ES -- DX/CL -- isee -- cboe put/call -- specialist/public short ratio -- trinq -- trin -- aaii bull ratio -- abx -- cmbx -- cdx -- vxo p&f -- SPX volatility curve -- VIX:VXO skew -- commodity screen -- cot -- conference board

Thursday, April 30, 2009


gene sequencing indicates mild flu

this from the los angeles times corroborates well with experience so far.

As the World Health Organization raised its infectious disease alert level Wednesday and health officials confirmed the first death linked to swine flu inside U.S. borders, scientists studying the virus are coming to the consensus that this hybrid strain of influenza -- at least in its current form -- isn't shaping up to be as fatal as the strains that caused some previous pandemics.

In fact, the current outbreak of the H1N1 virus, which emerged in San Diego and southern Mexico late last month, may not even do as much damage as the run-of-the-mill flu outbreaks that occur each winter without much fanfare.

whole thing is worth a read. without significant adverse further mutation, this pandemic will probably be indistinguishable from the normal seasonal influenza.


Wednesday, April 29, 2009


WHO moves to level 5

reporting on bloomberg. "pandemic imminent", from the WHO presser on CNN.

the new york times' tracker map and their full coverage page.

UPDATE: this twitter from veratect:

US: CDC's Influenza Division Director states clinical presentation of swine influenza in the US "is looking a bit more" like that in Mexico.

so far in the united states the swine flu, while proving highly contagious, simply hasn't presented with anything like the severity of what was implies from early returns in mexico. i suspect this is a data quality problem -- chances are, many more people were infected in mexico than originally expected, wildly inflating the mortality rate.



april consumer confidence

as black as it was, a rebound was perhaps inevitable. the april report from the conference board:

The Conference Board Consumer Confidence Index™, which had posted a slight increase in March, improved considerably in April. The Index now stands at 39.2 (1985=100), up from 26.9 in March. The Present Situation Index increased to 23.7 from 21.9 last month. The Expectations Index rose to 49.5 from 30.2 in March.

the glimmer of hope from december that may have corresponded to at least a local low -- see the positive PCE in today's q1 GDP release -- has blossomed into a 26-point positive differential. this is a distinct indication of recovery in consumer spending. context here.

UPDATE: more analysis from david rosenberg via zero hedge and calculated risk regarding the investment picture. rosenberg points out that consumer spending is still anemic and likely to continue to deteriorate under the influence of unemployment; CR notes that residential investment, a normal cyclical leader of economic activity, bottomed but is likely to remain depressed thanks to inventory issues in housing.

UPDATE: yet more via zero hedge from rosenberg.

While most of the post-Lehman collapse in spending, output and credit supply is behind us, we would advise investors to view the consumer rebound in 1Q as 'noise' or a blip in what is still very likely going to be a secular (multi-year) downtrend.

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house price declines near peak rate

following on last month's record rate of decline:

The Composite 10 is off 18.8% over the last year.

The Composite 20 is off 18.6% over the last year.

This is near the worst year-over-year price declines for the Composite indices since the housing bubble burst started.

still very fast, but moderating. one wonders to what degree this deceleration is tied to the reduction in the pace of foreclosures over the past few months which is now, post-moratoria, resumed with gale force.

it was also noted that more expensive homes are starting to come through foreclosure at higher rates. this has an analog, as calculated risk notes, in accelerating price declines among the higher tiers of the case-shiller data.

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Tuesday, April 28, 2009


headwaters of the pathogen

from the guardian:

A Mexican village whose inhabitants were overwhelmed by an outbreak of respiratory illness starting in February has emerged as a possible source of the swine flu outbreak which has now spread across the world.

The state government of Veracruz in eastern Mexico has confirmed one case of swine flu in the village of La Gloria with the sufferer named locally as a four-year-old boy, Edgar Hernández Hernández. The federal government said tonight that he tested positive for the same strain of the virus which has claimed lives in Mexico.

The boy's case earlier this month came amid an outbreak of respiratory illness in the area in which around 400 people requested medical help. The boy was treated in hospital and survived. But two babies from the same village died during the outbreak. Sufferers complained of symptoms including fever, severe cough, and large amounts of phlegm.

"The symptoms were exactly like the ones they talk about now [with swine flu]," said a local resident. "High fevers, pain in the muscles and the joints, terrible headaches, some vomiting and diarrhoea. The illness came on very quickly and whole families were laid up."

It remained unclear tonight whether the illness was swine flu but the Mexican government appeared to cast doubt on its original diagnosis of the outbreak as a more typical H2N3 flu virus when it revealed that the only sample it sent to North America for swine flu tests came back positive.

"The sample of one of the cases, that of a four-year-old boy, was kept," said federal health minister José Ángel Córdova. "It was among the samples sent [to labs abroad] and that came back confirmed."

The Veracruz state government had previously said the infants died of bacterial pneumonia and said it has no plans to exhume their bodies to find out if the cause of death was swine flu. ...

A La Gloria resident who spoke to the Guardian on condition of anonymity yesterday described how illness swept through the village. "Some people started getting ill in February and an eight-month-old baby died," she said. "After that another baby died on 21 March. Suddenly most of the village got ill. It was weekend and the tiny clinic here was closed. The state health authorities then did send doctors and nurses to look after us, and give us medication. About 60% of the village were ill and we asked them what it was and they said it was a severe and atypical cold. We talked about influenza and they said that was impossible, that influenza had been eradicated from Mexico." ...

The outbreak of respiratory illness in the area of the [Smithfield] Granjas Carroll plant was first detected at the beginning of this month by Veratect, a company based in Washington state which monitors the spread of disease and pandemics around the world for corporate clients.

On 6 April it reported local officials had declared a health alert. According to its dispatch: "Sources characterised the event as a 'strange' outbreak of acute respiratory infection, which led to pneumonia in some paediatric cases. Health officials recorded 400 cases that sought medical treatment in the last week in La Gloria, which has a population of 3,000; officials indicated that 60% of the town's population, approximately 1,800 cases, has been affected."

Local health officials established a health cordon around La Gloria and the monitoring company reported that officials launched a spraying and cleaning operation that targeted the fly suspected to be the disease carrier. "State health officials also implemented a vaccination campaign against influenza, although sources noted physicians ruled out influenza as the cause of the outbreak," it said.



containment unlikely

following on the first media reporting of the swine flu outbreak that retrospectively began in mid-march around mexico city -- the bbc is reporting the comments of dr. keiji fukuda, a WHO influenza expert.

The swine flu virus first detected in Mexico can no longer be contained and countries should focus on mitigating its effects, a top UN official said.

World Health Organization deputy chief Keiji Fukuda was speaking as the WHO raised its alert level to four, or two steps short of a full pandemic. ...

Alert level four means the virus is showing a sustained ability to pass from human to human and is able to cause community-level outbreaks.

Mr Fukuda said this was a "significant step towards pandemic influenza" but a pandemic should not be considered inevitable.

Experts did not recommend closing borders or restricting travel, he stressed.

"With the virus being widespread... closing borders or restricting travel really has very little effects in stopping the movement of this virus," he said. ...

The number of flu cases under observation in Mexico has reached 1,614. Swine flu was confirmed in 20 of the 152 deaths.

Health Minister Jose Angel Cordova said all of those who had died were aged between 20 and 50. Infections among young healthy adults are a characteristic of past pandemics.

Mr Cordova said the first suspected case of swine flu had occurred in the southern state of Oaxaca but stressed that nobody knew "the point of origin or dissemination" of the virus.

He noted that the number of new cases reported by Mexico's largest government hospitals had declined during the past three days: from 141 on Saturday to 119 on Sunday and 110 on Monday.

Schools nationwide are to remain closed until 6 May as the country grapples with the outbreak.

In almost all swine flu cases outside Mexico, people have been only mildly ill and have made a full recovery.

hopefully the fairly radical steps taken by the mexican government to close schools, sporting events and other mass gatherings will minimize the outbreak.

some early assessments:

-- the fatality rate looks huge. of the first suspected 2000 or so cases there are over 150 deaths, a rate of 7%. data is partial and incomplete, though, deriving primarily from mexico at this point and will likely be heavily revised. the death rate of the spanish influenza of 1918-19 (the last pandemic outbreak of the A/H1N1 virus) was estimated to be just 2.5%. it did, however, infect up to 50% of the global population (then about 2bn), resulting in the deaths of somewhere between 20mm and 100mm people.

-- a widely-cited similarity to past pandemics is the demographic preference for those who are normally least vulnerable to influenza. cytokine storms are poorly understood but may play a critical role in killing those who would normally be thought of as the healthiest hosts. this seems to be happening in mexico.

UPDATE: here's the CDC's mainpage. last i checked, i think yesterday, there had been eight kids in new york thought to have contracted the flu while in mexico. earlier today the caseload had been in the twenties. CDC is now reporting 45 in the city alone. if this is the real deal, it will be in the hundreds very shortly.


In 1918:

In large U.S cities, more than 10,000 deaths per week were attributed to the virus. It is estimated that as many as 50% of the population was infected, and ~1% died. To compare, in "normal" (interpandemic) years, it is estimated that between 10-20% of the population is infected, with a .008% mortality.

The fact the current 'swine flu' has shown to be contagious is alarming. So far the virus has shown to have a 6% to 6.3% mortality rate. It may not seem like much, but please consider the following: The deadly influenza panic in 1918 had a mortality rate of under 1%.

This virus went on to kill tens of thousands of healthy people a day in large cities and up to 100 million people world wide.

Viruses, like this strain of swine flu, kill their host by over-stimulating active immune systems that are robust and healthy. That is why the victims in Mexico were between the ages of 20 and 45.

Some have said that no one in the United States have died from the virus, so we need not worry. Experts say it is only a matter of time. The virus is not prevalent enough to reach statistical significance in the United States, with only a handful of confirmed cases. 93.7% of all Mexicans with the virus recovered.

More cause for worry: The 1918 virus started off 'mild' before it mutated into a raging storm. It also does not mean we will see millions of deaths. It is too early to draw sweeping conclusions. Nevertheless, there is potential for a disastrous pandemic. If 50% of Americans catch this flu in the next two years, and the mortality rate stays at 6.3%, we would witness 20+ million deaths.

This strain of virus is more potent and more deadly than the virus that hammered the world in 1918 and 1919. Viruses come in waves. There are striking similarities to this virus and the virus that killed up to 100 million people in 1918. The first wave is historically more mild than the later waves.

In addition to this virus becoming more severe, it is mutating faster than previous virus that we have seen. In addition, this virus is nothing like we have ever seen before because it combines features from viruses natural in different parts of the globe. We are in uncharted territory.

If it follows the same path as the 1918 flu, we will see very damaging results. However, we must remember we are a global society now and the virus can spread quicker than we have ever witnessed in history. This is very concerning especially since the drugs we have now seem resistant.

While there have been no deaths in America, it is shadowed by the fact the common variable among the deaths seem to be age. While most American cases have involved the very young and very old (under 10 and over 50) the Mexican cases that ended fatally involved the robust and healthy (over 20 and under 45).

This virus kills the host by over-stimulating the immune system. The term that is used when the immune system over reacts is called a Cytokine Storm. It is usually fatal. During this “Storm” over 150 inflammatory mediators are released. This would account for the high mortality rate in 1918-19.

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So far the virus has shown to have a 6% to 6.3% mortality rateju, i would only say that data quality is a big issue right now. this rate is probably much too high because many cases which were not lethal never were diagnosed.

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something to think about

i don't want to descend into tinfoilhattery, so i'm going to circumscribe this to mere observation.

zero hedge has been banging the drum hard on equity market manipulation. i think everyone understands that, while credit markets run the world, equity markets are the public relations department. tyler durden has made some clear missteps in his zeal to expose what he perceives (debunked here).

but this is also clearly a case where the opportunity for impropriety is in place, thanks to massive government intervention into the investment and commercial banks, and potentially meeting motive. if durden is wrong, it isn't because it's not possible.

indeed the commentary of one of his readers following this post opens the potential avenue.

Why is this not explained by reference to Goldman’s role as a Supplemental Liquidity Provider in the NYSE pilot program? From the Federal Register: November 5, 2008 (Volume 73, Number 215)] [Notices] [Page 65904-65912] []:

“SLPs may only enter orders electronically from off the Floor of the Exchange and may only enter such orders directly into Exchange systems and facilities designated for this purpose. All SLP orders must only be for the proprietary account of the SLP member organization. Thus, an SLP will not handle orders from public customers or otherwise act on an agency basis. They will have a 5% average quoting requirement per assigned security. Additionally, if an SLP posts displayed or non-displayed liquidity in its assigned securities that results in an execution, the Exchange will pay the SLP a financial rebate.”

Yeah, I think you ought to look at Rule 107B - Supplemental Liquidity Providers - of the NYSE Rules on Dealings and Settlements, adopted October 29, 2008. The program's description reads a lot like the trading activity described in this blog these past few weeks: a group of securities assigned to Goldman, the provider (Goldman) to use program trading and the providers own accounts rather than client accounts, etc. And, the purpose is to generate liquidity. Isn't this exactly what Zero Hedge has been describing? But, if so, it is not a conspiracy - it is an announced program being run on a 6-month pilot basis.

it's been earlier noted at zero hedge that goldman's prop desk own-account trading is accounting for a mind-boggling share of the activity in a field cleared of many former competitors. (more from felix salmon on that point.) goldman was the rollout desk for the program and went live on or around november 18. the market put in its low on november 20.

the supplemental liquidity provider pilot expires at the end of this month. from ceoworld:

An NYSE staff committee will assign each SLP a cross section of NYSE-listed securities. Multiple SLPs may be assigned to each issue. The pilot will start with a focus on highly active issues, and gradually expand its coverage.

UPDATE: zero hedge on the SLP designation.

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While I agree the motive for manipulation is there (to try to attract more private recapitalization money for the banks), it would seem odd that global stock markets are still rallying along with US markets if the US markets are being manipulated. The only way that would make sense is if foreign markets take the lead from the US and don't have much of a "mind of their own", which doesn't exactly fit theory, but I suppose in crisis times anything is possible...

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this is why, hbl, theorizing on the potential of any such program is problematic at best. how exactly do global equity markets interact? can anyone say? i certainly can't.

all i know is that SLPs exist, and that goldman is one of them (and almost certainly the largest of them). they are being paid to keep liquidity in selected large-cap names using their prop accounts.

that may or may not account for the massive increase in goldman's prop trading -- i suspect it probably does account for at least some of it.

does that translate into big price support in thin markets -- even price manipulation? maybe.

does that further translate into a global equity rerisking? beats me.

