Category: Economy

Carbon Trading: Once Again, Speculative Market Type Solutions to Real Problems Fail Abysmally

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It appears that they have discovered that outright fraud is destroying carbon trading.

According to the World Wildlife Fund, one out of every five carbon credits that’s been issued by the United Nations may be bogus in the sense that the projects being credited for reducing emissions are in fact increasing emissions.

The justification for carbon trading has been that speculative markets will magically find truth and the best way of doing things.

The real justification is that people with MBAs can create complex instruments that generate them lots of fees for doing things that do not benefit the public, or achieve the stated goals of the program.

Basically, this is gambling, and Wall Street sets itself up as the house. It’s what the FDR era regulations were supposed to minimize, and what 30 years of deregulation, starting under Carter, have given us.

It’s a system that encourages phony numbers and lying to generate fees and profits.

Carbon trading is a carbon tax, they both serve to raise the cost of releasing carbon into the atmosphere.

The only difference is that the former benefits Wall Street types, and the latter benefits everyone, so under today’s morality, the former is good, and the latter is bad.

Economics Update

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The Michigan Higher Education Student Loan Authority will stop making loans under the Michigan Alternative Student Loan, because it cannot raise money in the capital markets to lend out. You can see their notice here

Student loans are about as safe as it gets. You cannot discharge them through bankruptcy, and they are very safe, but no one is willing to buy the paper, both because the bond insurers are basically belly up, and because no one trusts anything.

In a similar vein, though more directly related to the bursting housing bubble, Freddie Mac cut nearly in half the size of its REMIC (Real Estate Mortgage Investment Conduits) issue, because it cannot find buyers.

And in the useful congressional hearings area, i.e. not Roger Clemens and steroids, we have hearings on the collapse of the bond insurers.

In another sign of a slowing economy, media company Belo corporation is showing a loss.

Part of this may be the fact that, and I speak from experience having experienced their flagship Dallas Morning News, that Belo is to journalism what Osama bin Laden is to wet t-shirt contests. When you have a crappy product, you get hammered.

Economics Update

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First, it appears that the current credit crisis is now being recognized by some media outlets, such as the New York Times, as not being limited to subprime borrowers. Of course the story misses the fact that it’s not just mortgages, and the story that they use to illustrate the problem is a, “a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition”, who is the last person we should think of bailing out.

He understood the issue, and took the loan anyway.

As to the general, and ongoing, credit meltdown, we have yet another New York Times story, this leading off with Sailfish Capital Partners, a hedge fund that is being liquidated.

The pair, both fixed-income specialists, quickly raised $1 billion for their flagship multi-strategy fixed-income fund, according to investor documents. Assets grew steadily, reaching $1.2 billion by the end of 2005 and $1.5 billion by the end of 2006, when the fund returned more than 12 percent. In July, the fund sat atop almost $2 billion, and exhibited relatively low volatility — a key factor for institutional investors.

But July proved treacherous. As the credit markets seized up, Sailfish owned seemingly safe top-rated investments, including mortgage investments, that suddenly plummeted in value.

Illiquidity will get worse, and this is one of what will be many stories,

And then we have Warren Buffet offering to buy the good assets of the bond inurers and so give them a capital injection (see also Also here).

Basically, he wants to buy the good stuff for pennies, and leave the sh%$pile for the monoliners to deal for later. Buffet ain’t dumb, this is thinking vulture capitalism.

We are starting to see adulatory coverage of the (very boring, but generally safe)municipal bond market, though I wonder what happens to resale value of the bonds if the monoliners go belly up before Jimmy Warren Buffet gets his hands on those assets.

Finally, we have the federal budget deficit more than doubling, which means that we have to borrow even more foreign money and more downward pressure on the dollar.


A Rebuttal to An Earlier Post

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I made a post on Barack Obama’s policies regarding the stimulus package, and Barack Obama’s and specifically his advisor, Austan Goolsbee’s position on the low income heating assistance program.

