Death by Bubble
Posted: October 10, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, The Bonus Class, The Great Recession, U.S. Economy | Tags: bubble economies, Consumer Financial Protection Agency, shadow banking system 2 Comments
Economist Andy Xie says Lehman Brothers died in vain and that it’s just a matter of time before we get hit by another deadly bubble. His guest post at Caijing Magazine is just so dead on that you must go read it.
There has been plenty to learn from last year’s miserable economy and near collapse of key financial markets but U.S. policy makers appear to rebuilding the same system with the same ghastly mistakes in place. We cannot afford to be complacent about this because if it’s done, another huge mishap can’t be far behind. Xie explains that the entire financial system is one big Lehman now and has become much more costly to bail out.
So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars — probably more than US$ 10 trillion when we get the final tally — to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.
‘Absolutely no progress’ may actually be an optimistic estimate of the current situation. No progress would mean, to me, we’re not rebuilding the same time bomb. Xie’s article is remarkable in that it deconstructs the arguments one-by-one that we’re hearing that things are really changing, What we actually have is the proverbial shuffling of the chairs on the financial Titantic.
Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 — about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding.
This, of course, leads to the most fundamental question of all. What happens when the government funding disappears? I admit that I see no end to that infusion unless the Fed or some other central bank becomes spooked by the possibility of inflation. These institutions would have to be rebalancing their portfolios in lieu of all the M&A activity they’ve undertaken this year to be able to live with out cheap government funds. Some of them may be repaying the TARP funds, but the real deal happens when Quantitative Easing and ZIRP ends. We’ve had no indication from the FOMC or Bernanke that that’s in the works any time soon but I can tell you, one little glimpse of inflation and the game ends there.
Now, here’s my favorite point. It’s this bull market where the shadow banking system profits from churning and running up your own portfolio by selling it back and forth between the parent and subsidiaries to create a false sense of momentum.
…financial institutions are operating as before. Institutions led in reporting profit gains in the first half 2009 during a period of global economic contraction. When corporate earnings expand in a shrinking economy, redistribution plays a role. Most of these strong earnings came from trading income, which is really all about getting in and out of financial markets at the right time. With assets backed up by US$ 16.5 trillion in debt, a 1 percent asset appreciation would lead to US$ 16.5 billion in profits. Considering how much financial markets rose in the first half, strong profits were easy to imagine.
Trading gains are a form of income redistribution. In the best scenario, smart traders buy assets ahead of others because they see a stronger economy ahead. Such redistribution comes from giving a bigger share of the future growth to those who are willing to take risk ahead of others. Past experience, however, demonstrates that most trading profits involve redistributions from many to a few in zero-sum bubbles. The trick is to get the credulous masses to join the bubble game at high prices. When the bubble bursts, even though asset prices may be the same as they were at the beginning, most people lose money to the few. What’s occurring now is another bubble that is again redistributing income from the masses to the few.
Yup, there it is. The idea that many of the bigger players are just trying to run up the market enough to entice the suckers back near the top. Catch the one about redistribution? We’re basically using cheap money to finance the reverse Robin Hood scenario one more time.
Who Holds Wall Street Accountable?
Posted: October 5, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, Surreality, Team Obama, The Bonus Class, The Great Recession, The Media SUCKS, U.S. Economy | Tags: Andrew Ross Sorkin, Bear Stearns, Goldman Sachs, Hank Paulson, Investment banks, Matt Taibbi, Morgan Stanley, Simmons Bedding Company, Wall Street Comments Off on Who Holds Wall Street Accountable?
If your answer included any of number regulators or congress with its oversight duties or the traditional media with its watchdog of the public duties sorta answer, that would be a wrong answer. There were so many articles today about past and present Wall Street tomfoolery that I almost forgot to check the Wall Street Journal or The Hill. Instead, I”m relying on my subscriptions to things I’m supposed to be reading in the bath tub with Chopin playing in the background and a glass of Pinot Grigio nearby. Today, the best read came from Vanity Fare and was written by Andrew Ross Sorkin. (My Vanity Fare showed up today along with my latest copy of The Economist with the cover shouting “After the Storm: How to make the best of the Recovery.” ) My bottom line is still that Wall Street caused this and they are not only NOT cleaning it up, they are not being cleaned up.
