Every now and then there’s great article–or a compelling report–published “out there” that is worthy of sharing. The Pool Room keeps track of them; these pages archive the earlier Gems and Brickbats pages which have grown too big.
Highlights
The Monster Mash; you gotta laugh, and this sendup of the whole financial crisis to the tune of the old Monster Mash song from the 50’s is a wonderful gem.
On the topic of humour, this explanation of Central Banking by SBS’s Newstopia is well worth a look.
And The Onion has hit the nail on the head with its call for a new bubble to get us out of the trouble caused by the old ones(thanks to Alan Kohler for pointing out this gem):
Congress is currently considering an emergency economic-stimulus measure, tentatively called the Bubble Act, which would order the Federal Reserve to begin encouraging massive private investment in some fantastical financial scheme in order to get the nation’s false economy back on track.
Current bubbles being considered include the handheld electronics bubble, the undersea-mining-rights bubble, and the decorative office-plant bubble. Additional options include speculative trading in fairy dust—which lobbyists point out has the advantage of being an entirely imaginary commodity to begin with—and a bubble based around a hypothetical, to-be-determined product called “widgets.”
The St Louis branch of the US Federal Reserve is maintaining a detailed timeline of the crisis.
Centre for Policy Development InSight Special Edition | The Global Financial Crisis in Review. Articles by myself, John Quiggin, Richard ‘Estrange, James Murray and Ian Dunlop.
Steve Keen, Predicting the crisis: Medal winning analysts. “If they were to hand out medals for predicting the global financial crisis, the Gold Medal for having predicted the crisis must go to Irving Fisher, who in 1933 developed the “Debt Deflation Theory of Great Depressions” — a piece which remains the best description of what happens to an economy that succumbs to excessive debt in the context of low inflation. We are now reliving the horror he warned us against…
The academic economists who predicted this crisis were ignored because the mainstream of the economics profession follows what is known as neoclassical economics, which ignores debt and models the economy as if it is always in equilibrium. The contrarians were ignored because for so long, the way to make money was to “go with the herd”. Today, conventional neoclassical economics is being starkly proven wrong by this very crisis, while contrarians are now the only ones making money.”
Robert Skidelsky (one of Keynes’s biographers), “Where do we go from here?”, Prospect.
“Any great failure should force us to rethink. The present economic crisis is a great failure of the market system… There were three kinds of failure. The first, discussed by John Kay in this issue, was institutional: banks mutated from utilities into casinos. However, they did so because they, their regulators and the policymakers sitting on top of the regulators all succumbed to something called the “efficient market hypothesis”: the view that financial markets could not consistently mis-price assets and therefore needed little regulation. So the second failure was intellectual… Behind the efficient market idea lay the intellectual failure of mainstream economics. It could neither predict nor explain the meltdown because nearly all economists believed that markets were self-correcting. As a consequence, economics itself was marginalised. But the crisis also represents a moral failure: that of a system built on debt…”
January 1 2009, New York Times: Worldwide, a Bad Year Only Got Worse. “Stocks lost 42 percent of their value in 2008, as calculated by the MSCI world index, erasing more than $29 trillion in value and all of the gains made since 2003. Just about the only assets to prosper were government bonds of developed countries and gold, where prices rose as investors ran for cover. ”
Portfolio.com special: The End: The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong; and
What a Swell Party: a photographic timeline of two decades of Wall Street excess
The Biggest Losers: Normally I say that this crisis is no time for Schadenfreude–the negative consequences for the whole species are just too great. But when it comes to the top twenty monkeys? I can’t help enjoying this tale of executive loss on The Business Sheet by Hilary Lewis.
Glovernomics: saving the nation. Good one Richard Glover! “It now seems ages since the crisis first hit — that golden time when no one in Australia had even heard of Freddie Mac and Fannie Mae. Even now, Fannie Mae sounds like an American version of Movember. I imagine myself in April, really looking forward to the commencement of festivities.”
For the benefit of any US readers who can’t understand why this is uproriously funny (to Australians): (a) “Movember” is an annual men’s health awareness event that requires participants to “Grow a Mo”–as in a moustache–for the month of November; (b) Check the final line of the Wikipedia disambiguation of the term Fanny: “Fanny is also a name used for the …”
Top Gear’s Jeremy Clarkson: Vauxhall Insignia 2.8 V6: An adequate way to drive to hell. “I was in Dublin last weekend, and had a very real sense I’d been invited to the last days of the Roman empire. As far as I could work out, everyone had a Rolls-Royce Phantom and a coat made from something that’s now extinct…
Everyone appeared to be drunk on naked hedonism. I’ve never seen so much jus being drizzled onto so many improbable things, none of which was potted herring. It was like Barcelona but with beer. And as I careered from bar to bar all I could think was: “Jesus. Can’t they see what’s coming?”
I have spoken to a couple of pretty senior bankers in the past couple of weeks and their story is rather different. They don’t refer to the looming problems as being like 1992 or even 1929. They talk about a total financial meltdown. They talk about the End of Days…”
January 15 2007: Gillian Tett, Financial Times: Should Atlas still shrug? The threat that lurks behind the growth of complex debt deals. This article, just brought to my attention by a blog reader, deserves an award for prescience: “At a glitzy dinner in a Mayfair hotel in London last week, prizes were awarded to the best capital markets performers in 2006. Strikingly, the group that grabbed the tag “best financial borrower” — meaning, most creative in raising funds — was not a bulge-bracket Wall Street or City name. Instead the honour went to Northern Rock, a lender to homebuyers, which is based in north-east England’s gritty Newcastle and has become an enthusiastic issuer of mortgage-backed bonds.”…
January 3, 2009, FRANK RICH: A President Forgotten but Not Gone. This story has nothing to do with debt, but it’s too good not to link to: Frank Rich’s New York Times OpEd (with an abridged version on the SMH) on the narcissism that defines and maintains George W. Bush:
“The man who emerges is a narcissist with no self-awareness whatsoever. It’s that arrogance that allowed him to tune out even the most calamitous of realities, freeing him to compound them without missing a step. The president who famously couldn’t name a single mistake of his presidency at a press conference in 2004 still can’t.”
George Monbiot on Giselle’s circulating script scheme: A Better Way to Make Money.
“In Russell Hoban’s novel Riddley Walker, the descendents of nuclear holocaust survivors seek amid the rubble the key to recovering their lost civilisation. They end up believing that the answer is to re-invent the atom bomb. I was reminded of this when I read the government’s new plans to save us from the credit crunch. It intends — at gob-smacking public expense — to persuade the banks to start lending again, at levels similar to those of 2007. Isn’t this what caused the problem in the first place? Is insane levels of lending really the solution to a crisis caused by insane levels of lending?…
the projects which have proved most effective were those inspired by the German economist Silvio Gessell, who became finance minister in Gustav Landauer’s doomed Bavarian republic. He proposed that communities seeking to rescue themselves from economic collapse should issue their own currency. To discourage people from hoarding it, they should impose a fee (called demurrage), which had the same effect as negative interest. ”
January 20th: John Kemp, Reuters: U.S. and UK on brink of debt disaster.
“The United States and the United Kingdom stand on the brink of the largest debt crisis in history.
While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt to more manageable levels. Everything else is window-dressing.”
Yahoo Finance: Microsoft resorts to first layoffs, cutting 5,000. Credit (pardon the pun!) where it is due: Ballmer is the first major CEO I’ve seen who has accurately diagnosed what is going on:
“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy,” said Chief Executive Steve Ballmer during a conference call. For consumers, that may mean less discretionary income to spend on a second or third home computer, he said.
Ordinarily I’d only file a report like this in the Rolling Parade section, but this is such a perceptive summary of the root of the crisis by such a prominent executive that it deserves highlighting. Maybe I’ll winge less about Microsoft products in future…
19 January: Ambrose Evans-Pritchard, Telegraph UK. Biblical debt jubilee may be the only answer. Finally, the scale of the problem, and the impossibility of solving it while still honouring all the debt, is starting to be acknowledged.
“There is no guarantee that the measures will succeed. The vast scale of government borrowing may exhaust the stock of global capital. Markets are already beginning to question the credit-worthiness of sovereign states. The Fed may find it harder than it thinks to disengage from colossal intervention in the bond markets. In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee. Creditors are not going to like that.”
Aaron Task & Henry Blodget, Yahoo Finance Tech Ticker: Big Banks Hoarding TARP Funds: Why Not Just Nationalize Them?
“Nobody (or only a scant few) wants to see the government take control over the banking system, which would signal the end of market-based capitalism as we know it.
But the reality is we have a creeping form of nationalization going on already via the initial injection of capital into big banks, and the intense government oversight of how banks operate that is almost certain to accompany TARP II (and III and IV) funds.
Meanwhile, banks are mainly just sitting on the TARP funds, as The Wall Street Journal details…”
The Guardian Road to Ruin Series, Twenty-five people at the heart of the meltdown ….
“The worst economic turmoil since the Great Depression is not a natural phenomenon but a man-made disaster in which we all played a part. In the second part of a week-long series looking behind the slump, Guardian City editor Julia Finch picks out the individuals who have led us into the current crisis.”
January 3: MICHAEL LEWIS (author of Liar’s Poker) and DAVID EINHORN, New York Times. The End of the Financial World as We Know It.
“OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest…
IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.”
January 31: Clancy Yeates and Scott Rochfort, SMH. Drop the anchor and furl the sails, we’re going over the edge. Good to see my fellow bear Gerard Minack being given a solid run here. It’s not easy being sober when all around you are drunk, and Gerard raised the alarm before even I did, in his regular “Down Under Daily” reports for Morgan Stanley.
An economist at Morgan Stanley, Gerard Minack, also bluntly rejects any argument that Australia can avoid being dragged down with the rest of the world.
“The reason that Kevin Rudd’s GFC [global financial crisis] is hitting us is not because we were simply an island of innocence getting hit by evil offshore influences,” says Minack.
“The idea that we were a prudent, sensible country that never indulged in the reckless excesses that the rest of the world did — that is complete crap,” he says. “We partied as hard, if not harder.”
Brushed off for his bleak forecasts in the boom times by many in the market, Minack’s views have been taken more seriously in recent times.
Minack says our addiction to debt makes us just as vulnerable as the rest of the world to the melt-down in capital markets, and recent profit warnings are only the early stages in the downturn. Tumbling commodity prices will only make the trough deeper, he says.
January 31: News Kontent Blog. Academic scans former Master of Universe.
“I had dinner last night with a guy whose career wandered through nearly a half-dozen major brokerages. He was at ground zero of the securitization and creation of the alphabet soup of the real estate market…
Wall Street and the banking system is every bit as nuts as we all think… You want leverage? Imagine a 20 billion dollar portfolio of mortgage backed securities with a capital base of $10k–literally 2 million-fold leverage. Imagine the shock of the inventor as he watches as his successors expand similar portfolios up to $900 billion…
So where are we now, and where are we heading? This is the bad part: I thought I was the pessimist. Sheesh. He was describing a system infected by flesh eating bacteria. Every day looks more dire than the previous day. The solutions being proposed look feeble, and the Fed looks both powerless and confused”
16 december 2008: News Kontent. My open letter to Prime Minister Rudd. The letter itself is worth a read, but what I’d prefer to highlight here is the comment from James Cumes that accompanies it, written prior to the election:
” In 1929, no one, least of all James Scullin and his ministers, had any idea that the world was about to crash into the greatest economic depression the world had known. They had even less idea of how they should react to any such crisis. Intriguingly, two of the key issues which confronted them were irresponsible debt and industrial relations.
The same seems to be true of the prospective Rudd Government. He has proclaimed himself to be a “conservative economist.” He has spoken, during the campaign, mainly about interest rates and housing costs in conventional terms. He will amend industrial legislation to be more acceptable to workers. He says it all in the obvious expectation that the next few years – the next ten years perhaps – will be much the same as the last ten years under Howard.
There is not the slightest possibility that they will be…
Unless the incoming government – let’s assume it will be a Rudd Government – is extremely lucky, the crash will become manifest in the next few weeks or latest by March 2008. The United States is almost certainly in recession already – concealed only by spurious official statistics – the dollar has fallen sharply and almost certainly will fall further and faster as the weeks go by. Household, corporation and public debt is monstrous, unprecedented and all those adjectives that we thought we would never have to use. Consumer and asset inflation is high. Credit is tight and getting tighter – largely because, in the casino world that the global economy has become, too many have already lost their shirts and far too many more fear that the shirt hangs far too loosely on their own back and on the backs of those who already do or might want to owe them money…
With those prospects, Labor – and Kevin Rudd — might be well advised to disdain any offer of power to govern and so avoid going down in history as another well-meaning but feckless Scullin-type Government. Let Howard and his retinue take the blame and just opprobrium for a catastrophe to which they have contributed with such unbridled generosity.
It won’t happen of course. On the night of 24 November 2007, Labor, led by Rudd, will probably be declared the victor and they will confront their unenviable destiny. For Australia, it won’t be any worse than having Howard’s Coalition as the victor. Indeed, it might be rather better. However, whoever is the victor, I – as one who grew up in the last Great Depression – can only offer a prayer and express a hope. That hope is that we Australians may come through this new and even more terrible challenge, with the same spirit and fortitude that we did seventy years and more ago.”
February 5: David Hirst, The Age. US gambles freedom on risky printing press policy. I wouldn’t have chosen the title, tone or slant of this article myself, but the data is unmistakeable: Bernanke is putting into practice his “logic of the printing press” analogy (se e Debtwatch No. 31).
Keen, who last week was interviewed by The Wall Street Journal and is fast becoming a world-recognised economic authority, outlined in his recent Debt Watch Report that Bernanke’s famous “helicopter drop doubling of base money will be impotent against the US’s credit crunch”.
Most economists believe the US and China are bound irrevocably by US debt and China’s continued purchase of that debt. They assume the US, with 46 states insolvent or approaching insolvency, will suffer immediate MAD if China ends the long financial arrangement.
But with the US entering a period of deflation, its economic leadership appears to be doing the unthinkable — going it alone and letting the electronic printing presses take care of the huge sums required to keep the nation afloat. The consequences for the world economy are incomprehensible as China’s purchases of US treasuries underwrite the US’s unquenchable demand for money to service its multitrillion-dollar public debt, which President Obama said recently would reach $US11 trillion ($A17 trillion) this year.
