The G-20 begins on April Fools Day!

Perfect.

Dinner tomorrow night.

Fools indeed. Perhaps this is unintentional? Or is it because the Saudis and Chinese don't recognize April 1, and are screwing with us? I suspect the latter....

The G20: expect nothing, hope for the best and prepare for the worst

An Oligarch on compensation: "We're all over that"

Per that last post on Simon Johnson's Atlantic essay, John Mack of Morgan Stanley just concluded a conference call with the bank's employees. Per Bloomberg, here's one juicy tidbit:

...(Mack) said Obama, Treasury Secretary Timothy Geithner and Lawrence Summers, Obama’s senior economic adviser, recognize that efforts to tax or otherwise curb Wall Street compensation is a concern for employees.
‘All Over That’
“I know there’s been a lot of talk about compensation and taxes, I just want to assure you we’re all over that,” Mack said. “The president and his financial team and Larry Summers and Secretary Geithner understand it.”

Sounds like the Oligarchs are still in charge.....

"The Quiet Coup": Simon Johnson in The Atlantic

http://www.theatlantic.com/doc/200905/imf-advice

An absolute must read. In my view, the most devastating and disheartening part of Johnson's critique of the cronyism at the heart of this nations financial and political system - a cronyism resulting in the US "becoming a banana republic" - is that, in large part, the system remains intact, and is thus continuing to stymie the real reforms needed to fix things.

Excerpts, emphases mine (and stick around for the ending, which is devastatingly spot-on):

After comparing this crisis to previous financial crises in emerging economies (and similar crises have occurred only in emerging economies, gulp) in which elite business interests are at the center of the crisis, Johnson writes:

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

He continues:

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

Further on, Johnson begins his description of the now-well-known revolving doors between the highest levels on Wall St and in DC with this doozy:

Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

Wow - this from a man who has dealt directly with Putin's Russia! What did this oligarchy accomplish?

...the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

This belief seemingly has remained intact, even in the face of the disaster which it has created:

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change.

And due to the ongoing (even growing) deference to Wall street, the obvious thing to do has still not been done:

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

....Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5trillion (or 10percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

This will require some old-fashioned trust-busting:

The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Ending his essay, Johnson issues a very bleak but urgent alarm. It's difficult to disagree with anything below. This blog has been concerned about all of it, especially about the half-measures used to address the crisis thus far, and the lazy assumptions that things are really gonna be OK. As Johnson persuasively summarizes here, Its Worse Than You Think It Is:

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.
Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

Yikes

So much for that bottoming housing market

Home Prices in 20 US Cities Fell by a Record 19% in January

March 31 (Bloomberg) -- Home prices in 20 U.S. cities fell 19 percent in January from a year earlier, the fastest drop on record, as demand plummeted and foreclosures rose.
The S&P/Case-Shiller index’s decrease was more than forecast and compares with an 18.6 percent decrease in December.

“There are very few bright spots that one can see in the data,” David Blitzer, chairman of the index committee at S&P, said in a statement. “Most of the nation appears to remain on a downward path.”

And as the Journal aptly put it a moment ago: Tight credit and a still-bleak economic outlook amid high numbers of job cuts have added more stress to U.S. households, meaning the glut of housing remains.

Not much reason to see a bottom in what really matters - prices - as long as the above holds true. Anyone foresee looser credit, better employment numbers or lower inventories anytime soon?

Kudlow loves bankruptcy! Says it's 6 months too late!

Great news, yes?? Finally time to deal with the banks??? Get rid of all the crap? Wooo hooo! hooo!!

I almost leaped out of my seat, until I realized that, alas, he's only raving about GM, and giving himself credit for begging for it 6 months ago....

Ooops....

Kudlow being Kudlow, and Wall St still being Wall St, nothing much has changed in the past 20 months re all the criminally irresponsible banks: "let everyone but us get hammered and nationalized...." "Free markets for sure, but we demand that there be guaranteed profits and unfettered opportunities for Wall St to milk the public teat..."

The man is shameless, and by extension, so is the increasingly delusional and greedy US financial sector

Proxy vulture firms: a sad sign of the New American Economy?

As a sign of the times (or, the Times), Thursday's special NYTimes Dealbook section featured only four (4) ads, all full page. Very notably, three of them were from firms specializing in the business of protecting negligent boards from proxy fights. Hmmmmm.

On page three: Mackenzie Partners: "Have the winning team on your side!"
Page five: Georgeson: "What forces could crash down on your deal?"
Page seven: Innisfree: ""Still trying harder"

(As an aside, all three ads are about as poor creative executions as I've ever seen - clumsy, ugly, sophomoric, don't communicate, poorly branded, etc)

Anyhooooo, this would seem to signal that:

1. The Times is desperate for any ad revenue from anyone
2. Proxy vultures sense a huge bull market in protecting incompetent Boards as outraged investors demand action.

#1 above is exhibit 500,000 in the decline of American media

#2 above is exhibit number five million in the decline of American capitalism

Alas and alack

Belief in "The Markets"

You hear the phrase thrown about all the time, in terms of near-magical reverence. Sort of like the Greek Muses, or the Oracle of Delphi: "The Markets will lead us". "The Markets know the real truth". "Trust The Markets". "Don't bet against The Markets".

Such regular pronouncements of omniscience or magic have in more recent ages been the province of Court Jesters, Astrologists, Alchemists, Witch Doctors, Medecine Men, and The Born Again.

A few things all such seers have in common:

• An impenetrable vocabulary and/or beguiling gestures
• A gullible audience
• Persuasive salesmen
• A powerful platform
• Political permission
• The allure of inevitability
• The attraction of thoughtlessness and entertainment

Today, our Court Jesters are the financial press and the mainstream media (FPMSM). They dance at the foot of the King's table, spin clever diversions to keep the masses amused, and tell tales of endless riches around the corner, if only you have faith

So, it is with no degree of surprise, that our modern Fool - CNBC - is yet again today flogging stocks, (Bristol Myers! Amazon!) even as 'The Market" is again in the tank. They're endlessly looking for stuff that might magically rise in value, and endlessly ignoring reality. All day long I've (sadly) had them on in the background, and all day long have yet to hear more that 20 minutes total about anything other than the 'upside' to devastating economic news. GM to liquidate? No prob, we're 'off the lows of the day!' G-20 to fail? No biggie, "markets will adjust!"

The idea is to beguile the masses with the notion that all you need do is to believe. Believe, believe, and all will be well. In Wall St's case, it's crucial to drive blind faith in "The Markets", and the job of the FPMSM is to devine every single obscure sign that "The Markets" will become benevolent, and allow us again to prosper. The ancient Egyptians, and their faith in the magical power of asps, were not much different. Nor were the blessings of Zeus, nor those of Mayan priests performing human sacrifice (tho the Mayans may be closest to our Wall St leaders in the human sacrifice aspect....)

Upon such stuff is progress based....

An intelligent and articulate President, at long last

A quick note to say that the single most uplifting set of events last week was President Obama's multiple and deeply impressive public appearances - the press conference, his on-line public forum, his interviews, his announcements.....

