Financial topics

[John]

Dear David,

> This humorous piece from the NYTimes seems to have generational
> dynamics written all over it, what do you think John?

> http://www.nytimes.com/2009/10/14/opini ... illin.html

Thanks for pointing it out. This is an interesting article
contrasting "our guys," the Boomers, and the "smart guys," the
Gen-Xers.

The idea that brilliant Gen-Xers devised the structured securities
that turning into toxic assets, while dumb Boomers just looked on, has
actually been generally recognized for quite a while now.

My problem with this article is that it portrays what happened as the
actions of children at play. The kids invented these securities
while their parents looked on, and no one's to blame for what
happened.

What needs to be better understood is that the kids knew exactly what
they were doing when they were defrauding investors; and the parents
may not have understood the math, but they knew exactly what the kids
were doing when they were defrauding investors. This is why I keep
talking about the lethal combination of Xers and Boomers. This
crisis could not have occurred without the kids and parents fully
cooperating with one another, defrauding the public for their own
gain.

> And another question for you....if the banks took the bailout
> money and invested it in the stock market, why are Treasuries
> still yielding such low interest?...is someone else buying them
> (the Chinese)?....

For all the talk about the weakening of the dollar, if you have lots
and lots of money, there's still no safer place to put it than in
Treasuries, and a lot of people are doing that, raising the prices of
Treasuries and pushing down yields. To say that a lot of the
stimulus money is being channeled into the stock market doesn't mean
that all of it is.

John

[Jason]

John, you are going to hate this information...

Mortgage Backed Asset Securitization was already legalized in 1970, when the oldest GenXer was around 10 years old.

Many blame mortgage securtization for being the root cause of the current "World Financial Crisis" or WFC.

"Asset securitization began with the structured financing of mortgage pools in the 1970s. For decades before that, banks were essentially portfolio lenders; they held loans until they matured or were paid off. These loans were funded principally by deposits, and sometimes by debt, which was a direct obligation of the bank (rather than a claim on specific assets). But after World War II, depository institutions simply could not keep pace with the rising demand for housing credit. Banks, as well as other financial intermediaries sensing a market opportunity, sought ways of increasing the sources of mortgage funding. To attract investors, investment bankers eventually developed an investment vehicle that isolated defined mortgage pools, segmented the credit risk, and structured the cash flows from the underlying loans. Although it took several years to develop efficient mortgage securitization structures, loan originators quickly realized the process was readily transferable to other types of loans as well."

"In February 1970, the U.S. Department of Housing and Urban Development created the transaction using a mortgage-backed security. The Government National Mortgage Association sold securities backed by a portfolio of mortgage loans"

Looks like the lethal combination of Boomers and Silent Generation gave birth to this evil baby.

Of course the usual suspects, a "greedy nihilistic Gen X" must take the blame, as always..... hehehe.
.

[aedens]

http://www.pbs.org/wgbh/pages/frontline/warning/ It is spin with itself but worth a watch to choices that avarice makes in itself. We are warned in history to hold banks in sceptical regard if not contempt so grow up Voters your senate screwed you point blank.....

Human Action was written for actual clarification by Mises, and not Rands and Greenspans souless ideological pacification to reach each other to factor understanding to it's relavance in itself to themselves by PBS steering comittee. No appeal to any historical or empirical considerations can discover any fault that men aim at certain ends based on reason suspect of itself undisclosed since derived from public coffers now unabated. We understand unmask logical errors in the chain which produced it, or acknowledge there validity. This cannot be done since the peversion of the term Laissez faire. It means clearly no more than let the common man choose and act, do not force him to yeild to a dictator.

This voice, mine as yours, is now lost to the socialist horde of usefull and cheerfull idiots in there sway in history again. Unacountable and tyrany does reign since I am not represented no matter what discourse I have with my Government who only duty is gatekeeper in a sence they do not even comprehend in a Christian Nation in its daily discourse. Many will stain this a left comment but the truth of the matter it should be added to Mr. Zinns History of the United States given its research since the people will again suffer from the act's of a few since fundamentals where murdered as in Contract and the Law and they murder its citizens with to wit from overall ignorances. The PBS spin is for CFTC to regulate OTC agreements. That has nothing to do with the taxpayer who now suffers and dies from avarice top to bottom and the market will entail a price. Free men must decide to continue to die under the yoke of evil guised as the friend in Government or vote in reason to prevail. They do not understand economic that is simply clear. I can see a handfull in the Senate who care of the letter.

Is not your fear of God your confidence, and the intergrity of your ways your hope? Will it be well with you when he searches you out? Amos did warn of a famine not of bread, or a thrist for water but of hearing the words... The people suffer as a measure. Sad how the nation flows.
As for the choice Mr. Franklin summed it up either there is, is not, or you better hope not to paraphrase for simplicity. Economic history is a long record of Governmental policies that failed because they were designed with a disregard for the laws of economics. I hope the bluedogs pocess some sanity to moderation and understand the World is fallen and there current path is pointless without seeking actual justice and balance.

