April 25, 2009: A recession buster cut, thank you. Willliam McInnes, SMH
The hairdresser was closed. That’s why I ended up at the barber. The last time I went to a barber, the haircut was so bad the perpetrator refused to look me in the eye when I paid. When I got home my mother held her hand to her head and said, “Oh Jesus, what have you done?”…
Life is full of cycles, just like the economy. We are young, we are old and we die. It is elemental; it is the order of things. Somewhere along the way economics seems to have conveniently become a hard science of statistics and systems instead of a social system of human society. It is distant from the beings it represents.
April 25, 2009: Budget key to future of buyers’ subsidies. Jacob Saulwick, SMH
FIRST-HOME buyers appear set to hold on to increased government subsidies in next month’s budget — but only for houses yet to be built.
The shadow treasurer, Joe Hockey, raised concerns that the grant could trap young people into buying houses they could not afford.
“I would hate to see that those people being encouraged to go out and buy their first homes and are going to end up unemployed in the next 12 to 18 months,” he told ABC radio.
“It might be great to stimulate and distort one part of the economy. But if it means that those poor buggers are going to end up unemployed and default on their home loan in 12 or 18 months’ time through no fault of their own, then this will be seen to be a mistake.”
April 24, 2009: Madoff investors ordered to return false profits.
The trustee trying to unravel Bernard Madoff’s massive pyramid scheme is threatening legal action to recover $735 million from investors who unwittingly made money off the swindle.
For decades, Madoff paid out steady profits to his clients, telling them the money had been earned in the stock market. The gains, though, were fictitious, and Madoff pleaded guilty last month to stealing funds from some investors to pay bogus profits to others.
In recent days, court-appointed trustee Irving Picard has sent letters to 223 investors, ordering them to return money they withdrew from their accounts at Bernard L. Madoff Investment Securities in the six years before the scheme collapsed.
“These amounts were paid to you at the expense of other customers while BLMIS was insolvent,” said one letter, sent to an investor who gradually withdrew $975,000 between 2003 and 2008. “The Trustee demands that you immediately return such amounts to the Trustee for the benefit of all defrauded creditors.”
April 23, 2009: RBA, banks must cut rates further: ACCI.
Australian Chamber of Commerce and Industry chief executive Peter Anderson said it was “bleak news” for business when coupled with government and RBA acknowledgments that Australia’s in recession.
“In the wake of this bleak news there is a stronger case for the Reserve Bank, when it next meets, to further reduce interest rates,” Mr Anderson told reporters in Canberra on Thursday.
“They have not fallen as low as they should fall.”
April 23, 2009: Economy in rapid decline. Jacob Saulwick and Phillip Coorey, SMH.
THE Australian economy will shrink faster than the global average this year, the International Monetary Fund said last night, foreshadowing another dire batch of revisions in next month’s budget.
The predictions followed the release of mixed figures on inflation by the Bureau of Statistics. They showed inflation was falling, but perhaps not fast enough to trigger interest rate cuts by the Reserve Bank.
Australia’s economy is set to contract by 1.4 per cent in 2009, the IMF said, before growing just 0.6 per cent next year.
April 22, 2009: Global economy may shrink for 1st time in 60 years; Global economy likely to shrink 1.3 percent this year, IMF says; first drop in 60 years, Yahoo Finance.
The world economy is likely to shrink this year for the first time in six decades.
The International Monetary Fund projected the 1.3 percent drop in a dour forecast released Wednesday. That could leave at least 10 million more people around the world jobless, some private economists said.
“By any measure, this downturn represents by far the deepest global recession since the Great Depression,” the IMF said in its latest World Economic Outlook. “All corners of the globe are being affected.”
April 22: Freddie executive death apparent suicide: police source. Yahoo FInance.
RESTON, Virginia (Reuters) — The finance chief of troubled U.S. mortgage giant Freddie Mac, David Kellermann, was found dead on Wednesday after apparently committing suicide, a police source said…
Kellermann’s death followed several high-profile suicides in the global financial crisis.
German billionaire businessman Adolf Merckle threw himself in front of a train in January after heavy losses on the stock market.
Merckle’s business empire included major cement and drug companies but was hobbled by debt and effectively controlled by the banks that lent it money after a series of wrong-way bets on stock investments.
Frenchman Thierry Magon de la Villehuchet, 65, co-founder of money manager Access International, was found dead in a New York office building in December, reportedly distraught over losing up to $1.4 billion in client money to Bernard Madoff’s fraud. He slit his wrists with boxcutters.
April 23, 2009: First home buyers to lose boost. The boost to the first home owners grant will not be extended beyond June 30, Prime Minister Kevin Rudd says.
April 23, 2009: Car sales sink most in 18 years. Chris Zappone, SMH.
For the year to March, the total number of new cars, four-wheel-drives and trucks sold in Australia slumped 22.6%, seasonally adjusted, according the Australian Bureau of Statistics. That’s the biggest fall since 1991, based on original numbers
April 22, 2009: It’s bricks and slaughter out there. Jessica Irvine, SMH. Bravo Jessica for a forthright critical commentary
What they forget is that average house prices are now seven times the average annual salary, up from about three times when the boomers first bought in. They forget, too, that in the months since the temporary boost to the first-home owners grant — $7000 for established homes and $14,000 for new ones — house prices in the sub-$500,000 category have ballooned.
Seemingly unaware of the false economy, first-home buyers have engaged in a game of mutually assured destruction, and in fact, have been bidding house prices up…
So the Rudd Government, which was elected promising to improve housing affordability, now wants to seek re-election next year as the party which stopped house prices from falling.
They’re being egged on by Treasury boffins who think reduced housing affordability for first-time buyers is a small price to pay for the confidence boost that existing home owners get from homes that maintain their value.
April 21 2009: Timmy Testifies, We Take Notes. Dirk van Dijk, CFA
This morning, Secretary of the Treasury Tim Geithner testified before the Congressional Oversight Panel (COP) headed by Elizabeth Warren. In general, the questions were excellent; unfortunately, the answers were not forthcoming.
One excellent question was, “How does protecting the common shareholders of Citigroup © help the economy?” There was no real answer to that question — just a dance about how it was not appropriate for him to talk about any individual financial institution. The true answer to the question is: it doesn’t.
He said in response to questioning about the asymmetric risks and returns in the Public Private Investment Plan (PPIP) that if you had to sell your house immediately but there were no mortgages available, you would not get a very good price. I think that this is fundamentally the wrong analogy to use, and it reflects a flawed assumption that underlies the PPIP program — namely that the buyers in the market are wrong.
It assumes that the reason that there is no volume in the market for these “legacy assets,” the new term for “toxic assets,” is that there are no buyers, rather than that there are no sellers. This is an unproven assumption at best, although one of the better features of the PPIP is that it should help answer the question of a lack of buyers vs. a lack of sellers.
A better analogy (or at least one that is equally valid) is: suppose you wanted to sell your home, but it has suffered major water damage and is now infested with termites. However, you owe $500,000 on it, and no buyer is willing to pay more than $250,000 for it, and you cannot afford to sell it at that price. Simply because mortgages are available at reasonable interest rates will not make buyers want to buy your house for anything like $500,000.
April 21, 2009: Profits mask bank problems: analysts. Rob Lever, SMH.
Martin Weiss at Weiss Research called the surge in earnings “bogus”, and a result of tricks including an easing of mark-to-market accounting rules.
“Regulators have now agreed to let banks cover up their toxic assets by booking them at fluffy-high values, bearing little resemblance to actual market prices,” he said.
