What is wrong with the US economy? Part 2

[Astronuc]

Stocks advance amid hope for automaker rescue
http://news.yahoo.com/s/ap/20081212/ap_on_bi_st_ma_re/wall_street

NEW YORK – Wall Street showed further signs of stability Friday, rebounding from an early sell-off to end higher, after the government said it would assist troubled U.S. automakers.

Stocks managed their rebound after the Treasury Department said it was prepared to assist the nation's Big Three automakers. The day's gains left blue chip stocks little changed for the week and gave the tech-heavy Nasdaq composite index a 2 percent advance.

"It's hard to say if this is indeed the beginning of a recovery, but it could be," said Matt King, chief investment officer of Bell Investment Advisors. "It seems like the past few Fridays we've ended the week on a positive note."

Stocks have shown an impressive advance since their mid-November lows and, more important, trading has been more orderly with fewer panicked declines in the face of bad news.
. . . .

So the market is putting along on a hope and prayer?

RE: SEC knew about Madoff and did nothing. wtf!?

From article cited by Greg.

In May 2001, Barron's ran a story that called Madoff's returns into question. Some wondered if Madoff was using information from his market-making business, which trades stocks for financial institutions, to front-run trades in his funds. It would be illegal if true, but investors seemed happier not to know. "Even knowledgeable people can't really tell you what he's doing," one "very satisfied" investor told Barron's.
. . . .
A securities executive by the name of Harry Markopolos first started alerting the S.E.C. to Madoff's suspicious operations in 1999, and continued to press them for years. "Bernie Madoff's returns aren't real and if they are real, then they would almost certainly have been generated by front-running customer order flow from the broker-dealer arm of Madoff Investment Securities," Markopolos wrote to the S.E.C. in November 2005.

One very adept hedge fund investigator advised his clients not to invest with Madoff after he discovered his auditors operated out of a 13-by-18-foot office in Rockland County, according to Bloomberg. This was where books on the $17 billion under management by Madoff were "audited."
. . . .

What is wrong with this picture?

Unbelieveable!

 

[kronon]

Apparently some investors suspected Madoff was doing something illegal, (to explain the good returns), so that's why they invested with him.

They never imagined they themselves were part of a ponzi scam.

 

[fuzzyfelt]

Where'd you get that from? I'd say the last thing the Fed could be called in reaction to the '29 financial panic was, unfortunately, laissez faire. The Fed clamped down hard on the money supply, cut off liquidity.

Sorry it took a while to get back. He says:

Laissez faire is too strong perhaps, but tardy in response certainly, not proactive. They didn't begin reacting until 1931, then as you rightly say had left things go so far that they had to make huge changes. Similarly, in Japan in the 90's there was no significant response for a few years. Here they have been reacting BEFORE the eco numbers are being released.

One other great comment re the citation of Rodgers: 'The market can stay irritated longer than you can stay solvent normally', Keynes.

 

[fuzzyfelt]

Thanks jal and Andre for your responses, too.

I read it also. It seemed a realistic analysis of the problem. But we science geeks have never been too overly concerned with economics.(see Faraday and Tesla: died paupers) Not to say that one of us should not have been watching the chicken coop. But who's going to decide who that is?(Money is so boring when there is science to be done...)

Astro said something to the effect that he has no problem with something as long as it is practiced ethically. I believe the former chairman(Greenspan) said something to the same effect a few weeks ago.

There have been a few mistakes made in the past couple of decades, by both democrats and republicans. Did Fuzzy's hubby have any suggestions as to how to fix this mess with the least amount of fuss and muss?

I've been feverishly pumping money into the system for the last 4 months, trying to reduce my debt load down to zero, such that when the sun again begins to shine, I'll be poised for the greed stampeed.

Kidding!

I'll die a pauper like all good geeks.

If I've transcribed correctly, he says:

The biggest problem is that since the first event (probably the Bear Stearns HF's failure), no one has been able to stop the dominoes falling. Not for want of trying. The bad case scenario is that US consumers stop spending, start saving, all at once. This appears to be happening, sadly. A savings base needs to be rebuilt, but at 0.5% p.a. would be ideal as there would still be room for some GDP growth.

Recession is the final dominoe, and it has pretty much fallen already. 14 months intervention has happened, LEH, AIG, WaMu all went down but shouldn't have. So, if GDP can bounce positively by the second half of 2009, and deflation avoided, and if unemployment is less than 9%, this is the best case to be hoped for.

One thing: economics exists pretty much independant of politics.

 

[mheslep]

Sorry it took a while to get back. He says:

Laissez faire is too strong perhaps, but tardy in response certainly, not proactive. They didn't begin reacting until 1931, then as you rightly say had left things go so far that they had to make huge changes.