Faced with the huge sinkhole created by the financial meltdown and the prospect of deflation, US Fed boss Ben Bernanke has been printing money so rapidly that the US is being flooded with liquidity. This is beyond unprecedented.
Many Americans believe printing money can free the country from the suffocating embrace of mutual dependence with China. In his blog earlier this week, Brad Setser from the US Council on Foreign Relations, and one of the world’s most respected China commentators, outlined the US position: “Exchange rate policies can also influence the allocation of resources across sectors. China’s de facto dollar peg is an obvious example … it is hard for me to believe that as much would have been invested in China’s export sector if China had had a different exchange rate regime …
“Those who attribute the growth of the past several years solely to the market miss the large role the state played in many of the world’s fast growing economies.”
Setser and others close to policymakers are realising the boom in China may not be a rerun of the Japanese and German postwar economic miracles but more akin to the creation of a giant sweatshop for the benefit of Western companies and the Chinese Communist Party. But this required US consumers to play their role as the linchpins. Now the linchpin has broken. There is no way the old arrangement can continue and the US is realising the system will end. By reverting to the printing press it can free itself from dependency on China.
February 6: Andrew Boughton with Michael West, SMH and The Age. Wanted: A new economic theory.
Now that Prime Minister Kevin Rudd has hailed in his “Monthly’ essay a new political era of ”social capitalism” and embarked on another stimulus package it merely remains to find an economic theory to accompany it.
Economics has failed manifestly to see the global financial crisis coming. Only those once derided as doomsayers and crackpots were anywhere near the mark. An entire generation of richly-remunerated experts got it wrong, once again
A few years ago, University of Western Sydney’s Professor Steve Keen took up the cudgels for real estate and finance, supported by the theories of Minsky and colleagues back at the Merewether Building at Sydney University, having long held an interest in the mathematics of political economy.
Keen, whose predictions of reckless leverage and speculation in recent years have been vindicated overall through the present credit crisis, declared this week that Australia was bound for a Japanese-style experience of drawn out recession. Stimulus measures were not resolving the problem, he said, simply adding to the Government debt.
The same theme was current in Boughton’s earlier work, along with other correspondents in the United States such as Charles R Morris and Lowell Bryan, though he differs from Keen on the role of government.
While citing Marx on the proclivity of the ”parasites”, the banks, to ”periodically despoil industrial capitalists” and ”interfere in actual production”, Keen noted that he did not expect capitalism to collapse.
February 6: Jim Manzi, Stimulus predictions: put up or shut up. Jim calls on economists who are making predictions about what Obama’s stimulus package will or won’t do to present their models on which these predictins are based. In part, he says:
So here’s what we would need to falsify a prediction. Anyone who claims to know the impact should escrow a copy of the source code of the econometric model that is used to make the prediction, along with a stated confidence interval, operational scripts, and assumptions for all required non-stimulus inputs that populate the model with a named third-party. Upon reaching the date for which the prediction is made, the third-party should run the model with the actual data for all non-stimulus assumptions and compare the model result to actual. Any difference would be due to model error. We actually still would not be able to partition the sources of error between “error in predicting causal impact of stimulus” and “other”, but at least we would have a real measurement of model accuracy for this instance.
Of course, I sincerely doubt this will happen. I wonder why not?
Feb 12th: Irving Fisher–Out of Keynes’s shadow, The Economist.
“As parallels to the 1930s multiply, Fisher is relevant again. As it was then, the United States is now awash in debt. No matter that it is mostly “inside” or “internal” debt—owed by Americans to other Americans. As the underlying collateral declines in value and incomes shrink, the real burden of debt rises. Debts go bad, weakening banks, forcing asset sales and driving prices down further. Fisher showed how such a spiral could turn mere busts into depressions. In 1933 he wrote:
Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip.”
Feb 12th: America’s Banking Crisis–Worse than Japan?, The Economist.
This crisis, like most others in rich countries, emerged from a property bubble and a credit boom. The scale of the bubble—a doubling of house prices in five years—was about as big in America’s ten largest cities as it was in Japan’s metropolises. But nationwide, house prices rose further in America and Britain than they did in Japan (see first chart). So did commercial-property prices. In absolute terms, the credit boom on top of the housing bubble was unparalleled. In America private-sector debt soared from $22 trillion in 2000 (or the equivalent of 222% of GDP) to $41 trillion (294% of GDP) in 2007 (see second chart).
Judged by standard measures of banking distress, such as the amount of non-performing loans, America’s troubles are probably worse than those in any developed-country crash bar Japan’s. According to the IMF, non-performing loans in Sweden reached 13% of GDP at the peak of the crisis. In Japan they hit 35% of GDP. A recent estimate by Goldman Sachs suggests that American banks held some $5.7 trillion-worth of loans in “troubled” categories, such as subprime mortgages and commercial property. That is equivalent to almost 40% of GDP.
Feb 12: RBA faithful banking on policy power, Stephen Long, ABC. “Last week an economist in Sydney was briefing his colleagues from the bank’s dealing room about the Reserve Bank’s latest forecasts. One of the screen jockeys cut him short. “I don’t take anything the RBA or the Treasury says seriously anymore,” he said. “They’ve been wrong too many times.””
February 9, 2009: Now is the time for a revolution in economic thought. Anatole Kaletsky, The Times.
These are just a few examples of the creative thinking that has started again in economics after 20 years of stagnation. Butthe academic establishment, discredited though it is by the present crisis, will fight hard against new ideas. The outcome of this battle does not just matter to academic economists. Without a better understanding of economics, financial crises will keep recurring and faith in capitalism and free markets will surely erode. Changes in regulation are not sufficient after this financial crisis — it is time for a revolution in economic thought.
February 13: Dodgy loans, unjust contracts and the public interest, Richard Ackland, SMH. This reports the failure on appeal of the Cooks case that initially motivated me to raise the alarm about excessive debt. Unfortunately it appears that, as Richard summarises below, “The public interest can be a step too far for some judges.”
Acting Justice Patten, who initially heard the case, found that the contract was unjust. The lender, Permanent Mortgages, should have been aware on making the most perfunctory of inquiries that the Cooks were incapable of servicing this debt.
The judge rewrote the loan so as to remove the default interest rate. The appeal was about whether the Cooks’ equity in their home should be restored and the interest debt cancelled. Parliament has said that contracts can be unwound where they are unfair, and one of the considerations to be taken into account is “the public interest”.
There was evidence before the court that the loans to the Cooks were of the “equity-stripping” species — the lenders did not care whether the money could be repaid, as long as the property could be sold.
Economists gave evidence that these transactions could be categorised as “Ponzi loans” — which could only ever be repaid by taking out a larger loan or by selling the asset.
There was evidence that, were the practice of Ponzi loans to become widespread, “it would substantially increase the tendency of the Australian financial system to asset bubbles and subsequent financial crisis”, Professor Steve Keen told the court — something, you might think, that would be a matter of “public interest”. Invariably, though, the phrase is subjected to mauling at the hands of the judiciary. And so it was here. The appeal judge Roger Giles said in a narrowing flourish: “I have some difficulty in seeing that the health of the economy falls within the public interest to which regard may be had in determining injustice of the particular transaction.”
The public interest can be a step too far for some judges.
Tuesday, 10 February: Nigel Morris, Deputy Political Editor, and Sean O’Grady, Economics Editor, The Independent (UK). This is the worst recession for over 100 years. Ed Balls, the PM’s closest ally, warns that downturn is ferocious and says impact will last 15 years.
In an extraordinary admission about the severity of the economic downturn, Ed Balls even predicted that its effects would still be felt 15 years from now. The Schools Secretary’s comments carry added weight because he is a former chief economic adviser to the Treasury and regarded as one of the Prime Ministers’s closest allies.
Mr Balls said yesterday: “The reality is that this is becoming the most serious global recession for, I’m sure, over 100 years, as it will turn out.”
He warned that events worldwide were moving at a “speed, pace and ferocity which none of us have seen before” and banks were losing cash on a “scale that nobody believed possible”.
The minister stunned his audience at a Labour conference in Yorkshire by forecasting that times could be tougher than in the depression of the 1930s, when male unemployment in some cities reached 70 per cent. He also appeared to hint that the recession could play into the hands of the far right.
Sunday, February 15: Matthew Richardson and Nouriel Roubini. Nationalize the Banks! We’re all Swedes Now, Washington Post.
The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is to nationalize it.
As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner’s recent plan to save it has many of the right elements, it’s basically too late.
February 2009: The Crisis of Credit Visualized. It’s not perfect and blames the crisis solely on subprimes–ignoring the long run up of debt beforehand–but this visual portrayal of the crisis is still pretty good.
February 22, 2009: Paul Krugman, New York Times. Banking on the Brink.
Comrade Greenspan wants us to seize the economy’s commanding heights.
O.K., not exactly. What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree…
The Obama administration, says Robert Gibbs, the White House spokesman, believes “that a privately held banking system is the correct way to go.” So do we all. But what we have now isn’t private enterprise, it’s lemon socialism: banks get the upside but taxpayers bear the risks. And it’s perpetuating zombie banks, blocking economic recovery.
24 Feb 2009: Alex Mitchell. Financial Crisis: Do Not Resuscitate.Note to economics writers: your beloved free market is dead. Now tell us the real story about the global financial crisis.
For many years it was my conscientious belief that the worst practitioners in the media were celebrity reporters who did little more than rewrite press handouts supplied by agents for limelight-seeking B‑grade actors and pop stars.
I’ve now revised my views and am convinced that the media’s bottom-feeders are the economics writers.
In so-called normal times, these erudite commentators wrote very little and not very often. Indeed, they rarely came to work and weren’t seen around newsrooms. They sat at home in their book-lined studies mousing their way through international websites looking for ideas for something to write about.
February 23: Recipe for Disaster: The Formula That Killed Wall Street, Wired Magazine.
David X. Li, it’s safe to say, won’t be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li’s Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
How could one formula pack such a devastating punch? The answer lies in the bond market, the multitrillion-dollar system that allows pension funds, insurance companies, and hedge funds to lend trillions of dollars to companies, countries, and home buyers.
February 27: Economy shrinks at fastest pace in 26 years, Yahoo Finance.
February 28, 2009: US stocks plumb 12-year lows.
“US stocks fell and the S&P 500 closed at a 12-year low on Friday, after the government said it will take a large stake in Citigroup’s common shares, fanning fears it will increase its role in other major banks.
The decline closed out a grim month on Wall Street, with the Dow industrials hitting the lowest level since May 1997 as the blue-chip index fell for a sixth straight month.”
February 28: The great repression by Niall Ferguson, The Australian.
“There is something desperate about the way people on both sides of the Atlantic are clinging to their dog-eared copies of Keynes’s General Theory. Uneasily aware that their discipline almost entirely failed to anticipate the crisis, economists seem to be regressing to macro-economic childhood, clutching the multiplier like an old teddy bear.
The harsh reality that is being repressed is this: the Western world is suffering a crisis of excessive indebtedness…”
“The idea of modifying mortgages appalls legal purists as a violation of the sanctity of contract. But, as with the principle of eminent domain, there are times when the public interest requires us to honour the rule of law in the breach. Repeatedly in the course of the 19th century, governments changed the terms of bonds that they issued through a process known as conversion. A bond with a 5 per cent coupon would simply be exchanged for one with a 3 per cent coupon, to take account of falling market rates and prices. Such procedures were seldom stigmatised as default. Today, in the same way, we need an orderly conversion of adjustable rate mortgages to take account of the fundamentally altered financial environment.
No doubt those who lose by such measures will not suffer in silence. But the benefits of macro-economic stabilisation will surely outweigh the costs to bank shareholders, bank bondholders and the owners of mortgage-backed securities.
Americans, Churchill once remarked, will always do the right thing — after they have exhausted all the other alternatives. But if we are still waiting for Keynes to save us when Davos comes around next year, it may well be too late. Only a Great Restructuring can end the Great Repression. It needs to happen soon.”
The Rolling Parade
February 28: The great repression by Niall Ferguson, The Australian.
“There is something desperate about the way people on both sides of the Atlantic are clinging to their dog-eared copies of Keynes’s General Theory. Uneasily aware that their discipline almost entirely failed to anticipate the crisis, economists seem to be regressing to macro-economic childhood, clutching the multiplier like an old teddy bear.
The harsh reality that is being repressed is this: the Western world is suffering a crisis of excessive indebtedness…”
“The idea of modifying mortgages appalls legal purists as a violation of the sanctity of contract. But, as with the principle of eminent domain, there are times when the public interest requires us to honour the rule of law in the breach. Repeatedly in the course of the 19th century, governments changed the terms of bonds that they issued through a process known as conversion. A bond with a 5 per cent coupon would simply be exchanged for one with a 3 per cent coupon, to take account of falling market rates and prices. Such procedures were seldom stigmatised as default. Today, in the same way, we need an orderly conversion of adjustable rate mortgages to take account of the fundamentally altered financial environment.
No doubt those who lose by such measures will not suffer in silence. But the benefits of macro-economic stabilisation will surely outweigh the costs to bank shareholders, bank bondholders and the owners of mortgage-backed securities.
Americans, Churchill once remarked, will always do the right thing — after they have exhausted all the other alternatives. But if we are still waiting for Keynes to save us when Davos comes around next year, it may well be too late. Only a Great Restructuring can end the Great Repression. It needs to happen soon.”
February 28, 2009: US stocks plumb 12-year lows.
“US stocks fell and the S&P 500 closed at a 12-year low on Friday, after the government said it will take a large stake in Citigroup’s common shares, fanning fears it will increase its role in other major banks.
The decline closed out a grim month on Wall Street, with the Dow industrials hitting the lowest level since May 1997 as the blue-chip index fell for a sixth straight month.”
February 27: Economy shrinks at fastest pace in 26 years, Yahoo Finance.
February 28, 2009: Dole spike hits boom states of Queensland and WA first, David Uren and Sid Maher, The Australian.