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it is interesting to note from the december 2008 trading volume figures:

U.S. cash products average daily volume (“ADV ”) increased 30% to 3.3 billion shares[2].

NYSE-listed matched volume (Tape A) increased 21% to 2.2 billion shares.

Tape A matched market share was 43.4%, compared to 42.7% in October. The increase in share was driven in part by the introduction of the NYSE’s new market model in November which established a new category of liquidity provider, the Supplemental Liquidity Provider and replaced Specialists with Designated Market Makers.

NYSE Arca- and Alternext US-listed matched volume (Tape B) increased 148% to 519 million shares.

Nasdaq-listed matched volume (Tape C) increased 4% to 292 million shares.

Exchange-traded funds matched volume (included in the trading volume numbers above) increased 112% to 491 million shares.

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i added a link to felix salmon in the body of the post -- in it, GS says outright that their massive prop desk trading increase is a function of their SLP activity.

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Monday, April 27, 2009


thoughts on TICK

dr. steenbarger.

Another pattern I've noticed is that the number of significant buying minutes tends to peak ahead of price: as buying dries up late in a rally, we see fewer very high $TICK readings. Note that the most recent rally has occurred with fewer significant buying episodes.



summers at the IADB

via simon johnson at baseline scenario:

Summers made five points ....

  1. All crises must end. The “self-equilibrating” nature of the economy will ultimately prevail, although that may take massive one-off government actions. Such a crisis happens only ”three or four times” per century, so taking on huge amounts of government debt is fine; implicitly, we will grow out of that debt burden.
  2. We will get out of the crisis by encouraging exactly the kind of behaviors that “previously we wanted to discourage” two years ago. It is “this insight, this view” particularly with regard to leverage (overborrowing, to you and me) that “undergirds the policy program in the United States.”
  3. There is a critical need to support financial intermediation and to ensure it is adequately capitalized, with a view to the risks inherent in the current situation. He then said, with a straight face, that the current bank stress tests are designed with this in mind.
  4. Growth in the 1990s and more recently was based too much on finance (this appears to be a relatively new thought for Summers). The high and rising share of finance in corporate profits “should have been a warning”. The next expansion should be based less on asset bubbles and more on investment in key public services.
  5. The financial regulatory system “in fundamental respects has been a failure”. There have been too many serious crises in the past 20 years (yes, this statement was somewhat at odds with the low frequency of major crises statement in point 1).

in the first three points, summers is outlining a plan to use government balance sheet to sustain GDP by refinancing the private sector debt bubble while removing private sector reasons to precipitously deleverage as much as is possible. points four and five imply a realization that the private financial sector must be downsized relative to GDP over time.

johnson's tone indicates disapproval, but to be honest i don't think he has a better idea of what to do. indignation is easy, but this says much regarding the unrealism of his outlook:

There was nothing in Summers speech that addressed how we avoid - at the US or global level - becoming more like Japan in the 1990s, given the state of consumers’ and firms’ balance sheets around the world. There is no issue with debt levels; apparently, we can turn everything around with fiscal expansion and support for banks.

johnson has not yet accepted that japan was successful, indeed perhaps more successful than we can hope to be -- but i surely am glad that summers has. because it would appear that johnson's alternative plan is little short of embracing the armageddon of a self-reinforcing liquidation spiral.

The usual advice - given by the IMF, often at the behest of the US Treasury - is: manage an insolvency process for failed banks, precisely to reduce fiscal costs now and in the future, and to help restore confidence in the economy. Come to think of it, wasn’t this exact point made - forcefully and publicly - by Summers to the Japanese government during the 1990s?

johnson does not fully appreciate the ramifications of that plan, in my opinion, and is misguided in believing that touching off a liquidation spiral will somehow either reduce taxpayer costs or improve the general welfare. quite the opposite on both counts -- fiscal stimulus as massive as the american public's newfound propensity to save as a means of maintaining aggregate cash flows is probably the only means of avoiding both a pointless destruction of public welfare and a corresponding collapse of tax revenues.

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quant implosion update

following on earlier notes, zero hedge:

Jim Simons monster RIEF fund, which is arguably one of the largest quant funds in the world with $100 billion in total capacity (comps being BGI, Getco and Highbridge, the last of which incidentally was responsible for the massive market spike on Thursday afternoon as it force-deleveraged through its owner JP Morgan), indicate that it is underperfoming the S&P by almost 17% Month To Date. ...

As Zero Hedge has warned, when it comes to quant funds, the performance distribution is not a simple zero sum: the market's very topology is held in place by a smoothly functioning quant sector. Its absence results in abnormal and outsized index gyrations, incidentally like the one experienced by the S&P500 in the last 5 minutes of trading on Friday.

It would be critical for the MSM to pick up on this topic, as the last time RIEF underperformed so poorly was the summer of 2007, which as everyone knows culminated with the global quant implosion in early August that year. The last thing the current jittery market needs right now is a repeat event of that scale.

RIEF is down over (-8%) this month versus an S&P up 9%.

not unrelated -- eric rosenfeld, the professor-cum-LTCM-trader so awfully profiled in "when genius failed", gave a very interesting talk on illiquid crowded trades.

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Rosenfeld mentionned around the 70:00 minute mark that Lehman had to wrap its Swaps already in 2007 with an AIG guarantee. So AIG functionned as a kind of clearinghouse back then.

What would that mean in the context of September 2008 and the Lehman filing? Anybody any ideas ?

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bear market rally volume

via zero hedge, hussman funds' study of market volume as a trend indicator.

Whether it was William Peter Hamilton observing the trading activity of the 19th century, or Richard Russell who has studied the market's real-time price and volume action for more than 50 years, or Russell Napier who took the time for an in-depth review of the 4 greatest buying opportunities in the 20th century, each came to a similar conclusion: to confirm a change in market conditons, watch trading volume closely. By this measure, the market's recent rally still has much to prove.

the charts are a fairly devastating indictment of the now-eight-week-old surge. some of it overlaps the implications of the lowry analysis.

i'm still hanging on short on the merit of my own technical analysis, which has been showing increasing downside risk even as price moves higher.

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influenza type A H1N1

the world health organization briefing page. WHO declared over the weekend that the current outbreak -- which is already shuttering commernce in mexico city, the center of the outbreak -- has pandemic potential.

here's the financial times alphaville rundown. wikipedia pages can be useful in these kinds of events.

so far it reminds of the bird flu scare of 2005. but of course these things seem to be always overhyped -- until, of course, they aren't.


Interesting that the US government has made estimates of the potential magnitude of an influenza pandemic, should the virus prove capable of spreading widely. The estimates appear to be simply based on 20th century experience, like the 1918, 1956, and 1968 pandemics, saying that around 30% of the population could be sick to some degree and maybe 0.9 to 9.9 million hospitalized. That's according to the influenza plan prepared by Health and Human Services. It isn't clear to what degree the meliorating effects of better treatments today have been accounted for. However, the large impact is still useful, because we should be ready for a really bad outcome. Just look at what happened when the financial industry (regulators, etc.) ignored proper risk management and ignored the supposedly unlikely worst cases. The National Strategy for Pandemic Influenza warns that if the higher estimates pertain, the pandemic “will ultimately threaten all critical infrastructure by removing essential personnel from the workplace for weeks or months”. I don't know if that's investable, however.

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Friday, April 24, 2009


continued deterioration in durable goods


UPDATE: via zero hedge -- david rosenberg considers what's in the pipeline.

This financial crisis and deep recession has the economic outlook shifting so rapidly that the economic data flow, no matter how timely, is being rendered old news before it is even released. No piece of data exemplifies this more than today’s durable goods report for March. While it was far from a good report, the fact that orders ‘only’ fell by about half of what was expected fed the greenshooters’ case that we are starting to turn the corner. But this info is now stale news given GM’s tape bomb: a complete shutdown of production for the balance of the second quarter.

What this means is the ISM could retest the 32.9 cycle low in May or June, even though the April ISM figure could well move higher when it is reported next Friday. In all, we are expecting vehicle production to be down 45% compared to last year, even factoring in Ford’s news that it would up production by 25%. The GM shutdown does not just mean more layoffs at their assembly plants; it will ripple across the parts industry as well. If parts manufacturers take similar production hits it could reduce motor vehicle payrolls by 140k. Chrysler has not released any new production intentions but with the specter of bankruptcy looming, could trim their 2Q production plans as well.

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how to evaluate equities

ft alphaville relays bnp paribas.

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I've been wondering how much weight the price/earnings ratio arguments for stocks should carry right now. According to US stock market history and graphs like this, P/E ratios should fall further, as I know they are currently high. Future earnings and the effects of stimulus are of course a big wild card but there are certainly reasons for further caution.

I had trouble finding a similar history for Japan's stock P/E. Best I could find was this, which doesn't show the scale very well, but suggests the Nikkei never fell below about 20 P/E. I guess it depends a little on earnings timescales used.

To figure out how the two countries' outcomes might compare, it would seem useful to look at measures like total stock market earnings as a percentage of GDP, total stock market dividends as a percentage of GDP, yields, etc, so as to speculate where US equities might go based on Japan's experience. Of course I've seen useful stuff like this but it doesn't tell the whole story.

Any thoughts on this stuff or knowledge of how to find this kind of data? Okay some quick extremely rough calculations suggest the Japanese stock market cap (TOPIX) is around 70% of GDP. That seems roughly in line with the current US stock market capitalization so maybe intervention and stimulus has a chance to overpower fundamentals...?

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Aha! Well my limited searches so far haven't turned up any good data on Japanese earnings and dividends pre and post 1990 (it would make a useful input to understanding what could happen to US earnings).

However, I did run into this which references some measures like the stock-market-cap-to-GDP one I just suggested...

And just to be clear, what I'm interested in is the medium term level at which US markets might stabilize in a "least bad" scenario -- it seems clear to me that in the next couple months/years the downside risks are still big.

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Thursday, April 23, 2009


chrysler to file bankruptcy next week

on the heels of a GM death rattle comes this via zero hedge.

Some analysts questioned whether the Treasury’s steps to prepare a bankruptcy case were an effort to put more pressure on lenders, with which it has exchanged proposals meant to reduce Chrysler’s debt. Chrysler faces an April 30 deadline from the Treasury, while G.M. faces a June 1 deadline in its own efforts to draft a new restructuring plan.

to these amateur eyes, chances look good that chrysler never makes it out of bankruptcy. but the idea is, as calculated risk notes, to launder chrysler through chapter 11 with fiat taking the assets, the government taking the pensions and the bondholders getting the shaft.

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unemployment hints at moderating slowdown

this isn't new news for those reading about green shoots, but ed harrison takes on the weekly unemployment report.

Average Initial Claims are trending down, both for seasonally adjusted numbers and for unadjusted numbers. Comparisons to last year continue to trend down as well, with the worst comparison for unadjusted numbers having been a full three months ago. To me, this suggests that the worst of the carnage in the jobs market for this cycle is behind us. Mind you, the numbers do show continued weakness for unemployment that I see lasting well into 2010, but I am not convinced that the ravages of unemployment will continue to work against consumer spending.

Paul Kasriel and Asha Bangalore of Northern Trust say:

It is likely that real consumer spending grew in the first quarter of this year after having contracted in the third and fourth quarters of last year. At least, this is what the behavior of “real” retail sales is suggesting. When nominal retail sales data are deflated by the CPI for goods, the quarterly average of this proxy for real retail sales grew at an annual rate of 2.5% in the first quarter of this year after having contracted in each of the five preceding quarters (see Chart 4). Although both nominal and “real” retail sales fell in March, there has been a rebound in same-store nominal chain-store sales in the three weeks ended April 11 (see Chart 5). The weak showing for retail sales in March and the apparent rebound in late-March – early-April might be related to the relatively late Easter holiday this year.

Mind you, they are NOT saying we are about to see an imminent recovery. However, they do believe that the worst is behind us (for this cycle) and hat GDP may turn positive as early as Q4 2008.

if you're wondering what green shoots look like on a chart, this is kasriel's citation of the chicago fed's national activity index, a broad weighted leading economic indicator index.

moving beyond the state of absolute economic freefall that was evident at times in 4q08 and 1q09 is a positive to be sure, and should perhaps not unreasonably be expected given the amount of government support that has been sunk into both the financial system and consumer demand via fiscal stimulus. furthermore, this vicious cyclical recession will end.

but complacency remains a significant danger. for so long as the loan component of bank balance sheets are downsizing, in conjunction with household liabilities, the economy is likely to remain dependent on government assistance.



GM considering nine-week shutdown; will default june 1

via clusterstock:

The company's CFO says the firm will not make its June 1, $1 billion debt payment reports WSJ.

via zero hedge -- in bankruptcy there's likely not much for GM bondholders.

rolfe winkler among others relayed a rumored summer closing of all or nearly all of GM's north american capacity.

The shutdown could be catastrophic to many auto parts suppliers that already are near bankruptcy due to previous production cuts. During the shutdown, suppliers couldn’t ship parts to GM and would lose critical revenue.

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Wednesday, April 22, 2009


crisis and mythology

david goldman wrote this piece for asia times back in january, but it may be the best one-stop-shop for understanding the nature of the global crisis.

i noted it while reading his... evisceration of simon johnson, who has now rather famously been establishing the meme of a conspiracy of bankers in the public eye, more particularly the conspiracy of goldman sachs.

Economists like Prof. Johnson are experiencing a dreadful sense of powerlessness. There must be a conspiracy to explain why our policy prescriptions don’t work any more. Perhaps a witch has conjured Satan to sour our cow’s milk, or Goldman Sachs is secretly controlling the government.

Whether or not the government bails out banks, the crisis will continue. One school of thought, represented by San Francisco Federal Reserve Bank President Janet Yellen, insists that the crisis occurred because the government let Lehman Brothers fail last fall. Another school, represented by Prof. Johnson (and New York Times columnist Paul Krugman) believes that the problem is that the government didn’t allow all the other banks to fail. Both schools are wrong. The banking crisis is merely a surface manifestation of a deeper problem. The West failed to produce a new generation large enough to buy the existing housing stock, or fund existing pension programs, or maintain the wealth that the West thought it had. That is why we are poorer, as I show in the current issue of First Things.

goldman then further clarifies.

What I object to in Prof. Johnson’s article is the notion that if only the banks hadn’t wielded all that undue influence, things would have been better. That simply is not true. The public was speculating with all the leverage it could obtain, just like the bankers. Leverage was available because of a global savings/investment imbalance ultimately arising from demographic causes.