“Like magic, the bad assets are suddenly worth more.”
April 21, 2009: Bad news prompted RBA April rate cut. Garry Shilson-Josling, SMH.
The Reserve Bank of Australia (RBA) cut interest rates earlier this month after it realised the outlook for economic growth was even worse than expected.
April 20, 2009: Spain’s Falling Prices Fuel Deflation Fears in Europe.
Nowhere is this cycle more evident than in Spain. Last month, it became the first of the 16 nations that use the euro to record a negative inflation rate. The drop, though just 0.1 percent, had not happened since the government began tracking inflation in 1961, and Spanish officials have said prices could keep dropping through the summer.
Some of the decline came as volatile food prices sank; the cost of fish fell 6.2 percent, and sugar was down 5.7 percent. But even prices in normally stable sectors like drugs and medical treatments fell 0.7 percent in March, and there were slight declines in footwear, clothing and prices for household electronics.
“Alarm bells are going off,” said Lorenzo Amor, president of the Association of Autonomous Workers, which represents small businesses and self-employed people. “Economies can recover from deceleration, but it’s harder to recover from a deflationary situation. This could be a catastrophe for the Spanish economy.”
April 20, 2009: Will Bank “Stress Tests” Kill Market…or Government Credibility? Henry Blodget, Tech Ticker (video)
Believe it or not, the “stress tests” that the government is performing to see how that banks will do if the economy continues to get worse were originally intended to inspire confidence.
April 21, 2009: One in four firms to cut staff. Jessica Irvine and Phillip Coorey, SMH
TWENTY-FIVE per cent of small to medium-sized businesses in NSW expect to sack staff within three months, a survey by the NSW Business Chamber has found…
Lack of access to new credit remains a pressing issue, with one in three NSW companies saying they had trouble being able to borrow from their bank.
April 20, 2009: Swan contends with a moving feast. Phillip Coorey, SMH.
Acommon perception that refuses to die concerns how Peter Costello foretold the global financial crisis…
Certainly, Costello and John Howard warned repeatedly of economic storm clouds on the horizon in the lead-up to the November 2007, poll but the “huge tsunami” of which Costello spoke concerned a global collapse driven by China.
In an election campaign interview with the Herald’s Peter Hartcher and Jessica Irvine in late October that year, Costello said a “huge tsunami” would result when China floated its currency, which was fixed at below value. There would be a major realignment of currency flows globally, wreaking havoc with exchange rates, and unleashing even greater instability on financial markets than what was being caused at the time by the-then fledgling US subprime crisis.
“That will be a wild ride when that happens,” Costello said of the expected Chinese action. “That will set off a huge tsunami that will go through world financial markets.”…
In reality, no one [ahem…], Costello included, knew back then the scope of what was about to emanate from the US, and politicians and economists are still struggling to get a handle on it.
April 20, 2009: China’s money mandarins take the hard line. John Garnaut, SMH.
The weekend’s Boao Asia Forum may go down as the moment in history China binned the Deng Xiaoping dictum that had guided China’s foreign policy for 30 years: “Keep a cool head, maintain a low profile and never take the lead.”
Inside the palatial Sofitel resort on China’s southern coast, there seemed scarcely a moment when a top Chinese official wasn’t ridiculing the world’s financial institutions, demanding major concessions from the United States, proposing new Asia-centric international architecture or threatening to turn off the taps of Chinese capital which the rest of the world so desperately needs.
And for Lou Jiwei, the sovereign wealth fund chief, it was personal. Lou was engaged in an electric debate about global imbalances with Zhou Xiaochuan — the man ostensibly in charge of China’s exchange rate policy — and “Dr Doom” Noriel Roubini. Roubini pointed out that China’s “vendor financing” policy of fixing its exchange rate (for which Zhou was ostensibly responsible) and funnelling the resulting foreign exchange reserves into the US (through vehicles such as Lou’s fund) was an integral part of the problem.
Roubini was asked how he foresaw the financial crisis in all its gory detail. He replied that “the more interesting question is why most people didn’t get it”.
Lou gave as good as he got. And then he paused from a searing attack against “rising financial protectionism” in the West to offer a digression: “I especially want to thank someone. Last year, we faced a lot of financial protectionism. European Union officials even talked with me, visited my office, and asked me to declare my investments below 10 per cent or give up my voting rights. They said they will take away my voting rights unless I agreed. I said no, I will not go to the EU. So I have not invested a single penny in Europe since then.
“I have to thank these European officials. They have saved me a lot of money.
“But this year, European countries came to me and gave up all their conditionality and declared they welcomed China’s sovereign wealth fund.”
April 20, 2009: Toxic assets leave black hole in highlands shire’s coffers. Clancy Yeates, SMH
THE Wingecarribee Shire Council may seem an unlikely player in the global financial crisis. However since the sleepy Southern Highlands region became tangled up in the failure of the Wall Street bank Lehman Brothers, its plight has captured the gaze of many investors. Even The New York Times drew readers’ attention to the “idyllic collection of towns and villages” with its koala and kangaroo population. The focus is for all the wrong reasons, of course.
Through Lehman and its predecessor, Grange Securities, Wingecarribee invested $29 million in complex and highly rated securities called collateralised debt obligations (CDOs), which have now plunged in value. The shire is just one of many councils and community groups fighting to regain $625.6 million from one of history’s biggest bankruptcies, which rocked markets in September. Seven months after the bankruptcy, Lehman’s administrators, PPB, have made an offer to the councils: 5.6c in the dollar.
Others in the queue, however, stand to recoup a much higher share. Related-party creditors within the fallen Lehman Brothers empire could receive between 34c and 70c in the dollar of their $179.8 million in debts under a deed company arrangement proposed by PPB.
April 20, 2009: First-home buyers swamping banks. Jessica Irvine, SMH
LENDERS are struggling to keep pace with an unexpected increase in applications from first-home buyers, taking as long as a month to approve loans, which has led to some buyers missing settlement dates.
He said about half of all applications received by the bank for the first-home buyers grant in NSW required “a rework” because of insufficient or incorrect information provided on the forms, adding to delays. The figure was 90 per cent in Queensland.
“There is a massive volume at the moment of people trying to get into the market,” Mr Batten said. Staff were working at weekends to clear the backlog, and waiting times for approval had been reduced from 20 days to 10.
April 17 2009: Why the Economic Crisis Was Not Anticipated. RICHARD A. POSNER, Chronicle of Higher Education
An article in the October 11 New York Times attributed the almost universal failure to anticipate our current economic crisis to “insanity” — more precisely, to a psychological inability to give proper weight to past events, so that if there is prosperity today we assume that it will last forever, even though we know that in the past booms have always been followed by busts. But experts on the business cycle, such as Federal Reserve Chairman Ben Bernanke, are not confined to basing predictions on naïve extrapolation. So why did he and other experts, inside and outside of government, neglect warning signs of a coming crash?…
On August 17, 2008 — just a month before the financial tsunami struck — The New York Times Magazine published an article revealingly titled “Dr. Doom” about an economist at New York University named Nouriel Roubini, who, for years, had been predicting with uncanny accuracy what has happened. Two years earlier Roubini had “announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide, and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks, and other major financial institutions like Fannie Mae and Freddie Mac.”
April 17, 2009: After Year of Heavy Losses, Citigroup Finds a Profit. ERIC DASH, NYT.
But the headline number — a net profit of $1.6 billion for the first quarter — was not quite what it seemed. Behind that figure was some fuzzy math.