All these were further and growing evidence of his enormous and timely gifts as a once-in-a-lifetime leader in this time of crisis.

What a blessed change from the Bush era, to be perfectly blunt. We have, finally, a guy who is deeply thoughtful, incredibly intelligent, and entirely engaged; with the ability to communicate and think in actual sentences and paragraphs, not mere sound bites. One who is comfortable with real ideas and real discourse. One who, despite accusations hurled at him by the Right, is not a blind ideologue (unlike, ahem, the right). A leader who increasingly comes across as a man who knows how deeply serious are the challenges we face.

The man has clear mastery of all of the critical issues, the ability to make them understandable, the courage to tackle them, and the open-mindedness to learn along the way. His message of 'persistence' in particular, is incredibly important, as this crisis will indeed persist, and will require ongoing ongoing effort and multiple course corrections. Only an intelligent and engaged mind will be able to navigate this minefield. We can dispute some of Obama's decisions, but not his mastery of policy options, of political discourse, and of the gravity of the decisions he's making. Mr Bush had none of these qualities, and we blundered endlessly the past 8 years.

If ever we've needed such a gifted leader now is the time. Inspiration is in short supply, and Obama provides it in (careful) abundance.

Consider us very lucky.

A shout-out to Keith Boykin

The man just endured 28 minutes on CNBC's Power Lunch defending unions. Imagine - defending little people on "Power Lunch"! On CNBC, fawning fan of Billionaires! Hard to think of a more thankless task. Mr Boykin faced the withering scorn (if not intelligible thinking) of all the usual suspects (MCC, Kneale) with great aplomb.

Visit his web site, send him some good vibes: http://www.keithboykin.com/

Speaking of MCC (Michelle Caruso-Cabrera) - she continues to outstrip the pack as the single most loathsome female CNBCer. In fact, her lead is growing. Has gained new wind (iness) of late, as she's chanelling her inner Friedman, uber-Wall St bull, and innate and existential nastiness. Her advantage? She's far, far meaner than equally clueless and ideological hostesses such as Regan and Francis. (At least those two can smile instead of merely grimmacing, and have a Q rating in positive territory). In fact, MCC is fast getting close to leading the whole CNBC pack of fools - alpha dogs included. Is actually nearing Kudlow. Has caught up to Bowyer and Luskin.. Long ago surpassed Kneale and Santelli....

Merkel's scary quote

In today's Herald Tribune interview, she utters these unsettling words, in the context of resisting urges to get on the stimulus bandwagon:

“International policy is, for all the friendship and commonality, always also about representing the interests of one’s own country,”

Alas. Here is the crux of the problem, in one tidy sentence. When the leader of Europe's largest economy (and the third largest in the world, after the US and Japan) speaks in such a bluntly nationalistic tone, we're all in trouble. And while Gordon Brown is sending us happy signals (British PM Points to Coordinated Progress Before Economic Summit) that Europe will be united at the G-20, Ms Merkel could not be more starkly in opposition to anything 'coordinated' along the US/UK model of fiscal stimulus and bank rescues.

And Ms Merkel certainly has skin in the game. As the Herald Tribune points out "she finds herself at the helm of the world’s largest exporter of goods at a moment when world trade is collapsing". (In her defense, she also finds herself the leader of a rapidly aging populace, making spending challenging and deficits more difficult- tho by no means impossible - to finance in the future). Let's not lose sight of the fact that Germany is one of the world's largest surplus nations. If surplus/export nations feel they do not need to act on fiscal stimulus, look out below! And do note that China - another massive surplus/export country - has itself embarked on a massive stimulus program. Germany could learn a lesson from the Chinese, it would seem, if not from the Americans and our deficits.

Per Martin Wolf, one should never expect much economic leadership from the Europeans. But you'd think that the leader of the world's largest exporter would be keenly interested in finding ways to stimulate global demand in the midst of a 'collapse' in global trade and the worst economic crisis since the 1930s. I rather think that could even be construed as being in Germany's self-interest and be marketable in a re-election campaign....

Merkel is acting as though this crisis is not as bad as it is. (She's not alone in this - see Congressional Republicans, for one large group in denial.) Recall how she pretty high-handedly refused to help out Central and Eastern European nations a few weeks ago. There's one more quote along these lines which struck me: “On an international level, we must all recognize that after the crisis we need to return again to solid financial policies" "After the crisis...."? What an amazingly passive construction! Sounds to me that the German Chancellor is assuming that this crisis will somehow magically solve itself, and shall soon pass, and that Germany thus need not change anything it's been doing for years now.....

Such thinking seems guaranteed only to deepen this crisis.

Here's the article: Merkel Is Ready to Greet, and Then Resist, Obama

Two hints of future US bank bailouts, and a devastating assessment of the PPP

Bailouts:

1. The Spanish leading the way?: Spain bails out first bank in 16 years
2. Geithner suggesting a similar outcome in the US?

The key line from Geithner:

“Some banks are going to need some large amounts of assistance,” he said yesterday on the ABC News program “This Week.”

These "large amounts of assistance" would be on top of the new PPP, folks.

If only we'd get this over with sooner rather than later, per Mr Wolf. Alas.

Devastating video:

Speaking of the PPP, if you have 12 minutes to spare you must watch this video, which demonstrates how banks will make a killing - and taxpayers take a bath - by forming shell companies to buy toxic assets from themselves at full price yet only risk 7 cents on the dollar: YouTube - Geithner Plan II ("The problem of banks buying assets from themselves")

Stick with it the whole twelve minutes - the last three are priceless, in a manner of speaking (from the Khan Academy http://www.khanacademy.org/ , which I'd not heard of until today, but will for sure be following in the future...my bad on that one)

Should this scheme take place - and the case for it from the bank POV is, ummmm, compelling - expect another round of populist anger. Just one far more justified than the AIG bonus fiasco, since this time taxpayers will be hosed to the tune of $800 billion+, not a mere $160 million.

IMF fun

Well, not fun exactly.

But it is indeed fascinating to observe a normally staid and bureaucratic institution get all lathered up. But unprecedented and scary times tend to get even the most gray of organizations speaking forcefully. And speaking forcefully, and lathered up, the IMF indeed is.

They can be found here: http://www.imf.org/external/index.htm

Some recent and attention-getting missives from headquarters, emphases added:

1. World Faces Crisis Crossroads at G-20 Summit, Says IMF In a video conference with journalists based in London, Paris, and Washington, Strauss-Kahn outlined five key subjects on which the IMF wanted to see progress at the summit to combat the worst economic downturn in 60 years, in addition to considering how to improve regulation of the fractured global financial system.
2. IMF’s note for the G-20: “The prolonged financial crisis has battered global activity beyond what was previously anticipated. Global GDP is estimated to have fallen by an unprecedented 5% in the fourth quarter (annualized), led by the advanced economies, which contracted by 7%. GDP declined by around 6% in both the United States and Europe, while it plummeted at a post-war record of 13% in Japan. Growth also plunged across a broad swath of emerging economies … against this backdrop, global activity is expected to contract in 2009 for the first time in 60 years.”
3. Global Economic Slumps Challenges Policies A pernicious feedback loop between the real and financial sectors is taking its toll. The continuation of the financial crisis, as policies failed to dispel uncertainty, has caused asset values to fall sharply across advanced and emerging economies, decreasing household wealth and thereby putting downward pressure on consumer demand. In addition, the associated high level of uncertainty has prompted households and businesses to postpone expenditures, reducing demand for consumer and capital goods. At the same time, widespread disruptions in credit are constraining household spending and curtailing production and trade
4. Advanced Economies to Contract Sharply in 2009 Advanced economies will suffer deep recessions in 2009, the assessment said. Leading economies in the Group of Seven are expected to experience the sharpest contraction for these countries as a group in the post-war period by a significant margin (see table). The IMF said that in the fourth quarter of 2008 global GDP contracted by 5 percent at an annualized rate. The IMF is still working on its projections and will announce numbers for countries around the world on April 22.