Of course I was unfair to him — I made fun of him the way an opinion journalist is supposed to. But my point stands. I don’t want to let the public off the hook by hanging bankers from street lamps. The roots of the crisis go deep, as I argued in my First Things essay, Demographics and Depression.

that is a quite salient and wise critique of a point of view being set out not only by johnson and krugman but yves smith, rolfe winkler, dean baker and many other of the crisis' best interpreters who favor (or perhaps better said do not see an alternative to) nationalization.

the vital counterpoint has arisen, forwarded by goldman, richard koo, john hempton and at times it seems jck of alea -- one which has won me as a convert. in many respects, it is a yet more dour outlook than that being put forward by either the nationalization school or the obama administration precisely because fixing the banks is seen to be the easy part, not to mention completely insufficient as an avenue to ending the depression.

i have recently taken time to revisit the work of jack lule, "daily news, eternal stories: the mythological role of journalism". in it lule, a former journalist, analyzes a set of news articles from the new york times in the context of an academic understanding of mythology and its role in society. few books one can read will more thoroughly upend the way one approaches the news, for lule makes all too clear how information is but a secondary pretense for the retelling of age-old stories which serve to reinforce social norms and mores.

this is perhaps obvious on consideration, but the ramifications are profound -- most of us tell ourselves that the fourth estate of journalism serves the public to keep it informed of reality so as to dispose it to make the reasoned public decisions which are the backbone of the democratic concept. while some measure of information conveyance may be a secondary function, lule sees something very different in the news: information is selected and in fact often distorted in order to make it a proper conveyor of what was folklorists might call morality plays. this is of course the understood function of myth among anthropologists, which is why lule sees the mythology of postmodern society in the news. lule goes so far as to outline seven master myths which are so common across disparate cultures and civilizations in both space and time that their foundation must be something beyond a long-lost shared experience.

taken through the lens provided by lule, it at once becomes apparent that the mythologizing of the crisis is in full swing and has been for some time. incarnations of 'the victim', for example, are too many to enumerate or exemplify. but there are other more interesting myths at work to recast events in a moral light.

the scapegoat

johnson -- whatever his conscious motives, which one can be sure are as true as anyone's -- is forwarding in part a retelling of the master myth of 'the scapegoat'. as goldman points out, responsibility for the crisis is everywhere one cares to look.

The public was speculating with all the leverage it could obtain, just like the bankers.

but by loading the banks with the sins of the multitude and casting them out, society exonerates itself and can move on without a destabilizing admission of systemic flaws in not only the consumer credit model but in the concept of the masses as a rousseauian font of virtue, homespun wisdom and innate reasonability. the exoneration of the common man is completed by the myriad examples of the victim, noble in their sacrificial demise, which seem to flow through the media in a torrent as if from a vast reservoir.

it is important to note that, while some concentrate on bankers -- many of whom have had their persons excoriated endlessly, new examples of which are showing up almost daily -- some others are making scapegoats of banks as institutions, suggesting that they are on some level intolerable agents of dissent from acceptable morals. this is one of the undertones of johnson's argument: nowhere does he personalize his argument as is so famously done at outlets like clusterstock or dealbreaker. instead, banks and abstracted impersonal entities such as bondholders are to be punished for their transgressions through nationalization or liquidation.

the trickster

a more complex mythology is also being retold through the travails of the banks -- that of 'the trickster', the archetype of the ruinous animal-child. lule:

Almost always, the Trickster is driven by physical appetites, lust and desire. He has no control over his impulses. Paul Radin, with Karl Kerenyi and Carl Jung, produced one of the earliest treatments of the Trickster. Radin too found the Trickster to be a kind of antihero "who is always wandering, who is always hungry, who is not guided by normal conceptions of good and evil, who is either playing tricks on people or having them played on him and who is highly sexed."

The Trickster, as Radin implied, usually serves as an exemplary model in reverse. Hynes and Doty call him a crude and lewd moralist. "The rude mockery, even scatology, present in Trickster stories is not simply anti-religious or anti-social criticism," they argue. Rather, the Trickster serves as a model illustrating the necessity of societal rules. Like the Scapegoat archetype, the Trickster archetype shows what happens if the rules laid down by society are not observed. But instead of being punished by society in a cumulating, climactic drama, in the manner of the Scapegoat, the Trickster continually shows the need for societal standards as he lives an error-filled life of ruin. The Trickster proceeds from one afflicting happenstance to the next, seemingly always on the edge of self-destruction.

lule, almost surprisingly, didn't write this in response to the crisis and the banks' role in it. yet if you've been reading the press of the crisis closely, alarm bells should be ringing in every quarter on reading those paragraphs.

the myth of the trickster is not a simple comprehension because of the implied duality of the nature of the archetype. while a monster, the trickster is also a victim -- a savage, a wild animal, a reckless child in need of a direction or authority to corral his appetites that was never offered. it doesn't take much to draw the parallel to the massively increased regulatory power over banks which is both part of the narrative and broadly taken as a common sense prescription.

the flood

most obvious, perhaps second only to the victim, in the mythological narrative of the crisis is the flood. again lule:

Through the Flood myth has many interpretations and permutations, some basic characteristics or themes can be established.

  1. Flood myths almost always are based on the premise that humankind has sinned or that a particular people have erred or strayed from the path of righteousness.
  2. The Flood comes in and is total in its devastation. The Flood does not discriminate in choosing its victims or evaluate their fine gradations of evil. Whole populations are destroyed.
  3. Humans are helpless against the power of the Flood. The Flood humbles. People struggle futilely.
  4. Humankind, once purified, is regenerated and renewed. Some few worthy or fortunate individuals live to rebuild society, solemn and chastened in the wake of the Flood.

here again it is not hard to see narrative parallels between the representation of the crisis and its archetype. but particularly we might pay attention to a characteristic of the myth which lule terms, 'striking those who have strayed'.

A primary characteristic of the Flood myth is that devastation comes to a people who have done wrong. Detailing the wrong -- defining the sin -- is a crucial and socially specific aspect of the Flood myth. Were people punished for hubris and pride? Did they worship the wrong gods? Did men take wives for themselves, "whomever they chose," as in Genesis?

there is a very active debate ongoing as the mythology of the crisis is being shaped as to who did wrong and how. johnson's retelling suggests that the hubris of an investment bank is responsible. others have branded those who worshipped the false god of mathematical modeling. still others lay blame at the ridiculous ideology of this or that political faction. in a very important respect, winning this debate will ultimately characterize the history of the crisis.

the point of this analysis of how the crisis is being presented in a certain narrative stream is not to void it completely of intellectual merit. johnson and others who are casting the story of the crisis through these myths are not doing anything unusual and are certainly not paranoid in any sense of the word i recognize; indeed such reduction and framing of the narrative through myth may be the only way in which large numbers of people can communicate anything at all to each other about the crisis. nor should it be implied that, because johnson may be representing his point of view through myths, no one else is; indeed i think it more likely that everyone in the public discourse is offering some manner of mythology in the guise of explanation.

but it is nevertheless a sort of warning, as i perceive it, and a rather stark one. the crisis is a reality external to any individual explanation of it. that reality, being an economic and therefore human construct, will interact with widely accepted mythologies in ways that may be hard to fathom and impossible to predict. but it is i think extremely important not to misunderstand the nature of the crisis, its mechanisms and potential solutions, by seeing it primarily not through an essentially pragmatic or mechanistic lens but an essentially mythological one.

myth represents a reconciliation of a complex world often beyond our understanding with our capacity to understand, the intersection of the apparent and overwhelming chaos of reality with a clear social order upon which we depend for survival as an often-fragile cooperative culture of human beings. seen as such, following through on the moral imperatives of our myths -- the need to cast out the goat bearing our sins, the need to humiliate and subjugate the reckless deviant, the need to see the wicked stricken by god -- may be important to reinforce our conception of a righteous social order deserving of allegiance.

but satisfying those moral imperatives without recourse to reason may very well be at odds with our economic interests -- perhaps devastatingly so. just possibly, the flood myth that will be told in ages to come about our time will not be of how god smote the hubris of banks but rather of those who, to borrow from a higher order of human story, dared to ignorantly and brazenly cast stones.

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So...what you're saying is - it's the same old story.

Our hero-leaders, powerful and fearless, chosen from the ranks of the unworthy, purified and anointed in ritual ceremony; our heroes seek out and reveal the greedy manipulators and their sycophantic hangers-on as the lower-than-lowlife they are; the perpetrators are put to the trial and their certain fate. All the while the chorus wails, lamenting the sad tale as known only too well by the long-suffering audience who in fairness were only trying to catch a shred of the great dream, and bring a little light to their miserable existence.

Art imitates life.

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Goldman is long on the ad hominen attack, short on fact-based arguments. Suggesting that someone you disagree with is mentally ill is distasteful in the extreme.

Goldman is too mean-spirited to be credible in my opinion. I find it painful to read his blog for this reason.

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In Goldman's January piece he appears to be arguing for the "fat spread" solution to fixing the banking system and that the government can't afford capital injections. That differs significantly from Richard Koo's "four kinds of banking crisis" analysis. And even if $1 trillion of value really can be extracted from hedge funds by the banking system, Roubini's estimate (always too conservative so far) is for $3.6 trillion of losses on US-originated assets (granted, some are held by foreigners). Also it seems surprising to me that all these assets would really be so much cheaper right now than fair value and therefore have cashflow exceeding future losses from writedowns -- do you agree with that?

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or art imitates our perception of life, rm, which is a far thing from the unknowable reality of the world as it is.

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Suggesting that someone you disagree with is mentally ill is distasteful in the extreme.agreed, og. johnson isn't mad. i think he's simply seeing the situation through ancient convention -- and not without cause. social order is important.

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the "fat spread" solution ... differs significantly from Richard Koo's "four kinds of banking crisis" does, hbl. for better or worse, there's not a unanimity of opinion.

right now, the spreads are so ridiculously fat that banks can and should take in massive positive cash flows. banks are anecdotally becoming active in the secondary market as well, using incoming cash to sop up AAA asset-backed at 25 cents. housing has big problems yet to come, but these securitizations can withstand quite a lot of damage and still pay handomely from such prices (it's the hedge funds that soaked up the mezz and equity tranches that are well and truly cooked). so they can earn well for some time.

eventually, though, spreads should narrow and paying securitizations dwindle. only then we'll know the extent to which the majors really need capital. until then, i would simply refuse to mark the books and make big banks into black boxes. no one will invest in them and that's fine; government guarantees should keep the counterparties trading. they'll still have more than enough lending capacity to fill the amount of loan demand that will likely exist -- likely that aggregate private sector debt contracts hugely over time, and not all through default, meaning banks will take in more money than they know what to do with.

there may come a time for recapitalizations for a number of big banks, but i'd wait. i'm not sure i see the need to rush. in the meantime, the administration had best focus on demand management to stave off depression.

Also it seems surprising to me that all these assets would really be so much cheaper right now than fair value and therefore have cashflow exceeding future losses from writedowns -- do you agree with that?it wouldn't happen in an efficient market, would it? but there isn't enough balance sheet capacity in the aftermath of the collapse of the shadow banking system to make an efficient market. too many securitizations, not enough room to hold them -- so they get puked out and marked very low.

i haven't seen a good retail exposure to this market, have you? maybe a newly-formed bank? i should maybe comb the FDIC for new banks that have IPO'd. i recall seeing a bank called heritage floated late last year -- maybe a new york bank? not sure.

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this is the bank i'm remembering.

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Wow, this is a very powerful glimmer of hope to the extent that it is a feasible outcome... (thanks!) Hedge funds are relatively speaking the segment of our financial system best able to bear these losses without major systemic consequences. But it still seems a little too good to be true -- the banks themselves held such a huge amount of these toxic assets at the start of this crisis, from what I understand. Also I find it hard to believe that a sufficient number of assets on aggregate will be given up by hedge funds so cheap -- can't they use the new accounting rules to pretend things are worth more, also? Or will investors continue forcing so many redemptions that it won't matter? And cash flow on all this stuff will recede in deflation (defaults and prepayments) so this still seems to be a LONG process in even the best case.

I have wondered to what extent the articles about Volcker being marginalized could be a smoke screen by the administration to conceal the degree of this involvement and the nature of the potential plan that necessitates deception. Perhaps there's merit to that. I have been surprised to see no one else raise that possibility -- everyone has seemed to buy into the story without questioning.

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ed harrison on bank cash flow generation.

I find it hard to believe that a sufficient number of assets on aggregate will be given up by hedge funds so cheap -- can't they use the new accounting rules to pretend things are worth more, also? Or will investors continue forcing so many redemptions that it won't matter?

hedge funds are faced with what the banks are not -- a run. waves and waves of liquidation requests from investors. our shop (runs a closed fund-of-funds) is similar to many, and we've done nothing but redeem capital for months. the result is hedge funds that are closing up shop, refusing to redeem (a delayed failure), or raising cash and staying liquid. even that last is a problem, though -- many funds get into side pocket private-equity-type deals that are small when times are good but now consitute a large and completely illiquid part of their balance sheet. it is utter devastation for most. no one i've spoken with has seen any significant capital allocated since lehman brothers -- all redemptions.

And cash flow on all this stuff will recede in deflation (defaults and prepayments) so this still seems to be a LONG process in even the best case.agreed -- banks have a long row to hoe. years, but the front end would be the best. this is largely what folks are talking about when they complain that banks are taking TARP money only to speculate, taking "bigger risks" to get out from under the last set. hard for me to see how 25 cents for loss-buffered securities yielding 6% on face value is a bigger risk, but if the government were to abandon demand support it conceivably could be a loss generator. by then, though, we'll have bigger problems.

I have wondered to what extent the articles about Volcker being marginalized could be a smoke screen by the administration to conceal the degree of this involvement and the nature of the potential plan that necessitates deception. Perhaps there's merit to that.thing is, volcker's the king of this stuff. he was responsible for organizing the conspiracy of silence in the aftermath of the latin american debt collapse; he advised japanese banks (contra many american public voices) to go slow on writedowns and obfuscate balance sheet information. while his reputation in blogging circles seems to be build on his willingness to hike rates to kill inflation with pain, his diplomatic skill in managing the devastating fallout in banking is what made him the highly respected central banker he is in policy circles.

i'm okay with summers because i think he understands the problem even though he's got other problems. but i would dearly love for volcker to be installed tomorrow in a position of real power. to be honest i think he would be a very major disappointment to many who want to see a bloodbath resolution.

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David Goldman is a very bright guy, and well worth listening to generally. Nice to see what he is saying on the topic. I had lost track of him.