One of the maneuvers, widely used since the financial crisis erupted last spring, involves the way Citigroup accounted for a decline in the value of its own debt, a move known as a credit value adjustment. The strategy added $2.7 billion to the company’s bottom line during the quarter, a figure that dwarfed Citigroup’s reported net income. Here is how it worked:
Citigroup’s debt has lost value in the bond market because of concerns about the company’s financial health. But under accounting rules, Citigroup was allowed to book a one-time gain approximately equivalent to that decline because, in theory, it could buy back its debt cheaply in the open market. Citigroup did not actually do that, however.
“It’s junk income,” said Jack T. Ciesielski, the publisher of an accounting advisory service. “They are making more money from being a lousy credit than from extending loans to good credits.”
April 16, 2009: A Minsky Meltdown: Lessons for Central Bankers. Presentation to the 18th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies—“Meeting the Challenges of the Financial Crisis”, Organized by the Levy Economics Institute of Bard College, New York City
By Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco
It’s a great pleasure to speak to this distinguished group at a conference named for Hyman P. Minsky. My last talk here took place 13 years ago when I served on the Fed’s Board of Governors. My topic then was “The ‘New’ Science of Credit Risk Management at Financial Institutions.” It described innovations that I expected to improve the measurement and management of risk. My talk today is titled “A Minsky Meltdown: Lessons for Central Bankers.” I won’t dwell on the irony of that. Suffice it to say that, with the financial world in turmoil, Minsky’s work has become required reading. It is getting the recognition it richly deserves. The dramatic events of the past year and a half are a classic case of the kind of systemic breakdown that he—and relatively few others—envisioned…
[This speech by a Federal Reserve President eating humble pie, and eulogising Minsky, so it belongs here on Gems. But it is also on the Brickbats page. Why? Because her understanding of Minsky is so flawed. Reading this was rather like reading Hicks’s “Mr Keynes and the Classics” (1937), in which the deeply neoclassical young John Hicks completely mangled Keynes’s arguments in the General Theory to argue that Keynes was compatible with neoclassical thought:
“Income and the rate of interst are now determined together at P, the point of intersection of the curves LL and IS. They are determined together; just as price and output are determined together in the modern theory of demand and supply. Indeed, Mr. Keynes’ innovation is closely parallel, in this respect, to the innovation of the marginalists.” (p. 153)
Yellen didn’t claim anything quite as brazen as this, but her unintentional emasculation of Minsky’s argument was, to me breathtaking.
April 18, 2009: IMF warns recovery a long way off. Clancy Yeates, SMH.
THE International Monetary Fund has set the scene for more gloom on the world economy when it releases fresh predictions on global growth next week…
The fund’s latest forecasts said the world economy would shrink by between 0.5 per cent and 1per cent this year, the biggest fall since the Great Depression in the 1930s. But this week’s comments suggest the IMF’s predictions on regional growth, to be published in its World Economic Outlook on Wednesday, could be even more dire.
April 17 2009: Latest figures show investors returning to property market. Desley Coleman, LateLine business (video)
STEVE KEEN, UNIVERSITY OF WESTERN SYDNEY: The basic reason I’m a sceptic is that I’m expecting a depression to come out of this global financial crisis. And for property to continue to be a good investment, it would need to be able to survive a depression, and I simply I don’t believe that’s feasible.
April 16, 2009: Housing Dilemma: Govt. Needs Banks to Play Ball as Public Outrage Grows. Aaron Task, Yahoo Tech Ticker (video).
Hopes for a bottom in the housing market took a serious knock Thursday as the government reported housing starts fell 10.8% in March while building permits fell 9% to a record low…
But, of course, the government must also respond to the public’s outrage over the bailout bonanza the banks have gotten to date. Whether the Obama Administration can successfully navigate that very fine line will go a long way in determining whether the housing market really can established a floor sooner rather than (much) later.
April 16 2009: U.S. Housing Starts Fall; Permits Drop to Record Low, Bloomberg.
U.S. builders broke ground on fewer homes in March and permits fell to a record low, as homebuilders sought to rein in inventory amid rising foreclosures.
Housing starts fell 10.8 percent to an annual rate of 510,000, the Commerce Department said today in Washington. Building permits, a sign of future construction, fell 9 percent to 513,000.
Thursday April 16, 2009: US foreclosures up 24 percent in 1st quarter as temporary halts expire. Yahoo Finance.
The number of American households threatened with losing their homes grew 24 percent in the first three months of this year and is poised to rise further as major lenders restart foreclosures after a temporary break, according to data released Thursday.
The big unknown for the coming months, however, is President Barack Obama’s plan to help up to 9 million borrowers avoid foreclosure through refinanced mortgages or modified loans. The Obama administration expects its plans to make a big dent in the foreclosure crisis. But it remains to be seen whether the lending industry will fully embrace it, despite $75 billion in incentive payments.
The faltering economy is causing the housing crisis to spread. Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same time period a year earlier, according to RealtyTrac Inc., a foreclosure listing firm…
April 16, 2009: Responding to the global crisis, Lindsay Tanner.
Understanding the global economic crisis is a bit like analysing an aviation disaster but without a black box. There is no simple cause. The interaction of a number of elements in a dynamic and rapidly evolving global economy has produced the worst economic crisis since the 1930s. Why did this happen?
The origins of the crisis can be found in changes in the global financial system decades ago. The breakdown of the Bretton Woods system in the early 1970s and the abandonment of capital controls by major developed economies at the end of the 1970s triggered the onset of economic globalisation. ..
So what do such possibilities imply for the way we view the world?
Mainstream economics is in crisis. The era of mathematics dominating economics is clearly ending. The efficient markets theory, and the assumption that people act rationally in their own self-interest, are under intellectual siege.
April 16, 2009: China growth fizzles. John Garnaut, Beijing, SMH.
Update China has posted the lowest annual GDP growth in at least 17 years thanks to a 20% contraction in exports during March quarter.
But China still recorded growth of 6.1% despite economic contraction across the world as the government’s stimulus flowed through to higher investment in roads, railways, power generators, mining and real estate.
April 15 2009: US economy goes back to 1955 as deflation returns.
The consumer price index fell at an annual rate of 0.4% in March, the first decline since August 1955, figures from the US labour department showed today. It was bigger than the 0.1% drop expected by economists.
April 15 2009: Financial optimism ‘delusional’, analyst says. Stephen Long, ABC PM
A prominent American risk analyst says optimism about economic recovery is delusional because the economic growth in America and much of the world was a mirage built on debt.
In January and February, real dollar sales were still tens of billions of dollars below the levels of late 2007 — to mid 2008.
Risk analyst and author Satjayit Das says despite the rate of change, the aggregate total dollar amounts are still 10 to 15 per cent lower.
“That’s 10 to 15 per cent of demand that doesn’t exist in the consumer sector which translates into lower investments and therefore lower growth,” he said.
April 2009: Goodbye, homo economicus. Anatole Kaletsky, prospect.
The economics profession must bear a lot of the blame for the current crisis. If it is to become useful again it must undergo an intellectual revolution—becoming both broader and more modest.
The scandal of modern economics is that these two false theories—rational expectations and the efficient market hypothesis—which are not only misleading but highly ideological, have become so dominant in academia (especially business schools), government and markets themselves. While neither theory was totally dominant in mainstream economics departments, both were found in every major textbook, and both were important parts of the “neo-Keynesian” orthodoxy, which was the end-result of the shake-out that followed Milton Friedman’s attempt to overthrow Keynes. The result is that these two theories have more power than even their adherents realise: yes, they underpin the thinking of the wilder fringes of the Chicago school, but also, more subtly, they underpin the analysis of sensible economists like Paul Samuelson.