Dr. Goolsbee took exception to my post in the comments, and has granted me permission to reproduce it as a post, which follows:

This is totally bogus. I have never opposed LIHEAP as a program and neither has Senator Obama (who has voted many times to fund the program). The only objection to the program–in the CNBC clip and in all previous discussions–is trying to use LIHEAP as a stimulus program. Because there is an application process, it won’t get out the door quickly. Obama’s stimulus plan would cut checks for low income people that are BIGGER than the LIHEAP checks and would send them the money right away.

Proof that I support LIHEAP just not as a stimulus, see the debate over stimulus is the NY Observer of January 24

“For the most part, Goolsbee had little to take issue with. He had a much bigger problem with the Clinton plan’s call for $25 billion in emergency energy assistance for families facing skyrocketing heating bills. Goolsbee’s criticism of this component was consistent with his major beef with Clinton’s entire stimulus plan, which is that it would take way too long to enact, and therefore wouldn’t provide for any real stimulus at all.

Here’s Goolsbee’s critique: “It is a very detailed program. It is a very good program that people are familiar with but it just isn’t a stimulus. It is for winter heat and by the time this thing gets through we’d be talking about next winter. Two, it’s a five to 10-page application process which is significantly onerous.

He added, “After convincing the people to apply and getting them to fill out the application process, you then have an evaluation process, so this will take many months if not a year to get out the door.”

Note: there were some apostrophes that were munged by haloscan that I corrected. Otherwise it is as posted.

Economics Update

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Chancellor of the exchequer, Alistair Darling has stated at a G-7 forum that the credit crunch will be a “prolonged adjustment”.

Auditors for AIG, the world’s largest insurer is showing “material weakness” ovalues some of its complex financial instruments, specifically its, “credit-default swap portfolio”, see here and here.

Basically, it needs to write down more of its holdings in the big sh^%pile.

In related news, credit-default swaps are becoming more expensive across the markets, which reflects the standard risk/return equation. People find these riskier, so they are demanding higher yields.

In real estate, experts are saying that home prices will drop for 2 more years. I think that it will be 5+ years, at least adjusted for investment.

A Morgan Stanley analyst has stated the obvious, that Fannie Mae will be seeing a lot mroe defaults on its loans.

In personal finance, credit card companies are jacking up rates of credit worthy customers. It appears that they are looking for cash flow to offset losses in various financial derivatives and the mortgage market.

Rupert Murdoch Dow Jones is ajusting the Dow Jones Industrial Average, with Bank of America and Chevron replacing Honeywell and Altria.

This really does not mean much, after all the Dow is not really a good metric anyway, Honeywell has become too small, and with the spinoff of Kraft, Altria is pretty much just tobacco. Nothing to see here, move along.

Finally, I recommend that you check out this examination of the US financial position compared to meltdowns in 5 other counties. It’s kind of grim, as these charts show:
The Big Picture | 5 Historical Economic Crises and the U.S. look at pics”/>


Obama To Maine – ‘Drop Dead’

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Lets be clear, normally, I find Rense to be an unreliable source, but this is analysis and, there is a video on CNBC where Austan Goolsbee says what Rense says he said.

video where he is dismissive of LIHEAP.

Obama To Maine – ‘Drop Dead’

Blocked Emergency LIHEAP Money For Maine This Winter
2-8-8

AUGUSTA — Barack Obama’s chief economics adviser Austan Goolsbee today boasted that the Obama campaign had helped to prevent emergency heating assistance for low-income families from being included in the just-approved economic stimulus package which is now on its way to President Bush’s desk for signature. An increase in federal low-income heating assistance (known as LIHEAP), Goolsbee pointed out, had been championed by Obama’s opponent, New York Democratic Senator Hillary Clinton. Goolsbee’s remarks came in an interview this morning with Carl Quintanilla of CNBC business news television.”

It’s clear in the video, where Goolsbee dismisses LIHEAP as bureaucratic and wasteful.

Keeping poor people from freezing is a core Democratic Party value. In Maine, it’s a bipartisan value, but the folks who made it to the caucuses there are clearly too well off to qualify for the program, or to care about those who do.

George W. Bush has spent 7 years trying to make the poor poorer, and to denigrate this program, which helps the poor heat their homes in the winter is repulsive.

Goolsbee is “Chicago School Lite” on his economics, which may be useful for contacts with the press, which is increasingly overpaid, overfed (Candy Crowley), and self importantly proclaiming its support for the low wage economics that have prevailed since the mid 1970s, but it is not good for the American people or the Democratic Party.

