"Sign on Baltimore Street, Baltimore, Maryland"
Ilargi: Due to tragic family circumstances, Stoneleigh has been forced to interrupt her speaking tour of Michigan today, Tuesday September 14. We’ll keep you posted on alternative dates for the talks in the future.
Ilargi: Basel III was pushed through this weekend. Isn’t that great? All those ugly big bad banks will now have to adhere to much stricter international regulations. That’ll teach ‘em. And we’ll all be soooo much better off. Never again a financial crisis, and honey flowing from the trees into eternity.
Yeah. Only, who makes them regulations? Why, naturally, that would be the strongest political forces around internationally. And they happen to be, no, wait for this, the banks. They’re once again, as they have been in Washington for decades, regulating themselves, setting the terms for their regulation, in Basel. And yeah, you can or could make a few bucks in the stock markets by betting on that. You know, profit from your own demise. So yes, the stock markets are up. Buy Citi, , buy Deutsche, buy Goldman, buy BofA. They can ply their trade for a bit longer. And you can be richer because of it. Well, not all of you. Someone's got to pay the bill at the end of the day.
Under the agreement, banks will have six years starting Jan. 1, 2013, to progressively increase their capital reserves. Under current rules banks have to hold back at least 4 percent of their balance sheet to cover their risks. Starting in 2013, this reserve – known as tier 1 capital – will have to rise to 4.5 percent, reaching 6 percent in 2019. [..] In addition, banks will be required to keep an emergency reserve known as a "conservation buffer" of 2.5 percent. In total, the amount of rock-solid reserves each bank is expected to have by the end of the decade will be 8.5 percent of its balance sheet.
Still, while cheering Basel III, you're cheering the further, continued and deepening screwing of American people, and European, and Japanese, not to mention dirt-poor-to-begin with Africans and Asians, who will for instance increasingly be bid out of what fertile land they once had to feed their children.
Basically, the banks can continue to do anything they want till 2013, and "just about" anything they want until 2019. Not that they'll be lending to "consumers", mind you, unless their governments force them to and/or make it very attractive (50+% credit card charges), and if anyone has anything adverse to say about that, their answer will be that they will need the money to comply with Basel III in 2019. Oh, the lovely irony.
And everyone should get it through to their heads that in an economic situation as dire as the one we're in today, and it is deeply dire no matter what either you think or stocks actually do, there isn't a banker on the planet who looks ahead 3 and certainly not 9 years, and is then still taken seriously by his peers. Profits and bonuses are all about tomorrow, not about 1 or 3 or 9 years from now. The guys in the know at the major banks are well aware of what the amount and degree of toxicity is of the mountains of "securities" and deriviatives in the banks' vaults. There's a clock ticking loudly, and it won't keep on ticking forever. Better get your share while you can.
For the past decade, the mood and strategy on Wall Street, in the City, in Frankfurt and Tokyo has been, and is increasingly so, to rake in as much in profits as you can get away with, since this baby's bound to bomb and you can never be sure what tomorrow morning brings.
What we should really want to see in these Basel sort of things is new international rules on marking toxic assets, but there isn't much in that regard. Well, there's this:
With yesterday’s decision, the Basel committee has completed most of its work on a package of reforms it will submit to leaders of the Group of 20 nations who are meeting in November in Seoul. The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios.
Translation: we had to feed them something, and we hope they didn't notice that even the 10-years-from-now requirements don't have a denominator yet. In other words, boys, steady as she goes, jolly good, and let’s break open the champagne. Job well done, lads.
Meanwhile, US poverty rates are skyrocketing, and homeless shelters are so overcrowded they probably don’t even care about the upcoming rounds of cuts anymore. Can’t get lower than the gutter, can you?
And it's not as if there's no-one stateside who gets what’s to be gotten. Tech Ticker has finance professional Scott Bleier say this:
Banks Are Stealing The Wealth Of This Country, And Deflation Is Here"There is no 'double-dip,' there are no 'green shoots,' there was no recovery," he says. "There are simply segmented pieces of the economy muddling along and getting better or staying the same."
How to Spark the "Mother of All Market Rallies[..] Bleier wants to see a legislative act -- "The Real Estate Debt Restructure Act of 2011." It would require banks to go line-by-line to examine each asset of every mortgage-backed security (and their derivatives). Banks would have to renegotiate bad loans and then would be allowed to write them off to wipe their balance sheets clean.
"The other option is to let the banks foreclose and own all the underwater properties, and then force them to mark-to-market again. Most would then be insolvent," says Bleier. That's not the only problem. "There will be mass homelessness if banks keep foreclosing underwater properties, and that socially is unacceptable [..]
