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Weekend Economists--The Bah, Humbug! Edition December 5-7, 2008

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:16 PM
Original message
Weekend Economists--The Bah, Humbug! Edition December 5-7, 2008
I'm asking forgiveness in advance, folks. I got up on the wrong side of the year. It was my first week back to full schedule after contracting influenza from a woman who had gotten a flu shot which is only 44% effective this year, by the way, and the windchills are in single digits and it snows every day--in November! And December! and It's Not Supposed To Do This Until Late January, At the Earliest! You'd think we were in Finland, where I spent one memorable winter in long johns and fur, freezing to death. Did you know that forty below is the same in both Fahrenheit and Celsius? And that's not counting windchills.

So I say: "BAH, HUMBUG!"

Humbug on the markets and their roller coaster rides! Humbug on anything the Bush Administration says, does, or thinks!

Humbug on certain computer-based companies that I will not name, since The Machine is listening, which created such manifestly unreliable crap.

I am channeling the great Mogambo Guru, donning my tinfoil accoutrements, and telling it like it was said to me. Post them if you've got them. And don't believe anything you read!

U.S. FUTURES &
MARKETS INDICATORS>
NASDAQ FUTURES-----------------------------S&P FUTURES



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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:24 PM
Response to Original message
1. Financial Crisis Tab Already In The Trillions
http://www.cnbc.com/id/27719011

NOTE THAT THIS REPORT IS SEVERAL WEEKS OLD! SO I'M BEHIND A LITTLE! SO SUE ME!

-November 17, 2008 -- Given the speed at which the federal government is throwing money at the financial crisis, the average taxpayer, never mind member of Congress, might not be faulted for losing track.

CNBC, however, has been paying very close attention and keeping a running tally of actual spending as well as the commitments involved.

Try $4.28 trillion dollars. That's $4,284,500,000,000 and more than what was spent on WW II, if adjusted for inflation, based on our computations from a variety of estimates and sources*.

Not only is it a astronomical amount of money, its' a complicated cocktail of budgeted dollars, actual spending, guarantees, loans, swaps and other market mechanisms by the Federal Reserve, the Treasury and other offices of government taken over roughly the last year, based on government data and news releases. Strictly speaking, not every cent is a direct result of what's called the financial crisis, but it is arguably related to it.

Some 68-percent of the sum falls under the Federal Reserve's umbrella, while another 16 percent is the under the Troubled Asset Relief Program, TARP, as defined under the Emergency Economic Stabilization Act, signed into law in early October. (The TARP alone is bigger than virtually any other US government endeavor dating back to the Louisiana Purchase. See slideshow

http://www.cnbc.com/id/27717424 / )

BETTER VIEW OF TABLE AT LINK

Financial Crisis Balance Sheet
Government Entity Sum in Billions of Dollars

Federal Reserve

(TAF) Term Auction Facility 900

Discount Window Lending
Commercial Banks 99.2
Investment Banks 56.7
Loans to buy ABCP 76.5
AIG 112.5
Bear Stearns 29.5
(TSLF) Term Securities Lending Facility 225
Swap Lines 613
(MMIFF) Money Market Investor Funding Facility 540
Commercial Paper Funding Facility 257


(TARP) Treasury Asset Relief Program 700


Other:
Automakers 25
(FHA) Federal Housing Administration 300
Fannie Mae/Freddie Mac 350

Total 4284.5
Note: Figures as of Nov. 13, 2008

*References include US National Archive, US Dept of Defense, US Bureau of Reclamation, Library of Congress, NASA, Panama Canal Authority, FDIC, Brittanica, WSJ, Time, CNN.com, and a number of other websites.

(Editor's Note: CNBC's Steve Liesman and Sabrina Korber have been keeping a runny tally of the government's efforts, while Sean Entwistle, Yolaiki Gonzalez, Giovanny Moreano and Ariel Nelson researched and computed the data for the comparisons with other major historical events in the slideshow.)


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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 08:48 PM
Response to Reply #1
20. How's That Bailout Going? Henry Paulson's bank-rescue program was always a turkey of a deal.
http://www.motherjones.com/commentary/columns/2008/11/h...

by Nomi Prins




Perhaps this is stating the obvious, but the big US bailout plan hasn't worked so far. I don't just mean the $700 billion granted by Congress through the Economic Emergency Stabilization Act on October 3. I mean none of the related measures have worked, either.

Treasury Secretary Henry Paulson convinced Congress that the sky would fall without a $700 billion cushion. The Fed has initiated a loan program for troubled financial firms, spending trillions of dollars to bail out any company that ever overleveraged anything, and it has chopped interest rates in concert with its global central bank brethren.

And yet, the bloodbath continues. This week jobless claims clocked in at a 16-year highand these figures don't even include the 53,000 job cuts announced by Citigroup, 3,000 by JPMorgan Chase, or up to 6,000 by Sun Microsystems. Nor do they count the cuts that will come from the auto industry, which will be in the tens of thousands if the Big Three survive, and in the millions if they don't. Last week, the Department of Labor announced that in October the US Consumer Price Index had staged its biggest drop in 61 years.

Why are we still listening to painful debates about whether to fix the bad decisions made by top corporate executives, rather than addressing the people at the foundation of the economy?

Recently, Sheila Bair, chair of the Federal Deposit Insurance Corporation, deftly explained the very sensible idea of helping homeowners in danger of foreclosure, as opposed to Paulson's idea of injecting arbitrary amounts of money into banks. This isn't a shot-in-the-dark solution Bair's offering; it's one that the FDIC has made work in a very short period of time. The same period during which Paulson's decisions have, well, not worked.

Bair wants private lenders to do what the FDIC has done successfully: help distressed borrowers. Since the FDIC seized Pasadena-based IndyMac in July, it's been able to reduce loan payments for some borrowers to 38 percent of their income by reducing interest rates, extending terms, or deferring principal payments.

According to the FDIC, "IndyMac has sent out more than 23,000 modification letters to eligible borrowers and has completed more than 5,300 modifications..." With that kind of proven efficiency, Bair proposed a similar $24 billion government-backed bailout program to be used for homeowners more generally.

Paulson didn't warm to her approach.

Since the bailout package was signed into law in October, the global economy has nose-dived. Maybe that wasn't Paulson's fault, but buying equity in banks was his choice.

In mid November, members of Congress on both sides of the aisle were incensed that Paulson flip-flopped on the original intent of his Troubled Asset Relief Program, which was purchase toxic assets from imperiled financial firms, deciding that injecting capital into troubled banks was the best way to dethaw the frozen credit markets. The rest of us can let that concern go. Buying junky assets would have been just as ineffective as buying stock in the companies that processed the junk. On October 28, the Treasury Department spent $125 billion to purchase preferred shares in Goldman Sachs, Merrill Lynch, Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, State Street, and Bank of New York Mellon. Since then, shares in those firms have plummeted an average of 55 percent. That makes the $125 billion investment worth about $69 billion right now.

The big lie was that this capital would go toward easing credit, but it hasn't. Nor will it, for three reasons. First, with banks like Citigroup trading at roughly 10 percent the price of McDonald's shares and struggling for survival, they need to conserve all the capital they can. Second, as long as there is uncertainty among banks as to what kinds of losses lurk within their books, there will be no true credit flow in the industry. And third, consumers will always come dead last on their list of priorities.

But as the nation turns to the next bailout question, whether to come to the rescue of the auto industry, we've got to ask if capital injections or loans are the best way to go. Perhaps the leaders of the Big Three need what the finance industry needs: a Sheila Bair-style solution.

The problem with automakers is their lack of operating cash, not withstanding the group CEO trip to DC to ask for $25 billion more of it. Simply providing cash will only prolong the problem. If Bair's plan can convert 5,300 loans to manageable assets rather than declining ones, and keep people in their homes, maybe a similar program could help GM, Ford, and Chrysler. Say the FDIC took these firms over. A comparable plan could negotiate affordable loans (since banks are sitting on their money) for consumers to purchase auto inventory with appropriate incentives, like upgradeability to energy-friendly cars as they get produced. A sustainable program providing ongoing cash infusion through inventory movement while reducing leverage could have a shot.

But even that might be too late. The fact that their cars weren't selling (first because the companies weren't forward thinking, and then because consumer throttle back on big ticket purchases in general) has created a potentially irrevocable cash shortage. There are those who blame this on pension and health care programs. But GM had $17 billion pension surplus at the end of 2006. Ford recorded a one-time $2.2 billion accounting gain on health care expenses this quarter. So really, it's the income shortfall that's the bigger problem.

Maybe it's wishful thinking, but it would be a good idea to get Bair's advice on this. She seems to be on the right track.

Photo from flickr user The Joy of The Mundane used under a Creative Commons license.

Nomi Prins is a reformed Wall Streeter and a frequent Mother Jones contributor.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 08:56 PM
Response to Reply #20
21. Problem banks stoke fears over FDIC fund
http://www.ft.com/cms/s/0/6b5c80e2-bb26-11dd-bc6c-00007...

By Saskia Scholtes in New York

Published: November 25 2008 19:29 | Last updated: November 25 2008 21:23

The list of problem banks grew by almost 50 per cent in the third quarter, the Federal Deposit Insurance Corporation reported on Tuesday, stoking fears that further bank failures could put the agencys insurance fund under severe pressure.

Sheila Bair, FDIC chairman, suggested more failures were likely in spite of government support for the banking industry. While the US Treasurys capital purchase programme would bolster bank capital levels and revive lending, she said the scheme was not intended to help banks that were not viable, such as those on the problem list.

The number of problem banks, those deemed at risk of failure, grew from 117 to 171 in the third quarter, the largest number since the end of 1995, according to the FDICs quarterly report. Total assets of problem institutions increased to $115.6bn from $78.3bn.

The FDIC is working on plans to raise additional capital to shore up reserves that have been depleted by 22 bank failures so far this year, including Washington Mutual, the biggest bank to go under in US history.

Provisions for current and future failures have reduced the FDICs deposit insurance fund to $34.6bn, down from $45.2bn at the end of June.

The FDIC insures up to $250,000 per depositor in each bank, a temporary increase on the previous level of $100,000 that will expire at the end of 2009.

The agency is required by law to make sure its insurance fund has at least $1.15 for every $100 of insured deposits, a calculation that does not currently include the additional temporarily insured deposits.

The fund slumped to 76 cents for every $100 of insured deposits in the third quarter, a ratio that would be much lower if the temporary $250,000 insurance level were made permanent...

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Dr.Phool Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 09:09 PM
Response to Reply #20
23. Taxpayers out billions so far on bank holdings.
Taxpayers out billions so far on bank holdings
Some Treasury investments down $9 billion in a month, AP analysis finds
http://www.msnbc.msn.com/id/28069615 /




updated 4:31 p.m. ET, Fri., Dec. 5, 2008

WASHINGTON - Stock intended to eventually earn taxpayers a profit as part of the Bush administration's massive bank bailout has lost a third of its value about $9 billion in barely one month, according to an Associated Press analysis. Shares in virtually every bank that received federal money have remained below the prices the government negotiated.

Even as stocks dropped steadily at the opening bell on Friday in reaction to a larger-than-expected number of job losses, a top Treasury Department official told the Mortgage Bankers Association that the tax dollars are being invested in "very high-quality institutions of all sizes."

"We're not day traders, and we're not looking for a return tomorrow" said Neel Kashkari, the director of Treasury's Office of Financial Stability, which oversees the $700 billion financial rescue fund. "Over time, we believe the taxpayers will be protected and have a return on their investment."
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 09:18 AM
Response to Reply #20
46. Martin Wolf Says Big Stimulus Programs by Big Debtor Countries Will End in Tears

http://www.nakedcapitalism.com/2008/12/martin-wolf-says...

One thing I have found troubling is the near-unanimity in the US that we must Do Something about the burgeoning economic crisis, and that Something is big time monetary and fiscal stimulus.

Near unanimity is almost never a good thing in the political and policy realm, since conditions and options are sufficiently complicated so as to make it unlikely that there is a magic bullet.

Not to beat a dead horse, but we have been struck by the number of analogies made to the Great Depression that strike us as wrongheaded. The first is the idea that throwing money at "stimulus" will actually do the job, I see a lot of back of the envelope calculations of what % of GDP it will take to do the job.

But as the misguided tax rebates showed, it is quite possible to devise programs that are largely ineffective (roughly 80% of the rebates went to savings or debt reduction, which is a form of savings). A lot of money has similarly been thrown at the "get credit markets working again" program. And what are the results? Consumer and small business credit slashed, private securitizations a thing of the past, almost no debtor in possession financing (crucial for Chapter 11 bankruptcies), letters of credit scarce and costly, A2/P2 commercial paper at record spreads, and the Fed and Treasury still seeming to create, increase, or extend programs on virtually a weekly basis.

So what economist Tom Ferguson calls the "hydraulic Keynesian" approach might not be as successful as its advocates suggest. And that assumes it is the right remedy. We have argued that Keynes himself would not be on board with the idea of the US leading the stimulus charge:

The operating assumption behind US policy now is seeing the US situation as parallel to that of the US in the Depression, and taking the view, based on the fact that the US seemed to finally shake off the slump with the demands of wartime production and the unprecedented budget deficits that accompanied them. But there were considerable worries in 1946 that the US would fall back into Depression. The conventional view is that pent-up demand carried the US through, after a sharp but very short downturn in 1946.