Regarding Flood myths, that's another issue... the issues regarding their historicity are significant, but fossil evidence argues for a significant catastrophe of some sort to explain all the strata shifts. It is one reason why I think non-catastrophist evolution theories are wrong. The earth and the solar system are too irregular to support uniformity hypotheses.

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Tuesday, April 21, 2009


stress test leaks

via zero hedge -- a day after some very strange speculations which elicted a baffling denial from treasury, the associated press is reporting that it has seen the stress test results which the treasury yesterday claimed it doesn't have.

The government's "stress tests" of 19 large U.S. banks take a harsher view of loans than of other troubled assets, according to a Federal Reserve document obtained by The Associated Press. That approach favors a few Wall Street banks while potentially threatening major regional players. ...

The regulators' focus could spell trouble for big regional banks undergoing the tests. Their portfolios have more individual loans and fewer of the big pools of securitized loans that Wall Street giants specialize in.

Some analysts said regulators are favoring the largest banks because if even one failed that would pose a severe economic risk. Banks that deal in securities are more interconnected to other corners of the global financial system.

Regulators also face pressure to highlight the weaknesses of some banks, or critics will dismiss the tests as a whitewash. That would undermine the goal of improving confidence in the financial system.

the regionals in the stress test 19: keycorp, fifth third, regions, BB&T, suntrust, bank of new york mellon, US bancorp, PNC.

it wasn't all that long ago that it was postulated that cannibal large banks would be fed the flesh of smaller, healthier banks in an effort to shore up their wrecked balance sheets. given what is transpiring, the regional taken whole wouldn't be of much help -- but laundered through the FDIC, a la the JPM acquisition of wamu, their juicier bits could be of immense assistance for the majors.

as of this writing, the money center banks are up 8-10% on the day -- whereas KEY (-5.8%) and BK (1.6%) are two of the big laggards among the banks.

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stay of execution for GM, chrysler

via credit writedowns. perhaps some in the white house really are aware of the probable outcome distribution of a bankruptcy.

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IMF: $4.1tn in losses now expected

via clusterstock and the financial times.

The IMF estimated that total writedowns on US assets would reach $2,700bn, up from the $2,100bn estimate it made in January and almost double what it forecast in October last year. Including loans originated in Japan and Europe, the writedowns would hit $4,100bn, it added.

Banks would bear about two-thirds of the losses, it said, with insurance companies, pension funds, hedge funds and others taking the rest. ...

US banks so far taken about half of the writedowns they face, while European banks – particularly vulnerable because of their exposure to emerging European markets – have only taken one-fifth. But if banks took all the writedowns they face immediately, the IMF calculates it would wipe out their common equity altogether.

That highlights the urgent need to inject more capital into many banks and other institutions. To restore their balance sheets to the state they were in before the crisis – defined by the IMF as a tangible common equity to tangible asset ratio of 4 per cent – US banks need $275bn in capital injections, euro area banks need $375bn and UK banks $125bn.

One possible step would be for governments to convert their preferred shares in banks into common equity, the IMF suggested. ...

Even if governments do take bold action to shore up the system, the credit crisis will be “deep and long-lasting”, the IMF warned. It said that deleveraging and economic contraction would cause credit growth in the US, the UK and the eurozone to contract and even turn negative in the near future, and only recover after a number of years.

The IMF was also gloomy about the prospects for emerging markets as foreign investors and banks withdraw funds. It estimated the refinancing needs of emerging markets are around $1,800bn, while net private capital will flow out of such economies this year.

there are more dire estimates, and jeremy grantham has estimated that more than $10tn will have to be eliminated via writedowns and repayments.

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Monday, April 20, 2009


euro bank leverage problems overstated

via alea -- they're run just about the same as american banks, but with a massive difference in accounting standard.

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levered ETFs as portfolio insurance

via paul kedrosky -- a barclays white paper on the gamma hedging implications of levered exchange traded funds.

anyone who's used these understand that they cannot be held -- the structure decimates capital with volatility. they work well only in strong trending markets. but that they might be the progenitors of exactly such trending is not immediately obvious.

[L]everaged ETFs must re-balance their exposures on a daily basis to produce the promised leveraged returns. What may seem counterintuitive is that irrespective of whether the ETFs are leveraged, inverse or leveraged inverse, their re-balancing activity is always in the same direction as the underlying index's daily performance. The hedging flows from equivalent long and short leveraged ETFs thus do not "offset" each other. The magnitude of the potential impact is proportional to the amount of assets gathered by these ETFs, the leveraged multiple promised, and the underlying index's daily returns. The impact is particularly significant for inverse ETFs.

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the demographics of diminishing demand

via yves smith -- david goldman's piece on american demographics with some stunning datapoints.

All the armamentarium of modern capital markets boils down to investing in a new generation so that they will provide for us when we are old.

To understand the bleeding in the housing market, then, we need to examine the population of prospective homebuyers whose millions of individual decisions determine whether the economy will recover. Families with children are the fulcrum of the housing market. Because single-parent families tend to be poor, the buying power is concentrated in two-parent families with children.

Now, consider this fact: America’s population has risen from 200 million to 300 million since 1970, while the total number of two-parent families with children is the same today as it was when Richard Nixon took office, at 25 million. In 1973, the United States had 36 million housing units with three or more bedrooms, not many more than the number of two-parent families with children—which means that the supply of family homes was roughly in line with the number of families. By 2005, the number of housing units with three or more bedrooms had doubled to 72 million, though America had the same number of two-parent families with children.

The number of two-parent families with children, the kind of household that requires and can afford a large home, has remained essentially stagnant since 1963, according to the Census Bureau. Between 1963 and 2005, to be sure, the total number of what the Census Bureau categorizes as families grew from 47 million to 77 million. But most of the increase is due to families without children, including what are sometimes rather strangely called “one-person families.” ...

The declining demographics of the traditional American family raise a dismal possibility: Perhaps the world is poorer now because the present generation did not bother to rear a new generation. All else is bookkeeping and ultimately trivial. This unwelcome and unprecedented change underlies the present global economic crisis. We are grayer, and less fecund, and as a result we are poorer, and will get poorer still—no matter what economic policies we put in place. ...

The collapse of home prices and the knock-on effects on the banking system stem from the shrinking count of families that require houses. It is no accident that the housing market—the economic sector most sensitive to demographics—was the epicenter of the economic crisis. In fact, demographers have been predicting a housing crash for years due to the demographics of diminishing demand. Wall Street and Washington merely succeeded in prolonging the housing bubble for a few additional years. The adverse demographics arising from cultural decay, though, portend far graver consequences for the funding of health and retirement systems.

goldman is illustrating the point that a complete lack of lending standards did not only drive up the price of homes by increasing buyer borrowing power; it also put large homes within the financial reach of people who had no real use for them but vanity. this expansion of the pool of buyers incentivized the mcmansion, among other things, and the huge tract developments of suburban housing that ring many major american cities.

the end of the credit bubble will dislodge plenty of folks from these homes. not only will many of the mortgages on what might be called "underoccupied" houses be underwater and easier prey to recession in one-person one-income arrangements, driving the prices of such homes down; the simple operating costs of oversized housing will present a real burden to such households, not to mention the problems of transport costs and services in the exurbs.

The Virginia Tech economist Arthur C. Nelson has noted that households with children would fall from half to a quarter of all households by 2025. The demand of Americans will then be urban apartments for empty nesters. Demand for large-lot single family homes, Nelson calculated, will slump from 56 million today to 34 million in 2025—a reduction of 40 percent. There never will be a housing price recovery in many parts of the country. Huge tracts will become uninhabited except by vandals and rodents.

this is a dynamic already visible in post-bubble california, as i understand it.

UPDATE: more, via clusterstock, from charles hugh smith.

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john steinbeck

via mark thoma -- john steinbeck's non-fictional short 'a primer on the 1930s'.

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Saturday, April 18, 2009


empire state cites ease of credit

via econblog review -- the new york fed reports in its empire state manufacturing survey.

Most respondents cited little or no difficulty obtaining financing for either long-term commitments (capital investment) or short-term needs (operating expenses). Moreover, fewer than 10 percent of those surveyed indicated that problems obtaining credit had adversely affected their production or sales.

for all the regulatory and public hysteria about bank balance sheets and credit crunches, this eerily echoes survey results from japan during their long malaise.

as this thing drags on, we're liable to find that credit availability was never really the problem it was advertised to be -- indeed even many writedown-plagued banks have ample capital to lend thanks to various government interventions, guarantees and rule changes.

the trouble is that no one wants to borrow. loan demand is awful. household debt outstanding is contracting. there has been a secular shift in attitudes toward credit. and that can't be patched up by the fed.

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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.

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Friday, April 17, 2009


one-third of REOs trashed

via calculated risk -- something to think about when buying a foreclosure, which is getting to be half of all real estate transactions.



sold short

using just the technicals i follow, there's a compelling case for a pullback -- diminishing upside momentum, diminishing participation.

chatter has polarized as well -- proclamations of health have grown more exuberant (which is boggling to me given what we're seeing economically) while more skeptical parties have gone black.

UPDATE: from quantifiable edges -- wow.

[W]hat might the Worden 1-standard deviation measure suggest when it gets extremely high? As of Friday it was certainly extremely high. Over 80% of stocks closed at least 1 standard deviation above their 40-day moving average. Worden Bros. maintains data back to 1986 and this is the 1st time the indicator has cracked the 80% level.


Thursday, April 16, 2009


vanishing quant desks and implications of the liquidity problem

a phenomenal series of postings at zero hedge -- here, here and here.

UPDATE: merrill follows zero hedge.

UPDATE: and more on the quants and yet more from the prolific tyler durden. he also points at a warning from NYSE euronext CEO duncan niederauer.

i also bumped this post up chronologically from its original april 12 date. this calls for further reflection.

UPDATE: and more chatter, with durden pointing up scary activity in t-bills and money markets -- ABCP rates are vaulting while risk-free yields crash. there is clearly massive capital movement out of risk over the last few days.

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updated housing outlook from t2 partners

via option ARMageddon -- t2 partners has updated their housing presentation slideshow.

T2 Partners Presentation on the Mortgage Crisis-4!3!09 3 optionarmageddon
Publish at Scribd or explore others: Finance Business & Law subprime housing crisis

not much change of tone, but disquieting nevertheless -- particularly beginning around slide 37, with slide 29 as pretext. this shows the complete disaster that is california housing prices, but most importantly that prices have smashed though their trend mean without even a pretense at slowing.

this is what makes aggregate demand management the foremost imperative for the obama administration. if aggregate cash flows are not supported, asset prices will chase discounted cash flows to the floor and right through it, annihilating financial, corporate and household balance sheets, turning what is already a bad dream of interminable balance sheet repair into a financial apocalypse without remedy or shelter. positive carry won't be enough if rents continue to collapse under pressure from falling incomes as well as general oversupply.

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Wednesday, April 15, 2009


industrial production continues its collapse

via calculated risk.

Industrial production fell 1.5 percent in March after a similar decrease in February. For the first quarter as a whole, output dropped at an annual rate of 20.0 percent, the largest quarterly decrease of the current contraction. At 97.4 percent of its 2002 average, output in March fell to its lowest level since December 1998 and was nearly 13 percent below its year-earlier level. Production in manufacturing moved down 1.7 percent in March and has registered five consecutive quarterly decreases. Broad-based declines in production continued; one exception was the output of motor vehicles and parts, which advanced slightly in March but remained well below its year-earlier level. Outside of manufacturing, the output of mines fell 3.2 percent in March, as oil and gas well drilling continued to drop. After a relatively mild February, a return to more seasonal temperatures pushed up the output of utilities. The capacity utilization rate for total industry fell further to 69.3 percent, a historical low for this series, which begins in 1967.

the beige book saw some signs of regional moderation in the rate of economic collapse, but alongside march retail sales and -- of particular interest -- unemployment claims, there's little here to suggest that the economy has turned around. to the contrary, in fact.

UPDATE: ft alphaville relays what dresdner thinks it will take for a sustained rally in credit.

Every time ISM found a bottom, spreads started to come in. But in each case, credit investors soon seemed to realise that ‘less bad’ news was not yet ‘good news’, and the spread path reversed. The real sustainable spread compression started only later… It is remarkable that these ‘true’ rallies all occurred only when ISM was back above 50 again (52 in most cases – as shown on the ISM graph), i.e. when manufacturing was expanding again. ...

One of the reasons why investors do not want to anticipate a rally too far ahead is the cost of getting it wrong. As we suggested before, even if there were scope for further spread compression, we think spreads would widen out again before starting a sustainable rally. In the current market environment, it is very difficult to get in and out at an acceptable cost (even if one were able to time it perfectly).

we're still a long way from ISM finding 50 again.

UPDATE: via CR, a mild improvement in unemployment claims.

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why banks cannot be nationalized

david goldman in two posts -- here and here -- on why major banks with large capital structures cannot be resolved nor even pushed into a large debt-to-equity swap.

The next sector to collapse would be the insurers: as I’ve said here again and again, the big pyramid scheme in the US financial system is that the insurers own the bottom of the capital structure of the banks. Bank preferreds, trust preferreds, hybrids, etc. were the favorite repast of yield-hungry insurance portfolio managers. ...

[W]hat [goes] if the insurers go?

The answer is, “everything,” including the most mundane transactions in trade — because everything requires insurance. ...

Of course it was a pyramid scheme: of course the insurers who allow a load of kasha to get from Minsk to Pinsk should not have owned the bottom of the banks’ capital structure, and so forth. No-one should have owned bank preferred shares but misers living in caves in the Swiss alps living exclusively on home-grown goats’ milk, so that the vaporization of these securities under nationalization would not even have gone noticed. Bank subordinated debt should have been sold exclusively to the hoards of sleeping dragons who would not hear the crash of the issuer thousands of miles away. We know that now. My recommendation is that Larry Summers and Timothy Geithner should be deputized to find sufficient dragons and Swiss misers to place the $135 billion in TARP capital injections to the banks….