Expect more colorful language in that April 22 report, as the writers at the IMF are seemingly only getting warmed up....

Rasing taxes in a Recession

Most everyone agrees that the last thing to do in a massive recession is to raise taxes. That, plus too-little stimulus and protectionism, was a key ingredient in the Great Depression. Thus, the Obama team here has been extremely careful to point out that its tax hike on folks with incomes over $250,000 won't kick in until 2011, at which point the recovery will, in theory, be underway.

But such restraint is seemingly not possible at the State and local levels, where budgets have to be balanced, and where government incomes have collapsed. Across the nation, frantic efforts are underway to mend gaping holes in state and local operating budgets, and every rock that might generate new revenue is being overturned. Not State better illustrates this than New York, epicenter of the financial meltdown, and the scene of frenzied efforts to keep New York City's mass transit system semi-solvent, and to keep the State's budget from near-collapse. The solution (in large part)? Raise taxes! And, btw, don't forget to keep spending on really stupid things (and cut spending on vital ones) along the way:

State Leaders Outline Deal on a Budget

The plan would take steps toward a $16 billion deficit with billions of dollars in new taxes, financing from the federal stimulus and a substantial slowdown in the growth of health care spending.

....despite the enormous fiscal pressure the state faces, the budget contains $170 million in financing for pet projects — an amount unchanged from last year — suggesting that Albany’s appetite for with what critics call pork-barrel spending appeared to be undiminished. Listed in the budget were grants to gun clubs, an upstate museum dedicated to bricks and brick-making, the Soccer Hall of Fame in Oneonta and an organization known as the Urban Yoga Foundation.

....A major part of the tax portion will come from a plan to temporarily raise taxes on New York’s highest earners, starting with single filers who earn more than $200,000 and married and joint filers who make more than $300,000. New Yorkers will also pay new or increased fees to obtain a driver’s license, operate a boat, hunt and fish, rent a car, and buy wine, beer and cigars. The deal would also raise $557 million in taxes on utilities.

Note that New York's tax increases are across the board - hit up the wealthy, sure, but also hit up all those folks who drive, and drink beer and are also doing really well economically (haha)....

Now, New York is famously disfunctional at the State level, as evidenced by that brick museum, etc. But expect measures such as these to multiplied in almost every other state, and in thousands and thousands of municipalities all over the country. Governments are bleeding red ink everywhere you look.

Of course, this is going to put further downward pressures on consumer spending, thus further deepening and lengthening the Recession. Especially look out for the rich to be extra-stingy; they're getting hammered left and right with equity losses, and are gearing up for an era of much higher tax bills...

Negative feedback loops, anyone? Reduced consumer spending results in reduced government revenues and lower corporate profits, creating rising unemployement, further increasing consumer savings, further hurting the economy in the near term, etc, etc ad nauseum. We've seen this movie before.

Here's a Google News search result under 'tax hikes': Results 1 – 10 of about 11,904 for tax hikes. A few of the hits:

Smokers brace for huge tobacco tax hikes
stimulus funds won't save state from tax hikes
Cigarette, fuel tax hikes in RI budget plan
State faces higher income tax, more cuts
New York's high-income earners facing big tax increase
Cigarette tax hike has many fuming
Vt. lawmakers to consider gas tax hike today
County projects may usher in bigger tax hike
Your taxes are going up this week

This is yet another of the myriad reasons that the Federal stimulus is far too small. Local governments need revenues, but in their desperate search for them are further poisoning the economic well. The feds can keep printing money, and should be. The crisis is worsening.

Martin Wolf: Worried, to put it mildly

Successful bank rescue still far away

Excerpts, emphases mine:

I am becoming ever more worried. I never expected much from the Europeans or the Japanese. But I did expect the US, under a popular new president, to be more decisive than it has been. Instead, the Congress is indulging in a populist frenzy; and the administration is hoping for the best.

Addressing the Geithner public/private partnership, he writes:

I think of this as the “vulture fund relief scheme”. But will it work? That depends on what one means by “work”. This is not a true market mechanism, because the government is subsidising the risk-bearing. Prices may not prove low enough to entice buyers or high enough to satisfy sellers. Yet the scheme may improve the dire state of banks’ trading books. This cannot be a bad thing, can it? Well, yes, it can, if it gets in the way of more fundamental solutions, because almost nobody – certainly not the Treasury – thinks this scheme will end the chronic under-capitalisation of US finance. Indeed, it might make clearer how much further the assets held on longer-term banking books need to be written down.....

He prefers public recapitalization (nationalization) but fears this is politically impossible at the moment, or at least exceedingly difficult:

Why might this scheme get in the way of the necessary recapitalisation? There are two reasons: first, Congress may decide this scheme makes recapitalisation less important; second and more important, this scheme is likely to make recapitalisation by government even more unpopular....

If this scheme works, a number of the fund managers are going to make vast returns. I fear this is going to convince ordinary Americans that their government is a racket run for the benefit of Wall Street. Now imagine what happens if, after “stress tests” of the country’s biggest banks are completed, the government concludes – surprise, surprise! – that it needs to provide more capital. How will it persuade Congress to pay up?

I fear, however, that the alternative – adequate public sector recapitalisation – is also going to prove impossible. Provision of public money to banks is unacceptable to an increasingly enraged public, while government ownership of recapitalised banks is unacceptable to the still influential bankers. This seems to be an impasse

Conclusion?

The conclusion, alas, is depressing. Nobody can be confident that the US yet has a workable solution to its banking disaster. On the contrary, with the public enraged, Congress on the war-path, the president timid and a policy that depends on the government’s ability to pour public money into undercapitalised institutions, the US is at an impasse.

It is up to Barack Obama to find a way through. When he meets his group of 20 counterparts in London next week, he will be unable to state he has already done so. If this is not frightening, I do not know what is.

"Wishful thinking syndrome"

Back from a few days of travel. Much has been going on, of course, and this blog will catch up on stuff as the week unfolds and as we move towards the G-20 on Thursday

But let's start with Robert Shiller, who's on CNBC this morning. As ever, he's concerned about 'animal spirits' and market psychology, and doesn't like what he's seeing and hearing. He sums things up by saying that the Obama administration is suffering from the title of this posting. I agree. So many of their initiatives have assumed near-ideal market outcomes and macroeconomic developments, rather than worst-case. And if we've learned anything, it's to expect, and plan for, the worst, unfortunately. Shiller's very worried that if the latest round of government rescues - esp the new Geithner plan and the stimulus bill - fail (and, like Krugman, he's afraid they're too timid) then market psychology spiral downward, making further recovery efforts even more difficult. In 6 months we could be looking at another phase of the crisis - one which is accelerating and for which few policy options would have political support.

