News What is wrong with the US economy? Part 2

[mheslep]

I also heard most of the Michael Greenburger interview. He clarified the reason for the AIG bailout: AIG has acted as a hedge by insuring mortgage and other securities against default around the world, and that is a major reason they're in trouble. The flip side to this is that the firms covered by AIG, which with good insurance are not really in trouble, become in trouble if AIG can no longer backstop. Greenburger also said he had advised both of then Treasury Secretaries Reich and Ruben of the over leverage problem, that the dept instruments needed more capital reserve requirements, neither were persuaded.

Regards McCain's role in oversight of the lead up to the sub-prime problem, look up the "http://www.govtrack.us/congress/bill.xpd?bill=s109-190&tab=summary"".

Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were "illusions deliberately and systematically created" by the company's senior management, which resulted in a $10.6 billion accounting scandal.
...
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.

http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190#sMonofilemx003Ammx002Fmmx002Fmmx002Fmhomemx002Fmgovtrackmx002Fmdatamx002Fmusmx002Fm109mx002Fmcrmx002Fms20060525-16.xmlElementm0m0m0m

While this from Rep Barney Frank:

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63&sec=&spon=&pagewanted=print
The bill was killed.

Finally note that the CEO of Fannie during the period that prompted the bill and McCain's statement about gross malfeasance was http://www.businessweek.com/magazine/content/05_02/b3915646.htm" . Raines previously worked in the Clinton Whitehouse an is now a prominent economic adviser to Sen Obama.

 

[Gokul43201]

Regards McCain's role in oversight of the lead up to the sub-prime problem, look up the "http://www.govtrack.us/congress/bill.xpd?bill=s109-190&tab=summary"".

http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190#sMonofilemx003Ammx002Fmmx002Fmmx002Fmhomemx002Fmgovtrackmx002Fmdatamx002Fmusmx002Fm109mx002Fmcrmx002Fms20060525-16.xmlElementm0m0m0m

That's odd. This, from an interview he gave in 07 to the Keene (NH) Sentinel.

Q: “Well the dimension of this problem may be surprising to a lot of people, but to many people, to many others there were feelings that there was something amiss, something was going too fast, something was a little too hot. Going back several years. Were you one of them? Or, I mean you’re a busy guy, you’re looking at a lot of things, maybe subprime mortgages wasn’t something you focused on every day. Were you surprised?

McCain: “Yeah. And I was surprised at the dot-com collapse and I was surprised at other times in our history. I don’t know if surprised is the word, but...

Q: “S&Ls?”

McCain: “I don’t -- what did you say?”

Q: “The S&Ls."

McCain: "Yeah, the S&Ls."

Q: "Is this bigger than that?

McCain: “I don’t know the dimensions of this. It’s hard to know what the dimensions are. As I say, I never thought I’d pick up the paper and see a city in Norway is somehow dramatically impacted by it. When I say ‘surprised’ I’m not surprised when in capitalist systems that there’s greed and excess. I think it was Teddy Roosevelt who said ‘unfettered capitalism leads to corruption’ or something like that, that people have disputed for years.

“But so, in this whole new derivative stuff, and SIBs and all of this kind of new ways of packaging mortgages together and all that is something that frankly I don’t know a lot about.

"But I do rely on a lot of smart people that I have that are both in my employ and acquaintances of mine. And most of them did not anticipate this. Most of them, I mean I can find some that did. But, a guy that’s on my staff named Doug Holtz-Eakin, who was once the head of the Office of Management and Budget, said that there was nervousness out there. There’s nervousness. There was nervousness that we had such a long period of prosperity without a downturn because of the history of our economy. But I don’t know of hardly anybody, with the exception of a handful, that said ‘wait a minute, this thing is getting completely out of hand and is overheating.'

"So, I’d like to tell you that I did anticipate it, but I have to give you straight talk, I did not.”

http://www.nhelects.com/NHPrimaryVideos.asp?MultiID=77&HTitle=VLTitle

 

[mheslep]

That's odd. This, from an interview he gave in 07 to the Keene (NH) Sentinel.http://www.nhelects.com/NHPrimaryVideos.asp?MultiID=77&HTitle=VLTitle

'It' in that conversation appears to be all the dimensions of the sub-prime problem as of that interview, and McCain rightly does not take credit for foreseeing the scope of that. McCain's co-sponsored S 190 just addressed Freddie/Fannie for which there had been frequent calls for reform for some time including Greenspan[1], but most loudly from the WSJ editorial page starting in 2001.

[1]

In February 2005, the House Financial Services Committee heard testimony from Chairman Greenspan on the condition of the economy. After his prepared testimony, in response to a question about the GSEs' portfolios, Greenspan noted, "We have found no reasonable basis for that portfolio above very minimum needs." He then proposed "a $100 billion, $200 billion--whatever the number might turn out to be--limit on the size of the aggregate portfolios of those institutions--and the reason I say that is there are certain purposes which I can see in the holding of mortgages which might be helpful in a number of different areas. But $900 billion for Fannie and somewhat less, obviously, for Freddie, I don't see the purpose of it." Greenspan then articulated his reasons for limiting the GSEs' portfolios: "If [Fannie and Freddie] continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road." He added, "Enabling these institutions to increase in size--and they will, once the crisis, in their judgment, passes--we are placing the total financial system of the future at a substantial risk."

http://www.aei.org/publications/pubID.22514/pub_detail.asp
http://online.wsj.com/article/SB121677050160675397.html

 

[russ_watters]

In addition to the nearly $9 trillion federal debt (from chronic deficits), the federal government has assumed another $5 trillion or so debt from Fannie Mae and Freddie Mac.

