From the article The Real Reason for the Global Financial Crisis:
Go read the rest of the article too.
Category: Economy
I Wish This Were My Congresscritter
Matt Stoller, of Open Left, got the following missive from an unnamed Congressman:
Paulsen and congressional Republicans, or the few that will actually vote for this (most will be unwilling to take responsibility for the consequences of their policies), have said that there can’t be any “add ons,” or addition provisions. F$#@ that. I don’t really want to trigger a world wide depression (that’s not hyperbole, that’s a distinct possibility), but I’m not voting for a blank check for $700 billion for those mother f$#@ers.
Nancy said she wanted to include the second “stimulus” package that the Bush Administration and congressional Republicans have blocked. I don’t want to trade a $700 billion dollar giveaway to the most unsympathetic human beings on the planet for a few f$#@ing bridges. I want reforms of the industry, and I want it to be as punitive as possible.
Henry Waxman has suggested corporate government reforms, including CEO compensation, as the price for this. Some members have publicly suggested allowing modification of mortgages in bankruptcy, and the House Judiciary Committee staff is also very interested in that. That’s a real possibility.
We may strip out all the gives to industry in the predatory mortgage lending bill that the House passed last November, which hasn’t budged in the Senate, and include that in the bill. There are other ideas on the table but they are going to be tough to work out before next week.
I also find myself drawn to provisions that would serve no useful purpose except to insult the industry, like requiring the CEOs, CFOs and the chair of the board of any entity that sells mortgage related securities to the Treasury Department to certify that they have completed an approved course in credit counseling. That is now required of consumers filing bankruptcy to make sure they feel properly humiliated for being head over heels in debt, although most lost control of their finances because of a serious illness in the family. That would just be petty and childish, and completely in character for me.
I’m open to other ideas, and I am looking for volunteers who want to hold the sons of bitches so I can beat the crap out of them.
The Undeniable Lightness of Being a Rich Pig
We are now seeing sob stories out of Wall Street like this:
‘A lot of those people will have to sell their homes, they’re going to cut back on the private jets and the vacations. They may even have to take their kids out of private school,’ said Frank. ‘It’s a total reworking of their lifestyle.’
He added that it’s going to be no easy task.
‘It’s going to be very hard psychologically for these people,’ Frank said. ‘I talked to one guy who had to give up his private jet recently. And he said of all the trials in his life, giving that up was the hardest thing he’s ever done.’
The Chinese have the right idea: A bullet to the back of the head for the folks who managed this fiasco.
H/T Kevin Drum.
Economics Update
If you think that this crisis is over, it’s not even close, as evidenced by the fact that 40% of US money market funds posted no returns yesterday:
More than 40 percent of U.S. taxable money market mutual funds posted zero return Thursday amid persistent turmoil in the credit markets, fund tracker Lipper said Friday.
Lipper said 560 of the 1,263 classes of taxable money funds it tracks earned no return Thursday. This compared with 73 classes that posted zero return Wednesday and 63 Tuesday.
A lot of taxable money mutual funds “put up big fat zeros yesterday,” said Jeff Tjornehoj, senior research analyst at Lipper in Denver. “This is unprecedented in recent history.”
Expect to see the phrase, “unprecedented in recent history,” a lot in the next few months.
Part of this was no doubt the rather large gyrations in US T-Bills over the past few days, which went almost to 0% a on Thursday, because people were so concerned about finding safe havens. The 3 month T-Bill was at 0.22% Thursday, before heading back up to 0.91% on Friday following announcement of various rescue plans for the financial markets.
The dollar rose in response to the bailouts too, as did oil, though gasoline is down for the 3rd straight day, as that market adjusts to the realities of Hurricane Ike.
That being said, even with the rescue packages, Moody’s is still looking at cutting its ratings on monoliner insurers Ambac and MBIA.
Also, it now looks like Morgan Stanley is still looking at merging with a commercial bank, even if the news of the bailout plans may have helped.
Economics Update
Again, as this seems, this is only the so called little stuff, because there is a lot of big stuff again
I’ve been firmly in the recession camp of the, “Is it recession yet,” dispute, and the the Leading Economic Indicators falling again reinforces that notion, though the fact that the Philadelphia Fed Factory Index rose runs counter to that, but as it is the first rise in 10 months, I put that one in the outlier category.