Economics Update

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Consumer confidence sinks lower the RBC Cash Index falls to its lowest level since it was created in 2002, and consumer borrowing tumbles, rising at an annual rate of 2.1%, the lowest rate since April.

On a “beat my own drum” note, it’s nice seeing a real economist warning that the stimulus package is going to damage Fannie Mae and Freddie Mack by increasing the loan limits, and hence exposure. I warned about this yesterday, and it’s nice to see a real economist agree.

In high finance, it looks like there will be significant writedowns on the $160 billion of “pier” loans out in finance land.

Basically, a “pier loan” is a bridge loan for things like a private equity transaction where the banks cannot sell the debt, and hence it’s a “bridge to nowhere”, or a “pier”.

The average price for the most actively traded U.S. loans fell to 88.37 cents on the dollar this week, from 91.14 cents last month, according to S&P’s LCD. Prices have fallen from 100, or face value, last June.

This means that no one is interested in buying the loans, so they have to discount.

Finally, look at these charts on The Financial Ninja, and be very, very afraid.

Economics Update

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The Fed Bank of Philidelphia president is making noise about how inflation is poised fore a comeback, which bummed out stock traders.

It looks like the current economic situation is leading bankers to screw their small customers. Of course, were the economic situation reversed, it would be used by bankers to screw their small customers.

At least, there is symmetry.

Foreclosures: Las Vegas is the foreclosure capital of the US. This appears not to be from the economic downturn, it’s a prosperous area, but rather from exotic mortgages.

In a blaze of recognizing the bloody obvious, the NAR is now saying that they expect home prices to decline in 2008.

If you look at regional downturns, we are looking at 5-10 years before a rebound.

The director of the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Fannie Mae and Freddie Mac, is warning that the GSEs are taking on too much risky debt. He is saying that, “reducing risks in the market, but concentrating mortgage risks on themselves.”

I think that he is suggesting that without tighter regulation, the suggestion of allowing Fannie and Freddie to take on larger mortgages is a very bad idea.

Overseas, the Bank of England cut its benchmark 25 basis points to 5.25%, while the European Central Bank holds kept its rate steady at 4%. The UK appears to be in a real-estate driven downturn, while most of Europe (Spain excepted) did not experience the same sort of speculative real estate bubble.

On Jobs, new applicants for unemployment fell by 22K last week, but the total number of people collecting unemployment continues to rise. (the former is a far noisier number).

In retail, January sales posted their worst performance since records were kept, with same store sales rising only 0.5%, which is a significant drop when inflation is factored in.

And finally, a cartoon for your amusement:

Sonny Perdu is an Idiot, and He Will Kill Atlanta Through Thirst

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Most of you not from the far SE US are probably unaware of the fact that Georgia, Alabama, and Florida are fighting over water rights.

Well, alabama and Florida have just won a major case, over the allocation of water from the federal Lake Lanier reservoir.

The judge ruled that, “agreement between Georgia and the Army Corps of Engineers that would have given Georgia rights to use nearly a quarter of the water …. was void because the two parties had not first obtained Congressional approval.”

As is the case with most such cases, this has been bubbling along* for the past 20 or so years, and has been compounded by the drought, and by Georgia’s unwillingness to take steps to ensure adequate water to feed its growth.

In related news, the very next day,Sonny “He’s Not a Schmuck Because a Schmuck Has a Head†” Purdue has announced will be allowing folks to fill their swimming pools and water their lawns.

This is a metaphor for what will be the next resource fight, potable water.

If conflict over the past 35 years has been largely defined by fights over oil, fights over the next few decades will be over water.

It will be far more brutal, because people don’t die without oil.

*Pun intended.
†True…Learn your Yiddish.

Fun Economic Indicators

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The Big Picture discusses The Ticker Tape Parade Indicator:

  • The NY Giants won their first Super Bowl in 1987; the Great US Stock Market Crash appeared later.
  • The NY Giants won their second Super Bowl in 1991; the last US full-blown recession appeared; money center banks barely avoided the abyss.
  • Before yesterday, the last NYC ticker-tape parade was 2000 (Yankees); the Great US Stock Bubble burst.
  • The NY Giants won their third Super Bowl in 2008 and received a ticker-tape parade; head to the caves! Take it for what you will.