You are equating two things that are not equal. The $9 trillion federal budget debt is debt: money spent that the government does not have, but spent via the government getting loans This money is already gone. And it's the worse kind of debt: debt with no collateral.

The $5 trillion is credit. It is money loaned by Fannie and Freddie. But this isn't credit card debt - it has collateral. $5 trillion in loans backed by somewhere around $5 trillion in real estate. The potential exposure here (ie, assuming every single home owner in America walked out on their mortgage) is nowhere near $5 trillion. It's off by at least an order of magnitude, probably more like two.

We discussed the fact that these exposure numbers the media likes to throw around are bogus in the other thread. Shock value only.

 

[russ_watters]

You can calculate the real potential for loss by taking the value of the loans, multilplying by the increase in foreclosure rate, and multiplying by loss from the sale of the homes.

Googling, I find that the foreclosure rate is about 0.2% per month and that is roughly double what it usually is. Now assuming the trend covers 5 years of bad policy, a number equal to about 6% of current mortgages could fail during this crisis. And let's say the average foreclosure sale loses 25% of the value of the mortgage (I'll look, but that will be tough to find...). That would make the loss $75 billion.

 

[Astronuc]

You are equating two things that are not equal. The $9 trillion federal budget debt is debt: money spent that the government does not have, but spent via the government getting loans This money is already gone. And it's the worse kind of debt: debt with no collateral.

The $5 trillion is credit. It is money loaned by Fannie and Freddie. But this isn't credit card debt - it has collateral. $5 trillion in loans backed by somewhere around $5 trillion in real estate. The potential exposure here (ie, assuming every single home owner in America walked out on their mortgage) is nowhere near $5 trillion. It's off by at least an order of magnitude, probably more like two.

We discussed the fact that these exposure numbers the media likes to throw around are bogus in the other thread. Shock value only.

You're right Russ, I should have been careful and represented the $5 trillion in mortgages as potential obligations, not debt. In theory, over time, Freddie Mac and Fannie Mae will recoup that money. I was reflecting on the government so deeply in debt, and then backing the mortgages, essentially.

As for the $5 trillion, given the housing prices have dropped about 20%, it may be that the value of collateral (the real estate) is less than that.

 

[Astronuc]

The futures on the US exchanges are pointing up this morning. There appear to be bargains.

Why the government helped AIG.
http://marketplace.publicradio.org/display/web/2008/09/17/aig

It's basically, an $85 billion bridge loan from the federal government. In exchange for that, the federal government will get warrants, pieces of paper that say, if you don't pay this loan back, AIG, in two years, we'll take over up to about 80 percent of the company.

So if AIG doesn't pay the loan back in 2 years, the government can take 80% of the company. Based on that, now is the time to buy AIG at about $2/share. It should recover once things settle down, especially when they sell off some assets.

WaMu and Morgan Stanley are in talks with Citigroup and Wachovia, respectively, to merge.

 

[Astronuc]

Kraft Foods to replace AIG on Dow Jones Industrial Average.

AIG is up this morning.

Well AIG has been beaten down and Kraft Foods is a reflection of the consumer market.

Apparently WaMu is talking to institutions other than Citibank.


Does McCain or Obama get it?

Commentary: Next president should keep Paulson, end bailouts

NEW YORK (MarketWatch) -- To borrow a line, it's not that I think Barack Obama and John McCain don't care about what's happening on Wall Street. I think they just don't get it.

Or, maybe they do get it but are unwilling to talk about what's really a complicated problem that calls for a solution requiring everyone to pitch in.

Instead both candidates have offered "blame game" rhetoric on the stump and little more in the form of written policy.

Listen to the Democrat talk about Wall Street, and you'll hear what the Republican thinks and be told that the crisis is the Republican's fault. See full story.

Listen to the Republican talk, and you'll hear him call the economy "fundamentally sound," blame Wall Street's woes on "unbridled corruption and greed" and propose the formation of a commission.

Sorry, guys, but how about a plan?

Yeah - how about a solution? All I hear is both sides talking about the other guy and why his plan will fail. I'm not hearing anything credible that indicates a solution.

I have heard that foreign investors are looking rather unsure to the point of pulling capital out of the US. Not that there is really any better place to put it.

 

[Alfi]

Not that there is really any better place to put it.

Canada.




:)

 

[Astronuc]

This mornings rally mostly faded after a brief and partial recovery from yesterday's rout and after Fed injects $180 billion into the global financial system. Another volatile day on the stock markets.

On Monday Sept. 22, Kraft Foods Inc. will be added to the Dow Jones Industrial Average, replacing troubled insurance giant American International Group, which has lost 96% of its value this year, mostly in the past week!

Our products are present in more than 99% of U.S. households, so it's only natural that we are now present in the cupboard of leading stocks in the Dow Jones Index," the company said in a written statement.

The addition of Kraft, the world's second-biggest packaged food and beverage maker, now leaves the battered blue-chip index under-weighted in financial stocks.

 

[Gokul43201]

Stocks are soaring. Dow is up by 400 points - apparently on news of a rescue plan:

[BRIEFING.COM] The stock market surges near session highs as a CNBC reporter reports the government may be planning to to solve the current financial termoil using the a method similar to the 1980s savings and loan crisis.

CNBC's Gasparino reports his Wall Street sources say that Treasury Secretary Paulson is talking about a Resolution Trust Corporation-type solution to the current crisis. The RTC was created during the savings and loan crisis of the 80s.

http://news.moneycentral.msn.com/briefing/StockTicker.aspx

 

[mheslep]

Good move if its true. Several wise men have been recommending another RTC.

 

[Astronuc]

Good move if its true. Several wise men have been recommending another RTC.