I’m also checking out Matt Taibbi and TaibBlog now that his infamous vampire squid article in July’s Rolling Stone defined the shadowy world of Goldman Sachs better than just about any thing I’ve recently read. Matt’s blog today takes on naked selling or ‘naked swindling’ in the succinct framing of the Wall Street Deal that I now consider better jargon than that of the derivatives blah blah blah that I was taught in any of my PhD level corporate finance or investment classes. I may be able to do the proof for the Black Scholes formula but I will never be able to prove its social usefulness.
Actually, this takes me back to the Grey Lady and my first read of the day about the now bankrupt Simmons Bedding company that was the cash cow purposely inflicted with mad cow disease. Now days, it’s still more about the arbitrage deal and the leveraged deal that produces dividends than it is about what a company produces and the lives of the workers and long time managers who produce valuable stuff. It’s no longer build it and they will come. It’s leverage it to the hilt, take your dividends now, and find the next sucker with the next model that can hyperactivate the milking machine. It’s another real life example of Gordan Gekko and the greed is good speech. Spend some time with the Simmons story before you hit Taibblog and definitely the Sorkin article in Vanity Fare. It’ll put you in the right frame of mind.
Keith Olbermann is a BOOB (open thread)
Posted: October 4, 2009 Filed under: Women's Rights | Tags: Breast Cancer Awareness Month, NFL, open thread, Real Men Wear Pink 3 CommentsIt’s national BREAST CANCER AWARENESS MONTH YOU IDIOT!!!! Keith Olbermann, today’s biggest boob in the world!!!
Well, the NFL was trying to do something nice by supporting Breast Cancer Awareness month with their Real Men Wear Pink Campaign. Leave it to Keith Olbermann to something completely Freudian on National TV.
Some times being Right doesn’t always make you Feel Good
Posted: October 3, 2009 Filed under: Global Financial Crisis, Team Obama, The Bonus Class, The Great Recession, The Media SUCKS, U.S. Economy, Voter Ignorance | Tags: balanced budget amendment, DeLong, Krugman, Obamanomics, Reaganomics, Stiglitz, stimulus plan, unemployment Comments Off on Some times being Right doesn’t always make you Feel Good
You may remember back in January that I was not happy and very outspoken about the size of the Obama Stimulus plan. I was not impressed by the content or with the mix between tax cuts and direct government spending. You may recall that the Blue Dogs interminable resistance to do anything that might wake their sleeping Republican voters and the desire on the part of POTUS to appease the unappeasable remnants of the Republican party led to a very watered down plan. At the time, all that I could hope was that it might be enough to get the ball rolling. However, I felt that the historical multiplier –especially for taxes– was not going to kick in the way it had in the past.
The release of the miserable unemployment data yesterday (not all that unexpected as you’ll recall) as well as an estimate of our output gap now clearly squares with my earlier view as well as the earlier views of Brad deLong, Paul Krugman, Mark Thoma and Joseph Stiglitz among others. The stimulus was clearly not the blue pill the economy needed. (That last link is from me saying this same thing in July.)
The Washington Monthly says the decision to appease centrists and Republicans looks even worse in retrospect. Now, the media gets it. Color me completely unsurprised because I told you so back then that it wasn’t going to be enough. I even mentioned it recently when it appeared the stimulus plans of German, France, and Japan had already lifted those economies from the worst of it last spring. These countries emphasized direct government spending. We mostly shuffled a few funds as stop gaps and the created a bunch of tax cuts that no one really needs right now.
In February, when the debate over the economic stimulus package was at its height, a handful of “centrist” Senate Republicans said they’d block a vote on recovery efforts unless the majority agreed to slash over $100 billion from the bill.
