Thirty-one Percent of Economist Still Don’t Think There is a Recession

 

When there is too much credit in the system, something had to give.  The market has no faith in the government which has been carpet bombing liquidity.  The market is saying, no matter what the government does, there is going to be another at least 25% to 30% correction in the valuations of homes, the credit markets that financed these homes, and the equity markets that are tied into the world-wide economy.  No one was differentiating one business from another. That was what happened in giant pyramid selling schemes.  Banks don’t trust banks.  And this morning people not only do not trust banks but any company’s stock. 

 

In other news today, 31% of economists do not think there is a recession.  Are these people reading counterfeit tea leaves?    

Some snippets off the web, in blue:  

“We are in the middle of a crisis.  It is not over.  It is to be taken seriously, but it is centrally an American crisis.” – German Finance Ministry spokesman Torsten Albig on September 15, 2008.

 

“At this stage, we’re quite confident.” – A spokesman for the French Finance Ministry, who said that French banks and French government debt agency, Agence France-Tresor, are not in danger from the market turmoil in the U.S. on September 15, 2008

 

July 2008……UK mortgage lending fell by 32 per cent in the year to June and will worsen further if the Bank of England raises interest rates in a bid to combat. 

 “So why is reduced mortgage lending always reported as a ’shortage of finance for struggling buyers’?”                                            -Victor M, Cricklewood, London

 

NEVER ever try and mess with the markets.  You (government) are doomed to failure. History proves that. You put in place uncontrollable regulation and forgot to control the regulators -the fraudsters got you as they always will.  The last bastion of capitalism being run by neo-commies what a state we are all in. If someone had told me this 40 odd years ago when I first met people in the American financial world they would have though me ‘raving’.  -Victor M, Cricklewood, London

 

From thetimes.co.uk……a little history.  “We now know that the sub-prime securitized-mortgage market was little more than a giant pyramid selling scheme in which simple transactions, loans to buy homes, were packaged, bundled, sold, refinanced and the credit risk insured by myriad institutions. None of the bankers who grabbed the passing parcels had any means of ascertaining the solvency of the ultimate borrowers, nor any idea of the true value of the bricks and mortar that underpinned the loans.   

 

“If we want to know why some bankers behave like bison racing to the cliff-edge, we need to remember where they came from. The guts of an investment bank is the broker-dealer model, the merging of two types of business: brokers – people who act as agents for investors, buying and selling securities on their behalf – and dealers – who act as principal, trading securities for their own account.  Three decades ago, brokers and dealers (the latter were known as stock jobbers in Britain) were separate partnerships, owned by the management whose personal wealth was on the line every day, in every trade. I remember visiting a jobber’s pitch in 1985 on the floor of the London Stock Exchange, where a lad barely out of school scribbled entries into a large, black ledger. He could mentally tot up his long or short position at feverish speed from a page of buy and sell orders.  Today, the books are electronic and the positions algorithmic, but the point is not a sentimental one. Today’s broker-dealers have no skin in the game – they are staff and the bosses are staff. Their rewards in shares are a bonus, never a liability.  The Big Bang in London in the mid-Eighties and the earlier deregulation in New York transformed a business made up of ruthless individuals joined together by a merchant’s compact into a tower of corporate ego. Merchant banks, such as SG Warburg and Morgan Stanley, bought brokers and jobbers and the culture of personal ownership and personal risk quietly vanished.  It’s difficult to imagine the boy on the exchange floor behaving like Jérôme Kerviel, the Société Générale trader who set fire to his bank’s balance sheet, and it is not just a question of scale or computers. It is about the corporate mindset that makes risk political, a struggle between managerial egos rather than a simple balance of good bets versus dangerous gambles. It is the difference between directors’ service agreements – with generous severance terms – and joint and several liability.

Partnerships are run by people who know that their home is at risk if they get it wrong, but for Dick Fuld, the chief executive of Lehman, no such danger threatened. His greatest fear was losing face. Ego, not greed was what drove Lehman off the cliff and ego will put paid to Wall Street, too.        -carl.mortished@ thetimes.co.uk

Paulson built up a personal net worth of over $700 million in his career at Goldman Sachs according to estimates.  He was compensated to the tune of $30 million in 2004 and $37 million in 2005.  Henry Paulson put one of these 5 investment houses as well as all Americans into this mess.  According to the International Herald Tribune, Paulson “was one of the first Wall Street leaders to recognize how drastically investment banks could enhance their profitability by betting with their own capital instead of acting as mere intermediaries.” In a Business Week article in 2006, Paulson was “one of the key architects of a more daring Wall Street, where securities firms are taking greater and greater chances in their pursuit of profits.” “Mr. Risk Goes to Washington,” reported that under Paulson, derivatives meant “taking on more debt: $100 billion in long-term debt in 2005, compared with about $20 billion in 1999. It means placing big bets on all sorts of exotic derivatives and other securities.”