A nice reward from their government for a lifetime of prudence and saving. Thanks for nothing, guys.

[mannfm11]

Some day it will sink in when I say money doesn't exist in banks. The money Jesse showed was already in the accounts. Bank capital isn't money, but the use of money. When a bank is recapitalized, depositors take money and give it to the bank. The bank buys bonds with it or holds it as credit between them and the bank that had the deposits, but the money isn't in a bank account any more. In some fashion it has to be made liquid. What you have is a series of debits and credits and little else.

I believe in this case, the need for money was to grease the flow of funds between banks. The banks don't need liquidity to make loans, they need capital. It is capital that banks are missing. Recently, Michael Keen of Debtwatch posted some data about how the bank idea is backwards. Banks never need Federal Reserves until after loans are made. i have understood this for years because for most of the history of banking under the Federal reserve, securities bore interest while cash didn't. http://www.debtdeflation.com/blogs/2009 ... e-rescued/

"This is especially so since, following the advice of neoclassical economists, Obama has got not a bang but a whimper out of the many bucks he has thrown at the financial system.

In explaining his recovery program in April, President Obama noted that:

“there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask”.

He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

What are the odds that this will happen, when they already owe more than they have ever owed in the history of America? The next chart inverts the usual portrayal of America’s debt to GDP ratio by inverting it: the top of the graph represents zero debt, the bottom, a debt to GDP ratio of 300 percent—which is just shy of the current ratio of 292 percent.

If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375%—more than twice the level that ushered in the Great Depression.

This is a rescue? It’s a “hair of the dog” cure: having booze for breakfast to overcome the feelings of a hangover from last night’s binge. It is the road to debt alcoholism, not the road to teetotalism and recovery.

Fortunately, it’s a “cure” that is also highly unlikely to work, because the model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.

Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money. However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.

Kydland and Prescott observed at the end of their paper that:

Introducing money and credit into growth theory in a way that accounts for the cyclical behavior of monetary as well as real aggregates is an important open problem in economics.




In short I understand what Koo is talking about, as I have given a lot of thought to it. When a creditor pays a bank, the money no longer exists. People have suddenly found themselves in debt with nothing saved for retirement. In order to have real money, you need to get out of debt. This means the credit cards, the car payment the house payment, all of it. Realize the common $100K a year household quite often has $300,000 or more in debt including the house. Being the cars are like having a horse, eats all the time, this debt repeats itself over and over again. But, figuring the person needs to get out of debt, they need to save this $300,000 plus pay the interest, depreciation and upkeep on what the debt is against. If that person saved 20% of his after tax income, which is roughly $15,000 on $75,000 after tax, it would take him 20 years to get out of debt. Maybe he don't need the larger house, but he still needs a house and likely this guy or gal is 40 or older, so at the end of payoff, they are looking retirement in the eye. The point is, the debt has to go if there is going to be a retirement. Forget the stock return models and all the other nonsense.

The other side of this equation is the inflation side, which is what creates the returns that people boast about in the first place. If people are looking at 5% inflation, they can imagine making 8% to 10% forever and with maybe $400,000 and Social Security they can imagine some kind of retirement. But, what if we have zero interest rates? $400,000 maybe earns $4000 and the idea of living forever on $32,000 a year goes to hope I can draw out $15,000 and not go broke or if I am going to draw $32,000 a year, I am going to need to save $1 million. So the psychology turns and what it threatens is the money supply itself.

So, the government issues enough bonds borrow funds and keep funds in accounts. The central banks may accomodate them. so the private sector is paying down their debt and owing it through the public sector. The difference is that when the public sector collects the money to pay off their debts, they give it back. This involves a tax increase.

I don't know that it would work. I believe the US inflated the world. If you read the Keen article, he makes the kind of points I believe are very pertinent. Stuff like the mess wasn't created by Chinese savings, but the reverse, Chinese savings was created by excessive American credit creation. The problem we face is the banking system almost has to go broke in this matter and the faster the debt is cleared out through bankruptcy and the faster people get the bill for their losses, the sooner we will get on the right track again. My guess is the best we could hope for is a 5 year recession with another 5 to 10 years of poor growth.

As far as the really rich getting richer? Much of it is a debt bubble that inflates the price of assets. Note the decline after the market decline in 2001-2003. Also, the debts are owed by the people farther down the pole, so it is clearly the case that the percentage would accumulate to those without debt. When you figure that 60% of the population isn't worth $100,000, this puts it in greater perspective. At the MSFT peak, Gates was supposed to have been worth $100 billion. That is closer to $40 billion now, but at $100 billion, he was worth 1 million times $100,000. That might have been the net worth of the bottom 10 million people in the US by himself. Maybe bottom 20 million if you take out their debts. It is only natural that this chart would appear as it does, as the numbers are only meaningful to the rich themselves, as the numbers are inflated and not likely to be sold to the poor or middle class. The chart is likely to turn down hard soon. The stock market is worth 50% of its current price over history and quite likely will decline in value in the next 5 to 10 years.