But it looks like the current set of business managers didn't learn from those who trashed the S&L business. I hope Paulson plans on some tough terms for assuming the bad debt of various companies, such as forfeiting bonuses, limits on management compensation, and/or perhaps some portion of the profits or dividends are paid to the treasury. Otherwise, the government rewards those who engage in irresponsible or reckless behavior. Gamblers do not need to be rescued. The people who money they took do.

 

[Art]

I see the UK FSA agrees with me

FSA clamps down on short-selling

The City regulator has announced restrictions on short-selling, whereby traders bet on share prices falling, in a bid to tackle market instability.

The Financial Services Authority (FSA) is clamping down on the practice that some think contributed to the sharp falls in HBOS shares in recent days.

Earlier on Thursday Lloyds TSB sealed a deal to buy HBOS for £12.2bn.

The FSA's clampdown means investors will not be allowed to take new short positions or add to existing ones.

The rule is effective from midnight (2300 GMT) on Thursday September 18.

The restrictions, which will be in force until 16 January 2009, will be reviewed after 30 days.

http://news.bbc.co.uk/2/hi/business/7624012.stm

I wonder will the US follow suit??

 

[OmCheeto]

Sorry to jump in so late. But I find economics to be about as incomprehensible as human beings.

Are we going to be one of the red countries soon?

http://upload.wikimedia.org/wikipedia/commons/0/03/GDP_PPP_per_capita_IMF.png

 

[Art]

The SEC has also now banned short selling in 799 financial institutions so watch the financial stocks rocket when the market opens as those short sellers, who didn't see this coming, try desperately to cover their positions

http://biz.thestar.com.my/news/story.asp?file=/2008/9/19/business/20080919192123&sec=business

It'a a pity this action wasn't taken sooner but better late than never. This will give the financial institutions some breathing space to sort themselves out calmly and so avoid being forced to the wall by predatory speculators.

The SEC are also investigating who exactly were the main players attacking the banks. It will be interesting to see the results. I wouldn't be surprised to find some financial institutions have been indulging in a little fratricide.

 

[Astronuc]

The SEC are also investigating who exactly were the main players attacking the banks. It will be interesting to see the results. I wouldn't be surprised to find some banks were indulging in a little fratricide.

In some cases, it might have been investment firms which are now looking to be bought by or merge with the banks.

 

[Astronuc]

Vast Bailout by U.S. Proposed in Bid to Stem Financial Crisis
http://www.nytimes.com/2008/09/19/business/19fed.html

Socialism for the wealthy and corporations! Can't assist the poor or distressed, but the government can through billions at those who gamble with their money.

I agree with McCain that the US taxpayer should not bailout those who engage in irresponsible or reckless financial practices. But McCain made a comment that the Fed/Treasury should get back to monetary policy and supporting the dollar. Clearly McCain doesn't get it with respect to the regulatory function of government. It's the bad business practices (among other things) that have undermined the US economy and the dollar. It is the lack of fiduciary responsbility that has brought on the current crisis.

While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen.

Why is the government buying? OK, it is at deep discounts.

I hope the government plans on a thorough and rigorous audit. There are many ill-gotten gains out there, and those who unjustifiably received huge bonuses and benefits should be required to return them.

 

[Jimmy Snyder]

The SEC has also now banned short selling in 799 financial institutions so watch the financial stocks rocket when the market opens as those short sellers, who didn't see this coming, try desperately to cover their positions.

I didn't see anything about covering in the article. As I understand it, there is no requirement to cover existing shorts, just a prohibition against opening new short positions. Am I wrong about that?

 

[Art]

I didn't see anything about covering in the article. As I understand it, there is no requirement to cover existing shorts, just a prohibition against opening new short positions. Am I wrong about that?

No requirement to cover positions but financial suicide if you don't; as with the downward pressure relieved, stocks will rise, leading to losses and the danger of shorting stocks is your losses are limitless. At the moment for example Morgan Stanley are up 25% and Goldman Sachs up 18%: not so good for someone betting on the stock price falling.

 

[OmCheeto]

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/18/AR2008091803733.html
Associated Press
Friday, September 19, 2008
The House yesterday approved legislation aimed at curbing speculation in oil and other commodity markets, saying federal regulators don't have the tools or manpower to track trading abuses.

...

The White House said in advance of the House vote that President Bush is likely to veto the bill if it reaches his desk.

Has everyone but Bush figured out that maybe bad dogs should be kept on short leashes?

 

[nuby]

How much inflation will "injecting" billions of dollars into the economy cause?

 

[Art]

How much inflation will "injecting" billions of dollars into the economy cause?

That depends a lot on where the extra liquidity ends up.

Typically it gets soaked up by property causing house price inflation but it was excess liquidity that caused the housing boom which started the current mess in the first place so it's hard to imagine folk jumping straight back into that again.

If it ends up leading a consumer spending boom then inflation will rise.

Perhaps the capitalist model is fundamentally flawed? It appears to share a lot of attributes with pyramid marketing schemes which eventually always topple.

 

[nuby]

What does "injecting" money into the economy really mean anyway? Is the government just giving money to the investment firms/banks for nothing (or very little)? It seems they did that with AIG... 79 percent stake for 8 times their market cap.
Seems to me this is about as extreme as "Trickle Down" economics can get. The little guys are hurting financially but the government is shoveling billions into the hands of the ultra wealthy as fast as they can.

Doesn't this seem wrong?The sad irony of this is... If you ask the majority of (middle class) Republicans which political party gives money away for nothing.. They'll say Democrats.

 

[edward]

It looks like we will be seeing a new and larger version of the Resolution Trust Corporation of the 90's.