Meanwhile, the weekly, and this week affected by hurricanes, new filings for unemployment rose to 455K and housing starts fell to a 17 year low, even as mortgage rates continue to fall.
Of course, not too many people can get the loans these days, because all the money is fleeing to treasuries.
Gas prices tick higher – Sep. 17, 2008
Housing Starts Plummet to 17-Year Low in August – Economy * US * News * Story – CNBC.com
In energy, eased off of a bit, as did gasoline for the first time in 9 days, as the panicking over Hurrican Ike moderated.
Finally, I just want to say that Tom Toles is a bloody genius:
A Very Good Read on the Economy
Titled The End of Leverage. Money quote:
An enormous hoax has been perpetrated on global financial markets during the past 10 years. An American economy based on opening containers from China and selling the contents at Wal-Mart, or trading houses back and forth, provides scant profitability. Where the underlying profitability of the American economy was poor, financial engineering managed to transform thin profits into apparently fat ones through the magic of leverage.
This paragraph illustrates why I am such a bear.
In 1929, the US was an energy exporter, and the most robust manufacturer in the world.
Today, it’s all arbitrage with other people’s money….We have nothing left to fall back on.
Go read it.
Borat Economics
Felix Salmon of Condé Nast notes:
It’s not just hedge funds, either, which could end up being the vector by which crisis is spread. It could be a big insurance company, or it could be a series of failures of small and medium-sized banks. Or it could come out of left field entirely: the “shadow banking system” is now so big and so global that for all we know a series of bad decisions by a mid-level technocrat in Kazakhstan could precipitate cataclysm across America and the world.
(emphasis mine)
I would note that Borat Sagdiyev hails from, “Glorious Nation of Kazakhstan”.
It does raise the point that when markets are deregulated to the degree they are, people will stomp all over the line in an attempt to maximize short term gain, and this raises the possibility that minor actions will have major effects on the economy.
That’s why we need regulation in the first place. Enlightened self interest absent common sense regulation, gives way to unenlightened, and uninformed self interest, which invariably becomes bubbles and fraud.
H/T Kevin Drum for the catch.
Economics Update
You know that there is a problem, when I open with ratings downgrades.
We have S&P downgrading Washington Mutual to junk status, and even more significantly, AIG, the largest insurance company in the world has been downgraded by Fitch Ratings to A from AA-, and S&P and Moody’s downgraded them too, from to A- from AA- for S&P, and to to A2 from Aa3 for Moody’s.
This is ugly, and it is not surprising that the costs of corporate bond insurance has skyrocketed on what is called “counterparty risk” by the MBA types, and the belief that you are dealing with a bunch of lying bastards foo the rest of us.
It’s the same reason that the costs of overnight borrowing has gone up too, with the LIBOR more than doubling from 3.10625% to 6.43750%.
No one knows when the next shoe is going to drop, and even the additional $70 billion that the Fed dropped out of helicopters wasn’t much help.
It’s why we’re seeing Thornburg Mortgage struggle under a sudden onslaught of margin calls.
When Goldman Sachs earnings 70%, even though they hedged against the real estate crash, you know that no one is making money.
And at the end of all this the Fed decided to leave interest rates unchanged, which is not surprising, since they are already pushing on a string.
Meanwhile, the dollar is behaving like my cat when he gets outside in a rain squall, it really did not move, but you can see the conflict between fear driving people to dollars, and the fear of the US financial meltdown driving people away from the dollar.
We actually saw consumer prices fall, driven by falling energy prices (oil is now about $91.15/bbl on demand concerns from the financial meltdown)
Gasoline still went up, driven by the came hurricane refinery concerns that have driven prices over the past 4 or so days.
How the Chicago Boys Wrecked the Economy
Some times you come across something about which you have nothing to add but an admonition to go and read it.
Thisinterview with Michael Hudson falls in this category.
So go and read it.
Economics Update
Obviously, with Merrill Lynch ceasing to exist as an independent entity, and Lehaman ceasing to exist completely, it has been a busy day.
This update, therefore just covers the more ordinary stories, as opposed to the 767s slamming into the US financial system, though many of these stories are in fact driven by the bigger stories.