And then Tech Ticker also has Greg Ip, US economics editor for The Economist:
"Socialize It!" Greg Ip's Solution to the Toxic Debt Problem[..] Ip has a fairly controversial policy recommendation he says has been used successfully in other countries following banking crises: America should "make a concerted effort to buy up all the bad loans clogging the banking system; take 'em out of the private sector and in some sense socialize it," he says. "We really haven't done that - we've given the banks extra capital but all they're basically doing is stringing along the borrowers hoping to hide the problems for as long as possible. The longer they do that, the more they starve the growing part of the economy of credit."
Neither of these distinguished gentlemen seems to be aware of the depth of losses within the American and European banking systems. " Banks would have to renegotiate bad loans and then would be allowed to write them off [..]" sounds nice and all, but what would be the implications? If you're talking about, and we are here, trillions of dollars in loans, securities, derivatives, it might take decades to re-negotiate a line-by-line re-examination. And even if that were possible, they would never get more than 50 cents on the dollar, and that simple acknowledgement alone would condemn them to death by at the gallows.
And who would take the losses then in order for the banks to survive? You and me, I suppose. But why would we not just let them die, guarantee our deposits with them through the state, and be done with it all?
"America should "make a concerted effort to buy up all the bad loans clogging the banking system; take 'em out of the private sector and in some sense socialize it [..] ".
Yeah, buy up all the bad loans from the private banking sector, that their staff have made billions on issuing, with taxpayer money, so that the banking sector may survive and do it again.
Perhaps we could solve at least part of all this by letting the banks go down who prove to be insolvent once we force them to bring their toxic assets into the light. It’ll be bad for the Chinese, who hold stocks and bonds in them, and it will be awful for our own market funds and pension funds, but it would be a first step regardless.
People who talk about renegotiating bad loans, or about countries buying up those loans, as a way out of the crisis, do not, in my view, appreciate the gravity of the situation.
And why should they, really? They can keep on talking their book for now, because the Basel III accord allows for the banks to keep on pretending, until at least 2019, that all is well.
The point here is, though, that that can't possibly work. There will be a bank, or an entire country, someday soon, that will either go down directly or try desperately to save its skin, and the valuation of assets will be center. Some bank in Latvia or Belgium, or some unexpected place like Sacramento, will be forced to mark its holdings to market, and they will be the same as those held by a party in France or Italy or California. Who will then have to follow suit. And then their peers.
Basel III allows for some more facade time, the cardboard ghost town gets to stand up and fool people a bit longer. But that's all this Basel accord is good for. Some of you will make some dough on that, and the rest of you will pay for it. But the banks are still doomed, on account of the paper they still hold at face value, but that is really worth mere pennies on the dollar. We could, as a nation, buy all that paper (and my, did we try already), and the banks then might survive, but unfortunately we would surely not, as a society.
There is no way out of this that keeps both our banks AND our societies alive. Basel III says, and very clearly so, that it’s the banks that are winning.
There's something wrong here:
We didn't even fight them, and they still won.
Banks Climb as Firms Get Eight Years to Adopt Basel
by Jann Bettinga and Yalman Onaran - Bloomberg
Bank stocks rose in Europe and Asia as regulators gave firms more time than analysts expected to comply with stiffer capital requirements aimed at preventing future financial crises. France’s Credit Agricole SA and Dexia SA led the Bloomberg Europe Banks and Financial Services Index. The benchmark was up 1.8 percent at 1:05 p.m. in London at a one-month high. The 224 member MSCI AC Asia Pacific Financials Index rose 1.7 percent at 6 p.m. Hong Kong time, set for its biggest gain since July 8.
At a meeting in Basel, Switzerland yesterday, regulators reached a compromise that more than doubles capital requirements for the world’s banks, while giving them as long as eight years to comply in full. Germany had sought to give firms a decade to make the transition, while the U.S., U.K. and Switzerland pushed for a maximum of five years. “The implementation period is much longer than expected, which is generous to the sector,” Credit Suisse Group AG analysts including Jonathan Pierce wrote in a note to clients today. “The fact that the sector now has a greater degree of certainty about capital requirements going forward ought to act as a material positive catalyst.”
The Basel Committee on Banking Supervision will force lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends, though not forced to raise cash. Lenders will have less than five years to comply with the minimum ratios and until Jan. 1, 2019 to meet the buffer requirements.
“The agreement reached is a very positive step forward which will create a much more resilient banking system in the future while ensuring that banks will be able to maintain lending to the real economy,” U.K. Financial Services Authority Chairman Adair Turner told reporters in Basel today. “It’s a very, very balanced package.” The decision will reduce uncertainty about banks’ capital, and allow some to raise their dividends, Morgan Stanley analysts Henrik Schmidt and Huw van Steenis said in a report today. “Nordic banks will be the first to raise dividends, followed by the Swiss,” they wrote. JPMorgan Chase & Co., U.S. Bancorp and Northern Trust Corp. may be among the first U.S. firms to increase their dividends, according to Morgan Stanley.
