives if we want to survive.

Volcker Knows Kohn is Conning Inflation

From Dow Jones: Heavyweights Kohn,Volcker Spar Over Inflation Goal

Paul Volcker grilled [Federal Reserve Vice Chairman Donald Kohn] over the Fed’s apparent effort to convey that it considers a roughly 2% inflation rate to be appropriate for the economy in the long term.

Former Fed Chairman Volcker … questioned how the Fed can talk about both 2% inflation and price stability…

In the minutes of its January policy meeting, the Fed said … 2% inflation would be … price stability.

"I don’t get it," Volcker said … By setting 2% as an inflation objective, the Fed is "telling people in a generation they’re going to be losing half their purchasing power," Volcker said. …

Kohn responded that by aiming at 2%, "you have a little more room in nominal interest rates … to react to an adverse shock to the economy."

"Your problem is 2[%] becomes 3 becomes 4," Kohn told Volcker. But other central banks with a roughly 2% target haven’t had that problem, Kohn said.

Fed officials, he added, "need to be clear about why we’re choosing the number we’re choosing."

And Volcker on Congressional oversight of the Federal Reserve, from Bloomberg: Volcker Says Fed’s Authority Probably to Be Reviewed

"I don’t think the political system will tolerate the degree of activity that the Federal Reserve, in conjunction with the Treasury, has taken," Volcker [said] …

U.S. lawmakers from both political parties have expressed concern in recent months that the central bank has overstepped its authority by creating several emergency credit programs aimed at reviving lending and ending the recession.

"I think for better or for worse we are at a point where the Federal Reserve Act, after all that has been happening in the last year or more, is going to be reviewed," Volcker said.

The Trend May Not Be Your Friend

Government and the Fed just did a lot of wrong things.

So at the height of the Depression, in 1933, as Roosevelt was coming into his first term, we had 25% total unemployment; 37% (!) of non-farm workers were unemployed; 4004 banks had failed; $3.6 billion in deposits was lost. That’s like trillions in dog years, okay? At least in 2009 dog years. You end up with bread lines, and the stock market just keeps going down, down, down (with a few marvelous bear-market rallies – maybe like what we are seeing today?).

Roosevelt comes along and we get the New Deal. He applied massive stimulus. By the way, his stimulus hired people. He put them to work building parks and the Tennessee Valley Authority. They were building a lot of infrastructure. He didn’t put it into Democratic wish lists and permanent wealth transfers and welfare and special-interest agendas to increase the overall budget beyond what we could ever hope to actually pay for (without even more radical tax increases), which the Obama Administration is clearly doing. We’ll get to the effectiveness of current policies in a moment.

Then let’s look at what he did in 1937. With the economy somewhat on the mend, he tried to balance the budget, raise taxes, reduce deficit spending. And what happened? We had another deep recession and unemployment jumped back up to 20%. It was hard to pull that stimulus back out. And it’s particularly dangerous to raise taxes in a weak economy.

Most of the people in this room are old enough to remember the Blue Screen of Death. Remember, you would be typing along on your computer and all of a sudden you would get this screen, saying, "You have an impossible error." (Okay, what’s an "impossible" error? Clearly something happened that was possible.)

And the only thing you could do was just unplug the thing. You couldn’t even turn it off – you just had to unplug the computer. It was the Blue Screen of Death. Well, that is kind of what World War II was for the world. We unplugged the world economy, and then we started from a new base. We hit the reset button. We were at lows everywhere in the world; places were in a mess. So we began to grow from there. The bebt supercycle started. For all the recessions and bear markets, a new stability ensued, and debt and leverage began to grow.

We’ll revisit that point in a moment. We are doing just what I do in my regular e-letter: I’m going to take three or four ideas, and at the end I’m going to try and tie them all together. Let’s see how successful I am.

Stress Test: Debating How and What to Release

From Bloomberg: Bank Regulators Clash Over Endgame of U.S. Bank Stress Tests.

The U.S. Treasury and financial regulators are clashing with each other over how to disclose results from the stress tests … with some officials concerned at potential damage to weaker institutions.