Best to get all the pain over with sooner rather than later, and the nationalization of banks with toxic assets still makes most sense. Absent nationalization, the Achilles heel of all bank rescue plans - how to value toxic assets - remains. Here's an assessment from Doug Roberts at bloggingstocks.com:

Paul Krugman, the liberal Noble Prize winner, wrote an editorial in The New York Times attacking the plan as "Cash for Trash." Subsequently, Newt Gingrich, the former Republican Speaker of the House, announced on Fox News that he agreed with Professor Krugman. When senior figures on both left and right agree, it may be wise to look past the euphoria.

The problem with the purchase of toxic assets has always been one issue:price! Banks claim that this is a liquidity issue and that these assets are worth much more in the long run. Outside investors disagree and think that these assets are worth far less. However, if banks sell at these prices, many may be insolvent. This would require receivership under current FDIC rules. In some circles, this is called nationalization, something the government desperately wants to avoid.

Therefore, the government appears ready to create substantial incentives for these private investors to purchase at higher prices, possibly including non-recourse loans and government guarantees. This assumes that the banks are right, and these assets will eventually return to higher values.

However, suppose that the investors are right, and these assets are worth very little. We are merely paying private investors and banks with taxpayer funds to postpone the inevitable write-down of these assets. As we saw in Japan, postponing these write-downs does not change the situation. You cannot re-inflate the bubble!

This will simply result in huge tax bill for the American public sometime in the future. The cure may be truly worse than the disease.

After the G-20 this week (at which it now appears certain that no coordinated response will emerge) the next big reality check will be the (secret) results of those bank stress tests in late April. Reuters has a good peek into what that might look like: Bank stress tests could broadly hurt corporate debt

As ever, it's best to avoid wishful thinking....

Let's keep pissing off the Chinese and see how that works

Goldman Looking To Dump Shares Of Chinese Bank

Not that the Chinese hold any of our debt or anything, and not that that debt won't soon collapse in value.... Let's now hose em on equities too. Won't they be amused? How'd that Blackstone investment work out after all? So, now, we've got pissed off Chinese saying screw US equities, and afraid of US debt. With very much good reason on both accounts.

Fun to think of only Americans buying US treasuries, given that Americans are utterly broke....

And does not that "private/public partnership" ultimately require, indeed beg for, foreign investment (since that's what passes for 'private' these days)

Thanks Goldman. Keep up the good work for your multi-millionaire partners.....

Is it Obama's fault that the Dow is up 400?

Just asking.....

No more mark to Marquette!

I foolishly picked Marquette in my March Madness pool, and am now hosed in the West bracket, as they screwed the pooch manana.

But in my case, marking to Marquette caused me to over-value my asset, not under-value it. Now I'm really confused.

Going forward, my NCAA picks shall be considered marked to myth....

What a great idea! (If Geithner's plan can work, at least)

From a correspondent (PK) on Baseline Scenario (emphasis mine):

If Geithner’s taxpayer subsidized toxic public/private plan goes forward, I think it would be fair if the federal government allow non-institutional investors to participate via a no-fee investment vehicle. I think if Americans had the option of investing in this program (without having to pay the egregious fees to the investment advisors/PE shops), it would be much easier to swallow since they would at least get the same deal the sharks are getting. There is probably more money on the sideline with individual investors than all these institutional investors. Maybe they could set up some ETF equivalent for it. I think the willingness of the administration to do such a thing would tell us a lot about whose for whose interest they are really looking out.

It really would be fabulous if individuals had a shot at fairness and profits after the past 10 years.

"Financial De-globalization"

There is probably no more important story in the world than this. The informal system which has governed the world's economic operations (often referred to a 'Bretton Woods II', in which saving nations finance debtor nations) has abruptly ended.

As always, look to Brad Setser for authoritative analysis thereof: Financial de-globalization, illustrated

I urge you to dig in, as this is one story we will all live with for a decade or (much) more, and is one poorly covered in most media, as it's (as you'll see) rather technical

Excerpts:

• The financial world has changed — even if the scale of the change isn’t obvious in the financial sector’s 2008 bonuses.
• Judging from the data on net flows, Bretton Woods II has in some sense come to an end. The world’s central banks are no longer building up reserves and thus are no longer a net source of financing to the US.
• Words cannot really capture the sheer violence of the swings in private capital flows that somehow produced a a rise (net) private demand for US financial assets.
• it is hard to look at these charts and conclude all is well in the world. Cross-border financial flows rose to crazy heights during the credit boom. Thank the shadow financial system. Over the past year those flows have collapsed with stunning speed.
• To date, the United States “sudden stop’ has manifest itself as a credit crisis not a currency crisis (that qualifier 'to date' scares the hell out of me)
• And it is also striking, at least to me, that financial globalization collapsed of its own weight, not because of any political decision to throw sand into its gears. That may yet happen. The political reaction to the financial excesses of the past few years is just beginning. But the fall in financial flows to date largely reflects the unwinding of a a host of leveraged bets made by the City and the Street — not demands from Whitehall or Washington.

One consumer fallout from the Recession - many more 'underbanked'

From the Mercator Group:

…the number of “unbanked” and “underbanked” people is growing rapidly in the current economic crisis. The Mercator Advisory Group, a research service focused on the credit and payments industry, estimated in November that the volume of transactions on general-purpose prepaid cards totaled more than $4 billion in 2008. It forecasts an increase to $7.2 billion in 2009 and $10.8 billion in 2010.

And this would seem to underestimate things by a wide margin:

“The rapid growth squares with what we see in the marketplace,” said Mark Troughton, president of cards and networks at Green Dot, “but we find the totals too low. We did more than $4 billion by ourselves last year.”

A lot of this growth can for sure be attributed to the steep and continuing rise in unemployment

New TALF, II

Macroman humorously points out that a very similar 'public/private partnership' was attempted in London, to a distinct lack of success. And we agree that Congress is a major impediment to this thing working....

Here We Go Again....

...if this program is going to make a important contribution towards solving the crisis, it will have to be a bit better than the hints that Geithner drops in today's WSJ. Heavy on platitudes and light on details, Macro Man can see nothing there to suggest that the PPIP will be any more successful than the TALF (after a 2.35% take-up, the latter has changed its name to "That's Another Laughable Failure")

One of the problems with Congress' excise tax solution to the AIG bonus scandal is that it renders the private sector a little, ahem, nervous about going in to partnership with the government. After all, what would stop the Feds from going after the profits that firms made in the PPIP (PIMCO, Blackrock, and GS excepted, natch)?