While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen.

http://www.nytimes.com/2008/09/19/business/19fed.html?_r=1
&ref=worldbusiness&oref=slogin

Why is it fair to the taxpayers for the government to buy out just the distressed mortgages and leave the banks with the good paper?

We haven't hit the bottom of the mortgage crisis yet. There are still a lot of mortgages that are going to fall under the distressed column.

There must be an end point in sight, such as a limit that saves the banks without drowning the taxpayers.

 

[Astronuc]

The other day, gold jumped about $87/oz as investors fled equities and bonds in favor of gold.

NEW YORK (MarketWatch) -- Gold futures plummeted Friday as speculation that a Washington-engineered rescue plan could avert financial crisis reduced demand for gold as an investment haven.

Gold for December delivery closed down $32.30, or 3.6%, at $864.70 on the Comex division of the New York Mercantile Exchange. The benchmark contract fell as much as $68.50 an ounce, or 7.6%, in electronic trading overnight, its biggest percentage drop in more than 25 years.

This is ridiculous.

This kind of activity is not about generating wealth as much as it is transfer of wealth. This just adds to the cost of living for all those who can't afford to gamble in the financial industry.

 

[LowlyPion]

The other day, gold jumped about $87/oz as investors fled equities and bonds in favor of gold.

This is ridiculous.

This kind of activity is not about generating wealth as much as it is transfer of wealth. This just adds to the cost of living for all those who can't afford to gamble in the financial industry.

That is the free market and that's not all bad.

A couple of days ago the biggest jump with AIG constipated and on the toilet, followed by the biggest fall with the more global bailout.

Gold is just a short term proxy for fear.

As for generating wealth, you can bet that if it rained somewhere there was someone that got some sunshine. I'd hesitate to say wealth wasn't created somewhere.

 

[LowlyPion]

It looks like we will be seeing a new and larger version of the Resolution Trust Corporation of the 90's.

McCain wants to call it the Mortgage Funding something-or-other.

What a fine acronym that will be making.

Might as well call it the Federal Underwriting Commission.

 

[Astronuc]

OK - we heard statements from McCain and the Bush administration that the fundamentals of the economy were strong.

Yet -

Senate Banking Committee Chairman Chris Dodd (D-Conn.) said on ABC’s “Good Morning America” said lawmakers were told last night “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications, here at home and globally.”

Not good for a consumer driven economy.

Congressional leaders said after meeting Thursday evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke that as much as $1 trillion could be needed to avoid an imminent meltdown of the U.S. financial system.

http://www.politico.com/news/stories/0908/13602.html

Stunning!

The drive to deregulate the financial markets began under Reagan and accelerated under Clinton, particular when the GOP took control of the House, then Senate. It has culminated in a major crisis. Both political parties have contributed to the current mess.

The solution being proposed by the Bush administration is the most expensive bailout in the nation’s history, sharply curtailing the ability of the next president to push for tax cuts or new spending.

The government should increase taxes, or at least charge the corporations that they are rescuing.

 

[turbo]

Neo-cons like to say that Dems want to tax and spend, as if their borrow and spend philosophy is somehow more fiscally responsible. Combined with the stunning lack of regulation and oversight of the financial markets, we are in a train-wreck that once again will leave average taxpayers to pay for the excesses of the wealthy and well-connected. We are in a decidedly socialist state - only it's the wealthy that benefit. We can't afford to cover our citizens with health-care, but we can afford a trillion-dollar bailout of the financial markets? This sucks.

 

[Astronuc]

Congressional Leaders Stunned by Warnings
http://www.nytimes.com/2008/09/20/washington/19cnd-cong.html

WASHINGTON — It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.

Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.

“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

Oh - but - the fundamentals of the economy are strong! Bush and McCain said so.

 

[mathwonk]

I find it fascinating that in situations like the present, there are still many people who will argue that the democrats are to blame, e.g. that it is the bad policies of say bill clinton, that were timed so as to take harmful effect just now, after 8 years with a republican in charge, spending money [e.g. on war] like a drunken sailor. then after the democrats straighten things out again, they will argue that george bush's wise stewardship only just began to work after the democrats took over.

or perhaps they realized that clinton's presidency was managed better than reagan's and bush senior's, but when the economy was running smoothly under him, they decided anyone, even bush jr, could not mess things up in only 4-8 years, and so they would vote based on their fears and biases instead of good sense. who knows the mind of the us electorate?

but currently, it is hard to imagine how anyone could vote for a republican candidate. still many no doubt will.

question: do you think, in the privacy of the ballot booth, phonies like o'reilly, hannity, and limbaugh, who although perfidious are not stupid men, actually will vote for another visibly disastrous republican ticket like mccain palin?

 

[russ_watters]

There are more than two choices there, mathwonk. It isn't either the democrats or the republicans. It can also be both or neither. There are two important things that make it difficult to know for sure who'se strategy is better:
-both the President and Congress are responsible for getting laws enacted.
-The economy is cyclical.

"it is hard to imagine how anyone could vote for a republican candidate" is a common view here. But imagination has nothing to do with it. What it takes is the ability to put yourself in other peoples' shoes and understand why they think the things they do.
I find it somewhat entertaining but simultaneously a little disturbing that people in this forum are so unable to take the other side seriously. So unable to even grasp the reasons why people think differently than they do. Unable to see anything but what they want.

[edit] Also, being cyclical also extends timeframes. The current situation would be no more than a minor, recessionless slowdown had the financial system been properly regulated. The housing market is cyclical too, and people had to know that the boom was going to end in a big bust. But these companies were unprepared to ride-out a bust. That's their fault, but it is also the governments' fault for letting them be so reckless.