[aedens]

Some day it will sink in when I say money doesn't exist in banks. The money Jesse showed was already in the accounts. Bank capital isn't money, but the use of money. When a bank is recapitalized, depositors take money and give it to the bank. The bank buys bonds with it or holds it as credit between them and the bank that had the deposits, but the money isn't in a bank account any more. In some fashion it has to be made liquid. What you have is a series of debits and credits and little else.

I believe in this case, the need for money was to grease the flow of funds between banks. The banks don't need liquidity to make loans, they need capital. It is capital that banks are missing. Recently, Michael Keen of Debtwatch posted some data about how the bank idea is backwards. Banks never need Federal Reserves until after loans are made. i have understood this for years because for most of the history of banking under the Federal reserve, securities bore interest while cash didn't. http://www.debtdeflation.com/blogs/2009 ... e-rescued/

"This is especially so since, following the advice of neoclassical economists, Obama has got not a bang but a whimper out of the many bucks he has thrown at the financial system.

In explaining his recovery program in April, President Obama noted that:

“there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask”.

He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

What are the odds that this will happen, when they already owe more than they have ever owed in the history of America? The next chart inverts the usual portrayal of America’s debt to GDP ratio by inverting it: the top of the graph represents zero debt, the bottom, a debt to GDP ratio of 300 percent—which is just shy of the current ratio of 292 percent.

If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375%—more than twice the level that ushered in the Great Depression.

This is a rescue? It’s a “hair of the dog” cure: having booze for breakfast to overcome the feelings of a hangover from last night’s binge. It is the road to debt alcoholism, not the road to teetotalism and recovery.

Fortunately, it’s a “cure” that is also highly unlikely to work, because the model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.

Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money. However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.

Kydland and Prescott observed at the end of their paper that:

Introducing money and credit into growth theory in a way that accounts for the cyclical behavior of monetary as well as real aggregates is an important open problem in economics.




In short I understand what Koo is talking about, as I have given a lot of thought to it. When a creditor pays a bank, the money no longer exists. People have suddenly found themselves in debt with nothing saved for retirement. In order to have real money, you need to get out of debt. This means the credit cards, the car payment the house payment, all of it. Realize the common $100K a year household quite often has $300,000 or more in debt including the house. Being the cars are like having a horse, eats all the time, this debt repeats itself over and over again. But, figuring the person needs to get out of debt, they need to save this $300,000 plus pay the interest, depreciation and upkeep on what the debt is against. If that person saved 20% of his after tax income, which is roughly $15,000 on $75,000 after tax, it would take him 20 years to get out of debt. Maybe he don't need the larger house, but he still needs a house and likely this guy or gal is 40 or older, so at the end of payoff, they are looking retirement in the eye. The point is, the debt has to go if there is going to be a retirement. Forget the stock return models and all the other nonsense.

The other side of this equation is the inflation side, which is what creates the returns that people boast about in the first place. If people are looking at 5% inflation, they can imagine making 8% to 10% forever and with maybe $400,000 and Social Security they can imagine some kind of retirement. But, what if we have zero interest rates? $400,000 maybe earns $4000 and the idea of living forever on $32,000 a year goes to hope I can draw out $15,000 and not go broke or if I am going to draw $32,000 a year, I am going to need to save $1 million. So the psychology turns and what it threatens is the money supply itself.

So, the government issues enough bonds borrow funds and keep funds in accounts. The central banks may accomodate them. so the private sector is paying down their debt and owing it through the public sector. The difference is that when the public sector collects the money to pay off their debts, they give it back. This involves a tax increase.

I don't know that it would work. I believe the US inflated the world. If you read the Keen article, he makes the kind of points I believe are very pertinent. Stuff like the mess wasn't created by Chinese savings, but the reverse, Chinese savings was created by excessive American credit creation. The problem we face is the banking system almost has to go broke in this matter and the faster the debt is cleared out through bankruptcy and the faster people get the bill for their losses, the sooner we will get on the right track again. My guess is the best we could hope for is a 5 year recession with another 5 to 10 years of poor growth.

