Depression

It's still possible that this "R" word will not turn into the "D" word but in parts of the world it is a depression already. The quarterly economic output numbers are in. In our Great Depression GDP fell 6+ percent in 1931. In Korea last quarter it was down 22%. In Japan 12%. In Germany 7% and here 6%. Recessions are usually under a percent or two. China has lost 10 million jobs. Brazil lost 650000 in December and we are losing 500000-600000 a month. Obama's economic advisers are a disaster packed with bankers and Fedsters like Robert Rubin and Larry Summers and Geithner for Treasury lately of the NY Fed. I mean we just got rid of old Mr conflict of interest himself, Henry Paulson and we have replaced the pigs in the barnyard with new pigs of the same species. The WSJ reports today that Geithner's new Chief of Staff, Mark Patterson, was chief lobbyist for Goldman Sachs. Great. So we can expect more of the same disastrous bailouts with Obama as with Bush and Obama is calling for a hurry up offense to push the bailouts forward. Not a minute to waste. Is this Deja Vu all over again? So it's more money to insolvent banks, more purchases of corporate paper(corporate bonds), more purchases of mortgage debt commonly known as toxic waste, bailouts of sinking car companies and so on. And no oversight, no voting rights to go along with all these enormous injections of cash. The same executives are still there. And if these bailouts haven't worked, then it must be that we haven't spent enough. Obama and his gang of well connected intelligent morons never learned the first rule of problem solving: when you've dug yourself a hole, the first thing you need to do is stop digging! The congressional Dems have learned nothing from the Bush bailouts and the Republicans ideas to handle a massive increase in the public debt is to cut taxes on the corporations and the wealthy. I have a primitive understanding of global financial markets but is it possible that buying up hundreds of billions to trillions in corporate bonds and toxic scum while simultaneously having Treasury sell bonds with almost no return to our own Federal Reserve pose some risks going forward? Like collapse of the bond market? Like collapse of our currency?My fear is that all these expensive antics will just delay the final reckoning. Obama's team believes that we have a liquidity crisis but it is a debt and credit crisis. Their way to solve the problem is to get people lending again, get people borrowing again. 70% of our GDP has been consumer driven consumption so let's get those Wall Mart shoppers shopping! But those shoppers are tapped out and their only friend in the world is their credit card. Average credit card balance in this country is over $11000. Fifteen years ago it was $4000. Credit card default is soaring. Total credit card debt is over $1 Trillion and I read that 5.8% is in arrears with estimates going forward of 10 to 15% this year. If unemployment hits 10 or 12%, those default numbers could be conservative. The news from the states is also not good. Most will be running deficits and a variety of governors from Pennsylvania to California are calling for furloughs, 4 day workweeks, paying bigger share of their generous health and retirement benefits and of course cancelling bond issues, capital projects and the like. California looks particularly iffy with 230,000 of some of the highest paid union workers in the country. My brother has told me that Police and Fire get 90% of their salary at retirement which is often 6 figures as well as lifetime health coverage. The deficit in California is said to be $28 to 48 Billion going forward. California could be the next Argentina. England could be the next Iceland. Latvia could be the next Lithuainia. Personally, I'm pulling for Iceland. The Pots and Pans Revolution finally had an effect. The 17 week protest in front of the Althingi, the Parliament, finally brought the government down and it looks like a woman PM by the name of Johanna Sigurdardottir will be a temporary Prime Minister with a Left Green coalition running things until general elections in May. Could be chaotic but bound to be interesting. Meanwhile over in Davos the World Economic Forum is meeting to resolve this little problem of global meltdown. I suspect there will a lot of grist for John Stewart there. I can't wait to see what happens tomorrow.