…but in the meantime, the only alternative is to allow the banks a zombie existence cannibalizing the “toxic” assets left over from the structuring excesses of the boom.

the government of great britian is now being forced, in the wake of a collapse in private trade finance or supply chain insurance, to make a market where insurers no longer can. one can imagine such a step as but a taste of what could come in the aftermath of large bank resolutions. even the creeping restructuring presented on the citi example is unlikely to run very far very fast.

with the help of goldman, richard koo and others, i've changed my opinion on bank nationalizations severely since this posting in late february. critical to my changed understanding has been the exposition of a mechanism by which the united states government can rationally embark on a plan to support monetary aggregates and incomes and therefore (following a severe repricing to discounted cash flows) asset prices with the expectation of never testing a national bankruptcy -- that is, by dredging the banks for all cash flowing into them which cannot then be lent out, thanks to the collapse in loan demand as the private sector retrenches, in exchange for treasuries.

but equally important has been a deeper understanding of exactly who and what stands to be liquidated in the event of grand-scale bank debt restructuring. such a process would, so far from leaving a cleansed banking system, wreak untold havoc on the global economy -- indeed loosing what australian academic economist steve keen considers in recent comments to be an unwind so vast and pervasive as to dwarf even the great depression in its potential. needless to say, many western governments would not survive such a turn.

whereas i once said

[I]n my view these are problems that have to be remedied, if only because an FDIC-style resolution process -- probably involving a long-term RTC-style bad bank to warehouse and sell assets taken over in resolution back into the private sector -- is the only remotely practicable, safe and fair way forward. it won't be painless, but it will put losses where they belong and leave in its wake a stronger and healthier banking system.

i now see both that there is an alternative and that to "put losses where they belong" is not a reasonable course of action regardless of any perceived moral imperative. i hope to write more upon the subject of that moral imperative soon.

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Structural Sustained Immoral Kleptocratic/Oligarchic/Serfish US Economic Structure 1

Gaius 0

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"by dredging the banks for all cash flowing into them which cannot then be lent out, thanks to the collapse in loan demand as the private sector retrenches, in exchange for treasuries"Does that mean you are no longer worried about treasuries finding enough buyers, assuming this process happens in relatively slow motion?

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is it really more moral, anon, to attempt to lay waste to western civilization in a reactionary populist quest of vengeance?

i understand people want a simple and clear moral solution, but none exists. this just in: reality is complicated.

fwiw, there is plenty of room to punish individual criminals without destroying institutions which, after all, are only instruments.

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I don't understand why recapitalizing banks by converting bonds and preferred into common equity would hurt destroy insurers. Goldman doesn't explain.

I also think that if Geithner has the Fed and FDIC give handouts through underwater nonrecourse loans. Because that is illegal, it will lead to civil unrest once the losses come to light. I think the only way to avoid violence in the streets is for Obama to have a public debate over recapitalizing the banks. If he doesn't, I think people will start doing stuff like kidnappings, vandalism, and worse. I don't think the politicians understand the level of anger that is building up.

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that's right, hbl -- what concerns i have are at the periphery. flows into banks that cannot be lent out will represent demand lost to the paradox of thrift. that flow cannot be allowed to dead-end in excess reserves, and can easily instead be used by banks to fund treasury purchases. there's going to be no problem in that recycling.

it's what happens when treasury is trying to float large amounts of debt to recapitalize banks that may be more difficult. it has to be done to some extent, given that net loan demand is going to be negative, net interest differential will close, and banks will therefore have a hard time recapitalizing by earnings alone. or it will take a very long time.

following on your comment, it's critical that writedowns run very slowly. as gov't injects cash/equity, the temptation will be there for the banks to reserve against loan losses.

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I don't understand why recapitalizing banks by converting bonds and preferred into common equity would hurt destroy insurers. Goldman doesn't explain.many insurers can easily be rendered insolvent by losses on bank debt -- that's the obvious part. but if it were converted to an equivalent face value of equity, however, wouldn't the problem be circumvented?

no, and the reason is that insurers cannot hold a significant slice of common equity in their general account -- it's not permissable to do so precisely because equity is too volatile and not safe enough to back general claims. the conversion would turn supposedly-staid insurers -- whose business is predicated on reliably outliving its clients -- into nothing more than big equity funds (something they're already much too close to) and destroy the public confidence in their business model. chances are good that the result would be runs on the insurers, forcing an industry collapse.

then you'd be facing a bailout of the insurance industry more expensive than the bank bailout in an environment that would probably much resemble 1932.

i understand your point about candor, anon, but to be honest i think you have a lot more faith in the virtue of the probable public reaction to an honest assessment than is justified. the administration needs to articulate a legitimate attack plan to gain public trust; but they do not at all have to be honest about the frightening extent of the devastation, which to my way of thinking wildly exceeds the worst fears of most americans. government is having to walk a fine line between assuaging public paranoia and dealing with the reality of a global depression more intimidating in many ways than its 1930s counterpart. i don't envy them that job, but their fear of public counterproductivity under these circumstances could hardly be better founded.

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"I think the only way to avoid violence in the streets is for Obama to have a public debate over recapitalizing the banks. If he doesn't, I think people will start doing stuff like kidnappings, vandalism, and worse. I don't think the politicians understand the level of anger that is building up."Agreed. I see this every day. I am a bankruptcy attorney and I meet with 12-14 people a day from all different walks of life and social backgrounds. The changes in the type of people that I am working with is staggering. Individuals who make $200K+ a year voluntarily foreclosing on their homes. Unemployed couples with $100-200K in credit card debt. Illegals with 4 properties and $1M+ of debt simply filing Chapter 7 and sending 70%+ losses to the banks. Business owners and developers with $10-$30M in business and personal debt.

A year ago, it was mostly individuals who couldn't pay and who had marginal debts ($30-50K of CC debt, a house with a $200K mortgage, etc). Now it is the largest players that are starting to file. Now it is those who simply don't want to pay anymore. Now it is those who have had their rates raised, their limits and their score droped who want revenge. The main thing (IMHO) that keeps people from filing is their credit score. When Citi & Chase raise rates and cut limits, a person's score get crushed. They lose the last reason to hold on to their debt. The banks are absolutely slitting their own throats.

My take is this: The social contract is being torn to shreds by Washington's response to this crisis. The stigma associated with BK has collapsed since October. A year ago, most people felt bad not paying back "those nice people who lent them money when they needed it". Now they gladly stick it to the banks. The floodgates are open and I don't see any way to turn back the tide. Anger is exactly what I am seeing.

With a large portion of American homeowners underwater or with little equity when sales costs are considered, the incentive to walk away and declare BK is huge. Most people can live in their homes 6-24 months before it is foreclosed, especially if they hire an attorney to fight the bank.

The public is starting to wake up to this reality. And with a growing population of unemployed attorneys, it is only a matter of time before bankruptcy services are expanded and agressively marketed to the public. Short of banning it(difficult, given that it is in the Constitution), Washington can do little to slow down these losses. A BK forces the writedown on the bank, whether they like it or not. I don't see how a Japanese solution is possible in the USA. Consumers are already rejecting debt slavery in record numbers.

Now that's a BULL MARKET.

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many insurers can easily be rendered insolvent by losses on bank debt -- that's the obvious part. but if it were converted to an equivalent face value of equity, however, wouldn't the problem be circumvented?

no, and the reason is that insurers cannot hold a significant slice of common equity in their general account -- it's not permissable to do so precisely because equity is too volatile and not safe enough to back general claims.


The government can modify the rules to let the insurance companies value the common equity received at the par value of the preferred stock or bonds relinquished. They could also have the banks distribute to them in kind debt held by the banks, and give the insurers guarantees.

And of course, if assistance is requried, force conversion of bonds and preferred issued by insurance companies into common equity. Doing this would recapitalize insurance companies, so they have capital to pay out insurance contracts, annuities, etc.

The government could also void all OTC derivative contracts.

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"reactionary populist quest of vengeance"

No; Clear the system that reaches a multigenerational debt reset;

Really? Reality mostly grey? Whocouldanode........

The FIRE based economy, in combination with its monetary and cognitive capture of .gov, set itself up for collapse. Collapse happened. The Fed and .gov use 1.7Trl and 12.8 Trln in balance sheet and payments/guarantees - respectively - to catch a collapsing market. To save all sorts of creditors (and equityholders) Save the status quo with scare taxpayer resources. This is all rear view mirror. The economy remains crippled. Where are the new jobs coming from? Putting humpty dumpty back together again? The Social Contract gets no schrift - not just short shrift. There is no social contract really compared to the FIRE bailout contract. The system is utterly maladjusted to epic 370% debt to GDP and rising. Ben and Tim and Shiela whore out the FDIC. Games, lies, deceit and protection of the kleptocratic, oligarchic FIRE based tail that wags our whored out manufacturing base productive economy.

I am at peace with it correcting itself to a new, sustainable equilibrium after allowing those that made fraudulent bets to eat them and fraud criminality prosecuted.

We are nowhere near this point and running in the opposite direction.

The instruments and institutions are horrilby insolvent. You seem to imply the acceptance of permanent fusion of the parisite/cancer to the patient.

Ill pass.

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Why not just start over? New banks and new insurers, if that's what's necessary to insure that grain gets from Minsk to Pinsk. Why prop up a failing system? Why are high asset prices better than low asset prices?

I agree that justice (vengeance) is a very expensive commodity, but from a practical standpoint, is it better to prop up the system for a few years or start over now?

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The government can modify the rules to let the insurance companies value the common equityit can modify the rules, anon. it cannot convince other market participants of the validity of those rule changes.

rather as in the mark-to-market debate -- the economist made a good point recently by saying that the solvency of a modern bank is not a defineable technical condition but rather depends entirely on the aggregate of the opinions of its creditors. i doubt very much that the market would regard a massive conversion of fixed income to stock underlying insurers ability to pay as a survivable event. most counterparties would be compelled by their own controls to quit such a firm.

and if government guarantees are meant to reassure those counterparties, then why not cut out a step and guanrantee the banks? it would be less expensive and less convoluted with fewer unintended consequences.

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My take is this: The social contract is being torn to shreds by Washington's response to this crisis. The stigma associated with BK has collapsed since October.i agree, r -- the floodgates ARE open and the latent damage done to the social contract over some generations will be manifest. but this is part and parcel to household balance sheet remediation -- it is a big step toward debt repudiation and these people will not be back to borrow money again soon. you're going to be busy, and the intelligence of your clients regarding debt will have grown immensely.

but i would say

I don't see how a Japanese solution is possible in the USA. Consumers are already rejecting debt slavery in record numbers.debt slavery is exactly what the japanese have quietly been emerging out from under. true, the debt was corporate and not household, but the effect should be quite similar.

one can say, "what of the massive government debt! think of their children!" but the truth is that the government's ability to support debt is predicated on GDP.

this is not a choice i would wish to make, but it is ours anyway thanks to the baby boomers and their thirty-year escapist love affair with deregulation and debt:

1) refuse to add to government debt, but crash GDP as debt deflation takes hold. monetary aggregates and incomes collapse, with tax revenues falling even further. deficits, rather than contracting, widen -- and debt:GDP forms a spike similar to that seen on this chart in the early 1930s, but starting not from 170% but 350%. such a spike would probably run the ratio over 700% and possibly force international capital flight -- sparking the kind of emerging market crisis most people think impossible but which reinhart and rogoff have demonstrated is quite normal under these conditions. eventually, as in 1933, the chaos forces political change and fiscal remediation of the disaster. perhaps it comes via the ballot box as in the american election of 1932; perhaps it comes via a back door putsch as in germany 1933.

2) use the government balance sheet to refinance the monster private debt bubble by a process of stabilizing monetary aggregates and cash flows. micro allocation will not be optimal, but it will be survivable. assets reprice to these stagnant cash flows but fall no further. GDP stagnates but does not fall. government debt:GDP rises dramatically from the current 50%, but total debt:GDP (seen in the aforelinked chart) slowly declines as some private debt is run off while the rest is transferred to the public. this condition of stable macro GDP and income can be made to persist until private debt is minimal, privae savings are high, assets have repriced completely and the conditions for the next growth phase are present. GDP starts growing again, and the resultant explosion of tax revenues allows government to repay debt out of taxed profits.

this has been done before, notably by britain during and after ww2. it was not easy, but it was vastly easier than a Greater Depression.

if you fear civil unrest as i do, if you fear for your children's future as i do, then the only intelligent thing to do at this point is support government efforts to refinance private debt through aggregate demand support. notably contra all the fucking idiots dumping tea into any puddle they can find, to do so is the OPPOSITE of enjoining debt slavery.

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notably contra all the fucking idiots dumping tea into any puddle they can findand just a further note on this, as i refuse to dedicate an actual post to such stupidity:

what we are witnessing with these contrivances is nothing more or less than yet another extenstion of the narrowminded puerile narcissism of the same privileged bourgeois morons who ignorantly fostered this mess by similar means. the united states is the most horrendously undertaxed and underserviced postindustrial society on planet earth, not that such people would bother to know it, and more to its detriment than its benefit (as will become apparent later in this depression, i fear).

these adolescent NIMBYists -- who, by the way, would claim to be patriots -- are traitors as soon as anything like the real heavy lifting of their country needs to be done. these neojacobin sockpuppets -- who, by the way, would claim to be christians -- are devils as soon as anything like true charity or compassion becomes imperative. there is as little sense as morality in such people -- selfishness seems to be their primary prerogative, and fuck their fellow man as he simply deserves all he got or didn't get.

what rot. such people are exactly those which this society must purge to repair its moral structure. for far too long now, americans have fetishized the rote escapism of nth-degree individualism, living out a despicable nihilistic cartoonish caricature of neitzschean principles. christian civilization is neither created nor maintained of such things; it is instead fundamentally the active institutional and cultural repression of them. these contemptible tea parties, i would firmly state, are yet another example of how the decline of western civilization is manifest.

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I am at peace with it correcting itself to a new, sustainable equilibrium after allowing those that made fraudulent bets to eat them and fraud criminality am i, anon. what we disagree on is how resets can happen.

i'll write much more on this soon, but the pervasive public reaction (and pardon me for lumping you in with them, anon, if it isn't justified) has been driven less by analysis and more -- much more -- by mimesis. confused and alienated people are shrugging off reason and progress to fall back (as we are wont to in crisis) on the ageless mythologies that form the bedrock of primitive animistic religions. it's clearly observable in the news, which is as always as much mirror as leash.

that is a deeply satisfying response because it recasts recent events as a most primitive kind of morality tale, one which appeals to the parts of our brain that we've had longest. but it is not an intelligent or sensible or, in my view, civilized one.

this crisis can be viewed coldly and empirically and some have actually viewed it as such. we can punish criminal individuals and reform without destroying institutions. there do appear to be reasonable avenues to a return to economic health while avoiding wholesale economic (and thence potentially political) destruction. we needn't necessarily court superdepressions, revolutions and warfare as we sometimes in the past have. there are examples -- postwar britian, post-1990 japan -- that provide evidence.

is that not the legacy we would choose to leave to our descendents? in preference to periods like 1929-53, or 1870-96, or 1775-1815?