As far as the really rich getting richer? Much of it is a debt bubble that inflates the price of assets. Note the decline after the market decline in 2001-2003. Also, the debts are owed by the people farther down the pole, so it is clearly the case that the percentage would accumulate to those without debt. When you figure that 60% of the population isn't worth $100,000, this puts it in greater perspective. At the MSFT peak, Gates was supposed to have been worth $100 billion. That is closer to $40 billion now, but at $100 billion, he was worth 1 million times $100,000. That might have been the net worth of the bottom 10 million people in the US by himself. Maybe bottom 20 million if you take out their debts. It is only natural that this chart would appear as it does, as the numbers are only meaningful to the rich themselves, as the numbers are inflated and not likely to be sold to the poor or middle class. The chart is likely to turn down hard soon. The stock market is worth 50% of its current price over history and quite likely will decline in value in the next 5 to 10 years.

http://yelnick.typepad.com/yelnick/2009 ... ndard.html
To many confuse Balance of trade enmass from the Keynesian camp followers. Fiat is the multiplier as we know the construct.
Obama clearly also understood and conveyed that there was not enough in supply which the base supply did not reflect such as the OTC CDO claims. Redundant CDO issuance as many are as in many areas lay claim to the asset unmarked. As for the CDO market itself over 500 trillion or whatever do need a serial number of asset to clarify which if I understand what the BIS forwarded will enable the so called monetary FIAT base to reflect and as for how that will work out it will take more time than the Government has since they clearly made a choice to stay on the Bankers leash to the peril of the taxpayer to date. As you clearly have conveyed as compared to what nomimal value I had to concede the point to you only in relationship to time of the said assets compiled and the proclivity of the FED to match the differential of payment in the frozen credit market to day to day operation of the commercial paper financial issuances. The point I am trying to make is what Mises and Rothbard warned of in context to amplification of effect as in a waves to settlement of contracts since credit is not the issue when debt marked is the obstacle overwelming the flow of credit to clear malinvestment which Government cannot solve given there attributes to nuetralize effective consumer market preferences. The main point I would like to foster is redundant claims since title and contract must be enabled to asset claim then debt issues. In 1993 the bankers trust murdered the market before our eyes and malinvestment pricing "FED rate" and bubble asset management that was reduced to gaming the demise as a industry ad hoc the United States which was the initial article I had written when Obama took office and the travails of the CFTC and SEC capitulation since the beltway working groups ignored sane counterbalances. These where as Mises warned the total fullfillment of contract and claim of said assets in a legal status arrogated away by the Senate. This observance has been forwarded also as we understand in the early to mid eighty's that the Senate was reduced to servatude by the Globalism which the link above supplied to to actual conveyances to previous monetary policy's of trade and lines of credit to global stabilization lost in the context of Austrians somewhat and the Liberal Keynesians education systems over the decades which we monitor as Generational Dyanamic's today. What I find unfortunate is whay the planet who dragged us into there sorid affairs of Global warfar and distress us when 99 percent of Americans do not want to save them from calamity's from so few idiot causing so much discord. CDO's are landmines to say the least and should be recorded in a office to be eliminated when they are settled. Moral hazzard started way before we where born and the senate must prudently deal with it and desist in scope and size before, and as many feel properly instill law and contract. As long as Global Money corupts the only cure is the Voter eliminating the original moral hazzard. Spending other people money and 595 trillion landmines called CDO's gamed to eliminate the North American Commerce from Bank's who know the current balance sheet depression's since they are the inside information killing us one Contract at a time with the senates observances of arrogated abuse of public trust called our currency. There core function is futility to date based on fraud and special interest bordering on say we call it treason of public trust and a bent of mind to ideological demise of America ability to stabilize manufacturing which is recovery or prolonged recessionary realities since workers consume and the Consume side of goverment's has never observed the survival of the goverment's as we know, since in the long run there is no unpopular government littered in history for the long run. American's will decide, and Washington needs to assert reason since it will prevail longer than there opinion of left or right abuses.

[abs]

New article talking about Koo in today's Bloomberg:

http://www.bloomberg.com/apps/news?pid= ... 682ThUSwY4

U.S. Risks Japan-Like ‘Lost Decade’ on Stimulus Exit, Koo Says
Share | Email | Print | A A A

By Jason Clenfield and Norihiko Kosaka

Oct. 23 (Bloomberg) -- U.S. officials contemplating an exit from record fiscal stimulus are in danger of repeating mistakes that plunged Japan into its lost decade of stagnant growth, according to Richard Koo of Nomura Research Institute Ltd.

“This isn’t a cold, its more like pneumonia,” said Koo, author of “Balance Sheet Recession,” a 2003 book about the malaise that hit Japan after its stock and real-estate markets crashed in 1990. “We still need more government spending,” he said, adding it could take “three to five years to get out of this mess, even under the best of circumstances.”

Koo’s comments echo the view of economists including Nobel laureate Paul Krugman, who warn that the U.S.’s likely return to growth in the second half of 2009 doesn’t mean a sustained recovery is assured. The Obama administration aims to rein in a record $1.4 trillion budget deficit as growth returns, seeking to safeguard the value of a declining dollar.

“If you learn your lesson from the Japanese experience, you don’t remove your fiscal stimulus until private sector de- leveraging is over,” Koo, 55, chief economist at the research arm of Japan’s biggest brokerage, said in an interview at his Tokyo office last week. “When we see the private sector coming to borrow again, I’ll be the loudest person on earth arguing for fiscal reform. That’s the exit.”