 

From Dave Smith’s Economics website…” Bill White is a Canadian economic adviser to the Bank for International Settlements (BIS), the Basel-based central bankers’ bank.   Alan Greenspan appeared to be aware of the danger. He watched with alarm as each time the debt bubble threatened to burst.  However, Greenspan and his fellow central bankers around the world, rather than accepting a temporary downturn in their economies, pumped up the bubble even more by cutting interest rates. “What amazed me was how each time they managed to rejuvenate the system by reducing interest rates,” Bill White said last week. “But in the end, if the fundamental position is that there is too much credit in the system, something has to give.”  In June 2007, two months before the present global financial crisis broke into the open with devastating effect, White warned in the Bank for International Settlements’ annual report that, just as “no one foresaw the Great Depression of the 1930s”, so it was possible that mainstream economic opinion was understating the dangers from toxic debt.  It was a common view that “busts” could be swiftly tackled by central banks cutting interest rates, White noted. But just because that had worked in the recent past did not mean it would in the future.

 

Japan had cut interest rates when its bubble burst, as did America in 1930, but with limited effect. Sometimes the downward forces are just so big that even ultra-low interest rates – zero in Japan’s case – will not do the trick.

 

Warburton says the credit system has “atrophied” and also believes the deep downside risks he has been warning of for some time are now in plain view.  (See http 

://www.economicsuk.com/blog/cat_david_smiths_other_articles.html.)   

 

And to start the day, on October 5, 2008 the one-month dollar Libor has fallen to 4.0925% from 4.11% Friday, well above the Federal Reserve’s 2% Fed funds target, with the three-month dollar Libor slipping to 4.28875% from 4.33375% on Friday. 

 

There was a battle of ideology going on between the credit markets and the equity markets. In the current envirnment, no matter the moves put on by Henry Paulson, a son of Wall Street, banks were not buying in.  That was why credit markets froze. Bankers have always been conservatives.  They were not buying into the social engineering on capitalism.  They neither trusted another bank’s balance sheet nor the government. 

 

Oh the cost of doing business between banks.  In my view, it was only a matter of time before one side would win.  Ultimately, either hyperinflation or deflation would be the result? 

 

The Truth About Cheating

“Don’t do what so many of us do, which is hold our breath and hope [the problem] goes away.”                             –Gary Neuman       

In private talks on Capitol Hill, the Bush administration was pushing an even bleaker picture. A Republican familiar with the warnings issued by the Treasury Department away from the cameras, said the New York stock market should brace for a collapse of up to a third of its value if the deal failed to materialise.  “We could see falls of 3,000 or 4,000 points on the Dow in just a couple of days. It’s one of those things that no one can quite grasp or understand. Everybody is extraordinarily scared.”                                          - Tim Shipman in Telegraph.co.uk

 

In a new book, “The Truth About Cheating: Why Men Stray and What You Can Do To Prevent It,” Gary Neuman says, “Don’t do what so many of us do, which is hold our breath and hope [the problem] goes away.” 

 

“The price of all this greed? Sadly, because of the actions of the investment banks, the mortgage industry and the rating agencies, the investment community has now incurred an estimated $1 trillion and more in losses. Even more troubling, housing prices have dropped 20 percent from their July 2006 highs, with the very real likelihood that housing could contract another 15 to 20 percent — essentially wiping out more than $4 trillion in housing values. This would be the biggest hit since the Depression to Americans’ most important asset.  What is even more remarkable is that at the same time, firms such as Goldman Sachs and Lehman not only made billions of dollars packaging and selling these toxic loans, they also wagered with their own capital that the values of these investments would decline, further raising their profits. If any other industries engaged in such knowingly unscrupulous activities, there would be an immediate federal investigation.  Why is Washington so complicit in this intricate and lucrative affair? First, the Fed laid the groundwork for both these asset bubbles by lowering interest rates to historic lows. Treasury secretaries under Presidents Clinton and Bush — Robert Rubin and Hank Paulson, respectively — took no action to curb these abuses. It certainly was not because they did not understand Wall Street’s practices — both are former chief executives of Goldman Sachs.” –Eric D. Hovde chief executive of Washington-based Hovde Capital  in the Washington Post on September 21, 2008

 

By one estimate the nominal value of certain derivatives ballooned to $62 trillion, based on only $6 trillion of underlying assets.

