Weekend Economists Lost Weekend September 25-27, 2009

[Demeter]

Today, I confess, I am lost. It's been a month of mayhem, a week of whacky, a Daily doozy.

By threatening the Kid with returning to the hospital, I got her to stop pulling the staples out of her incision....she doesn't want to go back, even though they have cable.

The roofing project is nearing completion, and with yesterday's solatube installation, and today's insulation, I am mostly ready for a light, bright warm winter hibernation.

The Solatubes are amazing. Where before it was two dark, cramped baths and a dungeon-like stairwell, now it is as if angels from heaven are beaming right through the roof, bringing tidings of great joy (and showing up years of the Kid fingerpainting her way around).

This has been a summer in which nothing went as expected, but many important or unique things happened. Hence the feeling of lost.

Of course, the jobs, homes, retirements and economies we lost were the most significant of all the turnover. To those who have sufered losses, this weekend is dedicated to your suffering, in hope of eventual redemption. Or at least, revenge!

http://www.youtube.com/watch?v=oZNZArVwXAU

lost Horizon - Again the Fire Will Burn

[Demeter]

1. Oliphant on Obama and Racism--Another Innocence Lost

[Demeter]

2. And to Start Off Another Bank Fails in Georgia

Georgian Bank, Atlanta, Georgia, was closed today by the Georgia Department of Banking and Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with First Citizens Bank and Trust Company, Inc., Columbia, South Carolina, to assume all of the deposits of Georgian Bank...

As of July 24, 2009, Georgian Bank had total assets of $2 billion and total deposits of approximately $2 billion. In addition to assuming all of the deposits of the failed bank, First Citizens Bank agreed to purchase essentially all of the assets.

The FDIC and First Citizens Bank entered into a loss-share transaction on approximately $2 billion of Georgian Bank's assets. First Citizens Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-sharing arrangement is projected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers...

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $892 million. First Citizens Bank's acquisition of all the deposits was the "least costly" resolution for the FDIC's DIF compared to alternatives. Georgian Bank is the 95th FDIC-insured institution to fail in the nation this year, and the nineteenth in Georgia. The last FDIC-insured institution closed in the state was First Coweta, Newnan, on August 21, 2009.

SO, OUT OF $2 BILLION ASSETS, HALF IS GARBAGE!

[Demeter]

3. Lost Horizon - Share the Joy - Olivia Hussey

http://www.youtube.com/watch?v=LFGayvuO2Rw&feature=PlayList&p=FAD615E42A0674EB&playnext=1&playnext_from=PL&index=1

this is a film musical based on Shangri-La, an awkward, clumsy thing, but it had some interesting songs.

[Dr.Phool]

4. Do they have any banks left in Georgia?

[Demeter]

7. Why Ask Me? I thought You LIVED There!

[Dr.Phool]

11. Nah, I'm in suburb of Georgia.

It's called Florida.

[Demeter]

21. Midnight Raid to Georgia - Capitol Steps

Found It! I just like this and it has Georgia in it....

http://www.youtube.com/watch?v=FDi47fjRr3s&feature=related

[DemReadingDU]

27. First time seeing these Capitol Steps videos

Not bad at all.
:)

[Seldona]

35. 'SO, OUT OF $2 BILLION ASSETS, HALF IS GARBAGE!'

If it ever really existed at all. Bubbles are still popping.

[Po_d Mainiac]

55. How can this be?

On June 30, 2009 the bank reported total troubled assets at $383,410,000, but the DIF takes a $892,000,000 hit? What if this is the typical lack of marking down to "market" for other Atlanta based banks? :scared:



http://banktracker.investigativereportingworkshop.org/banks/georgia/atlanta/georgian-bank/

Take a trip down the banks listed at http://banktracker.investigativereportingworkshop.org/banks/georgia/atlanta/ and do the equivalent additional markdown...:puke:

Reba's tune "The night that the banks went out in Georgia" is now stuck in my head

[DemReadingDU]

56. only 1 bank this week?

odd. Shelia Bair of the FDIC, did say there are over 400 banks on their troubled list.


edit to add these links...

List of banks with the highest levels of troubled loans. These 368 banks in the U.S. had troubled asset ratios of 90 or higher at the end of the latest quarter.
http://www.msnbc.msn.com/id/29619237/ns/business-us_business

List of the 400 biggest banks and their troubled loans. These are the 400 largest banks in the U.S., along with their troubled asset ratios for recent quarters. The banks are ranked by overall size, in assets, with the largest banks on top.
http://www.msnbc.msn.com/id/29619236/ns/business-us_business

[Demeter]

59. It's A Rather Large Loss, Though

And the amount of number crunching is probably straining the manpower just as the size of the loss is straining the budget. The FDIC has to pace itself, try to wrap up some of the old business and cash out so they can take on new challenges.

[Demeter]

5. German recovery loses momentum (that was short)

http://www.ft.com/cms/s/0/4e1cb3e2-a8ee-11de-b8bd-00144feabdc0.html

they don't like the numbers they are crunching--no clue if the numbers are accurate, though

[Demeter]

6. Kroes warns EU over ‘stealing’ car jobs

http://www.ft.com/cms/s/0/b66cbd3e-a93e-11de-9b7f-00144feabdc0.html

Europe’s competition chief on Thursday delivered a blunt warning to EU member states against “bribing” car companies in an attempt to “steal” jobs from other countries, saying such behaviour risked sparking a trade war.

Neelie Kroes, competition commissioner, who will decide whether a deal brokered by Germany to sell General Motors’ European Opel business to the Canadian car parts supplier Magna complies with state aid rules, told an audience in New York that she was “examining carefully” Berlin’s conditions for the rescue.

“We cannot accept one government bribing companies in order to steal or end the jobs of another,” said Ms Kroes.

“We cannot accept companies becoming addicted to aid. Such behaviours are a recipe for a trade war and poverty – not a way out of this recession.”

[Demeter]

22. Help Me Honda - Capitol Steps

http://www.youtube.com/watch?v=hIIPfxv1RwQ&NR=1

[DemReadingDU]

28. a different spin on bailouts

:)

[Demeter]

8. Employment Oppty! Bullet Makers 'Working Overtime' in US

http://news.aol.com/article/bullet-shortage-in-us/684136?icid=main|main|dl1|link6|http%3A%2F%2Fnews.aol.com%2Farticle%2Fbullet-shortage-in-us%2F684136

NEW ORLEANS (Sept. 23) - American bullet-makers are working around the clock, seven days a week, and still can't keep up with the nation's demand for ammunition.

Shooting ranges, gun dealers and bullet manufacturers say they have never seen such shortages. Bullets, especially for handguns, have been scarce for months because gun enthusiasts are stocking up on ammo, in part because they fear President Barack Obama and the Democratic-controlled Congress will pass antigun legislation — even though nothing specific has been proposed and the president last month signed a law allowing people to carry loaded guns in national parks.

Gun sales spiked when it became clear Obama would be elected a year ago and purchases continued to rise in his first few months of office. The FBI's National Instant Criminal Background Check System reported that 6.1 million background checks for gun sales were issued from January to May, an increase of 25.6 percent from the same period the year before.
"That is going to cause an upswing in ammunition sales," said Larry Keane, senior vice president of the National Shooting Sports Foundation, a trade association representing about 5,000 members. "Without bullets a gun is just a paper weight."

The shortage for sportsmen is different than the scarcity of ammo for some police forces earlier this year, a dearth fueled by an increase in ammo use by the military in Iraq and Afghanistan.

"We are working overtime and still can't keep up with the demand," said Al Russo, spokesman for North Carolina-based Remington Arms Company, which makes bullets for rifles, handguns and shotguns. "We've had to add a fourth shift and go 24-7. It's a phenomenon that I have not seen before in my 30 years in the business."

Americans usually buy about 7 billion rounds of ammunition a year, according to the National Rifle Association. In the past year, that figure has jumped to about 9 billion rounds, said NRA spokeswoman Vickie Cieplak.

Jason Gregory, who manages Gretna Gun Works just outside of New Orleans, has been building his personal supply of ammunition for months. His goal is to have at least 1,000 rounds for each of his 25 weapons.

"I call it the Obama effect," said Gregory, 37. "It always happens when the Democrats get in office. It happened with Clinton and Obama is even stronger for gun control. Ammunition will be the first step, so I'm stocking up while I can."

So far, the new administration nor Congress has not been markedly antigun. Obama has said he respects Second Amendment rights, but favors "common sense" on gun laws. Still, worries about what could happen persist.

[Demeter]

9. Pack The Knife - Capitol Steps

http://www.youtube.com/watch?v=ECA8yqSWCwE&feature=PlayList&p=F31378F55B2966F0&index=3

[DemReadingDU]

29. Next time I fly

remind me to dress weird
:)

[Po_d Mainiac]

53. Yup, u blend in with the masses that way n/t

[DemReadingDU]

10. Elephant in the Room

9/25/09
This post is courtesy of "Mike" who writes

Thought you might enjoy this short but nevertheless quite superb Youtube cartoon depicting an imaginary episode of the BBC 'Question Time' show popular over here in the UK. A little light relief in these trying times. Keep up the good work. Regards, Mike


Note: The video is quite funny but contains foul language and risqué cartoon graphics. If you are offended by such things, don't play it.

http://globaleconomicanalysis.blogspot.com/2009/09/elephant-in-room.html

or direct link
3/28/09 The British Prime Minister, an Economist and a Banker bear the full brunt of the Elephant in the Room during Question Time. Economic collapse can make your eyes water.
http://www.youtube.com/watch?v=RYA0DsPcbaU

[Demeter]

13. Ah, the English! Such a Contrast Between Manners and Humor

[Dr.Phool]

14. "Debt is Dandy" .....Prick Muncher Gordon Brown.

[Demeter]

12. Fed eyes tie-up with mutual funds

http://www.ft.com/cms/s/0/e313ceb8-a885-11de-9242-00144feabdc0.html

The Federal Reserve is looking to team up with the money-market mutual fund industry as part of its strategy to ensure that its unconventional policies to stimulate the economy do not produce a bout of post-crisis inflation.

The central bank envisages eventually draining liquidity from the financial system by engaging in trades called “reverse repos” with the deep-pocketed money-market funds. In these, the Fed would pledge mortgage-backed securities and Treasuries acquired during the crisis as collateral for short-term loans from the funds.

CAN YOU SAY TOXIC WASTE DUMP? I THOUGHT YOU COULD!

The discussions about the strategy form part of a Fed effort to ensure it will be in a position to raise interest rates when it decides the moment is right – even though most officials believe it is still many months away from having to do so. In its policy statement, issued after a two-day meeting, the Federal Open Market Committee on Wednesday signalled a slightly brighter outlook for the economy. Indicating that it does not expect a double-dip recession, the Fed said it expected a “strengthening of economic growth”.

The US central bank said it would complete its planned $1,450bn purchases of securities and debt issued by Fannie Mae and Freddie Mac at a reduced pace, allowing it to stretch out the buying to March 2010.

However, it indicated it is slowly retiring some of the tools used to fight the crisis, saying it would “continue to employ a wide range of tools to promote recovery” rather than “all available tools” as in past months.