“While there is always a jump in the number of unemployment benefit claimants at the beginning of a year, new figures from the Department of Education, Employment and Workplace Relations show the number of jobless in Queensland is 45.4 per cent higher than it was at the same time last year. The number of jobless has soared by 40.5 per cent in WA, which is suffering from the collapse of the mining boom. There have been smaller increases in the southeastern states, with rises of 25.7 per cent in NSW, 25 per cent in Victoria, 15.7 per cent in South Australia and 22.4 per cent in Tasmania.”
Feb 27 : Europe’s Crisis: Much Bigger Than Subprime, Worse Than U.S. Tech Ticker, Yahoo Finance.
“But in an echo of teaser-rate subprimes here in the US, there is a problem. Along came the synchronized global recession and large Polish current-account trade deficits, which were three times those of the US in terms of GDP, just to give us some perspective. Of course, if you are not a reserve currency this is going to bring some pressure to bear. And it did. The Polish zloty has basically dropped in half compared to the Swiss franc. That means if you are a mortgage holder, your house payment just doubled. That same story is repeated all over the Baltics and Eastern Europe.”
February 23: Recipe for Disaster: The Formula That Killed Wall Street, Wired Magazine.
David X. Li, it’s safe to say, won’t be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li’s Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
How could one formula pack such a devastating punch? The answer lies in the bond market, the multitrillion-dollar system that allows pension funds, insurance companies, and hedge funds to lend trillions of dollars to companies, countries, and home buyers.
February 25: Chris Bowen, federal Assistant Treasurer and member for Prospect, writing in the Fairfax press. Offers of easy credit are bad news for the poor.
It’s “No credit check month” at Radio Rentals. If you go to its website, the first thing that greets you is a big sign assuring customers that they can apply for the lease of a plasma television, fitness equipment or “computers plus more” without having their credit record checked.
The company claims this isn’t being irresponsible. What garbage.
Anybody who claims that this sort of behaviour is responsible or ethical is talking absolute twaddle. It is subprime greed writ small.
24 Feb 2009: Alex Mitchell. Financial Crisis: Do Not Resuscitate.Note to economics writers: your beloved free market is dead. Now tell us the real story about the global financial crisis.
For many years it was my conscientious belief that the worst practitioners in the media were celebrity reporters who did little more than rewrite press handouts supplied by agents for limelight-seeking B‑grade actors and pop stars.
I’ve now revised my views and am convinced that the media’s bottom-feeders are the economics writers.
In so-called normal times, these erudite commentators wrote very little and not very often. Indeed, they rarely came to work and weren’t seen around newsrooms. They sat at home in their book-lined studies mousing their way through international websites looking for ideas for something to write about.
February 22, 2009: Paul Krugman, New York Times. Banking on the Brink.
Comrade Greenspan wants us to seize the economy’s commanding heights.
O.K., not exactly. What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree…
The Obama administration, says Robert Gibbs, the White House spokesman, believes “that a privately held banking system is the correct way to go.” So do we all. But what we have now isn’t private enterprise, it’s lemon socialism: banks get the upside but taxpayers bear the risks. And it’s perpetuating zombie banks, blocking economic recovery.
February 21: The Government and the Banks, NYT Editorial.
Bank stocks plunged last week on fears that the government will have to take over battered institutions like Citigroup and Bank of America. That would wipe out the banks’ shareholders — hence, investors’ rush for the exits — and put the government in control of a swath of the financial system.
Americans have a visceral horror of the word nationalization. So call it restructuring or majority ownership. Or call it the taxpayers’ due after pouring in hundreds of billions of dollars in capital and guarantees and standing ready to pour in hundreds of billions more. We increasingly believe it is the least bad solution to a truly desperate situation.
February 21, 2009: What We Don’t Know Will Hurt Us, FRANK RICH, NYT.
One of the most persistent cultural tics of the early 21st century is Americans’ reluctance to absorb, let alone prepare for, bad news… Obama’s toughest political problem may not be coping with the increasingly marginalized G.O.P. but with an America-in-denial that must hear warning signs repeatedly, for months and sometimes years, before believing the wolf is actually at the door.
This phenomenon could be seen in two TV exposés of the mortgage crisis… Both reports were superbly done, but both could have been reruns… But still the larger message may not be entirely sinking in. “House of Cards” was littered with come-on commercials, including one hawking “risk-free” foreign-currency trading — yet another variation on Quick Loan Funding, promising credulous Americans something for nothing.
February 21: After Huge Losses, a Move to Reclaim Executives’ Pay. SHOULD executives get to keep lavish pay packages when the profits that generated their compensation go up in smoke?
Executives at seven major financial institutions that have collapsed, were sold at distressed prices or are in deep to the taxpayer received $464 million in performance pay since 2005, according to an analysis performed for The New York Times. Almost half of that consisted of cash compensation.
Yet these firms have reported losses of $107 billion since 2007, a result of their own missteps and the ensuing economic downturn. And $740 billion in stock market value has been lost since these companies’ shares peaked in 2007, just before the housing bubble burst.
February 21: When Consumers Cut Back: A Lesson From Japan, NYT.
As recession-wary Americans adapt to a new frugality, Japan offers a peek at how thrift can take lasting hold of a consumer society, to disastrous effect.
In Japan, Neither Spending Nor Saving The economic malaise that plagued Japan from the 1990s until the early 2000s brought stunted wages and depressed stock prices, turning free-spending consumers into misers and making them dead weight on Japan’s economy.
Today, years after the recovery, even well-off Japanese households use old bath water to do laundry, a popular way to save on utility bills. Sales of whiskey, the favorite drink among moneyed Tokyoites in the booming ’80s, have fallen to a fifth of their peak. And the nation is losing interest in cars; sales have fallen by half since 1990.
February 2009: The Crisis of Credit Visualized. It’s not perfect and blames the crisis solely on subprimes–ignoring the long run up of debt beforehand–but this visual portrayal of the crisis is still pretty good.
February 21: US probe reveals Swiss bank tricks. “Swiss bank UBS AG used coded language in internal emails and memos, created hundreds of sham offshore entities and lied to US officials in an elaborate scheme to conceal the overseas accounts of wealthy Americans, the Internal Revenue Service claimed in federal court documents.”
“According to the IRS, UBS allegedly staged training sessions so that ”client advisers” could travel frequently to consult with secret US customers without attracting the attention of tax agents or law enforcement officials. They were told to keep “an irregular hotel rotation” and falsely claim on customs forms that they were in the US on pleasure, not business.”
February 21, 2009: Annette Sampson, SMH. Supersized fees for making you poor.
The fund manager Andrew Parsons of Resolution Capital has hit it on the nose. Why should investors pay performance fees on assets that are going backwards? Parsons took a swipe this week at management of Macquarie Office Fund for taking $12.6 million in performance fees for the December half year while reporting a $1 billion loss. How, he asked, could management claim they were being paid for long-term outperformance when the fund had listed at 12 years ago at $1 and now had net tangible assets of 63c.
February 21, 2009: Colin Kruger, SMH. Storm’s financial maelstrom threatens banking sector; Thousands have been hit by this financial disaster and Australia’s banks may be next. But nobody was as closely intertwined with Storm as Commonwealth Bank.
Unlike the other three service providers, Commonwealth offered the lot, from mortgages to margin loans and index funds, which Storm advisers sold to clients. At its peak, Commonwealth had an estimated $3 billion worth of business with Storm split equally among the three areas.
It was an enormous exposure and a concentrated one in the cases where Commonwealth was providing the one Storm client with all three products.
By this stage, index fund investments were falling off a cliff, threatening a “domino effect” for Commonwealth, as Cassimatis pointed out in his pitch.
If enough margin loans were triggered by the falling value of the funds it could all come tumbling down.
It promised plenty of grief for a highly public institution like Commonwealth and it was a bargaining chip Cassimatis was apparently keen to exploit.
February 21, 2009: Ian Verrender, SMH. Darkness at break of noon shadows even the silver spoons.
Sticking your neck out can be a dangerous business. Professional gamblers offset their bets, financial types hedge their investments and politicians usually err on the side of caution by never actually answering a question.
But sometimes a pollie goes out on a limb. Take this little missive to a constituent from Joe Hockey, the federal member for North Sydney who this week was elevated to the role of Opposition spokesman on Treasury.
Dear Mr M…
Thank you for your letter of 12 August, 2007 concerning the global finance system.
I have noted your views. I however disagree vehemently with your analysis that the world is facing a collapse of the financial markets. The last few days have indicated that the financial markets, with the support of the central banking institutions, are able to meet the demands that have been placed on them.
Yours sincerely, Joe Hockey.
Oops. August 2007 was the beginning of the greatest meltdown in financial markets that the world has ever seen. August 2007 was when credit markets froze completely and the Australian sharemarket officially went into a “correction”, a 10 per cent fall.
February 19: Michael West, SMH. Don’t mention the debt.
Our economy, like the US, UK and many in the developed world, is a chronic current account deficit nation, splashing year-in year-out on the national credit card and hoping the global bank keeps increasing the limit.
What is the limit? We don’t know that, yet. Yet surely it must be tested one day.
And in light of the recent developments in the US and particularly in Austria and Eastern Europe, that day may arrive sooner rather than later. It is as close as a foreign lender or two saying, no thanks, we’ve got enough of that, can’t take any more.
Sunday, February 15: Matthew Richardson and Nouriel Roubini. Nationalize the Banks! We’re all Swedes Now, Washington Post.
The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is to nationalize it.
As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner’s recent plan to save it has many of the right elements, it’s basically too late.
February 16: Daniel Rook, SMH. Japan says economic crisis worst since WWII. “Japan warned Monday it was in the deepest economic crisis since World War II, after Asia’s biggest economy suffered its worst contraction in almost 35 years in the fourth quarter of 2008.”
Tuesday, 10 February: Nigel Morris, Deputy Political Editor, and Sean O’Grady, Economics Editor, The Independent (UK). This is the worst recession for over 100 years. Ed Balls, the PM’s closest ally, warns that downturn is ferocious and says impact will last 15 years.
In an extraordinary admission about the severity of the economic downturn, Ed Balls even predicted that its effects would still be felt 15 years from now. The Schools Secretary’s comments carry added weight because he is a former chief economic adviser to the Treasury and regarded as one of the Prime Ministers’s closest allies.
Mr Balls said yesterday: “The reality is that this is becoming the most serious global recession for, I’m sure, over 100 years, as it will turn out.”
He warned that events worldwide were moving at a “speed, pace and ferocity which none of us have seen before” and banks were losing cash on a “scale that nobody believed possible”.
The minister stunned his audience at a Labour conference in Yorkshire by forecasting that times could be tougher than in the depression of the 1930s, when male unemployment in some cities reached 70 per cent. He also appeared to hint that the recession could play into the hands of the far right.
February 14: US Congress passes $1.2 trillion stimulus, SMH. “An economic stimulus package worth $US787 billion ($1.2 trillion) is headed to President Barack Obamas desk after Congress passed the plan that Democrats say is critical to helping pull the US economy out of recession.”
February 14: Friday the 13th for Europe’s economies, SMH. “A flurry of data revealed the dismal contours of Europe’s new economic landscape on Friday, with key economies in deep recession, weak growth in previously dynamic eastern states and a disaster zone in the Baltics.”
Curiously, the one exception was France, which as a survey of Western OECD nations by the RBA revealed a year ago, is the only Western OECD country whose debt to GDP ratio had fallen over the period 77–07.
February 14: Michael West, SMH. Babcock’s loot.
The time will come for painstaking analyses, for the tale of the rise and fall of Babcock & Brown. But for now, let’s not beat around the bush: who pulled out the loot, and how much was it?
Old habits, though, apparently die hard as the new CEO of B&B Power, Rolf Ross, has just won a $2 million salary despite the market cap of the entire company being just $42 million.
It’s a far cry from the old days though. At the $33 peak in the B&B share price in 2007, Jim Babcock was worth almost $700 million, Phil Green $400 million, Peter Hofbauer $260 million, Rob Topfer $120 million and Eric Lucas $180 million. And that is just counting their shares in the parent company alone.
Of these big hitters, Jim Babcock appears to have done best, pulling out around $100 million. Phil Green seems to have fared worst. Not only did Green leave the building with his IPO stock mostly intact, he ploughed a good deal of money into the foundering satellites.
February 13: Dodgy loans, unjust contracts and the public interest, Richard Ackland, SMH. This reports the failure on appeal of the Cooks case that initially motivated me to raise the alarm about excessive debt. Unfortunately it appears that, as Richard summarises below, “The public interest can be a step too far for some judges.”
Acting Justice Patten, who initially heard the case, found that the contract was unjust. The lender, Permanent Mortgages, should have been aware on making the most perfunctory of inquiries that the Cooks were incapable of servicing this debt.
The judge rewrote the loan so as to remove the default interest rate. The appeal was about whether the Cooks’ equity in their home should be restored and the interest debt cancelled. Parliament has said that contracts can be unwound where they are unfair, and one of the considerations to be taken into account is “the public interest”.
There was evidence before the court that the loans to the Cooks were of the “equity-stripping” species — the lenders did not care whether the money could be repaid, as long as the property could be sold.
Economists gave evidence that these transactions could be categorised as “Ponzi loans” — which could only ever be repaid by taking out a larger loan or by selling the asset.
There was evidence that, were the practice of Ponzi loans to become widespread, “it would substantially increase the tendency of the Australian financial system to asset bubbles and subsequent financial crisis”, Professor Steve Keen told the court — something, you might think, that would be a matter of “public interest”. Invariably, though, the phrase is subjected to mauling at the hands of the judiciary. And so it was here. The appeal judge Roger Giles said in a narrowing flourish: “I have some difficulty in seeing that the health of the economy falls within the public interest to which regard may be had in determining injustice of the particular transaction.”
The public interest can be a step too far for some judges.
February 12: Fed Calls Gain in Family Wealth a Mirage, NYT. “The leap in wealth that Americans thought they were enjoying over the last several years has already turned out to be a mirage, according to new estimates by the Federal Reserve.
In its triennial survey of consumer finances, released Thursday, the Fed found that the median net worth of American households increased by a seemingly healthy 17 percent between the end of 2004 and the end of 2007.