The Debt Depression

I know. You've seen my debt to GDP graphs before and I have been beating you over the head with them but I am entirely convinced that understanding the role of debt is crucial if you want to understand how we got to this current catastrophe. I particularly like the colors in this one. That red ellipse needs additional labels. Put Reagan at the bottom left and Bush at the top right. I have read many cogent articles on the causes of the Great Delamination and I commend them to you for your required reading. One of the best was Michael Lewis et al in the Jan 3rd issue of the NY Times entitled"THe End of the Financial world as we know it" and here is the link:
http://www.nytimes.com/2009/01/04/opinion/04lewiseinhorn.html?_r=2&scp=1&sq=michael%20Lewis&st=cse. If you are not familiar with Jeremy Grantham, you should be. He is principal at the investment advisor firm GMO and his recent 4th quarter 2008 news letter is a gem. He along with a very few others has been sounding the alarm and here is the link to that report:http://www.gmo.com/websitecontent/JGLetter_4Q08.pdf. Take particular note of his use of the term "Stranded debt." A word of warning: he is not kind to the dearly departed bush administration and he has many doubts about the incoming Obama folks. I will soon add some websites of writers and analysts who I feel are the best of a small bunch of clear heads on this blog. You will note that most of them have no background in economics and it is the classical economists who certainly bear enormous blame for the current predicament. I recall Napoleons's remark about the Bourbons: "They know nothing and they have forgotten nothing."
I have told my wife, and friends and family that no matter how worried and pessimistic I have been, each day brings more news which shows how optimistic I have been. So far things haven't gotten really ugly but the first stirrings of social unrest are showing up in Iceland, Latvia, Lithuania and parts of eastern Europe and it can't be far off in in the PIGS of Europe(Portugal, Italy,Greece and Spain). China looks to a tinderbox and once the clueless underclasses in America wake up we could be in for it here as well. Nothing focusses the mind more than losing your job and your house. If you can stand a lot of profanity, click on the video in the Daily Bail website. It is hilarious in spite of an avalanche of 4 letter words:http://dailybail.com/home/2009/1/25/there-are-no-words-to-describe-the-following.html.
Frankly, I fail to see how the bank bailouts now taking place worldwide will have any useful effect. The debt is simply too huge to print our way out in the US or in the countries with debt problems thjat mirror the US. There are countries with low debt to GDP and many of them are not our traditional friends such as China, Russia and the Middle East. And there is another time bomb ticking and that is Peak Oil and scarcity, availability and price of that, the most important commodity will be a potential coup de grace to a struggling world economy. But that is the subject of another post.

Titanic Metaphors

I continue to write forcefully on today's economic and social events as much to inform others as to clarify my own thinking and understanding of these events. I would urge any readers to seek out their own oracles and data sets and come to their own conclusions. Cast an especially wary eye at government and corporate leaders and believe no bankers. We are in the midst of what I will call today The Great Delamination. You may call it what you wish. This recession or depression seems to be worsening by the day both here and in the rest of the world. Social unrest and street protest is springing up in coutries with little history of that sort of activity. Like Iceland and Latvia for example. The street protests outside the Parliament in Reyjkavik have become larger and more virulent with fires and garbage and flying skyr , their local yoghurt. They have been
demanding accountability from their prime minister and their elected officials and new elections. Until today the parliament has ignored them. But 5000 skyr flinging citizens finally had an effect. Prine Minister Geir Haarde has announced he will step down and call for new elections in May. Over in the US Senate Chuck Schumer and Richard Shelby are calling for $110 Million to be spent on hiring new FBI and SEC staff to go after the obvious fraud of Wall Street and the banking industry officials who have brought the US to the brink of financial ruin. They will attempt a "claw back" of the hundreds of billions essentially looted from taxpayers , investors and depositors. This will not"fix" the current disaster but finding another way to fund bailouts beside stealing it from our children seems like a good first step. As I wrote in a previous blog:"Let them be known. Let them be hated. Let them be hunted for the remaining days of their miserable lives." I hope that the first person they subpoena will be our former Treasury Secretary.
An ominous statistic I read from Jim Jubak over at msnmoney.com was sobering. The good old Federal Reserve is looking wobbly. On Jan, 16, 2008 the Fed had $868 Billion in "reserves" of which 84% represented T bills and notes which are even today considered pretty secure reserves. One year later on Jan 14th, 2009 the reserves had ballooned to $2.1 Trillion. T bills now had dropped to a paltry 23% of reserves. As you may know, the fed has been out buying up commercial paper and swapping T Bills for toilet paper in the form of CDO's from our insolvent banks.
However, I am beginning to see some hopeful signs . Some prominent academics and economists are suggesting that some of the banks may need to be nationalized. I continue to try to dig up more information on what I will term the Swedish Solution . I found a pdf from a symposium in 1998 at the FDIC which dealt with how the FDIC and RTC responded to the savings and loan debacle of the 1980's. Tucked into that meeting was a presentation by Arne Berggren, a consultant from Stockholm. Here is the link and his presentation starts on pg 3:http://www.fdic.gov/bank/historical/managing/sym1-09.pdf.
It seems that in the late 1980's, Sweden went through a deregulation of banks much like the US combined with a run up in debt and explosion in the property market. Sound familiar?
In just a 2 year period from 1989 to 1990 their percentage of debt to GDP went from 90% to 140%. Nordbanken, the largest bank had an asset base equal to 23% of GDP. The Swedish government fully nationalized Nordbanken and it took an amount equal to 3% of Sweden's GDP to fully recapitalize it. The important thing to remember is that it worked and eventually the bank was resold and privatized at almost no ultimate cost to the Swedish taxpayer. Keep in mind that at the time Sweden had no FDIC deposit equivalent and all countries are different and comparisons are odious but there are similarities between our two economies and lessons we could almost certainly use as we grope for solutions. I hope that some of Obama's advisers are looking at the Swedish Solution. But I fear the worst. I think there is a chance that events are proceeding at a pace faster than the Fed's printing presses can keep up.