Perhaps Geithner may wish to ask Londoners how well their version of a Public-Private Partnership has worked, both financially and service wise. (Hint: it rhymes with "not very.")So there you have it. The US Treasury has come up with a plan similar in spirit (or at least name) to one foisted upon London by the wretched "Red Ken" Livingstone. Why does Macro Man have the feeling that after this plan is launched, equities will tank and we'll all be saying "here we go again..."?

The new TALF

More on this to come as details emerge, but here are some early impressions:

1. At $500 Billion initially, and up to $1 Trillion over time (Timothy Geithner: My Plan for Bad Bank Assets ) it may still be too small. I hate to say this, as the Federal debt is becoming obscene - and the worst-case scenario remains a dollar/Treasuries collapse - but bank losses just here in the US are now estimated to be $1.8Trilllion (RGE Monitor), only $300 Billion of which have thus far been realized. So, there's another $1.5 Trillion to come, at least. At $500 Billion, the TALF is thus 2/3 too small; at $1 Trillion it's 1/3 too small.
2. It assumes that underlying assets behind the 'troubled/toxic' assets will stabilize in the near future - that the worst of asset value collapses are behind us. I'm not so sanguine about that. Things economic are worsening, not stabilizing. The housing market is still probably 18-24 months from bottoming (and thus the value of RMBs, CMBs etc will continue to plunge) and any other consumer debt (or, I'd argue, equity) security is likely to weaken in value over the next year. See Meredith Whitney on this - 2009 will be worse for banks than 2008 (and 2010 won't be a treat) because the underlying economy - esp consumers - will be much weaker. Thus bank losses will continue, and the toxic assets will become ever more toxic. And we therefore still have the fundamental question we've had all along - what are these things worth? And my guess is that a lot of investors will still be too wary to kick in
3. Who really wants to hop into bed with the feds when Congress is running wild? We urgently need signs of responsible behaviors from folks on Capitol Hill to calm investor fears of overly-meddlesome regulators
4. Krugman's loathing of the whole thing worries me: Financial Policy Despair Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place.
5. I still much prefer the more radical (yet time-tested) approach of nationalizing the banks - or the riskiest ones. Guarantee bank debt at the Federal level and take control of insolvent banks. And with $1.5 Trillion in losses still to come, you can bet your bottom dollar there is a pile of insolvent banks out there. Let's finally face this head-on.

How clueless is the media?

This is about the best (funny) example of wasted media resources in years. Or, umm, excuse me, months. I mean, errr, weeks. No - maybe, perhaps, days?? Minutes? Remind me - when was Madoff imprisoned??

Protest Bust! 20 Vans Of Media, Just One Bus Of Protesters

Krugman slams the Geithner plan as nothing new, and insufficient

If not even outright dangerous, as this is the last chance we have to get this right. Agreed. Time for the Swedish solution. And its been time for about a year now......

More on the bank plan

"If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.

But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls."

Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution.

Credit Unions are not immune

Regulators Seize Two Large Credit Unions: U.S. Central and WesCorp

You've probably never heard of them, but these two are big ($50 billion+ in total assets).

Tho two firms in question are 'wholesalers' and thus consumers will, for the moment, be unaffected, I, for one, had hoped that the non-profit depositor-owned credit union sector might have been one of the bright spots in the banking system in the past few years (as the greed factor was less at play, and they weren't into the wholesale securitization frenzy). But it looks, sadly, as though they too got caught up in the mess. Many of their assets have been marked down dramatically. US Central's having a conference call with member Unions on Monday to discuss implications

The crisis is spreading to every nook and cranny of the economy....

BTW, the Feds always seize banks on Friday evenings, when no one's paying attention. If we (when we) finally go down the nationalization route for Citi etc, expect a Friday 7pm announcement.

HINT: If I worked for a firm advising clients, I'd do an emergency webcast Monday morning

Because things are, yet again and as in Sept/Oct, unraveling super-fast. If not even faster.

And this just when there are many in the US corporate world are again imagining that the worst is over. Cuz the 'market' has 'rallied' for two weeks. Cuz revenues have 'stabilized'. Or because unemployment claims aren't getting worse. Pick your reason to be delusional, and you'll hear in in the halls of Congress and in executive suites all over the land.....

Some bracing stuff to chew on, in addition to my recent posts:

Much Bigger Deficits Seen in Budget Office Forecast

http://www.cbo.gov/ftpdocs/100xx/doc10014/03-20-PresidentBudget.pdf

From Washington, an A.I.G. Flogging for the Masses
By JOE NOCERA 5:52 PM ET
All that invective and posturing over the bonuses at A.I.G. may be undermining efforts to shore up the economy

Joe's on the case for sure:

By week’s end, I was more depressed about the financial crisis than I’ve been since last September. Back then, the issue was the disintegration of the financial system, as the Lehman bankruptcy set off a terrible chain reaction. Now I’m worried that the political response is making the crisis worse.


This emergency is real, and growing, and still not understood. In fact, it's still utterly underestimated by complacent American business leaders, and by an almost willfully irresponsible Congress.

Time for scaring the children again!

Kinda cool - Goldman on my case?

Just checked my blog stats, and all's trending up (thanks folks!)

But in the process discovered that the good folks (security?) at Goldman took note of my friendly little mention yesterday about that teeny weeny protest at their Manhattan HQ. Lots 'o first-time links yesterday from the Death Star to my wee little blog, and all of them to that one particular post...

Interesting. No black helicopters thus far, but will keep you posted!

Check out Doug Short

The link's to the right. Here it is if you're lazy :) dshort.com - Financial Life Cycle Planning

If you're like me, you'll be increasingly struck by the parallels between the 1929-1932 and 2008-2009 equity market crashes. Tho not exact, I'm more and more convinced that their similarities have real meaning.

Krugman blog on the collapse of manufacturing - sort of misses the point, imho

The Great Recession versus the Great Depression

Seems that here in the US the manufacturing collapse is, thus far, (only) 1/2 of what it was in the Depression. Thus Krugman concludes: not as bad as the Depression, but 'pretty bad'.

For sure

But here's the kicker: things global (if not US) are unravelling at least as fast now as in the '30's, cuz we're more interconnected and cuz this puppy began in the undisputed capital of finance - the good ole USA. And we're in the beginning of this crisis, not the middle and for sure not the end.

See: Key Trends in Globalisation: The convulsion in world trade From John Ross, emphases mine:

Considering the relation between the financial decline and the productive economy, an article on this blog earlier this month also noted that, for the major industrialised economies, the annualised rate of decline in exports in the last three months has actually been more rapid than in 1929.
The latest statistical data released by the Organisation for Economic Co-operation and Development (OECD) for world trade up to December 2008, with data for more recent months in a few cases, allows the calculation of a picture for a wider range of countries that confirms this trend in striking fashion.

Due to the extremely rapid shift in the situation three indicators have been calculated for exports – the actual year on year decline to December 2008, the actual decline in exports since the peak month for each country or area last year, and the change during the three months to December 2008 on an annualised basis.

In order to give a historical scale of comparison the decline of US exports, in current prices, was 22.5% in 1929-30, 32.7% in 1930-31, 32.4% in 1931-32 and 4.0% in 1932-33 after which partial export recovery commenced - i.e. the most rapid annual rate of decline of US exports in the Great Depression, and the most rapid on record to date, was 32.7% in 1930-31. By 1933 US exports had fallen 66.2% below their 1929 level.