 

 

An environment in which discouraging words are seldom heard may be fine for a place where the deer and the antelope play, but not for the frenzied range where the bulls and the bears roam.  Rupert Murdoch-owned Wall Street Journal is engaging in un-Murdochian restraint, banishing words like “crash” and “pandemonium.”  Financial media organizations are keeping Un-Happy Talk to a minimum.  “We’re very careful not to throw words around like ‘meltdown’ and ‘free fall’,” CNN correspondent Ali Velshi.  It’s one thing for media organizations to censor themselves. It’s quite another for the government to ban certain types of speech.”   –-Daniel Gross  in Newsweek on Sep 27, 2008

 

Peter Spencer, economic adviser to the Ernst & Young Item Club, said: “This has the potential to make [the stock market crash of] 1929 look like a walk in the park.  It would be disastrous. This is the time you just have to bail people out and ask questions later. It is very difficult to see how the US banking system would survive without that package.  – Tim Shipman in Telegraph.co.uk

 

 

Consider that financials make up about 16% of the S&P 500 index, and I think we’ve found the squeaky wheel.  “If there’s a silver lining to bear markets, it is that they make stocks cheap for the next wave of investors. But so far in this downturn, it isn’t working out that way.  Based on the price-to-earnings ratio, stocks have actually become more expensive even as share prices have come tumbling down. In fact, the P/E ratio for the Standard & Poor’s 500-stock index, based on earnings over the previous four quarters, has risen to just over 24 from around 19, according to S&P.”  –Peter Lim in NYTimes 9/10

 

And in an articl by Tim Shipman in Telegraph.co.uk, this is what happened starting last Thursday in Washington: 

 

“In a closed-door meetings with senior Democrats, Mr Paulson accepted compromises (limits on executive pay at the banks needing help, and more support for struggling mortgage holders) that allowed the House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid to line up their troops in support of the plan. The White House soon won over Senate Republicans, too. But when the 199 House Republicans gathered, just four raised their hands to back Paulson’s proposals.

And more was needed to sell the deal to the nation. Step forward George Bush, whose political capital has long been deep in the red. His televised address on Wednesday night laid out a vision of plummeting house prices and pension funds. “Our entire economy is in danger,” he said.

Steve Clemons, a senior fellow at the New America Foundation think tank, accused Mr Bush of pushing the “fear” button: “He said the clock was ticking. This seems like a bad episode of 24.”

In the panelled splendour of the Capital Grille, a favoured haunt of the political smart set, a former White House speechwriter reflected the view that the presidents doom-mongering could actually make things worse: “If we didn’t need a bail-out before that, we do now.”

But in private talks on Capitol Hill, the Bush administration was pushing an even bleaker picture. A Republican familiar with the warnings issued by the Treasury Department away from the cameras, said the New York stock market should brace for a collapse of up to a third of its value if the deal failed to materialise. “The economy is dropping into the john,” he said. “We could see falls of 3,000 or 4,000 points on the Dow in just a couple of days.

“What’s being put around behind the scenes is that we’re looking at Thirties stuff. We’re looking at catastrophe; huge, amazing catastrophe. It’s one of those things that no one can quite grasp or understand. Everybody is extraordinarily scared.”

This harum-scarum offensive seemed to bear fruit and the tentative basis of a deal was hammered out by Thursday lunchtime. But by then, John McCain had made another of the political gambles for which he is becoming known. The Republican presidential candidate, whose unsure performance on the economy (declaring the fundamentals sound just as the stock market plunged, opposing the bail-out of insurance giant AIG the day before supporting it) had seen his poll numbers decline, declared that he was suspending his campaign to return to Washington and help finalise the deal. From a man known as Senator Hothead for his profanity-laced negotiating style, this was like a bull announcing to the inhabitants of the china shop his intention to do a little browsing.

Mr McCain succeeded in persuading Mr Bush to invite the principal players, and his Democratic rival, Barack Obama, to a Thursday-afternoon summit in the White House. His move also emboldened the House Republicans.

What happened next will go down as the biggest White House drama since The West Wing left our screens two years ago. President Bush lost control as tempers flared in the cabinet room. John Boehner, the Republican House minority leader, torpedoed the Paulson plan, offering up an alternative proposal that would force banks to buy insurance for their failing securities instead of giving them public money.