Let’s start with one that has nothing to do with Lehman or Merrill, retail gasoline is up for the 3re time in 3 days, because Hurricane Ike has closed about 20% of US refining capacity.
We’ll see how this shakes out over the next few days, but we also now have another unrelated pice of news, that the New York Fed Manufacturing Index Decreased to -7.4 in September, indicating that it’s not just those Wall Street whores getting it up the ass, it’s all of us, which is why
credit card debt and delinquencies are up the past month.
And now on to the main show:
- Oil and gasoline futures fell, the increase in gasoline prices was retail and driven by immediate refinery capacity shortages, but the futures are driven by heavy gloon.
- The Fed has expanded its cash for sh&%-pile program even further, making more money available, and loaning on the basis of even more flaky collateral, and the banks are getting as much as they can through this program.
- The European central banks are shoveling money out the door too.
- The Chinese central bank cut rates, though I’m not sure if that is to strengthen their economy, or to hold down their currency.
- The dollar is taking a pounding (here: and here.)
Paul R. La Monica is an Idiot
As I have said before, and will undoubtely say again, , the writer of CNNFN’s “The Buzz” column, Paul R. La Monica, is a complete Pratt.
Well, a few days back, La Monica claimed that the next bubble will be — get this — short selling.
This is the statement of someone who does not get the concept of a bubble beyond the fact that it’s an “in word” in the media.
A bubble is an artifact of an unreasonable optimism, and short selling is a manifestation of pessimism, but the clue train has not arrived to La Monicaville.
Economics Update
Well, I guess that the lead story has to be Lehman Brothers, which appears to be collapsing Bear Stearns style, and looking for government funding of it’s eventual sale, Bear Stearns style, so negotions with potential buyers continue apace.
The Fed and the Treasury Department appear to be seriously twisting arms to make the deal go through, though they claim that there will be “no federal money” involved.
Seriously, all we are doing here is socializing losses. Nationalize the lot of them, throw out upper management, and go after their bonuses, otherwise, we will see more of the same.
Of course the fact that WaMu just had its ratings cut….again…Means that Paulson may have two things on his “to do” list this weekend.
There are already rumors that Washington Mutual is on the auction block.
In the real economy, the one that the rest of us live in, news ain’t great. The weekly job claims fell, but the 4 week moving average and the continuing claims, continue to rise.
Additionally, retail sales fell again in August, showing a continued weakening in the economy, as does the large gain in business inventory.
Real estate is looking worse and worse too, with foreclosures continuing to increase.
This has driven the dollar down, because it points toward the Fed cutting rates.
In energy, oil is continuing on a downward trend, because of hurricane Ike, selling briefly below $100/bbl (!), though the fact that it’s heading toward refineries is driving gasoline up.
I would note that this is actually normal market behavior. Knock out refineries, and the demand for oil decreases, and the price drops, but the demand for gasoline remains the same, so prices increase.
BTW, I’m not sure what is going on in insurance, but it is clear that American International Group is getting absolutely hammered, and when the subject of the short selling is the largest insurer in the world, something is whack.
Economics Update
Seeing as how the nationalization-in-everything-but-name of the GSEs has been covered elsewhere on the blog, it won’t be here.
That being said, the response of the international markets, rising dollar and oil prices falling despite a hurricane pointed at the gulf, appear to be positive.
It comes from the fact that while shareholders will get F$#@ed, the foreign national banks and sovereign wealth funds which bought Fannie and Freddie paper are getting bailed out.
It also looks like the monoliner bond insurers are winners here too, at least that’s how their stocks reacted to the news.
This does not mean that the housing crisis is over, or even that it has bottomed out, which is why foreclosures hit a record high in Q2.
Additionally with the official unemployment rate spiking to a 5 year high, the rest of the economy sucks wet farts from dead pigeons too.
What’s more, as Krugman notes that the U6 numbers are positively grim.
The common reported number is U3, while U6 is:
Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, as a percent of all civilian labor force plus all marginally attached workers
And U6 is higher than it was in the worst part of the 2001 recession:
It’s not just banking, real estate, or employment though; Paul Volker is saying that the current financial system, which relies on complex securitization, as opposed to conventional loans is very broken.
The best proof of this is that the bank of China is suffering a liquidity crisis, because its investments are illiquid.
Economics Update
Things have seemed pretty hectic today.