Credit Agricole jumped 6 percent to 11.63 euros as of 2:05 p.m. in Paris trading, and Societe Generale was up 5.1 percent at 46.15 euros. Dexia advanced 5.1 percent to 3.38 euros in Brussels. In Frankfurt, Deutsche Bank AG rose 1.7 percent to 48.51 euros and Commerzbank AG, Germany’s second-biggest lender, advanced 2.3 percent to 6.43 euros. The cost of insuring bank bonds against default plunged to a five-week low. The Markit iTraxx Financial Index of credit- default swaps on the senior debt of 25 banks and insurers fell 9.5 basis points to 120 as of 1 p.m. in London, the lowest level since Aug. 10, according to JPMorgan Chase & Co.
European banks are less capitalized than U.S. counterparts and may be required to raise more funds under the new Basel rules. Agricultural Bank of Greece, Banco Popolare SC, Credito Valtellinese Scarl and Banca Monte dei Paschi di Siena SpA may fail to meet the 7 percent ratio in 2012, analysts at Goldman Sachs Group Inc. said in a report to clients today.
Eugenio Cicconetti, an analyst at UniCredit Corporate and Investment Banking in London, said Italian banks, which have some of the lowest capital levels among European lenders, will benefit from the extra implementation time. Monte dei Paschi rose 3 percent to 1.04 euros and Banco Popolare advanced 4.2 percent to 4.90 euros in Milan trading. The rule-making process, which began in 2009, has pitted countries against each other. Some, including Germany, said higher capital requirements would hurt their banks and curb lending at a time when global economic recovery is faltering. Germany led the fight for lower ratios and a slower time frame for implementation, according to participants in the talks.
“We have very precisely agreed upon the transition period which will permit that this standard won’t hamper the recovery,” said European Central Bank President Jean-Claude Trichet, speaking on behalf of central bankers from the G-10 nations in Basel today. “It’s good for the global economy, good for growth.”
Germany’s 10 biggest banks, including Frankfurt-based Deutsche Bank and Commerzbank, may need about 105 billion euros ($134 billion) in fresh capital because of new regulations, the Association of German Banks estimated on Sept. 6. While Germany didn’t get the deadlines extended all the way, it won some concessions for its state-owned banks, which may have a harder time to comply. Government capital injections will continue to count as common equity until the end of 2017, even if they were in a form that the new Basel rules consider as not qualifying. State banks get an extra five years of exemptions to rules tightening the definition of capital.
“German banks should have more breathing room,” Citigroup Inc. analyst Ronit Ghose said in a note to clients today. “French banks such as Societe Generale and Credit Agricole should now have more time to augment capital adequacy.” Deutsche Bank, Germany’s biggest lender, is seeking to raise at least 9.8 billion euros in a stock sale. The lender expects to fulfill the Basel requirements no later than the end of 2013, and won’t need fresh capital to meet requlatory standards after its stock sale, Chief Executive Officer Josef Ackermann said today.
Axel Weber, president of the German central bank, who attended yesterday’s meeting in Basel, expressed satisfaction with the outcome. Germany, which had withheld its signature from the committee’s July agreement, signed up to yesterday’s plan. “The gradual transition phase will allow all banks to fulfill the rising requirements for minimum capital and liquidity,” Weber said in a statement. “The unique characteristics of German financial institutions that aren’t stockholder corporations are thus appropriately catered for.”
Germany’s VOEB association of public sector banks, which represents the country’s state-owned Landesbanken, said today the transition times are “too short” and the new requirements will place a “heavy burden” on German banks.
End to Uncertainty
Other European banks will fare better. Credit Suisse, whose losses from the credit market meltdown were about one-third those of its main Swiss rival UBS AG, said in a statement yesterday that it expected to comply with the new rules “without having to materially change our growth plans or our current capital and dividend policy.” U.K. banks are unlikely to have difficulties meeting the capital requirements, JPMorgan Cazenove analysts led by Carla Antunes da Silva said in a report.
“We expect the market to respond positively to a more regulatory certain environment and we would expect investors to focus on capital return for those banks where we see the strongest balance sheets,” the analysts wrote. HSBC Holdings Plc, Europe’s biggest bank, may boost its dividend, they said. Banks in Asia have high capital ratios and will be able to avoid the degree of fundraising needed elsewhere to meet a new international standard, said Zhu Min, a special adviser to the International Monetary Fund.