But the gains were wiped out by the collapse in housing and stock prices last year. Adjusting for those declines, Fed officials estimated that the median family was 3.2 percent poorer as of October 2008 than it was at the end of 2004. ”
February 9, 2009: Now is the time for a revolution in economic thought. Anatole Kaletsky, The Times.
These are just a few examples of the creative thinking that has started again in economics after 20 years of stagnation. But the academic establishment, discredited though it is by the present crisis, will fight hard against new ideas. The outcome of this battle does not just matter to academic economists. Without a better understanding of economics, financial crises will keep recurring and faith in capitalism and free markets will surely erode. Changes in regulation are not sufficient after this financial crisis — it is time for a revolution in economic thought.
Feb 12: RBA faithful banking on policy power, Stephen Long, ABC. “Last week an economist in Sydney was briefing his colleagues from the bank’s dealing room about the Reserve Bank’s latest forecasts. One of the screen jockeys cut him short. “I don’t take anything the RBA or the Treasury says seriously anymore,” he said. “They’ve been wrong too many times.””
Feb 12th: America’s Banking Crisis–Worse than Japan?, The Economist.
This crisis, like most others in rich countries, emerged from a property bubble and a credit boom. The scale of the bubble—a doubling of house prices in five years—was about as big in America’s ten largest cities as it was in Japan’s metropolises. But nationwide, house prices rose further in America and Britain than they did in Japan (see first chart). So did commercial-property prices. In absolute terms, the credit boom on top of the housing bubble was unparalleled. In America private-sector debt soared from $22 trillion in 2000 (or the equivalent of 222% of GDP) to $41 trillion (294% of GDP) in 2007 (see second chart).
Judged by standard measures of banking distress, such as the amount of non-performing loans, America’s troubles are probably worse than those in any developed-country crash bar Japan’s. According to the IMF, non-performing loans in Sweden reached 13% of GDP at the peak of the crisis. In Japan they hit 35% of GDP. A recent estimate by Goldman Sachs suggests that American banks held some $5.7 trillion-worth of loans in “troubled” categories, such as subprime mortgages and commercial property. That is equivalent to almost 40% of GDP.
Feb 12th: Irving Fisher–Out of Keynes’s shadow, The Economist.
“As parallels to the 1930s multiply, Fisher is relevant again. As it was then, the United States is now awash in debt. No matter that it is mostly “inside” or “internal” debt—owed by Americans to other Americans. As the underlying collateral declines in value and incomes shrink, the real burden of debt rises. Debts go bad, weakening banks, forcing asset sales and driving prices down further. Fisher showed how such a spiral could turn mere busts into depressions. In 1933 he wrote:
Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. The very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate…the more debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip.”
February 10: Jacob Saulwick, SMH. Disappearing job ads augur rise in unemployment. “On the bank’s figures, the number of advertised jobs has fallen 34 per cent in the past year, and the series shows nine months of consecutive decline.”
February 09: Economy at a Crossroads: We’ll Be Lucky If Downturn Only as Bad as Japan’s, FT’s Wolf Says, Yahoo Tech Ticker.
Wolf, who is also a professor of economics at University of Nottingham, believes “it will be lucky” if the current downturn is only as bad as Japan’s so-called lost decade. Unlike the U.S. today, Japan was able to count on a strong global economy to mitigate the affects of its burst bubble and struggling financial system. “There is no world economy to rescue the U.S.,” he says. “Chances are [it will prove] much worse than Japan.”
February 9: Simon Maierhofer, Yahoo Finance. Bailout Deja Vu — Is Obama’s Version Doomed To Fail?
It hasn’t been much publicized, but the last four months have seen the creation of the Commercial Paper Funding Facility (CPFF), Money Market Investor Funding Facility (MMIFF), Term Asset-Backed Securities Loan Facility (TALF), Government Sponsored Entities Purchase Program (GSE) and other initiatives with a price tag of several trillion dollars.
As the chart below shows, none of these initiatives (CPFFMMIFFTALFGSE) has been able to stabilize the markets, let alone resurrect the economy, stocks or consumer sentiment to its previous glory.
February 7: IMF Says Advanced Economies Already in Depression, Bloomberg. “Advanced economies are already in a “depression” and the financial crisis may deepen unless the banking system is fixed, International Monetary Fund Managing Director Dominique Strauss-Kahn said.”
Februay 7: Ray Dalio, Chief Investment Officer, Bridgewater Associates, Barron’s. Recession? No, It’s a D‑process, and It Will Be Long.
What the Federal Reserve has done and what the Treasury has done, by and large, is to take an existing debt and say they will own it or lend against it. But they haven’t said they are going to write down the debt and cut debt payments each month. There has been little in the way of debt relief yet. Very, very few actual mortgages have been restructured. Very little corporate debt has been restructured.
The Federal Reserve, in particular, has done a number of successful things. The Federal Reserve went out and bought or lent against a lot of the debt. That has had the effect of reducing the risk of that debt defaulting, so that is good in a sense. And because the risk of default has gone down, it has forced the interest rate on the debt to go down, and that is good, too.
However, the reason it hasn’t actually produced increased credit activity is because the debtors are still too indebted and not able to properly service the debt. Only when those debts are actually written down will we get to the point where we will have credit growth. There is a mortgage debt piece that will need to be restructured. There is a giant financial-sector piece — banks and investment banks and whatever is left of the financial sector — that will need to be restructured. There is a corporate piece that will need to be restructured, and then there is a commercial-real-estate piece that will need to be restructured.
February 5: GE chief warns on US depression threat, Financial Times.
The US economy is suffering its steepest downturn since at least the 1970s and could descend into a depression, Jeff Immelt, General Electric’s chief executive, warned on Thursday.
“Unlike the other downturns that I’ve been a part of, this one is faced with limited liquidity,” Mr Immelt, GE’s chief since 2001 told a conference. “Once you break through ’74-’75, you don’t stop ’til you get to 1929.”
February 07: Clive Mathieson, The Australian. Bitten investors grow wary of experts. As the blog member who brought this to my attention said, the group that did well in this survey certainly included me; as for other academic economists who raised the alarm publicly, I can think of Peter Brain from the National Institute for Economic and Industrial Research, Bill Mitchell from the University of Newcastle’s CoFFEE (Centre oF Full Employment and Equity), but few others.
“DISILLUSIONED with so-called market experts and downright distrustful of financial planners, investors are taking matters into their own hands…
The only group of experts that has came out with any credibility are the academic economists, who were dismissed as doomsayers when they began warning several years ago that there was too much debt and complexity in financial markets, pointing to a potential crisis.”
February 5: Obama’s speech to the Democratic Party retreat to consider the bailout. Especially if you haven’t seen “The One” deliver an impromptu speech, that’s all the more reason to watch this one.
He also makes some references that, from my point of view, indicate trouble ahead–he is a politician after all, and has to rely upon people that he has no reason yet to doubt are the experts–because he frequently defended ideas in the package on the basis that they were derived from the best economic advice. Of course that advice is coming exclusively from neoclassical economists, and from my different perspective, the best advice would be something entirely different.
However, the personal and intellectual power shown in this speech makes me cling to the hope that, once these standard policies have been tried and found wanting, Obama will have the courage it takes to well and truly step outside the square, and consider and implement far more effective measures.
February 5: Japan’s Big-Works Stimulus Is Lesson, New York Times. “Economists tend to divide into two camps on the question of Japan’s infrastructure spending: those, many of them Americans like Mr. Geithner, who think it did not go far enough; and those, many of them Japanese, who think it was a colossal waste.”
February 7: Stevenson Jacobs and Erin Mcclam, Yahoo Finance. The rise and (almost) fall of America’s banks.
“We’re asking the same people who got us into this mess to get us out. These are the guys who buy airplanes and decorate their offices for a million bucks,” says Bill Seidman, a former chairman of the FDIC who ran the government bailout during the savings and loan crisis.
Seidman and others are calling for an alternative rescue plan that they say would avoid the pitfalls of past efforts: a short-term nationalization of the banks.
To many people, that very thought is an affront to the free-market system, more Argentina than America. But that’s exactly what the U.S. government did in the S&L debacle of the 1980s.
With Seidman at the helm, the government-run Resolution Trust Corp. took over failed S&Ls and sold off their depressed assets — repossessed homes, offices, cars, planes and even artwork. Any institution needing help had its management fired and its shareholders wiped out.
During the next six years, the RTC sold nearly $400 billion in assets on the books of more than 700 failed thrifts. Then it sold the cleaned-up S&Ls back into the private sector.
The cost to taxpayers? About $125 billion to $150 billion by the time the bailout was completed in 1995, which was about 2 percent of one year’s gross domestic product at the time.
February 7: Danielle Teutsch, SMH. Don’t bet your house on it…but it can be cheaper to buy … How criminal will this appear in a year or so’s time, when many of these young people have been enticed into debt and then lose their jobs?:
THE gap is narrowing between renting and buying in Sydney, prompting first-home owners to take the plunge into the property market. If buyers take out an interest-only loan, it can be cheaper to buy than to rent…
Figures compiled by The Sun-Herald show that repayments for a median-priced property of $536,000 in Sydney — taking into account the most recent rate cuts — are $592 a week. A similar-priced property can rent for between $450 and $550 a week.
If the buyer takes out an interest-only loan, the repayments fall to $461 a week — about the same as, or cheaper than, renting.
Fortunately Liam O’Hara of Australian Property Monitors offered a caution:
Mr O’Hara cautioned that fears about worsening unemployment needed to be taken into account. “My advice would be to think wisely before burdening yourself with too much debt,” he said. “The rental market may be less risky.”
But the overall tenor of the article was that it’s a good idea now for renters to take the government’s incentives and plunge into debt:
Tara Saul, 28, an occupational therapist, is about to sign a contract for a one-bedroom unit at the Waterpoint for $428,000. She was swayed by lower interest rates and the $40,000 she will receive in grants and incentives. With a 5 per cent deposit, her weekly repayments will be about $480. The same unit will rent for about $400.
No criticism of the journalist here–she’s just reporting a news trend, and she did secure the cautionary quote from O’Hara. But how will these young people feel about the First Home Buyers incentive in two years time, if they lose their jobs in the downturn, and are then unable to sell their properties for a profit after defaulting on their mortgages? There could be a lot of angry young people, literally in and on the streets over this, in a year or two.
February 6: Peter Schiff: Why I’m Right and My Critics Are All Wrong, Yahoo Tech Ticker. You have to admire Peter Schiff, both for calling the crisis correctly, and for having the courage to confront criticism when in the short term, his counter-strategy to the meltdown has led to large losses. I accept Peter’s arguments here, and my disagreements with him relate to his model of money creation and why that misleads him, rather than to his diagnosis of the problem in the first place.
February 6: Jim Manzi, Stimulus predictions: put up or shut up. Jim calls on economists who are making predictions about what Obama’s stimulus package will or won’t do to present their models on which these predictins are based. In part, he says:
So here’s what we would need to falsify a prediction. Anyone who claims to know the impact should escrow a copy of the source code of the econometric model that is used to make the prediction, along with a stated confidence interval, operational scripts, and assumptions for all required non-stimulus inputs that populate the model with a named third-party. Upon reaching the date for which the prediction is made, the third-party should run the model with the actual data for all non-stimulus assumptions and compare the model result to actual. Any difference would be due to model error. We actually still would not be able to partition the sources of error between “error in predicting causal impact of stimulus” and “other”, but at least we would have a real measurement of model accuracy for this instance.
Of course, I sincerely doubt this will happen. I wonder why not?
February 6: Yahoo Finance. Consumer credit falls more than expected in Dec. Consumer borrowing falls for third straight month in December, longest stretch in 17 years.
“The Federal Reserve said Friday that consumer borrowing dropped at an annual rate of 3.1 percent in December. The $6.6 billion decline was nearly double what analysts expected. It followed an $11 billion drop in November that was the biggest monthly plunge on records going back to 1943.”
February 7: Peter Hartcher, SMH. Rudd burnt the midnight oil as lights went out. “ty Therese. It must be tough living with a nocturnal, workaholic technocrat. While the rest of Australia took Christmas holidays to put worries aside, Kevin Rudd spent his getting gloomy. The Prime Minister kept a close daily eye on the economic news from three pivotal countries — the United States, China and Britain — and it was uniformly bad.”
“Rudd was worried that the stimulus plan would get the Government into serious debt and wanted a plan to get it out again. He asked the Treasury for some fiscal rules. Henry came back with a number of alternatives, and Rudd adopted the Treasury’s preferred option.
This was a pair of guidelines. First was that once growth returned to its long-run trend of 3per cent, any extra revenues would go towards reducing the deficit. Second was to limit the rise in government spending to 2per cent in real terms once the crisis had passed.
When the package was finally assembled, it was $42 billion over four years. The Treasury forecast that, as a result, Australia’s economy would grow by 1per cent this financial year and by 0.75 per cent in the next.
Unemployment would rise to 7 per cent by June 2010. The stimulus would not prevent pain, but could only try to limit it.”
February 7: Miriam Steffens, SMH. Murdoch to cut jobs as News suffers $11.7b loss.
RUPERT MURDOCH has flagged more job cuts at News Corp and a 30 per cent slide in profits this year, warning the company is witnessing “the worst global economic crisis” since he started building his global media empire more than 50 years ago.
News reported a $US7.6 billion ($11.7 billion) operating loss for the second quarter after it was hit by a sharp downturn in advertising sales and booked an $US8.4 billion write-down for television licences, goodwill and the value of newspapers assets.
The loss, after a $US1.4 billion profit the previous year, was a “direct reflection of a recession that’s deeper than anyone predicted”, Mr Murdoch said.
February 7: Jacob Saulwick and Danny John. Bank warns rate cut joy over. “HOMEOWNERS are unlikely to enjoy the full benefit of further interest rate cuts, after the chief executive of the National Australia Bank warned it would cost too much to pass them on.”
February 7: Eric Johnston, SMH. Bad loans reach an 18-year high. “Earlier this week Commonwealth said a surge in revenue should help it deliver a bigger-than-expected $2 billion interim cash profit when it delivers its first-half results on Wednesday.
But the nation’s largest bank said it will also be hit with a sharp jump in bad debts. The bank’s $1.6 billion first-half charge will be nearly five times the $333 million loss incurred by the bank in the first half of last year.”