Wealth Destruction

Koo calculates that the bursting of Japan’s asset bubble in 1990 erased 1,500 trillion yen ($16 trillion) in wealth, equivalent to three times the size of the economy. Companies focused on repaying debt rather than undertaking new projects, causing demand to plummet and triggering a cycle in which cash flows fell, asset prices dropped and balance sheets deteriorated.

This time it’s the U.S. consumer that’s inundated with debt. Household debt soared more than 10 percent each year from 2002 to 2005, when the economy expanded an average of 2.75 percent.

Koo, who previously worked at the Federal Reserve Bank of New York, said the solution for what he calls a balance-sheet recession is sustained government spending to fill the hole left as households and businesses retrench.

The Fed’s efforts, lowering the benchmark interest rate to near zero and pumping more than $1 trillion into the banking system, aren’t sufficient, he said.

“We have zero interest rates and still nothing’s happening,” Koo said. Businesses and households don’t want to borrow money even at zero rates; they’re too busy rebuilding savings and paying off debt, he said.

Preventing Collapse

For Japan, it was only government spending that prevented a collapse potentially worse than the Great Depression, Koo argued in his 2009 book, “The Holy Grail of Macroeconomics: Lessons From Japan’s Great Recession.” A decade of investment in roads and bridges also led to a government debt nearing 200 percent of gross domestic product, the biggest among advanced economies.

Krugman wrote earlier this month in the New York Times that “it’s time, I keep hearing, to shift our focus from economic stimulus to the budget deficit. No, it isn’t.” He added that “the complacency now setting in over the state of the economy is both foolish and dangerous.”

The Commerce Department will probably report next week that the U.S. economy grew in the third quarter for the first time in a year.

President Barack Obama’s administration is spending money to stem job losses while also trying to reassure the U.S.’s creditors it plans to rein in debt once a recovery is secured. The dollar has weakened against 15 of the 16 major currencies this year as the budget shortfall widened.

Stimulus Spending

The government’s $787 billion economic recovery plan swelled the federal budget gap to $1.42 trillion for the year ended Sept. 30, more than triple the $455 billion record set a year earlier, according to Treasury Department figures released last week.

Fed Chairman Ben S. Bernanke said Oct. 19 the government should establish “a sustainable fiscal trajectory, anchored by a clear commitment to substantially reduce federal deficits over time.” Treasury Secretary Timothy Geithner said in an interview with CNBC broadcast Oct. 16 that “when we have an economy that’s growing again and we get unemployment down, we’re going to have to bring those deficits down.”

Japan’s so-called lost decade, a period during which the economy slipped in and out of recession and grew at an average rate of about 1 percent a year, dragged on because the government was in a hurry to pay off debt, according to Koo. A telling example came in 1997 when, after a year of 2.6 percent growth, Prime Minister Ryutaro Hashimoto raised the sales tax, smothering consumer spending and squashing a recovery.

“We had these false starts,” Koo said. “The economy would begin to improve and then we’d say ‘oh my god, the budget deficit is too large.’ Then we’d cut fiscal stimulus and collapse again. We went through this zigzag for 15 years.”

[OLD1953]

Jason, I'd think John would be very happy over that piece of news. Obviously, you just proved that removing a law while the Silents were in control had no bad effect, and neither did the community reinvestment act (passed in the same time frame), until the time came that people were in charge who had neither ethics nor morals nor any guide save piling up money and the hell with the bad effects on the economy, their neighbors or even the long term effects on themselves. The CRA was in effect for most of my life, and can't possibly have been some kind of innocent thing for 30 years, but a viper waiting to strike five years ago, it's just words on a piece of paper. The same goes for mortgage securitization.

I'll admit to a bit of surprise at the graphs from the last economic posting, I'd known for quite a while that inflation had been pushed into the stock market and held there, and have actually had several bull sessions with like minded friends trying to figure out how the hell the Fed was managing that. Damned if it doesn't look like the most cynical one was right, they seem to be just handing money over and saying "use this for the good of the country" (buy stock and drive up the DOW). Blatantly illegal, which is why the Fed will fight to the last man standing to keep that bill for an audit of the Fed that Ron Paul put up last week from ever becoming law.

The market and even the market news has gone insane. I'll put money in a mattress, gamble it away, loan it to my son in law, but I sure won't put it in this market. Just today there was a report "Microsoft WOWS Wall Street", top of the news. A few hours later Information Week posted "Microsoft profit for third quarter falls 18%". So dropping profit 18% over the same quarter last year is really good news and means the stock should be higher than last year. Ahh, not by me. The market and Wall Street have both gone crazy. If the Christmas sales news doesn't knock them off their giddy perch, and the market keeps going up through February, then I think it won't collapse until next October. Just a wild guess, but it's a wild market.