However, would this strategy have worked in a peacetime setting? The US also emerged from its slump to a world with a tremendous amount of industrial production destroyed by the war. Thus, the US, whose problem in the late 1920s (which didn't look like a problem at the time) was that it was a huge exporter, to the point where it sucked up so much gold as to be destabilizing to the financial system, could with 50% of world GDP, revert to its preferred old role with less damaging side effects. Had the rest of the world gone into wartime levels of stimulus along with the US, without the loss of productive capacity, would there ever have been an end of the beggar-thy-neighbor trade policies of the 1930s? International trade didn't just fall, "collapsed" is not an uncommon characterization of the degree of contraction....

Similarly, as we have said before, the US was a world-dominating exporter, as China is now, and had the biggest gold reserves, as China now had the largest FX reserves. Thus it is China that needs to undergo a huge-scale stimulus program to make up for the loss of demand from the US. Keynes, in the 1930s, advocated that the US make up for the demand loss rather than expecting the US's overindebted European trade partners to continue overconsuming....

Yet what is being advocated as a Keynesian remedy is in fact the opposite of what Keynes called for in his day. Keynes' prescription then would lead to a global rebalancing, with the US depending more on internally generated demand and less on its foreign partners (who were defaulting on their government debt). But if it were successfully deployed in the US now, it wold lead to a continuation, of our excessive consumption and China's underdevelopment of its internal demand.

Martin Wolf, in today's Financial Times, comes to a similar conclusion:

With businesses uninterested in spending more on investment than their retained earnings, and households cutting back, despite easy monetary policy, fiscal deficits are exploding. Even so, deficits have not been large enough to sustain growth in line with potential. So deliberate fiscal boosts are also being undertaken...

This then is the endgame for the global imbalances. On the one hand are the surplus countries. On the other are these huge fiscal deficits. So deficits aimed at sustaining demand will be piled on top of the fiscal costs of rescuing banking systems bankrupted in the rush to finance excess spending by uncreditworthy households via securitised lending against overpriced houses.

This is not a durable solution to the challenge of sustaining global demand. Sooner or later....willingness to absorb government paper and the liabilities of central banks will reach a limit. At that point crisis will come. To avoid that dire outcome the private sector of these economies must be able and willing to borrow; or the economy must be rebalanced, with stronger external balances as the counterpart of smaller domestic deficits. Given the overhang of private debt, the first outcome looks not so much unlikely as lethal. So it must be the latter.

In normal times, current account surpluses of countries that are either structurally mercantilist that is, have a chronic excess of output over spending, like Germany and Japan or follow mercantilist policies that is, keep exchange rates down through huge foreign currency intervention, like China are even useful. In a crisis of deficient demand, however, they are dangerously contractionary.

Countries with large external surpluses import demand from the rest of the world. In a deep recession, this is a beggar-my-neighbour policy. It makes impossible the necessary combination of global rebalancing with sustained aggregate demand. John Maynard Keynes argued just this when negotiating the post-second world war order.

In short, if the world economy is to get through this crisis in reasonable shape, creditworthy surplus countries must expand domestic demand relative to potential output. How they achieve this outcome is up to them. But only in this way can the deficit countries realistically hope to avoid spending themselves into bankruptcy.

The UK is closer to the endgame than the US, so it is easier for them to perceive the risks (Willem Buiter has detailed the parallels between the UK and Iceland). The US, with the advantage of its deep Treasury markets and the reserve currency, has more rope with which to hang itself and its hapless creditors.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 09:23 AM
Response to Reply #20
47. Paulson May Ask for the Remaining $350 Billion TARP Allotment
http://www.nakedcapitalism.com/2008/12/paulson-may-ask-...



You have to hand it to Paulson. The man is brazen.

Now, admittedly, he has not asked Congress for the second half of the $700 bailout funds; the Wall Street Journal says merely that he is considering making a request.

Now let us consider;

1. Paulson got the bill passed (remember the timing: it was signed into law October 3) by threatening Congressional leaders that if he didn't have the funding, the result would be financial armageddon. October delivered that anyhow.

2. Paulson first was going to buy troubled assets, and when that turned out not to be such a hot idea (observers saw it as a back door bank recapitalization, with the added advantage of creating phony inflated valuations for crappy paper, useful for those who did not avail themselves directly of the program), he switched gears and started recapitlizing banks directly and inefficiently, putting $125 billion into nine large banks, some of whom profess they didn't need it (and that was a feature, not a bug, with Paulson saying up front that he didn't want to stigmatize banks by singling out the bad ones). Oh, and virtually no strings attached, this was supposed to be user friendly

3. Paulson then renounces the TARP version 1.0 "buy crappy assets" program. Crappy MBS go into a tailspin, necessitating creation of new Treasury/Fed programs to help shore up agency mortgages and asset backed securities, and rescue of Citi.

4. New head of oversight panel, Elizabeth Warren, is already saying that the Treasury is failing about and lacks a strategy.

Put more simply, what pray tell do we have to show for the $350 billion spent so far? Why would you trust this man with another penny, particularly when the terms of the bill put him above the law (although some readers contend that language is unconstitutional). Plus there is no pending emergency to warrant releasing the funds.

But with that lousy fact set, Paulson still has the gall to be noodling making a appeal to Congress for more dough. But then again, those Goldman new business guys were trained to be relentless....
What nonsense is this? Since when was the TARP envisioned as a vehicle for propping up "markets" generally? You'd need to add at least another zero to the commitment to accomplish that scale of manipulation.

From WSJ:

On Capitol Hill, there is little appetite to grant access to the second $350 billion. The skepticism that almost torpedoed the original legislation in September has turned into full-blown revolt amid distrust over implementation and frequent changes to the program.

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pscot Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:27 PM
Response to Original message
2. Well, we can stay here and get trampled
or we can go to the mall and get shot.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:35 PM
Response to Original message
3. Depression 2009: What would it look like?
http://www.boston.com/bostonglobe/ideas/articles/2008/1...


Lines at the ER, a television boom, emptying suburbs. A catastrophic economic downturn would feel nothing like the last one.

By Drake Bennett

OVER THE PAST few months, Americans have been hearing the word "depression" with unfamiliar and alarming regularity. The financial crisis tearing through Wall Street is routinely described as the worst since the Great Depression, and the recession into which we are sinking looks deep enough, financial commentators warn, that a few poor policy decisions could put us in a depression of our own.

It's a frightening possibility, but also in many ways an abstraction. The country has gone so long without a depression that it's hard to know what it would be like to live through one.

Most of us, of course, think we know what a depression looks like. Open a history book and the images will be familiar: mobs at banks and lines at soup kitchens, stockbrokers in suits selling apples on the street, families piled with all their belongings into jalopies. Families scrimp on coffee and flour and sugar, rinsing off tinfoil to reuse it and re-mending their pants and dresses. A desperate government mobilizes legions of the unemployed to build bridges and airports, to blaze trails in national forests, to put on traveling plays and paint social-realist murals.

Today, however, whatever a depression would look like, that's not it. We are separated from the 1930s by decades of profound economic, technological, and political change, and a modern landscape of scarcity would reflect that.

What, then, would we see instead? And how would we even know a depression had started? It's not a topic that professional observers of the economy study much. And there's no single answer, because there's no one way a depression might unfold. But it's nonetheless an important question to consider - there's no way to make informed decisions about the present without understanding, in some detail, the worst-case scenario about the future.

By looking at what we know about how society and commerce would slow down, and how people respond, it's possible to envision what we might face. Unlike the 1930s, when food and clothing were far more expensive, today we spend much of our money on healthcare, child care, and education, and we'd see uncomfortable changes in those parts of our lives. The lines wouldn't be outside soup kitchens but at emergency rooms, and rather than itinerant farmers we could see waves of laid-off office workers leaving homes to foreclosure and heading for areas of the country where there's more work - or just a relative with a free room over the garage. Already hollowed-out manufacturing cities could be all but deserted, and suburban neighborhoods left checkerboarded, with abandoned houses next to overcrowded ones.

And above all, a depression circa 2009 might be a less visible and more isolating experience. With the diminishing price of televisions and the proliferation of channels, it's getting easier and easier to kill time alone, and free time is one thing a 21st-century depression would create in abundance. Instead of dusty farm families, the icon of a modern-day depression might be something as subtle as the flickering glow of millions of televisions glimpsed through living room windows, as the nation's unemployed sit at home filling their days with the cheapest form of distraction available.

The odds are, most economists say, we will yet avoid a full-blown depression - the world's policy makers, they argue, have learned enough not to repeat the mistakes of the 1930s. Still, in a country that has known little but economic growth for 50 years, it matters to think about what life would look like without it.

. . .

There is, in fact, no agreed-upon definition of what a depression is. Economists are unanimous that the Great Depression was the worst economic downturn the industrial world has ever seen, and that we haven't had a depression since, but beyond that there is not a consensus. Recessions have an official definition from the National Bureau of Economic Research, but the bureau pointedly declines to define a depression.

What sets a depression apart, most economists would agree, are duration and the scale of joblessness. To be worthy of the name, a depression needs to be more than a few years long - far longer than the eight-month average of our recent recessions - and it needs to put a lot of people out of work. The Great Depression lasted a decade by some measures, and at its worst, one in four American workers was out of a job. (By comparison, unemployment now is at a 14-year high of 6.5 percent.)

In a modern depression, the swelling ranks of the unemployed would likely change the landscape of the country, uprooting people who would rather stay where they are and trapping people who want to move. In the 1930s, this took the visible form of waves of displaced tenant farmers washing into California, but it also had another, subtler effect: it froze the movement of the middle class. The suburbanization that was to define the post-World-War-II years had in fact started in the 1920s, only to be brought sharply to a halt when the economy collapsed.

Today, a depression could reverse that process altogether. In a deep and sustained downturn, home prices would likely sink further and not rise, dimming the appeal of homeownership, a large part of suburbia's draw. Renting an apartment - perhaps in a city, where commuting costs are lower - might be more tempting. And although city crime might increase, the sense of safety that attracted city-dwellers to the suburbs might suffer, too, in a downturn. Many suburban areas have already seen upticks in crime in recent years, which would only get worse as tax-poor towns spent less money on policing and public services.

"You could have a sort of desurburbanization phenomenon," suggests Michael Bernstein, a historian of the Depression and the provost of Tulane University.

The migrations kicked off by a depression wouldn't be in one direction, but a tangle of demographic crosscurrents: young families moving back to their hometowns to live with the grandparents when they can no longer afford to live on their own, parents moving in with their adult children when their postretirement fixed incomes can no longer support them. Some parts of the country, especially the Rust Belt, could see a wholesale depopulation as the last remnants of the American heavy-manufacturing base die out.

"There will be some cities like Detroit that in a real depression could just become ghost towns," says Jeffrey Frankel, a Harvard economist and member of the National Bureau of Economic Research committee that declares recessions. (Frankel does not, he emphasizes, think we are headed for a depression.)

. . .

At the household level, the look of want is different today than during the last prolonged downturn. The government helps the unemployed and the poor with programs that didn't exist when the Great Depression hit - unemployment insurance, Medicaid, food stamps, Social Security for seniors. Beyond that, two of the basics of existence - food and clothing - are a lot cheaper today, thanks to industrial agriculture and overseas labor. The average middle-class man in the late 1920s, according to the writer and cultural critic Virginia Postrel, could afford just six outfits, and his wife nine - by comparison, the average woman today has seven pairs of jeans alone. So we're less likely to see one of the iconic images of the Great Depression: Formerly middle-class workers in threadbare clothes lining up for free food.

If we look closely, however, we might see more former lawyers wearing knockoffs, doing their back-to-school shopping at Target or Wal-Mart rather than Banana Republic and Abercrombie & Fitch. Lean times might kill off much of the taboo around buying hand-me-downs, and with modern distribution networks - and a push from the reduce-reuse-recycle mind-set of environmentalism - we might see the development of nationwide used-clothing chains.

In general, novelty would lose some of its luster. It's not simply that we'd buy less, we'd look for different qualities in what we buy. New technology would grow less seductive, basic reliability more important. We'd see more products like Nextel phones and the Panasonic Toughbook laptop, which trade on their sturdiness, and fewer like the iPhone - beautiful, cleverly designed, but not known for durability. The neighborhood appliance shop could reappear in a new form - unlicensed, with hacked cellphones and rebuilt computers.

And while very few would starve, a depression would change how we eat. Food costs remain far below what they were for a family in the 1920s and 1930s, but they have been rising in recent years, and many people already on the edge of poverty would be unable to feed themselves on their own in a harsh economic climate - soup kitchens are already seeing an uptick in attendance. At the high end of the market, specialty and organic foods - which drove the success of chains like Whole Foods - would seem pointlessly expensive; the booming organic food movement could suffer as people start to see specially grown produce as more of a luxury than a moral choice. New England's surviving farmers would be particularly hard-hit, as demand for their seasonal, relatively high-cost products dried up.

According to Marion Nestle, a food and public health professor at New York University, people low on cash and with more time on their hands will cook more rather than go out. They may also, Nestle suggests, try their hands at growing and even raising more of their own food, if they have any way of doing so. Among the green lawns of suburbia, kitchen gardens would spring up. And it might go well beyond just growing your own tomatoes: early last month, the English bookstore chain Waterstone's reported a 200 percent increase in the sales of books on keeping chickens.