“Today if you look at the whole of Asia, Tier 1 capital is more than 10 to 12 percent,” and as a result “I don’t think Asian banks at the moment will go to the markets to raise a lot of capital,” Zhu, a former deputy governor of China’s central bank and vice president of Bank of China Ltd., said on Bloomberg Television from Tianjin. Commonwealth Bank of Australia, the nation’s biggest lender, rose 1.6 percent after Australia’s Treasurer Wayne Swan said the nation’s banks will “comfortably meet” the new requirements. Mitsubishi UFJ Financial Group Inc., Japan’s biggest lender, led banks higher in Tokyo, rising 2 percent.
The committee also gave banks until the end of 2017 to comply with the tighter definitions of capital and said that a new short-term liquidity standard wouldn’t be implemented until the beginning of 2015. While a separate long-term liquidity rule has been shelved under pressure from the banking industry, the short-term rule was expected to go into effect earlier. The two liquidity rules would require banks to hold enough cash and easily cashable assets to meet liabilities.
Bank of America, Citigroup
“Extending these deadlines -- liquidity, buffers, capital definitions -- should be a relief to banks,” said Frederick Cannon, an analyst at Keefe, Bruyette & Woods in New York.
Of the 24 U.S. banks represented on the KBW Bank Index, seven including Bank of America and Citigroup would fall short of the new ratios based on calculations using the revised definitions of capital, Cannon said in a Sept. 10 report.
“The new standard is 7 percent, and that’s very high,” said Scott Talbott, senior vice president at the Washington- based Financial Services Roundtable, which lobbies on behalf of U.S. banks. “It will curb lending. The stronger the banks, the weaker the economic recovery will be.”
The Association of Financial Markets in Europe, which represents banks on that continent, welcomed the extended transition periods provided to its members for compliance. The group said it still has “significant concerns,” including the possible outcome of the Basel committee’s continuing work on the largest financial institutions.
With yesterday’s decision, the Basel committee has completed most of its work on a package of reforms it will submit to leaders of the Group of 20 nations who are meeting in November in Seoul. The committee has yet to agree on revised calculations of risk-weighted assets, which form the denominator of the capital ratios to be determined this weekend. The Basel committee has another meeting scheduled for Sept. 21-22 and said it may gather in October to finish its work.
Bankers Agree To New Global Rules Designed To Prevent Future Financial Crisis
by Greg Keller - AP
Global financial regulators on Sunday agreed on new rules designed to strengthen bank finances and rein in excessive risk-taking to help prevent another crisis. Banks will be forced to hold more and safer kinds of capital to offset the risks they take lending money and trading securities, which should make them more resistant to financial shocks such as those of the last several years.
European Central Bank president Jean-Claude Trichet, chairman of the committee of central bankers and bank supervisors that worked on the new rules, called the agreement "a fundamental strengthening of global capital standards." "Their contribution to long-term financial stability and growth will be substantial," Trichet said in a statement. U.S. officials including Federal Reserve chairman Ben Bernanke in a joint statement called the new standards a "significant step forward in reducing the incidence and severity of future financial crises.
Some banks have protested however that the new rules may hurt their profitability and cause them to reduce the lending that fuels economic growth, possibly dampening a global economic recovery. Representatives of major central banks, including the ECB and the U.S. Federal Reserve, agreed to the deal at a meeting in Basel, Switzerland, on Sunday. The deal still has to be presented to leaders of the Group of 20 forum of rich and developing countries at a meeting in November and ratified by national governments before it comes into force.
The agreement, known as Basel III, is seen as a cornerstone of the global financial reforms proposed by governments following the credit crunch and subsequent economic downturn caused by risky banking practices. Earlier this year the Brussels-based European Banking Federation warned that the new global rules forcing banks to put aside more capital could keep the eurozone economy in or close to recession through 2014.
The federation said its analysis of proposed new Basel III banking standards would limit eurozone banks' credit growth and profits, hurt the economy and prevent the creation of up to 5 million jobs in the 16 nations that use the euro. Under the agreement, banks will have six years starting Jan. 1, 2013, to progressively increase their capital reserves. Under current rules banks have to hold back at least 4 percent of their balance sheet to cover their risks. Starting in 2013, this reserve – known as tier 1 capital – will have to rise to 4.5 percent, reaching 6 percent in 2019.
In addition, banks will be required to keep an emergency reserve known as a "conservation buffer" of 2.5 percent. In total, the amount of rock-solid reserves each bank is expected to have by the end of the decade will be 8.5 percent of its balance sheet.
Already one bank has cited the new rules as a reason for its plans to tap the market for billions of euros in new capital. Earlier Sunday, Germany's biggest bank, Deutsche Bank AG, announced plans to raise at least euro9.8 billion ($12.4 billion) in a capital increase. The planned issue of 308.6 million new common shares is meant primarily to cover the consolidation of Postbank, "but will also support the existing capital base to accommodate regulatory changes and business growth," Deutsche Bank said. It did not elaborate.