The central bank reiterated that it expects to keep interest rates near zero for an “extended period”. The Fed said activity has “picked up” and noted signs of a rebound in activity in the housing market. But policymakers still appeared very unsure about the prospects for household spending – which they said “seems to be stabilising, but remains constrained”.

Most policymakers presently anticipate that the first rate hike will not come before the second half of 2010. However, the Fed wants to establish the mechanisms for doing this well in advance, which is why it is exploring the idea of transactions with money funds.

The obvious counterparties for reverse repo deals are the Wall Street primary dealers. However, the Fed thinks they would only have balance sheet capacity to refinance about $100bn of assets. By contrast, the money-market funds have $2,500bn in assets, which means they could plausibly refinance as much as $500bn in Fed assets. Officials think there would be appetite on the part of the funds, which are under pressure from regulators and investors to stick to low-risk liquid investments.

During the crisis, the Fed created roughly $800bn of additional bank reserves to finance asset purchases and loans. This total is likely to rise in the coming months as the central bank completes its asset purchases and the Treasury unwinds financing it provided to the Fed. Fed officials think they could raise interest rates even with this excess supply of reserves by offering to pay banks to deposit their surplus funds with it rather than lend them out. However, they also want to use reverse repos in tandem to soak up some of the excess reserves. Policymakers call this a “belt and braces approach”.

[Demeter]

15. Ain't No Surplus - Capitol Steps

http://www.youtube.com/watch?v=fGmsYxCF49c&feature=PlayList&p=CA82B0BA72C982B2&playnext=1&playnext_from=PL&index=40

[DemReadingDU]

30. Ain't that the truth

:(

[Demeter]

16. China rolls over $36bn of bail-out bonds

http://www.ft.com/cms/s/0/1787651c-a79e-11de-b0ee-00144feabdc0.html

The Chinese government has extended the maturity of bonds used to bail out one of the country’s largest banks in an accounting move that will further delay a final reckoning for the banking crisis that hit China a decade ago...

SO DID THE CHINESE START IT ALL? OR WAS THAT DOT.COM FALLOUT?

[Demeter]

20. Credit Suisse bankers poised for pay-out

http://www.ft.com/cms/s/0/ba9c1610-a877-11de-9242-00144feabdc0.html

About 300 Credit Suisse bankers and executives stand to share an estimated SFr1.9bn ($1.85bn) in stock next spring under a performance-based retention plan instituted nearly five years ago as the bank struggled to retain staff.

The eligible Credit Suisse managing directors and executives were paid one-fifth to one-half of the bonuses they received in early 2005 in “performance incentive plan” awards rather than in cash.

The move saved Credit Suisse much-needed funds in the middle of a critical turnround campaign, but proved internally unpopular at the time because it forced high-level bankers to wait five years – and to remain at Credit Suisse – before cashing in on their awards...

[Demeter]

33. Lost Horizon 1973 - The World Is A Circle - Liv Ullman - Bobby Van

http://www.youtube.com/watch?v=qC1C1L5jOHE

[Demeter]

17. BP given new warning over Texas refinery

http://www.ft.com/cms/s/0/109b3a6c-a7d0-11de-b0ee-00144feabdc0.html


The US department of labour has warned BP of continued safety issues at its Texas refinery, where 15 people were killed and hundreds injured in a 2005 blast that led to widespread questions about the safety of the UK company’s US operations.

Following the blast, BP agreed to pay a maximum $21m fine, while also improving safety at the refinery – BP’s biggest.

Yet the labour department’s Occupational Safety and Health Administration said an audit had identified “systemic deviations from industry standards” at the facility that have yet to be addressed.

It outlined in detail other “areas of concern”, including a failure four years after the blast to complete a determination of which alarm functions in each unit were critical to process safety...

[Demeter]

18. Chevron takes Ecuador fight to the Hague

http://www.ft.com/cms/s/0/c274870c-a8a7-11de-9242-00144feabdc0.html

Chevron, the world’s third biggest oil company, said it had filed an international arbitration claim against the government of Ecuador, citing violations of the country’s obligations under the US-Ecuador bilateral investment treaty, investment agreements and international law.

The claim stems from what Chevron calls Ecuador’s “exploitation” of a lawsuit filed against Chevron, which accuses Texaco, which Chevron bought in 2001, of leaving an environmental disaster upon withdrawing from Ecuador in 1992.

Chevron has been aggressively defending itself against the lawsuit, in which plaintiffs are seeking $27bn in damages. The company demanded the removal of the judge, Juan Núñez, after releasing videos it claimed contained evidence of political interference and corruption in the country.

Chevron said the tapes allegedly showed Judge Núñez revealing that he planned to rule against Chevron. Judge Núñez has denied wrongdoing but offered to recuse himself.

Ecuador has said it will investigate, but Ecuadorian courts on Wednesday said the judge’s request to recuse himself was “unfounded” and put him back on the case.

Chevron filed the arbitration claim before the Permanent Court of Arbitration in The Hague, under the rules of the United Nations Commission on International Trade Law, citing the Ecuador government’s failure to uphold its duties under decade-old contracts.

Chevron said Texaco spent $40m on cleanup, and the Ecuador government released it in writing from further responsibility as part of a settlement agreement.

But the plaintiffs representing the surrounding Amazonian communities charge that agreement did not release Chevron from third-party claims.

“Because Ecuador’s judicial system is incapable of functioning independently of political influence, Chevron has no choice but to seek relief under the treaty between the United States and Ecuador,” Chevron said.

Chevron noted in filing for arbitration that in February 2009, the US Department of State released its investment climate statement for Ecuador, which noted that “systemic weakness and susceptibility to political or economic pressures in the rule of law constitute the most important problem faced by US companies investing in or trading with Ecuador”.

Ecuador has denied any wrongdoing in the case.

[Demeter]

19. Capitol Steps - What Kind Of Fuel Am I

http://www.youtube.com/watch?v=9l0WHGFs6dk

[DemReadingDU]

32. What kind of cost is this?

Is it for real?
:)

[Demeter]

25. God Bless My SUV - Capitol Steps

http://www.youtube.com/watch?v=FBzU_H4Z9NA&NR=1

[DemReadingDU]

34. only gets 5 MPG

definitely a clunker!


There's a lot of these videos. I'll need to checkout YouTube, and see what else I'm missing!


Glad your daughter is healing
:hug:

[Demeter]

38. Thanks!

I love the Capitol Steps. Even when they're wrong.

[Demeter]

23. GIC makes $1.6bn from Citi stake sale

http://www.ft.com/cms/s/0/b8479e9a-a75d-11de-9467-00144feabdc0.html

Singapore’s sovereign wealth fund has pocketed a $1.6bn profit after selling half of the 9 per cent stake in Citigroup it acquired during this year’s US-government led refinancing of the troubled bank.

In an unexpected announcement on Tuesday, the Government of Singapore Investment Corporation said that the sale followed the conversion, on September 11, of its $6.8bn of convertible preferred stock for Citigroup common stock at $3.25 a share...

[Demeter]

24. Moody’s warns over ‘living wills’

http://www.ft.com/cms/s/0/504a117a-a874-11de-9242-00144feabdc0.html

Plans to make the UK’s biggest banks prepare “living wills” so they could be dismantled more easily in a crisis could hurt their credit ratings, it emerged on Wednesday.

Large UK banks would have to spell out what businesses they would sell to raise emergency funds and allow them to wind up their trading books within 60 days of a collapse, under plans drawn up by the Financial Services Authority, the UK regulator. This would help reassure nervous creditors.

Moody’s, the ratings agency, warned that as the government withdraws support, this could result in “very notable...downgrades” unless banks strengthen their own credit profile by measures such as beefing up capital.

The introduction of living wills means that a second big obstacle preventing the government from pulling the plug on a bank would be removed. This, in turn, means the issue would become a political decision...

AT LEAST THE UK IS THINKING ABOUT IT

[Demeter]

26. Willis latest to leave low-tax Bermuda

http://www.ft.com/cms/s/0/aa7df612-a6cf-11de-bd14-00144feabdc0.html

Willis, the world’s third-largest insurance broker, plans to move its global headquarters from Bermuda to the Irish Republic, becoming the latest in a string of multinational companies to leave the low-tax Caribbean island.

The company said Dublin provided “a more stable environment” and would improve Willis’s ability to “maintain a competitive worldwide effective corporate tax rate”.

Willis follows Accenture, the consulting group, and about 10 others in announcing a move away from Bermuda since Barack Obama became US president and began to take a much tougher line on tax havens , saying their widespread use by American businesses was “the biggest tax scam in the world”...

[Demeter]

31. Obama Mia!

http://www.youtube.com/watch?v=VLZ6f-slzrk&feature=related

[Demeter]

36. The End Of Capitalism: Ahmadinejad Speech at the UN

http://www.youtube.com/watch?v=5EBgqgIWuoc&feature=player_embedded

I'd say the jig was up.

,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
Tehran dumps dollar for euro

http://www.arabianbusiness.com/568241-tehran-dumps-dollar-for-euro

Iran's President Mahmoud Ahmadinejad has ordered the replacement of the US dollar by the euro in calculating the value of the country's Oil Stabilisation Fund (OSF).

The edict, issued on Sept 12, follows a recommendation by the trustees of the country's foreign reserves, Iran's English-language daily The Tehran Times said on Monday, citing Iran's semi-official Mehr News Agency.

The move was taken because the government wishes to protect itself from the fragility of the US economy and the weak dollar.

The OSF, which forms part of Iran’s foreign exchange reserves, is a contingency fund set aside to cushion the economy against fluctuating international oil prices....

[Demeter]

37. East Africa's drought A catastrophe is looming

http://www.economist.com/world/middleeast-africa/displaystory.cfm?story_id=14506436&fsrc=rss

Governments are at their wits’ end to keep their hungry people alive


THIS year’s drought is the worst in east Africa since 2000, and possibly since 1991. Famine stalks the land. The failure of rains in parts of Ethiopia may increase the number needing food handouts by 5m, in addition to the 8m already getting them, in a population of 80m. The production of Kenyan maize, the country’s staple, is likely to drop by one-third, hitting poor farmers’ families hardest. The International Committee of the Red Cross says famine in Somalia is going to be worse than ever. Handouts are urgently needed by roughly 3.6m Somalis, nearly half the resident population (several million having already emigrated during years of strife). In fractious northern Uganda cereal output is likely to fall by half. Parts of South Sudan, Eritrea, the Central African Republic and Tanzania are suffering too. Rich countries are being less generous than usual. The UN’s World Food Programme says it has only $24m of the $300m it needs just to feed hungry Kenyans for the next six months.

In Mwingi district, in Kenya’s Kamba region, the crops have totally failed. Villagers are surviving on monthly government handouts of maize-meal, rice and a little cooking oil. Worse than the hunger, say local leaders, is the thirst. People are digging wells by hand, but they hit rock. They plead for the means to go deeper but they cannot afford the dynamite or machinery.