At the same time, the cheapest option for many is decidedly less rustic: meals like packaged macaroni and cheese and drive-through fast food. And we're likely to see a move in that direction, as well, toward cheaper, easier calories. If so, lean times could have the odd effect of making the population fatter, as more Americans eat like today's poor.

. . .

To understand where a depression would hit hardest, however, look at the biggest-ticket items on people's budgets.

Housing, health insurance, transportation, and child care are the top expenses for American families, according to Elizabeth Warren, a bankruptcy law specialist at Harvard Law School; along with taxes, these take up two-thirds of income, on average. And when those are squeezed, that could mean everything from more crowded subways to a proliferation of cheap, unlicensed day-care centers.

Health insurance premiums have risen to onerous levels in recent years, and in a long period of unemployment - or underemployment - they would quickly become unmanageable for many people. Dropping health insurance would be an immediate way for families to save hundreds of dollars per month. People without health insurance tend to skip routine dental and medical checkups, and instead deal with health problems only when they become acute - meaning they get their healthcare through hospital emergency rooms.

That means even longer waits at ERs, which are even now overtaxed in many places, and a growing financial drain on hospitals that already struggle to pay for the care they give uninsured people. And if, as is likely, this coincided with cuts in money for hospitals coming from cash-strapped state and local governments, there's a very real possibility that many hospitals would have to close, only further increasing the burden on those that remain open. In their place people could rely more on federally-funded health centers, or the growing number of drugstore clinics, like the MinuteClinics in CVS branches, for vaccines, physicals, strep throat tests, and other basic medical care. And as the costs of traditional medicine climbed out reach for families, the appeal of alternative medicine would in all likelihood grow.

Higher education, another big expense, would probably take a hit as well. Students unable to afford private universities would opt for public universities, students unable to afford four-year colleges would opt for community colleges, and students unable to afford community college wouldn't go at all. With fewer applicants, admissions standards would drop, with spots that once would have been filled by more qualified, poorer students going instead to wealthier applicants who before would not have made the cut. Some universities would simply shrink. In Boston, a city almost uniquely dependent on higher education, the results - fewer students renting apartments, going to restaurants and bars, opening bank accounts, buying books, taking taxis - would be particularly acute.

A depression would last too long for unemployed college graduates to ride out the downturn in business or law school, so people would have to change career plans entirely. One place that could see an uptick in applications and interest is government work: Its relative stability, combined with a suspicion of free-market ideology that would accompany a truly disastrous downturn, could attract more people and even help the public sector shake off its image as a redoubt for the mediocre and the unambitious.

. . .

In many ways, though, today's depression would not look like the last one because it would not look like much at all. As Warren wrote in an e-mail, "The New Depression would be largely invisible because people would experience loss privately, not publicly."

In the public imagination, the Depression was a galvanizing time, the crucible in which the Greatest Generation came of age and came together. That is, at best, only partly true. Harvard political scientist Robert Putnam has found that, for many, the Depression was isolating: Kiwanis clubs, PTAs, and other social groups lost around half their members from 1930 to 1935. And other studies on economic hardship suggest that it tends to sap people's civic engagement, often permanently.

"When people become unemployed in the Great Depression, they hunker down, they pull in from everybody." Putnam says.

That effect, Putnam believes, would only be more pronounced today. The Depression was, famously, a boom time for movies - people flocked to cheap double features to escape the dreariness of their everyday poverty. Today, however, movies are no longer cheap. Nor is a day at the ballpark.

Much of a modern depression would unfold in the domestic sphere: people driving less, shopping less, and eating in their houses more. They would watch television at home; unemployed parents would watch over their own kids instead of taking them to day care. With online banking, it would even be possible to have a bank run in which no one leaves the comfort of their home.

There would be darker effects, as well. Depression, unsurprisingly, is higher in economically distressed households; so is domestic violence. Suicide rates go up in tough times, marriage rates and birthrates go down. And while divorce rates usually rise in recessions, they dropped during the Great Depression, in part because unhappy couples found they simply couldn't afford separation.

In precarious times, hunkering down can become not simply a defense mechanism, but a worldview. Grant McCracken, an anthropologist affiliated with MIT who studies consumer behavior, calls this distinction "surging" vs. "dwelling" - the difference, as he wrote recently on his blog, between believing that the world "teems with new features, new things, new opportunities, new excitement" and thinking that life's pleasures come from counting one's blessings and appreciating and holding onto what one already has. Economic uncertainty, he argues, drives us toward the latter.

As a nation, we have grown very accustomed to the momentum that surging imparts. And while a depression remains far from inevitable, it's as close as it has been in a lifetime. We might want to get a sense for what dwelling feels like.

Drake Bennett is the staff writer for Ideas. E-mail drbennett@globe.com .

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:43 PM
Response to Reply #3
4. U.S. job losses worst since 1974 as downturn deepens By Alister Bull


http://www.reuters.com/article/ousiv/idUSTRE4B437520081...

WASHINGTON (Reuters) - U.S. employers axed 533,000 jobs from payrolls in November, the most in 34 years, as the year-old recession hammered the economy and hardened calls for dramatic government action to restore growth.

The Labor Department said Friday the unemployment rate hit 6.7 percent last month, the highest since 1993, which adds up to 10.3 million Americans out of work, 2 million more than the population of New York City.

The jobless rate, which stood at 6.5 percent in October, would have been even higher but for people leaving the labor force in discouragement over their search for work.

A number of U.S. companies have announced jobs cuts this week, including General Motors Corp and asset manager Legg Mason Inc Friday, a day after phone giant AT&T said it was letting 12,000 workers go. Economists expect the unemployment rate to top 8 percent by late next year....
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:45 PM
Response to Reply #4
5. and from ABC News Headline:
533,000 Jobs Lost in November
Since the Beginning of the Year, 1.8 Million Jobs Have Been Cut by Employers
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:46 PM
Response to Reply #5
6. Sen. Bernie Sanders (I-VT): Unemployment Emergency Requires Urgent Action
http://www.buzzflash.com/articles/alerts/524

BURLINGTON, VT -- Senator Bernie Sanders (I-VT) called today for immediate action to create jobs in the wake of a new report that more than half a million jobs were lost in November, the worst monthly showing in 34 years.

The job losses pushed the unemployment rate to 6.7 percent, the highest rate since the recession of the early 1990s, the Labor Department reported.

Sanders called on Congress to pass an economic recovery package.

"This is an emergency. We need to jolt our economy back to life. Immediate action is needed to create millions of jobs," Sanders said. "The situation is urgent!"

The senator has advocated a stimulus package of at least $500 billion. "After years of neglect, our top priority should be a major investment in repairing our crumbling roads and bridges, fixing our schools, reviving our railroads, and making a major financial commitment to energy efficiency and sustainable energy. Now is the time to move forward aggressively because each $1 billion investment creates up to 47,000 new jobs," Sanders said. "If Congress can fork over $700 billion to rescue the Wall Street fat cats from their reckless gambles, why can't we put millions of Americans to work rebuilding our country as we address the severe economic crisis we face?"

Sanders also said Congress must take a hard look at the manufacturing sector in the United States. "American corporations must reinvest in America and stop taking away our good-paying jobs and sending them overseas."
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:48 PM
Response to Reply #6
7. Stephen Crockett: Is Senator Shelby a Threat to American Economy?
http://www.buzzflash.com/articles/contributors/1860


A BUZZFLASH GUEST CONTRIBUTION
by Stephen Crockett

Senator Richard Shelby (R-AL) has a very negative record when it comes to protecting the economic health of the American nation. He has routinely endorsed every major, so-called "free trade" deal that has been proposed for decades. Shelby has routinely stood in the way of government provided, universal healthcare proposal for decades. Now, Shelby (like most other Republican Senators with similar voting records) is blocking the federal bridge loans to the American auto companies designed to save the American auto industry.


The stakes are huge. A million auto worker retirees have their healthcare and pensions put at risk by Shelby's unpatriotic and reckless actions. The ripple effect of not approving the loans could destroy one out of ten jobs in the American economy.


Political and economic pundits, along with most officeholders, have refused to link the economic crisis facing the auto industry to government policy. The situation facing the auto industry is more a result of bad government policy than bad management decisions. The attempt by politicians such as Shelby to blame labor unions is factually wrong and, in my opinion, intentionally dishonest. Shelby and his Senate allies created this auto industry crisis by adopting economic policies that have crippled the American economy.


All industrialized nations except the United States has government provided, universal healthcare. Only in America, do we place the costs of workers' healthcare and their families' healthcare on the backs of employers. This puts our employers at a huge competitive disadvantage with foreign corporations.


At the same time, foreign governments have helped their auto manufacturing in terms of research and development (R&D) much more than the American government has in recent decades. Senate Republicans have routinely placed the profits of HMOs, drug companies, and insurance companies over the health of American manufacturing. Shelby has undermined both the personal health of hundreds of millions of American citizens and our industrial base for decades.


Our nation spends 17% of our total economy on healthcare. We have 47 million uninsured and many more underinsured citizens. Our industrial competitors in Europe, Asia, and Canada spend 8% of their economies on healthcare. They cover all their citizens' healthcare needs.


Without government provided, universal healthcare, it is economic death for American manufacturing to open up our borders to so-called "free trade" with nations who provide such healthcare to their citizens. Shelby and his Republican Senate allies are trying to murder American manufacturing.


The auto industry bridge loans are badly needed. Failure to pass these loans would be more than just irresponsible. It would be a threat to our economic and military national security. We cannot remain a major military power without a vibrant industrial base, especially in vehicle manufacturing.


We need to address the long-term government policies that created the current crisis after approving the auto industry bridge loans. We must either adopt government provided, universal healthcare by passing legislation such as the Medicare For All Bill (HR 676) or ending tariff free imports in manufactured goods. We need to adopt a Re-Industrialization Policy designed to restore our economic health in the world economy. We must end the political dominance of the economic elite in our federal government by replacing politicians such as Shelby with economic patriots who actually care about working Americans and national security.


Stephen Crockett, host of Democratic Talk Radio and Editor of Mid-Atlantic Labor.com.
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Mojorabbit Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 12:05 AM
Response to Reply #3
33. He speaks of people not
leaving their homes but what happens when these people lose their homes? What if they do not have relatives they can live with? Will we see an even greater upsurge in tent cities?
Otherwise I think he may be right but I wonder if there will be an upswing in civil unrest. Interesting times for sure.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 08:28 AM
Response to Reply #3
34. In Other Words, Looks Like More of the Same, Harder and Faster
by those descriptions, we've been in Depression for at least 8 years...
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 09:08 AM
Response to Reply #3
43. Metal prices fall further than during Great Depression
http://www.telegraph.co.uk/finance/newsbysector/industr...


The price of key industrial metals has fallen further over the last four months than occurred during the worst years of Great Depression between 1929 and 1933, according to research by Barclays Capital.

By Ambrose Evans-Pritchard
Last Updated: 7:29AM GMT 03 Dec 2008


Kevin Norrish, the bank's commodities strategist, said the average fall in the price of copper, lead, and zinc has been roughly 60pc since the peak in July this year. All three metals were traded on the London Metal Exchange in the inter-war years so it is possible to make a comparison.

Prices for the three metals fell 40pc from their highs in 1929 before touching bottom in 1933, with the bulk of the fall in 1930 as the slump spread worldwide. "Lead and zinc have already lost more than they did in the 1930s," he said.

Copper was hit hardest during the Depression, despite the electrification drive in the US and the Soviet Union, falling 70pc at one stage before creeping back in the mid-1930s. The reason was an 85pc fall in US construction, then the biggest user of the metal.

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BeatleBoot Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:52 PM
Response to Original message
8. "Detroit could become a Ghost Town..."
Lol!

It already IS a Ghost Town.

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:58 PM
Response to Reply #8
11. You Said It!
When I came back home, I cried.
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BeatleBoot Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 08:00 PM
Response to Reply #11
13. The Vernor's is on me!
:D
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 08:08 PM
Response to Reply #13
15. I'll Bring the Vanilla Ice Cream
Boston Coolers all around--a drink that Boston has never heard of!
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Dr.Phool Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 09:10 PM
Response to Reply #15
24. Is the bar open yet?
We need a Happy Hour after today.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 09:22 PM
Response to Reply #24
25. You May Do the Honors
I'm going to get some shut eye.
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Hugin Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 10:05 PM
Response to Reply #15
26. I'm not even sure I can get a Vernor's around here anymore.
Edited on Fri Dec-05-08 10:06 PM by Prag
I used to drink them all the time...

:beer:

http://en.wikipedia.org/wiki/Vernors
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DemReadingDU Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 10:14 PM
Response to Reply #26
27. I remember Vernors

:toast:

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Hugin Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 10:34 PM
Response to Reply #27
32. A friend of mine used to have a case sent down now and then...
:toast:
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Dr.Phool Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 10:05 PM
Response to Reply #26
69. My wife went out to pick up some ginger ale this evening.
Edited on Sat Dec-06-08 10:24 PM by Dr.Phool
She brought home a twelve pack of Canada Dry, and a 2 liter bottle of Vernors! I'm drinking some now. :beer:

I think she went to Publix.
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Hugin Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 10:23 PM
Response to Reply #69
71. I'm having one of my favorites...
The cheapest Lemon/Lime soda I could find. Chilled 'till it makes my teeth hurt! :beer:

:toast:
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:54 PM
Response to Original message
9. UN team warns of hard landing for dollar

http://www.ft.com/cms/s/12eab3b4-bf06-11dd-ae63-0000779...