Stung by the experience of having to bail out some ailing banks to avoid wider economic collapse, regulators also agreed a number of other measures to shore up the stability of financial institutions:
- Countries will be able to demand that banks build up a further reserve during good times amounting to up to 2.5 percent of their common equity. This "countercyclical buffer" is to help avoid excessive lending during periods of economic boom.
- Another measure aimed at preventing banks from overstretching themselves is the introduction of a leverage ratio of 3 percent. Leverage, or borrowing to invest elsewhere, boosts returns but can backfire catastrophically if an investment declines. Some European banks had objected to this, arguing that the measure unfairly penalizes small lenders with relatively safe credit portfolios.
- Regulators also agreed to continue working on additional safeguards for "systemically important banks" – those that could bring down entire economies if they collapse.
Banks' Plans for Foreclosed Homes Will Drive Market
by Nick Timiraos - Wall Street Journal
The speed at which house prices fall over the next few months could depend less on mortgage rates and Americans' appetite for home buying than on how banks decide to manage the huge number of foreclosed homes they own or may take from delinquent borrowers in the near future. Unlike home owners, banks often are much quicker to slash prices to unload properties quickly.
The upshot is that, the more homes being sold by lenders, the faster prices tend to fall. That pattern was clear over the past two years: Price declines that began four years ago accelerated rapidly in 2008 as banks dumped foreclosed properties at fire-sale prices. By January 2009, the share of distressed sales had soared to 45% of all sales nationally; it was even higher in hard-hit markets such as Phoenix, according to analysts at Barclays Capital.
Even though mortgage defaults kept mounting, housing markets began to stabilize early last year as low prices and government interventions broke the downward spiral. Policy makers spurred demand for homes by holding down mortgage rates, offering tax credits for buyers, and extending low-down-payment loans through the Federal Housing Administration. The government also attacked the supply problem. Regulators relaxed mark-to-market accounting rules, giving banks more flexibility in valuing certain real-estate assets and removing some of the impetus for banks to quickly foreclose. Meanwhile, the Obama administration put in place an ambitious program to modify mortgages.
The Home Affordable Modification Program has fallen short of its goals. So far, fewer than 500,000 loans have been modified, below the target of three million to four million. Yet the program served as a "closet moratorium" on foreclosures that stanched the flow of bank-owned homes to the market, said Ronald Temple, portfolio manager at Lazard Asset Management. The result: The share of distressed sales fell by November to 25% of home sales, and prices stabilized. After rising in the winter, the distressed share fell to 22% in June, before bouncing to 30% in July.
The problem is that these measures are wearing off. Demand plunged this summer after tax credits expired, and unsold homes are piling up. More foreclosures could move onto the market as borrowers fall out of the loan-modification program. "We see the perfect storm brewing with rising supply and falling demand," said Ivy Zelman, chief executive of research firm Zelman & Associates and one of the first to warn of trouble five years ago. She estimated that distressed sales could account for half of the market by year-end if traditional sales didn't rebound.
The market does have some tailwinds: Housing starts are at all-time lows. Banks have hired more staff to manage problem loans and government entities such as Fannie Mae and Freddie Mac that own a growing share of foreclosures are less likely to deluge the market. The next leg down in prices "isn't going to be the foreclosure-induced freefall where you just had inventory coming out the wazoo, and it was going to be sold one way or the other," said Glenn Kelman, chief executive of Redfin Corp., a real-estate brokerage.
Prices also have come down so much already they have less distance to fall. During the housing boom, prices inflated much faster than incomes rose, thanks to speculation and lax lending. The ratio of home prices to annual incomes reached 1.6 at the end of June, which is below the ratio of 1.88 from 1989 to 2003, according to Moody's Analytics. By those metrics, prices are actually undervalued in markets that have already seen huge declines, such as Las Vegas, Phoenix and Los Angeles. But Moody's data show that prices remain "significantly overvalued" elsewhere, including Boston; New York; Seattle; Orange County, Calif., and Charlotte, N.C. Markets in both camps face supply imbalances that will pressure prices for years.
The fastest cure for housing would be job creation because it would boost demand for homes while putting delinquent borrowers back on solid footing. But if that doesn't materialize, policy makers face a thorny question: whether to intervene if price declines accelerate beyond the 5% to 10% that most economists expect. In recent weeks, the White House has been surveying industry analysts on how to manage the inventory overhang.