Nationalize the Banks or Charge into the Valley of Death!

I had a pleasant month out of the country working on my old sailboat and while things were bad when I left, the last week or so has the US economy in free fall led by the same old suspects, the banks. While I was away I read David McCullough's "John Adams", a fascinating history of John and Abigail Adams and the new American nation in the late 18th century. One of the early steps to stabilize the economy with its patchwork of currencies was the establishment of the first national bank of the United States in 1791 followed in 1816 by the Second National Bank of the United States. It was the establishment of these banks which gave me the idea that a possible way out the current banking morass would be to establish a true national bank which would have most of the features of private commercial and investment banks. It would be staffed by government employees and entirely transparent. I should add that upon closer scrutiny I discovered that these early national banks were in fact private quasi government affairs not entirely dissimilar from the public private banks of today where lately the private sector reaps the profits and the public sector shoulders the debts. The alternative idea would be to nationalize some or all of the banks. This has been partially done already here and in Europe, primarily in Ireland and the UK. It has been a disaster and a failure as the bank losses keep mounting and government front end loaders keep shoveling money into their vaults in a futile attempt to keep them solvent. It must stop. My suggestion would be stop all banking bailouts until the banks open their books and mark to market the toxic assets and derivatives and then we will have a realistic accounting. For example, I have tried to look at what passes for the books at Citigroup from multiple sources. I have a very simplistic and primitive understanding of basic economics and accounting and I may be missing some key concepts but here is what I found. Henry Blodget, a journalist and securities analysis in Wall Street with a storied past(read criminal) pulled some of Citigroup numbers together.
City is said to have $2.05 Trillion in assets. They list $775 Billion in deposits which I assume is part of the $2.05 Trillion. They have short debt(borrowing) of $105 Billion, $393 in long debt and $646 Billion of other debt and liabilities which includes $250 Billion from the Fed. I think this totals $1144 Billion. The problem is that the figure of $2.05 trillion is bogus because as anyone knows, a lot of Citigroup's assets are worth only a fraction of their value and who knows what fraction. Now lets say we have the mother of all bank runs and the $775 Billion in deposit assets are removed from the balance sheet. I am ignoring the reality of fractional reserve banking for the sake of illustrating the simplest asset/liability structure of Citi. That would leave Citi's assets at $1.275 Trillion($2.05-$.775 trillion). If the remaining assets are worth 90 cents on the dollar(.9X1.275) then Citis assets are worth $1.14 Trillion, equal to their liabilities. It is far more likely that these toxic assets are worth less than 90 cents on the dollar and therefore Citi is insolvent. Until City is forced to mark these assets to true book value, difficult as that would be, there is no justification of giving them or any of the other banks one more dollar. There are several banks in the UK and Ireland who are insolvent despite government denials and I have a sneaking suspicion that the same situation exists here. The crash in banking stocks of the past few days comes despite the disgraceful exit of a discredited administration and the coronation of Obama. The sad fact is that the Obama Administration seems quite willing to continue the flawed bailouts of the Bush era. I say either nationalize the banks or let them fail. There is simply not enough money in this country to save these insolvent banks not to mention irrelevant car companies, insurance companies, bond holders, pension funds etc. In the early 1990s Sweden went through a de facto default of its banking system and Sweden took over the banks, fired the management, and marked assets to true value. They cut loose the bond and equity holders and began to run the banks in the interests of the people and businesses of Sweden. That is how it it should be.I know that the Mutual funds and wealthy bond holders will squeal like pigs but allowing them their losses is far preferable to handing the losses to the taxpayer and his children who bear no responsibility to keep an insolvent, incompetent and and corrupt former investment bank in business. The problem is there is very little time and this country needs a change and using the personnel and policies of the Clinton and Bush administrations represents failure as usual. The current actions hark back to Lord Cardigan's famous blunder during the Crimean War in 1854 immortalized by Tennyson in "The Charge of the Light Brigade." If we keep on this present course it wont be Henry Paulson and his cronies descending into the valley of death. It will be the American taxpayer.