No, if as before you are indeed talking about the Federal Reserve:

... moves by Fed/Treasury. Previously, the mistakes they made were to be too laissez faire (eg, 1930s), and not move fast enough or far enough...

then the government was not tardy, my reading is that the Federal Reserve triggered, and later the government at large caused the Great Depression. The Fed, esp. the NY Fed, in 1928 was concerned about the rampant speculation on Wall Street and raised its discount rate, making money more expensive. Later Hoover proposed import tariffs, and they materialized in drastic form from the Congress as the Smoot Hawley Act, which raised tariffs 40 and 60 percent in some cases. These actions collapsed trade, and thence the US economy. Hoover further accelerated the decline by recommending a tax increase in '31.
http://www.econlib.org/library/Enc/GreatDepression.html
Ben Barnanke, Fed Chairman:
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm

If you are changing the topic to government spending, then certainly Roosevelt instituted large spending programs well into the Depression. I am not convinced those spending programs did anything to end, or even lessen, the Depression.

Similarly, in Japan in the 90's there was no significant response for a few years. Here they have been reacting BEFORE the eco numbers are being released...

Japan dramatically increased government spending in the 90's. I'm not aware of any clear evidence that the spending stimulated the Japanese economy as a whole.

 

[mgb_phys]

So Japan's economy is toast because even with 0% interest rates people would rather save than buy stuff they can afford.
The USA's economy is stuffed because even with double digit credit card rates people would rather buy stuff they can't afford than save.

Has anyone thought of a merger?

 

[Astronuc]

Friday, December 19, 2008, 12:11AM ET

4:25 pm : Stocks chopped along in a relatively narrow range until economic bellwether General Electric (GE 15.96, -1.43) had its credit outlook lowered late in the session. The announcement induced selling pressure, which took the stock market to a loss of 3.0% before it finished with a loss of 2.1%.

Shares of General Electric fell to a multiweek low after Standard & Poor's lowered the company's credit outlook to Negative from Stable, which is not the same as an actual downgrade. GE is one of only a handful of companies to carry a coveted AAA rating.. . .

IMO, GE's recover will depend primarily on GE Capital's recovery, and then how well other units do.

http://finance.yahoo.com/marketupdate/update (above will change with each new day)

 

[OmCheeto]

If I've transcribed correctly, he says:

The biggest problem is that since the first event (probably the Bear Stearns HF's failure), no one has been able to stop the dominoes falling. Not for want of trying. The bad case scenario is that US consumers stop spending, start saving, all at once. This appears to be happening, sadly. A savings base needs to be rebuilt, but at 0.5% p.a. would be ideal as there would still be room for some GDP growth.

Recession is the final dominoe, and it has pretty much fallen already. 14 months intervention has happened, LEH, AIG, WaMu all went down but shouldn't have. So, if GDP can bounce positively by the second half of 2009, and deflation avoided, and if unemployment is less than 9%, this is the best case to be hoped for.

One thing: economics exists pretty much independant of politics.

Sorry to be so dense, but does "0.5% p.a." mean "0.5% per annum"?
Seems a bit low. Did he mean 5%?
And does investing in the market count as saving?
Right now I'm investing 4.25% of my gross pay in the market.
I'm also reducing my debt by about 12% per annum. (morgage+c.card)

I'm not looking for investment advice, but I'd like to know the optimal flow of cash to help out the economy.

 

[fuzzyfelt]

Sorry to be so dense, but does "0.5% p.a." mean "0.5% per annum"?
Seems a bit low. Did he mean 5%?
And does investing in the market count as saving?
Right now I'm investing 4.25% of my gross pay in the market.
I'm also reducing my debt by about 12% per annum. (morgage+c.card)

I'm not looking for investment advice, but I'd like to know the optimal flow of cash to help out the economy.

Hi OmCheeto - I will have to get a full definition of the Savings number for you. I did mean 0.5% per annum. The problem (and its not been an issue for about 20 years) is that to save necessarily detracts from growth, as the money isn't going back into the system. I think i am right in remembering that if savings were to rise by 1.0%, then GDP declines by 0.7%. So clearly we don't want that, and that is why the Fed/Tres are doing whatever it takes to make everyone feel that money is so abundant that they shouldn't flip around and become a saver overnight, the economy will hit a wall. Its pretty clear from data to date that Q4 2008 GDP for the US is going to be something like -5 to -8%, you know what, if oil hadnt fallen $100 since July it would be like -15%... these are unheard of levels, kinda frightening. The other thing that's unheard of is the size of the reaction already by Fed/Tres... so its really wait and see. Anyway, to your question - reestablishing the savings of a generation arent going to be easy, the economists want everyone to spend spend spend - problem is that people are becoming uneasy about their jobs and deflation... pay down the debt is a great idea, its degearing and we are all doing it. Money into investments is savings i am sure, and it seems like a really sensible program you are on -- don't buy a new plasma, that's a waste and they will probably get cheaper, buy yourself some GE instead!

 

[jal]

Hi fuzzyfelt!
Should you not add to your analysist that saving are also desireable because the financial system will lever it (10X?).
The ideal situation would be with nobody in debt, with everyone having savings and still having enough income to do purchases.

 

[gravenewworld]

MUST SEE FILM FOR EVERY AMERICAN

Maxed OutBasically a documentary about the abusive practices of creditors, much of which has led to this current economic crisis.