Analysts at Barclays Capital estimate that some four million loans are in some stage of foreclosure or are at least 90 days past due, down slightly from a January peak. While more tax credits aren't likely, policy makers could still attack the supply problem by, for example, taking foreclosed homes off the market and renting them out. Ultimately, market fundamentals will prevail "and any attempt to get around that will only be short-term," said Susan Wachter, a professor of real estate at the University of Pennsylvania's Wharton School. But officials should be prepared to intervene anyway, she said, if psychology spurs a downward spiral "where price declines are feeding further price declines."
That leaves few attractive options. Prolonged intervention could backfire by creating uncertainty that keeps buyers on the sidelines. Extending foreclosure timelines also risks inducing more borrowers to default and live rent-free. Letting the market take its medicine sounds more appealing than it did 18 months ago. But it risks saddling taxpayers and the banking system with billions more in losses and trapping more borrowers in homes on which they owe more than the house is worth.
Banks Are Stealing The Wealth Of This Country, And Deflation Is Here, Says Scott Bleier
by Stacy Curtin - Tech Ticker
What's your mood on the economy these days? Take jobs: Are you feeling better about job growth after private employers added more jobs than expected in August -- or worse because the unemployment rate actually went up from 9.5% to 9.6%?
How about GDP? Are you doing worse after a revised report of GDP showed growth slip in the second quarter from 2.4% to 1.6% -- or better because all major areas of demand actually moved slightly higher? New GDP forecasts for the rest of this year and next may swing your mood yet again. A panel of 50 economists cut GDP expatiations -- for the third month in a row -- for the rest of this year and next.
This is no ordinary recession like so many would have you believe, says Scott Bleier of Create Capital. It is time to "get real" and stop believing all the "catch phrases." "There is no 'double-dip,' there are no 'green shoots,' there was no recovery," he says. "There are simply segmented pieces of the economy muddling along and getting better or staying the same." Bleier argues that there was no recovery in the first place to "dip" from.
"When we function based on what the market is doing, the market dictates our economic mood," says Bleier. "The stock market dictates consumer spending, the stock market dictates where economists come on TV and say where the markets are going." If it is time to "get real" as Bleier says, what needs to be done?
He says we have to address what got us into this crisis in the first place, which is a nation overly leveraged in the real estate market. Banks are brimming with toxic assets, and until those are completely written off -- not "papered over" -- the U.S. won't see a recovery, he believes. Another reality check: Near 0% interest rates are destroying and "stealing" the wealth of this county, Bleier says. "We cannot pay the bills because a lot of the bills are paid with the interest [of investments]. We are eating the principal going on two years now."
As long as we live in a credit-contracting environment, Bleier says the wealth of our nation is at risk. "The fixing is going to be a process, but if you start it, the market will then look past all of the anxiety as we go through it," he says.
How to Spark the "Mother of All Market Rallies"
by Stacy Curtin - Tech Ticker
Are you ready for a recovery? It's possible, as is the "mother of all market rallies," says Scott Bleier of Create Capital. But, not before we "get real" and rid ALL the banks of ALL toxic assets. "The vast wealth of our country is tied up in leveraged real estate, and most property purchased in the last decade is under water. There can be no positive economic resolution until this is dealt with," he says.
So Bleier wants to see a legislative act -- "The Real Estate Debt Restructure Act of 2011." It would require banks to go line-by-line to examine each asset of every mortgage-backed security (and their derivatives). Banks would have to renegotiate bad loans and then would be allowed to write them off to wipe their balance sheets clean.
"The other option is to let the banks foreclose and own all the underwater properties, and then force them to mark-to-market again. Most would then be insolvent," says Bleier. That's not the only problem. "There will be mass homelessness if banks keep foreclosing underwater properties, and that socially is unacceptable," he says. Bottom Line for Bleier: Recovery is not possible until we "get real" and rid the banks of ALL bad debts.
Poverty Rate In U.S. Saw Record Increase In 2009: 1 In 7 Americans Are Poor
by Hope Yen and Liz Sidoti - AP
The number of people in the U.S. who are in poverty is on track for a record increase on President Barack Obama's watch, with the ranks of working-age poor approaching 1960s levels that led to the national war on poverty. Census figures for 2009 – the recession-ravaged first year of the Democrat's presidency – are to be released in the coming week, and demographers expect grim findings.
It's unfortunate timing for Obama and his party just seven weeks before important elections when control of Congress is at stake. The anticipated poverty rate increase – from 13.2 percent to about 15 percent – would be another blow to Democrats struggling to persuade voters to keep them in power. "The most important anti-poverty effort is growing the economy and making sure there are enough jobs out there," Obama said Friday at a White House news conference. He stressed his commitment to helping the poor achieve middle-class status and said, "If we can grow the economy faster and create more jobs, then everybody is swept up into that virtuous cycle."