Bush and the Republican Congress will be blamed for this crisis because it happened on their watch. But the Democrats didn't do anything to try to prevent it either. By the same token, no one in govt did anything to cause the boom of the 1990s or prevent it's end in 2000. Fortunately, history was kind enough to keep us honest about the Clinton Boom - the Clinton Recession started just before he left office. But at the same time, people attach Enron and the accounting scandals of the early part of Bush's presidency to Bush even though the crimes began in and took place mostly during Clinton's Presidency. People see what they want to see.

 

[russ_watters]

Congressional Leaders Stunned by Warnings

Since we don't know the content of that, it is tough to comment. It'll be an interesting week, though.

Oh - but - the fundamentals of the economy are strong! Bush and McCain said so.

I have a PDF of an article that was emailed around my company last week. It was written by a JP Morgan senior market strategist. Among other things, it says:

Clearly, as a culmination of the year-long crisis which has swept over financial markets,
the events of last weekend are unprecedented in their impact on the structure of Wall
Street investment banks. There is, today, great uncertainty about the ultimate
ramifications of these events.

It is important for all of us to acknowledge this uncertainty while also recognizing the very
difficult situation which now faces many employees of the firms affected. However, it is
also important for investors to keep these events in perspective...

The bankruptcy filing by one of the oldest investment firms on Wall Street, along with the
forced merger of another, will remind people of other times of Wall Street turmoil such as
October 1929 or March 2000. But while the worries are the same, the economy and
markets are different.

This is not the economy of October 1929. Structurally, it is a far more stable economy,
prone to fewer and shallower recessions. Cyclically, with home-building, vehicle sales
and inventories already at very low levels, there is some potential for stronger economic
growth in 2009. The commercial banking system is protected by FDIC insurance and is
heavily regulated. Both the Treasury Department and the Federal Reserve are more
engaged and have far more tools at their disposal than they did 80 year ago.

Nor is this the stock market of March 2000. Back at the turn of the millennium,
technology stocks had been bid up to levels that could not be justified by any
conventional measure of valuation. By sharp contrast, the stock market today is at a
lower level, despite significantly higher profits, particularly outside of financials, with much higher dividend yields, much lower long-term interest rates, and lower taxes on
dividends and capital gains. By the numbers and assuming a moderately growing
economy, the stock market was expensive in March 2000. By the same numbers and
under the same assumption, it is cheap today.

First, the economy matters. Remember that this is an economy of long summers
and short winters. As can be seen on page 13 of the Guide, American economic
expansions have been getting longer over the decades while recessions have been
getting shorter. While the events of this weekend are shocking, they most likely will not
prevent the economy from resuming a path of moderate expansion.

McCain is unfortunately in camaign mode and he has to respond to people's perceptions instead of speaking unpopular truths. He backed away from that staement of his, when he shouldn't have. I repeat this almost every other post now: The financial system is in crisis right now and with it, the construction market. So far, these problems have not extended to the economy as a whole. The Recessino of 2008 didn't happen as many predicted, but a recession of 2009 still might. Action needs/ed to be taken to improve liquidity and get money flowing again in loans, so I guess I support the takeover of the mortgage giants, though as a capitalist, I don't like it. I'd have preferred that the gov't had done what it needed to do to to prevent them from screwing up so badly.

The point is, the financial system isn't the machine of the economy, it is only the grease on the gears.

 

[LowlyPion]

McCain is unfortunately in camaign mode and he has to respond to people's perceptions instead of speaking unpopular truths.

McCain's problem is that his fingerprints are over multiple crime scenes. Beginning with Keating and the Savings and Loan and the deregulation votes he's made for decades - and what's the problem again - things were not regulated. And there's McCain's fingerprints again along with his good buddy Phil Graham's.

If he thinks the economy is sound, then he should say so - at the risk of course of portraying just how out of touch he is. Now that he is suddenly for regulation, it's a little stunning to see him act like he would be the one to be trusted to fix it.

Trickle down economics has failed. Get used to it. I'd say it's definitely time to change course and steer the country toward fiscal responsibility again. Attempt to recover from the mismanagement of these Bush years that have seen the government squander surpluses and balanced budgets with tax breaks and unregulated greed.

 

[Astronuc]

Industrial production decreased 1.1 percent in August and was revised down in June and July to show smaller gains of 0.2 percent and 0.1 percent respectively. After little movement over the previous three months, factory output was down 1.0 percent in August, in part because of a drop of 11.9 percent in the production of motor vehicles and parts. Excluding motor vehicles and parts, the index for manufacturing decreased 0.3 percent. The output of mines declined 0.4 percent, and the output of utilities fell 3.2 percent, as temperatures in August were unseasonably mild.

Precautionary shutdowns in the Gulf of Mexico in advance of Hurricane Gustav partly curtailed refinery activity, petrochemical production, and the extraction of crude oil and natural gas; however, the estimated effect in August of disruptions due to the hurricane on total industrial production is estimated to have been less than 0.1 percentage point. At 110.3 percent of its 2002 average, total industrial production was 1.5 percent below its level of a year earlier. The capacity utilization rate for total industry fell to 78.7 percent, a level 2.3 percentage points below its average level from 1972 to 2007.

http://www.federalreserve.gov/releases/G17/Current/default.htm

NEW YORK (CNNMoney.com) -- As things in the economy have gotten worse, the number of people and businesses heading to bankruptcy court has spiked.

Bankruptcy filings surged 29% in the 12 months that ended June 30, according to government figures released Wednesday.

Total filings rose to 967,831 from 751,056 a year earlier.

Business filings jumped more than 41% to 33,822 from 23,889 in the year-ago period. Personal filings totaled 934,009, up 28% from last year.