[StilesBC]

Haven't posted here in a while. I've got to remember to come back more often for the quality posts here. Anyway, I did a podcast this week in which I mentioned GT. If you've got a half hour to waste, I invite you to check it out:

http://futronomics.blogspot.com/2009/10 ... -bear.html

[aedens]

Some day it will sink in when I say money doesn't exist in banks. The money Jesse showed was already in the accounts. Bank capital isn't money, but the use of money. When a bank is recapitalized, depositors take money and give it to the bank. The bank buys bonds with it or holds it as credit between them and the bank that had the deposits, but the money isn't in a bank account any more. In some fashion it has to be made liquid. What you have is a series of debits and credits and little else.

[/b]

In short I understand what Koo is talking about, as I have given thought to it. When a creditor pays a bank, the money no longer exists. People have suddenly found themselves in debt with nothing saved for retirement. In order to have real money, you need to get out of debt. This means the credit cards, the car payment the house payment, all of it. Realize the common $100K a year household quite often has $300,000 or more in debt including the house. Being the cars are like having a horse, eats all the time, this debt repeats itself over and over again. But, figuring the person needs to get out of debt, they need to save this $300,000 plus pay the interest, depreciation and upkeep on what the debt is against. If that person saved 20% of his after tax income, which is roughly $15,000 on $75,000 after tax, it would take him 20 years to get out of debt. Maybe he don't need the larger house, but he still needs a house and likely this guy or gal is 40 or older, so at the end of payoff, they are looking retirement in the eye. The point is, the debt has to go if there is going to be a retirement. Forget the stock return models and all the other nonsense.

The other side of this equation is the inflation side, which is what creates the returns that people boast about in the first place. If people are looking at 5% inflation, they can imagine making 8% to 10% forever and with maybe $400,000 and Social Security they can imagine some kind of retirement. But, what if we have zero interest rates? $400,000 maybe earns $4000 and the idea of living forever on $32,000 a year goes to hope I can draw out $15,000 and not go broke or if I am going to draw $32,000 a year, I am going to need to save $1 million. So the psychology turns and what it threatens is the money supply itself.

So, the government issues enough bonds borrow funds and keep funds in accounts. The central banks may accomodate them. so the private sector is paying down their debt and owing it through the public sector. The difference is that when the public sector collects the money to pay off their debts, they give it back. This involves a tax increase.

I don't know that it would work. I believe the US inflated the world. If you read the Keen article, he makes the kind of points I believe are very pertinent. Stuff like the mess wasn't created by Chinese savings, but the reverse, Chinese savings was created by excessive American credit creation. The problem we face is the banking system almost has to go broke in this matter and the faster the debt is cleared out through bankruptcy and the faster people get the bill for their losses, the sooner we will get on the right track again. My guess is the best we could hope for is a 5 year recession with another 5 to 10 years of poor growth.

As far as the really rich getting richer? Much of it is a debt bubble that inflates the price of assets. Note the decline after the market decline in 2001-2003. Also, the debts are owed by the people farther down the pole, so it is clearly the case that the percentage would accumulate to those without debt. When you figure that 60% of the population isn't worth $100,000, this puts it in greater perspective. At the MSFT peak, Gates was supposed to have been worth $100 billion. That is closer to $40 billion now, but at $100 billion, he was worth 1 million times $100,000. That might have been the net worth of the bottom 10 million people in the US by himself. Maybe bottom 20 million if you take out their debts. It is only natural that this chart would appear as it does, as the numbers are only meaningful to the rich themselves, as the numbers are inflated and not likely to be sold to the poor or middle class. The chart is likely to turn down hard soon. The stock market is worth 50% of its current price over history and quite likely will decline in value in the next 5 to 10 years.

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Back in forums for clarification: Interferes in actual production in a most dangerous manner since it is impossible to mark and measure moral hazard malinvestments from a premise of credit collapse with out marked to market seeking stabilization.
Basil Moore 1983, “Unpacking the post Keynesian black box: bank lending and the money supply”, Journal of Post Keynesian Economics 1983, Vol. 4 pp. 537-556; here Moore was quoting a Federal Reserve economist from a 1969 conference in which the endogeneity of the money supply was being debated.

by aedens » Fri Jul 31, 2009 7:25 pm

http://generationaldynamics.com/forum/v ... 1740#p3862

http://generationaldynamics.com/forum/v ... pool#p3755
This refers to John's conveyance to his linear relationship to monetary supply and Mr. Market as we conveyed from in forums to seen and unseen and the conformity in crisis since Uncle Sam needed to stabilize... http://generationaldynamics.com/forum/v ... t=27#p1920