By Harvey Morris in New York

Published: December 1 2008 08:48 | Last updated: December 1 2008 08:48

The current strength of the dollar is temporary and the US currency risks a hard landing in 2009, according to a team of United Nations economists who foresaw a year ago that a US downturn would bring the global economy to a near standstill.

In their annual report on the world economy published on Monday, the economists said the dollars sharp rebound this autumn had been driven mainly by a flight to the safety of the international reserve currency as the financial crisis spread beyond the US.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 07:57 PM
Response to Original message
10. Harvard endowment loses $8bn in four months
http://www.ft.com/cms/s/0/639c4b18-c192-11dd-831e-00007...

By Rebecca Knight in Boston


Harvard, the worlds wealthiest university, said that its endowment lost 22 per cent, or $8bn, in the first four months of the fiscal year, underscoring how higher education has been hard hit by the global financial crisis.

The decline brings the schools endowment from $36.9bn on June 30 to $28.7bn (22.5bn, 19.3bn) by the end of October.

Drew Faust, Harvard president, and Edward Forst, the schools executive vice-president, described the impact of the loss in a letter sent to the universitys deans late on Tuesday evening.

To put a loss of that size in historical context, over the last at least 40 years, Harvards worst single-year endowment return was a negative 12.2 per cent in 1974, and at that time our endowment stood at less than $1bn and funded a much less significant proportion of university operations, read the letter, which is on the colleges website.

Since that time, there have been only three years of negative performance, with returns ranging from minus 0.5 per cent to minus 3 per cent.

The university is preparing for a 30 per cent reduction in its endowment by the end of the year, the letter warned. A report issued last month by Moodys Investors Service said that most university endowments had declined between 15 and 30 per cent between August and November...Many colleges have adopted economy measures such as halting faculty raises, freezing all new hires and delaying capital investments to compensate for their shrinking endowments...Like many institutions, Harvard relies on revenue generated by its endowment to cover operating costs. In Harvards case, income distributed from the endowment now funds 35 per cent of the its overall operating budget, and some of its schools rely on endowment income to cover more than 50 per cent of their expenses....
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 08:00 PM
Response to Original message
12. Funny Story About That Cartoon Above
When I first saw it, in my Hotmail account, I thought it said "Managers for Sale 50% Off"

And I thought that was still far too high.
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DemReadingDU Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 10:15 PM
Response to Reply #12
28. lol

:rofl:
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Hugin Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 10:26 PM
Response to Reply #28
30. That's exactly what I thought when I saw it on the OP!
:rofl:
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 08:07 PM
Response to Original message
14. AIG sells Swiss private bank to Abu Dhabi group
http://www.ft.com/cms/s/0/a701c5f6-bf79-11dd-9222-00007...

By Haig Simonian in Zurich and Robin Wigglesworth in Abu Dhabi



AIG on Monday announced that it had sold its Swiss-based private bank to an investor group from Abu Dhabi, its first significant disposal since it was taken over by the US government in a massive bail-out.

Aabar Investments PJSC, a quoted investment group linked to the Abu Dhabi government, said it paid SFr307m ($253m) for the private bank, and would also assume outstanding loans of up to a maximum of SFr100m.

AIG Private Bank, which had assets under management of SFr21bn at the end of last year, is the first financial sector investment made by Aabar, which is primarily an oil and gas investment company.

An announcement had been expected as early as 10 days ago but the closing of the deal was delayed by legal complications in the US, because the sale represented the first significant dismemberment of AIG since the giant US insurer was rescued by the US government.

A Swiss private bank available for sale doesnt happen often, Mohammed Al Husseiny, chief financial officer of Abaar, told the Financial Times. We know the bank has been looking to grow in the Middle East and we hope we can help.

...Founded in 1965, AIG Private Bank was originally a vehicle for the funds of top AIG Group executives, but soon broadened out into a traditional Swiss private bank. Net profits at the bank, which has about 530 staff, fell slightly to SFr31.3bn last year from SFr36m in 2006...AIG Private Bank will continue to be run by its present management, but will be rebranded. No new name has as yet been revealed.

-------------------------
UBS advised AIG on the deal.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 08:40 PM
Response to Reply #14
18. AIG to pay retention bonuses to executives
http://www.ft.com/cms/s/0/d2c5989e-bc12-11dd-80e9-00007...

By Greg Farrell in New York

Published: November 26 2008 23:41 | Last updated: November 26 2008 23:41

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

In a regulatory filing on Wednesday, the insurance group disclosed that Jay Wintrob, an executive vice-president, had put off receiving the first instalment of his $3m retention bonus from December to April 2009. He will receive the second instalment, originally scheduled to be paid out in December 2009, in April 2010. David Herzog, AIGs chief financial officer, also opted for the later payment schedule.

The retention bonuses for 130 key executives were disclosed by AIG in September, after the US government rescued the firm from bankruptcy by purchasing 79.9 per cent of the company for $85bn. After the government takeover, Edward Liddy, the former Allstate chairman, was named chief executive and AIG offered retention bonuses to Mr Wintrob, head of AIGs retirement services division, among others.

In October, AIGs management was embarrassed by the disclosure that the company spent $440,000 on a weekend retreat in California for senior performers.

The company announced on Tuesday that Mr Liddy would be paid a salary of $1 for 2008 and 2009, and that Paula Rosput Reynolds, who joined AIG as chief restructuring officer in October, would receive no salary or bonus for 2008.

The company said the other five members of AIGs seven-member leadership group would not receive annual bonuses for 2008 or salary increases through 2009.

AIG also said that the companys senior partners, about 60 executives, would not earn long-term performance awards in 2008, not earn salary increases in 2009, and that the groups annual bonuses would be limited.

An AIG spokesman said on Wednesday that retention bonuses were different from the annual bonuses included in Tuesdays statement. In September, Mr Liddy pledged to sell off significant portions of AIGs international operations in order to pay back the government loan. The company said at the time that retention bonuses would be necessary to maintain continuity and value at various AIG units.

Retention bonuses are a better alternative for the repricing of option awards so long as they are reasonable, fully disclosed and truly needed to retain talent, said Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees union.

But in this market we dont see much clamour for executives who made big bets, cannot make risk and were paid more than they are worth, he added.
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Hugin Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 10:24 PM
Response to Reply #18
29. Hey, I'm pretty talented too... Where's my 'retention bonus'?
I must admit driving a multi-billion dollar business into the ground requires a certain talent... But, is it the
type of talent you want to pal around with?

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 08:30 AM
Response to Reply #29
35.  Well, Look At How Hard the Guys Are Trying To Outdo Each Other

Of course, they all look like pikers compared to our Fearless Leader.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 08:59 AM
Response to Reply #18
42. Thoughts for the Day: AIG, Private Equity and Venture Capital
Edited on Sat Dec-06-08 09:01 AM by Demeter
http://www.informationarbitrage.com/2008/12/thoughts-fo...


AIG: Maurice Greenberg's piece in today's Wall Street Journal

http://www.informationarbitrage.com/2008/12/thoughts-fo...

nearly provoked an attack of apoplexy. I'm not sure if I've read such a slanted, self-serving editorial in a long, long time. I'm pretty shocked that the WSJ would publish such pandering drivel. Be that as it may, we all know that the Big Mo controls gobs of AIG shares both directly and through his management of CV Starr, so let's just say that we know where he is coming from. When he starts out with the bailout-inconsistency argument, he kind of had my ear. But when he went on to praise the Citigroup package while chastizing the AIG deal, I couldn't help but call bull$hit.

To date, the government has shown everything but a consistent approach. It didn't give assistance to Lehman Brothers. But it did push for a much-publicized and now abandoned plan to purchase troubled assets. The government also pushed for a punitive program for American International Group (AIG) that benefits only the company's credit default swap counterparties. And it is now purchasing redeemable, nonvoting preferred stock in some of the nation's largest banks.

The Citi deal makes sense in many respects. The government will inject $20 billion into the company and act as a guarantor of 90% of losses stemming from $306 billion in toxic assets. In return, the government will receive $27 billion of preferred shares paying an 8% dividend and warrants, giving the government a potential equity interest in Citi of up to about 8%. The Citi board should be congratulated for insisting on a deal that both preserves jobs and benefits taxpayers.

But the government's strategy for Citi differs markedly from its initial response to the first companies to experience liquidity crises. One of those companies was AIG, the company I led for many years.

********************

The maintenance of the status quo will result in the loss of tens of thousands of jobs, lock in billions of dollars of losses for pension funds that are significant AIG shareholders, and wipe out the savings of retirees and millions of other ordinary Americans. This is not what the broader economy needs. It is a lose-lose proposition for everyone but AIG's credit default swap counterparties, who will be made whole under the new deal.

The government should instead apply the same principles it is applying to Citigroup to create a win-win situation for AIG and its stakeholders. First and foremost, the government should provide a federal guaranty to meet AIG's counterparty collateral requirements, which have consumed the vast majority of the government-provided funding to date.

********************

The purpose of any federal assistance should be to preserve jobs and allow private capital to take the place of government once private capital becomes available. The structure of the current AIG-government deal makes that impossible.

The role of government should not be to force a company out of business, but rather to help it stay in business so that it can continue to be a taxpayer and an employer. This requires revisiting the terms of the federal government's assistance to AIG to avoid that company's breakup and the devastating consequences that would follow.

Hank, you've got to be kidding me. The U.S. taxpayers saved Citigroup's life, and for that we may get up to 8% of the company. THAT is called a "punitive program" in Hank's parlance for the U.S. taxpayer. In my world when you save a company you own ALL the equity, not 1/12th of the equity. The fact that the taxpayer gets up to 80% of AIG - now that starts to make sense. I agree with the Big Mo's contention that "The purpose of any federal assistance should be to preserve jobs and allow private capital to take the place of government once private capital becomes available." But that has nothing to do with post-restructuring equity ownership. He then pulls on the heartstrings by saying "The maintenance of the status quo will result in the loss of tens of thousands of jobs, lock in billions of dollars of losses for pension funds that are significant AIG shareholders, and wipe out the savings of retirees and millions of other ordinary Americans." Well, Hank, that is 100% on you. YOU should have thought things through before building a company and a culture that gambled it all - and lost. You tell that retiree, that pensioner how you screwed them. That's called integrity. This thinly-veiled call for personally getting bailed out is both insulting and offensive. And I'm not buying it. I'm sure that my fellow U.S. taxpayers aren't, either....
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Joe Chi Minh Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 02:21 PM
Response to Reply #18
54. I wonder what happened to doing your job to the best of your ability, out
of self-respect - or for Christians, more proximately, for the glory of God.

When common bonds of personal and social morality are no longer universally acknowledged on some level, however subliminal and to however small a degree, why would not anomie ensue as the natural consequence, so that the watchword becomes, "Every man for himself"?
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Tansy_Gold Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 05:06 PM
Response to Reply #54
60. "Every man for himself," or as the shruggers would say
"I swear, by my life and my love of it, that I will never live for the sake of another man nor ask another man to live for mine."

Pretty cool, no?

:sarcasm:


Tansy Gold
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Joe Chi Minh Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 05:08 PM
Response to Reply #60
61. The speaker you quote needs to read your signature line, Tansy!
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Tansy_Gold Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 06:06 PM
Response to Reply #61
62. The quote is the Atlas Shrugged equivalent of the lord's prayer or
golden rule or whatever comparison someone wants to make. I suppose the attribution is to John Galt, but of course Ayn Rand wrote it.


The Machado quote was in a supplementary text in a high school Spanish class. I never forgot it.


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Joe Chi Minh Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 06:43 PM
Response to Reply #62
63. Oh, no. Don't say it was Ayn Rand who wrote! If so, she presumably
can't have interpreted it as a disparagement of egocentricity, as I did.

I find it really difficult to believe that so many people see her as some kind of philosopher, rather than an unambiguous, essential psychopath. Then I remind myself of her clone, Milton Friedman, and how well received his putative economic philosophy has been by the fathomlessly covetous. As I quoted somewhere else this evening, though, in the words of the late J K Galbraith Snr (which I expect we're all familiar with): "The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness."

But those two?! Well, Hitler, apparently, was short-listed for the Nobel Peace Prize, so I suppose nothing should surprise about the moral and intellectual stature of the West.
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Tansy_Gold Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 07:25 PM
Response to Reply #63
66. No,of course she didn't. After all, one of her books was titled
"The Virtue of Selfishness."

And she was a personal mentor, if you will, of Alan Greenspan, who used to come over to her place back in the 50s and was treated to chapters of Atlas while she was writing it. http://www.bbc.co.uk/radio4/news/pip/q2rys /


Personally, I *do* see her as a philosopher, but I also see her as something approaching sociopathic (if not quite psychopathic). But her philosophy, much like some religions, finds support mainly among those who already want to (or do) believe in it. As promulgated in Atlas Shrugged, it simply doesn't hold up to its own internal standards of logic, much less in any kind of real world application.