"As we continue to hear more bad economic news, we will continue to see bankruptcies spiral upwards," said Jack Williams, resident scholar at the American Bankruptcy Institute.

The bankruptcy group expects filings to reach 1.2 million this year, as problems in the housing market have "reverberated throughout the economy," he added.

The data also showed that filings for Chapter 7 rose 36% to 615,748 in the 12 months that ended June 30.

Chapter 7 bankruptcy is designed to give individual debtors a "fresh start" by discharging many of their debts. Under Chapter 7 a filer's assets minus those exempted by his home state are liquidated and given to creditors first in line for repayment, while the rest of his debts are cancelled.

Another type of individual bankruptcy - Chapter 13 - requires debtors to pay back their debts over time. Total Chapter 13 filings rose 17% to 344,421 from 294,693 a year earlier.

Filings for Chapter 11 bankruptcy, which is aimed at assisting struggling corporations or partnerships, rose more than 30% to 7,293.

http://money.cnn.com/2008/08/27/news/economy/bankruptcy/

Foreclosures spike 112% - no end in sight
More than 155,000 families have lost their homes to foreclosure this year; one out of every 194 U.S. households received a foreclosure filing.

http://money.cnn.com/2008/04/29/rea...still_rising/index.htm?postversion=2008042909

 

[OmCheeto]

There are more than two choices there, mathwonk. It isn't either the democrats or the republicans. It can also be both or neither. There are two important things that make it difficult to know for sure who'se strategy is better:
-both the President and Congress are responsible for getting laws enacted.
-The economy is cyclical.

True! I just ran the numbers for the http://www.nyse.com/indexes/nyahist.csv" of course.

http://home.europa.com/~garry/pfnysecompadf4inf4yrs.jpg


1968 $602.28 Johnson
1972 $522.77 Nixon $0.87
1976 $367.95 Nixon/Ford $0.70
1980 $346.71 Carter $0.94
1984 $340.43 Reagan $0.98
1988 $473.43 Reagan $1.39
1992 $606.74 GHW Bush $1.28
1996 $849.89 Clinton $1.40
2000 $1,412.17 Clinton $1.66
2004 $1,215.96 GW Bush $0.86
2008 $1,322.64 GW Bush $1.09


column 1: year
column 2: NYA adjusted for inflation(1968=100%)
column 3: president leaving office that year
column 4: if you'd invested a dollar at the start of that presidents term, how much your investment would be worth by the end of the term.

I don't really see any correlation between party and the economy.

And from the direction of the graph, I'd say the economic woes are mostly hysteria.
Just look at the loss of value between 1968 and 1984. It was almost 1/2!
Did we all die or starve to death or become one of those red nations I pointed out earlier?
Nope. We plugged along and have increased our collective wealth by a factor of 4.

And what's all the hype about 3/4 of a trillion dollars to bail out the banks?
Did the henny-penny's squawk when we all got our 1/6 trillion dollar economic stimulus easter present?

"it is hard to imagine how anyone could vote for a republican candidate" is a common view here. But imagination has nothing to do with it. What it takes is the ability to put yourself in other peoples' shoes and understand why they think the things they do.
I find it somewhat entertaining but simultaneously a little disturbing that people in this forum are unable to take the other side seriously. Unable to even grasp the reasons why people think differently than they do.

Because everyone else is an idiot. Just look at the way they drive!

 

[LowlyPion]

Did the henny-penny's squawk when we all got our 1/6 trillion dollar economic stimulus easter present?

A trillion here and a trillion there and pretty soon it could begin to add up to some real money.

 

[OmCheeto]

A trillion here and a trillion there and pretty soon it could begin to add up to some real money.

Yes it has been.

What I'm thinking right now is whether or not we should all keep throwing out facts, figures, and blame, or whether we should start a new thread on how to fix the now squeaky economy?

There are a lot of smart people in this forum.

 

[edward]

Yes it has been.

What I'm thinking right now is whether or not we should all keep throwing out facts, figures, and blame, or whether we should start a new thread on how to fix the now squeaky economy?

There are a lot of smart people in this forum.

We could start the fix by making those who profited from the situation pay their share.

 

[OmCheeto]

We could start the fix by making those who profited from the situation pay their share.

It would be interesting to see a list of who made how much money over the last two weeks.
I read up on "selling short" the other day.
I was amazed.

I keep reading that there is nothing wrong with the practice and that it is good for the market.

http://www.sundayherald.com/news/heraldnews/display.var.2450053.0.0.php
"Every hedge fund engages in short selling. In fact, lots of people who are not hedge funds engage in short selling. In an orderly manner, short selling is perfectly legitimate and indeed helps the marketplace."

My interpretation of short selling:
Frank owns a cow.
Bill rents the cow because he knows someone that needs milk.
Bill sells the cow to Suzy for $100, even though it's still Franks cow.
Next week Bill buys the cow back from Suzy for $80, because he didn't tell her the cow was a bull.
Bill returns the cow to Frank, along with the $1 rent.
So Suzies out $20, Frank made $1, and Bill got $19.

Is that the definition of "helping the marketplace"?
Screwing one person out of their money and putting it in some con artists pocket?

And is it just me, or are the only people who think selling short is ok, are the brokers making all the money?

This is interesting:

http://blogs.wsj.com/deals/2008/09/17/dear-main-street-a-letter-of-explanation-from-wall-street/

Dear Main Street: A Letter of Explanation From Wall Street

Of course, we deserve heaps and heaps of blame. Wall Street took the mortgages, sliced and diced them a hundred ways, sold and traded them. We took a nice cut along the way, blissfully oblivious to the risks.

oblivious to the risks. hmmmm... let's see. get washington to deregulate to the point of absurdity by telling them that only commies would regulate the market. inflate the bubble. pop the bubble. sell short. make several trillion dollars.

man I want to see the list of next years Forbes 400...