April 14, 2009: Real Estate/Credit Bubble Deflation 18: Tick-Tick-Tick, by Steve Moyer, Safehaven
“To restore the wealth lost in the current financial crisis, the Treasury would have to monetize some $30 trillion of toxic assets, almost ten times what the Geithner Treasury is currently contemplating, and twice the size of current U.S. annual GDP. Add to that about $10 trillion of value lost in the collapse of commodity prices and another $10 trillion in real property values, and we have a wealth loss of $50 trillion.” ~ Henry Liu, Asia Times via Mike Whitney
April 14, 2009 : Retail and Price Data Show Continuing Economic Weakness, New York Times.
The 1.1 percent monthly drop in retail sales displayed the fragility of some recent “glimmers of hope” in the economy cited by President Obama and other policy makers as they press the administration’s economic agenda…
Retail sales were down 10.7 percent from last March, many of the declines stemming from a 34 percent drop in gasoline prices and a 23.5 percent drop in vehicle sales…
The producer price index fell a seasonally adjusted 1.2 percent in March, reflecting a substantial slide in energy prices from a month earlier. Producer prices declined3.5 percent from the same period in 2008, their largest yearly drop in more than 50 years, reflecting the decline in oil prices from more than $100 a barrel in March 2008.
April 14, 2009: Retail sales fall unexpectedly in March. yahoo Finance
WASHINGTON (AP) — Retail sales fell unexpectedly in March, delivering a setback to hopes that the economy’s steep slide could be bottoming out.
The Commerce Department said Tuesday that retail sales dipped 1.1 percent in March. It was the biggest decline in three months and a much weaker showing than the 0.3 percent increase that analysts expected.
April 14, 2009: Financial engineers tarred and feathered but still seeking fees on road to oblivion. Ian Verrender, SMH.
Just as it is difficult to conceive why sane people throughout Europe staked their fortunes on tulips in the late 1630s, heads will one day shake at the naivety of those who were seduced into putting their money into heavily indebted trust structures that nominally owned toll roads, airports and the like.
In the past decade, infrastructure became the fodder for a Ponzi scheme — an elaborately constructed and complex one, but a Ponzi scheme just the same. BrisConnections was merely one of the last and more brazen, and the one to implode most spectacularly.
The idea was fairly simple. Buy something, anything, for a ridiculous amount of money, using a raft of overly optimistic assumptions stretching out for decades. Borrow almost all the purchase price. Sell it into a tax-effective trust. The higher the price, the bigger the fees. When the business doesn’t generate enough income to cover the interest, borrow even more so you can pay investors a dividend and maintain interest payments.
April 14, 2009: Relax dole test, urges welfare network. Stephanie Peatling, SMH.
The main change that the welfare network wants introduced is a reduction in the number of jobs unemployed people must apply for to continue receiving their welfare payments. “The Government should review in the current economic climate whether it is still reasonable for job seekers to look for 10 jobs a fortnight,” Mr Thomas said.
April 14, 2009: Car industry doomed with Holden first to go, expert says.
Editor of the car buyers Dog & Lemon Guide, Clive Matthew-Wilson, said the Australian car manufacturer is poised to shut down for good because it can no longer compete in the global market.
‘Australia’s car factories are losing money on every vehicle they make,” Mr Matthew-Wilson said in a statement.
”No amount of incentives from the state and federal governments can solve this basic problem.
”It’s not a matter of whether they close down, but when they close down.”
He said Holden would be the first to go, followed by Ford and then Toyota.
”People falsely believe that Ford is doing OK. That’s not true,” he said.
”American Ford’s sales are down 43% in the first quarter of this year.
”Ford is losing billions just like GM; it’s just that Ford arranged private sector finance before the recession, so it’s not quite so obvious how serious things are.”
April 13, 2009: Cheap rent tax break is pushing up house prices. Jessica Irvine Economics Writer, SMH.
SMALL investors are being encouraged to cash in on a Rudd Government scheme offering tax benefits of up to $8000 a year on investment properties, provided they are leased at 20 per cent below market rent.
But analysts warn that the scheme, intended to increase the supply of cheap rental accommodation, is contributing to a boom in house prices under $500,000, making home purchase more expensive.
April 12, 2009: How a joker sent Battman to the rescue, Chris Berg, The Age. Chris Berg is a research fellow at the Institute of Public Affairs and editor of the IPA Review. [This is another first–putting a feature from an IPA Fellow on my Gems page…]
CONFIDENT that the Prime Minister can steer us out of the financial crisis? Don’t be. Every policy announcement, every job-creation program, every plan to fix the economy point to one thing: The Government’s just makin’ it up.
Want proof? The team at the Department of the Prime Minister and Cabinet have developed www.economic stimulusplan.gov.au to tout all the ways they’re fighting the downturn. And the first, most prominent, measure listed on the website is a subsidy to home insulation.
April 12, 2009: Think your credit card interest rate is steep? Try 48 per cent. James Kirby, The Age.
Amazing Loans can’t claim the same level of success as Cash Converters.
In fact with a weak stock price it has announced it will be delisting in July.
But before stockmarket investors wave goodbye to the lender that calls itself “fast, fair and friendly”, it’s worth hearing what it has been up to recently. The Consumer Action Law Centre recently started legal action against the lender over a case where a woman went to borrow $2000 from Amazing Loans and walked out with a deal where her total bill came to $4422.08.
The interest rate on the Amazing Loans deal did not sound too bad — 17 per cent (on a par with a credit card) — it was the $1600 “loan and administration” fee that was, yes, amazing.
April 11, 2009: Mr. Soddy’s Ecological Economy. ERIC ZENCEY, New York Times
Frederick Soddy, born in 1877, was an individualist who bowed to few conventions, and who is described by one biographer as a difficult, obstinate man. A 1921 Nobel laureate in chemistry for his work on radioactive decay, he foresaw the energy potential of atomic fission as early as 1909. But his disquiet about that power’s potential wartime use, combined with his revulsion at his discipline’s complicity in the mass deaths of World War I, led him to set aside chemistry for the study of political economy — the world into which scientific progress introduces its gifts. In four books written from 1921 to 1934, Soddy carried on a quixotic campaign for a radical restructuring of global monetary relationships. He was roundly dismissed as a crank.
He offered a perspective on economics rooted in physics — the laws of thermodynamics, in particular. An economy is often likened to a machine, though few economists follow the parallel to its logical conclusion: like any machine the economy must draw energy from outside itself. The first and second laws of thermodynamics forbid perpetual motion, schemes in which machines create energy out of nothing or recycle it forever. Soddy criticized the prevailing belief of the economy as a perpetual motion machine, capable of generating infinite wealth — a criticism echoed by his intellectual heirs in the now emergent field of ecological economics.
April 11 2009: Easy lending to ‘hurt’ young home buyers. Bridget Carter, The Australian.
FIRST-HOME buyers are being warned that generous loan criteria could land them in financial stress, after revelations that the top four banks will lend up to $465,000 to a purchaser on a salary of $70,000 a year.
A survey by The Weekend Australian, which sought pre-approval interviews with bank managers, revealed Westpac would lend $465,000, the Commonwealth Bank was willing to lend $444,000 and the National Australia Bank would approve a $380,000 mortgage to a first-home buyer on $70,000 a year and a credit card with an $8000 limit.
The loan offers were made on the proviso the borrower paid mortgage insurance, which is a one-off cost as high as $10,000.