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a good LOL on the tea party isolation chamber.

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I am in total agreement that the only choice we have is to continue to let the lunatics steer the asylum into the event horizon.

I would also remind everyone that we don't live in a vacuum. We have pulled in almost everyone else on the planet in with us.

I would also say that I am more than certain that not all them will go willingly into this abyss.

No one seems to give credence to the notion that forces beyond the control of bankers can render all this effort as pointless.

I think Putin will be the first to pull away from the poker table and wait it out in the wilderness. Relative to everyone else he has almost no skin in this game.

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The Tea Party movement is brilliant in its conception. Get middle-class taxpayers who pay marginal tax rates higher than Warren Buffett and Lloyd Blankfein out in the streets protesting against taxes. Combine that with the continual reminder that the wealthiest 10% pay more income taxes than the remainder of the population, forgetting to mention that the wealthiest 10% have more income than all the rest of the populace, and stir up resentment against the poor by saying they have no skin in the game so will ask for and receive more handouts.

Goebbels would bow before such genius.

That said, there are some genuine problems with appearances these days. To wit:

(1) Larry Summers earning $5.2M for 1 day/week at DE Shaw; $2M+ for delivering "talks" at the Houses of Finance
(2) Treasury Sec cheating on his taxes and using the Statute of Limitations to limit his liability until forced to act otherwise by events
(3) John Thain spending more to redecorate his office than the median wage worker will earn in 22 years (NPV)and being smug about it
(4) Lloyd Blankfein "earning" $53.6M in one year
(5) Edward Liddy's stake in Goldman Sachs
(6) "Government Sachs" (self-explanatory)
(7) The list could go on. And on.

The arrogance and misplaced sense of privilege of the titans of Wall Street, coupled with the general disdain for Congress in particular and politicians in general, is fueling the populist rage against bailouts. Some heads need to roll to restore the Public's trust. This has not happened, rather, it appears that private avarice is being back-stopped by the Public purse.

Current policy is utilitarian and morally agnostic. This is public policy the way lawyers make it. Obama's challenge here is to provide some moral leadership without being accused of being a wealth re-distributing socialist. So far, he has not risen to that challenge.

FDR's fireside chats established the need to take action for the sake of the body politic; he excoriated the money changers and committed to a policy of broader social welfare. FDR was elected 4 times, each time by large margins. Political courage and moral clarity pay political dividends. The Presidents who exhibit these traits are the ones We the People value most highly.

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The cant about "civilization" ignores that fact that institutions depend on the trust and respect of the average citizen. Confidence in the integrity and fairness of the system is a public good that definitely has monetary value in voluntary payment of taxes, willingness of foreigners to trade in our markets and invest here, etc.

Some contemporary neuroscience is relevant. Feelings about fairness and reciprocity are deeply wired into the nervous system. Monkeys that receive smaller rewards than other monkeys will protest by refusing to participate in the experiment, though a pure game theory analysis says this is self-destructive behavior. This has some normative aspects: general estimations of the quality of governments and societies tend to be simple applications of individual behavioral patterns to institution.

The "teaparties" seemed to be a dumb PR stunt, but the protest at Paulson's shakedown of Congress for $700 billion showed that there's large reservoir of people who think that the bubble and bailout were totally rotten. Yet, no one will be prosecuted or penalized for their behavior. And none of the incentives for corrupt behavior will be changed.

I fail to see the merits of having Joe Sixpack write a check for a Goldman partner's yacht. You appear to be arguing that as long as Mr. Sixpack can be kept in the dark, things are A-OK. That may be correct, but it isn't the general understanding of what the Founders had in mind. And it runs the practical risk that if Mr. Sixpack becomes one of the army of unemployed, he may be susceptible to some nasty political seductions.

One of my relatives was Ambassador to France during the Terror, and someone asked him about using the US Constitution as a model for a new French government. His reply was that it required the US citizenry to operate, and that letting the French of the time apply it would be a disaster. I do wonder what he'd say about our situation.

--Roger Bigod

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The cant about "civilization" ignores that fact that institutions depend on the trust and respect of the average does not ignore that at all, rb -- i'd be the first to tell you that western civilization first went astray when its master institution lost, by abandoning the ethereal for the temporal, the allegiance of its most important constituency. but that constituency was not the mob.

the truth is that the "average citizen" does as much thinking along these lines as a bird. "feelings of fairness" are notoriously manipulable. democracy is a contemptible concept precisely because the mass of men are meant to be led, not lead. however difficult that is to reconcile with revisionist notions of what the founders wanted or rousseauian visions of popular sovereignty, it's true nevertheless. and so a democratic power structure inevitably empowers the degenerate demagogue, trivial examples of which are leading these tea parties.

(fwiw, as an aside, i'd argue you that the founders, perhaps excepting jefferson, knew this all too well and constructed american government specifically to closely circumscribe the power of the mob. constitutional power is loaded into the senate, where no one was to be elected. presidents are selected by a college of electors, not the voters. even in order to vote one had to be a fee-simple freeholder -- that is, less than 10% of the american population could vote, and it was broadly the wealthiest 10%. that is not a democracy; that is a republic of landed gentry. the founders were not rousseauian revolutionaries; they staged and luckily won a middle-class tax revolt which at the start had utterly no intention of leaving the british empire. all of this has of course been revised away in the public conception as rousseau's ideas have risen in the ascendant, as democracy has gone from obviously despicable vehicle of despots to the self-evidently righteous form of governance at the end of history.)

as far as the bank bailouts go, i think you read me right -- if there has been a real fault in the political machinations regarding the crisis, imo, it has been in the public face of it. it's been presented horribly. political corruption is irremediable but public relations is not, or at least has not been in the past. and yet i harbor some awful fears, particularly in light of how things have played out.

following the latin american debt collapse of 1982, american banks were absolutely skewered. no significant american bank was solvent -- not one. but there was no public furore because there was no public awareness. indeed, a far bigger stink was made over the S&L problems of 1990, a crisis one-tenth the size.

the latam crisis was resolved thanks to the work of global central bankers, particularly paul volcker, maintaining a conspiracy of silence for a decade as the banks were allowed to slowly recapitalize themselves on earnings. and that is how 90% of all banking crises in history have been resolved.

the question now is whether crises can be resolved in that way in the age of the internet. or must we have more frequent and severe mass panics in the name of public awareness? must we have an unlimited forum for rabble-rousing idiots on every end of the political spectrum who have abdicated their social responsibility in the name of freedom of expression and lust for influence? because i uneasily suspect that, were the current conditions of communication always present in every age, we may never have got much past tribes and clans, to whom we were at least bonded by blood.

i wonder now if the death of the gatekeeper paired with the rise of individualism and diversity -- both, regardless of current norms, harbingers of social collapse through the ages -- has not ultimately rendered a complex society basically ungovernable, or at least incapable of unified action. i rather wonder if imperial rome and post-periclean athens were not very similarly afflicted.

anyway -- it's too much to think that everyone could simply be kept in the dark. this is, after all, a household debt problem at core -- and one that households share culpability for, of course. but this entire effort at remediation might have been presented with a vastly different and more positive face, and in a different age might have been done so much more easily.

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Wow gm, most of your comment responses continue to pack enough insight to form their own blog ;)

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I didn't say we need to be a perfect democracy. I said that trust and confidence in the government is an important public good, and that your purely financial analysis ignores it.

I certainly agree that the Founders didn't intend a pure democracy. One day they spent some time discussing the proper extent of the franchise. My relative remarked that they were wasting time, since the rich would have their way with the electoral process no matter how it was formally set up. IIRC, there's no attempt in the Constitution to specify the qualifications. But it isn't the case that the populance were happy peasants until the internet addled their brains. They were very interested in the political process, as you can tell from the quality of political coverage in their newspapers, the profusion of political parties and schools of the right and left, the role of political conventions.

I'm familiar with the Latin American debt crisis. But there certainly was public awareness. You might be interested to know that Citicorp and other banks were insolvent again in 1990 and recovered because of zero-interest loans approved by Greenspan. It didn't get a lot of publicity, but it was hardly a state secret. I probably ran across the matter in Barrons.

It's a respectable position that these efforts were to some extent corrupt. The choice of banks to help was somewhat arbitrary and invites the speculation that there were payoffs. The money had to come from somewhere and was indirectly taken from the public. And the management of the banks weren't penalized for their bad judgment.

Several features distinguish those bailouts from the current round. The mistakes then appear to have been in good faith, not wholesale fraud. No one was collecting huge salaries and bonuses justified by "creativity". The money came from the Fed, not the Treasury, where it will have to be repaid by taxes. There were no elaborate shell games to waste more of the public's money in order to conceal from the public that their money is being wasted.

This is the kind of mismanagement and abuse of power that brings down empires, not "the rise of individualism and diversity".

--Roger Bigod

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I said that trust and confidence in the government is an important public good, and that your purely financial analysis ignores it. rather than ignoring it, rb, i think we see that trust and confidence as emerging from different sources.

if, as it seems, you believe that the majority or even a significant minority of the public at large informs itself cogently through available media and arrives at relevant and meaningful judgments independently -- so that trust and confidence emerges from a more or less rational assessment of reality as it is -- we completely disagree.

i would instead say that information media -- from the roman catholic church of the 10th c to the television news of the 20th -- are largely engines of mythology which utilize the pretense of information broadly to perpetuate and reinforce social order, to create trust and confidence. peasants may or may not have been happy under that regime, but they were not politically restive unless roused and organized to action by some iconoclasm. when they were roused, it was by the promulgation of alternative mythologies, as much a nascent trust in a new emergent order as a mistrust in the existing order. news can thus be a force for fomenting revolt, if only rarely, in the pre-mass-media age.

at least remnants of that basic condition still exist, i hope. consider the ability of the bush administration to manufacture "popular" civil disobedience to serve its ends in places like ukraine, lebanon, georgia and elsewhere -- publics are still easily manipulated in the age of the internet because that ease is a function not of technology but human nature, and the bush administration showed that at least in some societies it is possible to coopt the narrative sufficiently to break up a society.

but if it showed that, did it also show that the narrative can in this age of increasingly diffuse information access be controlled sufficiently to support a society? this worries me. competing mythologies pushed by powerful competing interests are now rampant, and mistrust is commonplace as a result.

to be fair, i think there are levels of corruption that cannot be overcome through social reinforcement, where spontaneous disorder results. but we are nowhere near them. i doubt north korea is near them, frankly, though nearer.

the general public here will absolutely not arise of its own volition because it is incapable of doing so -- the idea that it can is a fantasy of rousseau's intellectual descendents, imo. however, it COULD arise provided a compelling alternative mythology organized and forwarded by demagogic iconoclasts playing on the steady undercurrent of mistrust that is the natural result of a social order founded on something less perfect than the divine. and perhaps the internet -- perhaps the ultimate technical expression of the memes of individualism and diversity yet invented -- provides a means of doing so in the same way that the printing press was in a different age.

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shiller, zuckerman: more stimulus needed

via bloomberg, the commentary of robert shiller.

It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger.

It would be a shame if we are so overwhelmed by anger at the unfairness of it all that we do not take the positive measures needed to restore us to full employment. That would not just be unfair to the U.S. taxpayer. That would be unfair to those who are living in Hoovervilles in Sacramento and Fresno, California, and elsewhere; it would be unfair to those who are being evicted from their homes, and can’t find new ones because they can’t find jobs. That would be unfair to those who have to drop out of school because they, or their parents, can’t find jobs.

mort zuckerman from his home base.

... The upshot is that consumer spending is projected to fall by at least $500 billion annually. And we are still seeing the recession work itself out in unemployment, another powerful deflator of consumption. ...

The collapse of consumption is on a scale not witnessed since the Great Depression of the 1930s. The Conference Board's index of consumer confidence fell to 25 in February, the lowest reading in the more than 40 years of the survey. Before the current downturn, the all-time low had been a 43 reading in December of 1974. Consumer expectations about the future are even glummer. They are down to an index number of 27.5, compared with the previous low of 45.2 in 1973, when the country was reeling from the oil shock.

The decline in consumer confidence defies the record-breaking stimulus program voted by Congress and championed by the popular President Obama. If confidence is this low now, where will we be in the fall, when we could be looking at an additional 3 million jobless, further declines in home prices, higher credit card defaults, and accelerating business bankruptcies? In that case, critics from the left and the right will be questioning whether the financial rescue package and the stimulus package have done any good. If that happens, the public may think we have experienced a policy failure—which would be another blow to confidence.

The problem is that household balance sheets will take a long time to regain lost ground. ...

All this argues for yet another national stimulus program to be prepared for implementation in the event that the forces of contraction get out of control. This is no time to take a chance that a particular program will work in the context of the biggest collapse in economic confidence since the Great Depression.

these views come in spite of the relative assurance of marshall auerback in his recent piece at credit writedowns.

it's encouraging to see important voices calling for what needs to be done, though it would be better to also hear them articulate how it can be done. the united states badly needs to hear a coherent attack plan put forward in the public square. at the moment public discourse is driven more by ideology, mythology and raw anger than a pragmatic, mechanistic assessment of what must be done. i doubt seriously that the rising tide of agitation can be turned back short of convincing people that someone knows what to do, and despite having some imperfect candidates no one in the obama administration has stepped forward as that leader.

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Thursday, April 09, 2009


foreclosures in the pipe

via zero hedge and field check group -- the suppressing effect of prior foreclosure moratoria are rolling off over the next few months.

The bottom line is that there is a massive wave of actual foreclosures that will hit beginning in April that can’t be stopped without a national moratorium — this wave is so big I would not put it past them trying it.

CA foreclosure background - in mid-2008 the foreclosure wave was artificially held back as a result of the CA law SB1137 enacted in Sept 2008. This also kept NOD’s and NTS’s at much lower levels than the actual defaults that were occurring. Other bubble states and several banks/servicers also went on random moratoria and the foreclosure wave was held back for the past six months. But just like so many other intervention and moratoria in the past, the problem just comes out the other side even more violent than if they would have done nothing. Adding insult to injury, the GSE’s announced this week that they were coming off moratorium, which could increase foreclosures by 20-25% alone.

particularly interesting to see that higher-end middle class properties are starting to come through foreclosure at titanic levels.

i've recently remarked on falling absolute levels of inventory in housing in spite of accelerating price declines as a possible intermediate-term precursor to a bottoming process. information like this is a good reason to defer judgment for the time being. the foreclosure problem is clearly still accelerating along with price declines, interrupted only by temporary legal injunctions.