Keep in mind this film was actually made before the current credit crunch which is amazing.

 

[Astronuc]

AP study finds $1.6B went to bailed-out bank execs (last year before the bailout)
http://news.yahoo.com/s/ap/20081221/ap_on_bi_ge/executive_bailouts

. . . .
This year, Goldman will forgo cash and stock bonuses for its seven top-paid executives. They will work for their base salaries of $600,000, the company said. Facing increasing concern by its own shareholders on executive payments, the company described its pay plan last spring as essential to retain and motivate executives "whose efforts and judgments are vital to our continued success, by setting their compensation at appropriate and competitive levels." Goldman spokesman Ed Canaday declined to comment beyond that written report.

I have to question that judgement.

Actually, to be fair to Goldman, they are one of the better managed financial and investment institutions.

_John A. Thain, chief executive officer of Merrill Lynch, topped all corporate bank bosses with $83 million in earnings last year. Thain, a former chief operating officer for Goldman Sachs, took the reins of the company in December 2007, avoiding the blame for a year in which Merrill lost $7.8 billion. Since he began work late in the year, he earned $57,692 in salary, a $15 million signing bonus and an additional $68 million in stock options.

Like Goldman, Merrill got $10 billion from taxpayers on Oct. 28.

. . . .

At Bank of New York Mellon Corp., chief executive Robert P. Kelly's stipend for financial planning services came to $66,748, on top of his $975,000 salary and $7.5 million bonus. His car and driver cost $178,879. Kelly also received $846,000 in relocation expenses, including help selling his home in Pittsburgh and purchasing one in Manhattan, the company said.

Goldman Sachs' tab for leased cars and drivers ran as high as $233,000 per executive. The firm told its shareholders this year that financial counseling and chauffeurs are important in giving executives more time to focus on their jobs.

JPMorgan Chase chairman James Dimon ran up a $211,182 private jet travel tab last year when his family lived in Chicago and he was commuting to New York. The company got $25 billion in bailout funds.

Banks cite security to justify personal use of company aircraft for some executives. But Rep. Brad Sherman, D-Calif., questioned that rationale, saying executives visit many locations more vulnerable than the nation's security-conscious commercial air terminals.

. . . .

The executive compensations seem a wee bit excessive, especially given the dramatic failures of many institutions. Why does a bank executive need a financial planner? Do they not understand finance? If so, why are they managing banks? And why are they compensated so much for jobs done so poorly?

 

[OAQfirst]

And why are they compensated so much for jobs done so poorly?

*raises hand* To fund their various altruistic projects?

Here's the belt in the back:

Banks that have their hands out in Washington this year were handing out multimillion-dollar rewards to their executives last year.

The 116 banks that so far have received taxpayer dollars to boost them through the economic crisis gave their top tier of executives nearly $1.6 billion in salaries, bonuses and other benefits in 2007, an Associated Press analysis found.

That amount, spread among the 600 highest paid bank executives, would cover the bailout money given to 53 of the banks that have shared the $188 billion that Washington has doled out in rescue packages so far.

http://news.yahoo.com/s/ap/20081222/ap_on_bi_ge/executive_bailouts

Every time I look at the deductions in my pay stubs, my teeth clench. I don't know why.

 

[Astronuc]

*raises hand* To fund their various altruistic projects?

Well some billionaires and millionaires, and the financial and investment institutions to have philanthropic foundations/trusts and/or community development programs.

http://www2.goldmansachs.com/citizenship/community-giving/index.html

http://www2.goldmansachs.com/citizenship/10000women/index.html


Even troubled Merrill Lynch has/had a philanthropic program

http://philanthropy.ml.com/index.asp?id=66319_67031


Yet I have to wonder at the 10's of millions of dollars + perks.

 

[Astronuc]

Economic fallout: On the road to ruin in America's RV capital
http://www.mcclatchydc.com/227/story/58131.html

ELKHART, Ind. — On the snow-covered sales lot at the Great Lakes RV Center, owner Rob Reid talked about what life is like as an endangered species.

Throughout the year, Reid has watched eight recreational-vehicle dealerships close their doors, leaving four others and himself in the immediate area to fight for the few customers that still bother to visit.

This year, Reid has sold about 50 fewer vehicles than he did last year, and his gross revenue is down by nearly $400,000. He's had to pour more than $250,000 of his own cash into the business to keep it afloat.

In August, he closed his other sales lot because business was so slow. Over the last two months, Reid has laid off eight service department employees and three salespeople.

Those are troubling developments for any business, but in this northern Indiana town of 53,000, dubbed the "RV capital of the world," it's a downright panic.

According to the city's Web site, one of every four jobs in Elkhart is tied to the service or manufacture of recreational vehicles and component parts. RV manufacturers, suppliers, service centers and related businesses provide more than $1 billion in annual wages for residents in Elkhart and four surrounding counties.

. . . .