Understanding financial vulnerabilities requires thinking across departments that have not historically been well coordinated—e.g., Defense, Treasury, and the intelligence community. Since money in the modern era can be instantly moved electronically, even the appearance of a threat to accounts can lead to large outflows into safer banks in safer countries. This is how the Eurodollar market began back in the early 1950s. The Soviet Union sold gold for dollars, but was afraid to keep the dollars in an account in New York, where they might be blocked for Cold War reasons. Moscow started a dollar-denominated account in an Italian bank known as “Eurobank,” where it felt safer from seizure.
In the 1956 Suez crisis, when Britain and France landed forces on the Suez Canal to prevent its nationalization by Egypt, President Dwight Eisenhower looked for ways to pressure London to call off the attack. Clearly, Washington could not take direct military action against NATO allies. Eisenhower turned instead to financial warfare. He ordered the Treasury Department to dump British Sterling on the international market. This depressed the value of the British pound, causing a shortage of reserves needed to pay for imports. If this financial situation had continued for much longer, it would have also increased British inflation. The message quickly got through to London, which, along with Paris, soon pulled out of the Canal.
In the aftermath of Iran’s seizure of U.S. hostages in 1979, President Jimmy Carter ordered Iranian government bank accounts frozen in the U.S. and the UK. Recently, the U.S. has acted to block North Korean bank accounts linked to illegal activities and the financing of its nuclear program. The U.S. Treasury Department blocked $25 million in accounts held in Banco Delta Asia in Macao. This Department also pressured other banks to stop dealing with the banks of Iran and Syria, as well as those of certain Russian companies involved in the arms trade. This pressure has made it more difficult for them to use the global financial system for letters of credit, trade finance, and remittances from their overseas citizens. It also has increased the risk premium and interest rates on any financing they are able to secure from other sources.
A U.S. crackdown on Iran’s Bank Sederat involved getting foreign banks including some of the world’s largest banks—UBS and Credit Suisse of Switzerland and ABN Amro of the Netherlands—to agree not to conduct business with this bank or risk being cut off from the U.S. financial system. U.S. actions have involved both official sanctions undertaken by the Treasury Department’s Office of Foreign Assets Control, and informal actions intended to sap business confidence in dealing with Iran.

[aedens]

Economic Calendar
10/27/2009 U.S. Case/Shiller Home Price Index - Aug
U.S. Consumer Confidence - Oct
U.S. Durable Orders - Sept
10/28/2009 U.S. Crude Inventories - 10/23
U.S. New Home Sales - Sept
10/29/2009 U.S. Chain Deflator (Adv) - Q3
U.S. Continuing Claims - 10/17
U.S. GDP (Adv) - Q3
U.S. Initial Jobless Claims - 10/24
10/30/2009 U.S. Chicago PMI - Oct
U.S. Employment Cost Index - Q3
U.S. Michigan Sentiment (Rev) - Oct
U.S. Personal Income - Sept
U.S. Personal Spending - Sept

Brazil’s September current account was not quite as good as expected, but that has not prevented further gains in the Brazilian real. The September current account deficit was $2.31B, slightly wider than expected, while September foreign direct investment was $1.82B, slightly less than expected.

China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. China, the world’s largest holder of dollar reserves, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability.
“There’s a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management,” Heiner Flassbeck, co-author of the report and a UNCTAD director, said in an interview from Geneva.

Watch the numbers. The QE gang will insist the left hand will benefit, and the right to rail for God and Country. Meanwhile, back at the ranch the fly over States ponders is there any adults to fiscal sanity and the insider creator's of paper pusher's of CDO"s wonder why treasury printed overprinted. Left or Right I hope Independants who instill sanity when they step up to be a vote to reason.

Nick at ZH posted a good observation:
Testing the 50-dma in AUDUSD would alost be a victory in itself, as sad as it is to say. But this move by the Brazilian authorities could be the first of several by other governments. A friend pointed out to me last week on a couple occasions that New Zealand is very uncomfortable with the NZD where it is, and that rates expectations there are grossly overstated. Apparently he was citing some discussions with central bank staffers there, and his arguments were very convincing. Maybe this kind of news will embolden them to take matters into their own hands. In the meantime I will be watching carefully trend following indicators to assess the level of pain of carry traders. After all we are only overdue for some payback! As per our trade update yesterday and this morning it seemed the Dollar Index was due for some short-term strength and equities for a retracement. We haven't even breached the intermediary support at 1,082 in S&P futures, and the DXY is a touch short of our short-term target of 75.80. Our short-term entry was good, but there is little reason to get too excited just yet. So let's take a few minutes to thank Brazil and remain vigilant.
Nic Lenoir of ICAP

I cannot disagree to date with his assessment to date but all Government’s have problems so yes it a numbers game in any area. But remember when the Aussie PM was in Washington in the spring for his alleged CDO's chat ? And posted recently was the current AUD since when does anyone come to Washington for just a chat? Yea as a taxpayer I would like to see that twisted exchange, but alas, the news missed that per se money call I assume of my tax dollar.