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Jct: And just think, the banking foreclosure industry was almost shut down without that great infusion of cash from Obama to make sure they keep doing their jobs of dispossessing Americans.
That's why people have no choice but to jump to alternative community currency lifeboats.
Best of all, when the local currency is pegged to the Time Standard of Money (how many dollars/hour child labor) Hours earned locally can be intertraded with other timebanks globally!
In 1999, I paid for 39/40 nights in Europe with an IOU for a night back in Canada worth 5 Hours.
U.N. Millennium Declaration UNILETS Resolution C6 to governments is for a time-based currency to restructure the global financial architecture.
See my banking systems engineering analysis at with an index of articles at

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Fannie and Freddie announced that they did away with an outright ban on foreclosures only to replace it with a "stay in your home free" card program that requires people to file paperwork to apply for modifications.
No word was given as to how many times a person could apply for modification.

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foreign currency swap lines for the fed

via alea:

Five central banks have agreed to currency swap lines that enable the Federal Reserve to provide foreign currencies to U.S. financial institutions.

Q: What does it mean?

A: So far the funding shortfall was thought to be largely a USD problem, the C.B.s are telling us loud and clear, it isn’t.

the fed is opening lines that could help american banks funds foreign capital flight from the united states. this is disturbing.

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Can you elaborate on this point and compare it to the USD swap lines previously provided by the FED to other CBs?

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my understanding -- which is sketchy -- is that previous swap lines were designed to provide euro CBs with dollar funds to lend to their commercial banks -- the fed did not then receive funds that it could lend in return. the fed was exposed to euro CB counterparty risk, euro CB exposed to credit risk.

this works the other way around.

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What's this stuff about a secret bailout for Reijkavik-on-Thames

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jck addresses buiter. it would appear that buiter does not understand forex swaps.

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steve eisman on GE

via clusterstock:

GE Capital is currently hiding $40-$45 billion of embedded losses in the GE Capital portfolio. This $40-$45 billion of losses, if rinsed through the income statement all at once, would wipe the company out. In fact, if GE weren't able to fund itself with the "heroin injection" of the government's commercial paper program, it would already be bankrupt.

So is GE toast?

No. Unlike banks, GE is not required to mark its assets to market, so Eisman thinks the company will just hobble along for years as the bad news gradually works its way through its income statement (the very definition of a zombie bank). The losses will hammer GE's earnings, though. Especially as the performance of the industrial business deteriorates.

similar to john hempton's analysis.

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Wednesday, April 08, 2009


the song remains the same

via barry ritholtz:

particularly savor the muderous-dictator-as-exemplar looming on the horizon. the driver of the wagon is rex tugwell, rather an anonymous person in the modern conception but in 1934 one of the country's most prominent economists, founding member of roosevelt's brain trust and ostensible leader of the new deal. on the wagon are harold ickes, henry wallace and donald richberg.

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TARP for insurers too

david goldman comments on speculation that TARP will be opened to insurers.

The insurers own the capital structure of the banks, and you can’t haircut the banks’ capital securities without beheading the insurers. ... Let folks know that even their insurance policy and their annuity isn’t safe, and you will see a degree of panic that would make the consumer slump of the past six months seem like boom times by comparison.

i've changed my thinking fairly radically upon a more comprehensive reading of richard koo among others. whereas i was even recently quite skeptical of the ability of the united states to avoid major bank nationalizations, it seems to me less and less that such resolutions are an approachable option if the very worst is to be mitigated. goldman's assessment of the position of the insurance industry only entrenches that change of mind.

to coin an imperfect metaphor, banks should perhaps be thought of as the castle wall, rather than (as i'm sure they widely are now) the castle keep. the outer defenses are already overrun. if the walls are breached, it isn't the end of the attack -- it's the beginning of the slaughter.

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Hussman seems to think that you could give the bondholders a haircut if you allow the company to fail with a conservatorship for the existing business. He thinks Wamu is an example of how you could have an orderly failure of banks.

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Why not guarantee the insurance contracts and annuities at their present levels (well, maybe not the "guaranteed" death benefits and high-water mark annuitization values pushed by many annuity sellers in the last six years) just as the FDIC backs depositor money. The banks and insurance companies could be liquidated without the catastrophic loss to their customers. I think the question is more where you draw the line--protect the customers, or protect the companies. I believe that you could do the former without the latter (after all, the run on money market funds was stopped last fall after the Feds issued a blanket guarantee).

Maybe I'm being naive, but aren't there established procedures for winding down insolvent insurance companies, as well as state insurance funds for making the customers whole? I'm sure they aren't anywhere near fully funded, but the federal government could simply throw the money into the pot for the difference, if we're trying to prevent Mom and Pop from taking any losses here.

He who defends everything defends nothing.

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In virtually all cases, the liabilities of these companies to their own bondholders are capable of fully absorbing all losses without the need for public funds to defend those bondholders.

this is why he thinks so, rb, and he's right -- i've said the same.

trouble is in who owns these bonds. goldman's point is that it is both other banks and (more importantly, on his view) non-bank financial institutions like insurance companies. these institutions are already underfunded thanks to the asset crash of 2008. to give the heretofore undamaged assets of these companies a big haircut -- and it would be very big, well into if not through the senior debt, if all the losses are foisted onto the capital structure -- precipitates what goldman sees as the third stage of financial panic, where even insurance policies and annuities are potentially worthless. these are older folks' rainy day funds. remember that there is no FDIC for folks with big equity stakes in such products -- they are managed and backed at the state level.

in the event, presumably the federal government would have to launch a program analogous to the FDIC to assure the general public of the value of these products -- but that amounts to yet another tremendous contingent liability, and by then much more damage will have been wrought through fear.

hussman, like many, makes great hay out of the losses to be suffered by taxpayers through capital infusions. and i would agree -- these are capital transfers, not investments.

what he and others seem not to understand is that the losses for the taxpayer are, rather like the massive debt pile everyone fears calling into existence through fiscal stimulus, already there.

what is left for the taxpayer to decide, ihmo, is whether s/he wants to take large losses as a collective on defending the banks and promoting aggregate demand -- or take utterly unfathomable losses both as a collective and as individuals on a precipitate run through not only the banks but the entire system of financial intermediaries as well as an absolute trashing of monetary aggregates and economic activity.

the counterpoint to the tradeoff -- no free lunches -- is the assumption of nebulous incremental capital flight risk. such flight risk already exists -- it could happen regardless of US policy choices in response to external events. and i've come to think that careful use of domestic cash flows coming into banks for demand management and (rather less) for recapitalization minimizes that risk responsibly. but the risk nevertheless exists and could be amplified by offsetting private balance sheet remediation with public balance sheet expansion if it isn't done carefully.

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aren't there established procedures for winding down insolvent insurance companies, as well as state insurance funds for making the customers whole? I'm sure they aren't anywhere near fully funded, but the federal government could simply throw the money into the pot for the difference, if we're trying to prevent Mom and Pop from taking any losses here.

there are, but not for winding down whole industries. most insurance companies, large and small, are to my knowledge heavily exposed not to small banks (who have little capital structure for sale) but to the majors.

and you're right of course, bwdik -- the state funds have nothing in them and would ultimately have to be paid out by the feds.

i would use your witticism...

He who defends everything defends nothing

... alternatively as an analysis of federal financial product insurance programs. already there are louder and growing calls about solvency issues at the FDIC. plenty of smart people don't think the FDIC guarantee is worth a damn because the government would have tremendous difficulty floating the debt against a truly systemic run. now we would add another massive unfunded layer to the government's contingent liability?

i'm not so sure we don't begin to challenge and ridicule the entire concept of government backstops if we do. and if that dam breaks, we may all wash away. such guarantees work best, maybe work at all only in being never tested.

moving to slowly repair and fortify banks as the "castle wall" and support demand is, in essence, a massive refinancing of the gargantuan private debt bubble that was created over the last 30 years. once that refinancing is completed, several years from now, government will be able to tap truly secure long-term cash flows to gradually pay down the debt in the subsequent private sector growth phase.

i wouldn't consider that defending everything by a long shot -- much damage has already been done and we're in for a long period of essentially no growth. and i think it's about as morally reprehensible as a homeowner refinancing from a 5-yr ARM on a 10-yr amortization schedule into a 30-yr fixed in order to keep his house.

it is also effectively putting the full power of our society affirmatively behind the capitalist system, warts and all. to say that it rewards the few to punish the many to do so does, i think, radically underestimate the degree of benefit accrued to even the parsimonious by the economic activity of the profligate. when all these idiots took out 120% LTV neg-am timebombs en masse, ALL of our incomes increased incrementally because of it. i don't think the individualist fantasy has ever had much to back it up, whether espoused by some leave-my-profits-alone trader superstar in the boom or a leave-my-taxes-alone thrifty worrywart in the bust, in the context of civilization. just as you can make an excellent case for greater efforts to redistribute wealth from the top through govenrment in booms to increase equality, so i think can you make as good a case for the many saving the few in disaster. fwiw, my view is that we're in the soup together -- even though we haven't heard a lot of that in either the boom or the bust, even though i myself at times have not been as true to that dictum as i might like to have been.

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thought-provoking as usual, fellows. thank you, and pardon my tangential ramblings. :)

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Here's the thing the concerns me about Goldman's analysis and that of his fellow preachers of Armageddon - there aren't any facts presented to support his argument. For example, Goldman says insurance companies "own the capital structure of banks". Ok, how much? 100%? Can't be, 2 minutes work on Vanguard's site and I know that Vanguard bond funds own $1,375,000,000 in Citi debt alone. Granted, that's only about 0.16%(!) of the Citi total, but there are a lot of mutual funds, hedge funds, and private investors holding that debt too, so insurance companies don't own it all. How much do they own?

As an aside, if Citi has $859,000,000,000 in debt, can we all agree that this behemoth is too big for the financial safety of the world? And when are we going to re-impose Glass-Steagall?

None of the myriad sides in this debate are putting all the cards on the table. The banks are obfuscating about the full nature and value of their assets, Geithner can't articulate the reasons to Congress why taxpayers should underwrite a massive bank bailout so he resorts to gimmicks like PPIP, and the talking heads pontificate with certainty but present few facts.

If we taxpayers are going to be roasting squirrels on a stick and digging for tubers in the public square if bank stockholders are wiped out and debt is swapped for equity, why can't anyone explain why this is so with facts *and* figures? I hold Congress in as low a regard as the next person, but are they collectively so stupid that Geithner can't convince them of the necessity for a taxpayer bailout? Or is Geithner so incompetent? Well, maybe I just answered my own question...

I'm an engineer, but I can read a P&L and balance sheet. Let's have a fact-based debate about the best way forward instead of this back-room wheeling-dealing by the Banks, Hedge Funds, PIMCO, Blackrock, and the Feds. The cacophony of the chattering classes just makes it harder to think.

Give me the facts; I can handle the truth. At least I think I can.

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from perrone: well, those ramblings are hardly tangential, gm. but dig this, if I may be somewhat crude: if you want to fuck me, you have to kiss me first. this is largely the problem, I think. we've got plenty of enthusiasm and urgency at the top now for "the many saving the few," but where were those guys over the last 30 years when it came to helping "increase equality?" I'll tell you -- hiding their dough from the taxman, paying off political hacks and morons to kneecap the taxman, and generally lining up cronies to preserve and expand their license to steal. um, have I got it wrong?

so there's more anger than pundits even understand, I think, just beginning to churn up through that "society" that has to sacrifice to save the system. in the end the many will get fucked, probably pretty roughly, so that the few get off (dual meaning intended) and mortal havoc is at least postponed. but the bad blood that's oozing now is going to gush later, and leave big puddles. that's what happens when you skip part one and go right to part two.

what does that mean? it means the biggest job for our government, bigger even than managing its balance sheet or guarding a strong market for T-bills, is going to be proving that capitalism isn't just a con. that part one can really work, and keep us generally healthy. otherwise, eventually, who knows when, it just isn't going to be possible to summon or hoist enough "weight" to stave off chaos.

I hope we're up to job, I think we are. I think we'll take some lessons away from this that enlarge our perspective and sympathy and understanding and connectedness. I hope so. but I wish I felt surer.

damn, how I long for some kissing.

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og, i'd say the insurers own enough of the bank debt to say that significant haircuts would undermine their balance sheets precipitously, given that many own equities as well as other forms of debt that have been smashed in the rout of 2008.

isolating out the life/all-lines insurers -- the most troubled of the various sectors as i understand it -- using the 2008 ACLI life insurers fact book as a source, they hold about $5.1tn in american assets. $1.9tn of this is held in separate account (backing risk-pass-thrus like variable annuities and pensions), much of which is funneled into risk assets (common stock, mortgages, etc). the other $3.2tn is general account (backing fixed payout like life).

bond holdings represent $244bn of the separate account assets (13%) and $2.3tn (72%) of general account.

the separate account has, along with all manner of pensions and endowments, been savaged in the last year -- life insurers nowadays (thanks to deregulation) hold $1.7tn in stocks, about 4% of the total capitalization of american stocks, almost all of it in the separate account. but let's concentrate on general account. of the general account assets, government debt (fed, state and muni, foreign and domestic) represents just $156bn (5%) of holdings. another $250bn (8%) is GSE, including FHLB.

corporate debt holdings, however, amount to $2.0tn, and at $1.8tn substantially 60% of the general account.

now, this is far from being the entirety of corporate debt. but by many accounts, insurers went wild for higher-yielding bank debt in recent years. and the losses being recorded by some insurers reflect their concentration. goldman has previously noted that insurers own "perhaps 40% or more of $800 billion in outstanding bank hybrid paper". note also the bank hybrid debt is a small slice of bank debt, the majority of which is the long-term senior stuff that insurers favor -- they are similarly concentrated in that stuff. this concentration is why their fixed income portfolios have suffered so badly of late.

far be it from me to trust anyone. after some searching, i can't find a proper analysis of the weighting of insurer fixed-income assets by industry. but i wouldn't expect a public admission of facts, even open secrets within the financial sphere, for fear of inciting a panic.

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Thanks for the link to the insurance company holdings. Very informative.

Exchanging the insurance company's bank debt holdings for equity could be the best thing that ever happened to the insurance companies. With the Fed guaranteeing wide interest spreads, the Government juicing the stock market, and inflationary policies firmly in place, the insurance companies would probably make out better in equity than bonds.

Unless of course the whole rotten, debt-laden mess crashes down around us. I'm making note of where the squirrels live in my neighborhood just in case.

Best wishes for a Happy Easter.

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more from goldman.