All the way back in the distant past of September, I wrote:

When I started, some months ago, to examine the correlation between the novel and the reality, my gut fear was that the shruggers in our midst had NO CLUE how fragile a fiction Rand had created. They had suspended their disbelief too far. It's one thing to enjoy the make-believe world of a story and quite another to try to make its fantasy real.

As another writer once said, "A blank piece of paper is God's way of saying it ain't easy being God."

Rand's universe was completely in her control; the real world is in no one's.

http://www.democraticunderground.com/discuss/duboard.ph...



I can't remember who the other author was; I got that quote from Writer's Digest a zillion years ago and then later someone told me who originally wrote it, but I've lost the source again. The point being, however, that in creating a viable fictional universe, one has to be very careful to make that world seamless. Richard Matheson explored this somewhat in his novel "Bid Time Return," which is on one level a very pleasant romantic sci fi novel, but is on another level a study of the whole concept of willing suspension of disbelief.

As children, we're able to do this much more easily, but as (if) we become critical thinkers, we find it increasingly difficult to set aside the reality we know so that we can engage the fantasy. Most of the time, we do it consciously and temporarily and are easily able to separate the two.

For whatever reason, those who espouse the shrugger "philosophy" seem not to have developed critical thinking skills. They embrace, because it's very comfortable/comforting, a worldview that would not/does not work in the real world.

The other point, of course, is that Atlas Shrugged only deals with the destruction of what Rand saw as the evil of the collectivist world. At the end, the governments have been destroyed and the "victors" are leaving their hide-out to reclaim the world and, one presumes, remake it in a perfectly selfish model. But Rand never addresses the issue of rebuilding, much like boooooosh never addressed the issue of rebuilding Iraq after he destroyed it.

Indeed, it ain't easy being god, but sometimes it can be fun. http://venuslaughed.blogspot.com /


Tansy Gold, laughing all the way (even if sometimes it is a slightly maniacal cackle)



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Joe Chi Minh Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 07:44 PM
Response to Reply #66
67. The puzzle remains just as impenetrable to me. Why would anyone want to suspend their
disbelief in nightmarishly self-centred world?

I read your piece a little earlier, and I must say you have a gift for making that young woman, Ivy, sound very alluring! Subtle in an emphatic kind of way(!), like the YouTube video clip from Pulp Fiction of Uma Thurman dancing with John Travolta. You know those weird mating rituals and displays of some birds - her routine seems a bit like them. It's almost as if her dancing creates the music; a fantastic dancer. She's looks a tall girl, but even before she starts dancing, her every gesture is ultra feminine.

If you haven't seen it, here it is:

http://uk.youtube.com/watch?v=zoUEMZnibS8&feature=relat...
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Tansy_Gold Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 08:02 PM
Response to Reply #67
68. Because some people are nightmarishly self-centred.
It's a justification for "I got mine, now you go scratch."

Most of us outgrow that in the process of becoming adults, but some never do. "It's all about me," that kind of thing.

I first read it when I was 19 and, because I was a writer, I saw the holes in the plot. Like the penny in the Matheson novel, the holes in Rand's plot kept me from swallowing the philosophy EVEN THOUGH IT APPEALED TO ME. Hey, I was 19, struggling to survive in NYC, impressionable. I fell for SOME of it, but because it's an all or nothing proposition, I could never get comfortable with it. I kept questioning, doubting, examining.

Those who are afraid to examine it -- see Altemeyer http://home.cc.umanitoba.ca/~altemey /
and/or Dean http://en.wikipedia.org/wiki/Conservatives_without_Cons... --- simply believe it, much the way devout christians, jews, muslims believe their sacred writings. And I do use the word "afraid" intentionally: Anyone who wishes to analyze sacred writings is certainly free to do so, but refusal must have a different motivation and that can only be, I suppose, fear.

I'm in an uncommitted relationship with one of those people. While he can and frequently does give lip service to a liberal/progressive agenda, his unguarded responses are far more libertarian and "it's all about me." Very telling.


Tansy Gold
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Joe Chi Minh Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Dec-07-08 08:53 AM
Response to Reply #68
73. It's obvious we're singing from the same hymn sheet. Little wisdom is acquired
Edited on Sun Dec-07-08 08:54 AM by KCabotDullesMarxIII
between the womb and our late twenties, if any. Glad your not committed to the guy.

Somebody on another thread quoted an amazing title for the extreme egocentricity of babies, I think conceived by Freud - something like, "His Royal Majesty"! Psychopaths, apparently, basically don't develop from that mindset/worldview.
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Hugin Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 10:21 PM
Response to Reply #67
70. Gee, I stumbled upon this conversation just in time for an Uma Thurman clip!
How'd I get so lucky!

I'm telling you, I lead a charmed life... :7

:thumbsup:
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Joe Chi Minh Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Dec-07-08 09:23 AM
Response to Reply #70
74. I became a fan of hers after seeing this!
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 08:13 PM
Response to Original message
16. Poland rejects borrow and spend
Edited on Fri Dec-05-08 08:14 PM by Demeter
http://www.ft.com/cms/s/0/53bb2ac6-bf1b-11dd-ae63-00007...

By Jan Cienski in Warsaw


Poland has no intention of trying to spend its way out of the looming economic slowdown, Donald Tusk, the prime minister has said. The comments align his country with Germany rather than the US and the UK as international divisions grow over how to handle the recession.

When I talk to European politicians who boldly tell me how much money they are going to pump into the economy, I pose the question, Where do you have the money for that?, Mr Tusk told the Financial Times.

We arent saying that because we dont have gigantic sums of money, he said. I dont think that borrowing money on a huge scale is a good method of resolving the crisis.

Angela Merkel, the German chancellor, last week criticised the US and other countries for making cheap money a central tool of their recovery strategies.

Ms Merkel, who warned this could lead to another crisis in only five years, made her comments following UK and US announcements of increased borrowing to tackle the downturn.

Separately, Poland on Sunday announced an economic stabilisation package totalling 91bn zlotys (24.1bn), although it contains almost no new spending. The major items were 60bn zlotys to revive the interbank market and a series of smaller measures to make it easier for Poland to gain access to European Union funds.

The effects of this crisis are not particularly visible in Poland, Mr Tusk said. If there are negative effects, that is mainly because things are not always that good with our neighbours.

The government scaled back growth projections for 2009 from the current estimate of 4.8 per cent to 3.7 per cent. The new number is still on the optimistic side; Slawomir Skrzypek, the central bank governor, foresees a rate of growth next year as low as 2.8 per cent.

The slower growth will mean a revenue shortfall of 1.7bn zlotys, but Jacek Rostowski, finance minister, made clear his resolve to keep the deficit unchanged at 18.2bn zlotys.

I am determined investors, both Polish and foreign, should understand we shall maintain the health of Polish public finances and they can trust Poland, and particularly the Polish government, as a debtor, said Mr Rostowski. I see no advantage in increasing the deficit and just finding that this is chewed up by increased debt service payments.

IS 4 GENERATIONS TOO LATE TO RETURN TO THE OLD COUNTRY?
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 08:18 PM
Response to Original message
17. Fed adds $800bn to boost borrowing
http://www.ft.com/cms/s/0/e7411216-bafb-11dd-bc6c-00007...


By Joanna Chung in Washington and Michael Mackenzie and Nicole Bullock in New York

Published: November 25 2008 14:30 | Last updated: November 26 2008 02:40

The US Federal Reserve on Tuesday escalated its efforts to revive the financial system, pledging $800bn to bolster markets for loans to homebuyers, consumers, students and small businesses.

The planned intervention in consumer lending markets had a dramatic impact on interest rates for mortgage-backed securities, which fell to their lowest levels since January after having remained stubbornly high despite Fed interest rate cuts.


However, the announcement also underscored the severity of the credit crisis and raised concerns among some analysts that the Fed might be taking too much risk and printing too much money in response.

I wish there was one action that we could take, and all this would end, and the financial system would turn around ... but that is not the world we live in today, Hank Paulson, Treasury secretary, said in discussing the measures. We are dealing with a historic situation that happens once or twice in a 100 years.

The Fed said it would buy up to $600bn of mortgage bonds issued or guaranteed by government-sponsored housing enterprises such as Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks.

The Fed said it was launching another programme the term asset-backed securities loan facility, or Talf to lend up to $200bn to holders of AAA-rated securities backed by student loans, auto loans, credit card loans and small business loans. The Treasury will use $20bn from its $700bn troubled asset relief programme, or Tarp, to provide credit protection for the Talf. Mr Paulson said that the $200bn facility could expand to include commercial and non-agency residential mortgage-backed securities.

The yield on Fannie Maes 30-year mortgage bond fell as much as 60 basis points to 4.81 per cent, its lowest level since last January. Rates on 30-year conforming mortgages meaning they can be bought by Fannie and Freddie fell to 5.77 per cent from 6.06 per cent on Monday, according to HSH Associates.

However, some analysts expressed concerns about the new programmes impact.

Instead of having the Treasury borrow the cash to fund these programmes through the Tarp, were just going to crank up the magical printing presses and expand the Feds balance sheet, said Stephen Stanley, chief economist at RBS Greenwich Capital. For those not connecting the dots, the Treasury has essentially just outsourced the purchase of troubled assets to the Fed, with lots of leverage.

The Fed moves came as the European Union prepared on Wednesday to unveil its own fiscal stimulus plan.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 08:42 PM
Response to Original message
19. Slims bank buys up to $150m in Citi shares
http://www.ft.com/cms/s/0/8c5ff868-bc0d-11dd-80e9-00007...

By Adam Thomson in Mexico City and Greg Farrell in New York

Published: November 26 2008 23:27 | Last updated: November 26 2008 23:27

Inbursa, the bank owned by Carlos Slim, the Mexican billionaire, has bought up to $150m in Citigroup shares over the past week as the US financial groups stock plunged in value.

Inbursa, Mexicos sixth largest bank, began buying the stock as prices fell on Wednesday last week, and continued the next day when they punctured the $5 mark. The banks brokerage arm is believed to have bought as many as 29m Citigroup shares for about $150m.

Arturo Elis Ayub, Mr Slims son-in-law and the communications director of his Carso Group, on Wednesday confirmed the transactions. bought some shares for clients and investment funds, Mr Elis Ayub told the Financial Times.

Mr Elis Ayub would not specify amounts but a company source confirmed that Mr Slim, one of the worlds richest men, was an Inbursa client in the transactions. Inbursa declined to comment.

Thanks largely to a $20bn US government-backed rescue plan, Citigroup shares have staged a recovery of about 60 per cent from last weeks levels.

On Wednesday, they closed in New York at $7.05, 16 per cent up on the previous days close.

The move has sparked rumours around business circles that Mr Slim might have been gearing up for an attempted purchase of Banamex, Citigroups Mexican subsidiary and the countrys second-largest bank. Local bankers in Mexico City believe that Banamex could be valued at anywhere between $10bn and $20bn.

However, Citigroup sources say that there is no plan to sell Banamex and that the bank would only contemplate doing so as part of a worst-case scenario. Sources close to Mr Slim also dismissed rumours that the billionaire would like to acquire Banamex.

Analysts argue that Mr Slims purchase of Citigroup shares fits seamlessly with his reputation as a value buyer. He has been particularly active in recent months. In September, he became the third-largest shareholder in the New York Times after reporting a 6.4 per cent stake valued at $127m.

At the time, Mr Elis Ayub told the FT: The investment is purely financial. Its a great company, the price is cheap and it gives a good dividend.

Mr Slim, who made his fortune from telecommunications, including Telmex, Mexicos fixed-line carrier, and Amrica Mvil, the pan-American cellular phone company, has been buying other media stock. He has significant holdings in the debt and equity of Mexicos two largest broadcasters, and disclosed a 1  per cent stake in Independent News & Media in May.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 09:07 PM
Response to Original message
22. Henry Blodget: After All That, Stock Market Finally At Fair Value
http://www.huffingtonpost.com/henry-blodget/after-all-t...
http://clusterstock.alleyinsider.com/2008/11/after-all-...

After thirteen months of a historic stock market plunge (yes, the worst since the Great Depression), occasionally interrupted by the usual sucker's rallies (of which last week's move may be the latest or may be the start of a recovery), the stock market is, finally, back to a rough approximation of fair value.

The best measure of fair value is the "cyclically adjusted P/E ratio," which smooths out the fluctuations in corporate profit margins by averaging earnings over 10 years. (The straight P/E ratio, based on one year's earnings, can be wildly misleading: when profit margins are high, P/Es look comfortingly low, and vice versa. Profit margins are highly mean-reverting, so the cyclically adjusted P/E gives a far more accurate picture of market value).

The cyclically adjusted P/E ratio is used by Robert Shiller, Jeremy Grantham, John Hussman, Andrew Smithers, and other analysts. As with most valuation analyses, the underlying assumptions are debatable (e.g., will P/Es be higher in the future than they have been in the past?), so estimates of fair value differ. But most of these folks put fair value for the S&P 500 in the 850-1050 range, and Smithers puts it right at 900.

Andrew Smithers' most recent chart showing the S&P 500 relative to its own average on two valuation measures: cyclically adjusted price-earnings (CAPE) and Tobin's Q, which is a measure of replacement cost. The chart is from early October, when the S&P 500 level was 909.