In the pastoral areas of northern Kenya, southern Ethiopia and south Somalia the death of livestock on a massive scale has sharpened conflict. Oromo rebels in south and east Ethiopia and Somali secessionists in the east of the country are likely to fight more fiercely. The drought may strengthen the hand of the Islamist Shabab movement, linked to al-Qaeda, in south Somalia; it uses food aid to control the people. Recent cattle raids in northern Kenya have left scores dead, with unprecedented numbers of women and children among the victims. Fighting may intensify until the land becomes greener again.

When will that be? Meteorologists reckon the rains due in October and November will be heavier than usual. That would be good, if the east African authorities were prepared. But they are not. Mud slides and floods are likely, with streams and rivers carrying off the topsoil. Malaria and cholera may increase. Surviving cattle, weakened by drought, will drown or die of cold.

Even the cities—and their economies—will be sorely afflicted, since 95% of Ethiopia’s power and 70% of Kenya’s is hydroelectric. With rivers down to a trickle or drying up completely, dams are running out of water; some are empty. Turbines have shut down. Electricity throughout east Africa is patchier than usual, just when governments are trying to pep their economies up.

The delayed opening of a big Ethiopian dam capable of producing 300MW has resulted in daily blackouts in Ethiopia’s capital, Addis Ababa. That, says the government, has reduced economic growth by two percentage points to 7%; others guess that growth has fallen to less than 5%. A British firm, Aggreko, has won a contract to set up electrical generators to supply 30MW to Ethiopia’s grid.

The same firm has also signed a deal with Kenya to double the power it temporarily supplies the country, to 290MW. Kenya has been rationing electricity. Most of its townspeople are without power for three days a week. Aggreko will keep more lights on but far more expensively. Small firms and poorer customers may be pushed into the dark.

The high price of food and water is making governments more disliked. The price of maize-meal has more than doubled since 2007. Jerry cans of water, which is often filthy, cost four times more than a year ago. With luck, governments may be forced to improve their management of water. Villagers may be persuaded to build terraces to stop topsoil running off. Dams need better maintenance and desilting. Officials should be shamed into stopping their friends from stealing or wasting water. As the cost of diesel power soars, schemes for renewable power and plans to link the region’s power grids may be speeded up. High prices have encouraged some industries to find their own solutions. An Indian cement firm, Sanghi, says it plans to run a new Kenyan cement factory on its own hydroelectric power.

Amid the gloom, a few companies and countries have benefited. Shares in the Kenya Power and Lighting Company have risen this year in expectation of more demand. The main Kenyan power supplier, KenGen, has sold bonds to finance a scheme to expand its output by 500MW. Malawi, which periodically suffered famine until a recent fertiliser-subsidy scheme came good, is to export maize to Kenya.

The drought cycle in east Africa has been contracting sharply. Rains used to fail every nine or ten years. Then the cycle seemed to go down to five years. Now, it seems, the region faces drought every two or three years. The time for recovery—for rebuilding stocks of food and cattle—is ever shorter. And if the rains fail before the end of this year, an unimaginably dreadful catastrophe could ensue.

[Demeter]

39. Time to Change Bernanke's Medication? Secret White House letter to G-20 By Greg Palast

http://www.huffingtonpost.com/greg-palast/time-to-change-bernankes_b_294262.html

September 23, 2009 "Huffington Post" - - I still get a thrill whenever I get my hands on a confidential memo with "The White House, Washington" on the letterhead. Even when--like the one I'm looking at now--it's about a snoozy topic: This week's G-20 summit.

But the letter's content shook me awake and may keep me up the rest of the night.

The 6-page letter from the White House, dated September 3, was sent to the 20 heads of state that will meet this Thursday in Pittsburgh. After some initial diplo-blather, our President's "sherpa" for the summit, Michael Froman, does a little victory dance, announcing that the recession has been defeated. "Global equity markets have risen 35 percent since the end of March," writes Froman. In other words, the stock market is up and all's well.

While acknowledging that this year's economy has gone to hell in a handbag, Obama's aide and ambassador to the G-20 seems to be parroting the irrational exuberance of Federal Reserve Chief Ben Bernanke who declared last week that, "The recession is very likely over." All that was missing from Bernanke's statement was a banner, "MISSION ACCOMPLISHED."

And the French are furious. The White House letter to the G-20 leaders was a response to a confidential diplomatic missive from the chief of the European Union Fredrik Reinfeldt written a day earlier to "Monsieur le Président" Obama.

We have Reinfeldt's confidential note as well. In it, the EU president says, despite Bernanke's happy-talk, "la crise n'est pas terminée (the crisis is not over) and (continuing in translation) the labor market will continue to suffer the consequences of weak use of capacity and production in the coming months." This is diplomatic speak for, What the hell is Bernanke smoking?

May I remind you Monsieur le Président, that last month 216,000 Americans lost their jobs, bringing the total lost since your inauguration to about seven million? And rising.

The Wall Street Journal also has a copy of the White House letter, though they haven't released it. (I have: read it here, with the EU message and our translation.) The Journal spins the leak as the White House would want it: "Big Changes to Global Economic Policy" to produce "lasting growth." Obama takes charge! What's missing in the Journal report is that Obama's plan subtly but significantly throttles back European demands to tighten finance industry regulation and, most important, deflects the EU's concern about fighting unemployment.

Europe's leaders are scared witless that the Obama Administration will prematurely turn off the fiscal and monetary stimulus. Europe demands that the US continue pumping the economy under an internationally coordinated worldwide save-our-butts program.

As the EU's Reinfeldt's puts it in his plea to the White House, "It is essential that the Heads of State and Government, at this summit, continue to implement the economic policy measures they have adopted," and not act unilaterally. "Exit strategies be implemented in a coordinated manner." Translating from the diplomatique: If you in the USA turn off fiscal and monetary stimulus now, on your own, Europe and the planet sinks, America with it.

Obama's ambassador says, Non! Instead, he writes that each nation should be allowed to "unwind" anti-recession efforts "at a pace appropriate to the circumstances of each economy." In other words, "Europe, you're on your own!" So much for Obama channeling FDR.

The technical policy conflict between the Obama and EU plans reflects a deep difference in the answer to a crucial question: Whose recession is it, anyway? To Obama and Bernanke, this is a bankers' recession and so, as "stresses in financial markets have abated significantly," to use the words of the White House epistle, then "Happy Days Are Here Again." But, if this recession is about workers the world over losing their jobs and life savings, the EU view, then it's still "Buddy, Can You Spare a Dime."

If Bernanke and Obama were truly concerned about preserving jobs, they would have required banks loaded with taxpayer bail-out loot to lend these funds to consumers and business. China did so, ordering its banks to increase credit. And boy, did they, expanding credit by an eye-popping 30%, rocketing China's economy out of recession and into double-digit growth.

But the Obama Administration has gone the opposite way. The White House letter to the G-20 calls for slowly increasing bank reserves, and that can only cause a tight credit market to tighten further.

It's not that the White House completely ignores job losses. The US letter suggests, "The G-20 should commit to ... income support for the unemployed." You can imagine the Europeans, who already have generous unemployment benefits--most without time limits--turning purple over that one. America's stingy unemployment compensation extension under the Stimulus Plan is already beginning to expire with no live proposal to continue aid for the jobless victims of this recession.

The Europeans are so cute when they're angry, when they pound their little fists. Obama assumes he can ignore them. The EU, once the big player in the G-7, has seen its members' status diluted into the G-20, where the BRIC powers (Brazil, Russia, India and China) now flex their muscles. But Europeans have a thing or two to teach Americans about the economics of the twilight of empire.

Maybe the differences are cultural, not economic; that Europeans lack America's Manifest Destiny can-do optimism.

So, to give the visitors a taste of the yes-we-can spirit, Obama should invite Pittsburgh's 93,700 jobless to the G-20 meet to celebrate that 35% rise in the stock market.

Or -- my own suggestion -- change Bernanke's medication.

Greg Palast is the author of The Best Democracy Money Can Buy. Palast wrote the column, "Inside Corporate America" for the business section of Britain's Observer newspaper.

[Demeter]

40. Card Defaults Surge in August to 11.49%, Moody’s Says (Update1)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aOUFvgV93LaI

Sept. 23 (Bloomberg) -- U.S. credit-card defaults rose to a record in August and more losses may lie ahead as delinquencies climbed for the first time since March, according to Moody’s Investors Service.

Write-offs rose to 11.49 percent from 10.52 percent in July, Moody’s said today in a report. Loans at least 30 days delinquent rose to 5.8 percent from 5.73 percent. “Early- stage” delinquencies, or loans overdue 30 to 59 days, surged to 1.65 percent, from 1.41 percent, signaling higher losses in coming months. Banks typically write off loans after 180 days.

Card issuers have struggled with rising defaults as the recession drove up unemployment to 9.7 percent and the impact of income tax refunds waned. Credit-card defaults typically track the U.S. jobless rate since consumers tend to fall behind on payments when their income dries up.

“We continue to call for a recovery of the credit-card sector to begin once industry average charge-offs peak in mid- 2010 between 12 percent and 13 percent,” said the Moody’s report, which predicted unemployment may reach 10.5 percent.

JPMorgan Chase & Co.,Bank of America Corp. and Citigroup Inc., the biggest U.S. credit-card lenders, said in federal filings on Sept. 15 that defaults climbed in August.

[Demeter]

41. Critics: TARP Has Failed to Halt Foreclosures or Job Losses

http://abcnews.go.com/Business/government-watchdog-extremely-taxpayers-recoup-tarp-money/story?id=8654889

Watchdog Warns Taxpayer Won't Make Back $700B TARP Investment

Nearly one year after Congress approved the $700 billion financial bailout, it was attacked by Republicans and fiscal watchdogs as an expensive failure that has not stopped home foreclosures or jobs from disappearing.

"This has been a failed program," Sen. Mike Johanns, R-Neb., said at today's Senate Banking committee hearing. "The very promises made to the taxpayer of what was going to happen with this money, in my judgment, have not been kept."

Johanns cited what he called "very damning" testimony by the bailout's Special Inspector General Neil Barofsky that said it is "extremely unlikely" that American taxpayers will get a full return on their $700 billion investment. Moreover, Barofsky observed, the Troubled Asset Relief Program has failed to increase bank lending, stop rising unemployment, or stem the rash of home foreclosures.

"In the last year," said the Congressional Oversight Panel's Elizabeth Warren, "the apprehension that pervaded this country has turned into something else: frustration and anger. Today's fragile stability has come at an enormous cost to the American people." Barofsky noted that "a lot of this frustration and cynicism and anger comes out of the lack of transparency in the TARP program." This, he said, was his group's "biggest frustration" with the Treasury Department and "one of the great failures of the past year."

Lawmakers on both sides of the aisle today felt that frustration first-hand. Sen. Bob Corker, R-Tenn., denounced as useless and unclear the testimony from Treasury official Herb Allison, who oversees the bailout program.

"This hearing has not been very useful," Corker told Allison about 45 minutes into the witness' testimony. "Maybe that's just the way it is, but I look forward to the next panel."

The panel's chairman, Sen. Chris Dodd, D-Conn., then noted sarcastically, "But the questions are valuable."

"I associate myself with Sen. Corker's thoughts," said Sen. Judd Gregg, R-N.H.

