Living La Vida Nada
Posted: April 29, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, U.S. Economy | Tags: Financial Crisis, Financial Times., FOMC, GDP, Martin Wolf, Quantative easing, recession, Willem Buiter, zombie banks 7 Comments
From the Federal Open Market Committee’s (FOMC) policy statement earlier today:
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
It goes on to state that its goal is to bring long term rates down farther by buying “up to an additional $750 billion of agency mortgage-backed securities”, “$300 billion of longer-term Treasury securities over the next six months” and “agency debt this year by up to $100 billion”. The Fed is aggressively using its balance sheet to inject liquidity into the financial system since the already low fed funds rate target is technically as low as it can get now. The Fed is hinting that we may be looking at the recession’s trough soon. Given the release of today’s 1st Quarter GDP, we can only hope and pray.
From Market Watch:
The central bank’s Federal Open Market Committee said that spending has stabilized and that the pace of the downturn appeared to be somewhat slower. The economy could remain weak in coming month but policy actions and “market forces” were aligned to create a gradual upturn, the statement said.
Fed watchers saw little drama in today’s announcement.
“The only major difference between today’s statement and the previous one on March 18 is that today’s cited the fact that most evidence points to a slowing rate of economic decline. Anyone with two eyes and a brain knows this to be the case,” wrote Josh Shapiro, chief U.S. economist at MFR Inc. in a note to clients.
Economists had expected the policy-setting panel to maintain the status quo. The FOMC kept its target interest rate unchanged at an ultra-low 0%-to-0.25% range.
The economy has fared dismally over the past six months — collapsing by the sharpest rate in more than 50 years. The unemployment rate has spiked and business investment has slowed.
Yesterday, Teabagging, Today Sandbagging
Posted: April 26, 2009 Filed under: Bailout Blues, Global Financial Crisis, Team Obama | Tags: bailout, COP, Elizabeth Warren, financial system meltdown, Nancy Pelosi, TALF, TARP, Yves Smith 3 Comments
I can’t tell you how disappointed I am that America’s first woman Speaker of the House has turned into a player for all seasons. First, we find out exactly how much she knew about the torture methods of the Bush Administration and when she knew about it. Then she tells a big lie about it. Rumors still abound that she was wanted Obama as POTUS because she could be the Queen Bee of Capitol Hill. His lack of knowledge and experience was certain to put her in a position of power. Too bad she is more of a demagogue than a democrat because if there was ever a chance to be the Queen of the Hill, it would’ve been with reform of the financial system.
Instead, we’re seeing her go after yet another woman who has tried to champion the voters/taxpayers over big party money. A head line from Yves Smith at Naked Capitalism says it all for you: “On Pelosi’s Duplicity and Apparent Sandbagging of Elizabeth Warren, watch dog of the TARP”. It’s a typical Capitol Hill soap opera if there ever was 
one. As appears customary with everything economic coming out of the democratic wing of our congressional whores, Pelosi is siding with the financial services industry over the voters/taxpayers. Yves first reminds us of the strange dance surrounding the birth of TARP. Remember, life was supposed to be different once the Democrats retook the Congress.
Recall how instrumental Pelosi was in getting the TARP passed. The widely mentioned gambit of Paulson getting on bended knee to plead for her support was a nice bit of theater to cover how readily she fell into line. The other justification for the Democratic leadership support was the claim that Treasury had given a closed door briefing to Senate and House leadership telling them the world would end if the TARP was not passed yesterday.
Some have suggested that Treasury provided data on the potentially disastrous money market fund withdrawals around the time of the Lehman failure (recall the death of Lehman led Reserve to break the buck). but that problem had already been addressed in September in part via the Fed providing non-recourse loans to purchase asset backed commercial paper, and more fully in October via yet another Fed facility. In other words, if the money market fund panic was indeed the scare tactic, the TARP was not the remedy.
But even if we give the devil its due, the performance of the Democratic leadership was pathetic. The most heinous aspect of the bill, putting the Treasury secretary outside the reach of law, was never cut back. The first draft, a doodle on a napkin, was offensive to democratic processes, the second draft added a lot more words but was still way too thin on basics, like objectives, criteria, procedures, and the final draft loaded tons of pork in to assure passage. And the ironies kept multiplying. The bill was wildly unpopular even with the media falling into line (and in the later stages, a clearly orchestrated campaign to have financial services industry employees contact legislators to counter the groundswell of opposition). And it was Senate Republicans who were the last holdouts.
Here’s the soap opera, errr, money line.
So why are we pointing a finger at Pelosi in particular? The next chapter is her appointment of one Richard Nieman to the Congressional Oversight Panel. Under the TARP rules, the House Majority leader selects one of the oversight panel members, so this choice was completely under her control.
W(h)ither Geithner and his TALF
Posted: April 23, 2009 Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, U.S. Economy, Uncategorized | Tags: banks, Elizabeth Warren, TALF, TARP, Timothy Geithner Comments Off on W(h)ither Geithner and his TALF
Neil Irwin of WAPO reported today that the TALF is not having the results trumpeted by the Obama administration. This is leading, again, to speculation about the relevancy of most of these plans and, of course, job security of Treasury Secretary Timothy Geithner.
In its first two months, the government’s signature initiative to support consumer lending has fallen well short of expectations, deploying only a fraction of the amount officials had hoped to extend to stimulate auto loans, student loans and credit card lending.
The slow rollout of the program has frustrated staff at government agencies working on the effort and diminished hopes that they could engineer a rapid return to healthy lending levels, according to interviews with government and industry sources. The initiative also serves as a window into the complexities of designing a giant rescue of the financial system.