Considering first the OECD area as a whole, and the situation in the European region, the data is set out in Table 1. As can be seen for the OECD region as a whole exports have already declined by over 30% since their peak in April 2008 - essentially equaling the rates of decline of the worst year of the 1930s. The annualised rate of decline in three months up to December 2008 was an astonishing 64%.

For the major G7 economies the decline was only slightly less severe - with a decline of 26.9% since the peak in July and an annualised rate of decline of 57.8% in the three months to December 2008.

Within the Euro area the annualised rate of decline for the three months to December 2008 was 50.4% and for the OECD European region, which includes some East European states, the annualised rate of decline was 67.0%.

It may therefore be clearly said that in the field of trade, as in that of financial markets, the current decline is full comparable in speed of descent to the onset of the Great Depression. The difference, so far, is not in the speed of fall but in its duration. The decline in exports after 1929 continued for four years whereas so far the current decline has been occurring for a year.

It's worse than you think it is

Goldman Sachs, Welfare Queen, wants off the dole...

Wall St, recently voted less guilty than Washington in creating this crisis, is edging ever-closer to giving DC and taxpayers the middle finger, and 'giving back' TARP money. Thus they can join the likes of their soulmates Bobby Jindal and Sarah Palin, those noted intelligent defenders of 'free market capitalism' who wish to see the house burn down on ideological principals.

Goldman is now muttering not-so-veiled threats to do so (after having happily been one of the very largest beneficiaries of Gov't largesse, and one of the very largest counterparties to AIG). Today they went to lenghts to dispel these beliefs (Goldman Says It Has No Material Exposure to AIG ) but color me unpersuaded. The next time a leading bank executive speaks utterly truthfully to analysts, investors, counterparties, the Feds, the press, and the public it will be the first such time since August 13, 2007. Goldman may indeed break this streak, but I'd hedge that bet....

PR is PR, even in a crisis, and Goldman's looking to gin their stock price, knowing that in about 2 weeks Emporers Citi and BoA will be revealed as wearing no clothes, and all FS equities will tank, Goldman's included... Plus, their partners are not amused by the prospect of 'filthy rich banker house tours' in Greenwich, and are seeking to regain anonymity, the consequences to the nation be damned...

Every time you want to cut these dudes a break, they again act like the asses who greedily helped cause the problem in the first place. At least the morons in Congress are (supposedly) accountable to the people. All we can do in Goldman's case is to short their stock.

For some juicy background, go no further than here: Goldman Sachs, Welfare Queen

Debate: Who's more to blame?

Is Wall Street or Washington more to blame for the crisis?

And not that an answer to this question can be agreed upon anytime soon (like never), and there are plenty (not me) who would add 'Main St' to the accused, but an interesting debate took place Tuesday night in NYC.

The verdict by audience vote - Washington. Though there's plenty of blame to go around, I rather tend to agree, and further now worry that Washington - esp Congress - is doing all sorts of frankly stupid things in their haste to avoid ever-escalating public wrath.

The debate motion was "Blame Washington more than Wall Street for the financial crisis"

Speaking for the motion were Niall Ferguson, professor of history at Harvard University; John Steele Gordon, author of An Empire of Wealth; and Nouriel Roubini, professor at New York University’s Stern School of Business and chairman of RGE Monitor.

Alex Berenson, investigative reporter for the New York Times; Jim Chanos, famed short seller and founder of Kynikos Associates; and Nell Minow, editor and co-founder of The Corporate Library spoke against the motion.

The full transcript of this debate is available online at this link

My favorite quotes:

1. “This symbiotic and indeed corrupt relationship between Wall Street and Washington is the thing that is rotten at the heart of the United States, it is the principal explanation for this crisis, and that brings me to the key question you have to ask yourselves. Who has to defend the public interest. Is it the investment bankers, the hedge fund managers, or is it your elected representatives. Ladies and gentlemen, it is perfectly clear, that it is Washington that has failed to defend the public interest, and I fear, it is continuing to fail to do so.” - Niall Ferguson
2. “[Greenspan] has been a creator of serial bubbles one after the other and when people expect to be bailed out then they behave accordingly, that’s the Greenspan put. We created a system which people expect, that the gains are going to be privatized, and the losses are going to be socialized; this is a welfare state for the rich, for the well-connected and for Wall Street. That’s what happened, that’s public policy.” — Nouriel Roubini

More signs of a Depression?

Well, if you look at the collapse in global manufacturing and trade, you'd sure be worried.

Here's an excellent summary from Nelson Schwartz in the Times: Rapid Declines in Manufacturing Spread Global Anxiety

A few highlights/lowlights. I simply bullet-pointed some amazingly striking data and quotes:

• In Europe, for example, where manufacturing accounts for nearly a fifth of gross domestic product, industrial production is down 12 percent from a year ago.
• In Brazil, it has fallen 15 percent.
• In Taiwan, a staggering 43 percent.
• Even in China, which has become the workshop of the world, production growth has slowed, with exports falling more than 25 percent and millions of factory workers being laid off.
• In the United States, until recently a relative bright spot for manufacturing despite the steady erosion of blue-collar jobs, industrial output fell 11 percent in February from a year ago, according to statistics released Monday by the Federal Reserve.
• The depth and speed of the plunge are striking and, most worrisome for economists, a self-reinforcing trend not unlike the cascading bust that led to the Great Depression.
• “Manufacturing has fallen off the cliff, and it’s certainly the biggest decline since the Second World War,” said Dirk Schumacher, senior European economist with Goldman Sachs in Frankfurt.
• The pattern of manufacturing and trade ominously recalls how the financial crisis of 1929 grew into the Great Depression: tightening credit and consumer fear reduced demand for manufactured goods in one country after another, creating a downward spiral that reduced global trade.
• “Plunging manufacturing suggests that as bad as things were in the fourth quarter, they are at least as bad now,” said Robert J. Barbera, chief economist at ITG, a New York research and trading business. “This is a classic adverse feedback loop. It won’t quickly correct itself.”
• In fact, trade is shrinking even faster than production. Germany’s exports down are 20 percent from a year ago, Japan’s have plunged 46 percent, and in the United States, exports fell at an annualized rate of 23.6 percent in the fourth quarter of 2008.

In the previous post, I argued for a large and coordinated fiscal stimulus by the G-20. This collapse in manufacturing and trade in, as noted above, self-reinforcing if not intervened with. Any fiscal stimulus would, by necessity, include those in the G-20 who are surplus countries. - after all, many of them are suffering the worst, or soon will be. The Chinese seem to get this, the Germans most decidedly do not. The US, UK and Spain are spending, but could certainly do even more.

Martin Wolf is still on the case, continuing to argue for a coordinated 'rebalancing' of the global economy, which in the long run will require surplus nations to spend those surpluses, not simply hoard them: Why saving the world economy should be affordable

Can we afford this crisis? Will governments destroy their solvency, as they use their balance sheets to rescue over-indebted private sectors?