Allison attempted to beat back the criticisms by arguing that the program had helped avert the collapse of the financial system last fall. It should not, he said, be viewed only through the prism of what financial returns are eventually seen by American taxpayers.

"It's too early to say how this is going to turn out," he said. "Some areas will probably see better performance than others, but we also have to look at the overall impact of the financial stability program on the American economy, on the banking system, and on the American public in general. I would shudder to think what the situation would be if the Congress and the administrations hadn't taken strong actions to deal with this crisis by, for example, creating the TARP program."

Dodd echoed that assessment, stating that Congress made the right move in enacting the program last October.

"I think we did the right thing and I think history will prove that to be the case," he said.

Watchdog Gene Dodaro of the Government Accountability Office offered a more mixed review.

"It's had some positive impact on the credit markets, but a lot of the programs have very uncertain outcomes at this particular point in time," he said.

Even the recent improvements of the banks  for many an acknowledged success of the program  were questioned today. Warren said the bailout's original purpose  to buy up the toxic assets weighing down banks' balance sheets  was never fulfilled.

"The toxic assets remain on the books of the banks," she said. "The commercial real estate mortgages are a coming crisis. Small banks are continuing to fail. We were talking a year ago about too big to fail. We are now facing an industry that's more concentrated than it was a year ago and too big to fail is up on us now in a much larger sense."

"Until we get down to dirt, to something that's solid, that we can put our feet on, our financial institutions are standing in a secure place, we can't rebuild and know that we are safely past this crisis," Warren said.

"The question about how we're going to get these toxic assets out of here at a time when the real estate mortgage market is still in trouble and the commercial real estate mortgage market may be getting into more and more trouble  I'm not hearing the plan," she said.

Another contentious issue today was whether or not Treasury Secretary Tim Geithner will extend the program until October 2010. At one point, Allison appeared to indicate that the bailout program would likely be extended.

"We still have a long way to go before true economic recovery takes hold," he warned, before later emphasizing on numerous occasions that Geithner has not yet made a decision.

[Demeter]

42. Lost Horizon- Reflections

http://www.youtube.com/watch?v=lNQR5Jqhuc4&feature=related

[DemReadingDU]

43. When do people understand that there won't be any recovery

That it's been all fake feel-good green shoots. Guess those would be withering weeds.

[Hugin]

46. But, then... Doing something about those things was never a part of TARP.

TARP is doing exactly what it was intended to do... Make sure the Rich, stay Rich.

It's what those 100 (against) to 1 (for) callers were saying to you last year... Congress.

But, those voices were drowned out by a few lobbyists whispering in your ears... Just like NOW with Health Care Reform, eh?

I'm almost tempted to dig up my post from almost exactly 1 year ago... The one where I said, "No! Wait! Stop! Don't!"

[DemReadingDU]

57. Barofsky Sees a 'Far More Dangerous' Financial Situation

9/25/09 A Year Later, Barofsky Sees a 'Far More Dangerous' Financial Situation

Neil Barofsky is the man who tracks the historic bailout known as the Troubled Asset Relief Program or TARP. Named in December, the 39-year-old special inspector general monitors a dozen separate bailout-related programs, which now account for nearly $3 trillion in financial commitments. Barofsky has subpoena power and, as a former federal prosecutor who successfully pursued white-collar crime, he has wasted no time in demanding details from institutions rescued by TARP. From a floor of office on L Street, the man known as SIGTARP has launched about two dozen investigations. In an audit released in July, Barofsky made clear that he was intent on demanding transparency from all quarters - including the U.S. Treasury. His next audit is due in October. In a half-hour interview with the Investigative Fund, Barofsky lays out the breadth of his work and is blunt in his assessment about whether the financial system, now with fewer and bigger banks, is yet safe. "I think we may be in a far more dangerous place today than we were a year ago," he said.

http://www.youtube.com/watch?v=BvwKzF6TLKo

[Demeter]

44. The Economy Is A Lie, Too By Paul Craig Roberts

http://www.informationclearinghouse.info/article23550.htm

September 21, 2009 "Information Clearing House" --- Americans cannot get any truth out of their government about anything, the economy included. Americans are being driven into the ground economically, with one million school children now homeless, while Federal Reserve chairman Ben Bernanke announces that the recession is over.

The spin that masquerades as news is becoming more delusional. Consumer spending is 70% of the US economy. It is the driving force, and it has been shut down. Except for the super rich, there has been no growth in consumer incomes in the 21st century. Statistician John Williams of shadowstats.com reports that real household income has never recovered its pre-2001 peak.

The US economy has been kept going by substituting growth in consumer debt for growth in consumer income. Federal Reserve chairman Alan Greenspan encouraged consumer debt with low interest rates. The low interest rates pushed up home prices, enabling Americans to refinance their homes and spend the equity. Credit cards were maxed out in expectations of rising real estate and equity values to pay the accumulated debt. The binge was halted when the real estate and equity bubbles burst.

As consumers no longer can expand their indebtedness and their incomes are not rising, there is no basis for a growing consumer economy. Indeed, statistics indicate that consumers are paying down debt in their efforts to survive financially. In an economy in which the consumer is the driving force, that is bad news.

The banks, now investment banks thanks to greed-driven deregulation that repealed the learned lessons of the past, were even more reckless than consumers and took speculative leverage to new heights. At the urging of Larry Summers and Goldman Sachs’ CEO Henry Paulson, the Securities and Exchange Commission and the Bush administration went along with removing restrictions on debt leverage.

When the bubble burst, the extraordinary leverage threatened the financial system with collapse. The US Treasury and the Federal Reserve stepped forward with no one knows how many trillions of dollars to “save the financial system,” which, of course, meant to save the greed-driven financial institutions that had caused the economic crisis that dispossessed ordinary Americans of half of their life savings.

The consumer has been chastened, but not the banks. Refreshed with the TARP $700 billion and the Federal Reserve’s expanded balance sheet, banks are again behaving like hedge funds. Leveraged speculation is producing another bubble with the current stock market rally, which is not a sign of economic recovery but is the final savaging of Americans’ wealth by a few investment banks and their Washington friends. Goldman Sachs, rolling in profits, announced six figure bonuses to employees.

The rest of America is suffering terribly.

The unemployment rate, as reported, is a fiction and has been since the Clinton administration. OH, MUCH LONGER THAN THAT! ST. RONNIE WAS THE FIRST TO REALLY MUCK UP THAT DATABASE The unemployment rate does not include jobless Americans who have been unemployed for more than a year and have given up on finding work. The reported 10% unemployment rate is understated by the millions of Americans who are suffering long-term unemployment and are no longer counted as unemployed. As each month passes, unemployed Americans drop off the unemployment role due to nothing except the passing of time.

The inflation rate, especially “core inflation,” is another fiction. “Core inflation” does not include food and energy, two of Americans’ biggest budget items. The Consumer Price Index (CPI) assumes, ever since the Boskin Commission during the Clinton administration, (AGAIN ST. RONNIE STARTED IT--BUT THIS FELLOW WORKED FOR RONNIE) that if prices of items go up consumers substitute cheaper items. This is certainly the case, but this way of measuring inflation means that the CPI is no longer comparable to past years, because the basket of goods in the index is variable.

The Boskin Commission’s CPI, by lowering the measured rate of inflation, raises the real GDP growth rate. The result of the statistical manipulation is an understated inflation rate, thus eroding the real value of Social Security income, and an overstated growth rate. Statistical manipulation cloaks a declining standard of living.

In bygone days of American prosperity, American incomes rose with productivity. It was the real growth in American incomes that propelled the US economy.

In today’s America, the only incomes that rise are in the financial sector that risks the country’s future on excessive leverage and in the corporate world that substitutes foreign for American labor. Under the compensation rules and emphasis on shareholder earnings that hold sway in the US today, corporate executives maximize earnings and their compensation by minimizing the employment of Americans.

Try to find some acknowledgement of this in the “mainstream media,” or among economists, who suck up to the offshoring corporations for grants.

The worst part of the decline is yet to come. Bank failures and home foreclosures are yet to peak. The commercial real estate bust is yet to hit. The dollar crisis is building.

When it hits, interest rates will rise dramatically as the US struggles to finance its massive budget and trade deficits while the rest of the world tries to escape a depreciating dollar.

Since the spring of this year, the value of the US dollar has collapsed against every currency except those pegged to it. The Swiss franc has risen 14% against the dollar. Every hard currency from the Canadian dollar to the Euro and UK pound has risen at least 13 % against the US dollar since April 2009. The Japanese yen is not far behind, and the Brazilian real has risen 25% against the almighty US dollar. Even the Russian ruble has risen 13% against the US dollar.

What sort of recovery is it when the safest investment is to bet against the US dollar?

The American household of my day, in which the husband worked and the wife provided household services and raised the children, scarcely exists today. Most, if not all, members of a household have to work in order to pay the bills. However, the jobs are disappearing, even the part-time ones.

If measured according to the methodology used when I was Assistant Secretary of the Treasury, the unemployment rate today in the US is above 20%. Moreover, there is no obvious way of reducing it. There are no factories, with work forces temporarily laid off by high interest rates, waiting for a lower interest rate policy to call their workforces back into production.

The work has been moved abroad. In the bygone days of American prosperity, CEOs were inculcated with the view that they had equal responsibilities to customers, employees, and shareholders. This view has been exterminated. Pushed by Wall Street and the threat of takeovers promising “enhanced shareholder value,” and incentivized by “performance pay,” CEOs use every means to substitute cheaper foreign employees for Americans .

Despite 20% unemployment and cum laude engineering graduates who cannot find jobs or even job interviews, Congress continues to support 65,000 annual H-1B work visas for foreigners.

In the midst of the highest unemployment since the Great Depression what kind of a fool do you need to be to think that there is a shortage of qualified US workers?

[Demeter]

45. And Here I Come to a Natural Stopping Point

There's only so much doom and gloom I'm willing to dish out in a day. Good night, folks! See you in the morning...

[hamerfan]

47. K&R, n/t

:kick:

[Demeter]

48. Banks fight to kill proposed consumer protection agency

http://www.mcclatchydc.com/227/story/75997.html

If you doubt that U.S. banks long to return to the days of impotent regulation, you need only look at one of the financial sector's top legislative priorities: killing a proposed new agency that would be dedicated solely to protecting consumers' financial interests.

The Obama administration is asking Congress to create a new Consumer Financial Protection Agency to regulate consumer financial products ranging from credit cards to mortgages, and to simplify disclosure about them all.

Though virtually every cause of the nation's recent financial crisis was rooted in weak consumer protection, the U.S. Chamber of Commerce is leading the fight against the proposed agency on grounds that it would make credit less available and more costly. The American Bankers Association, the Independent Community Bankers of America, and the Financial Services Roundtable also oppose the measure.

"We have no argument that regulation failed. Consumer protection is just one of the many areas where it fell down," said David Hirschmann, the president of the U.S. Chamber of Commerce's Center for Capital Markets, which opposes the panel. "It just simply adds a new layer of regulation without fixing . . . our outdated, broken regulatory structure that was a contributing factor in our crisis."