Mr Paulson explained that the idea was unworkable and declared: “We can’t start over.” But the rebels were not done. Republican Senator Richard Selby then produced a five-page list of 192 economists and business school professors who oppose the plan. That was a red rag to Mr Bush, who snapped back: “I don’t care what somebody on some college campus says,” saying he would trust Mr Paulson instead.

The President then summarised the dangers of inaction to the world economy in characteristically blunt terms: “If money isn’t loosened, this sucker could go down.”

With the deal on life-support, Mr Paulson then chased after furious Democrats, dropping to his knees, only half-jokingly, to beg Nancy Pelosi not to blow up the legislation. Through it all, Mr McCain, who knew Mr Boehner’s plans in advance, far from helping to engineer a compromise, sat mute.

Moderate Republicans were furious at Boehner’s band of brothers. Jim Nuzzo, a White House staffer under the first President Bush, branded the House Republicans “immature brats who have put ideology before country”.

“We’re at a point in our nation’s history when they need to grow up. If McCain can’t get the House Republican leadership to give him 100 votes to do something that the President wants, the treasury secretary wants, the Fed chairman wants, then he doesn’t have a set of nuts that’s worth a damn.”

If he can deliver them over the next 24 hours, it may yet boost Mr McCain’s credibility. Those 100 votes are critical political cover for the Democrats who fear they might lose 20 to 30 congressional seats in November if they alone pushed through an unpopular bill.

The Democratic Senate aide, steeped in seven years of military metaphors from the war on terror, said: “We were prepared to strap on the suicide bomb vests and pull the pins together. But we’re not committing suicide if the Republicans won’t do the same. It’s mutually assured destruction, or nothing.”

In the long run, the true significance of the opposition of the House Republicans may not be the narrow politicking but their stance on the broader historic issue of whether America, a country built on capitalism, will have to accept more government intervention in the market.” 

The past year has shown plenty of evidence of unsound fundamentals—eight straight months of job losses, the failure of financial institutions, etc. And yet the word from Washington for much of 2008 has been that things are just fine.  Was there a debate whether we were in a recession?

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3093680/US-economy-in-crisis-How-did-it-come-to-this.html

 

In a new book, “The Truth About Cheating: Why Men Stray and What You Can Do To Prevent It,” Gary Neuman talked about how a woman could entrust her vulnerability to that man again if you had a husband who is not truly apologetic – the 12 percent of those you surveyed who will cheat no matter what —for what he has already done, does not show remorse, is not now willing to be completely transparent.”  

 

How could we entrust our vulnerability again to companies like Goldman Sachs? The 12 percent who will cheat no matter what are still out there. 

The Road to Who Knows Where

 

“Get gold, humanely if possible. King Ferdinand of Spain said.  “But at all hazards–get gold.”  

 

Last week the people on Wall Street in the battle against the gods, for money to ease the suffering, for personal comfort, found out the human condition.  The standards of care changed last week.  Currencies which had replaced gold as the standard on how things could be valued in the 1970s would now be challenged.  Everything was up for grabs.  With concern over structures on Wall Street that have fostered sinful ways, excesses, government at this point is working on a new structure for the financial markets, against time, as the financial princes readied to work another week.

 

“How much? To whom? On what terms? When?” Who should get credit this time?  How are the pieces of the financial universe related?

 

Your reading syllabus: 

 

Charles MacKay’s Memoirs of Extraordinary Delusions and the Madness of Crowds

 

Robert Z. Aliber’s The New International Money Game

 

Read Chapter Ten of Charles Kindleberger’s Manias, Panics and Crashes which takes a look at the role of the Federal Reserve in the U.S., as the domestic lenders of last resort. “Kindleberger argues tentatively that ‘a lender of last resort’ (the Federal Reserve) does shorten the business depression that follows the financial crisis.” He also says there is “a presumption . . . that halting a cumulative deflation helps shorten the depression that follows.” One issue that is not addressed in this edition is how such crises may occur more rapidly and with greater amplitude than before due to improved information flows. As a result, it will be more difficult for lenders of last resort to take correct action in a timely way.” 

                   –Don Mitchell

 

This super power that was unchallenged since the end of the Cold War had found a kryptinite on Wall Street that had looked to destroy us from within.  Treasury Secretary Paulson was in search of a lead pipe to contain the 5 investment banks that were for now reduced to two.  We had all been brought to our knees.