The debate, as it has so often been, is between the US and Germany. Thus, in a speech last week, Tim Geithner, US Treasury secretary, noted that, “The IMF has called for countries to put in place fiscal stimulus of 2 per cent of aggregate GDP each year by 2009-10. This is a reasonable benchmark to guide each of our individual efforts. We think the G20 should ask the IMF to report on countries’ stimulus efforts scaled against the relative shortfall in growth rates.” Needless to say, no such firm pledge was forthcoming, with Germany particularly resistant.

...there is also a current agenda: rebalancing of world demand.

Surplus countries subcontract to their trading partners the job of spending oneself into bankruptcy, while lecturing the latter on their profligacy. Thus the reason the US, the UK and Spain have huge fiscal deficits is that they are offsetting the collapse of private spending at home and the export of demand abroad. This is unsustainable, in the long run.

The danger now is that the surplus countries expect recovery to come from enormous and sustained fiscal expansion in deficit countries. Some analysts argue that the US should have refused to take fiscal action at all, leaving it to surplus countries. Unfortunately, that would have meant a global depression. Nevertheless, without rebalancing there can be no healthy recovery. On this point, the US is right and Germany is wrong.

Indeed. In the near term the economic emergency necessitates massive spending and, yes, large deficits. This is unavoidable. What is also unavoidable, alas, in the mid term, will be paying the bills for this response. And there will be no easy or pain-free ways to do so. Entitlements in the Euro zone, the US, Japan etc need to be radically altered. Currencies (esp the dollar) will be under huge pressures. Interest rates will skyrocket.....None of this is fun. But it is unavoidable, given the depth of the crisis we have created

And that's why this blog has its title - things are indeed worse than you think they are, and will be for years to come.

Sorry to say so.

The problem with AIG

As noted earlier, The AIG story is all about the unregulated overconcentration of global risk in a fashion which if not criminal, was massively irresponsible. But instead, the story has become the bonus payments. There will be a ghoulish bus tour this weekend to visit AIG exec homes (including a few in my hometown), Congress is looking to tax corporate bonuses at 90%, and folks all over the country are outraged. With very much good reason. But all this sturm und drang really risks missing the forest for the trees: the world's banking system and economy is still perilously close to collapse, and very little is being done about it. Instead, all the air in the room is sucked up by posturing and populism.

I like a good populist revolt as much as the next guy, but folks - this is deadly serious and we're fast running out of time.

You've heard me worry about the disfunction of the G-20 (G-3). Expect more of that. But this morning brings fresh worries, and new news, from three places:

1. The WaPo: Facing Dilemma, Banks Cite 2 Paths to Disaster
2. David Brooks: Perverse Cosmic Myopia
3. Simon Johnson and James Kwak: Off With the Bankers

The Post points out the following:

Execs say either option -- accepting restrictions on compensation or returning billions in federal aid -- could have a disastrous effect on economy. I Don't disagree with bank execs on this, frankly. As they point out, legislation enacted in a fit of populist rage is not likely to be any good: The possibility of a newly weakened banking industry also raised concerns among businesses in the wider economy that already are struggling to find financial firms willing to lend them needed money.
"We're all going to lose on this thing," said an executive at a large bank that took federal aid. He and other bankers expressed shock at the rapid progress of legislation that could impose large pay cuts on thousands of workers, and dismay that the industry is at the mercy of an angry Congress. And the Post correctly points this out: legislative action could trigger the unraveling of the broader federal bailout of troubled banks, which has grown increasingly unpopular on Capitol Hill and across the country. I find the prospect that bank rescues might fail due to (relatively) small bonuses chilling. As David Brooks put it: We’re in the middle of a multitrillion-dollar crisis, and our political masters — always willing to throw themselves into any issue that is understandable on cable television — have decided to risk destroying the entire bank-rescue plan because of bonuses that account for 0.001 percent of the annual G.D.P.

Next we have more from Mr Brooks, who's getting better on the economic meltdown all the time. Today he's worried about things global, and the absence of any political will to act boldly. A few gems:

The tiger, of course, is the collapsing world financial system. Americans actually have a falsely mild view of this crisis because the economy is worse abroad. The U.N.’s International Labor Organization projects between 30 million and 50 million job losses worldwide. Central European countries are teetering; Japan’s economy is horrifying; and the Chinese job creation machine is losing the race against its demographic pressures.
There have been riots in Greece and China as well as huge protest rallies in Dublin, Paris, London and beyond. So far, the protesters express anger without an agenda, but if the global economy continues to slide through 2010, they’ll discover one. A predictable result is a series of beggar-thy-neighbor exchange-rate policies, followed by rising trade barriers and the degradation of the entire global system.

This is a global crisis, and a core lesson of the Great Depression is that a global crisis calls for a global response. As such, Tim Geithner and Larry Summers are preparing for the upcoming G-20 summit with an agenda that has the merit of actually addressing the problem at hand: coordinate global stimulus, strengthen the International Monetary Fund, preserve open trade.

But the G-20 process is heading toward global impotence because the Europeans are dismissing this approach. Instead, they want to spend this moment of peril working on a long-term architecture to regulate global finance. The world is in flames and they want directorates and multilateral symposia and vague plans for a powerless “college of supervisors.” This is what Marie Antoinette would be for if she were an annual Davos attendee

Then we have Mr Johnson and Kwak, also in the Times today. They debunk the myth that only banking insiders have the chops to unravel the messes they've created, and point to the 1998 crisis in Asia as evidence that nationalization works at a time like this. Excerpts, emphases mine:

They begin rather bluntly:

A.I.G. can hardly claim that its generous bonuses attract the best and the brightest. So instead, it defends the payments by arguing they’re needed to retain employees who are crucial for winding down transactions that are “difficult to understand and manage.” In other words, only the people who stuck the knife into the American International Group can neatly extract it for a decent burial.

There is no reason to believe this.

Similar arguments made during the 1997 Asian financial crisis, when currencies and stock markets collapsed in much of Southeast Asia, turned out to be a smokescreen to protect the executives who were partly responsible for the mess. Recovery from that crisis required Indonesia, South Korea and Thailand to close or consolidate banks. In all three countries, bankers protested, claiming that their connections with borrowers were critical to recovery....

The lesson of all this is that when insiders have broken a financial institution, the most direct remedy is to kick them out. Traders are hardly in short supply...

Even if the conclusion is that a few experts need to be retained, offering guaranteed bonuses to virtually the entire operation is hardly the way to achieve the desired results. We should not let people think that the best way to guarantee job security is to lose lots of money in a really complicated way.

The argument that A.I.G.’s traders are the people that we must depend on to save the United States economy is as weak and self-serving as it was in Thailand, Korea or Indonesia. A.I.G. is essentially advocating survival of the weakest. Thankfully, the American people are not buying it.

My bottom line here? Sure, fix the worst of the Wall St bonus system, and for sure do not give $$$ to mediocrities who got us here. And for sure, do not guarantee bank bonuses, especially for short-term performance. But do not destroy all of Wall Street in one fell swoop, and for very sure do not lose sight of the growing real crisis and for the need to act ever more boldly. We dither while the world burns.