The Chamber said it's spending about $2 million on ads, educational efforts and a grassroots campaign to kill the agency. It said that the grassroots effort has led to more than 23,000 letters sent to Congress to date.

The Center for Responsive Politics said that for the 2010 election cycle, commercial banks have donated almost $3.7 million to lawmakers — 54 percent of it to Republicans. Companies that provide credit have given about $1.4 million, 59 percent to Democrats. Mortgage bankers and brokers have given $581,423.

"Maybe instead of making government BIGGER, we should focus on making government BETTER," reads one Chamber ad.

The Chamber warns that the agency could morph into a monster regulator.

"If you look at this actual bill, the powers are so broad and so ill-defined that the scope of who is covered is incredible. They've managed to create a proposed new regulator for anyone who directly or indirectly provides credit to consumers," Hirschmann said. "If you allow people to give gift cards for your store . . . you've got a new regulator. It's amazingly broad in scope, scale and power."

The administration scoffs at those charges.

"Contrary to some advertisements you may have seen, we have no desire to interfere with Main Street retailers' ability to provide credit to their customers. That argument is to the financial regulation debate what the Death Panel argument is to the health insurance debate," Lawrence Summers, the chief economic adviser to President Barack Obama, said in a recent speech. "We have become convinced that it is essential that consumer financial regulation be carried on by an independent body whose mandate is uniquely and exclusively consumer and investor protection."

Until the current crisis, responsibility for these consumer protections fell to several separate regulators, who made consumer protection subservient to their core mission of regulating institutions for safety and soundness.

Predatory lending and no-documentation loans helped spawn the housing crisis. Weak oversight by federal regulators allowed mortgage bonds to be sold to investors as the safest of investments when they were far from it.

When economic times got tough last year, banks began padding their balance sheets by socking surprised consumers with new credit card fees that were hidden in contractual fine print.

"In practice, nobody really took it seriously. . . . I think clearly you have had a lot of abuses, and whatever was on the books wasn't being enforced," said Morris Goldstein, a former top official at the International Monetary Fund and a researcher for the Peterson Institute of International Economics. "I think it makes sense to try to wrap it together and give someone the responsibility to deal with the great bulk of it."

Opponents have suggested that the new agency could impede the way businesses operate, but that concern is rejected by Elizabeth Warren, a Harvard University law professor who's long championed creation of such a regulator. Separately, Warren leads a congressional panel that monitors the Treasury Department's bank bailout program.

"The CFPA will provide real oversight over financial institutions and create some basic safety standards. This will make it safer for your local butcher to take out a mortgage or a credit card, but the CFPA is not going to regulate the way he carries out his business," she told McClatchy, referring to a Chamber ad that suggests even local butcher shops would be regulated.

Rep. Barney Frank, D-Mass., the chairman of the House of Representatives' Financial Services Committee, said Tuesday that he intends to exempt most non-financial businesses from oversight by the new agency. At a congressional hearing on Wednesday, the Chamber's Hirschmann said that while he appreciated Frank's modifications, the Chamber still opposes the bill.

Some leading Republicans are siding with the banks.

"Is the proper role of the government to limit consumer choice?" Alabama Rep. Spencer Bachus, the senior Republican on the Financial Services panel, asked Assistant Treasury Secretary Michel Barr during a hearing this month.

Barr, who as a former professor helped create the concept of a consumer financial protection agency, responded that by requiring clear and simple information for consumers, the agency would help them make better informed choices.

"It doesn't limit choice," Barr said.

Some Democrats, such as New York Rep. Nydia Velazquez, who heads the House committee on small business, are concerned about the bill's potentially broad sweep. In a statement to McClatchy, she warned that, "if these proposals are not crafted correctly, they could ensnare small businesses we don't think of as financial institutions. In addition, we need to consider how new regulations will impact small firms in the financial sector, like community banks and credit unions."

The proposed agency appears to have broad Democratic support in the House of Representatives. In the Senate, which has been slower to deal with financial regulation, support is harder to gauge.

Sen. Christopher Dodd, D-Conn., the chairman of the Banking Committee, has voiced support for the idea, but he's breaking with the administration and the House by proposing to consolidate half a dozen bank regulators into a single unified agency. A consumer protection agency could be folded into it, or it could be separate.

Advocacy groups say that the financial sector's opposition underscores the need to act.

"I don't see why people don't understand that this should be a measure of why to pass it," said Barbara Roper, the director of investor relations for the Consumer Federation of America. "If you assume, as I do, that they fear anything that threatens the way they do their business, their ability to profit through the abuse of their customers, then this (legislation) should be taken seriously."

In this environment, J.P. Morgan Chase and Bank of America announced this week that they'd modify their overdraft fee policies.

[Demeter]

49. Just When You Thought It Couldn't Get Worse: Carlyle invests in Chinese milk powder maker

http://www.ft.com/cms/s/0/47c02d18-a5a0-11de-982d-00144feabdc0.html


Carlyle Group, the US private equity fund, on Sunday unveiled a substantial strategic investment in one of China’s leading milk powder producers, underscoring rising foreign involvement in the sector.

The fund has taken a 17.3 per cent stake in Yashili, a family-owned company based in the southern province of Guangdong, which specialises in infant formula milk and is a top three national producer.

Further financial details were not disclosed. The investment was made through Carlyle Asia Partners, a fund which typically spends between $100m and $200m on individual deals.

The investment comes as China seeks to modernise a fragmented dairy-related industry whose reputation was badly dented following last year’s melamine scandal.

More than 20 dairy companies sold products that contained melamine, an industrial chemical that boosts protein levels but in high doses can cause kidney stones. More than 50,000 children fell ill and four infants died.

The scandal led to worldwide recalls of foods that contained Chinese dairy ingredients and tarnished the image of Chinese products well beyond the dairy industry. It also highlighted gross inefficiencies in quality control of China’s fragmented and rapidly growing dairy industry.

Most raw milk comes from China’s 1.3m farmers who typically own between five and 10 cows each. They supply to middlemen, who were blamed for adulterating the milk to boost profits. Some Yashili products were recalled as a precaution.

According to data from the China Dairy Association, China’s infant formula industry is experiencing annual growth of up to 30 per cent, driven by rising affluence, urbanisation and demand for higher quality products.

Patrick Siewert, a senior Carlyle executive and former head of Coca-Cola’s Asian operations, told the FT that the tie-up would help to strengthen management and provide finance.

“Yashili will also benefit from our commitment to leveraging Carlyle’s global contacts and expertise to boost product quality and to raise scientific standards,” he said.

As part of the tie-up, Carlyle has promised to help Yashili recruit a chief quality officer, set up a food and safety advisory committee of leading experts and to establish links with international institutes to strengthen nutritional research and product development.

Yashili employs 3,000 staff and operates 15 production lines, which make milk powder, soy milk, cereal and rice powder. It focuses distribution in second and third tier mainland cities, whose economies are growing rapidly.

In June, Kohlberg Kravis Roberts, the US private equity fund, completed a series of investments, understood to total about $150m, in Ma Anshan Modern Farming. The company, also known as Modern Dairy, is based in China’s central province of Anhui.

ARE THEY OUT OF THEIR FRIGGING MINDS? IS THIS THE FINAL BLOW FOR CARLYLE, THE WOODEN STAKE THROUGH THE HEART? LET'S HOPE SO. THERE'S NO FIXING STUPID.

[Demeter]

50. California bond issue draws strong demand

http://www.ft.com/cms/s/0/6046af9c-a609-11de-8c92-00144feabdc0.html

Strong demand for California’s latest debt sale has pushed down anticipated yields in a sign that credit markets may be bouncing back from the financial crisis.

The state on Monday begins the sale of $8.8bn in short-term notes, less than three weeks after it stopped issuing IOUs to pay its bills amid a budget crisis. Originally expected to yield 2-3 per cent, the notes might now pay as little as 1.25 per cent for a tranche due in May and 1.5 per cent for another due in June.

“It’s a good thing for the state,” said Matt Fabian, managing director at Municipal Market Advisors. But “it is a sign of desperation among investors to get yield”, he added. “And, it is troubling as it shows risk is being dramatically under-priced and could lead to massive over-leverage by bond issuers.”

Other short-term investments, such as money market funds, are offering rates of nearly zero. The finances of states, cities and counties have suffered in the recession, but investors, particularly individuals lured by yield and a tax break unique to municipal debt, have been active buyers.

California issues “revenue anticipation notes” (RAN) annually to manage its cash flow needs, although this month’s sale represents a significant increase over past year when the state sold $5bn.

California will use the funds to finance its obligations until income tax revenues trickle into state coffers later in its fiscal year.

The imminent debt sale underscores the complexity of the state’s borrowing requirements. About $1.5bn raised will be used to repay JPMorgan for a recent loan to redeem thousands of IOUs issued during the summer.

The IOUs were issued in lieu of cash because of a budget crisis, which has since been resolved after Arnold Schwarzenegger, the governor, and the California legislature agreed to public spending cuts.

While the state’s financial picture has stabilised, officials are not taking any chances on the RAN sale. A print and radio advertising campaign that would normally have been limited to California has been expanded to include New York, Miami and Dallas.

“There is a lot of demand out there,” said Tom Dresslar, a spokesman for the state Treasurer’s office. “This is a good time to be going into the market and we are going to get a good deal for taxpayers.”

Marilyn Cohen, the founder of Envision Capital, an adviser to retail investors, said: “People will be buying on the thought that no state has ever gone bankrupt and California will slog through.”

[Demeter]

51. Business coalition urges pay overhaul (THE SKY IS FALLING! THE SKY IS FALLING!)

http://www.ft.com/cms/s/0/27919bb0-a615-11de-8c92-00144feabdc0.html

A coalition of US companies, investors and directors will on Monday propose a radical overhaul of executive pay, calling for the elimination of practices including severance payments, tax refunds and the personal use of corporate jets.

The group, formed by the Conference Board, a business organisation, will criticise corporate America for not reforming its compensation structures before the crisis, blaming that failure for causing a “loss of trust” in US companies.

The report by the coalition, which is backed by companies including technology groups Cisco, AT&T and Hewlett-Packard, and large investors such as the California State Teachers’ Retirement System, underlines the corporate sector’s desire to quell public anger over excessive compensation and stave off government action on the issue.

“It is a lot better for corporations to get compensation right . . . than to have a governmental solution, because that inevitably tends toward the one-size-fits-all,” said Robert Denham, a close adviser to Warren Buffett, who co-chaired the Conference Board group.

The economic crisis has widened the gap between executives’ pay and the salaries of average Americans, prompting a wave of resentment towards business leaders. The US Federal Reserve, other regulators and politicians are threatening to crack down on bankers’ pay and many companies and investors fear similarly strict rules could be imposed on the rest of the US corporate world.

The group’s report says companies should avoid promising executives large severance payouts when the company is sold and generous retirement plans that are not available to other employees.

The coalition also takes aim at companies that refund executives’ income and excise taxes and pay for their personal use of aircraft, club memberships and other perks.

The coalition does say that companies can adopt some of these practices in special circumstances – a clause that could spark criticism the proposals do not go far enough. However, the report warns that companies would have to justify such decisions to shareholders.