The TALF is the private-public partnership that couples the funds of private investors, like hedge funds, and the FED. The hedge funds invest small amounts that are matched by much larger amounts that would presumably come from the Treasury and Tax Payers if they wind up being nonprofitable. The combined funds will supposedly purchase non-toxic, virgin, high rated rated securities to fund everything from student loans and car loans to inventory and capital loans for business. As of yet, they really have failed to do so.
Officials envisioned TALF supporting tens of billions of dollars a month in new lending, saying it could eventually total $1 trillion. But in March, when it was launched, it backed only $4.7 billion in auto loans and credit cards. For April, it logged only $1.7 billion.
Sources involved in the program said private investors have been reluctant to work with the government, which they view as an unreliable business partner. Separately, the brokerage houses that are crucial intermediaries are being exceptionally cautious in the contracts they draw up with participants in the program, in part out of wariness that any mistakes could draw the ire of Congress or the media.
In congressional testimony on Tuesday, Treasury Secretary Timothy F. Geithner said that overall progress is “pretty good” for a program in its early days. Still, he acknowledged that participation was “lower than expected” because of “concern about the conditions that come with the assistance in the program . . . and uncertainty about whether they may change in the future.”
Meanwhile, on the bank front, stupid accounting tricks abound! Which begs the question is any one stupid enough to believe the numbers? Every large financial institution appears to be jumping on the band wagon of conveniently forgetting the month of December. What does this say about the state of public accounting today and Wall Street’s gulliblity?
What are the Equity Markets Smoking?
Posted: April 13, 2009 Filed under: Bailout Blues, Equity Markets, U.S. Economy 2 CommentsI’m torn between relief at watching my 403(b) improve and wondering why the stock markets appear so oblivious to reality at the moment. Stock markets appear to be celebrating the loosened mark-to-market rules and only the Greater Ethos would know what else. (Perhaps Spring break and more Girls Gone Wild Videos in the offing?) During the 14 trading days prior to March 27th, the S&P 500 index jumped 21%. That would be akin to the steepest rally since 1938. At the same time, the corporate bond market saw 35 defaults. Moody’s stated that number of defaults has not been seen in single month since the Great Depression. The Economist (April 11, 2009), in the article Whistling in the Dark thinks Equity investors have been humming the Monty Python Classic.
As American companies begin the first-quarter earnings season, the news on that front is hardly encouraging either. Profits are forecast to be down by 37%, according to Bloomberg. That will be the seventh straight quarterly drop, the longest losing stretch since, yes, the Depression.
So what explains this dichotomy between share prices and fundamentals? Markets fell so far, so fast that they already reflected a lot of bad news. And prices rarely drop in a straight line. They often rebound as investors who have gone short (bet on falling prices) take profits. There were five rallies of 20% or more between 1930 and 1932, during the worst bear market in history.
So, who is right? I’m going with the bond markets. They usually have the inside track on what is going on with the companies themselves because they are, well, bond holders. At least Equity Market Volatility is down and the markets appear ready to acknowledge bottom shortly. This is better than the recent series of financial and economic variables that look more like the trails of lemmings over precipices than randomly varying series. Still, the bond markets and most economists are somber because the real numbers still aren’t pointing to recovery despite what Bernanke and POTUS say recently about Green Shoots and Glimmers of Hope.
But David Rosenberg of Bank of America Merrill Lynch, one of the few Wall Street economists to predict the current recession, is sceptical. He points out that although the Institute of Supply Management’s index of American manufacturing has rebounded from 32.9 to 36, the latter figure is still the fourth worst in the last 27 years. Capital Economics, a consultancy, says its recovery index suggests the probability that the American recession has ended is less than 10%.
Other indicators also cast doubt on the idea of a sharp rebound. The Baltic Dry Index of freight rates is seen as a measure of global trade activity (although it is also affected by the supply of shipping). It bottomed in December, a staggering 94% below the May 2008 high. From that point, it more than trebled by early March, a sign of a rebound in activity. But it has since resumed falling and is down by around a third in the last four weeks. Nor is there any sign of a big pickup in commodity prices; the Dow Jones AIG index is above its recent low on March 2nd but is still less than half last July’s peak.
Living in a Black Swan World
Posted: April 8, 2009 Filed under: Bailout Blues | Tags: Black Swan, Nassim Nicholas Taleb 1 Comment
I’ve been reading Nassim Nicholas Taleb’s Black Swan in between journal articles. Boston Boomer and I picked up on this book and honed in on the theory earlier this year. A Black Swan moment or event is large-impact, hard-to-predict, and rare. The event is unexpected because its outside “normal” expectations. Here’ some basic information from Wiki.
The theory was described by Nassim Nicholas Taleb in his 2007 book The Black Swan. Taleb regards many scientific discoveries as “black swans” — undirected and unpredicted. He gives the rise of the Internet, the personal computer, World War I, and the September 11, 2001 attacks as examples of Black Swan events.
The term Black Swan comes from the assumption that ‘All swans are white‘. In that context, a black swan was a metaphor for something that could not exist. The 17th Century discovery of black swans in Australia metamorphosed the term to connote that the perceived impossibility actually came to pass. Taleb notes that John Stuart Mill first used the Black Swan narrative to discuss falsification.
peej
Carissa
bostonboomer
dakinikat
ecocatwoman
mablue2
Mama Lopez
peggysue22
quixote
skydancingguestblogger
Mona (aka Wonk the Vote)
Sky Dancing 
Recent Comments