The ANZ’s loan criteria was much tighter, requiring a 10 per cent deposit for a loan, as well as mortgage insurance.
The other three banks have recently tightened loan criteria to first-home buyers, requiring a minimum deposit of 5 per cent, including a minimum of 3 per cent saved over several months, and mortgage insurance.
But the survey’s findings defy the general belief that banks have become stricter on first-home-buyer lending due to the global financial crisis.
A $444,000 loan from the CBA would require someone on $70,000 to spend 62 per cent of their monthly income on mortgage repayments, which amounted to $2827 a month. Real Estate Buyers Agents Association of Australia president Byron Rose said a loan of more than $400,000 for someone on $70,000 a year was “absolutely too much”.
April 11: US profit season key to fate of market rally. Clancy Yeates, SMH.
Against such glimmers of hope, bears point to intractable problems at the heart of the crisis — the banking sector’s bad debts.
For example, a US banking analyst who correctly predicted the severity of the woes, Meredith Whitney, said banks will have to retain a higher share of earnings until next year because they were underestimating the slump in house prices. Ms Whitney said banks were assuming a fall of about 35 per cent from peak to trough, but the fall could be as much as 50 per cent…
The head of investment markets research at Colonial First State, Stephen Halmarick, said investors’ hopes may fade because lower consumer spending and industrial trade would damage corporate earnings.
The sharp rise in US unemployment — which has soared to a 25-year high of 8.5 per cent — had taken a large source of spending out of the economy, Mr Halmarick said.
“I just worry that the economic environment’s actually worse than the market may have priced in given the rally over the past few weeks.”
April 11, 2009: Good news for renters in sought-after suburbs. Jessica Irvine Economics Writer SMH.
THE tide has turned on Sydney’s upper rental market, as properties lie vacant and landlords are forced to slice asking prices by as much as 20 per cent.
Job losses, over-stretched budgets and a flood of unsold investment properties contributed to significant falls in median new rents in some well-located suburbs in the inner-west and north over the final three months of last year, Housing NSW figures show.
While rents continue to rise across Sydney as a whole, the median weekly rent on a one-bedroom unit slumped 12.5 per cent in Balmain to $350 a week, 9.6 per cent in Stanmore to $260 and 9.1 per cent in Glebe to $300…
Meanwhile, supply of new rental properties had increased, Mr Christopher said, and a lot of investors were trying to sell and failing. “What they’re trying to do to get some cash flow out of it is putting them into the rental market.”
April 11, 2009: Trapped in the bubble: life’s tough for real estate virgins. Joel Gibson, SMH.
It’s 9 o’clock on a Saturday. The regular crowd shuffles in. There’s a young couple standing next to me, wondering how they’d get their dining table in. I’ve been singing that tune every weekend, more or less, for the past two months, swept along in the first home buyers’ bumrush.
It’s been a weekly running of the bulls since governments began offering up to $24,000 to help with the process and the Reserve Bank began whittling away at interest rates. There’s no question there is a first home buyers bubble, and we are well and truly in it — but increasing calls for the bubble to be pricked are unfair and, at times, downright patronising…
I’ve been told mortgage centres and valuers are behind and cannot keep up with the pace of paperwork coming across their desks. I’ve even heard agents say they’ve given out 70 contracts for one property and have no idea what others are worth — uttering those dreaded words, “in this market”, like they’re selling apartments on Mars…
Even if low interest rates are the main carrot driving us to buy, there must be a lull after June because at least some will have brought forward their purchase, just in case. Prices will drop or slow, and if job losses increase, as many expect them to, there is a real risk that things could turn sour. Or so I’ve been told by everyone who has an opinion on the matter in the past week. And when it comes to property, everyone has an opinion on the matter.
But what’s a first home buyer supposed to do about it? A few years ago we were asking how the kids would ever be able to afford a home in Sydney. Now that they can, we are asking whether it’s really for the best. I’ll bet those preaching caution don’t have to seek their landlord’s permission before drilling a hole in their lounge room wall.
April 11, 2009: Timed to make the most of $14,000. Jessica Irvine, SMH.
Mr Millett has calculated the repayments on the new house, for which they paid $569,000, will cost $1200 more a month than they had been paying in rent.
But it is worth it for a foot in the property market door and a bigger house, he said.
April 11, 2009: Retirees left in cold with frozen incomes. Annette Sampson, SMH
They’re the forgotten victims of the financial crisis. More than 250,000 investors — many of them retirees — have been unable to access their savings for the past six months. They invested in products they were told were safe and would provide a reliable income, but instead their money is locked away and likely to remain that way until next year at the earliest.
April 9, 2009: A Game of Credit Cost Smoke and Mirrors at Wells Fargo? By PAUL JACKSON, HousingWire.com.
“The shocker was that they only had only $3.3 billion [in] charge offs,” said Whitney Tilson of hedge fund manager T2 Partners, in a CNBC interview Wednesday afternoon. “It’s weird, because in Q4 Wachovia and Wells Fargo together had $6.1 billion in charge-offs, and then in a quarter in which things were terrible, those charge offs fell by 50 percent … They’re going to have a lot of losses over the next couple of years, [and] anyone baselining at $3.3 billion in charge offs per quarter is crazy.”…
If the Fast Money crew had any desire to do basic analysis before running their collective mouths, they might have been able to pull up this chart — which should speak volumes about the value of skepticism here:
This shows the ratio of loan loss reserves/total loans at the four major U.S. banks still standing. Wells Fargo is in white. Notice anything? You know, like which bank is comparatively weakest on reserving activity against its loan book?
This chart doesn’t include updated Q1 numbers for Wells, as the bank did not provide an updated loan total on Wednesday — meaning it doesn’t include Wachovia. Historically, Wells has justified its lower reserves by maintaining a comparatively higher-quality loan book; can the same argument really be made now? With Wachovia’s option ARMs lurking? Because there’s an ugly truth about credit costs: they come home to roost eventually, irrespective of any games played with loss reserves in the interim.
April 09 2009: Clarke and Dawe on the major banks. The 7.30 Report
JOHN CLARKE: I can explain — do you understand how the economy works?
BRYAN DAWE: Yes, of course. I mean, everyone works their guts out and then the financial institutions gamble hundreds of billions of dollars of other people’s money and it all goes down the toilet.
JOHN CLARKE: A crude analysis, I would’ve thought.
BRYAN DAWE: It may be crude, but how are the banks going at the moment?…
April 08 2009: Number of grown-up children returning to live with parents triples amid recession, Daily Telegraph UK.
The number of 18–34 years olds living rent free with family and friends has more than tripled as the recession bites, new figures suggest.
Numbers have risen to 1.6 million, up from 500,000 this time last year, according to the findings by Abbey Mortgages. A further 300,000 people aged 35 to 54 also find themselves in this position, with the South being the hotspot for so-called Kidults.
April 09, 2009: Americans Were “Living in a Fool’s Paradise” That’s Gone Forever, Soros Says. Yahoo Tech Ticker.
If nothing else, the credit crisis of the past 18 months has debunked the notion of financial market being an all-knowing, self-correcting mechanism that perfectly allocates capital. Even Alan Greenspan admitted as much.
As a result of the bursting of that theoretical bubble, Americans’ lives have been inexorably changed and “there’s no way to go back to where we came from,” says George Soros, chairman of Soros Fund Management.
Americans were “living in a fool’s paradise” based on the “false promise” of the “market magic,” and the idea debt-fueled consumption was a sustainable and legitimate economic policy, the billionaire speculator says.