February 6: Andrew Boughton with Michael West, SMH and The Age. Wanted: A new economic theory.
Now that Prime Minister Kevin Rudd has hailed in his “Monthly’ essay a new political era of ”social capitalism” and embarked on another stimulus package it merely remains to find an economic theory to accompany it.
Economics has failed manifestly to see the global financial crisis coming. Only those once derided as doomsayers and crackpots were anywhere near the mark. An entire generation of richly-remunerated experts got it wrong, once again
A few years ago, University of Western Sydney’s Professor Steve Keen took up the cudgels for real estate and finance, supported by the theories of Minsky and colleagues back at the Merewether Building at Sydney University, having long held an interest in the mathematics of political economy.
Keen, whose predictions of reckless leverage and speculation in recent years have been vindicated overall through the present credit crisis, declared this week that Australia was bound for a Japanese-style experience of drawn out recession. Stimulus measures were not resolving the problem, he said, simply adding to the Government debt.
The same theme was current in Boughton’s earlier work, along with other correspondents in the United States such as Charles R Morris and Lowell Bryan, though he differs from Keen on the role of government.
While citing Marx on the proclivity of the ”parasites”, the banks, to ”periodically despoil industrial capitalists” and ”interfere in actual production”, Keen noted that he did not expect capitalism to collapse.
February 5: Obama’s address to the Democratic Party retreat discussing the bailout. Well worth a look to see the man’s passion and intelligence on his feet–a welcome change from George W–but also to see the extent to which, as he must, he is relying on the advice of people he considers experts on economics. This is why I expect his bailout to fail: the so-called experts aren’t at all (otherwise they would have seen this crisis coming, as I did), but believers in a false model of a market economy that largely contributed to this crisis.
February 5: The Times. D‑Day for Gordon Brown as he says world is already in a depression. “Gordon Brown described the global economic downturn as a depression for the first time yesterday during a furious Commons clash with David Cameron. The Prime Minister’s remark came as he told MPs that countries “should agree as a world on a monetary and fiscal stimulus that will take the world out of depression”.”
February 5: Eric Johnston, SMH. MacBank profit shocker. “Investment bank Macquarie Group warned its full year profit is likely to be halved after being forced to take an additional $900 million in writedowns and other charges during the second half, mostly as a result of a slump in the value of its listed funds, particularly its property assets… And for the first time, the investment bank revealed the extent of its jobs purge late last year, confirming some 1047 staff have been cut from the bank, reversing years of fast-paced growth.”
February 5: Michael West, SMH. Putting the cap on capitalism. “All the banks will argue strenuously that large and uncapped incentives are required to drive performance, as you would expect. It’s clear by now, however, that this line on executive remuneration is nonsense. Just read the finance pages (online or otherwise). The global meltdown has meant finance executives are a dime a dozen — the market has shrunk — and most who still have a job are happy to be gainfully employed. On a social equity plane, hardship is hardly an issue. No one needs more than $500,000 (US or Aussie dollars) to live on. Until guarantees are lifted, there is no justification for million-dollar salaries when the state is picking up the risk.”
February 5: David Hirst, The Age. US gambles freedom on risky printing press policy. I wouldn’t have chosen the title, tone or slant of this article myself, but the data is unmistakeable: Bernanke is putting into practice his “logic of the printing press” analogy (se e Debtwatch No. 31).
Keen, who last week was interviewed by The Wall Street Journal and is fast becoming a world-recognised economic authority, outlined in his recent Debt Watch Report that Bernanke’s famous “helicopter drop doubling of base money will be impotent against the US’s credit crunch”.
Most economists believe the US and China are bound irrevocably by US debt and China’s continued purchase of that debt. They assume the US, with 46 states insolvent or approaching insolvency, will suffer immediate MAD if China ends the long financial arrangement.
But with the US entering a period of deflation, its economic leadership appears to be doing the unthinkable — going it alone and letting the electronic printing presses take care of the huge sums required to keep the nation afloat. The consequences for the world economy are incomprehensible as China’s purchases of US treasuries underwrite the US’s unquenchable demand for money to service its multitrillion-dollar public debt, which President Obama said recently would reach $US11 trillion ($A17 trillion) this year.
Faced with the huge sinkhole created by the financial meltdown and the prospect of deflation, US Fed boss Ben Bernanke has been printing money so rapidly that the US is being flooded with liquidity. This is beyond unprecedented.
Many Americans believe printing money can free the country from the suffocating embrace of mutual dependence with China. In his blog earlier this week, Brad Setser from the US Council on Foreign Relations, and one of the world’s most respected China commentators, outlined the US position: “Exchange rate policies can also influence the allocation of resources across sectors. China’s de facto dollar peg is an obvious example … it is hard for me to believe that as much would have been invested in China’s export sector if China had had a different exchange rate regime …
“Those who attribute the growth of the past several years solely to the market miss the large role the state played in many of the world’s fast growing economies.”
Setser and others close to policymakers are realising the boom in China may not be a rerun of the Japanese and German postwar economic miracles but more akin to the creation of a giant sweatshop for the benefit of Western companies and the Chinese Communist Party. But this required US consumers to play their role as the linchpins. Now the linchpin has broken. There is no way the old arrangement can continue and the US is realising the system will end. By reverting to the printing press it can free itself from dependency on China.
February 21: Korean exports shrink by one-third. “outh Korea’s exports tumbled by a record 32.8% in January, foreshadowing a deepening slump in Asia’s export-driven economies. Shipments fell by the most since figures were first compiled in 1957, and at almost twice the pace of December’s 17.9% decline,”
February 2: Michael West. Babcock execs at the trough.
In an email chain leaked to BusinessDay, one employee expressed dismay that the firm’s staff were being asked to work hard in order to ensure that executives received their retention payments.
”I personally find it morally repugnant that senior members of this company have the arrogance to believe that, after a number of years of collecting very substantial bonuses and salaries effectively paid by the shareholders and creditors of B&B, they are still ”owed” a retention bonus for clearing up the mess that in a large part was created under their ”leadership”.
February 2: John Garnaut, SMH. China’s Premier pays heavy price for national insecurity. “Official figures show the Chinese Government has accumulated $US1.95 trillion in foreign exchange reserves, with about a third of that in US Treasury bonds.
Brad Setser, the world’s leading China reserves watcher, calculates the Chinese Government has $US1.7 trillion in US debt assets within a $US2.3 trillion portfolio of foreign exchange reserves.
“That is over 50 per cent of China’s gross domestic product, or roughly $US2000 per Chinese inhabitant,” writes Setser and Aparna Pandey in their paper, China’s $US1.7 Trillion Bet.Over the weekend, Wen implicitly ruled out the self-defeating option of boycotting US Treasury bonds: “We should take [purchasing decisions] in accordance with China’s own need and also our aim to keep the security of our foreign reserves and the value of them.””
February 2: Chris Zappone, SMH. House prices fall again. “Among capital cities, Melbourne fared worst, with house prices sinking 1.7% over the quarter. In Sydney prices eased 0.3%, while they dropped 0.9% in Perth and 1% in Hobart. Bucking the trend were Darwin (+1.6%), Canberra (+0.7%) and Adelaide (+0.3%).”
February 2: Neil Jenman, THE 2009 BULL BOOM–What the public should know.
“Back in 2002, this same agent was also bullish. One of his many bullish statements was at a speaking gig with one of Sydney’s biggest spruiking outfits. This perennially bullish agent told investors that any property they bought would “double in 5 — 6 years”… Anyone who bought properties from that spruiking firm after hearing your bullish predictions (as many unfortunately did) would have lost a lot of money (again, as many unfortunately did). Just one family alone, who bought two properties from your spruiking buddies, lost around $300,000 when the market tanked. ..
Oh, and just in case, you’re wondering about Professor Keen’s track record of predictions, I have checked him out. It’s impressive. A year ago (on February 9, 2008, to be precise), he said that interest rates would go “up for the next six months to a year” and then, afterwards, the rates would come “down like a brick.” That’s almost exactly what’s been happening.”
February 2: Adele Horin, SMH. Retrenched workers told they must wait for help. “The Howard government halved the amount of savings an unemployed person could have to $2500 for a single and $5000 for a couple before waiting periods for benefits cut in. On top of the usual one-week wait for Newstart after lodging a claim, people face a further week’s wait for every $1000 in savings over the threshold.”
February 1, 2009: Ian Traynor, London, The Age. European governments tremble as anger spreads.
“FRANCE paralysed by strikes, the boulevards of Paris resembling a battlefield. The Hungarian currency sinks as unemployment rises. Greek farmers block the road into Bulgaria. New figures show the three Baltic states face the biggest recessions in Europe …
It’s a snapshot of a single day in a Europe sinking into the bleakest of times. And while the outlook may be dark in the big, wealthy democracies of western Europe, it is in the young, poor, vulnerable states of central and eastern Europe that the trauma of meltdown looks graver. Twenty years ago, in revolutionary rejoicing, they ditched communism to put their faith in a capitalism by which they now feel betrayed. The result has been the biggest protests across the former communist bloc since the days of people power.
Europe’s governments are trembling. Revolt is in the air…’
February 1: Michelle Grattan. Fear spreads in the workforce. “THE smell of fear is beginning to permeate the Australian workforce. Many people are worried they could lose their jobs and won’t be able to find a comparable one — or any at all. That’s the strong message from a poll of 1016 workers to be released tomorrow, as politicians gather in Canberra for the new parliamentary year amid anticipation of an early economic stimulus package from the Government.”
February 1, 2009: Justin McCurry, SMH. Japan in crisis as jobs slashed.
“JAPAN could be heading for its worst recession since World War II after official figures showed industrial output fell almost 10 per cent in December and unemployment rose at its fastest pace for more than 40 years.
Production fell 9.6 per cent, the Trade Ministry said, surpassing November’s huge drop by more than 1 percentage point.”
February 1: Jonathan Dart, SMH. Bank workers forced to push loans to public. “AUSTRALIAN banks are engaging in high-pressure sales tactics to maintain falling profits as consumers pull back from an era of easy credit and high debt. Up to 170 bank workers each month are filing complaints about being unreasonably forced to push home loans or credit cards on customers.”
February 1: Anne Davies and Kerry-Anne Walsh. Australia heading for recession: IMF. “The head of the IMF’s Asia-Pacific department, Ray Brooks, said in Washington that Australia would likely have a negative growth rate of ‑0.2 per cent this year. Mr Rudd said the Government stuck by the Treasury’s forecast of a modest 2 per cent growth, but flagged a re-cast of the figures in the light of predictions by the respected international body.”
January 31: News Kontent Blog. Academic scans former Master of Universe.
“I had dinner last night with a guy whose career wandered through nearly a half-dozen major brokerages. He was at ground zero of the securitization and creation of the alphabet soup of the real estate market…
Wall Street and the banking system is every bit as nuts as we all think… You want leverage? Imagine a 20 billion dollar portfolio of mortgage backed securities with a capital base of $10k–literally 2 million-fold leverage. Imagine the shock of the inventor as he watches as his successors expand similar portfolios up to $900 billion…
So where are we now, and where are we heading? This is the bad part: I thought I was the pessimist. Sheesh. He was describing a system infected by flesh eating bacteria. Every day looks more dire than the previous day. The solutions being proposed look feeble, and the Fed looks both powerless and confused”
January 31: Phillip Coorey Chief Political Correspondent, SMH. Time for a new world order: PM.
In an essay to be published next week, the Prime Minister is scathing of the neo-liberals who began refashioning the market system in the 1970s, and ultimately brought about the global financial crisis.
“The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes,” he writes of those who placed their faith in the corrective powers of the market.
January 31; Adele Horin, SMH. You’ll work like a dog to make Centrelink happy. “As the economic drama unfolds a new class of unemployed people will discover for themselves that Australia has one of the harshest regimes in the Western world for dealing with the jobless… Every social security system requires rigorous rules to prevent fraud, prod the bludgers and maintain the public’s support. But Australia’s combination of low payment, tough rules and penalties is particularly harsh. It is still unclear what — if anything — Labor intends to do to soften the system’s impact in a recession when all the stick in the world won’t help. A new class of jobless may soon learn what others even less fortunate have known for some time: it can be a full-time job being unemployed.”
January 30: Jeannine Aversa, AP Economics Writer, Yahoo Finance. Economy has worst slide since ‘82 — and tailspin is accelerating as Americans ax spending. “All told, the economy staggered backward at a 3.8 percent pace at the end of last year, the government said Friday. And the tailspin could well accelerate in the current quarter to a rate of 5 percent or more as the recession churns into a second year and consumers and businesses buckle under a relentless crush of negative forces.”
A buildup in business inventories, adding to economic activity in calculating GDP, masked even deeper weakness. If inventories were stripped out, the economy would have contracted at a 5.1 percent pace in the fourth quarter. Businesses couldn’t cut production fast enough as customers stopped buying and got stuck with excess inventories, economists explained.
Jan 30: Aaron Task & Henry Blodget. Hybrid or Hydra? Meet the New Bailout, Same as the Old Bailout. Hats off to Henry Blodget and Aaron Task, who regularly say the word that Americans normally pussyfoot around: nationalisation. The financial system bankrupted itself, and the best solution is to nationalise the lot, force it to provide working capital to firms, and get ready to start all over again. “Meet the new bailout, which is essentially the same as the old bailout in that it continues to protect shareholders and existing management and the “sanctity” of private firms at the expense of taxpayers.”
January 31: Clancy Yeates and Scott Rochfort, SMH. Drop the anchor and furl the sails, we’re going over the edge. Good to see my fellow bear Gerard Minack being given a solid run here. It’s not easy being sober when all around you are drunk, and Gerard raised the alarm before even I did, in his regular “Down Under Daily” reports for Morgan Stanley.
An economist at Morgan Stanley, Gerard Minack, also bluntly rejects any argument that Australia can avoid being dragged down with the rest of the world.
“The reason that Kevin Rudd’s GFC [global financial crisis] is hitting us is not because we were simply an island of innocence getting hit by evil offshore influences,” says Minack.
“The idea that we were a prudent, sensible country that never indulged in the reckless excesses that the rest of the world did — that is complete crap,” he says. “We partied as hard, if not harder.”