My apologies if my post is a bit naive. I've only been studying wall street for about 3 days.

 

[LowlyPion]

My interpretation of short selling:
Frank owns a cow.
Bill rents the cow because he knows someone that needs milk.
Bill sells the cow to Suzy for $100, even though it's still Franks cow.
Next week Bill buys the cow back from Suzy for $80, because he didn't tell her the cow was a bull.
Bill returns the cow to Frank, along with the $1 rent.
So Suzies out $20, Frank made $1, and Bill got $19.

Is that the definition of "helping the marketplace"?
Screwing one person out of their money and putting it in some con artists pocket?

Short selling is a bit different than that. Once you accept that the market operates like a balance of perceived values, you know the bid/ask thing, and understand that borrowing shares and selling them is a mirror transaction to buying shares and holding them, then short selling allows you to capture value that you see may exist between the current selling price and your expectation of what that value is if you think it is less.

If you own a stock and think it will go down - then you sell it. If you don't own a stock and think it will go up you buy it.

But if you think it will go down and don't own it ... why not allow someone with conviction to do that? And if they think it will go up, then they can sell that "negative" holding by in essence buying the shares and closing the position.

It makes the market efficient and rewards those that have the best perception - in both directions, not just those that think it will be worth more than it currently trades.

Short-selling then is a relief valve against manipulation where companies may misrepresent with positive outlook their prospects. Just as a relief valve to short selling pressure to the down side is for a company to post greater revenue and profitability.

 

[OmCheeto]

Short selling is a bit different than that. Once you accept that the market operates like a balance of perceived values, you know the bid/ask thing, and understand that borrowing shares and selling them is a mirror transaction to buying shares and holding them, then short selling allows you to capture value that you see may exist between the current selling price and your expectation of what that value is if you think it is less.

If you own a stock and think it will go down - then you sell it. If you don't own a stock and think it will go up you buy it.

But if you think it will go down and don't own it ... why not allow someone with conviction to do that? And if they think it will go up, then they can sell that "negative" holding by in essence buying the shares and closing the position.

It makes the market efficient and rewards those that have the best perception - in both directions, not just those that think it will be worth more than it currently trades.

Short-selling then is a relief valve against manipulation where companies may misrepresent with positive outlook their prospects. Just as a relief valve to short selling pressure to the down side is for a company to post greater revenue and profitability.

Sounds like my cow story to me.
Bill and Frank both knew the cow was only worth $80.(best perception)
But they sold it to Suzy anyways at the inflated price of $100.
Then she found out the cow was a bull(market efficiency), and sold it for what it was worth.
Suzy has still been ripped off.

Bill's willingness to sell the cow to an unsuspecting buyer at the inflated market value, knowing that the value would go down, making the market "efficient" after he'd ripped Suzy off is what makes me believe this practice should have stayed banned, as it was when that Dutchman first invented it, 400 years ago.

Ah. Here's an interesting blipvert:

http://www.prospect.org/cs/articles?article=shorts_and_fannies_a_brief_history
Shorts and Fannies: A Brief History
An explainer on Fannie Mae, short-selling and government economic regulation.
Robert Kuttner | July 22, 2008 |

A brief history lesson is in order. Fannie Mae, (nee the Federal National Mortgage Association or FNMA) was once an irreproachable government agency -- its troubles began only after it was privatized and wise-guy executives started paying themselves multi-million dollar bonuses for taking excessive risks. And reformers have been trying to get rid of short-selling since before Franklin Delano Roosevelt.

I really don't believe this flow of money has any purpose other than to make a few people rich off of a lot of other peoples pension funds.

 

[LowlyPion]

Sounds like my cow story to me.

Then I guess I agree with you, in that you do need more than 3 days of study.

 

[OmCheeto]

Then I guess I agree with you, in that you do need more than 3 days of study.

I don't think so.

http://www.scribblygumbooks.com.au/9781596054868.html

Wall Street Speculation: Its Tricks and Its Tragedies

It is a peculiar feature of Wall Street speculation that the novice never gets his courage worked up to buy stocks until the market is right on the top, and he never concludes to sell until the market is clear on the bottom. -from Wall Street Speculation Why small traders shouldn't rely on brokers. Why you shouldn't trust the financial "news" in the business press. How the market is manipulated into decline and panic by savvy insiders. In a 1904 lecture, reproduced in this slim but provocative volume, Franklin Keyes explained in simple language a nugget of wisdom that should be commonsense: the general public cannot avoid getting fleeced by the buccaneers of Wall Street. Keyes's words are shocking but, in retrospect, obvious, and still highly pertinent today. You'll never look at a stock-market report in the same way again. FRANKLIN C. KEYES was a New York lawyer.

It would appear that little has changed in 104 years, except for perhaps the inclusion of their own brand of new-speak into their vernacular.

 

[Art]

Short selling is a bit different than that. Once you accept that the market operates like a balance of perceived values, you know the bid/ask thing, and understand that borrowing shares and selling them is a mirror transaction to buying shares and holding them, then short selling allows you to capture value that you see may exist between the current selling price and your expectation of what that value is if you think it is less.

If you own a stock and think it will go down - then you sell it. If you don't own a stock and think it will go up you buy it.

But if you think it will go down and don't own it ... why not allow someone with conviction to do that? And if they think it will go up, then they can sell that "negative" holding by in essence buying the shares and closing the position.

It makes the market efficient and rewards those that have the best perception - in both directions, not just those that think it will be worth more than it currently trades.