April 10, 2009: We, the people, need to know what goes on behind the prison fence. Christine Rau, SMH
Here we go again. Just when we think we have woken up to corporate shenanigans with the global financial crisis, and ditched plans to privatise NSW energy supplies and acknowledged that privatised road tolls place financial burdens on some drivers, jails become the subject of nonsensical ideas.
We will save money by outsourcing them, the politicians say.
Bulltwang. It will cost more, lead to less qualified staff and cutting every corner, including food and education for prisoners. Worse still, it will reduce accountability.
April 10, 2009: How Madoff’s victims fell for his $92b scam. Andrew Clark, SMH
An intriguing insight comes in an email sent three days before Madoff’s arrest by Jeffrey Tucker, the co-founder of Fairfield. Madoff’s house of cards was beginning to collapse as investors, spooked by the financial crisis, pulled out large sums known as redemptions. Madoff wanted Fairfield to replace the outflow of money.
Tucker wrote to Fairfield’s executive committee: “Just got off the phone with a very angry Bernie who said if we can’t replace the redemptions for 12/31 he is going to close the account. His traders are ‘tired of dealing with all these hedge funds’ and there are plenty of institutions who can replace the money.”
Shortly after midday on December 8, Tucker signs off: “I believe he is sincere.”
The last sentence is telling. Tucker — who, ironically, is a former Securities and Exchange Commission official — fell for Madoff’s bullying. It was a load of nonsense — there were no other institutions willing to provide money, and Madoff confessed 72 hours later that his business was riddled with lies…
Lipton’s subsequent interview with regulators is worth reproducing:
Q. How did you determine they had hundreds of clients?
A. That’s what the partner said on the phone to me.
Q. Did you corroborate it in any way?
A. No.
Q. How did you determine that they were well respected in the local community?
A. That’s what our conversation — my conversation with one of the partners at Friehling & Horowitz — that’s what was told to me.
Hardly the due diligence skills of Hercule Poirot, are they?
April 10, 2009: Truckload of trouble for US car makers: Can America’s car markers turn around or is this the end of the world? Jacob Saulwick, SMH
Like US banks, car makers dined out on easy credit in the years after 2001. This had two main effects. First, it made it easy to shift cars, so car makers could boost sales. “By the mid-2000s, the average duration of a US car loan was 62 months — five years and two months — and the average percentage advanced was 95 per cent,” says Williams. If negative equity is rife among homeowners, it is endemic to car-owners.
Second, it changed the profitability of the industry, which used profits from financing to cover up problems in manufacturing. “The American industry hasn’t made money out of cars for the past 15 years or so,” says Kim Rennick from industry consultants autopolis. “What money they have made has been out of financing or perhaps rebuilding the car.”
April 9, 2009: Jobless rate hits 5.7%. Chris Zappone, SMH.
UPDATE: More Australians lost their jobs last month in yet another sign that the global economic slowdown is dragging on the local economy.
”The rise in the unemployment is remarkable,” said JP Morgan economist Helen Kevans. ”It’s the highest since 2003 and a sign of things to come.”
Ms Kevans said the jobless rate could jump as high as 6% in April, outpacing earlier forecasts.
Last month 38,900 full time jobs were lost, following February’s shock loss of 53,800 full time positions, the most since July 1991.
The economy created 4200 part time jobs, down from the 55,600 gain in part time positions in February, as more workers were pushed onto reduced schedules. In March, 34,700 jobs were lost.
7 April 2009: The Financial War Against Iceland, by Michael Hudson.
Iceland is under attack – not militarily¬ but financially. It owes more than it can pay. This threatens debtors with forfeiture of what remains of their homes and other assets. The government is being told to sell off the nation’s public domain, its natural resources and public enterprises to pay the financial gambling debts run up irresponsibly by a new banking class. This class is seeking to increase its wealth and power despite the fact that its debt-leveraging strategy already has plunged the economy into bankruptcy. On top of this, creditors are seeking to enact permanent taxes and sell off public assets to pay for bailouts to themselves…
In Iceland – but nowhere else – home mortgages have a uniquely bad twist. Creditors have managed to protect the weight of their claims on debtors by indexing mortgage loans to the nation’s consumer price inflation (CPI) rate. Each month the debt principal is increased by the CPI increase – and so is the interest charge. During 2008 that index rose by 14.2%, so a 100,000-euro mortgage at the start of 2008 would have grown to 114,230 euros by yearend. These monthly adjustments also would added an entire percentage point onto the interest payment – an extra 100 euros to be paid to creditors monthly, in addition to the growing principal to be amortized. Talk about making money without effort …!
Such heavy debt charges would shrink any economy, and that is what is happening in Iceland. Prices for real estate declined by an estimated 21 percent for housing in 2008. So in the above example, the market price of the house worth 100,000 euros at the beginning of the year would have been worth only 79,000 at yearend, while the mortgage would have grown by 14% to 114,230. This would have plunged the homeowner 35,000 euros into negative equity – a remarkable 35% change.
6 April 2009: A Tale of Two Depressions, by Barry Eichengreen and Kevin H. O’Rourke.
This is an excellent statistical/graphical comparison of the severity of this crisis versus the Great Depression. On almost every metric, this one is much worse–as I’ve been arguing here for some time, with the cause (excessive debt levels relative to GDP) at least twice as bad as last time, the disease will in all probability be at least as bad–allowing that perhaps “Big Government” will soften the blow to some degree, as Minsky used to argue.
“Often cited comparisons – which look only at the US – find that today’s crisis is milder than the Great Depression. In this column, two leading economic historians show that the world economy is now plummeting in a Great-Depression-like manner. Indeed, world industrial production, trade, and stock markets are diving faster now than during 1929–30. Fortunately, the policy response to date is much better…”
April 8, 2009: Toxic debt may hit $US4 trillion. Lucy Battersby, SMH.
There is widespread speculation the International Monetary Fund will increase its estimate of global toxic debt to $US4 trillion in two weeks, which would prolong credit freezes around the world and may force governments to increase bail-out packages.
Apr. 7, 2009: How Bear Markets End. Henry Blodget, Clusterstock (animations).
Doug Short has taken a detailed look at the 10 bear markets and bear-market-recoveries since 1950. You can click through a slideshow showing each of these periods in detail here..
Importantly, Doug’s charts do not include the horrific bear market of 1929–1932, which puts all of these to shame. To get a more detailed sense of how that one “bottomed,” click through to the last slide, which overlays our current bear market on top of the three nastiest ones in the last century.
April 8, 2009: Banks hold back rate cuts as new squeeze felt. Eric Johnston, SMH.
For weeks NAB’s chief executive, Cameron Clyne, has been softening up customers not to expect the full effect of a rate cut, but few expected NAB to claw back the entire difference…
Since October NAB has paid as much as 150 basis points above the bank bill swap rate for term deposits, more than 10 times pre-credit crunch rates.
April 8, 2009: Irish ministers to quit en masse in cost-cutting exercise.
A WHOLE tier of Irish ministers will resign after Easter so that the Premier, Brian Cowen, can reduce their number as part of cost-saving measures contained in an emergency budget aimed at saving the republic’s economy.
April 8: We’re in recession: Reserve governor. Jacob Saulwick and Elicia Murray, SMH.
GLENN STEVENS has confirmed the Reserve Bank believes the economy is in recession, and warned it was “too early to judge” whether the tentative signs of stability in the world economy would hold…
There are tentative signs of stabilisation in several countries, including China, though it is too early yet to judge how durable these will prove to be,” Mr Stevens said.