(See chart here)
http://static.10gen.com/alleyinsider/~~/f?id=4932978b79...

"Fair value" (the green line) is fair value because the S&P 500 has historically spent about half the time below that level--often after spending many years above it. Given the cyclicality of this ratio, if I had to guess, we'd say the S&P 500 is in for a decade or two of below-average values, which argues against the idea that we're suddenly going to have a strong, sustainable valuation recovery.

More likely, the bear market that began in 2000 (after an 18 year bull market) will likely continue for another decade or so, during which stocks will occasionally become truly cheap--as they almost did a week ago, when the S&P 500 hit 750.

The good news is that, after 15 years of being overvalued, the S&P 500 is finally priced to deliver an average long-term return: about 9%-10% in nominal terms and 6% after adjusting for inflation. That's nothing to scream and yell about, but it's likely to be a lot better than cash.


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Dr.Phool Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 08:40 AM
Response to Reply #22
37. That all may be true when operating in a regulated, transparent market.
But, all bets are off, when you're shooting craps, with loaded dice, in a pool full of hammerheads.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 08:53 AM
Response to Reply #37
40. Yves of Naked Capitalism Says the Same, See Next Post
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Joe Chi Minh Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 02:38 PM
Response to Reply #37
56. That's one of the things I love about these economic threads: posters whose minds are as
Edited on Sat Dec-06-08 02:44 PM by KCabotDullesMarxIII
serpentine as the villainous plunderers, and some! Laserheads? You people are utterly, utterly twisted, and we should remember to thank God for you in our prayers!

These threads should be called, "Byzantium Revisited".
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Dr.Phool Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Dec-07-08 03:11 AM
Response to Reply #56
72. As I always say, "A sick mind is a terrible thing to waste".
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Joe Chi Minh Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Dec-07-08 09:24 AM
Response to Reply #72
75. What a classic!
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 08:51 AM
Response to Reply #22
39. Bill Gross Says Stocks May Not Be So Cheap
http://www.nakedcapitalism.com/2008/12/bill-gross-says-...


One of the arguments made by bottom-fishers is that not only are stocks "oversold" (a technical notion that reflects recent trading activity, such as trading volumes, price in relationship to various moving day averages) but are also cheap based on fundamental notions of value.

We have been somewhat leery of any long-term valuation notions given the fact that the US economy has gone through 20 years of growing leverage, with a steepening of debt levels in the mid 1990s, and a further ratchet up starting in 2004. The post 1996 period (starting the time Greenspan made, and then retreated from his famous "irrational exuberance" comment) shows a marked deviation from previous valuation norms (and that further suggests that removal or adjustment of the bubble era would have a big impact on norms as well).



Gross focuses on the role of leverage versus deleveraging, as well as government intervention, in the prospects for stocks. He concludes that those two factors mean that stocks might not be so cheap after all. Note he first looks at measures like the famed Q ratio, which suggests stocks are a bargain, and then P/E ratios, which are only a tad below their mean for the last 100 years.

http://www.pimco.com/LeftNav/Featured+Market+Commentary...

Key excerpt from his monthly missive (boldface his):

We will not go back to what we have known and gotten used to. Its like comparing Newton and Einstein: both were right but their rules governed entirely different domains. We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism, and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other peoples money. ....

Corporate profits have been positively affected for at least the past several decades by several trends that appear to be reversing. Leverage and gearing ratios the ability of companies to make money by making paper are coming down, not going up. In addition, the availability of cheap financing absent governments checkbook will likely not return...."

Gross does not mention that this last upturn saw an unprecedented portion of GDP growth going to corporate profits, as opposed to labor. Labor has had no bargaining power, and companies have been running as lean as possible in a nominally good economy. There will likely be some reversal of rules that worked against unions, but it is not clear whether this will help average workers much.

My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner. Dow 5,000? We dont have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well. One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well.

We noted before that in 1980, financial shares were a mere 8% of S&P 500 earnings versus over 40% at the stock market peak. The financial services industry will shrink as the economy delevers. Some of those earnings are not coming back.
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DemReadingDU Donating Member (1000+ posts) Send PM | Profile | Ignore Fri Dec-05-08 10:27 PM
Response to Original message
31. Hugh Hendry video: Defending Against Deflation

smiling on this video, Hendry's made money
http://www.bloomberg.com/avp/avp.htm?N=adviser&T=Eclect...
:)
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 08:36 AM
Response to Original message
36. It's Saturday! Lawmakers and White House agree on auto aid plan
The windchill is zero, the lake-effect snow is blowing about, and I'm back from tromping around in the dark delivering the local paper, in which it is announced that Nancy Pelosi bent over AGAIN for the Resident.

That woman has passed her sell date.

http://news.yahoo.com/s/nm/20081206/bs_nm/us_autos_bail...

WASHINGTON (Reuters) Congressional Democrats and the White House have reached agreement on emergency aid for U.S. automakers of between $15 billion and $17 billion, two senior congressional aides said on Friday.

The outline of the package was reached after auto executives pleaded with lawmakers for help and U.S. data showed employers axed more than 533,000 jobs in November, the highest monthly job loss in 34 years.

"Congressional Democrats and the White House have reached an agreement," a senior congressional aide said. Another source said negotiators had "agreed in principle to moving ahead but details have to be worked out." More talks were expected on Saturday with Congressional votes on a bill next week.

The temporary funding amount is far less than the $34 billion in loans requested this week by General Motors, Ford Motor, and Chrysler, but it would keep them going into next year.

Daniel Weiss, a senior fellow with the Center for American Progress, said he expected Democratic lawmakers to seek more money for automakers after a new Congress meets and Barack Obama is sworn in as president on January 20.

"A short-term loan agreement is like putting a Band-Aid on a hemorrhage and they will still have to try and save the patient in January," said Weiss.

The automakers say they need help to survive a sharp downturn in sales fueled first by the credit crisis and now recession.

At hearings this week, many lawmakers were skeptical of the automakers' viability, arguing they had failed in the past to cut sufficient costs, ween themselves from making gas guzzlers and produce innovative cars consumers want to buy.

FUNDING TUSSLE

Earlier on Friday, U.S. House of Representatives Speaker Nancy Pelosi dropped her insistence that aid come from the $700 billion financial services bailout fund the Bush administration had refused to use for automakers.

Rep. John Dingell, a Michigan Democrat and long-standing ally of the auto industry, said in a statement the money would come from a $25 billion Energy Department loan fund approved in September to help auto companies meet new fuel-efficiency standards -- an idea the White House has promoted.

In a statement, Pelosi had suggested she could agree with that source of funds under certain conditions.

"We will not permit any funds to be borrowed from the advanced technology program unless there is a guarantee that those funds will be replenished in a matter of weeks so as not to delay that crucial initiative," she said.

Compromising on the source of funds would likely build bipartisan support in Congress for a bill that could be signed into law by President George W. Bush, a Republican.

"This is a good beginning. We will work with leadership to see that it becomes law. Then next year we will work with President-elect Obama for a permanent solution," Dingell said.

Resolving the funding source has been the biggest roadblock so far to reaching an aid agreement. While Democrats and Republicans have agreed broadly in recent weeks that conditions -- like limits on executive compensation -- must accompany any assistance, there are differences on other benchmarks as well as whether government should oversee any restructuring.

White House spokesman Tony Fratto declined to comment on any discussions related to the automakers' bailout.

Both Pelosi and Senate Majority Leader Harry Reid said in statements they expected to have votes next week on an automaker assistance plan.

DISASTER FEARED

Congress and the White House are anxious to prevent the threatened near-term collapse of one or more of the Detroit Three -- which directly employ 250,000 people.

"In the midst of the worst economic situation since the Great Depression it would be an unmitigated disaster," said Rep. Barney Frank, chairman of the House Financial Services Committee, at a hearing with the chief executives from the automakers.

GM and Chrysler have asked for immediate loans to forestall possible failure, while Ford is asking for a $9 billion credit line that would be tapped later if necessary. GM wants $12 billion in loans, with $4 billion of that immediately, as well as a $6 billion credit line. Chrysler wants $7 billion.

Chrysler CEO Bob Nardelli told Frank's committee on Friday the company needs $4 billion to run operations through March. Over the same time frame, GM CEO Rick Wagoner said his company needs $10 billion to keep going.

Ford CEO Alan Mulally said again in testimony his company does not immediately need to use federal funds.

The automakers said they were encouraged by the developments and the plans for votes next week.

Meanwhile, GM, Ford and Chrysler appealed to the Canadian and Ontario governments for billions in emergency loans against a backdrop of fresh layoffs at Ontario assembly plants. "We're fighting for our survival," said Reid Bigland, president and chief executive of Chrysler Canada.

(Additional reporting by John Poirier and Kevin Drawbauh, David Bailey in Detroit; editing by Tim Dobbyn and Todd Eastham)


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Dr.Phool Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 08:57 AM
Response to Reply #36
41. Good morning. I know how you feel.
It's barely 65 here right now. They don't even tell us what the wind chill is. I know it doesn't sound that bad, but when it drops into the 50's now, my arthritis flares up. If I were still up north, I wouldn't be able to walk this morning. We've had a "cold snap" the last few days, and I've been eating percocets like M&Ms.

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Hugin Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 09:14 AM
Response to Reply #36
45. Well, there goes the Unions...
Poof. Losers in the white-collar war on the blue-collar announced by the US Chamber of Commerce about a year
or so ago.

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Dr.Phool Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 08:42 AM
Response to Original message
38. Morning kick!
:kick:
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 09:13 AM
Response to Original message
44. TIPS yields
http://www.econbrowser.com/archives/2008/12/tips_yields...

Greg Mankiw notes some odd behavior this week in the values reported by the U.S. Treasury for the yields on constant-maturity Treasury Inflation Protected Securities.

In normal times when investors anticipate positive inflation, the yield on nominal Treasuries should exceed that on TIPS, since both coupon and principal on TIPS grow with the CPI. That normal state of things was dramatically reversed over the last month, when the 5-year TIPS came to pay 200 basis points more than the 5-year nominal Treasury. But on Monday, the TIPS yield fell 214 basis points, while the nominal yield was down only 22 basis points, leaving the TIPS yield only slightly above the nominal.



Reported yields on nominal and inflation-protected 5-year Treasury securities. Data source: FRED <1>, <2>, and U.S. Treasury <1>, <2>.



Here is Greg's interpretation:

That is a huge change over only a few days. What happened? It appears to be, in large measure, a figment of data construction.

Here is how the data are made:

Real yields on Treasury TIPS (Treasury Inflation Protected Securities) at "constant maturity" are interpolated by the U.S. Treasury from Treasury's daily real yield curve. These real market yields are calculated from composites of secondary market quotations obtained by the Federal Reserve Bank of New York.

And this is what you find in the footnotes:

Starting 12/01/2008, the TIPS yield curve will use on-the-run TIPS as knot points rather than all securities under 20 years.

Why such a large difference between on-the-run (new) vs off-the-run (old) bonds, and why did the issue only arise now? I am not sure, and the Treasury website does not explain, but here is a guess.

TIPS offer asymmetric inflation-protection. If the price level rises, your principal rises as well. But if the price level goes down, you get your initial nominal principal back. (Don't believe me? Click here IN LINK.) A new TIPS bond is great when there is risk of deflation. It is a real bond if prices go up, but more like a nominal bond if prices go down. Heads you win, tails you win also.

An older TIPS bond, however, is not as attractive. A lot of price inflation is already built into the adjusted principal. All of that inflation has to be undone by subsequent deflation before the nominal floor on the principal kicks in. As a result, when there is risk of deflation, the older bond has to offer a higher yield to compete with a newer one.

In other words, after a period of inflation, an older TIPS is closer to a true real bond, whereas a new TIPS is an attractive hybrid. This fact could explain the large jump down in the inferred real interest rate when the Treasury changed the raw bond data it uses. And it can explain why the issue became significant only recently, as people have started to seriously worry about deflation, inducing Treasury to change its calculations.

One implication of this hypothesis is that the real interest rate now reported is not a true real interest rate but is infected by the hybrid nature of these bonds. Yields on older off-the-run bonds may be more meaningful.

Of course, my conjecture could be completely wrong, as this is not my specific area of expertise. Another possibility is that the difference between these bonds instead has to do with changing liquidity premia. But one thing I am sure of: It is best to be wary of data from the TIPS market.

In support of Greg's first conjecture, the 5-year 2011 TIPS and 10-year 2012 TIPS showed the 10-20-basis-point drop of the nominals rather than the 200-basis-point drop of the Treasury's 5-year constant maturity on Monday.

I note that this interpretation would imply that although the spread cannot itself be viewed as the actual expected inflation or deflation rate, its moves over the last month are attributable to concerns about a fall in the price level. On the other hand, Jeff Hallman speculates that another factor in the recent anomalous behavior of the TIPS yields may have to do with whether they are accepted as collateral for certain transactions.

Any additional insights from our readers would be most welcome. SEE COMMENTS AT LINK
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UpInArms Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 09:26 AM
Response to Original message
48. September trial set for ex-Bear Stearns executives
http://www.reuters.com/article/etfNews/idUSN05453249200...