Short-selling then is a relief valve against manipulation where companies may misrepresent with positive outlook their prospects. Just as a relief valve to short selling pressure to the down side is for a company to post greater revenue and profitability.

The problem is many of the 'shares' traded haven't even been borrowed, in a practice known as naked short selling.

Although theoretically this practice is regulated by the SEC in reality it hasn't been. One of the measures taken last week was a statement that rules governing this are actually to be enforced.

Another disturbing aspect of even properly covered short selling is most people buy their shares through a broker who then lends your shares without your permission to someone else so they can help push down the price of the shares you own.

With hedge funds with their massive resources being by far the biggest player in these 'shorts' it leaves companies' share prices wide open to manipulation. As has been seen lately all one has to do is identify a sector with problems where there is already a high level of nervousness amongst investors, pick a company within that sector, massively short their stock to get the ball rolling and accompany this with rumours regarding the company's financial health and hey presto the share price collapses and you make a fortune. Then simply move on to the next victim.

 

[LowlyPion]

The problem is many of the 'shares' traded haven't even been borrowed, in a practice known as naked short selling.

I will grant you that naked short selling is akin to fraud - selling something you don't have. But unlike fraud the seller remains at risk as there is recourse against such a participant as with any short position in that the risk remains unlimited. Tighter regulation may finally put an end to more rapacious practices.

And yes, it is true that there are all sorts of schemes to manipulate prices on the short side, as well as the long side I might add. But there are balanced strategies involving puts and calls and short and long positions and having the tools available does allow one to manage and hedge risk. That doesn't mean that the tools themselves are bad, so much as how the unscrupulous may use them.

Greed needs then the check and balance of regulation on both sides of transactions to insure that the markets are fair and orderly without penalty to those with the keenest insights, as they might make their profit off of making the flow of capital efficient and be appropriately rewarded.

 

[Astronuc]

THE EMPLOYMENT SITUATION: AUGUST 2008

The unemployment rate rose from 5.7 to 6.1 percent in August, and non-
farm payroll employment continued to trend down (-84,000), the Bureau of
Labor Statistics of the U.S. Department of Labor reported today. In August,
employment fell in manufacturing and employment services, while mining and
health care continued to add jobs. Average hourly earnings rose by 7 cents,
or 0.4 percent, over the month.

Unemployment (Household Survey Data)

The number of unemployed persons rose by 592,000 to 9.4 million in August,
and the unemployment rate increased by 0.4 percentage point to 6.1 percent.
Over the past 12 months, the number of unemployed persons has increased by
2.2 million and the unemployment rate has risen by 1.4 percentage points,
with most of the increase occurring over the past 4 months. (See table A-1.)

In August, the unemployment rates for adult men (5.6 percent), adult women
(5.3 percent), whites (5.4 percent), blacks (10.6 percent), and Hispanics
(8.0 percent) rose, while the jobless rate for teenagers was little changed
at 18.9 percent. The unemployment rate for Asians was 4.4 percent in August,
not seasonally adjusted. (See tables A-1, A-2, and A-3.)

Among the unemployed, the number of persons who lost their last job rose by
417,000 to 4.8 million in August, with increases occurring among those on tem-
porary layoff and those who do not expect to be recalled to work. Over the last
4 months, the number of unemployed job losers has increased by 810,000. (See
table A-8.)

In August, the number of long-term unemployed (those jobless for 27 weeks or
more) rose by 163,000 to 1.8 million, an increase of 589,000 over the past 12
months. The newly unemployed--those who were jobless fewer than 5 weeks--
increased by 400,000 over the month. (See table A-9.)

Total Employment and the Labor Force (Household Survey Data)

The civilian labor force, at 154.9 million, was about unchanged in August,
and the labor force participation rate remained at 66.1 percent. Total employ-
ment, at 145.5 million, was little changed from July. The employment-population
ratio fell over the month to 62.1 percent in August, down 1.3 percentage points
from its most recent high of 63.4 percent in December 2006. (See table A-1.)

In August, the number of persons who worked part time for economic reasons
was essentially unchanged at 5.7 million. This category includes persons who
indicated that they would like to work full time but were working part time
because their hours had been cut back or they were unable to find full-time jobs.
(See table A-5.)

The number of multiple jobholders increased by 298,000 in August to 8.1 million,
accounting for 5.5 percent of total employed. (See table A-6.)

http://www.bls.gov/news.release/empsit.nr0.htm (link shows current month)

 

[mheslep]

Senate Banking Committee Chairman Chris Dodd (D-Conn.) said on ABC’s “Good Morning America” said lawmakers were told last night “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications, here at home and globally.”

Stunning!

http://www.marketwatch.com/news/sto...00286-5BDC-433B-A2EF-A9B3CE520ADE}&dist=hpts"

Embattled mortgage finance giants Fannie Mae and Freddie Mac are "fundamentally strong" and questions about their capital are unwarranted, a top U.S. Senate Democrat said Friday afternoon. ... "This is not a time to be panicking about this. These are viable, strong institutions," Sen. Christopher Dodd, D-Conn., said at a Capitol Hill press conference

, actually,

 

[OmCheeto]

http://www.bls.gov/news.release/empsit.nr0.htm (link shows current month)

Has anyone discussed putting all of these people to work upgrading our national electrical infrastructure?(Ok. I did. In another thread) It's not like our entire current antiquated system wasn't built that way in the first place.

Perhaps we could get the DoD or Homeland Security to foot the bill for materials:

http://www.alcoa.com/global/en/news/news_detail.asp?pageID=231974841&newsYear=2003
The aluminum smelter was built and operated by Alcoa from 1941 to 1945 for the Department of Defense.

What is past is prologue.