Here's the bold action needed:

1. Nationalize as many bank as needed ASAP in a few weeks when the stress tests are completed. Then quickly implement the RTC model (or the good bank/bad bank one). We know how to do this, even if the scale this time is staggering. If in doubt, nationalize all of the biggest ones, so as not to play winners off losers. That could end up being the top 150 banks in the nation
2. The G-20 needs to have coordinated joint stimulus programs equal to 3% of GDP per country, and needs to eschew protectionism. The US should lead here by example, and stop picking on Mexico, etc
3. The US needs another, bigger stimulus in the next 6 months, one focused more on longer-term infrastructure investment, and less on near-term spending
4. There needs to be a serious effort to boost the capabilities of the IMF, beginning with more money and staff ASAP, but more importantly changing the charter to allow more involvement by developing countries, and less by Europe

Absent this stuff the decline towards global depression steepens....

Goldman protest at 4pm eastern!

Protest Outside Goldman Sachs Today At 4:00 PM


Sign up, show up. Madame DeForge avec guillotine may make an appearance....

Macroman on gold and oil

After yesterday's "shock and awe" move by the Fed, all wonder 'what happens now?' While I'm super-worried about the dollar in the long run (and, briefly, in the near term), Macroman is thinking of black and yellow commodities, not green currencies, today. And he's thinking that the black one is poised to skyrocket in price.

An excerpt, emphasis mine:

But consider the uber-bull case. In a world where gold trades at $2000, where is the oil price? Last year's oil rally was largely a demand phenomenon, some of which was real and some of which was speculative. But gold at $2k will pretty clearly be a monetary phenomenon, one which should impact all hard assets fairly similarly. When you throw in the multipliers that work in the oil market, via the monetary impact on the factors of production, Macro Man would submit that you should see a disporportionately large rise in energy prices. If you throw in the market pricing in an eventual recovery in demand volumes, the price impact could be explosive.

Gold may well be the superior trade for a 20% move. But Macro Man reckons that mid-curve oil is a far, far better trade for a 200% move.

For consumers, this would have the effect of creating even more uncertainty, and would for sure cause them to keep tightening the screws on all sorts of spending. Hard to see how any economic recovery is possible in light of a massive spike in energy costs. I'd for sure be really cautious about investing in just about anything that's not a hard asset (save real estate), still. There's the mother of all bubbles forming in bond markets, and equities are in a suckers rally. Looks like its back to Fall 2007, and time to hop onto the commodities bandwagon....

I'm falling in love with Chevelle

Let's just hope she's really a woman.

If you recall, Chevelle is the authoress of "Models and Agents" http://modelsagents.blogspot.com/

She (?) just bitch-slapped Paul Krugman in the most amusing and intelligent way thusly: A Nobel-prize winner adrift

Seems the Euros are getting really annoyed and gearing up for a fight. Finally!! If we all can get down in the mud pit and wrestle, we may come to a better understanding here....Where's that angry Chinese blogger? Turkish? Saudi? (oops). We need a heated and truthful conversation here, and my new love Chevelle has taken a large leap towards initiating it.

If she's a she

Enough gloom. Let's listen to some vintage Dispatch

Nothing better to lift your spirits (and mine) than this, mes amis:

DISPATCH

I highly recommend any live version of "Open Up" to get you started. Then think about Phish outside on some lawn this summer, and geeee, all is indeed well....

"Out of thin air"

No, not a new Krakauer book, but the Times' very apt description of what the Fed announced today:

Fed to Buy $1 Trillion in Securities to Aid Economy
By EDMUND L. ANDREWS 4:08 PM ET
The Fed dramatically increased the amount of money it will create out of thin air to thaw frozen credit markets.

Holy FOMC, part deux - bad news

When the Fed says they're gonna buy everything and anything in sight - from MBSs to Treasuries to Agencies to your goldfish farm - look out below! Where, pray tell, will all the $$$ for this come from? And why is the stock market 'rallying'. And why is Maria Bartiromo panting about 'optimism' and 'momentum'?

Well, the money's coming from future generations of us dupes (ooooops, Americans), via super-high interest rates and a collapsing dollar: eg everything you might want to buy in the next 2-30 years will be massively more expensive, and everything you might want to invest in will be wiped out by inflation.

Fun

While I've long argued for a massive governmental response to this crisis, and while the apparently monumental actions by the Fed today are gonna help things in the short term, today's machinations are at best a stop-gap. Had the Feds, rather, announced the immediate nationalization of all the largest 150 US banks, the 'markets' would have been apoplectic, but the root cause of this disaster would be closer to being solved...

We still have a fundamental and systemic crisis of the banking system, and Fed balance sheet inflation does absolutely nothing to address this

Triage to keep the patient alive, as done today, is yet another seemingly-dramatic-but-way-too-weak response to the crisis

Consider today's news to be very bad in the long run

Holy FOMC statement! Dollar collapse?

The Feds got closer to going all-in this afternoon - expanding their balance sheet by almost $1.5Trillion. But not a big enough move, per Bill Gross. Boy, things are really getting into Twilight Zone territory

More analysis soonish, but I'm most freaked by how the dollar is in free-fall. A sign of things to come, imho

(PS - no indication from the Feds that the economy is anything other than in continuing free-fall. "Downside risks" accelerating)

This is very cool news

RGE Launches the Peterson Institute for International Economics Monitor

Bookmark this puppy ASAP!

Here's the inaugural posting: Needed: A Global Response to the Global Economic and Financial Crisis

Fabulous stuff

How hard is it for the Fed to find qualified staff?

Well, this post on Mr Setser's blog pretty much sums it up:

babar responds:
if i were in any way qualified to work for the US treasury, i would go hire an illegal nanny for my kid TODAY.

Funny, sure. But this attitude scares me.

Recall this news from a week or so ago: http://online.wsj.com/article/SB123629285769044959.html?mod=djemalertNEWS

WASHINGTON -- Two candidates for top jobs at the Treasury have withdrawn their names from consideration, complicating efforts by Treasury Secretary Tim Geithner to staff his department at a time of economic crisis, according to people familiar with the matter.
Annette Nazareth, who was expected to be tapped as deputy Treasury secretary, and Caroline Atkinson, who was being considered to oversee international affairs, have both taken their names out of the running, these people said. Ms. Atkinson's name was withdrawn weeks ago and Ms. Nazareth withdrew several days ago.

It seems that no one who has a choice wants the seemingly thankless task of being subjected to the delights of obsessive and mindless public scrutiny of one's background and then working for peanuts 22 hours a day for infinity in order to solve a mammoth crisis of historic proportions which may be far too big for the US Treasury to handle by itself anyway....

And while Babar is indeed funny, this is really becoming a gigantic problem: the Government is way understaffed and outgunned here. At a moment in time when we need all hands on board as never in this nation's history, a vast majority of financial experts is sitting this one out.

This worries me more each and every day. Obama's got a truly first-rate senior economic staff and the best of outside council. But this massive, epic crisis needs experts at every level of government - especially at the day-to-day level of Treasury staff - and they are simply not showing up...