With a May 4 deadline approaching, there is no set plan for how much information to release, how to categorize the results or who should make the announcements … If all the banks pass, the tests’ credibility will be questioned, and if some banks get failing grades and are forced to accept more government capital and oversight, they may be punished by investors and customers.

A statement on the methods is scheduled for release April 24.

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said.

Maybe we can help Geithner and put together a list of what we think should be released.

On Good and Bad Financial Innovation

When does the frictional cost of having these all these savvy and highly paid risk professionals (who may overengineer matters to justify their own existence) become counterproductive relative to the real performance gains? Funny that that the cutting edge quants haven’t turned their modeling skills loose on that question.

Citi losing foreign deposits

Via econompic — interesting disclosures from citigroup in light of recent fed foreign currency swap arrangements. nearly a fifth of foreign deposits have left the balance sheet of the bank.

US to put conditions on TARP repayment

Strong banks will be allowed to repay bail-out funds they received from the US government but only if such a move passes a test to determine whether it is in the national economic interest, a senior administration official has told the Financial Times.

"Our general objective is going to be what is good for the system," the senior official said. "We want the system to have enough capital."

Bank bailout plan’s ‘stress tests’ already causing stress

"They’ve gotten themselves in a pickle on this thing," said Bert Ely, an independent banking analyst. "It’s clear they didn’t think through how this was going to play out."

Economic Cliff Diving – By the Charts…NO Bungee Cord 

Sunday Funnies (Humor, YouTube Video at bottom makes me happy I’m not a Congressman)

Larry Summers: "Substantial risks; issues in the global economy, commercial real estate"

Here is the transcript of Larry Summers on NBC’s ‘Meet the Press’

A few excerpts:

GREGORY: Let me ask — the president has talked about glimmers of hope in the economy. And obviously, what the government has done, through a stimulus package; what the Fed has done through buying up debt is try to create demand in the economy.

My question is, if you’re seeing any easing in the economy or an easing of the recession, is that because the government is propping the economy up?

Or do you see elements of recovery that are self-sustaining?

SUMMERS: Well, I think you’ve got to give the government credit, some credit for what’s happened, but these have the potential to build into something that’s self-sustaining. That’s certainly not something that’s been established to this point, and that’s why we’re going to need to maintain strong policies for quite some time to come.

But I think we can take some satisfaction that, after a period when there was literally no positive indicator to be found, when it seemed like our economy was in a — a vertical, it’s a more mixed picture today. And you’ve got to give public policies a significant part of the credit for that.

But as the engine turns over, you know, at some point, it will become something that’s much more — much more self-sustaining. But right now, we’ve got a long way to go in terms of supporting this economy.

GREGORY: Let me have you respond to some criticism. New York Times columnist and economist, and opponent on these matters of the administration, Paul Krugman wrote this week that the administration should be careful not to — to count a recovery a before it’s hatched.

He wrote this, specifically, about whether a full-blown depression is still possible. This is what he said: "Can a depression happen again? Well, commercial real estate is coming apart at the seams. Credit card losses are surging. And nobody knows just how bad things will get in Japan or Eastern Europe. We probably won’t repeat the disaster of 1931, but it’s far from certain that the worst is over."

What do you say?

SUMMERS: You know, I disagree with Paul about a lot of things, but he is right to be raising cautions. That’s why, when I just spoke about the economy, I said that, after a period when it — when everything was negative, there were now some mixture in the indicators. We don’t know what — we don’t know; we can’t know with certainty what’s going to happen next, and there certainly are real risks ahead.

That’s why the president’s approach to the banking system involves looking at a stress test that contemplates an adverse outcome and thinks about how the financial system will function in an adverse scenario. That’s why we’re very focused on maintaining the pressure.

No one is in any position to declare any kind of victory here. But the fact that no one can declare victory doesn’t mean that we shouldn’t take note of developments as they unfold. And the developments, as I say, are more — are more mixed now.

But cautions that we’ve got a long way to go; that there are still substantial risks; that there are downside contingencies that we’ve got to prepare for; that there are issues in the global economy; that there are issues in commercial real estate, that’s right.

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