Brushed off for his bleak forecasts in the boom times by many in the market, Minack’s views have been taken more seriously in recent times.
Minack says our addiction to debt makes us just as vulnerable as the rest of the world to the melt-down in capital markets, and recent profit warnings are only the early stages in the downturn. Tumbling commodity prices will only make the trough deeper, he says.
January 30: Ian Munro, SMH. Jolt for New York finances after bonuses slashed. “WALL STREET is measuring its losses in the tens of billions, and amid the carnage, cash bonuses paid to those once proclaimed on the street as masters of the universe have suffered their biggest percentage fall in 30 years. Wall Street bonuses slumped by 44 per cent last year, from $A49.5 billion to a still-impressive $27.7 billion. The average bonus was $168,000.
January 29: Ford Has Its Worst Year Ever but Won’t Ask for Aid, New York Times. ” The Ford Motor Company, the only Detroit automaker not being propped up by billions of dollars in government loans, said on Thursday that it lost $14.6 billion last year as sales slumped the most in decades, making 2008 its worst year in history. Still, the company said it had “sufficient liquidity to fund its business plan and product investments.” It finished 2008 with $24 billion in cash on hand but $25.8 billion in debt.”
January 29: New York Times, What Red Ink? Wall Street Paid Hefty Bonuses. “Despite crippling losses, multibillion-dollar bailouts and the passing of some of the most prominent names in the business, employees at financial companies in New York, the now-diminished world capital of capital, collected an estimated $18.4 billion in bonuses for the year.”
January 26th: Brad Setser, Council on Foreign Relations. A truly global slump. Do not look to the emerging economies for good news … “The commodity-importing BRICs aren’t doing much better. India is slowing. And China is really slowing. Stephen Green of Standard Chartered has constructed an indicator of Chinese economic activity that isn’t based on the government’s reported GDP data. It suggests a far bigger fall in Chinese output than in 1998. Chinese output shrank in the fourth quarter. The first quarter isn’t going to be any better.”
January 27: Martin Wolf, Financial Times. Why dealing with the huge debt overhang is so hard. “Over the past three decades the debt of the US financial sector grew six times faster than nominal GDP. The consequent increases in its scale and leverage explain why, at the peak, the financial sector allegedly generated 40 per cent of US corporate profits. Something decidedly unhealthy was going on: instead of being a servant, finance had become the economy’s master. In a superb brief account of today’s calamity, Lord Turner, chairman of the UK’s Financial Services Authority, refers explicitly to “illusory profits”.”
January 29: China sets 8% growth target to maintain social order.
“While the International Monetary Fund on Wednesday predicted China’s economy would grow by 6.7% in 2009, well below its average of recent years, Wen said 8.0% was needed to guarantee social stability, long a main concern of the government…
South Africa’s Finance Minister Trevor Manuel said wealthy nations appeared to be adopting a “lemming-like approach, trying to get to the precipice without knowing what their money would buy.” He said there was a real risk developed countries would come out of the crisis with massive debts.”
January 29: US Fed may buy long-term debt to revive markets, SMH. “The committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term,” it said in a nod to concerns over the risk of deflation.”
January 29: Michael West, SMH. Storm’s death throes. “Despite Cassimatis’s protestations, gearing is not appropriate for unsophisticated investors, particularly borrowing against the family home to buy shares, and even more particularly in the case of pensioners, who were urged to do just that and which made up a large proportion of Storm’s client base.”
January 29: Malcolm Moore, SMH. Year of the Ox also the year of the axe. “The gloomy prediction came from an official at the Central Communist Party School, who estimated that between 20 and 30 per cent of the 130 million provincial Chinese who rely on the cities for employment would find themselves redundant. To make matters worse, they will find no guarantee of work in their home regions, because sophisticated farming methods have reduced the need for labourers and agricultural hands.”
January 26: The Guardian Road to Ruin Series, Twenty-five people at the heart of the meltdown …. “The worst economic turmoil since the Great Depression is not a natural phenomenon but a man-made disaster in which we all played a part. In the second part of a week-long series looking behind the slump, Guardian City editor Julia Finch picks out the individuals who have led us into the current crisis.”
January 27: AIG executive sentenced to 4 years in prison, Yahoo Finance. “A former executive of insurance heavyweight American International Group Inc. was sentenced to four years in prison Tuesday in a fraud case that authorities say cost shareholders more than $500 million.
January 27: Grant McCool (yes, McCool…), Yahoo Finance: U.S. arrests and charges missing fund manager Nadel. “Nadel, head of Scoop Management overseeing six hedge funds he had valued at more than $300 million but may have less than $1 million according to authorities, is expected to make an initial appearance in a federal court in Tampa, Florida, later on Tuesday.”
January 28: Iceland’s tarnished cabinet sinks like Titanic, SMH. “THE Icelandic Government has become the first to collapse as a direct result of the global economic turmoil. The Prime Minister, Geir Haarde, said on Monday that he and his cabinet would resign immediately. As personal savings have been wiped out and joblessness soars, Icelanders — once among the world’s wealthiest people — have taken to the streets in protest, banging pots and pans and throwing eggs and toilet paper at Mr Haarde and other leaders.”
January 27: Alan Kohler: Unimaginable wealth destruction, Business Spectator. “So the demand from banks for a lower gearing ratio means that the $US30 trillion in assets needs to be supported by just $US12 trillion in debt, not $US15 trillion – meaning the total value of the debt should be around half the current level. That means that somewhere between $US10 trillion and $US15 trillion in US needs to disappear.”
January 26: Financial crisis topples Iceland government, Financial Times. “Iceland’s government collapsed on Monday following political turmoil prompted by the global financial crisis.”
January 26: 62,000 Jobs Are Cut by U.S. and Foreign Companies, New York Times. “On Monday alone, companies across the employment spectrum announced about 62,000 job cuts in the United States and around the world, a stark sign that businesses are enduring a painful, protracted downturn. “The economy is deteriorating at a faster clip than even the most dreary forecasts had expected,” said Joseph Brusuelas, an economist at Merik Investments.”
January 26: by Aaron Task & Henry Blodget, Yahoo Finance Tech Ticker: Big Banks Hoarding TARP Funds: Why Not Just Nationalize Them?
Nobody (or only a scant few) wants to see the government take control over the banking system, which would signal the end of market-based capitalism as we know it.
But the reality is we have a creeping form of nationalization going on already via the initial injection of capital into big banks, and the intense government oversight of how banks operate that is almost certain to accompany TARP II (and III and IV) funds.
Meanwhile, banks are mainly just sitting on the TARP funds, as The Wall Street Journal details…
January 24: FRANK RICH, New York Times. No Time for Poetry. “This debt-ridden national binge of greed and irresponsibility washed over our culture not just through the Marie Antoinette antics of a Schwarzman and a Thain but in mass forms of conspicuous consumption and entertainment. Cable networks like Bravo, A&E, TLC and HGTV produced an avalanche of creepy programming catering to the decade’s housing bubble alone — an orgiastic genre that might be called Subprime Pornography. Some of the series — “Flip This House,” “Flip That House,” “Sell This House,” “My House Is Worth What?” — still play on even as more and more house owners are being flipped into destitute homelessness.”
January 26, 2009: Eric Johnston, SMH. Big four back Rudd credit plan. “THE big four banks are preparing to each tip $500 million of wholesale funds into the new Federal Government-backed vehicle aimed at keeping credit flowing in the commercial property sector, as some struggling offshore lenders become reluctant to refinance existing loans. Bankers have given their initial backing to the planned vehicle, which could be leveraged to as much a $30 billion, saying it would ease pressure on bank balance sheets.
January 26: Natalie Craig, SMH. Housing ‘severely unaffordable’. “A comparison of median house prices with median household incomes in Australia, Canada, Ireland, New Zealand, Britain and the United States found that Australia had the most cities in the “severely unaffordable” category — where house prices are more than five times the median income. The Sunshine Coast in Queensland was the least affordable. The Gold Coast came third, behind Honolulu, and Sydney was fifth, behind Vancouver. Melbourne and Adelaide were equal 12th and were still less affordable than New York (14th), London (16th) and Dublin (32nd).”
January 26: Stephanie Peatling and Phillip Coorey, SMH: Saving the new jobless: Rudd’s urgent welfare challenge. “They will consider raising the unemployment payment by $30 a week and increasing the resources of welfare agencies, and discuss short-term relief such as supplementing the income of people who lose their jobs or are moved to part-time work. They will also canvass ways to prevent people from losing their homes if they cannot make mortgage repayments.”
January 24: JULIE CRESWELL and LANDON THOMAS Jr., New York Times. The Talented Mr. Madoff. ““With serial killers, they have control over the life or death of people,” Mr. McCrary explains. “They’re playing God. That’s the grandiosity coming through. The sense of being superior. Madoff is getting the same thing. He’s playing financial god, ruining these people and taking their money.””
January 25: Stakes are high in a tough year, SMH Opinion Piece:
“The unemployment benefits system is underpinned by a woefully inadequate and stigmatised subsistence payment to beneficiaries. It is not designed to meet the needs of thousands of previously high-earning, highly geared people.
Any strategy to retrain and support them must inevitably include initiatives to stop banks foreclosing on people who have lost work through no fault of their own.”
January 23: Edmund Conway, Economics Editor, Telegraph UK. Britain on the brink of an economic depression, say experts. “The plight facing Britain is uncannily similar to the 1930s, since prices of many assets —from shares to house prices — are falling at record rates, but the value of the debt against which they are held remains unchanged.”
19 January: Ambrose Evans-Pritchard, Telegraph UK. Biblical debt jubilee may be the only answer. “There is no guarantee that the measures will succeed. The vast scale of government borrowing may exhaust the stock of global capital. Markets are already beginning to question the credit-worthiness of sovereign states. The Fed may find it harder than it thinks to disengage from colossal intervention in the bond markets. In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee. Creditors are not going to like that.”
January 21: Where You Won’t Shop in 2009, Forbes Magazine. “More pain is on the way. One-third of U.S. women recently surveyed by America’s Research Group said they plan no clothing purchases–none–in 2009. Normally, it’s just 4%. That means the market is still far too saturated with stores…”
“I don’t think we will live the same way for 10 years,” says Howard Davidowitz, chairman of New York-based retail consultant and investment bank Davidowitz & Associates. “People are so scared they’re starting to save.”
January 21: Iain Martin, UK Telegraph. Gordon Brown brings Britain to the edge of bankruptcy.
“They don’t know what they’re doing, do they? With every step taken by the Government as it tries frantically to prop up the British banking system, this central truth becomes ever more obvious.
Yesterday marked a new low for all involved, even by the standards of this crisis. Britons woke to news of the enormity of the fresh horrors in store. Despite all the sophistry and outdated boom-era terminology from experts, I think a far greater number of people than is imagined grasp at root what is happening here.
The country stands on the precipice. We are at risk of utter humiliation, of London becoming a Reykjavik on Thames and Britain going under. Thanks to the arrogance, hubristic strutting and serial incompetence of the Government and a group of bankers, the possibility of national bankruptcy is not unrealistic.”
Ambrose Evans-Pritchard, Telegraph UK. UK cannot take Iceland’s soft option. “Britain has foreign reserves of under $61bn dollars (£43.7bn), less than Malaysia or Thailand. The foreign liabilities of the UK banks are $4.4 trillion – or twice annual GDP – according to the Bank of England. The mismatch is perilous.”
January 24: Rate cuts as growth flatlines, SMH. “Bernie Fraser, [Reserve Bank of Australia] governor during the last recession, in 1991, said policymakers could reduce the overnight cash rate target to less than 2 per cent, from 4.25 per cent at present. The bank’s board will gather for the first time this year on February 3.”
January 24: Britain plunges into recession, SMH. “The Office for National Statistics said the economy shrank by 1.5% in the fourth quarter of last year, the biggest drop since 1980. That followed a 0.6% fall in the third quarter, fulfilling the technical definition of recession.”
January 24: Paola Totaro, SMH. Bankers left out in cold as world leaders gather for Davos crisis summit. “For the first time the World Economic Forum, which begins in the Swiss ski resort on Wednesday, will be driven by politicians and economic policymakers — not the bankers blamed for the crisis.”
January 24: Elizabeth Knight, SMH. Five weeks’ notice for a lucky few will not quash volatility. “The hedge funds that are the culprits responsible for short selling have been a feature of investment markets for many years and regulators around the world have ignored them until last year. This is because during bull markets they were punting on shares moving up. Investors and corporates alike were happy enough to have them push share prices higher.”
January 23: Billions of Taxpayer Dollars Flushed Down John Thain’s $35K Commode, Yahoo Finance Tech Ticker. “Just when you thought the greed and avarice on Wall Street couldn’t possibly get any worse, Thursday brought revelations of John Thain’s disgusting behavior… In mid-December, at the same time Bank of America’s Ken Lewis was begging Washington DC for what became $20 billion more in bailout money, Thain secretly approved an accelerated bonus pool of $15 billion for top Merrill employees. (Oh the irony: the $15 billion bonus pool essentially matched Merrill fourth-quarter loss, which is what sent Lewis into a panic in the first place.)… All other of Thain’s sins pale in comparison to this dastardly act, which New York State AG Andrew Cuomo is investigating, but let’s list them anyway:”
January 23: Michael West, SMH: Investors short-changed. This article opens with a photo of Karl Marx, and ends with a quote (product disclosure statement here; there was another quote attributed to Marx in the first version of this paper, which turned out to be bogus. I sent Michael this genuine one, which will lead my next Debtwatch Report in February). I wonder when was the last time that Charlie’s face graced a mainstream newspaper?
“The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner-and this gang knows nothing about production and has nothing to do with it.” (Marx, Das Kapital III, Ch. 33, The medium of circulation in the credit system pp. 544–45.)”
January 20th: John Kemp, Reuters: U.S. and UK on brink of debt disaster.
“The United States and the United Kingdom stand on the brink of the largest debt crisis in history.
While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt to more manageable levels. Everything else is window-dressing.”
January 23: Anne Gleeson, SMH: The job from hell: queuing for work.