Normally I don’t mention this, I think that it is just noise, but all three major stock indices are down 3%+, so while it’s not yet raining Katz and Lehmans, it’s pretty ugly.
Note that this is my economic update post, so I’m not going to claim that a certain VP pick’s speech caused anything, and instead point at jobless claims spiking unexpectedly by 15,000, though truth be told, it should not cause that sort of reaction: the weekly data is simply too noisy for any rational investor to act upon the basis of those numbers.
But this isn’t “rational investors” this be Wall Street, so it could have been the Lehman CEO’s choice of shoes today.
The rest of the financial news is no where near as definitive, and even Federal Reserve officials are publicly disagreeing on whether the concern is recession or inflation.
Meanwhile, even though the Bank of England and the ECB kept rates steady, the cost of money in Europe went up, because the ECB has significantly tightened requirements to lend to banks.
In any case, the lack of rate hikes strengthened the dollar.
Mortgage rates are down this week, which would ordinarily be good news, but I think that “the markets” (and I) see this as a sign of a weakening economy, just as “the markets” (and I) see declining oil prices and declining gas prices as signs of a weakening economy.
Even so, the numbers for the service sector were good, so the blood on the street today is a bit odd.
Of course, it sucks to be a bank right now, with Community National Bank of Sarasota looking to be on the FDIC’s Friday afternoon press releases, and Lehman floating the idea of creating a “bad bank” to shift bad assets to.
Someone needs to explain the concept to me, because it seems to suffer from the, “We’ve run out of gullible idiots,” problem.
In any case, it appears that insurance giant AIG is considering something similar.
I’m not sure how piling crap in a separate pile really helps anything.
Honda Passes Chrysler in US Market Share
So this puts Chrysler #5 in market share.
Maybe if we weren’t spending more than the rest of the world combined in defense, we’d be more competitive in the civilian economy, though the overpaid incompetent management at the big little 3 auto makers has contributed to this quite a bit.
Economics Update
It’s generally not been a good year for manufacturing and construction, with the Institute for Supply Management’s (ISM) manufacturing index falling to 49.9, with any number below 50 meaning contraction, though I wonder how much inflation is being measured as “growth”, which is what I think is driving much of the US Commerce Department data showing an increase in factory orders.
I think that this is entirely export driven growth, a position that the abysmal auto sales reinforces, but these export sales are being driven by a cheap dollar, which will eventually drive interest rates higher in the US (foreigners will demand higher returns), crushing domestic consumption.
That being said, construction is clearly cratering, falling 0.6% in July, twice expectations.
Meanwhile, banking continues to look pretty heinous with the FDIC expanding office space in the expectation of a spate of bank failures, S&P downgrading two regional banks, and suggesting that 37% of regional banks will be down graded.
Additionally, when GMACis laying off thousands, you know that the industry is in dire straits.
With Euro zone inflation falling, it appears that the ECB will hold rates steady, for a while at least, which will serve to keep the dollar relatively strong, as evidenced by the US Dollar’s rise today.
Since the hurricanes in the Gulf were relatively mild, oil and gasoline have continued their downward path.
Economics Update
Well, the big news is that the US GDP rose by an adjusted 3.3% rate in Q2. The initial estimate was 1.7%, and the estimate for this, the 2nd cut on GDP numbers was 2.7%.
Of course, inflation ran at a 4.2% rate, which puts it back into negative territory, though the economists typically use the “core” rate, 2.1%, even though purchasing energy and food is included in the GDP numbers.
This is reinforced by the weekly unemployment numbers, with new claims down by 10,000 this week, but, “continued claims are now above 3.4 million for the first time since 2003.”
What is going on is that the real estate asset bubble was concealing the fact that productivity from 2000 through 2007, but middle class income fell.
We were working harder for less money, and going into debt because our houses were appreciating.
Things ain’t great in Europe either, with European retail sales falling, though German unemployment fell, even while the German economy contracted….I really don’t get that one.
We do have good news on the monoliner insurers, with MBIA getting a juicy insurance deal thanks to the help of the New York State Insurance Superintendent…..Smells like a backdoor bailout to me.
In the world of home mortgages, it appears that numbers showing a mortgage application increase may be garbage, because they do not account for multiple applications from one person, which is what tends to happen when lenders get pickier about issuing loans.