Interviews with six demographers who closely track poverty trends found wide consensus that 2009 figures are likely to show a significant rate increase to the range of 14.7 percent to 15 percent. Should those estimates hold true, some 45 million people in this country, or more than 1 in 7, were poor last year. It would be the highest single-year increase since the government began calculating poverty figures in 1959. The previous high was in 1980 when the rate jumped 1.3 percentage points to 13 percent during the energy crisis.
Among the 18-64 working-age population, the demographers expect a rise beyond 12.4 percent, up from 11.7 percent. That would make it the highest since at least 1965, when another Democratic president, Lyndon B. Johnson, launched the war on poverty that expanded the federal government's role in social welfare programs from education to health care.
Demographers also are confident the report will show:
- Child poverty increased from 19 percent to more than 20 percent.
- Blacks and Latinos were disproportionately hit, based on their higher rates of unemployment.
- Metropolitan areas that posted the largest gains in poverty included Modesto, Calif.; Detroit; Cape Coral-Fort Myers, Fla.; Los Angeles and Las Vegas.
"My guess is that politically these figures will be greeted with alarm and dismay but they won't constitute a clarion call to action," said William Galston, a domestic policy aide for President Bill Clinton. "I hope the parties don't blame each other for the desperate circumstances of desperate people. That would be wrong in my opinion. But that's not to say it won't happen." Lawrence M. Mead, a New York University political science professor who is a conservative and wrote "The New Politics of Poverty: The Nonworking Poor in America," argued that the figures will have a minimal impact in November. "Poverty is not as big an issue right now as middle-class unemployment. That's a lot more salient politically right now," he said.
But if Thursday's report is as troubling as expected, Republicans in the midst of an increasingly strong drive to win control of the House, if not the Senate, would get one more argument to make against Democrats in the campaign homestretch. The GOP says voters should fire Democrats because Obama's economic fixes are hindering the sluggish economic recovery. Rightly or wrongly, Republicans could cite a higher poverty rate as evidence.
Democrats almost certainly will argue that they shouldn't be blamed. They're likely to counter that the economic woes – and the poverty increase – began under President George W. Bush with the near-collapse of the financial industry in late 2008. Although that's true, it's far from certain that the Democratic explanation will sway voters who already are trending heavily toward the GOP in polls as worrisome economic news piles up. Hispanics and blacks – traditionally solid Democratic constituencies – could be inclined to stay home in November if, as expected, the Census Bureau reports that many more of them were poor last year.
Beyond this fall, the findings could put pressure on Obama to expand government safety net programs ahead of his likely 2012 re-election bid even as Republicans criticize him about federal spending and annual deficits. Those are areas of concern for independent voters whose support is critical in elections. Experts say a jump in the poverty rate could mean that the liberal viewpoint – social constraints prevent the poor from working – will gain steam over the conservative position that the poor have opportunities to work but choose not to because they get too much help.
"The Great Recession will surely push the poverty rate for working-age people to a nearly 50-year peak," said Elise Gould, an economist with the Economic Policy Institute. She said that means "it's time for a renewed attack on poverty."
To Douglas Besharov, a University of Maryland public policy professor, the big question is whether there's anything more to do to help these families. The 2009 forecasts are largely based on historical data and the unemployment rate, which climbed to 10.1 percent last October to post a record one-year gain. The projections partly rely on a methodology by Rebecca Blank, a former poverty expert who now oversees the census. She estimated last year that poverty would hit about 14.8 percent if unemployment reached 10 percent. "As long as unemployment is higher, poverty will be higher," she said in an interview then.
A formula by Richard Bavier, a former analyst with the White House Office of Management and Budget who has had high rates of accuracy over the last decade, predicts poverty will reach 15 percent. That would put the rate at the highest level since 1993. The all-time high was 22.4 percent in 1959, the first year the government began tracking poverty. It dropped to a low of 11.1 percent in 1973 after Johnson's war on poverty but has since fluctuated in the 12-14 percent range.
In 2008, the poverty level stood at $22,025 for a family of four, based on an official government calculation that includes only cash income before tax deductions. It excludes capital gains or accumulated wealth. It does not factor in noncash government aid such as tax credits or food stamps, which have surged to record levels in recent years under the federal stimulus program. Beginning next year, the government plans to publish new, supplemental poverty figures that are expected to show even higher numbers of people in poverty than previously known. The figures will take into account rising costs of medical care, transportation and child care, a change analysts believe will add to the ranks of both seniors and working-age people in poverty.
Number of Families in Shelters Rises
by Michael Luo - New York Times
For a few hours at the mall here this month, Nick Griffith, his wife, Lacey Lennon, and their two young children got to feel like a regular family again. Never mind that they were just killing time away from the homeless shelter where they are staying, or that they had to take two city buses to get to the shopping center because they pawned one car earlier this year and had another repossessed, or that the debit card Ms. Lennon inserted into the A.T.M. was courtesy of the state’s welfare program.