Me, I’m buying canned goods and bottled water.

Sen. John McCain (Ariz.), the frontrunner for the Republican nomination, missed the vote.

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The Senate stimulus package failed cloture by one vote.

Despite their return from the campaign trail, Democrats fell one vote shy of the 60 votes they needed to bring forward their preferred economic stimulus bill.

Sen. John McCain (Ariz.), the frontrunner for the Republican nomination, missed the vote.

This is something that both Clinton and Obama, and for that matter Harry Reid, should be harping on right now.

Illiquid

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Illiquid sounds like a mile word.

It sounds like maybe the markets are thirsty.

It’s actually MUCH worse than that.

It means that a buyer cannot be found for your asset, so for the time being at least, it is worthless.

It’s like being marooned on a desert island with a pirate chest full of gold doubloons. Technically, you are rich, but you still have no shelter, food or water, and you die all the same.

The Collateralized Debt Obligation (CDO)market is very nearly illiquid, according to Ross Heller of JPMorgan Securities, who is saying, “We’re definitely in a period of very low liquidity at the moment, which has actually been dropping precipitously in the last few weeks.”

Desert Island time.

I’m beginning to wonder if a Honda full of silver is over optimistic, and that instead we should fill it with canned goods and ammunition.

A Note on My Economic Updates

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Just in case you are wondering, I don’t generally discuss how the markets did on a single day.

There is simply too much noise for one day to mean much.

Additionally, the Dow Jones (Soon to be Murdoch?) Industrial Average sucks as a tool anyway. It’s a completely arbitrary bunch of stocks.

Besides, on days with big swings, like today, you hear it on the radio, or whatever.

Economics Update

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It turns out that banks are closing the barn door after the cow has gone, and they are tightening credit standards…a lot.

In fact, it’s the worst since they started keeping records, as Paul Krugman notes, and he provides has a good graph of just how tight it has become:

He correctly calls it “grim”

Additionally, we have the Institute for Supply Management’s non-manufacturing index, which accounts for around 9/10 of the economy, dropping. See also here.

Krugman has another graph to illustrate this:

Economics Update

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In January, employers cut 17,000 jobs, the first cut in about 4 years.

Truth be told, the private sector has not been responsible for significant employment growth in this “tide that leaves ordinary people drowning” recovery anyway. It’s pretty much all been public sector jobs.

Additionally, you have 2007 having the worst performance since 2002, with factory orders for the year being only 1.4% above 2006, though the month to month numbers for November and December were relatively healthy.

In the increasingly inevitable meltdown of the monoliner bond insurance companies, private equity firms want no part of a bailout of the insurers, so banks are trying to go it alone (here and here).

Banks trying to bail out insurers, so that the banks won’t show huge losses or insolvency as a result of losses in the market.

So, you have broke insurers being bailed out by banks that are broke too?

This will all unwind, just like the 1929 crash, only the availability of computers, and computer models, means that the level of exposure of these institutions has multiplied many times.

In any case, it appears that the credit crunch is in the process of making large private equity deals more risky for investment banks, in this case, a take over of Harrah’s Entertainment by Apollo Management and Texas Pacific Group.

The banks are, “Having trouble selling on the leveraged buy-out debt to third parties. With the bulk of the debt remaining on their books, the banks are sitting on a sizeable loss.” No one wants to buy the funny paper no more.

For the UK, there is some good news, asthere are now competing bids for the Northern Rock bank, with Richard Branson and the board of Northern Rock competing, which implies that the UK taxpayers won’t take too bad a hit.

In a sign of the new world order, CitiGroup is no longer number one in the world in market capitalization, that honor now goes to the Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. and Bank of China Ltd. (ICBC).

In fact, it’s number 7 on the list, after ICBC, Bank of America, HSBC Holdings, China Construction, Bank of China, and JPMorgan Chase.

And we now have indications that perhaps that trader was not so “rogue”, with Societe Generale in court defending itself against money laundering. It appears that they were laundering stolen checks through Israeli banks.