Lennar CEO says housing market getting worse, not better
http://www.mcclatchydc.com/100/story/58163.html

The housing market is getting worse, not better, the leader of Miami-based Lennar said Thursday as the homebuilding giant announced its second straight year of billion-dollar losses.

Lennar CEO Stuart Miller said home prices are in ''freefall,'' . . . .

Like other developers, Lennar is trying to navigate an ugly downturn at the root of a broader economic recession, a plunge that has sent Lennar's stock plunging 80 percent in the last two years and put several Florida developers such as WCI Communities into bankruptcy court. Lennar has major operations in Florida and California, the two states hit hardest by the housing downturn.

Lennar's strategy includes hoarding cash -- it had $1.09 billion in reserves as of Nov. 30 -- and establishing a fund aimed at buying distressed residential properties.

The $1.1 billion Lennar lost in its fiscal 2008 is a remarkable reversal of the $1.4 billion in profit Lennar earned in 2005. That year, the height of the housing boom, was the first -- and only -- time the company cracked a billion in profits.

. . . .

Earnings were great in 2005, but tumbled in 2006. The had to have been warning signs in 2006 that there was a major change in play. Intervention in 2006 could have prevented in the current crisis, but then since it wasn't a crisis, there wasn't motivation to intervene.

 

[OAQfirst]

Well some billionaires and millionaires, and the financial and investment institutions to have philanthropic foundations/trusts and/or community development programs.

But why would they bother? Does their overall conduct suggest genuine interests in the well being of others?

I might be digging, but it doesn't appear to be anything other than cover.

 

[Astronuc]

But why would they bother? Does their overall conduct suggest genuine interests in the well being of others?

I might be digging, but it doesn't appear to be anything other than cover.

It's not a cover, although from the outside, one has to wonder. One has to know some of the people to better understand.

 

[Astronuc]

This downturn is purvasive.

Last holiday shopping weekend keeps retailers edgy
http://news.yahoo.com/s/ap/20081222/ap_on_bi_ge/holiday_shopping

CHICAGO – The deals were there and, by most accounts, so were the shoppers. But at the close of the final holiday shopping weekend, consumers confessed they were still nervous about buying.

"This is going to be a poor Christmas," said Dee Dobbins, a 31-year-old from Goldsboro, N.C., who finished her holiday shopping with money she'd received from her recent graduation from North Carolina State University. "At least I had it, because I don't know what I would have done."

From flagship department stores to main street shops, consumers found packed parking lots, massive markdowns and extended hours — in some places, around-the-clock shopping — as merchants hope to salvage one of the worst shopping seasons in decades, brought on by the recession and growing economic uncertainty.

For those willing to spend, the deals abounded.

In Miami, Ana Solis bought T-shirts from the Disney Store featuring Kermit the Frog and Tigger. One shirt — original price $24.99 — was marked down to $7.99 before another 40 percent discount.

. . . .

and

Toyota projects first operating loss since 1941
http://news.yahoo.com/s/ap/20081222/ap_on_bi_ge/as_japan_toyota

NAGOYA, Japan – Toyota Motor Corp. projected its first-ever operating loss since it began such reports, acknowledging Monday that its nine-year stretch of global vehicle-sales growth had stalled.

Crashing auto demand, especially in its key U.S. market, and the profit erosion from a surging yen proved too much for Japan's top automaker, which had been booming on the success of its fuel-efficient models, incluading the Camry sedan and Prius gas-electric hybrid.

Gloom dominated the annual news conference by Toyota's president, who in recent years had outlined ambitious expansion plans. This year, Toyota President Katsuaki Watanabe even refused to give a worldwide vehicle sales goal for 2009.

"The tough times are hitting us far faster, wider and deeper than expected," he told reporters at Toyota's Nagoya office. "This is an unprecedented crisis requiring urgent action."

Watanabe also blamed the strong yen, which has risen to 13-year highs against the dollar to about 90 yen recently.

Toyota lowered its net profit forecast to just 50 billion yen ($555 million) for the year through March 2009 — a tiny fraction of the 1.7 trillion yen it earned the previous fiscal year.

Toyota expects to lose money on an operating basis of 150 billion yen ($1.66 billion) for the fiscal year ending March 2009. Toyota has never reported an operating loss since it began giving such figures in 1941. The only such loss it has had is an internal calculation for the year ending March 1938, a year after the company was founded.

. . . .

Low sales will mean reduced levels of replenishing stocks.

 

[turbo]

The poor economic picture makes our little neighborhood look like a bunch of geniuses. Instead of buying cards and gifts, we do little things for one another. I make hot sauces for one neighbor and took pictures of his granddaughters' Halloween parade. His wife made us a beautiful decorated wreath for our front door, and when his peach trees started splitting under the over-load of fruit, I picked at least 100 lbs and distributed them to family, including my father who loves fresh peaches, but won't splurge on them. I taught one neighbor how to field-dress a deer, and he has given me venison liver, the heart, and packages of steak with the promise of more. I swapped zucchini and winter squash with another neighbor, tested his garden soil for him, and yesterday, he and his wife dropped off a big nicely-wrapped plate of home-made cookies, fruit breads, etc. My wife gets discount coupons for New Balance Athletic Shoes several times a year, and we make sure that the neighbors all get some, especially the ones with growing children. That let's them share my wife's 40% discount on New Balance shoes and clothing, Dunham boots and shoes, PF Flyers, etc at the factory store.