Ponzi Schemes

Carlo aka Charles Ponzi was a famous swindler from the 1920's who used an elaborate pyramid scheme to reward earlier investors by using newer investor money, much the same way as Bernie Madoff did. Because of the scale of things, I think $50 billion trumps a few million and we should rename it a Madoff Scheme. But maybe we should call it a Federal Reserve Scheme or a Treasury Scheme or a Bernanke Scheme.
Bernie Madoff kept his operation going by choosing his investors carefully and by absolute secrecy of his methods much the same way of Bernanke and his Pals at the Fed. We call it the Federal Reserve but guess what? I recently realized there's nothing Federal about it. It's the Private Reserve. Bloomberg Financial News recently sued the NY Federal Reserve Bank to find out where a bit more than $2 Trillion dollars had gone that was dispensed by Chairman Bernanke. They used a Freedom of Information statute designed to pry previously secret information from the government. Bloomberg simply wanted to know which banks got how much of our taxpayer money. But the Federal Courts turned Bloomberg down. Why? Because the NY Fed is not part of the government.!!! Whaaat? Yup. How can that be? We have zillions and trillions of money going to god knows who from taxpayers administered by government employees to private firms and nobody but Bernanke and his goons know how it's being dispensed? When Bernanke was asked why he wouldn't release this information he said something to the effect that releasing that sort of information could erode confidence in said incompetent banks!! Who said we had any confidence? It was eroded a long time ago! The more I looked into this mess, the worse the smell. A lot of investment advisers and conservative libertarian bloggers have spouted these anti-fed sentiments over the years but lately some pretty responsible investment columnists like Bill Flenstein and Jim Jubak at MSMMoney have spilled some data which has given me pause.http://articles.moneycentral.msn.com/Investing/JubaksJournal/5-reasons-the-fed-is-obsolete.aspx?page=2
Jubak mentioned in a recent column as did Fleckenstein that the Fed has been buying up T Bills and notes and competing with institutional and private investors. The Fed is also buying agency debt such as Freddy's fannie paper, corporate bonds and stock as well as well as spending trillions filling up the coffers of criminally incompetent private banks that have brought the world financial system to the brink of ruin....and he is still doing it. Good luck trying to find out how much. I wont even suggest going to the federal (oops Private) Reserve website to try to find out anything. Jubak estimates that this buying of government securities is up 160% from last year and now totals something on the order of $2 to $3 Trillion. This is on top of an estimated o $8.5 trillion which has gone secretly to essentially insolvent banks. Kathleen Pender, “Government Bailout Hits $8.5 Trillion,” San Francisco Chronicle (November 26, 2008). The Fed used to track the different measures of money supply, M1, M2, M3 etc but has withdrawn the data. M2 survives as a measure of money in circulation and was about $8 Trillion last month. In just a matter of months, in a sense, the private Federal reserve has doubled our money supply It's our money they are giving to these thieves, right? Well, not exactly. It's more like the future of your money. The treasury floats bonds and notes and the Fed runs the printing presses. Federal reserve notes, Right? The Constitution has granted the right to print and oversee the money supply to our government. But the Fed is not our government. Does that mean that this consortium of private banks along with a passel of government appointed board members are our government? See what I mean by smell? Even Fannie and Freddy are not government. They are Quasi-Government entities, whatever that means.My head is spinning trying to understand this and so must be your head as well, but there is one thing which is becoming very clear to me. Our entire banking system is at the root of our troubles, Quasi- or not. The Fractional Reserve system(see Wiki: http://en.wikipedia.org/wiki/Fractional_reserve.......
is the system by which a certain amount of money is deposited in a bank and the bank can then loan out a Multiple of that deposit, maybe say 3 or 4 times the amount. The bank has to keep a certain amount handy on reserve to cover withdrawals, but only a fraction of the original deposit. Here is where the Ponzi part starts to kick in. If you have a loss of confidence in the bank, depositors may show up and demand their money back but because the bank only has a fraction of those deposits, it can only return a fraction of those deposits. So you now have a bank failure. The Federal Reserve can then step in with money if it chooses and provide reserves. The Fed is then part of the new money component of a ponzi pyramid scheme, at least as I see it. Of course if the bank has time it can sell off assets it had invested in but if those assets were Collateralized Debt Obligations of toxic mortgages which it had purchased on margin of say 20 or 40:1.......well then Houston.We have a problem.Nobody in their right mind will touch the stuff. It just gets more and more complicated because banks and investors had purchased "insurance" on their investments from the unregulated "derivatives" market. The whole complicated system was and is incestuous and interconnected and at high risk of instability or failure.
And now as the worst administration in the nation's history is packing its bags, things will improve. Right. I'm as optimistic as the next clod but I think I see the same play with different actors. The congress cares only about its reelection prospects and finding campaign money and most of the members of even the Banking Committees are either stupid or incompetent. The public is clueless and the whole corrupt unregulated incompetent quasi financial system of debt creation remains in place rolling along on a destiny that can only lead to collapse. Oh by the way, Happy New Year. I have been out of the country for a month and it has been pure pleasure not to have thought about the Great Delamination going on back home.