Rajiv Gupta, the former chief executive of the chemical group Rohm and Haas who co-chaired the Conference Board panel, said the measures were crucial to restoring public trust in US companies.

“The trust has been lost in the last few years and does need to be rebuilt, and it is up to management and boards to do so. Regulation alone cannot do that,” he told the Financial Times.

The report calls for companies to introduce provisions to “claw back” pay from executives who are found guilty of misconduct.

It also urges boards to disclose fees paid to compensation consultants - a thorny issue that prompted Hewitt Associates, a large pay consultant that worked on the report, to issue a dissenting opinion.

Jim Reda, the founder of James F Reda & Associates, another compensation consultant, said the proposals would help boards to shape executive pay. “Normally, if a board gets between a CEO and his money, it is not going to be very popular, “ he said. “The goal of these principles is making executive compensation fair to both executives and shareholders.”

The coalition was also backed by international business figures including Sir David Walker, head of the UK government’s corporate governance review and Sir Mark Moody-Stuart, the chairman of the mining group Anglo-American.

TALK ABOUT SPITTING IN THE WIND! I'D GIVE THIS ABSOLUTELY ZERO CHANCE OF HAPPENING.

[Po_d Mainiac]

52. The Biggest Government Bailout Is Yet To Come

And it's not just mortgages by which the government is trying to save itself. The U.S .government has auctioned $7 trillion of Treasuries this year alone to help fund the bailouts—$1 trillion more than it did in 2008. And who is buying all those Treasuries to help fund the bailout? The Federal Reserve, which owned $4.875 trillion of Treasuries as of March, making it the biggest holder of U.S. government debt. The Fed is also the biggest continuing buyer of Treasuries, snapping up 48 percent of the $339 billion in net new Treasuries sold as of the second quarter, according to the Wall Street Journal, and poised to dominate again as the Treasury auctions off a record $112 billion in bonds soon. In short, the Treasury is issuing bonds to fund the bailouts so the Fed can buy the bonds to fund the bailouts that the Fed helped create.

http://www.thebigmoney.com/articles/judgments/2009/09/24/biggest-government-bailout-yet-come

Thanks for the post Demeter :donut:

[Demeter]

54. Steve Keen: On the Edge with Max Keiser

http://www.creditwritedowns.com/2009/09/steve-keen-on-the-edge-with-max-keiser.html

Last week, I highlighted some of the ideas of Australian economist Steve Keen in my post, “Politics and reform: Say I’m a politician….” Keen is of the Minsky camp and he believes that an unsustainable debt bubble has build up in the industrialized world which can only be brought to heel through a ‘debt jubilee.’

Below is a video clip of Keen telling Max Keiser a bit more about how he sees things. Central to his ideas is the concept that demand for credit creates loans which create reserves, which is the opposite causality of what one sees in neoclassical economics. This would mean that, absent a pickup in demand for credit, inflation is unlikely to reappear – irrespective of what central banks do. I will have more on this subject in later posts.

http://www.youtube.com/watch?v=VoqaMzBK4pc&feature=player_embedded

[DemReadingDU]

58. NPR: Return to the Giant Pool of Money

9/26/09 In which we mark the anniversary of the economic collapse and the anniversary of Planet Money: recapping some of the original episode, The Giant Pool of Money, and finding out what's happened to all those guys in the year since.

Podcast available soon, or check you local NPR station for Sunday broadcast
http://www.thislife.org/Radio_Episode.aspx?episode=390

5/9/08 Giant Pool of Money (original episode)
A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money.

click link for Podcast
http://www.thisamericanlife.org/Radio_Episode.aspx?sched=1242

[Demeter]

60. Thanks DRDU!

I heard the last 6 minutes of this today and was going to go look for it, and you saved me the job. Can't wait to hear it all!

Well, I've been dealing with a lot of real life today, but tomorrow it's more posting all the time!

Goodnight, all!

[Demeter]

61. CEO of International Swaps & Derivatives Association says trust us

http://fancylogocatchytagline.blogspot.com/2009/09/ceo-of-international-swaps-derivatives.html

From the Bond Buyer:

But Robert Pickel, the ISDA’s CEO, told members of the House Agriculture Committee yesterday, “Not all standardized contracts can be cleared.” Pickel said that derivatives contracts that are infrequently traded, even if they have standardized economic terms, “are difficult if not impossible to clear” because a central counterparty clearing facility’s ability to clear a contract depend on such factors as liquidity, trading volume and daily pricing. This “makes it difficult for a clearinghouse to calculate collateral requirements consistent with prudent risk management,” Pickel said.

“End-users are not systemically significant and ­regulations intended to improve stability and decrease systemic risk should not ­apply to them.” Jonathan Short, senior vice president and general counsel of the ­IntercontinentalExchange Inc., also said Congress should focus regulation on the segments of the market where risk is greatest. “Mandating that interdealer and major swap participant trades be cleared would eliminate the bilateral counterparty risk that was central to the liquidity crisis that occurred last year,” he said. Pickel also argued against mandatory exchange trading of OTC derivatives, warning it “would undercut their very purpose: the ability to tailor custom risk-management solutions to meet the needs of end-users.” Dan Budofsky, a partner at Davis Polk & Wardwell LLP, who testified on behalf of the Securities Industry and Financial Markets Association, agreed that “it may be more appropriate for products that trade less frequently to trade over-the-counter.”

Witnesses also challenged the Treasury’s plan to impose capital requirements on cleared swap transactions. This would require the end-user businesses to post collateral for the swaps, Budofsky said. Collateral requirements for corporate end-users “would create a significant ­disincentive to use swaps to manage risk,” he said.

I have a business proposition for you.

Send me money to insure your house. As long as nothing goes wrong we'll be fine. If something does go wrong, that's ok, I'll be fine cuz I've collected the premiums from you. You'll be screwed if you have any losses since I never set aside enough collateral to cover anything .

[Demeter]

62. Gross: The new normal for “the next 10 years and maybe even the next 20 years”

http://www.creditwritedowns.com/2009/09/gross-the-new-normal-for-the-next-10-years-and-maybe-even-the-next-20-years.html

Bill Gross has a piece out now on Pimco’s website suggesting we are about to witness a sea change in saving and spending habits, government intervention, and a host of other issues. This is not a buy-the-dips kind of atmosphere and it will last for, oh, 20 years.

Gross says:

This “new” vs. “old” normal dichotomy was perhaps best contrasted by Barton Biggs, as I heard him on Bloomberg Radio in early 2009, when he said he was a “child of the bull market.” I thought that was a brilliant phrase, and Barton is a brilliant phrase-maker. He went on to say though, that his point was that for as long as he’s been in the business – and that’s a long time – it has paid to buy the dips, because markets, economies, profits, and assets always rebounded and went to higher levels. That is not only the way that he learned it, but that is the way, basically, that capitalism is supposed to work. Economies grow, profits grow, just like children do. I think that’s why he said he was a child of the bull market, not just because he had experienced it for so long, but also because economic growth and higher asset prices are almost invariably a natural evolution, much like the maturation of a person. That’s how people grow, and so I think Barton was saying that capitalism just grows that way too.

Well, the surprise is that there’s been a significant break in that growth pattern, because of delevering, deglobalization, and reregulation. All of those three in combination, to us at PIMCO, means that if you are a child of the bull market, it’s time to grow up and become a chastened adult; it’s time to recognize that things have changed and that they will continue to change for the next – yes, the next 10 years and maybe even the next 20 years. We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, the way children do; in which profits are relatively static; in which the government plays a significant role in terms of deficits and reregulation and control of the economy; in which the consumer stops shopping until he drops and begins, as they do in Japan (to be a little ghoulish), starts saving to the grave....MORE AT LINK BELOW

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Gross+Sept+On+the+Course+to+a+New+Normal.htm

[Demeter]

63. The origin of the U.S. dollar as legal tender and its link to Depression

http://www.nakedcapitalism.com/2009/09/the-origin-of-the-u-s-dollar-as-legal-tender-and-its-link-to-depression.html


Submitted by Edward Harrison of Credit Writedowns

I have been very interested in the concept of legal tender of late because of the revelation this summer that the State of California was issuing I.O.U.’s to honour its debts instead of paying in U.S. Dollars, which are legal tender and I.O.U.’s from the U.S. government (see posts here and here). What I found most interesting about the California case was how the I.O.U.’s allowed a state experiencing a depression and prohibited from printing money to settle debts. Given the similarities between California and Ireland, I felt this could be a model for that state...

The question was: how can a government without the levers of the money printing press use money as an escape-hatch in a depressionary environment? So to answer that question, I wanted to look at the origins of legal tender laws in the U.S.. When the United States was established, the U.S. Constitution outlined the basic framework through which government – both state and federal – could act on behalf of America’s citizens. Nowhere in the U.S. Constitution was legal tender mentioned, and this is a bone of contention still amongst those who see the Federal Reserve as an illegitimate institution. Below, I want to outline a brief (and hopefully non-ideological) history of how the greenback became legal tender in the United States. I have some related comments at the end on Depressions and their lasting consequences on politics and history.

The Constitution

The Constitution mentions the word money in three sections, 8, 9 and 10. Below are the individual citations as they pertain to Congress acting on behalf of the federal government:

Section. 8. The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

* To borrow Money on the credit of the United States;
* To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
* To raise and support Armies, but no Appropriation of Money to that Use shall be for a longer Term than two Years;

Section 9 is no longer applicable, but here it is.

Section. 9. The Migration or Importation of such Persons as any of the States now existing shall think proper to admit, shall not be prohibited by the Congress prior to the Year one thousand eight hundred and eight, but a Tax or duty may be imposed on such Importation, not exceeding ten dollars for each Person.

* No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

In Article 1, Section 10 of the Constitution, the authorities regarding money and taxation for individual states are outlined. It states:

Section. 10. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it’s inspection Laws; and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.

No State shall, without the Consent of Congress, lay any Duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.

You have probably noticed that nowhere in here was the term ‘legal tender’ used. Why? The intention was to allow anyone to issue coins and notes backed by gold or silver. In fact, foreign coins backed by gold and silver were accepted in the U.S. because 80 percent of money in circulation in the U.S. pre-1800 was foreign.

Centralisation or de-centralisation?

But, when the United States was created, there were factions. One faction led by Alexander Hamilton, a U.S. Constitution signatory and the first Treasury Secretary, favoured a strong central government. The other, headed by Thomas Jefferson, favoured states’ rights and a more de-centralised government and were more in favour of the Articles of Confederation, which was the original constitution that created the United States. One reason the term Confederacy was used for government in the south during the Civil War was opposition to a strong central government, which was seen to favour money interests over farming interests and thus the North over the South.

(Hamilton is one of two non-Presidents on circulated paper money. His face is on the front of the ten-dollar bill. Read the sordid details of his death at the hands of a sitting Vice President. The other non-President is Benjamin Franklin, on the face of the hundred-dollar bill. Since the 100 is the highest circulating U.S. bill, Benjamin Franklin has gained a certain notoriety as a result.)