Finally, oil is down, the dollar is up, and gas prices are down again, more than 45¢ off their peak.
Economics Update
Yesterday, I talked about a historically high housing inventory, well, now we have the numbers, 4.67 million, an 11.2 month supply.
Mortgage applications are up this week, but not enough to indicate any sort of resurgence of the housing market.
We have seen an increase in orders for durable goods, but this is almost entirely export driven, which means that US consumption is flat, and if the dollar strengthens further, it’s mixed today we lose what is currently the only major driver of economic growth.
Of course, with the ECB policy makers all pointing in different directions, likely because Germany’s inflation rate is down, it’s not surprising that nothing much is moving in currency right now.
Banking is not looking good period, what with FDIC troubled bank list growing, “117 with $78 billion in assets – up from 90 banks, $26 billion in assets in 1st quarter.”
The credit markets are still frozen, with Merrill Lynch and Wachovia seeing their rates skyrocket as they attempt to rollover bonds, and Fannie Mae just sold short term debt with a spread of 89 basis points vs. US treasuries, which may be a record.
Also, the FDIC is now saying that the IndyMac failure will have a bigger price tag than earlier predicted…..Are we looking at the FDIC needing a bailout?
And it isn’t just banks having problems, personal bankruptcies are surging, with the number of filings in the 2nd quarter the highest since the 4th quarter of 2005, when people rushed to beat the new law.
In energy, oil is up on hurricane Gustav, and gasoline is down again.
Economics Update
Well, once again, we have the financial press, trumpeting so called good news, that US home prices did not fall as fast as the previous month, even though the year over year decline was 15.4%.
They are noting that home sales are up a bit, but they neglect to note how many of these sales are short sales and REO (foreclosure, basically) sales.
The numbers that I’ve seen are around 20-30%, and no one notes that inventory is still at historical highs.
On the brighter side, consumer confidence is up, largely on the fact that Gasoline has fallen over 10% over the past few weeks, as it did again today, though oil is up over concerns regarding hurricane Gustav.
Everyone is expecting a fully coupled worldwide slowdown, and so the Dollar is now at a 6 month high, even though we are seeing signs of commodities bouncing back, at least that’s what the market in copper is showing, with contracts for immediate delivery being rather higher than those for 3 months delivery.
I would also note that Fannie and Freddie are slowing the rate of mortgage purchases for their portfolio, which means two things, that mortgages will be harder to get and more expensive, and that they are “deleveraging”, which is finance speak for trying to get themselves out of the hole that they have dug.
Economics Update
The Philly Fed chief is calling for higher interest rates, because of inflation concerns.
The fact that there are now closings of marginal mines and the like would also indicate that the commodity plunge of the past 6 weeks or so is going to bottom out soon.
Though, truth be told, I’m not sure that it will make much of a difference, as the the fact that spread between LIBOR and the Fed Funds rate is 78 basis points, near an all time high, and an indicator that the Fed has largely lost control over interest rates in the rest of the economy, as well as indicating that the credit system is still frozen up.
Mean while, in real estate, we have bad news presented as good news, with stories trumpeting an increase in existing home sales in July, and soft pedaling a 7% year over year house prices.
Why is this National Association of Realtors (NAR) Bulls$#@?????
Because, Seasonally adjusted it’s ignoring seasonal adjustments July and August are always big months, particularly for parents who do not want their children to change schools mid year. It’s actually the worst seasonally adjusted numbers since 2000.
This is why 75% of Americans have negative view of economy, because the financial press is a bunch of Pollyannas, who ignore the the fact that aggregate weekly hours have been experiencing continuous negative growth on a month-to-month basis since January 2008.
Meanwhile, among the Wall Street Banks, we are now getting reports of a dead pool for Lehman CEO Dick Fuld. He’s expected to be out within a year, which does not bode well for the company as a whole.
Meanwhile, Robert Rubin is stepping down from his position chairman of the board’s executive committee, though he will remain on the board, which probably means something, but I do not know what, but considering Citi’s record, I’m assuming bad news.
Meanwhile, oil is up today, even though the Baku-Tbilisi-Ceyhan pipeline has resumed flow, but gasoline prices continues their downward course.
Thedollar is mixed today.