Bloomberg: Today’s announcement reverses last year’s decision to end such taxes. In October 2008, President Luiz Inacio Lula da Silva eliminated a tax, known locally as IOF, of 1.5 percent on foreign investments in certain financial products and of 0.38 percent on foreign-currency loans. “Excess global liquidity could lead to an over-appreciation of the real,” Mantega said. That would threaten to hurt the country’s exporters and further fuel demand for imports. Foreign investor will pay a 2 percent tax when they enter the country to buy stocks or fixed-income securities. In the short term, the measure may help keep the real above 1.7 per U.S. dollar, said Antonio Madeira, chief economist at MCM Consultores Associados Ltd. As the market creates new investment strategies to bypass the tax, the impact in the currency market will be lost, he said. Mantega said the measures may not lead the real to weaken, but are designed to slow its appreciation and prevent the creation of bubbles in Brazilian markets. “These are to prevent excesses,” he said.

Andy Xie: Why One Bubble Burst Deserves another:
Financial markets are still maximum bearish on the dollar. Liquidity is being channeled out of dollar into all other assets. This is why there is such a high correlation between the dollar and other assets. I think this is the most crowded trade in the world. When the dollar reverses, the short squeeze could cause a global crisis.

I think Galleon may have solved that issue but we will see... meanwhile, back at SEC coma cave. An informant in the Galleon Group insider trading scandal had a history of sending tips to the firm, according to a court document that surfaced on Friday. The hedge fund run by billionaire Raj Rajaratnam received highly confidential nonpublic information about Intel Corp from the informant, Roomy Khan, as early as 1998

http://news.yahoo.com/s/nm/20091024/bs_ ... alleon_wsj

Slosh: The number of active dark pools transacting in stocks that trade on major U.S. stock markets has tripled since 2002. Given this growth of dark pools, a lack of transparency could create a two-tiered market that deprives the public of information about stock prices and liquidity.
To make trading through dark pools more transparent, the SEC's proposals generally would require that information about an investor's interest in buying or selling a stock be made available to the public instead of just a select group operating with a dark pool. The proposals also would require that dark pools publicly identify that it was their pool that executed the trade. "Today's proposals are intended to prevent the development of a two-tiered market in access to pricing information, further promote displayed liquidity, and enhance transparency of trade information," said James Brigagliano, Co-Acting Director of the Division of Trading and Markets.

I agree with Higgy "It is a carnival atmospere" We have posted back in forums numerous times to the ability "not a bad connotation intended"
of governments to deal with internal and external structures to cope with it other than time. Another Agency will never solve avarice but Law of Contract
should be enough for normal people. Let us accustom ourselves, then, not to judge things solely by what is seen, but rather by what is not seen. The sophism on this point consists in showing the public what it pays to the middlemen for their services and in concealing what would have to be paid to the state. Once again we have the conflict between what strikes the eye and what is evidenced only to the mind, between what is seen and what is not seen. Austrian economists are in general agreement with the proposition that market forces must be traced back to the plans of market participants, particularly the plans of entrepreneurs. Analytical differences arise over whether emphasis is to be placed on the expectations and decisions in which plans originate (an ex ante perspective) or on the experience the testing of plans provides (an ex post perspective). It seems to me that both perspectives are necessary for the analysis of dynamic economic processes, and that neither should be allowed to eclipse the other permanently. * Profit is then seen as the reward not for superior foresight, as Mises viewed it, but for the discovery of a piece of knowledge which others lack.
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Anom: The American dream is nothing more than a panacea fed to the populace to keep them in servitude. We've been told that if we just let business have free rein they would fuel the American engine. The premise is so entrenched in American society that even the most disenfranchised will argue for it even as there standard of living drops to third world status. With no health care no prospect for a pension that will provide anything but a poverty level subsistance no jobs of any consequence it's more of a nightmare than dream and yet we proptect it because well we don't know anything else.
I'm tired of watching half the population go without health care, bring on a publicly funded system.
I'm tired of seeing our seniors some of which served this nation in the countless wars we waged for no reason at all, retire into poverty because hey the market will take care of you if you just invest your money with us.
I'm tired of seeing over half our youth burdened by the cost of their education or not being able to afford it at all.
I'm tired of our city's once thriving hubs of manufacturing devolving into squalor and crime as our jobs are shipped overseas along with hope that even the simplest among us has a chance for a dignified life.
I'm tired at our celebrity culture were we hold people who celebrate gang culture as something to aspire to, with false promises of easy riches denegrated females at your feet just because you can string a few unintelligible words together.
Our dreams have enslaved us the American dream served only those with means and yet we protect it it's our God given right.
Now come down to the food bank were I volunteer and see the American reality.

And FYI: Lobbyists registered to work on financial regulation: Watch carefully dear taxpayer
Citigroup -- 46
U.S. Chamber of Commerce -- 46
American Bankers Association -- 44
Prudential -- 41
SIFMA -- 37
Managed Funds Association -- 31
Goldman Sachs -- 29
Charles Schwab Corp. -- 28
American Insurance Association -- 27
Investment Company Institute -- 25