It doesn't cost much to be nice to people, and the things we do for each other can't be bought at Wal-Mart.

 

[Astronuc]

The poor economic picture makes our little neighborhood look like a bunch of geniuses. Instead of buying cards and gifts, we do little things for one another. I make hot sauces for one neighbor and took pictures of his granddaughters' Halloween parade. His wife made us a beautiful decorated wreath for our front door, and when his peach trees started splitting under the over-load of fruit, I picked at least 100 lbs and distributed them to family, including my father who loves fresh peaches, but won't splurge on them. I taught one neighbor how to field-dress a deer, and he has given me venison liver, the heart, and packages of steak with the promise of more. I swapped zucchini and winter squash with another neighbor, tested his garden soil for him, and yesterday, he and his wife dropped off a big nicely-wrapped plate of home-made cookies, fruit breads, etc. My wife gets discount coupons for New Balance Athletic Shoes several times a year, and we make sure that the neighbors all get some, especially the ones with growing children. That let's them share my wife's 40% discount on New Balance shoes and clothing, Dunham boots and shoes, PF Flyers, etc at the factory store.

It doesn't cost much to be nice to people, and the things we do for each other can't be bought at Wal-Mart.

I heard a commentary on the radio that indicated people were re-evaluating their spending behavior, i.e. back to the more conservative habits of our parents or grandparents who live through or just after the Great Depression of the 1930's.


Meanwhile -

White House Philosophy Stoked Mortgage Bonfire
http://www.nytimes.com/2008/12/21/business/21admin.html

“We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.” — President Bush, Oct. 15, 2002

WASHINGTON — The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, “scared the hell out of everybody.”

It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Mr. Bush had agreed to pump $85 billion into the failing insurance giant American International Group.

The president listened as Ben S. Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money.

Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history.

Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.

“How,” he wondered aloud, “did we get here?”

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.

But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

“There is no question we did not recognize the severity of the problems,” said Al Hubbard, Mr. Bush’s former chief economics adviser, who left the White House in December 2007. “Had we, we would have attacked them.”

. . . .

It also took a Congress who didn't provide oversight.

 

[jal]

The number of officials that are saying, "Could have been or could be worst than the depression if we had done nothing." Is an idication that they are scared sh..less and will try anything to avoid a situation worst than the depression.
They are not saying everything that they know.

The Capitalist Finantial has finally broken down. It has to be rescued by the socialist infrastructure.

There is a new day dawning. Let's hope that the "fixes" will work before we hit bottom.
From my investments we are half way to the bottom.
jal

ps. What will happen if California goes bankrupt? Will the IMF come in and impose a solution?
http://www.news10.net/news/local/story.aspx?storyid=52277&provider=top
California Broke in 70 Days, Warns Controller

 

[mheslep]

I heard a commentary on the radio that indicated people were re-evaluating their spending behavior, i.e. back to the more conservative habits of our parents or grandparents who live through or just after the Great Depression of the 1930's.


Meanwhile -

White House Philosophy Stoked Mortgage Bonfire
http://www.nytimes.com/2008/12/21/business/21admin.html

It also took a Congress who didn't provide oversight.

Yes, would that the NY times write a similar piece holding their darlings Rep. Frank and Sen. Dodd to account.

 

[mheslep]

If people spent the money. The evidence is they did not, instead they just banked it, or payed down debt. That is, the stimulus checks mailed last May had no effect on GDP via the consumption contribution. See the attached BEA sourced graph on personal consumption vs disposable income. Income clearly spiked up w/ the govt. checks, consumption went limp.
http://online.wsj.com/article/SB122757149157954723.html

What is the definition of "personal consumption" and where did the money go? Even if people used the money to pay down credit card debt or pay (or get ahead of) their other bills, it is still money going out the door.

What else could account for the 6 months of positive GDP growth without income growth?

As a follow up, here is some research by a Kellog school economist, Parker, who checked directly on the spending habits of ~34,000 people who received the rebates in manner not possible before. While acknowledging that the aggregate, economy wide, spending data remained flat, his data shows that at least the people who received rebates actually did increase their personal spending by 3.5%; his conclusion then is that the aggregate numbers would have been even worse without the stimulus. I am skeptical, but the data is what it is.

The Impact of the 2008 Tax Rebates on Consumer Spending
A first look at the evidence
by Christian Broda And Jonathan A. Parker
http://insight.kellogg.northwestern.edu/index.php/Kellogg/article/the_impact_of_the_2008_tax_rebates_on_consumer_spending

 

[Astronuc]

A Crack in The System
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/29/AR2008122902670.html

By 1998, AIG Financial Products had made hundreds of millions of dollars and had captured Wall Street's attention with its precise, finely balanced system for managing risk. Then it subtly turned in a dangerous direction.