As a result of the Civil War and the large costs associated therewith, the factions favouring more centralisation gained sway on money matters. Basically, the government was broke and needed to control the money supply in order to alleviate these debts. Heavy taxation was the only other alternative, not something likely to get one re-elected. So Abraham Lincoln created the Legal Tender Act for the United States.

However, in 1870, the U.S. Supreme Court ruled these laws unconstitutional in a 4-3 decision in the case Hepburn v. Griswold. What was peculiar about the ruling was that Salmon P. Chase was the chief justice presiding and voted against the greenback as legal tender. He was also Treasury Secretary at the time the legal tender law was enacted. He also happens to appear on the face of the 10,000 dollar bill, a denomination not in circulation today.

Chase was concerned that the legal tender law was legalizing theft through inflation (the government was printing so many greenbacks that they had plummeted in value vis-a-vis gold). In his opinion, Chase wrote:

We confess ourselves unable to perceive any solid distinction between such an Act and an Act compelling all citizens to accept, in satisfaction of all contracts for money, half or three-quarters or any other proportion less than the whole value actually due, according to their terms. It is difficult to conceive what act would take private property without process of law if such an act would not.

We are obliged to conclude that an Act making mere promises to pay dollars a legal tender in payment of debts previously contracted, is not a means appropriate, plainly adapted, really calculated to carry into effect any express power vested in Congress, that such an act is inconsistent with the spirit of the Constitution, and that it is prohibited by the Constitution.

However, President Ulysses S. Grant expanded the size of the court to the present nine, adding two members who favoured legal tender laws. So, fifteen months after Hepburn came Knox v. Lee. And this case decided in favour of the Legal Tender Act in a 5-4 decision. And this is still the law of the land

Knox v. Lee led indirectly to Jim Crow

I don’t have an opinion on this issue. You will see why below. But I do have an opinion about the effects of the Legal Tender Act and Knox v. Lee.

First, the purpose of legal tender is to centralise the creation of money by creating monopoly control of the money printing press. This might be done to reduce the chaos associated with allowing anyone to issue bank notes. But it also might be done to inflate and increase leverage for taxation purposes. There are competing ideas on this issue but it boils down to a centralisation versus de-centralisation/States’ Rights versus Federalist argument.

More crucially to me, the Legal Tender Act did lead to inflation after the Civil War and an artificial boom Railroad investment created by this inflation. The inflation ended when Grant signed into law a bill restricting money growth by making greenbacks redeemable in gold. The boom turned bust in the Panic of 1873 when Jay Cooke & Company, a bank that was highly leveraged to the railroad industry, was brought down. The period that followed was known as the great depression before 1929 ushered in another Depression.

The economic downturn created a backlash against the Republican Party of Grant, which was also the party of Reconstruction and black politicians in the south. As a result, the Democrats swept the 1874 Congressional elections and almost eked out a win in 1876 for the Presidency. To keep the democrats happy, the Compromise of 1877 was made, which effectively ended reconstruction and threw millions of southern blacks into a near-century of humiliation, disenfranchisement and subjugation known as Jim Crow. It was an abomination, the legacy of which stains America to this day.

I am no fan of States’ Rights as a result. I see increased States’ Rights and de-centralisation as likely to lead to explicit measures of disenfranchisement. So when I look back to the history of legal tender laws, my point of view is very much biased by this fact.

What should also be clear from this Great Depression and the one after 1929 is that booms which turn into extraordinary busts lead to populist outcomes and the rise of populist leaders which have unpredictable negative long-term consequences.

Notes

A book that I like on this issue and Money and Banking more generally is called “A History of Money and Banking in the United States” by Murray Rothbard. the view presented is a relatively anti-central bank, anti-legal tender one. Rothbard is a Libertarian of the Austrian School variety, so read his book keeping his biases in mind.

[Demeter]

64. The FDIC to get credit from banks even while banks restrict lending

http://www.nakedcapitalism.com/2009/09/the-fdic-to-get-credit-from-banks-even-while-banks-restrict-lending.html


Submitted by Edward Harrison of Credit Writedowns

In the latest inexplicable move to extricate the U.S. banking system from crisis, the FDIC is reportedly close to asking the very banks it regulates for a loan to top up its balances. The plan is “strongly supported by bankers and their lobbyists” according to the New York Times.

Are you kidding me? This is the most preposterous thing I have heard yet. How is the FDIC suppose to adequately regulate banks when it owes them money? If your looking for a textbook route to regulatory capture, I present you Exhibit A. What’s more is banks are restricting lending right now. How is this going to help that situation?

The New York Times, like the even-handed mainstream media outlet it is supposed to be, reports this story like it is something truly reasonable.

Tired of the government bailing out banks? Get ready for this: officials may soon ask banks to bail out the government.

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

A hallmark of the financial crisis has been the decision by successive administrations over the last year to lend hundreds of billions of taxpayer dollars to large and small banks.

“It’s a nice irony,” said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. “Like so much of this crisis, this is an issue that involves the least worst options.”

Bankers and their lobbyists like the idea because it is more attractive than the alternatives: yet another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury.

No, bankers like this idea because it makes the regulator beholden to the regulated. Am I wrong or is this the worst idea you have heard since this crisis began?

FOR MORE DETAIL:

http://www.nytimes.com/2009/09/22/business/22bailout.html

[Demeter]

65. Railroad Traffic Decline Accelerates (Withering Green Shoot Watch)

http://www.nakedcapitalism.com/2009/09/railroad-traffic-decline-accelerates-withering-green-shoot-watch.html


One indicator of commercial activity is shipments, such as train and truck traffic.

Reader Marshall Auerback provided this sighting which shows that the decline in shipments is accelerating. Note that one of the general reasons for optimism is that many indicators are getting worse less quickly and some appear to be stabilizing.

Now this is merely a one-week shift and may be noise, but the change was pretty dramatic, and in the wrong direction. As Marshall noted:

The latest data out of the Association of American Railroads has been released. While a month ago the weekly YoY decline hit a very troublesome -17.1%, the last weekly decline added another almost 3% to the deterioration, and is now down -19.8% for Week 36. Cumulative traffic decline is flat at -18.4%. Including intermodal traffic or ton-miles in the calculation does nothing to improve the conclusion. Not a single “carload originated” category has improved, and in fact even the relatively stable ones from the prior update have slumped.



The data are not seasonally adjusted so when you actually take a look at the levels, they are all the way down to where they were in 1993.

[Demeter]

66. Deflation? By George Washington of Washington’s Blog.

http://www.nakedcapitalism.com/2009/09/guest-post-deflation.html

As Absolute Return Partners wrote in its July newsletter:

The most important investment decision you will have to make this year and possibly for years to come is whether to structure your portfolio for deflation or inflation.

So which is it, inflation or deflation?

This is obviously a hot topic of debate, and experts weigh in on both sides. I’ve analyzed this issue in numerous posts, but every day there are new arguments one way or the other from some very smart people.

Because the arguments for inflation are so obvious and widely-discussed (bailouts, quantitative easing, Fed purchasing treasuries, etc.), I will not discuss them here (other than pointing to an interesting new argument for inflation by Andy Xie).

How Bad Could It Get?

The biggest deflation bears are rather pessimistic:

* David Rosenberg says that deflationary periods can last years before inflation kicks in

* Renowned economist Dr. Lacy Hunt says that we may have 15-20 years of deflation

* PhD economist Steve Keen says that – unless we reduce our debt – we could have a “never-ending depression”

These are the most pessimistic views I have run across. Most deflationists think that a deflationary period would last for a shorter period of time.

The Best Recent Arguments for Deflation

Following are some of the best arguments for deflation.

Unemployment

Wall Street Journal’s Scott Patterson writes that we won’t get inflation until unemployment is down below 5%:

A rule of thumb is that inflation doesn’t become sticky until the unemployment rate dips below 5%…

“I see very little prospect of accelerating inflation” partly because of the employment outlook, said Mark Zandi, chief economist of Moody’s Economy.com. “I don’t think the risk shifts toward inflation until 2011, or even 2012.”

It could take a lot longer for unemployment to go back down to 5% (and for consumers to have more money to spend again).

(Note: hyperinflation is obviously an entirely different animal. For example, there was rampant unemployment in the Weimar Republic during its bout with hyperinflation ).

Debt Overhang and Deleveraging

Steve Keen argues that the government’s attempts to increase lending won’t work, consumers will keep on deleveraging from their debt, and that – unless debt is slashed – the massive debt overhang will keep us in a deflationary environment for a long time.

Mish writes:

An over-leveraged economy is one prone to deflation and stagnant growth. This is evident in the path the Japanese took after their stock and real estate bubbles began to implode in 1989.

Leverage is increasing again, according to an article in Bloomberg:

Banks are increasing lending to buyers of high-yield company loans and mortgage bonds at what may be the fastest pace since the credit-market debacle began in 2007…

“I am surprised by how quickly the market has become receptive to leverage again,” said Bob Franz, the co-head of syndicated loans in New York at Credit Suisse…

Indeed, as I have repeatedly pointed out, Bernanke, Geithner, Summers and the chorus of mainstream economists have all acted as enablers for increasing leverage.

Mish continues:

Creative destruction in conjunction with global wage arbitrage, changing demographics, downsizing boomers fearing retirement, changing social attitudes towards debt in every economic age group, and massive debt leverage is an extremely powerful set of forces.

Bear in mind, that set of forces will not play out over days, weeks, or months. A Schumpeterian Depression will take years, perhaps even decades to play out.

Thus, deflation is an ongoing process, not a point in time event that can be staved off by massive interventions and Orwellian Proclamations “We Saved The World”.

Bernanke and the Fed do not understand these concepts, nor does anyone else chanting that pending hyperinflation or massive inflation is coming right around the corner, nor do those who think new stock market is off to new highs. In other words, almost everyone is oblivious to the true state of affairs.

Pension Crisis

Pension expert Leo Kolivakis writes:

The global pension crisis is highly deflationary and yet very few commentators are discussing this.

Collapse of the Shadow Banking System

Hoisington’s Second Quarter 2009 Outlook states:

One of the more common beliefs about the operation of the U.S. economy is that a massive increase in the Fed’s balance sheet will automatically lead to a quick and substantial rise in inflation. An inflationary surge of this type must work either through the banking system or through non-bank institutions that act like banks which are often called “shadow banks”. The process toward inflation in both cases is a necessary increasing cycle of borrowing and lending. As of today, that private market mechanism has been acting as a brake on the normal functioning of the monetary engine.

For example, total commercial bank loans have declined over the past 1, 3, 6, and 9 month intervals. Also, recent readings on bank credit plus commercial paper have registered record rates of decline. The FDIC has closed a record 52 banks thus far this year, and numerous other banks are on life support. The “shadow banks” are in even worse shape. Over 300 mortgage entities have failed, and Fannie Mae and Freddie Mac are in federal receivership. Foreclosures and delinquencies on mortgages are continuing to rise, indicating that the banks and their non-bank competitors face additional pressures to re-trench, not expand. Thus far in this unusual business cycle, excessive debt and falling asset prices have conspired to render the best efforts of the Fed impotent.