“The woman at Centrelink directs me to a pod of bright red chairs under a screaming screen. Then a woman I’ll call Romany comes to my rescue. It doesn’t take long to discover that despite all the information I provided, my claim cannot be processed. The details my employer was asked to provide have not been received.
Romany rings him. He is unable to take her call. I hear her saying it is important and she will wait. I am buoyed by someone being on my side. Romany is letting the company have it. She says it is totally unacceptable to not have the information there, that no, it can’t be dealt with later; there are six more families waiting for her services before lunch, that I have already been sent away once and I need my payment processed.
Romany is a hero. She tells me that she can’t bear the thought of these people having so much control over other people’s lives, telling people there’s no work and then not doing a thing about it.”
January 23: John Garnaut and Phillip Coorey, SMH: The great stall of China. “In figures significantly worse than the Rudd Government was anticipating, China’s National Bureau of Statistics yesterday said annual growth almost halved from 13 per cent in 2007 to 6.8 per cent in the year to December — below the arbitrary 8 per cent threshold that Chinese leaders say creates risks of social instability. Citigroup calculates the economy shrank 0.1 per cent in December from the September quarter — the first contraction in at least 16 years.”
January 22: Yahoo Finance: Microsoft resorts to first layoffs, cutting 5,000. Credit (pardon the pun!) where it is due: Ballmer is the first major CEO I’ve seen who has accurately diagnosed what is going on:
“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy,” said Chief Executive Steve Ballmer during a conference call. For consumers, that may mean less discretionary income to spend on a second or third home computer, he said.
January 21: Investors pull record $155 billion out of hedge funds in ’08, Yahoo Finance. “edge funds around the world now manage an estimated $1.4 trillion, the same sum they managed in 2006 and far less than the $1.93 trillion they invested in the middle of 2008, Chicago-based tracking firm Hedge Fund Research said. This is only the second time since 1990 that the exclusive and often secretive hedge fund industry suffered net outflows for the full year, HFR said.”
21 January: SMH Money: Middle class hit by debt; Huge mortgage repayments and credit cards bills are taking their toll. Harvey, who has worked as a financial counsellor for 10 years, also says the demographics have changed in the past 18 months. As well as people on pensions, he is seeing middle-income earners overcommitted on mortgage repayments and credit card debt and struggling with big price jumps for food and petrol. “They all say: ‘I never thought I’d be in this position,’ ” he says. “It’s a fairly big wake-up call.”
January 21: Mirko Bagaric, SMH: Rudd’s war on the middle class. “The suggestion that more money for bosses equals more jobs for workers breaks the laws of economics and human nature. Trickle-down economics has long been discredited; there are simply too many greedy sponges at the top. Rudd’s call for wage restraint is a misguided justification for employers to exploit the vulnerable by undervaluing the toils of their labour.”
January 21: Rudd’s credit lifeline, SMH. “Mr Rudd signalled the Government could provide guarantees on all borrowing by Australian firms that have been unable to roll over existing loans — probably in return for a fee.”
January 19: Robert Barr, Yahoo Finance. RBS expects full-year loss up to 28 billion pounds–biggest full-year loss in British corporate history. “Yes, I am angry at the Royal Bank of Scotland and what happened,” Brown said at a news conference where he announced a new insurance program to cushion British banks’ exposure to bad assets. “Almost all their losses are in the subprime markets in America and related to the acquisition of the bank ABN Amro. And these are irresponsible risks which were taken by a bank with people’s money in the United Kingdom,” Brown said.”
18 January: Will Hutton, The Observer/Guardian UK. Unless we are decisive Britain faces bankruptcy. “After what happened to the world’s banks last week — and to Barclays Bank in particular, whose share price collapsed 25% in an hour on Friday — it’s clear that Britain is at risk of being next in line. We too have a banking system that is huge in relation to our GDP, but, like Iceland, we are not in the euro. Unless we act quickly, decisively and cleverly, the difficulties of our banks could overwhelm us, triggering an enormous run on the pound. Britain, in short, risks bankruptcy.”
January 19: Andrew Main, The Australian: Trouble ahead if foreign banks call in debts. “Banking contacts suggest that the following list of orders might well have been handed to the new banking chiefs by nervous central bankers: * One, get back to the core business of lending retail and commercial on your home turf. No private banking, investment banking, wealth management and all those add-ons. They must all go. * Two, do not run down retail lending on home turf. Retail borrowers vote. * Three, get out of all geographical and sectoral markets that are not strategic to your country of origin. And that’s Australia’s problem: there’s about $1.2 trillion of private debt in Australia owed to overseas institutions…”
January 19: Michael West, SMH: Storm founder tries again. “Some Storm clients were effectively exposed to four layers of leverage. Almost any equity investment in a company carries implied leverage thanks to the gearing of the company itself. At the peak of the bullmarket many companies already had gearing themselves in excess of 50%. The next two layers were via the margin loan and the second mortgage over property advocated by Storm. And to top it off, there was another implicit layer of leverage encapsulated in the Storm modelling which assumed a rising market would take care of serviceability on client loans. In other words, a client’s future income assumed growth in investments to pay the interest bills.”
January 16: Citigroup loses $8.3 billion, to split in two, Yahoo Finance. “Citigroup Inc (NYSE:C — News), scrambling to survive losses triggered by the credit crunch, unveiled plans to split in two and shed troubled assets, and reported a quarterly loss of $8.29 billion.”
Jan 16: Aaron Task & Henry Blodget, Yahoo Finance’s Tech Ticker. Bank of America Shocker: How Much More Will Taxpayers Take? “While Lewis and Thain certainly have some ‘splaining to do, they are businessmen trying to make a buck. Meanwhile, Paulson and Bernanke continue to throw taxpayer money down a rat hole, even pledging TARP funds that have already been allocated elsewhere; their behavior is the greatest abomination of them all and an affront to all Americans.”
January 16: Bank of America posts first loss in 17 years, Yahoo Finance. “Bank of America Corp (NYSE:BAC — News), posted its first quarterly loss in 17 years on Friday and slashed its dividend, hours after winning a multibillion-dollar lifeline from the U.S. government to help absorb Merrill Lynch, which lost a record $15.31 billion in the quarter. The dismal results came as the largest U.S. bank faced mounting pressure from investors who questioned how well it will absorb a tidal wave of soured loans in an economy showing no signs of escaping a deep recession. Bank of America cut its quarterly dividend to a penny from 32 cents.”
January 13: Ian Verrender, SMH: Asset-rich, debt-laden Rio Tinto adrift in a buyer’s market. “Remember that resources boom, the one that was supposed to ease us through the worst of the global economic meltdown, the one propelled by China’s insatiable appetite for growth? Hasn’t that come to a rather abrupt end? The casualty list of wounded corporations, which started with financial engineers this time last year, is growing by the day and now includes a number of once high-flying resources outfits.”
January 9: UK rates slashed to record low, SMH. “The benchmark rate has never been this low since King William III founded the central bank to fund a war against Louis XIV’s France. The rate began at 6% and fell no lower than 4% throughout the 18th century.”
January 6, Martin Wolf, Financial Times: Choices made in 2009 will shape the globe’s destiny. “Banking crises are protracted, they note, with output declining, on average, for two years. Asset market collapses are deep, with real house prices falling, again on average, by 35 per cent over six years and equity prices declining by 55 per cent over 3½ years. The rate of unemployment rises, on average, by 7 percentage points over four years, while output falls by 9 per cent.”
January 1, 2009: Elizabeth Farrelly, SMH: Is there bravery enough to slay the gnashing beast of profit? “The co-op, a la Europe, is neither socialist nor capitalist but a genuine third way, and it can happen here. But it won’t, until we have a law that is strong where flesh is weak.”
January 1, 2009: A year of turmoil, down 43pc and $754b poorer. “THE worst year in Australian sharemarket history is finally over. The All Ordinaries closed yesterday at a price tag of just under $1 trillion, after the global financial crisis and fear of recession wiped 43 per cent, or 2699 points, from the market.”
January 1, 2009: Jacob Saulwick, SMH: Credit data reflects the gloom. “The yearly growth in credit to households and businesses dropped to 8.2 per cent in November — half that of a year ago. That suggests a grim 2009 as firms rein in investment and a weak housing sector gives little support for construction.”
December 31, Yahoo Finance: Street looks to ’09 with relief after terrible ’08. “The last trading day of 2008 on Wall Street provided a merciful end to an abysmal year — the worst since the Great Depression, wiping out $6.9 trillion in stock market wealth.”
December 31, 2008: Stocks post worst ever year. ““The All Ordinaries index also had its worst calendar year on record, plummeting 43%, compared to the 32% slump during the oil shock of 1974 and the 34% fall in 1930, during the Great Depression.
December 30: John Carney, Clusterstock: House Prices Plunge Again, Now Down 25 Percent. “e still occasionally hear folks predicting that the overall house-price decline might be on the order of 20% or so–or maybe 25%, tops. Might be time to adjust those forecasts. Given the current rate of decline and the fact that house prices still have yet to reach their long-term historical average relative to incomes and rents, we remain comfortable with our prediction of a 35%-40% total decline. Unless the rate of price decline moderates soon, this could even prove conservative.”
December 30: Michael Evans, SMH: Westpac freeze on $1.2b held in US hedge fund. “The affected fund describes its investment strategy as “a multi-manager, multi-strategy hedge fund product (a fund of funds) which invests in an international portfolio of hedge funds featuring multiple investment managers and strategies, via a swap contract”. Its product disclosure statement says the fund aims to provide absolute returns of 10 to 15 per cent a year over three years, noting that “these returns will exhibit a low volatility”.”
December 29, 2008, Anatole Kaletsky, The Times, Market fundamentalism took us close to disaster in 2008. “What went wrong? In the last Economic View every year, I look back at what I predicted here in early January, to try to shed some light on the events of the previous 12 months. This is nearly always a humbling experience… This year, however, the routinely humbling experience has turned into a ritual humiliation. How else can I describe the public confession that I am now compelled to make..”
December 27: By Saying Yes, WaMu Built Empire on Shaky Loans, New York Times. “As a supervisor at a Washington Mutual mortgage processing center, John D. Parsons was accustomed to seeing baby sitters claiming salaries worthy of college presidents, and schoolteachers with incomes rivaling stockbrokers’. He rarely questioned them. A real estate frenzy was under way and WaMu, as his bank was known, was all about saying yes…
On a financial landscape littered with wreckage, WaMu, a Seattle-based bank that opened branches at a clip worthy of a fast-food chain, stands out as a singularly brazen case of lax lending. By the first half of this year, the value of its bad loans had reached $11.5 billion, nearly tripling from $4.2 billion a year earlier…
“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.””
December 23: Yuriy Humber and Torrey Clark: Oligarchs seek loans to survive squeeze. You know things are tough when Russian Oligarchs come cap in hand, asking for help!. “RUSSIAN oligarchs are lining up for Kremlin loans to survive the international financial crisis, handing the Prime Minister, Vladimir Putin, the opportunity to increase government control of the nation’s biggest companies. Just 12 years after they gained ownership of the former Soviet Union’s industries by bailing out the Government, the tables have now been turned.”
December 23: Miwa Suzuki: Japan slips deeper into the mire, SMH. “A survey in the Nikkei economic newspaper found that even large companies were becoming much more pessimistic. The survey found 99.3 per cent of leaders at Japan’s 137 major corporations believe the domestic economy is deteriorating. Among them, those who said the economy is rapidly worsening soared to 86.8 per cent from just 10.8 per cent in the previous survey in early October, the daily said.”
December 22: PAUL KRUGMAN: Life Without Bubbles, New York Times. I’d like to think that the optimism Krugman expresses here is because he is an optimist. But I think it’s more likely because he doesn’t understand how the crisis came about. “Whatever the new administration does, we’re in for months, perhaps even a year, of economic hell. After that, things should get better, as President Obama’s stimulus plan… begins to gain traction. Late next year the economy should begin to stabilize, and I’m fairly optimistic about 2010… The point is that it may take a lot longer than many people think before the U.S. economy is ready to live without bubbles. And until then, the economy is going to need a lot of government help. ”
December 22: Yahoo Finance, Toyota projects first loss in 70 years. “Toyota had reported strong growth in recent years, boosted by heavy demand for its fuel-efficient models … But Watanabe said a severe drop in demand, especially in the U.S., which accounts for one-third of vehicle sales, and profit erosion from a surging yen were too much for Japan’s No. 1 automaker. Overall U.S. auto sales fell to their lowest level in 26 years last month. “The change that has hit the world economy is of a critical scale that comes once in 100 years,” Watanabe said.”
December 22: Tech Ticker at Yahoo Finance, Henry Blodget: Madoff Scheme Tightens Noose on Fund of Funds. “Bernie Madoff’s biggest sales operation, Fairfield Greenwich Group, made more than $500 million over the past five years channeling investors to Madoff, the NYT says. We continue to believe the firm’s days are numbered, and we would be surprised if it made it through January.”
December 20: The Reckoning–White House Philosophy Stoked Mortgage Bonfire, New York Times. “Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed. There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk. But the story of how we got here is partly one of Mr. Bush’s own making…”
December 19, Yahoo Tech Ticker: S&P 600: That’s Gary Shilling’s Forecast for 2009, Not an Index.
December 19: Danny John, Commbank’s woes mount as bad debts rise to $2.5b, SMH. “Having set aside about $1 billion at the end of its 2008 full year at June 30, Commbank yesterday provided further detail to the market that an additional $1.5 billion would almost certainly be needed to make up for loans that have gone sour over the past six months.”
December 19: Elizabeth Knight: A cultured spin on an old scam, SMH. “Usually Ponzi perpetrators are smaller operators with no real financial pedigree who preys on the small and unsophisticated investor… Madoff, however, was in a different league. He suckered hedge funds, large banks like HSBC and the Royal Bank of Scotland, and a stack of high-profile businessmen like the US media magnate Mort Zuckerman, the owner of the New York Mets baseball team, Fred Wilpon, the Hollywood screen writer Eric Roth, and the director Steven Spielberg.”
December 19: Annette Sampson: Annus horribilis for super funds caught in the storm, SMH. “As super funds brace to report their worst calendar year on record, the question for investors is: did it have to be this bad? The dreaded November figures are due out on Monday, but in the 12 months to October 31 the average balanced super fund had lost 17.61 per cent…”
December 18: On Wall Street, Bonuses, Not Profits, Were Real, New York Times. “In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million. But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.”