The collapse last year of the High Grade Structured Credit Strategies Master Fund and the Enhanced Master Fund, which invested in mortgage-linked securities, was one of the first signs of major financial trouble at Bear Stearns, which was sold to JPMorgan Chase & Co (JPM.N: Quote, Profile, Research, Stock Buzz) in an emergency deal brokered by the U.S. Federal Reserve this past March.

The indictment contends that, despite expressing concern among themselves that the funds were in grave health and at risk of collapse, Cioffi and Tannin committed fraud by continuing to encourage investors to put money in the funds and telling them market conditions were creating a great buying opportunity.

Cioffi faces an additional charge of insider trading. Prosecutors contend he transferred a portion of his own holdings from one of the funds without telling investors.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 09:30 AM
Response to Reply #48
51. Think They Can Make the Charges Stick?
White collar crime is so difficult to successfully prosecute.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 09:27 AM
Response to Original message
49. Stigma, schmigma
http://blogs.ft.com/maverecon/2008/12/stigma-schmigma /

Stigma is routinely trotted out by assorted monetary authorities as a reason for not revealing the identities of banks or other entities that borrow from the central bank at the discount window or at any of the myriad other lending facilities created since the onset of the crisis. Most recently, the Chairman of the Fed, Ben Bernanke, has used the fear of stigma as an argument for not providing Bloomberg News with information about the identities of the banks that have accessed the Feds ever-expanding family of liquidity and lending facilities (see my previous post on this).

The argument is that to reveal that a bank has chosen to use (or been compelled to use) the lending facilities of the central bank, would cause this bank to be perceived as less creditworthy than before (and than it would have been if its use of central bank facilities had not been revealed). As a result, the bank becomes a less attractive counterparty in private financial transactions. It becomes more costly and more difficult, perhaps impossible, for that bank to fund itself privately. Using the loan facilities of the central bank could therefore, paradoxically, lead to the funding situation of the bank being worse than it would have been had it not borrowed from the central bank.

Before I deconstruct the logical structure of this argument, let me make two general points.

First, empirical support for the stigma hypothesis is sadly lacking. When pushed, central banks provide anecdotal evidence, such as the case of Barclays bank, which borrowed around 1.6 bn overnight in August 2007 at the Bank of Englands standing (collateralised) lending facility following a failure in the computer system that processes trades. This created quite a kerfuffle - the financial crisis was just starting - and Barclays had to issue a statement that it was flush with liquidity before things settled down.

I am underwhelmed by this kind of evidence. First, there is the interest cost of the overnight loan. The standing lending facility (which no longer exists in its August 2007 form today) lent at a rate 100 basis points above Bank Rate. Bank Rate is the rate at which Barclays could have borrowed from the Bank of England, had it had its house/system in order. That translates into an effective interest rate charge on the 1.6 bn of around 0.003 percent, say 50,000.00. No banker gets out of bed for 50,000.00, but even so. In any case, the financial penalties attached to the use of central bank facilities have been steadily reduced. The use of the overnight facilities now tend to attract only a 25 basis points penalty.

Second, the failure of the banks system was embarrassing and possibly worrying. How many customers and creditors of a bank finding itself in a Barclays-type situation would have thought: if this bank cannot even keep its core systems going, and if there is, apparently, not enough redundancy and backup built into the operations of the bank to stop such silly mishaps from happening, what else might be wrong with this bank? I would consider these to be legitimate questions prompted by valid concerns. Of course, these concerns can be expressed and these questions can be asked only if the identity of the bank using the central banks facilities is known to the public. Clearly, the clumsy bank would much prefer not to have its errors and weaknesses made public, but systemic stability is likely to be enhanced by hanging the offending banks out to dry.

Even if there were a reasonable argument for keeping confidential, at least for a short while, the identity of a suckling bank hanging at the public teat, that secrecy argument does not apply to other aspects of the transaction, including the following: how much was borrowed; on what terms; against what collateral; how was the collateral valued, if there were no readily available market prices available; what haircut was applied to these valuations?

The logic of the stigma argument

Now lets consider the logic of the stigma argument.

If the identity of a bank borrowing from a central bank (or Treasury) facility is made public, it either causes stigma or it does not. If it does not there is no problem.

If the identity of a bank borrowing from a central bank (or Treasury) facility is made public and stigma results, there are again two possibilities.

The first is that the stigma is deserved. The borrowing banks reputation for creditworthiness and liquidity prior to the revelation of its borrowing from the central bank, was too favourable. Access to private sources of funds becomes more costly and more difficult as a result, and may even become impossible. There is no problem here. If the bank has enough collateral eligible for funding itself at the central banks or Treasurys facilities, it will be able to survive until it sorts itself out. If it does not have enough eligible collateral, it should not be in business and deserves to fail. A properly designed special resolution regime for banks and other systemically important financial and non-financial institutions, with prompt corrective action and wide powers, can take over the running of all or part of the bank if it is deemed systemically important. If all else fails, part or all of a systemically important bank can be nationalised. Revealing the identity of the bank that is borrowing from the central bank or from the Treasury does not create a problem here. It fact, it is likely to improve the efficiency of the financial system and the process of financial intermediation.

The final possibility is that the identity of a bank borrowing from a central bank (or Treasury) facility is made public and stigma results, but the stigma is undeserved. The bank gets hammered unfairly in its access to private funding. This is bad. How bad is it? In all likelihood not very bad. If the stigma is undeserved, the bank will have ample collateral to fund itself at the central bank or the Treasury facilities, for as long as it takes to convince the markets that that their view of its creditworthiness and liquidity is too pessimistic. If it does not have enough eligible collateral to see it through, say, a six-month spell of unwarranted private market disfavour, then the stigma was in fact deserved. That bank ought not to be in business. Central banks now even lend against collateral that is not good collateral, in the normal sense of the word, that is, central banks lend against collateral that, although it is liquid in normal times and with orderly markets, is likely to be illiquid when it is foisted on the central bank.

Asymmetric information and stigma

All this begs the question: what causes this stigma, if it is indeed unwarranted? What causes the markets to take use of the central banks liquidity and lending facilities to be a signal that a bank is in worse trouble than previously thought? If it is a completely arbitrary and irrational distortion in risk perceptions there is little that can be done to remedy the problem. If however, the underlying reason is asymmetric or private information, there is good news.

Presumably, the bank knows more about its own creditworthiness, its liquidity, the quality of its management, systems and processes, than does the world outside the bank. If, based on the information that is commonly made public by banks, potential private lenders to the banks cannot discriminate between poor and good credit risks, then the good risks could be crowded out of the markets by the bad risks - a form of adverse selection.

But the solution to this dilemma is simple. Provide more verifiable information about the quality of your assets and about the variety and depth of your funding arrangements. Instead, many banks even today continue to exploit established ways and to seek new ways to hide unfavourable information from the markets and the regulators. The latest example of this is the eagerness with which many banks have availed themselves of the recent relaxation in the fair value/mark-to-market auditing and reporting requirements. After brow-beating the SEC and the Financial Accounting Standards Board and bulldozing the International Accounting Standards Board into diluting the application of the new fair value/mark-to-market principles, scores of banks on both sides of the Atlantic have wasted no time in hiding more of their dodgy assets from the preying eyes of the outside world.

Providing accurate, third-party verifiable information that would eliminate the information asymmetry that may underpin the stigma story is not particularly difficult. We are not guessing at things that can only be revealed through individual introspection, but about financial instruments and contracts. There is no deep, technological reason for informational asymmetry here. Its a choice made by those in charge of an organisation.

So, if unwarranted stigma is indeed due to asymmetric information about the creditworthiness and liqudity of banks, there is a rather simple solution: more and better information about both sides of banks balance sheets and about their off-balance sheet exposures.

If the information asymmetry cannot be sufficiently mitigated, and if my earlier proposal for letting the unfairly stigmatised banks fund themselves fully at the central bank and the Treasury for as long as the stigma sticks, is not acceptable, there is a further solution: use the coercive powers of the state to mandate borrowing by all banks.

In this case the regulator (or some other appropriate authority) mandates that all banks make use, regularly and routinely, of the lending facilities of the central bank, regardless of whether the banks need or want it. The willing borrowers would borrow their fill (subject to them having enough eligible collateral). The amount borrowed by the unwilling banks would be set by the central bank, which could randomize it between reasonable bounds, based on the amounts borrowed by the willing borrowers. It would be a small tax on all banks, but if it were to resolve the stigma problem (if there is one), it could be worth it.

There is, in principle, another type of solution; that is to try and achieve a separating equilibrium in which the good banks (currently illiquid but with a low probability of insolvency - solvent, for short) can and do borrow from the central bank but reveal themselves as good banks through some action, or some signal. To achieve such as separating equilibrium, good banks must be able to send a signal to the market that is costly to them (if it were not costly, it would not be a credible signal - it would be cheap talk) but less costly than to the bad banks (currently illiquid banks with a high probability of insolvency - insolvent, for short).

Borrowing from the central bank without the identity of the borrower being secret, cannot itself, however, be viewed as such a separating signal. For both the good bank and the bad bank, borrowing from the central bank when that borrowing becomes public information, is costly; there is financial penalty and there is the public embarassment of being caught short of liquidity. Would the opportunity cost of borrowing from the central bank be lower to the good bank than to the bad bank? Both would reveal they are illiquid, but the opportunity cost of not borrowing from the central bank would appear to higher to the good bank (which is illiquid but solvent if the central bank provides liquidity) than to the bad bank (which is illiquid and insolvent even if the central bank provides liquidity).

This, however, confuses social costs and returns and private costs and returns. As long as the bad banks managers get some benefit from extending the life of their insolvent institution through a loan from the central bank (or as long as there is some probability that the bad bank would regain solvency if if could only get through the immediate liquidity crunch), and as long as there is limited liability for managers and shareholders, a bad bank would be likely to mimick the behaviour of the good bank and borrow from the central bank.

Other than eliminating the information asymmetry by revealing the private information in a verifiable manner, I can think of no obvious signal that would break the back of the adverse selection problem. Mandating borrowing or living with the probably rather mild consequences of the stigma would both seem to be far superior to keeping the identities of the borrowing banks secret, even for a short time.

Conclusion

In my view, the true reasons for the unwillingness of the central banks to make public the identities of the banks using their liquidity or lending facilities have nothing to do with stigma. For the banks, commercial confidentiality is an overriding concern. They see the revelation of the identities of banks borrowing from the central bank as the thin end of the wedge towards more onerous reporting and audit obligations. Even if shareholders might be interested, management and captive boards would not be, as it would dilute their discretion to manage the bank for their own purposes.

There are wider political externalities associated with accepting stigma as an argument for hiding relevant information about the use of public resources. It would create a dangerous precedent as regards accountability for the use of public resources in other areas than liquidity support by the central bank. I am sure many other beneficiaries of states financial largesse would prefer to have their names kept out of the papers. They should not be granted this wish. Accountability for the use of public funds is well worth a bit of stigma.

For the central banks, the refusal to reveal the identities of the borrowers is partly just the manifestation in this particular setting of a long-standing central bank obsession with secrecy and confidentiality. This goes back to the period of central bankers as performers in quasi-religious mysteries, with central banks as their temples. Significant remnants of this ethic can still be found on the European continent and in the US - less so in the UK.

Many central banks are also far too close to the banks they deal with - they have been the objects of cognitive regulatory capture or other forms of regulatory capture. As a result they tend to act as advocates or lobbyists for the banking sector rather than as supervisors, regulators and sources of scarce public funds that have to be properly accounted for.

In addition, revealing the identities of the borrowing banks is likely to be seen by the central banks as part of a political drive towards greater accountability by the central banks for their use of public resources - as asset managers or indeed as portfolio managers. Central banks rightly fear that the pursuit of their traditional objectives - price stability (or price stability and full employment) and financial stability - could be impaired by too close a scrutiny of their performance as managers of ever larger and ever more risky portfolios of public and private securities. Well, welcome to the 21st century world of central banking. This is all there is. You break it, you own it, even if you broke it in a worthy cause.

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 09:29 AM
Response to Original message
50. And It's Off to the Next Gig
I got way behind with 2 weeks of the flu...carry on, WE, in my absence...
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Tansy_Gold Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 10:51 AM
Response to Reply #50
52. Not sure I'm ready to post this, but since I already kinda tucked it in...
on Friday's SMW, here goes.

http://venuslaughed.blogspot.com /


Catch y'all later.



TG
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 04:26 PM
Response to Reply #52
57. What Is This, Tansy? Is It Yours?
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Tansy_Gold Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 04:47 PM
Response to Reply #57
59. Yeah, it's mine (she says in an atypical shy whisper)
It's kind of a Paul Harvey-esque "rest of the story."
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Hugin Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 06:59 PM
Response to Reply #59
64. I have it marked for reading.
I'm kind of busy this weekend, but, I'll make time for it Tansy. :D
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Pale Blue Dot Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 01:55 PM
Response to Original message
53. Don't Buy the 'Stocks Are Cheap' Hype: Weak Earnings May Mean a 'Washout' in '09
Friday was another remarkable day in another remarkably wild week for stocks. After trading as low as 8,118.50 in reaction to the dismal November jobs report, the Dow snapped back in afternoon to close up 3% to 8635.42.