For months, several executives at AIG Financial Products had pulled apart the data, looking for flaws in the logic. In phone calls and e-mails, at meetings and on their trading floor, they kept asking themselves in early 1998: Could this be right? What are we missing?

Their debate centered on a consultant's computer model and a new kind of contract known as a credit-default swap. For a fee, the firm essentially would insure a company's corporate debt in case of default. The model showed that these swaps could be a moneymaker for the decade-old firm and its parent, insurance giant AIG, with a 99.85 percent chance of never having to pay out.

The computer model was based on years of historical data about the ups and downs of corporate debt, essentially the bonds that corporations sell to finance their operations. As AIG's top executives and Tom Savage, the 48-year-old Financial Products president, understood the model's projections, the U.S. economy would have to disintegrate into a full-blown depression to trigger the succession of events that would require Financial Products to cover defaults.

If that happened, the holders of swaps would almost certainly be wiped out, so how could they even collect? Financial Products would receive millions of dollars in fees for taking on infinitesimal risk.

The firm's chief operating officer, Joseph Cassano, had studied the model and urged Savage to give the swaps a green light.

"The models suggested that the risk was so remote that the fees were almost free money," Savage said in a recent interview. "Just put it on your books and enjoy the money."

Initially, the credit-default swaps business would amount to a fraction of the half-billion dollars in Financial Products' revenue that year. It didn't seem to them like a major decision and certainly not a turning point.

They were wrong. The firm's entry into credit-default swaps would evolve into insuring more volatile forms of debt, including the mortgage-backed securities that helped fuel the real estate boom now gone bust. It would expose AIG to more than $500 billion in liabilities and entangle dozens of financial institutions on Wall Street and around the world.

When the housing market tanked, a statistically improbable chain of events began to unfold. Provisions in the contracts kicked in, spurring collateral calls on swaps linked to $80 billion in questionable assets, requiring the firm and AIG to come up with billions of dollars in cash. They scrambled for almost a year to stave off the calls, but there were too many deals with too many counterparties.

In September, the Bush administration concluded that AIG's position at the nexus of the deals meant that it could not be allowed to fail, triggering the most expensive rescue of a private company in U.S. history. So far, the government has invested $152 billion in its efforts to save AIG. Federal investigators are sifting the carnage.

. . . .
But in the end, neither the buyers nor sellers truly understood the enormous risks they were creating. Anyone could sell such a swap, and anyone could buy one, even if he had no stake in the transaction. Some buyers used them to bet against failing companies, prompting a debate among state regulators about whether this type of swap was a form of gambling.
. . . .

Gambling, not investing.

It seems the 'seeds of the destruction' for the US and global economies were sown in 1998, with the development of credit-defalt swaps (CDS's) and derivatives such as collaterized debt obligations (CDO's).

Brooksley Born, the 57-year-old head of the Commodity Futures Trading Commission, argued forcefully for a public debate about whether derivatives posed an unknown and growing risk to the world's financial system. She testified at least 17 times before Congress on the subject.

Her campaign gained no traction. More powerful regulators, including Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin and Securities and Exchange Commission Chairman Arthur Levitt, opposed Born. They and others said her agency had no authority over derivatives and that her call for action was casting a "shadow of regulatory uncertainty over an otherwise thriving market."

from latter in the cited article. Basically, Greenspan, Rubin and Levitt didn't do their job, which is to protect the economy.

 

[mheslep]

A Crack in The System
http://www.washingtonpost.com/wp-dyn/content/article/2008/12/29/AR2008122902670.html
Gambling, not investing.

How so? Do you mean that investing should have no risk?

It seems the 'seeds of the destruction' for the US and global economies were sown in 1998, with the development of credit-defalt swaps (CDS's) and derivatives such as collaterized debt obligations (CDO's). from latter in the cited article. ...

Originating the entire credit panic with the creation of CDSs and CDOs is a bold statement, and per my reading can not be inferred from the referenced articles. Meanwhile, I'll make my own, as I've said before: no government backed Fannie or Freddie and this credit crisis never happens. All of the other bad bets, insurance, etc, flows from them.

BTW, I've also been following most of the WP series on this and I have little use for it. In the entire series, they make no mention of Freddie or Fannie (outside of the graphics) in what must be a 30,000 word series. None. That's simply absurd. Oh there's plenty of column on Country Wide and the like, but nothing on Sen. Dodd or Rep Frank. Of course, a WP reporter might lose their cherished insider and returned phone call status with the current head of the House Financial Services chairman if they credited either sacred cow with partial responsibility.

 

[mgb_phys]

How so? Do you mean that investing should have no risk?

In gambling you normally know the rules of the game and can work out the odds in advance
If the company is reputable you also know the game is fair and honest.

Investing on the other hand ...

 

[Astronuc]

How so? Do you mean that investing should have no risk?