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investment grade mispricing?

it's hard to tell whether this is a mere news cycle blip or the underpinning of a game-changing realization, but -- via clusterstock and CNBC's rick santelli -- a newly released draft of a paper penned by harvard's joshua coval and erik stafford as well as princeton's jakub jurek finds that current market pricing of securitized loans is not in fact a liquidity-driven mispricing of actual discounted cash flows but in fact a correction of previous mispricing of same.

"the pricing of investment grade credit risk in the financial crisis", abstract:

This paper uses a structural model to investigate the pricing of investment grade credit risk during the financial crisis. Our analysis suggests that the dramatic recent widening of credit spreads is highly consistent with the decline in the equity market, the increase in its long-term volatility, and an improved investor appreciation of the risk sembedded in structured products. In contrast to the main argument in favor of using government funds to help purchase structured credit securities, we find little evidence that suggests these markets are experiencing fire sales.

the focus is notably on investment-grade corporates, the better to avoid the problem is systemic misrating. if i read it correctly, the jist is to establish a link between equity and index option market perceptions and credit perceptions of modeled corporate cash flows, then evaluating any change in the balance. the conclusion is not that there is no mispricing, but rather that if the credit markets are mispriced they are no less so than equity markets.

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it's a depression, alright

barry eichengreen and kevin o'rourke at vox eu sketch out graphical comparisons in industrial output, work stock markets and trade, as well as measures of policy response.

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “Great Recession” label may turn out to be too optimistic. This is a Depression-sized event. ...

The good news, of course, is that the policy response is very different. The question now is whether that policy response will work. For the answer, stay tuned for our next column.

particularly marked is the stunning crash in global trade, far exceeding the early months of the great depression. this makes some sense, as crossborder shipping and supply lines are a much greater part of the global economy than then. but in a very real sense this implies only a higher ledge from which to fall.

among developed nations a lot of the economic collapse has been shunted off onto japan, thanks to a surfeit of excess capacity in high value goods for export and the unwinding of the massive yen carry trade. germany and china have also suffered tremendously, though in china's case the fact is often obfuscated. also quickly getting the knife have been small countries/currencies with high trade deficits -- iceland, eastern europe -- who have experienced catastrophic currency collapses that have crushed their access to global markets.

the united states, much like the british empire of the 1930s, has ridden a safe-haven reserve currency and its status as the global source of excess demand into a relatively softer decline. the story here is by no means over -- as monetary policy has been sidelined by the collapse of borrowing, government fiscal policies globally will be critical in determining how far the collapse goes before cash flows stabilize. this particularly figures to be a problem in europe under the restricitons of the maastricht treaty; ireland is a poor example of europe as a whole, having had more in common with a euroized iceland, but this could become an altogether too common and tragic theme.

“The S&P downgrade was a kick up the backside,” said Jim Power, chief economist at Friends First in Dublin. “There is a short-term firefighting issue in the budget and a longer-term sustainability issue.”

i suspect ireland is about to find out that cutting government spending will mean larger, not smaller, deficits as economic activity and tax revenues crash out in the aftermath. "sustainability" is something politicians know precious little about in good times and should pay even less attention to in crisis. richard koo recently remarked that ratings agencies, as counterproductive in their evaluations of the public balance sheet during depressions as they were in evaluating private credit during the boom, must be broadly ignored for the duration as govenrments preserve global incomes and deposits through fiscal deficits.

furthermore, changes in trade policy that might reinforce the collapse are still nascent.

ultimately, these are political, and not economic, questions whose outcomes have yet to be determined. i have long been a critic of democracy and won't hide the fact that i think it will serve us particularly poorly now. should raging populism become the driver of policy in world capitals -- as has too often been the case in the past -- the bottom can and will yet drop out.

UPDATE: krugman:

What Eichengreen-O’Rourke show, it seems to me, is that knowledge is the only thing standing between us and Great Depression 2.0. It’s only to the extent that we understand these things a bit better than our grandfathers — and that we act on that knowledge — that we have any real reason to think this time will be better.

i'd feel a lot better about that if there actually was some sort of economic consensus. it seems to me that the gains in economic understanding, while there, are parsimonious and very unevenly distributed. there were a few folks who understood generally what needed to be done in 1930; trouble was, they were frequently utnumbered and disempowered by those who didn't. i don't think it self-evident that the chessboard of public policy has changed all that much since then.

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Tuesday, April 07, 2009


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.

  • Lack of consumer and business demand. Joblessness keeps climbing and job insecurity among the employed keeps belts tightening. Unemployment benefits make up an ever larger portion of total consumer spending power. This is no doubt reducing overall demand, especially for big purchases like cars and appliances. Businesses are cutting back on inventory and equipment spending, as well.
  • Other programs may be more attractive. The proliferation of government aid programs may be reducing interest in the TALF. Some investors may consider the Public-Private Investment Partnerships from the Treasury a better investment.
  • Fear of political backlash. Although the Fed and Obama administration has made it clear that they do not plan to put compensation and other restrictions on those who issue or buy TALF bonds, its not clear that these promises would or could be kept if an AIG-style populist backlash arises.

not entirely surprising, in spite of treasury's efforts to make it as permissive as possible, opeing what many saw as potential loopholes for exploitation.

UPDATE: more from john carney. not at all unrelated, an unprecedented repayment of consumer credit card debt outstanding. here's the fed's g.19 release and corresponding chart, not yet updated. as noted by rolfe winkler, this is only the beginning of a long, hard slog of balance sheet repair.

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Monday, April 06, 2009


altman on the depression

calculated risk and others have noted roger altman's description of events and the way forward in the financial times.

The rare nature of this recession precludes a cyclically normal US recovery. Instead, we are consigned to a slow, painful climb-out, as are nations such as Japan and Mexico that depend on US demand. The implications for US policy include a likely second round of stimulus, much more federal capital for the banking system and stunning budget deficits that will slow key initiatives for President Barack Obama, such as healthcare and energy reform.

What is unusual is that this is a balance-sheet driven recession, centred on the damaged financial condition of both households and banks. These weaknesses mandate sub-normal levels of consumer spending and overall lending for about three years.

... [W]e saw a housing and credit market collapse that caused enormous losses among households and banks. The result was a steep drop in discretionary consumer spending and a halt to lending. To see why recovery will be slow, we can look at the balance sheet damage. For households, net worth peaked in mid-2007 at $64,400bn (€47,750, £43,449bn) but fell to $51,500bn at the end of 2008, a swift 20 per cent fall. With average family income at $50,000, and falling in real terms since 2000, a 20 per cent drop in net worth is big – especially when household debt reached 130 per cent of income in 2008.

... [H]ousehold balance sheets will not be rebuilt soon. Home values will keep falling through mid-2010 and there is no precedent for equity markets, still down 45 per cent from their peak, to make those losses up in just two years. It is illogical, therefore, to expect a full snap-back in the consumer sector in 2010 or 2011. This alone mandates a drawn-out, weak recovery. ...

This weak outlook is likely to force a second injection of spending rises and tax cuts in 2010 to prod demand. Despite public opposition, substantially more federal capital will be required for banks. The deficit outlook will worsen, perhaps to $1,000bn annually over 10 years. That will force a slowing of Mr Obama’s investment plans. That is a shame, because those investments are needed, but this balance sheet recession will be too deep.

if someone of altman's stature -- former deputy treasury secretary and founder of investment banking boutique evercore -- is on this page, one can have hope that many others in altman's wired circle are.

he also mentions possible limitations to fiscal stimulus as a result of combined borrowing for both fiscal stimulus and bank recapitalization. however essential as some amount of government aid in the direction of recapitalization is, that does indeed have potential to be seriously problematic. the obama administration must be careful to put demand management first. if it does not, if too much of the cash flow being poured into banks by the private sector is directed at capital transfer and not at maintaining demand, the potential results would seem to me at least fourfold:

  1. a need to float internationally treasury debt more or less equal to that pumped into capital transfers, in spite of much lower trade volumes and a massive global competition among sovereigns to do so, likely at the expense of demand management efforts overseas which we may well feel here at home;
  2. monetization of that same quantity on the part of the federal reserve, with potentially destabilizing consequences for the dollar beyond some murky tipping point of confidence;
  3. a rise in interest rates, forcing increasing amounts of capital out of alternative capital markets, such as that for stocks;
  4. a refusal to authorize sufficiently large deficits to do both, leading to insufficient demand replacement, leading to a deepening of the depression characterized by contractions in incomes, cash flows and yet more asset prices.

in the worst case we could see more than one of these effects, either in succession or simultaneously. none would be particularly welcome.

UPDATE: the recognition of the role of the balance sheet, particularly of debt, is happily increasing. witness via mark thoma quoting from the pages of the wall street journal, juxtaposed with the blogging of paul krugman.

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"But, within two years, concerns over budget deficits and inflation may revive, compelling the Federal Reserve to raise interest rates and Congress to adopt deficit reduction steps."

Jim Hamilton@econbrowser has highlighted studies by John Taylor , as well as offered his own perspective , that this downturn would not have been so severe but for the oil shock of 2008. He blames the Federal Reserve aggravating this commodity boom. Bernanke on the other hand, probably saw ahead, that the slowdown would bring inflation under control eventually. It looks like a case of damned if you do and damned if you don't.
In the real world, what if similarly premature acts to bring down the deficits such as occurred in 1937, Japan in 1997 and 2001 are also similar -- that the price of inaction would create a currency crisis due to untethered inflationary expectations?

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i can't make a good case for or against that, rb -- looking at the yen in 1997 and 2001, or JGB yields, there's not much indication of something like a run. but that's no substitute for having a window on the zeitgeist. the fear of difficulty can be every bit as powerful as the actuality, and i'm sure such reasons were part of the argument.

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The question of the extent to which bailouts and bank recapitalization will pressure treasury funding and interest rates is important... I suspect that the concern is overblown in the same way that concern about funding for fiscal deficit spending has been. As you know, for fiscal stimulus Richard Koo points out that the increase in savings will fund the increase in treasury issuance.

With recapitalizations, again, no money is created or destroyed. To walk through the mechanics:

1. The treasury issues bonds to raise cash for use in recapitalizations (here is the increase in marginal treasury supply, keep reading to see where the offsetting marginal demand comes from).
2. The treasury injects the cash as capital into an organization, thereby adding cash to the asset side of the balance sheet and equity to the liability side.
3. Whether or not writedowns are occurring at the organization is independent of the recapitalization and treasury funding dynamics so I think we can ignore the writedowns here
4. The organization now has two choices:
4a. Put the new cash to "work" (swap cash for assets on asset side of balance sheet) -- in a world with little new loan demand, odds are this means buying treasuries, so this is where the marginal treasury demand increase occurs.
4b. Shrink the balance sheet by paying off debt. The effect is that on the balance sheets of the bondholders, loan assets convert to cash as this debt is repaid. These organizations then face the same choice between re-invest or reduce balance sheet (goto step #4 again!)
- Ultimately the recursion in step #4b stops at organizations or individuals with no need to shrink their balance sheets (i.e., only equity on the liability side), so the marginal increase in treasury demand will show up eventually down the chain.

Anything wrong with this logic?

But this doesn't mean there is nothing to worry about, e.g.:

A. A contracting money supply (to the extent that loans were via fractional reserve lending as opposed to bonds) seems problematic for all asset prices. Though perhaps QE can offset this effect?
B. Too much debt was created on aggregate (Minsky's theories regarding ponzi financing) so it may not all be able to be repaid whether on or off government balance sheets. I guess this gets into the risk of a government debt so large it would have to be defaulted on. I wonder how large that would have to be if Britain really paid down government debt from the level of 250% of GDP! Maybe even Japan (180% of GDP) has hope :)

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An interesting, though probably simple, observation that this is all about preservation, and not about destruction .

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it is, rb, but i would hold at arms length a lot of what baruch says.

he holds a narrative of economic history where IMF prescriptions "worked great". that's highly questionable, and much depends on what you mean by "worked". there's no doubt one can achieve spectacular growth rates in the aftermath of an unimpeded collapse in monetary aggregates. but from what level? there's a reason the IMF is detested throughout the third world. that it worked great from the comfortable distance of new york is perhaps a more truthful submission.

moreover, to say that japan is "in the crapper" and attribute that to the fiscal demand management of 1990-2005 is both to hypersimplify their issues and presume correlation means causation from a great distance.

this is an interesting adjunct, rb, of posen's argument that you mentioned. posen et al thinks things got better thanks to addressing toxic assets following 2002's "takenaka shock" (a combined program of spending reductions and forced writedowns) with an assist to QE. baruch thinks things are still bad thanks to fiscal stimulus. this strange pair seems (in my anecdotal view) to broadly define the widely-held american interpretive biases re: japan -- and while superficially dissonant, both carry a moral undertone of painful reckoning.

posen is wrong on the basis of data, imo. domestic lending out of japan's banks simply did not pick up post-takenaka, even out to 2007 (which is all the data i've seen). the economic recovery that took place there was to some extent export-driven, but as importantly domestic businesses -- having driven aggregate corporate debt down to levels not seen since the pre-export-model 1950s -- began to redirect large cash flows from debt paydowns to economic activities in 2002 and 2003.

now of course they are suffering a different kind of shock, which baruch seems to conflate with the 1990-2005 malaise -- an external shock that strikes at the heart of their economic model as a provider of excess capacity. it is not (imo) properly interpreted as a result of demand management, QE or much else except the nature of japan's economic model and the pressure globalization is putting on it.

but most interesting of all, in my view, is the need -- the moral need -- of people of even widely differing views for a painful reckoning. if i might be so bold, this emotional desire to see pain inflicted in recourse to excess is not rational but nevertheless evident here as elsewhere. it reminds me much of jack lule's book -- the need and will to impose archetypes best described as mythologies onto our situation in order to come to a simian understanding of a just world is extremely powerful. thinking back on the media coverage and the diaspora of analytical responses -- which have not been exclusive, indeed far from it -- one can easily pick out examples of some of lule's master myths: the victim, the trickster, the scapegoat -- and, particularly in this event, the flood.

lule's book is priceless and i shoudl reread it now, but even just this article from the wake of the aceh tsunami may be instructive. the narrative has moved through the devastation phase, the humanity humbed phase, and we are clearly now in the rebuilding phase with a liberal dose of "striking those who have strayed". (this of course regardless of where we are in reality -- this is entirely about perceptions.)

i would suggest we be very careful of who we strike, because it could be the satisfaction of our moral need to strike that could kick off a much deeper destruction.

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You are correct that the current external shock-induced collapse does not imply a failure of the fiscal expansion from 1990-2005. Lule's book sounds interesting, I should check out our public library.

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