The group, which didn’t have any specific policy goals in mind and simply liked the idea of a small bill, specifically targeted $40 billion in proposed aid to states. Helping rescue states, Sen. Collins & Co. said, does not stimulate the economy, and as such doesn’t belong in the legislation. Democratic leaders reluctantly went along — they weren’t given a choice since Republicans refused to give the bill an up-or-down vote — and the $40 billion in state aid was eliminated.
At the time, it seemed like a very bad idea. That’s because it was a very bad idea.
In the past, government hiring had managed to somewhat offset losses in the private sector, but government jobs declined by 53,000, with the biggest number of cuts on the local and state levels. Even the Postal Service, which is included in the public-sector job statistics, dropped 5,300 jobs.
“The major surprise came from the public sector, where every level of government cut back,” Naroff said. “The budget crises at the state and local levels have caused an awful lot of belt-tightening.”
It’s still about the Jobs!
Posted: October 2, 2009 Filed under: Global Financial Crisis, The Great Recession, U.S. Economy | Tags: discouraged workers, Paul Krugman, Robert Riech, Underemployment, unemployment Comments Off on It’s still about the Jobs!
I keep repeating this like a mantra, but an economy that relies on households buying 70% of it’s production, and households that rely on wages for 67% of their income, is not going to get healthy until it creates more jobs. That’s why Robert Riech, Paul Krugman, and this Cajun Country Economist are still stuck on job creation and the unemployment rate. It appears the DJ and other stock indexes are taking notice too. This is from today’s Gray Lady.
The American economy lost 263,000 jobs in September — far more than expected — and the unemployment rate rose to 9.8 percent, the government reported on Friday, dimming prospects of any meaningful job growth by the end of the year.
The Labor Department’s monthly snapshot of unemployment dashed hopes that the pace of job losses would continue to slow as the economy clawed its way back from a deep recession. Economists had expected 175,000 monthly job losses.
“People have been celebrating that we’re through the financial crisis, but the underlying issues are all still there,” said Dean Baker, co-director of the Center for Economic and Policy Research. “We’ve lost trillions of dollars in housing wealth, and consumption’s going to be weak. It’s not the ’30s, but there’s really nothing to boost the economy.”
You’ll recall that it’s been two years since the NBER dated the beginning of this Great Recession. That means the U.S. economy has been hemorrhaging jobs for TWO years now. We’ve got it bad and that ain’t good. Robert Reich, President Clinton’s former Labor Secretary has the “Truth about Jobs” in his blog entry today.
Unemployment will almost certainly in double-digits next year — and may remain there for some time. And for every person who shows up as unemployed in the Bureau of Labor Statistics’ household survey, you can bet there’s another either too discouraged to look for work or working part time who’d rather have a full-time job or else taking home less pay than before (I’m in the last category, now that the University of California has instituted pay cuts). And there’s yet another person who’s more fearful that he or she will be next to lose a job.
In other words, ten percent unemployment really means twenty percent underemployment or anxious employment. All of which translates directly into late payments on mortgages, credit cards, auto and student loans, and loss of health insurance. It also means sleeplessness for tens of millions of Americans. And, of course, fewer purchases (more on this in a moment).
Unemployment of this magnitude and duration also translates into ugly politics, because fear and anxiety are fertile grounds for demagogues wielding the politics of resentment against immigrants, blacks, the poor, government leaders, business leaders, Jews, and other easy targets. It’s already started.
That’s right! Because of the way we actually count the unemployed, there are actually a lot more problems out there 
than the unemployment rate measures. All you have to be is employed 1 hour of paid work and that dumps you into the ranks of employed. So that means if you’ve been furloughed, had your hours cut, or had to take up part time employment, you may be miserably underemployed, but your still employed. You also have to be have been actively searching for a job if you don’t have one for the last four weeks to stay in the ranks of the unemployed. You start giving up, you’re considered not in the labor force and by definition not eligible to join the numbers of the unemployed. (These are so-called discouraged workers.)
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