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    Daily Digest – Apr 9

    by Davos

    Thursday, April 9, 2009, 2:58 PM

  • Ten principles for a Black Swan-proof world (H/T CM)
  • Economist Nouriel Roubini lashes out at CNBC’s Cramer
  • TALF appears to be failing for a second month
  • Revolving Consumer Credit (Chart)
  • Soros, Soros, Soros (Videos, Fed not up to the task!)
  • Almost Half of French Approve of Locking Up Bosses
  • Investing, Following the Winners (Page 12)
  • A New Kind of Crowd
  • Checkmate for Pensions?
  • Willem Buiter: "Non-Negligible" Risk of Default by US and UK
  • Elizabeth Warren says sack CEOs?
  • Civilization at the Crossroads (H/T PineCarr)
  • Communities print their own currency to keep cash flowing
  • Financial Crisis ‘Far From Over,’ Panel Says


Ten principles for a Black Swan-proof world (H/T CM)

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an "incentive" bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show "profits" while claiming to be "conservative". Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them "hedging" products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to "restore confidence". Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

Economist Nouriel Roubini lashes out at CNBC’s Cramer

"Cramer is a buffoon," said Roubini.

TALF appears to be failing for a second month

via clusterstock:

Only two lenders have applied for this months tranche of issued bonds under the Fed’s Term Asset-backed securities Liquidity Facility (TALF). The two borrowers, CarMax and World OMNI, are autolenders. If no other applications are submitted by the application deadline this afternoon, the issuance under the plan would be just $1.4 billion. …

The decline in interest in the TALF is troubling. As our "light at the end of the tunnel" story demonstrated this morning, there are high hopes that the TALF will effectively create economic growth. Last month’s $4.7 billion issuance was already way below expectations, even after the Fed loosened the rules and made it clear that limits on executive compensation wouldn’t apply to TALF participants. It was basically a flop. None of the big funds participated in the issuance, despite reassuring words from the likes of Wilbur Ross. It was viewed by many as a deal in which the "smart money" stayed home.

And now we’ve got a flop even twice as bad as last month’s. Things could look even worse if you keep in mind that the Fed actually expanded the types of loans that could be securitized under the program, including business equipment loans and "floor plan loans" that allow wholesalers to finance retail inventory.

So what’s going wrong? There seem to be three main problems with the TALF.

Revolving Consumer Credit (Chart)

Soros, Soros, Soros (Videos, Fed not up to the task!)

Almost Half of French Approve of Locking Up Bosses

PARIS (Reuters) – Almost half of French people believe it is acceptable for workers facing layoffs to lock up their bosses, according to an opinion poll published on Tuesday.

Staff at French plants run by Sony, 3M and Caterpillar have held managers inside the factories overnight, in three separate incidents, to demand better layoff terms — a new form of labor action dubbed "bossnapping" by the media.

Investing, Following the Winners (Page 12)

The performance histories of trend followers during the 2008 market crash, 2000-2002 stock market  bubble collapse, the 1998 Long-Term Capital Management crisis, the Asian contagion, the Barings Bank bust in 1995, and the German firm Metallgesellschaft’s collapse in 1993, answer that all important question: "Who Won?"

There were winners during October 2008 and they made fortunes ranging from 5% to 40% in that single month. Who were the winners? Trend followers. How did they do it? First, let me state how they did not do it:

A New Kind of Crowd

"The crowd is getting much more middle class, including some of our own congregants," said Ms Birchfield. "We give out three days’ worth of groceries. People reckon if they save that money, they can put it towards paying the mortgage."

Households are eligible for food stamps if they have less than $2,000 in the bank and a collective income no more than 30 per cent above the federal poverty level. For example, a family of four must earn $2,297 a month or less to claim up to $668 a month in food stamps – an amount that was increased this month from its previous level of $588 as a result of President Barack Obama’s economic stimulus.

Checkmate for Pensions?

The losses have left retirement plans about 50 per cent funded – that is, they have only half the money needed to cover commitments to 22m current and former workers, experts say. State governments typically put the funding figures closer to 60-70 per cent, although most experts use different calculations.

"There is a massive national underfunding problem," said Orin Kramer, chairman of the New Jersey pension fund. "

Unlike company pension plans, state and municipal retirement funds have no federal guarantee fund. This has led to predictions of benefit cuts and possible federal intervention.

"The federal government will get involved, without question," said Phillip Silitschanu, analyst at Aite Group, a consultancy. "They could provide federal loans, or demand cutbacks as a condition of stimulus money, or there could be a federalisation of some of these pensions."

Without investment income, funds are liquidating assets at huge losses to pay pensions.

Police pensions are in especially poor shape, in part because states have promised earlier retirement on full pensions, but seldom increased contributions.

Willem Buiter: "Non-Negligible" Risk of Default by US and UK

"The green shoots are weeds growing through the rubble in the ruins of the global economy",

Elizabeth Warren says sack CEOs?

The Guardian reports that Elizabeth Warren will be recommending startling actions. Any confirmation?

Elizabeth Warren, chief watchdog of America’s $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration’s approach to saving the financial system from collapse.

Civilization at the Crossroads (H/T PineCarr)

In our last letter we stated that, "American capitalism ended in 1913 and remains "An Unknown Ideal." We also commented that, "A troubling question arises: Has the financial community hijacked government?"

We are going to discuss those issues in an historical and philosophical context. We all today live in a twilight zone where things seemingly are and yet aren’t. We must travel down some roads, which are troubling and rather dark. But, it is necessary, because it is today’s reality. We can say at the start that you will find the trip unbelievable – I know I did when I first stumbled down this path. Matter of fact, at first I totally dismissed it as absolute insanity and therefore not possible. For, it was inconceivable that the morality of man could descend to such naked malevolence.

To look more deeply into our history is necessary, because almost all that comes from our "intellectual" community, is propaganda and spin. Before we heap cures on a dying patient, first and always diagnose. Diagnosis is the art or act of identifying the disease. All the talk about free markets and capitalism having failed and always what we need is more regulation and intervention are deliberate obfuscations. Naturally, with this propaganda barrage, Socialism keeps "gaining" by default. You have to be on another planet to think that what we have had for the last century is capitalism or free markets.

Communities print their own currency to keep cash flowing

By Marisol Bello, USA TODAY

A small but growing number of cash-strapped communities are printing their own money.

Borrowing from a Depression-era idea, they are aiming to help consumers make ends meet and support struggling local businesses.

The systems generally work like this: Businesses and individuals form a network to print currency. Shoppers buy it at a discount – say, 95 cents for $1 value – and spend the full value at stores that accept the currency.

Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts.

Ed Collom, a University of Southern Maine sociologist who has studied local currencies, says they encourage people to buy locally. Merchants, hurting because customers have cut back on spending, benefit as consumers spend the local cash.

Financial Crisis ‘Far From Over,’ Panel Says

The panel reported that the government has spent, lent or set aside more than $4 trillion through the Troubled Asset Relief Program, the Federal Reserve and the Federal Deposit Insurance Corporation.

Today, the "credit markets no longer face an acute systemic crisis in confidence that threatens the functioning of the economy," the report said.Warren also criticized the Treasury for its lack of openness on its rescue efforts as it first began the TARP program last year.

"As Treasury started this program," she said, "they really had the notion that they would spend the money the way they wanted, and not only were they not going to tell the public, I don’t think they were going to tell the Congressional Oversight Panel." [emphasis mine]

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