The market's ability to rebound and rally in the face of bad economic news is going to further encourage the bullish camp. With a number of market seers noting the market is at worst fairly valued on a long-term basis, talk of "bottoms" continues to fill the air (and airwaves).

But John Mauldin, author of the popular Thoughts from the Frontline e-letter, isn't buying the "stocks are cheap" mantra just yet.

Mauldin predicts valuations will eventually fall to record low levels meaning low single-digits price-to-earnings ratios before ultimately finding a floor.

"This is going to be a longer recession we've had in a long time earnings are going to be impacted a lot more than people are currently thinking," he predicts. If earnings do disappoint, today's "cheap" P/E ratios will prove to be a sucker's bet.

"You're going to see more earnings disappointments.. .those are what weigh on investors, you keep getting disappointed and disappointed," Mauldin says. "You could see a washout."

http://finance.yahoo.com/tech-ticker/article/yftt_14061... ^dji,^gspc,^ixic,QQQQ,SPY,DIA
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DemReadingDU Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 02:36 PM
Response to Original message
55. Debt Rattle, December 6 2008: Markets and the Lemming Factor

12/6/08 from Stoneleigh at http://theautomaticearth.blogspot.com /


Stoneleigh: In recent years, the prevailing financial orthodoxy has been that markets are efficient mechanisms for resource allocation based on the collective expression of rational human decision-making, the implication being that they are grounded in stabilizing negative feedback. Markets have been seen as essentially dispassionate and objective arbiters of value, and their constant fluctuations as a random walk with no underlying pattern. It would follow therefore, that market timing would not be possible, and the best one could do would be to buy and hold a diversified group of equities chosen on the basis of perceived undervaluation. In my opinion, this model is simply delusional.

As collective human endeavours, markets follow rules of collective, or herding, behaviour that are hardwired in us as they are in other mammals. As humans, we respond subconsciously to the emotional signals of others, validating our own opinions by their conformity to received wisdom. We are genetically programmed to feel reassured by conformity to consensus, whether accurate or not, and to feel acute discomfort if everyone else around us thinks we are crazy. As trend-following is a recipe for social inclusion, consensus is a powerful force. Most market participants have no real information upon which to act. All they have to go on is what they see others doing, and the perceived comfort level of others in taking those actions. Unfortunately, the received wisdom they rely on is a lagging indicator of relatively persistent trends. By the time the advantages of a particular course of action have become common knowledge, it is almost always too late to act on them advantageously, as the gains will have gone to the early movers.

Some trends are persistent enough that they eventually attract a very wide pool of participants, as apparent gains amongst one's peers eventually overcome the caution even of many inherently skeptical people. When they last long enough to overcome the caution of bankers, the result is easy credit to fuel the fire, and a blatant disregard for systemic risk. This is how the largest speculative bandwagons are formed - the ones that become manias and eventually lead to ruin for a large percentage of the population. Prices are continually pushed up, irrespective of any reasonable objective measure of value, by those who think that it doesn't matter how much they pay for something if there will always be a Greater Fool who will pay even more. The evidence of pyramid dynamics - where insiders and early movers benefit at the expense of later generations destined to become empty-bag holders - should be abundantly clear. The pool of Greater Fools is not limitless.

Markets are at heart a predatory wealth concentration mechanism for separating the herd from its money. They allow insiders to feed off the greed and fear of a momentum-chasing majority that is always fully invested at tops and fully liquid at bottoms. While the majority always hangs on for too long, giving back their erstwhile gains and more, insiders take a contrarian stance and reap the rewards. While some call this immoral, it is better described a amoral, and is no more unnatural than any of the many predator/prey relationships that exist within and between other species. While we generally prefer not to think of human societies in such terms, we delude ourselves to think that survival of the fittest does not apply to us. As individuals, we must be proactive rather than reactive, and we must not be complacent as the complacent become prey.

Markets have all manner of fluctuations at all degrees of trend simultaneously, which allow those who understand the dynamic to time their movements, at least probabilistically. Timing will be everything for a few years. Everyone forgets about market timing during long expansions when buy and hold seems so simple, but once volatility is the name of the game, market timing always makes a comeback. The pattern is one of positive feedback, which is inherently destabilizing. For those who may be interested in the application of fractal geometry and Fibonacci mathematics to market timing, I would recommend The Misbehaviour of Markets by Benoit Mandelbrot, or the work of Robert Prechter, including Conquer the Crash .

However, society's collective mood swings from optimism to pessimism are about far more than making, or more often losing, money in the market. Social mood tells you a lot about what people will collectively do, and as such acts as a leading indicator for a large constellation of effects. Prechter refers to this as socionomics and has written many books on the topic (some of which we recommend below). When the majority is in an optimistic mood, trust and confidence increase. People are prepared to take risks because they see a good chance of success, and their confidence becomes a self-fulfilling prophecy. They start companies, and invest for the long term because their 'discount rates' fall as their tolerance for risk increases. In other words, they value the future more than usual (although humans are collectively so biased towards short-termism that this increased valuation of the future is sadly never enough to actually preserve a future for the next generation). Mainstream environmental movements are always formed near highs in social mood for instance (but they disappear very rapidly when hard time short people's horizons drastically). Optimistic populations also increase the social inclusiveness of their political culture over time, weakening the 'us versus them' dichotomy to everyone's benefit.

Whereas long upswings generate trust, confidence, complacency as to risk, social inclusiveness and environmental concern, among other things (colourful clothing, cheerful if sometimes mindless music, an appreciation of beauty in art and literature etc), downturns generate the opposite. As the mood turns to pessimism, and a new negative consensus builds over time, the mood turns from greed to fear to anger, from social inclusion to exclusion (leading to increasing xenophobia and a blame-game), from care for the long term to worrying only about today and maybe tomorrow, and from risk tolerance to risk aversion. (On a more trivial note, people also begin wearing dark or drab colours, listening to angry and discordant music, developing a taste for horror stories and appreciating artwork that is deliberately ugly.) A sense of common humanity is (tragically) weakened by a revival of a tribal 'us versus them' mentality, where 'us' is ever more narrowly defined and 'them' is an increasingly pejorative term. Once again the consensus becomes a self-fulfilling prophecy, as people over-react to the downside to as great an extent as they previously over-indulged to the upside. From the point of view of markets, risk aversion is the killer because lack of trust and confidence translates very quickly into a lack of liquidity. In a very real sense, confidence is liquidity in a world where money is essentially pulled from a hat through fractional reserve banking. Markets freeze up very quickly when the mood turns, and mood can turn on a dime.

If you read the mood of the crowd and watch consensus develop, it is possible to predict where events are headed, since mood is a leading indicator. Mood drives liquidity and financial decisions, which are followed in turn by economic effects and then by political fallout from those economic effects. We are currently witnessing the development of a large scale shift towards a pessimistic mood in the wake of the greatest optimistic bubble in history. As trust and confidence are progressively lost, I am expecting (in roughly this order due to differing time lags) ever-increasing increasing risk aversion, progressively less liquidity, enormous financial losses, angry recrimination leading to witch hunts of those who have been particularly successful at the expense of others, xenophobic persecution and demonization of other cultures, the election of populists prepared to play the blame-game at great cost to everyone, and finally war.

By understanding the nature and direction of social mood, it is possible to resist becoming part of a highly unconstructive consensus, although there may be a social price to pay for doing so. Retaining trust in one's fellow man will become harder and harder, especially at a societal level. This is why we recommend establishing and cementing relationships of trust at the local level as soon as possible, as such relationships are the most valuable thing you can have in times of great upheaval.

click to read related articles and comments
http://theautomaticearth.blogspot.com/2008/12/debt-ratt...

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 04:35 PM
Response to Reply #55
58. Markets Are Meaningful When Honest, Honest When Everybody Pays Cash
Edited on Sat Dec-06-08 04:35 PM by Demeter
Otherwise, it's just another name for rigged.
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DemReadingDU Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Dec-07-08 06:32 PM
Response to Reply #55
76. Debt Rattle, December 7 2008: Energy, Finance and Hegemonic Power


12/7/08 Stoneleigh: The interface between finance and energy will prove to be the most important determinant of the way the Greater Depression we are rapidly moving toward will play out in practice. For those here who may be unaware of peak oil, the point is that global oil production appears to have reached a production peak that it will not be physically possible to exceed. Oil discoveries peaked decades ago and we have since been increasing production from large existing fields using ever more complicated and expensive technology, in order to supply increasing global demand from decreasing reserves.

The production peak does not mean that oil is imminently running out - in fact there is probably half of all the oil that ever existed still in the ground, but it is the expensive and relatively inaccessible half. We can no longer increase production and production will fall over time as we continue to use up reserves which are not being replaced by new discoveries. Although discoveries continue to be made, they are few and far between, and of much smaller size than the giant fields we have relied on for so long. As they are much more challenging to produce, they rely on high oil prices in order to remain commercially viable.

One might imagine that as an essential resource becomes scarcer, it's price would move in one direction only - up - and for a while it appeared that would be the case. However, our energy supply system is set in the context of our existing economic and financial structures. The extreme and increasing stress that these structures are under will interact with future energy scarcity with devastating effect, effectively placing a hard limit on any eventual recovery. Energy is the master resource without which no activity, economic or otherwise, is possible.

The effect of easy credit was to flood commodity exchanges with liquidity, as liquidity fleeing risky securitized assets searched for a safe haven. This pushed up the prices of all commodities beyond what could be justified, sending premature signals of scarcity that attracted even more speculative investment. In this way a bubble was formed, but bubbles always burst, and when they do, the speculative money disappears very quickly, taking price support with it. The price collapse we have seen since is partly a result of speculation in reverse, as speculators go short, and partly a result of falling demand, and that fall in demand has only just begun.

The consequence of that price plunge is a severe impact on the viability of continued fossil fuel exploration and development, and also a similarly significant impact on the viability of energy alternatives such as renewables and efficiency investments. Ilargi has long referred to this as the Law of Receding Horizons, meaning that each time alternatives appear to be reaching the threshold of viability, the combination of the price of conventional energy and the cost structure for the alternative is such that the threshold is never quite reached. Once again, energy prices are falling as costs for alternative have remained high, so that the hoped for developments will again be put on hold.

We are seeing the beginning of a global demand collapse, as the credit crunch takes an ever increasing toll on global economic activity and international trade. Already we are seeing the dire effects on shipping in the Baltic Dry index, thanks to the difficulty in obtaining letters of credit for shipments. Consumers in developed countries are tapped out and trying to repair their tattered balance sheets by cutting back, as are companies and banks. Consumption is therefore falling, which will hit exporting economies very hard indeed. They have spent vast sums, and used huge amounts of raw materials, to build what will now be shown to be an enormous excess of productive capacity. Their demand for raw materials will not recover any time soon, as there will be no demand for their products for a very long time.

For the time being, the on-going demand collapse, which has very much further to go, is causing the price of commodities, and particularly energy, to drop like a stone. This may well continue for a period of time, but the danger is that the demand collapse will lead to a supply collapse, and at that point prices will find a floor and begin to climb again. This price bottom could happen earlier in the coming Depression than would be the case for other goods and services.

Exactly when we might see the impact on supply is not clear, but I doubt if it will be all that long. Already there are many projects with high cost structures which are no longer viable. These are the projects that could have cushioned the down slope of Hubbert's curve (the decline from peak production of oil), but will not now come on line. Although they could in theory be developed at a later date, increasing capital constraints will make financing almost impossible, hence development will be unlikely for a very long time. We will therefore continue to make do with the fields already in production, but many of those are depleting very quickly - Ghawar in Saudi Arabia, Cantarell in Mexico, Burgan in Kuwait and many others.

For a while it will be enough to sustain the much lower level of economic activity that we are headed for, but not for all that much longer, especially since there will be many other 'above ground factors' to consider. For instance, production infrastructure requires expensive maintenance that will be increasingly difficult to perform, separatist movements in producing countries will seek to control resources for their own benefit, productive capacity being fought over will be damaged or destroyed, sabotage by the disaffected with nothing left to lose will increasingly become a factor, and piracy will make delivery much more challenging. Living off our fossil fuel legacy will therefore become progressively more difficult.

Many governments around the world, including those of all the major powers, are well aware of peak oil. In a very real sense in a modern world, oil IS power, as there is no comparable source of concentrated, transportable and flexible fuel. Securing access to it is therefore of the utmost strategic importance. Some governments, like the Anglo-Saxon economies, have so far appeared to place their trust in the global markets and their own perceived ability to outbid the competition. Others, notably China, have been quietly arranging long term bilateral supply contracts directly with producers, thereby taking production off the market.

China's strategy is likely to prove far superior in difficult times when international trade is drying up, the fungibility of oil comes under threat and no one can be sure of being able to outbid the competition. By the time others realize that trusting the market to provide is essentially a modern day cargo cult, they may have been completely out maneuvered. In my opinion, this will be the foundation of the coming shift in hegemonic power towards the Far East, but it will not be a peaceful transition. Resource wars are a given under these circumstances.

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truedelphi Donating Member (1000+ posts) Send PM | Profile | Ignore Sat Dec-06-08 07:10 PM
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65. Now now just because the economy is bad is no reason to beat up on the vaccine people
Their end of the economy is always booming. Even if the product is often defective, ineffective or outright dangerous!
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