December 18: Michael West: Storm catches Symonds, SMH. “Disabled Vietnam war veteran and pensioner, Steve Reynolds, was encouraged to borrow against his home to invest in the stockmarket, and take out margin loans as well. Reynolds now has debts of $1.2 million against assets now estimated at $800,000. He is up for an interest payment of $80,000 by June and has an annual income of $16,000. He was lent the money despite his obvious inability to service the loans in the event the stockmarket fell.”
December 16, Michael West: Tuning dial slips at Macquarie Media. “Here’s a puzzler. How can a listed entity with cash backing of $1.49 per unit, an entity which throws off cash earnings of 40c per unit from its operating businesses, be valued by the market at just 65c?..”
“Curiously, if the current share price and cash balances were to be maintained, Macquarie would never again be entitled to even a base management fee from MMG … the MMG prospectus made clear that, in most circumstances, the management company (wholly owned by Macquarie) would be entitled to an annual base fee of 1.5% of the MMG market capitalisation. Presumably in order to justify this fee … the prospectus also said the management company was to employ the 10 most senior managers in the radio business. Somewhere along the way though this changed… just two employees of the Australian media business, that is the CEO and CFO, are employed by the manager and seconded to the business. The other eight managers have been transferred back into the operating businesses… this represents a transfer of expenses of around $2 million annually away from the manager. There has been a transfer of value out of MMG back into the mothership…”
December 16, Vanda Carson: Crown’s $414m US investment ‘worthless’, SMH, ” gambling industry analyst with Citi, Jenny Owen, said the small stakes in two debt-laden US casino companies were now worth nothing “due to the highly leveraged nature of the private-equity-owned casino operators and the downturn in industry revenue”.”
December 15, Yahoo Finance: Fed weighs slashing rates to cushion fallout. “Helicopter Ben” is now testing Milton Friedman’s theory about how to prevent a Great Depression. “By boosting the quantity of money in the financial system, the Fed has engaged in so-called “quantitative easing” to provide economic relief. The Fed’s balance sheet has ballooned to $2.2 trillion, from close to $900 billion in September, reflecting efforts to mend the financial system.”
December 15: Henry Blodget: List of Madoff’s Victims Keep Growing, Likely to Extend Beyond Clients, Yahoo Finance’s Tech Ticker. “Henry Blodget has compiled an exhaustive list here, but some of the biggest names include: movie mogul Steven Spielberg, New York Mets owner Fred Wilpon, New Jersey Sen. Frank Lautenberg, and real-estate magnate Mort Zuckerman.”
Blodget’s list of victims known so far is here; with a slideshow of the destitute to match.
December 15: excellent piece by Jacob Saulwick: Free money as US pushes the print button, SMH:
“Nobody knows whether it will work, or what the consequences might be. A salvage job of such magnitude has never been attempted before. At some stage the economy might improve, inflation return, and this could lead to a crash in the bond market given all the new debt issued by governments.
Or the US Government might find that it has borrowed heavily and got little in return. The assets it has bought — bank shares or stakes in car companies — are worthless, and the stimulus package has done little to improve the economy.
In this scenario, future generations will pay for the largesse of the present through a diminution in social infrastructure, the impoverishment of public education, and the guts ripped out of the health system.
The system might work but it’s a bastard.”
December 1, 2008: Paul Sheehan: Playing chicken with stupid giants, SMH. “Buckle up. Two giants are playing “chicken”, the game where two cars speed towards each other and the loser is the one who swerves first. Unless neither flinches, then they smash head-on. In this case the giants playing chicken are General Motors Corporation and the Republicans in Congress. If neither blinks, you can forget all the happy talk about Australia avoiding a recession because the shock wave from this collision will be global.”
December 15: Investors chase missing billions, SMH. “It appears that at least $US15 billion of wealth, much of which was concentrated in southern Florida and New York City, has gone to ‘money heaven,’” he said.”
December 14: The 17th Floor, Where Wealth Went to Vanish, NYT: “Santander may face $3.1 billion in losses through its Optimal Investment Services, a Geneva-based fund of hedge funds that is owned by the bank. At the end of 2007, Optimal had 6 billion euros, or $8 billion, under management, according to the bank’s annual report — which would mean that its Madoff investments were a substantial part of Optimal’s portfolio”
December 13: Stuart Washington, SMH: In the eye of the storm. “At a public briefing on the crisis presented by two of Columbia University’s Nobel Prize-winning economists, Robert Mundell and Joseph Stiglitz — alongside a former Federal Reserve chairman, Paul Volcker — the striking thing was the lack of striking things. It was easy to leave the room thinking: even these guys don’t really know where this one is headed.”
December 13: Alan Ramsey, SMH: Here we go again: we’re in this together. “Seventeen years ago, during Paul Keating’s recession we had to have, I wrote a piece in this space about Bob Hawke and “togetherness”. It began: “You know things are crook as soon as Bob Hawke starts talking about doing things together. Together is one of those words the Prime Minister uses when the country’s in trouble, his Government’s in trouble, or he’s in trouble. Sometimes it can mean all three. Yesterday was a together day.””
December 12: Yahoo Finance Tech Ticker: “I Knew Bernie Madoff Was Cheating; That’s Why I Invested with Him”. “So why did these smart and skeptical investors keep investing? They, like many Madoff investors, assumed Madoff was somehow illegally trading on information from his market-making business for their benefit. They didn’t consider the possibility that he was clean on that score but running a good old-fashioned Ponzi scheme.”
December 12: More on Madoff and the world’s biggest explicit Ponzi Scheme (in reality both the stock market and housing market bubbles were also Ponzi Schemes) The World’s Biggest Ever Heist. “Right now, there are a handful people whose world has suddenly been turned upside-down: who have, overnight, suddenly lost billions of dollars of dynastic wealth to a Wall Street con man. I’m sure that their names will appear sooner or later. But there really is no precedent that I can think of: when has one man ever managed to steal $50 billion dollars? If the $100 million Harry Winston heist in Paris was the “steal of the century”, what’s this?.”
December 11: Bernie Comes Out of the Closet. An excellent market insider’s take on Madoff. “Not a year has gone by during the past fifteen that I have not contemplated what Bernie Madoff did (or didn’t do) to make his money. Seventy to one-hundred basis-points-a-month. Net. Net. Net. During tempests, earthquakes, panics and crashes — even during the closure of the exchange itself, Bernie apparently minted coin like few others. Even Renaissance and Shaw tripped occasionally. Not Bernie. Yet no one new what he did. It was one of the best kept secrets in the world. Oh yeah, sure, split-strike conversions were the official line. But every skeptical arb trader knew this couldn’t be true.”
December 11: Henry Blodget on Clusterstock: Bernie Madoff: The Indictment. “The criminal indictment of Bernie Madoff is embedded below. The good stuff starts at the bottom of page 2, when the FBI agent begins talking about his interview with two of Bernie’s senior employees. According to the WSJ, these two employees are Bernie’s sons. Also don’t miss the last paragraph, where the agent interviews Bernie himself.”
December 11th: Prominent Trader Accused of Defrauding Clients, NY Times. “On Wall Street, his name is legendary. With money he had made as a lifeguard on the beaches of Long Island, he built a trading powerhouse that had prospered for more than four decades. At age 70, he had become an influential spokesman for the traders who are the hidden gears of the marketplace. But on Thursday morning, this consummate trader, Bernard L. Madoff, was arrested at his Manhattan home by federal agents who accused him of running a multibillion-dollar fraud scheme — perhaps the largest in Wall Street’s history…”
“Mr. Madoff invited the two executives to his Manhattan apartment that evening. When they joined him there, he told them that his money-management business was “all just one big lie” and “basically, a giant Ponzi scheme.”
“The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the cash received from other investors.”
December 11th: Auto Bailout Talks Collapse in the Senate, NY Times. “A $14 billion emergency bailout for U.S. automakers collapsed in the Senate Thursday night after the United Auto Workers refused to accede to Republican demands for swift wage cuts.”
December 12th: Michael West: Storm turns into typhoon, SMH. “This one is worse than Westpoint or Australian Capital Reserve. Forget Allco, even MFS, ABC or City Pacific. The demise of Storm Financial Group is the greatest tragedy embroiling retail investors this year. The others are mortgage funds, one-product wonders, or single stock market companies in which investors are unlikely to lump their entire savings. Not so, Storm. We are talking 13,500 clients and $4.7 billion in funds under management.”
December 12th: Natalie Craig: Time bomb for home buyers, SMH. “ABOUT 300,000 Australian households could face “negative equity” next year — owing more money to lenders than their house is worth — if prices fall by 10 per cent as predicted. Modelling by RMIT’s Housing and Urban Research Institute suggests that about 4 per cent of Australia’s 8.5 million households could next year see the value of their property fall below what they owe on it.”
December 11: Michael West, SMH: Bank risks remain. “One obscure change in legislation, barely reported at the time, has proved momentous. And that was the decision by the Securities & Exchanges Commission (SEC) to revoke long-standing rules in 2004 which required broker/dealers to keep their debt-to-net-capital ratio to 15–1. In other words, for every $15 of debt, the banks were required to have $1 of equity. Thanks to quiet lobbying from Wall Street however, this ceiling was dropped and the likes of Bear Stearns soon ran up a gross debt ratio of 33–1. Then kaboom.”
December 11: Miranda Devine, SMH: Cash-machine Kev to the rescue. “As job ads slump, pink slips grow and houses sell for a fraction of their asking price, economics gurus everywhere are praising Rudd’s handouts as the only way to stave off a recession. But if they are really so smart, why didn’t they predict the GFC? In fact, why didn’t they stop it?”
December 11: Elizabeth Farrelly, SMH: Save the shonks: a car rescue deal you can trust. “It’s funny, isn’t it, how the global crunch is turning the tables? Funnier still how the turning seems to be 360, leaving the screw-ups still on the starched white linen with the crystal and silver, and the meek are still underneath, inheriting shite.”
December 10: Professor James Galbraith interviewed on Yahoo Finance’s Tech Ticker. How the ‘Experts’ Missed the Crash: Philosophical Flaws, No Sense of History. My post on this gives more detail.
December 10: Jessica Irvine, SMH: Bad signs as the CBD empties. “There’s a joke doing the rounds of finance workers in the CBD, given added poignancy by this week’s decision by upmarket shirt maker Herringbone to go into voluntary administration. What’s the definition of optimism in the finance sector? Answer: ironing five shirts on a Sunday night.”
December 9: The New York Times, Investors Buy U.S. Debt at Zero Yield. “In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world’s safest investment, United States government debt, that they agreed to accept a zero percent rate of return.”
December 6: John Cassidy on Portfolio.com, Economic Predictions for 2009. “Economists regard the Great Depression as something akin to the Black Death: a fascinating and terrifying historical aberration that, thankfully, can never happen again… Among noneconomists, there is much more concern about what lies ahead.. So who are we to believe: the experts who failed to predict the current crisis or the great American public? With due respect to my fellow dabblers in the dismal science, I share Joe the Plumber’s queasy feeling. Unless something miraculous happens in the next few weeks, the new inhabitant of the Oval Office will inherit an economy flailing under the weight of record debts and rising unemployment. If a depression is defined as a deep, extended recession of a severity that nobody under the age of 75 can recall, then it is quite likely that we are already in one.”
December 6: Some good detective work by Ross Gittins that points out that Australia’s slowdown began well before the financial crisis hit bigtime in September. The bad outlook is partly our own fault. “Take careful note of the figures we got this week on the state of the economy in the three months to September. Why? Because they show the economy had slowed to stalling speed before the full force of the global financial crisis had hit us.”
December 6: Ian Verrender in the SMH, Around we go again: the accounting fictions of corpses. “Given the meltdown on global financial markets, a worsening recession in almost every part of the world and the collapse of many of the world’s biggest financial institutions, it seems an odd time to be arguing for a diminution in accounting standards.”
December 6: Massive job losses deepen US crisis, SMH. “Employers cut 533,000 jobs, bringing losses so far this year to 1.91 million, the Labor Department said today in Washington. November’s drop exceeded all 73 forecasts in a Bloomberg News survey. The unemployment rate rose to 6.7 per cent, the highest level since 1993.”
December 5: GM faces rapid collapse without aid, SMH
December 5th: European central banks axe rates, SMH. “Policy makers are moving toward historically low levels of interest rates and they probably won’t stop there,” said Paul Dales, an economist at Capital Economics in London. “We are going to see all central banks bring rates down as close to zero as they can get.”
December 4th: UK offers $2.3b mortgage loan guarantee, SMH
December 3rd: It’s official: US now in recession for a year, SMH
December 2nd: Ben Stein’s “How Not to Ruin Your Life” column on Yahoo Finance on the appointment of Timothy F. Geithner, head of the Federal Reserve Bank of New York for the last five years, as his Treasury Secretary Change? To Washington? Ha!
December 2nd: Ed Shann in the Australian Financial Review, Forced sellers will keep prices falling
December 1st: Surprise surprise, inflation has gone and Big rate cut looms as inflation cools, and Large rate cut likely as pressures dive. This is the real worry that I had years ago when I began arguing against the RBA’s obsession with keeping the rate of inflation low, in the context of the debt bubble. When it burst, inflation would quickly give way to deflation and we would have the true “double whammy” conditions that give rise to a Depression. Now the data is very quickly showing that this is probably happening.
November 28th: Crisis has cost five trillion dollars
November 26th: Government Bailout Hits $8 Trillion
November 24th: Bernanke’s “I blew it” admission
November 12th: Andrew Linden & David Hirst on the confidence trick of abandoning mark to market valuations, The Age
November 12th: Michael West on Australia topping Merrill Lynch’s list of most at risk countries, SMH
November 11th: Rubicon Crossing–Michael West’s Profile of the now collapsed Rubicon, SMH
November 10th 2008: NY Times profile of the collapse of Merrill Lynch via mortgage bonds
November 5th 2008: Queen baffled at delay in spotting credit crunch, SMH
October 24 2008: Michael M. Thomas Alan Greenspan, ”Savant Idiot”, Forbes