Ellen Brown argues that the break down in the securitized loan markets (especially CDOs) within the shadow banking system dwarfed other types of lending, and argues that the collapse of the securitized loan market means that deflation will – with certainty – continue to trump inflation unless conditions radically change.

Support for Brown’s argument comes from several sources.

As the Washington Times notes:

“Congress’ demand that banks fill in for collapsed securities markets poses a dilemma for the banks, not only because most do not have the capacity to ramp up to such large-scale lending quickly. The securitized loan markets provided an essential part of the machinery that enabled banks to lend in the first place. By selling most of their portfolios of mortgages, business and consumer loans to investors, banks in the past freed up money to make new loans. . . .“The market for pooled subprime loans, known as collateralized debt obligations (CDOs), collapsed at the end of 2007 and, by most accounts, will never come back. Because of the surging defaults on subprime and other exotic mortgages, investors have shied away from buying the loans, forcing banks and Wall Street firms to hold them on their books and take the losses.”

Senior economic adviser for UBS Investment Bank, George Magnus, confirms:

The restoration of normal credit creation should not be expected, until the economy has adjusted to the disappearance of shadow bank credit, and until banks have created the capacity to resume lending to creditworthy borrowers. This is still about capital adequacy, where better signs of organic capital creation are welcome. More importantly now though, it is about poor asset quality, especially as defaults and loan losses rise into 2010 from already elevated levels.

And McClatchy writes:

The foundation of U.S. credit expansion for the past 20 years is in ruin. Since the 1980s, banks haven’t kept loans on their balance sheets; instead, they sold them into a secondary market, where they were pooled for sale to investors as securities. The process, called securitization, fueled a rapid expansion of credit to consumers and businesses. By passing their loans on to investors, banks were freed to lend more.

Today, securitization is all but dead. Investors have little appetite for risky securities. Few buyers want a security based on pools of mortgages, car loans, student loans and the like.

“The basis of revival of the system along the line of what previously existed doesn’t exist. The foundation that was supposed to be there for the revival (of the economy) . . . got washed away,” Galbraith said.

Unless and until securitization rebounds, it will be hard for banks to resume robust lending because they’re stuck with loans on their books.

Fed Paying Interest on Reserves

And Naufal Sanaullah writes:

So if all of this printed money is being used by the Fed to purchase toxic assets, where is it going?

Excess reserves, of course. Counting for $833 billion of the Fed’s liabilities, the reserve balance with the fed has skyrocketed almost 9000% YoY. Excess reserves, balances not used to satisfy reserve requirements, total $733 billion, up over 38,000%!

?bgcolor=%23B3CDE7&chart_type=line&drp=0&graph_bgcolor=%23FFFFFF&height=480&preserve_ratio=checked&recession_bars=On&txtcolor=%23000000&width=800&id=EXCRESNS&transformation=lin&scale=Left&range=Custom&cosd=1989-01-01&coed=2009-07-01&line_color=%230000FF&vintage_date=2009-08-27&line_style=Solid&mark_type=NONE&mma=0

Excess Reserves of Depository Institutions

The Fed pays interest on these reserves, and with an interest rate (return on capital) comes opportunity cost. Banks hoard the capital in their reserves, collecting a risk-free rate of return, instead of lending it out into the economy. But what happens as more loan losses occur and consumer spending grinds to a halt? The Fed will lower (or get rid of) this interest on reserves.

And that is when the excess liquidity synthesized by the Fed, the printed money, comes rushing in and inflates goods prices.

Of course, most people who are arguing we will have deflation for a while believe that we might eventually get inflation at some point in the future.

[Demeter]

67. William K. Black’s Proposal for “Systemically Dangerous Institutions”

http://www.nakedcapitalism.com/2009/09/guest-post-william-k-blacks-proposal-for-%E2%80%9Csystemically-dangerous-institutions%E2%80%9D.html

By George Washington of Washington’s Blog.

William K. Black, Associate Professor of Economics and Law at the University of Missouri – Kansas City, and the former head S&L regulator, has written the following fantastic new proposal concerning the giant, insolvent banks. Posted/reprinted with Professor Black’s permission.
William K. Black
Associate Professor of Economics and Law
University of Missouri – Kansas City

[e-mail]

September 10, 2009

The Obama administration is continuing the Bush administration policy of refusing to comply with the Prompt Corrective Action (PCA) law. Both administrations twisted a deeply flawed doctrine – “too big to fail” – into a policy enshrining crony capitalism.

Historically, “too big to fail” was a misnomer – large, insolvent banks and S&Ls were placed in receivership and their “risk capital” (shareholders and subordinated debtholders) received nothing. That treatment is fair, minimizes the costs to the taxpayers, and minimizes “moral hazard.” “Too big to fail” meant only that they were not placed in liquidating receiverships (akin to a Chapter 7 “liquidating” bankruptcy). In this crisis, however, regulators have twisted the term into immunity. Massive insolvent banks are not placed in receivership, their senior managers are left in place, and the taxpayers secretly subsidize their risk capital. This policy is indefensible. It is also unlawful. It violates the Prompt Corrective Action law. If it is continued it will cause future crises and recurrent scandals.

On October 16, 2006, Chairman Bernanke delivered a speech explaining why regulators must not allow banks with inadequate capital to remain open.
http://federalreserve.gov/newsevents/speech/bernanke20061016a.htm

Capital regulation is the cornerstone of bank regulators’ efforts to maintain a safe and sound banking system, a critical element of overall financial stability. For example, supervisory policies regarding prompt corrective action are linked to a bank’s leverage and risk-based capital ratios. Moreover, a strong capital base significantly reduces the moral hazard risks associated with the extension of the federal safety net.

The Treasury has fundamentally mischaracterized the nature of institutions it deems “too big to fail.” These institutions are not massive because greater size brings efficiency. They are massive because size brings market and political power. Their size makes them inefficient and dangerous.

Under the current regulatory system banks that are too big to fail pose a clear and present danger to the economy. They are not national assets. A bank that is too big to fail is too big to operate safely and too big to regulate. It poses a systemic risk. These banks are not “systemically important”, they are “systemically dangerous.” They are ticking time bombs – except that many of them have already exploded.

We need to comply with the Prompt Corrective Action law. Any institution that the administration deems “too big to fail” should be placed on a public list of “systemically dangerous institutions” (SDIs). SDIs should be subject to regulatory and tax incentives to shrink to a size where they are no longer too big to fail, manage, and regulate. No single financial entity should be permitted to become, or remain, so large that it poses a systemic risk.

SDIs should:

1. Not be permitted to acquire other firms

2. Not be permitted to grow

3. Be subject to a premium federal corporate income tax rate that increases with asset size

4. Be subject to comprehensive federal and state regulation, including:

a. Annual, full-scope examinations by their primary federal regulator

b. Annual examination by the systemic risk regulator

c. Annual tax audits by the IRS

d. An annual forensic (anti-fraud) audit by a firm chosen by their primary federal regulator

e. An annual audit by a firm chosen by their primary federal regulator

f. SEC review of every securities filing

5. A prohibition on any stock buy-backs

6. Limits on dividends

7. A requirement to follow “best practices” on executive compensation as specified by their primary federal regulator

8. A prohibition against growth and a requirement for phased shrinkage

9. A ban (which becomes effective in 18 months) on having an equity interest in any affiliate that is headquartered in or doing business in any tax haven (designated by the IRS) or engaging in any transaction with an entity located in any tax haven

10. A ban on lobbying any governmental entity

11. Consolidation of all affiliates, including SIVs, so that the SDI could not evade leverage or capital requirements

12. Leverage limits

13. Increased capital requirements

14. A ban on the purchase, sale, or guarantee of any new OTC financial derivative

15. A ban on all new speculative investments

16. A ban on so-called “dynamic hedging”

17. A requirement to file criminal referrals meeting the standards set by the FBI

18. A requirement to establish “hot lines” encouraging whistleblowing

19. The appointment of public interest directors on the BPSR’s board of directors

20. The appointment by the primary federal regulator of an ombudsman as a senior officer of the SDI with the mission to function like an Inspector General

[Demeter]

68. Do Ben and Tim = Thelma and Louise?

http://jessescrossroadscafe.blogspot.com/



One cannot help but note that Team Obama is trying to derail serious proposals regarding financial reform for Wall Street at the G20 meeting, as we suggested they would.

The concerns raised by US revelations at the G20 today about new intelligence regarding Iran's secret underground nuclear facility have overshadowed financial reform and economic problems, and Gordon Brown's prescription yesterday that the G20 would become the new governing council for the world. It also stepped rather heavily on the House Hearings on HR 1207 "Audit the Fed" bill sponsored by Ron Paul and a good part of the Congress.

Why waste a crisis indeed. Especially when you can cop a two-fer.

Yesterday we put forward a somewhat lengthy piece on the Fed and reverse repos being considered titled Fed Eyes US Money Market Funds.

There is a key quote in there that we would like to highlight today.

The central bank is now considering dealing with money market funds because it does not think the primary dealers have the balance sheet capacity to provide more than about $100 billion... Money market mutual funds have about $2.5 trillion under management..."

Only 100 billion in available capital for a relatively risk free short term investment in the global banking system including the Primary Dealers, does seem a bit tight for a set of such 'well capitalized' banks, especially since they aren't making many commerical loans, preferring to speculate in the commodity and equity markets for daytrading profits.

BNP Paribas Securities Corp., Banc of America Securities LLC, Barclays Capital Inc., Cantor Fitzgerald & Co., Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Daiwa Securities America Inc., Deutsche Bank Securities Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc. , Jefferies & Company, Inc., J. P. Morgan Securities Inc., Mizuho Securities USA, Morgan Stanley & Co. Incorporated, Nomura Securities International, Inc., RBC Capital Markets Corporation, RBS Securities Inc., UBS SecuritiesLLC.

Couple that with the revelation reported some time ago at ZeroHedge and covered here, that the Fed is taking on more than 50 percent of the longer dated Treasuries, and there is only about Ten Billion left on their balance sheet for expansion, and you get the picture of a financial system not cruising into recovery but heading straight at a confrontation with harsh reality.

We have considered the possibility that the Fed is doing this to place exclusively AAA and Treasuries on the balance sheets of the Funds, aka the Shadow Banking System, who are holding some seriously awful garbage. But this does not quite make sense unless those reverse repos are of a very long duration or rolled over automatically for a long period of time. A proper program such as was extended to the banks where the Fed buys the assets outright would be that solution. It made more sense to us that the banking system is still very tight on good capital assets and liquidity.

Here is an update from ZH that is somewhat compelling if one understand the implications. Visualizing the Upcoming Treasury Funding Crisis.

"Summary: foreign purchasers are congregating exclusively around the front end of the Treasury curve, meaning that the primary net purchaser of dated bonds has been the Federal Reserve. As everyone knows by now, the Fed only has $10 billion left out of the $300 billion total allotted for Treasury QE. That should expire next week. ... The time of unravelling may be upon us sooner than most think."

Do Tim and Ben = Thelma and Louise?

As the Eagles sang:

"Take it, to the limit, one more time..."

[Demeter]

69. That's All Folks!

I'm putting my cold to bed. Have a good week, just to spite them all!