They gambled that there would be no adverse economic conditions, and they bet the house (at AIG, and perhaps at Bear Stearns and Lehman).

Originating the entire credit panic with the creation of CDSs and CDOs is a bold statement, . . .

I certainly didn't make such a statement.

BTW, I've also been following most of the WP series on this and I have little use for it. In the entire series, they make no mention of Freddie or Fannie (outside of the graphics) in what must be a 30,000 word series. None. That's simply absurd. Oh there's plenty of column on Country Wide and the like, but nothing on Sen. Dodd or Rep Frank. Of course, a WP reporter might lose their cherished insider and returned phone call status with the current head of the House Financial Services chairman if they credited either sacred cow with partial responsibility.

But then the republicans (Hastert, Delay, et al) controlled Congress, and the democrats were more or less shutout of the process, until 2007.

How much of the problem was Freddie Mac or Fannie Mae? This article suggests that Fannie Mae and Freddie Mac were only a small part of the problem, and that sub-prime mortgages were primarily in the hands of private or non-government lenders.

In 2003, the government-sponsored enterprises were the source of 76 percent of the mortgage-backed and asset-backed issuances; "private label" issues by major Wall Street firms accounted for the remaining 24 percent, according to Inside Mortgage Finance. By mid-2006, the government-sponsored enterprise share had fallen to 43 percent, with private label issues accounting for 57 percent. Among the large private label issuers were well-known firms-such as Wells Fargo, Lehman Brothers, Bear Stearns, JPMorgan, Goldman Sachs, and Bank of America-as well as several major lenders to high-risk subprime borrowers, such as Indymac, WAMU, and Countrywide.

Along with this radical, and rapid, shift in market shares came a similar change in underwriting standards. Whereas Fannie Mae and Freddie Mac were almost entirely "prime" mortgage lenders, the private label share grew in large part through the origination and securitization of high-risk subprime mortgages as well as "Alt-A" mortgages, which were made to borrowers who were more creditworthy than subprime customers but presented more risks than prime borrowers (see table).
. . . .

http://www.globalpolicy.org/socecon/crisis/tradedeficit/2007/12tentacles.htm

 

[mheslep]

...

I certainly didn't make such a statement...

I was referring to this:

It seems the 'seeds of the destruction' for the US and global economies were sown in 1998, with the development of credit-defalt swaps (CDS's) and derivatives such as collaterized debt obligations (CDO

 

[mheslep]

They gambled that there would be no adverse economic conditions, and they bet the house (at AIG, and perhaps at Bear Stearns and Lehman).

Agreed.

But then the republicans (Hastert, Delay, et al) controlled Congress, and the democrats were more or less shutout of the process, until 2007...

The Democrats had the majority in the Senate from '01 to '03, and in the minority they always had enough votes to block cloture. Fannie and Freddie have clearly been championed by the Democratic side. In the House, Rep. Frank has been the loud champion of Freddie and Fannie for years. One doesn't get shut out of the political process whenever there are votes to be traded, even in the minority. The Republicans draw responsibility for not doing enough to oppose them on the issue.

 

[mheslep]

...How much of the problem was Freddie Mac or Fannie Mae? This article suggests that Fannie Mae and Freddie Mac were only a small part of the problem, and that sub-prime mortgages were primarily in the hands of private or non-government lenders.

http://www.globalpolicy.org/socecon/crisis/tradedeficit/2007/12tentacles.htm

In 2003, the government-sponsored enterprises were the source of 76 percent of the mortgage-backed and asset-backed issuances; "private label" issues by major Wall Street firms accounted for the remaining 24 percent, according to Inside Mortgage Finance.

To my mind, there was the creation of the problem right there. The ball was already rolling down hill at that point, with the GSE's holding nearly $5 trillion in mortgages. Per the Econobrowser authors (Hamilton Prof Economics UCSD, Chinn Prof PA and Economics UWM):

private institutions reasoned that, because the GSEs had developed such a huge stake in real estate prices, and because they were surely too big to fail, the Federal Reserve would be forced to adopt a sufficiently inflationary policy so as to keep the GSEs solvent, which would ensure that the historical assumptions about real estate prices and default rates on which the models used to price these instruments were based would not prove to be too far off.

http://www.econbrowser.com/archives/2008/07/did_fannie_and.html

By mid-2006, the government-sponsored enterprise share had fallen to 43 percent, with private label issues accounting for 57 percent. Among the large private label issuers were well-known firms-such as Wells Fargo, Lehman Brothers, Bear Stearns, JPMorgan, Goldman Sachs, and Bank of America-as well as several major lenders to high-risk subprime borrowers, such as Indymac, WAMU, and Countrywide.