April 07, 2009: Soros “Very Concerned” About Rising Global Unrest, But Sees Positive Signs in Russia, Yahoo Tech Ticker (video).
“Very often an economic crisis reinforces internal political divisions,” Soros says. “It could lead to governments losing control.”
April 07, 2009: Soros: “Danger of Collapse Has Passed,” But Stock Rally Not Sustainable, Yahoo Tech Ticker (video).
“The real danger of collapse has passed,” says legendary financier George Soros. But the “fallout of the collapse” of the banking system “will linger.”
In the wake of Lehman Brothers’ bankruptcy on Sept. 15, 2008, authorities were forced to put the financial system remains on “artificial life support, which is where it is now,” says Soros, the chairman of Soros Fund Management and author of several books, including most recently The Crash of 2008 and What It Means.
APRIL 6, 2009: From Bubble to Depression? STEVEN GJERSTAD and VERNON L. SMITH, Wall Street Journal.
Excellent analytic overview of the crisis by a non-orthodox winner of the Nobel Prize in Economics.
Bubbles have been frequent in economic history, and they occur in the laboratories of experimental economics under conditions which — when first studied in the 1980s — were considered so transparent that bubbles would not be observed.
We economists were wrong: Even when traders in an asset market know the value of the asset, bubbles form dependably. Bubbles can arise when some agents buy not on fundamental value, but on price trend or momentum. If momentum traders have more liquidity, they can sustain a bubble longer.
But what sparks bubbles? Why does one large asset bubble — like our dot-com bubble — do no damage to the financial system while another one leads to its collapse? Key characteristics of housing markets — momentum trading, liquidity, price-tier movements, and high-margin purchases — combine to provide a fairly complete, simple description of the housing bubble collapse, and how it engulfed the financial system and then the wider economy.
In just the past 40 years there were two other housing bubbles, with peaks in 1979 and 1989, but the largest one in U.S. history started in 1997, probably sparked by rising household income that began in 1992 combined with the elimination in 1997 of taxes on residential capital gains up to $500,000. Rising values in an asset market draw investor attention; the early stages of the housing bubble had this usual, self-reinforcing feature.
The 2001 recession might have ended the bubble, but the Federal Reserve decided to pursue an unusually expansionary monetary policy in order to counteract the downturn…
The causes of the Great Depression need more study, but the claims that losses on stock-market speculation and a monetary contraction caused the decline of the banking system both seem inadequate. It appears that both the Great Depression and the current crisis had their origins in excessive consumer debt — especially mortgage debt — that was transmitted into the financial sector during a sharp downturn.
What we’ve offered in our discussion of this crisis is the back story to Mr. Bernanke’s analysis of the Depression. Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we’re witnessing the second great consumer debt crash, the end of a massive consumption binge.
April 6, 2009: Jobs fund, mortgage relief to help ease pain. Mark Metherell, SMH.
KEVIN RUDD has announced measures “for the dark and difficult times that lie before us” — a $650 million community jobs fund and a 12-month reprieve on mortgage repayments for people who lose their jobs.
The banks were prepared to consider extending the period of the mortgage contract and reducing the amount of each payment due and even waiving fees in hardship cases. Interest would be capitalised into the loan, meaning it would still need to be paid in the long run [SK: This is a step in the right direction, but it will need amendment when (a) hordes of beneficiaries don’t find work by the time the extension expires and (b) those that do face crushing debt repayments via the capitalisation of unpaid interest]. Mr Rudd said the banks would make assessments based on the borrowers’ ability to meet new contractual obligations in the long term.
April 4, 2009: First-home rush keeps prices on boil.
AS FIRST-HOME buyers rush to take advantage of the increased Federal Government grant scheme, some agents are warning that people are paying too much for their properties.
Robyn Harrison, of Laing and Simmons Annandale, said the surge of first-home buyers was driving up prices by tens of thousands of dollars, well beyond the savings offered by the grant.
“We had three units in the same block, and two sold late last year for $409,000 and $415,000. But just last month a third unit there sold for $445,000,” she said.
“They’ve inflated their own market. My advice to people is just to calm down.”
Friday April 3, 2009: Jobless rate jumps to 8.5 percent, highest since late 1983; payrolls drop 663,000.
WASHINGTON (AP) — The nation’s unemployment rate jumped to 8.5 percent in March, the highest since late 1983, as a wide swath of employers eliminated 663,000 jobs. It’s fresh evidence of the toll the recession has inflicted on America’s workers, and economists say there’s no relief in sight.
If part-time and discouraged workers are factored in, the unemployment rate would have been 15.6 percent in March, the highest on records dating to 1994, according to Labor Department data released Friday.
The average work week in March dropped to 33.2 hours, a new record low. Since the recession began in December 2007, the economy has lost a net total of 5.1 million jobs, with almost two-thirds of the losses occurring in the last five months.
Friday April 3, 2009: Bailed-out banks may buy toxic assets.
Spencer Bachus, the top Republican on the House financial services committee, told the paper that he would introduce legislation to stop financial institutions “gaming the system to reap taxpayer-subsidized windfalls.”
Bachus added it would mark “a new level of absurdity” if financial institutions were “colluding to swap assets at inflated prices using taxpayers’ dollars,” according to the paper.
April 3, 2009: Banks, property and mark-to-market: eggshells all round. Michael Pascoe, SMH. Here’s another first–an item by Michael Pascoe appearing on my Gems page. Michael’s previous entry on Debtwatch was a classic Brickbat (Economists lining up to disagree with Steve Keen, Crikey 23 OCTOBER 2008); this is a very good analysis of the perils facing the commercial property market.
But the Hancock Tower sale is actually worse than it looks at first blush — much worse. (And remember that this is a marquee property with 95% occupancy.)
As a Morgan Stanley analysis of the transaction makes clear, that headline halving of the property’s value takes no account of the value of the financing the buyer now assumes.
The purchaser, Normandy Real Estate Partners, is only putting up $US20 million as it takes over the existing $US640.5 million mortgage on the property at an interest rate of 5.6%. The Morgan Stanley analyst asks the question: What is the value of being able to get a 97% LTV loan at 5.6% these days?
Working out that value is entirely hypothetical as it simply couldn’t be done, but the analyst goes through the numbers and makes a very reasonable case that the financing was worth about $US190 million — which means that the real clearing level for the top commercial property in Boston was only $US470 million — a crash of 65% from 2006 levels and 50% from 2003.
“The main takeaway: property values are down A LOT more than people think, especially when considering the implied value of financing. Caveat Emptor,” concludes Morgan Stanley…
Thursday, 2 April 2009: Hometrack: We have enough houses, By Agnes Gajewska.
“Our analysis indicates Australia may already have an excess of housing. We estimate there are at least 10 million dwellings in Australia compared with ABS data showing occupied dwellings of 8.3 million. The extra one to two million dwellings consists of a mixture of housing awaiting sale or development, vacant dwellings, second homes, and abandoned homes,” he said.
He went on to say that the ABS method for calculating the ratio of people per dwellings is based on ABS census data which in turn is based upon occupied dwellings. However, he said, Hometrack analysis which is based on postal address data indicates that Australia’s current level of housing relative to its population is in line with other Anglo economies.
Following on from this, Darcy said that when looked at in the context of population growth, total residential building approvals have been running above demand.
He came, he covered his face, he shimmied up a two-storey Corinthian column — and conquered the mighty Bank of England.