Along with this radical, and rapid, shift in market shares came a similar change in underwriting standards. Whereas Fannie Mae and Freddie Mac were almost entirely "prime" mortgage lenders, the private label share grew in large part through the origination and securitization of high-risk subprime mortgages as well as "Alt-A" mortgages, which were made to borrowers who were more creditworthy than subprime customers but presented more risks than prime borrowers (see)

This last part I take issue with. First Freddie and Fannie started taking mortgage market share back from the private sector after the private side peaked in early 2006. They aggressively worked back into subprime, and thus even if they didn't dominate the market they labeled it, by their presence in it, as bullet proof:

Fannie Mae aimed to benefit from subprime loans and expand the market for them -- and hoped to pass much of the risk on to others, documents show. Along with subprime loans, which were typically issued to borrowers with blemished credit, the company targeted so-called Alt-A loans, which were often made with no verification of the borrower's income.

"By entering new markets -- especially Alt-A and subprime -- and guaranteeing more of our customers' products at market prices, we met our goal of increasing market share from 22 to 25 percent," Mudd wrote in a 2006 year-end report to the Fannie Mae board dated Jan. 3, 2007.

In other internal documents, there was a common refrain: One of Fannie Mae's objectives for 2006 was to "increase our penetration into subprime."

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/18/AR2008081802111.html

Fred and Fannie further contributed by blurring of the lines between prime and subprime by instituting 'no-doc' and liar loans. I've yet to see any evidence that they really know just how 'prime' their so called prime portfolio really is, given the absence of documenation.

 

[edward]

Fannie and Freddie did it. No, not at all.

Private sector loans, not Fannie or Freddie, triggered crisis


Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.

Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.

Federal Reserve Board data show that:

More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.


Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.


Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics.

The "turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for U.S. subprime mortgages, beginning in late 2004 and extending into 2007," the President's Working Group on Financial Markets reported Friday.

http://www.mcclatchydc.com/251/story/53802.html

And the standards were lowered by the ratings industry in order to keep their market share.

Credit rating agencies put the global financial system at risk because they had to be lapdogs, not watchdogs, to survive, a top CEO testified Wednesday.
The three major agencies -- Moody's, Standard & Poor's and Fitch -- were caught in a race to bottom, forced to lower their standards in an attempt to maintain their market share, said Raymond McDaniel, chief executive officer of Moody's, who testified on Capitol Hill on Wednesday.

"We drank the 'Kool-Aid, McDaniel wrote in an internal memo released Wednesday.
That race to the bottom was very lucrative in the short-run for the companies, but disastrous for the global economy in the long haul, said Rep. Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee. Waxman said revenues at the three ratings agencies doubled between 2002 and 2007 to $6 billion, while Moody's had the highest profit margin of any company in the S&P 500 for five years running.

The three agencies rate financial securities on the risk that they won't be paid off.

Between 2002 and 2007, the agencies rated a flood of mortgage-related securities issued by Wall Street firms, giving many of the securities a coveted AAA rating at the time, only to downgrade most of them as house prices tanked and defaults spiked. The subsequent collapse in the value of those securities has taken the global financial system to the "brink of the abyss," in the words of the head of the IMF.

http://www.marketwatch.com/news/sto...B5EE7C1829D2}&print=true&dist=printMidSection

 

[mgb_phys]

Credit rating agencies put the global financial system at risk because they had to be lapdogs, not watchdogs, to survive, a top CEO testified Wednesday.

Is this just looking for someone else to blame?
Did the banks really do due diligence in checking the credit rating of risks or did they know the ratings were junk but just wanted a rubber stamp to wave at clients, auditors and government regulators ?

 

[Proton Soup]

How so? Do you mean that investing should have no risk?

it was gambling. they knew it was gambling. the guys running the casino even got congress to pass a law making it exempt from gaming laws. i take this as proof of intent.

http://static.uspirg.org/consumer/archives/2008/10/60_minutes_on_c.html
http://static.uspirg.org/consumer/archives/2008/10/swaps_and_deriv.html

now, we need to figure out a way to put Phil Gramm in prison. and not Club Fed, but "pound me in the ***" prison.

 

[edward]

Is this just looking for someone else to blame?
Did the banks really do due diligence in checking the credit rating of risks or did they know the ratings were junk but just wanted a rubber stamp to wave at clients, auditors and government regulators ?

As the man said : "We drank the Kool Aid" I would Imagine that Fannie and Freddie had their own brand of Kool Aid. They definitely had an involvement in this. But I wouldn't label them as the prime suspect.

 

[mheslep]

Fannie and Freddie did it. No, not at all.


http://www.mcclatchydc.com/251/story/53802.html

We've been there on this McClatchy piece before in this thread.
https://www.physicsforums.com/showpost.php?p=1911558&postcount=528
Why would you make a 'not at all' statement given eagerness of Fannie officers regarding sub-prime loans displayed in the Washington Post article sited above? The McClatchy piece is seriously flawed. First, the single year they mention happened to be the peak year for private, non-GSE mortgages. Before that Fannie was the mortgage leader, and after that in 2007 Fannie took market share back from the private sector. Also see the direct quotes from Fed Chairmen Bernanke and Greenspan warning about the GSEs years ago.
Other GSE culpability posts:
https://www.physicsforums.com/showpost.php?p=1895520&postcount=105
https://www.physicsforums.com/showpost.php?p=1918616&postcount=611