And when the protester’s black-and-white banner unfurled over the stone scrollwork, reading ‘Stop Trading on our Future’, the spontaneous roar and cheer of thousands said more than a million essays.
Beneath a sea of graffiti, politely scrawled over the Bank’s walls in washable blackboard chalk — ‘Built on Blood’, ‘Left is Right’ — London’s financial heart transformed into a massive, naughty teenager’s street party eerily guarded by a full-scale army of bouncers in police riot gear.
April 2, 2009: Michael Moore hails GM’s chief ‘stunning’ ouster.
Oscar-winning filmmaker and longtime political activist Michael Moore Wednesday hailed the historic decision by President Barack Obama to dismiss General Motors chief Rick Wagoner.
“I simply can’t believe it. This stunning, unprecedented action has left me speechless for the past two days,” Moore said.
“I keep saying, ‘Did Obama really fire the chairman of General Motors? The wealthiest and most powerful corporation of the 20th century? Can he do that?’ ” Moore, a native of GM’s hometown of Flint, wrote in an e‑mail to friends and posted on his website.
April 2, 2009: Toxic debts could bring the house down. Clancy Yeates, SMH.
THEY were once potent symbols of a superpower’s economic might, but now the US car makers threaten to unleash a fresh bout of turmoil through their massive debt liabilities, and the fall-out will surely spread to Australia.
Amid growing doubts over the future of General Motors, Ford and Chrysler, financial markets are fretting over $US250 billion ($360 billion) in total debt owed by the companies.
The debt — scattered throughout the world financial system — dwarfs their combined market value of about $US17 billion. About $US80 billion of the debt is held in bonds sliced up and repackaged in complex financial products.
April 2, 2009: Retailers pray for a reprieve — more money from heaven. Elizabeth Knight, SMH.
There is a lot riding on the High Court decision on Friday about whether the Federal Government has the constitutional power to pay the cash bonus promised to 7.7 million Australians.
The retail sales figures for February released by the Bureau of Statistics yesterday provide stark evidence that the public has radically curbed its spending since December’s cash bonus washed through the system.
Retail spending fell 2 per cent from January — four times more than economists were predicting.
April 2, 2009: Retail spending crashes. “Sales dropped 2 per cent for the month, the largest fall since the introduction of the GST and well below the expectations of market economists, according to figures released by the Bureau of Statistics yesterday.”
April 2, 2009: London calling as anarchists get ready to rumble. Paola Totaro, SMH.
Now, with the globe firmly in the grip of a catastrophic economic crisis, anarchy has returned to Britain and Europe.
Last night, British police seized an armoured car, at least one police uniform and arrested eight people as thousands of protesters gathered in London ahead of the Group of 20 meeting. Police estimated up to four thousand people had gathered outside the Bank of England, with some chanting “Abolish money”.
“We don’t have to manufacture anger the way we did in the past, the anger is out there without us … since the recession, there is the feeling that free market capitalism can’t deliver what you want,’ Bone tells the Herald after a 24-hour dance of texts and emails to try and meet. “At the moment, it has no political expression … hopefully it will manifest on the streets in the next few days.
April 1, 2009: Hold on to your home. Elinore Martel, SMH.
“A lot of people think mortgage insurance protects them but it only protects the bank,” he says. That means control is passed to a “faceless man in an office tower who doesn’t know the borrower and doesn’t want to”.
In Mendelson’s experience, they look at the valuation. “If they think they will lose money or are a risk, they will insist that the lender calls in the loan and puts it up for sale,” he says.
Associate Professor Steve Keen of the University of Western Sydney believes the grants for first homebuyers will make the crisis worse. “It’s just deferring and making worse the inevitable,” he says.
March 25, 2009: Call for help: Postal chief says agency crashing, Yahoo Finance.
The financially strapped U.S. Postal Service will run out of money this year without help from Congress, Postmaster General John Potter warned on Wednesday.
“We are facing losses of historic proportion. Our situation is critical,” Potter told a House subcommittee.
The agency lost $2.8 billion last year and is looking at much larger losses this year said Potter, who is seeking congressional permission to reduce mail delivery from six days to five days a week.
March 25, 2009: Jingle mail for zombie banks, Jessica Irvine, SMH.
The global financial crisis may be destroying life savings, but it’s also giving birth to a new vocabulary. This gallows humour, bred of tough times, includes “zombie bank”, “ninja loan” and a strange condition called “brickor mortis”. The new lexicon allows us to poke fun at what is a scary and little understood crisis engulfing the global economy.
As financial markets digest the details of the latest US bail-out of its troubled banking system, a recap of the best of these “credit crunch-isms” provides a useful start to understanding the causes of, and potential solutions to, the current mess.
Here is my top 10:
But the biggest motivating fear behind all attempts to clean up the financial system is the fear of the existence of a …
10. Zombie bank A half-dead creature that lives off taxpayer handouts. A zombie bank is one whose liabilities exceed its assets. The term was first coined in the late 1980s and 1990s to describe the situation in Japan when the bursting of dual real estate and sharemarket bubbles wreaked havoc with its banking system. The Japanese government continued to pump money into its banks to try to bring them back to life, but these attempts are often cited as being partly responsible for producing Japan’s “lost decade” in the 1990s. Instead of being left to suck the lifeblood out of the financial system, some argue that zombie banks should just be shot in the head.
March 23, 2009: “Happy Talk” Won’t Solve Crisis, Galbraith Says: Much More Govt. Action Needed, Yahoo Finance Tech Ticker.
From Obama to Geithner to Bernanke, policymakers are like doctors dealing with a “mildly ill” patient vs. treating one who is “gravely” ill, says James Galbraith, University of Texas professor and author of The Predator State.
The economist fears the economy is in terminal condition requiring much more intervention than already prescribed. He believes government “doctors” are engaged in a lot of “happy talk” about recovery based on a “fundamentally flawed model,” hinged on the idea the economy is self-healing and only needs a booster shot before it “naturally” returns to trend growth and unemployment in the 5% range.
March 23 2009: Galbraith says Geither’s Plan “Extremely Dangerous”. Part I of an excellent interview with Professor James Galbriath by Henry Blodget and Aaron Task on Yahoo’s Tech Ticker (video).
We think Geithner is suffering from five fundamental misconceptions about what is wrong with the economy. Here they are:
The trouble with the economy is that the banks aren’t lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it…
The banks aren’t lending because their balance sheets are loaded with “bad assets” that the market has temporarily mispriced. The reality: The banks aren’t lending (much) because they have decided to stop making loans to people and companies who can’t pay them back…
Bad assets are “bad” because the market doesn’t understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are…
Once we get the “bad assets” off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating…
Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they’ll be working it off for years…
March 23, 2009: Galbraith Interview Part II: Geithner, Obama Kowtowing to “Massively Corrupted” Banks, Galbraith Says.
Like it or not, many people seem to be resigned to the idea there’s no alternative to the public-private investment fund scheme Treasury Secretary Geithner detailed this morning. (Click here for part one of our discussion of the plan.)
That’s hogwash, says University of Texas professor James Galbraith, author of The Predator State. Of course there’s an alternative: FDIC receivership of insolvent banks.
March 24, 2009: Making a mint as inquiry founders. Ian Verrender, SMH.
Yesterday, ASIC banned a 32-year-old stockbroker from Bondi for allegedly sending 32 emails to his clients on September 17 last year about a run on the Macquarie Cash Management Trust.
The broker, perhaps unwisely, predicted Macquarie shares would halve overnight. He was right eventually. Macquarie shares did indeed halve, although it took until February 24 this year…