They ate lunch at the food court, browsed for clothes and just strolled, blending in with everyone else out on a scorching hot summer day. “It’s exactly why we come here,” Ms. Lennon said. “It reminds us of our old life.” For millions who have lost jobs or faced eviction in the economic downturn, homelessness is perhaps the darkest fear of all. In the end, though, for all the devastation wrought by the recession, a vast majority of people who have faced the possibility have somehow managed to avoid it.
Nevertheless, from 2007 through 2009, the number of families in homeless shelters — households with at least one adult and one minor child — leapt to 170,000 from 131,000, according to the Department of Housing and Urban Development. With long-term unemployment ballooning, those numbers could easily climb this year. Late in 2009, however, states began distributing $1.5 billion that has been made available over three years by the federal government as part of the stimulus package for the Homeless Prevention and Rapid Re-Housing Program, which provides financial assistance to keep people in their homes or get them back in one quickly if they lose them.
More than 550,000 people have received aid, including more than 1,800 in Rhode Island, with just over a quarter of the money for the program spent so far nationally, state and federal officials said. Even so, it remains to be seen whether the program is keeping pace with the continuing economic hardship.
On Aug. 9, Mr. Griffith, 40, Ms. Lennon, 26, and their two children, Ava, 3, and Ethan, 16 months, staggered into Crossroads Rhode Island, a shelter that functions as a kind of processing and triage center for homeless families, after a three-day bus journey from Florida. “It hit me when we got off the bus and walked up and saw the Crossroads building,” Ms. Lennon said. “We had all our stuff. We were tired. We’d already had enough, and it was just starting.”
The number of families who have sought help this year at Crossroads has already surpassed the total for all of 2009. Through July, 324 families had come needing shelter, compared with 278 all of last year. National data on current shelter populations are not yet available, but checks with other major family shelters across the country found similar increases. The Y.W.C.A. Family Center in Columbus, Ohio, one of the largest family shelters in the state, has seen an occupancy increase of more than 20 percent over the last three months compared with the same period last year. The UMOM New Day Center in Phoenix, the largest family shelter in Arizona, has had a more than 30 percent increase in families calling for shelter over the last few months.
Without national data, it is impossible to say for certain whether these are anomalies. Clearly, however, many families are still being sucked into the swirling financial drain that leads to homelessness. The Griffith family moved from Rhode Island to Florida two years ago after Mr. Griffith, who was working as a waiter at an Applebee’s restaurant, asked to be transferred to one opening in Spring Hill, an hour north of Tampa, where he figured the cost of living would be lower. He did well at first, earning as much as $25 an hour, including tips. He also got a job as a line cook at another restaurant, where he made $12 an hour.
The family eventually moved into a three-bedroom condominium and lived the typical suburban life, with a sport-utility vehicle and a minivan to cart around their growing family. In January, however, the restaurant where Mr. Griffith was cooking closed. Then his hours began drying up at Applebee’s. The couple had savings, but squandered some of it figuring he would quickly find another job. When he did not, they were evicted from their condo.
They lived with Ms. Lennon’s mother at first in her one-bedroom house in Port Richey, Fla., but she made it clear after two months that the arrangement was no longer feasible. The family moved to an R.V. park, paying $186 a week plus utilities. By late July, however, they had mostly run out of options. They called some 100 shelters in Florida and found that most were full; others would not allow them to stay together.
They considered returning to Rhode Island. An Applebee’s in Smithfield agreed to hire Mr. Griffith. They found Crossroads on the Internet and were assured of a spot. Using some emergency money they had left and $150 lent by relatives, they bought bus tickets to Providence. Now, the family is crammed into a single room at Crossroads’ 15-room family shelter, which used to be a funeral home. All four sleep on a pair of single beds pushed together. There is a crib for Ethan, but with all the turmoil, he can now fall asleep only when next to his parents. A lone framed photograph of the couple, dressed up for a night out, sits atop a shelf.
The living conditions are only part of the adjustment; there is also the shelter’s long list of rules. No one can be in the living quarters from 10 a.m. to 4:30 p.m. The news is even off-limits as television programming in the common area. Residents were recently barred from congregating around the bench outside. Infractions bring write-ups; three write-ups bring expulsion. The changes have taken a toll on the family in small and large ways. Ethan has taken to screaming for no reason. Ava had been on the verge of being potty-trained, but is now back to diapers. Their nap schedules and diets are a mess. Their parents are squabbling more and have started smoking again.
Mr. Griffith found that he could work only limited hours at his new job because of the bus schedule. The family did qualify last week for transitional housing, but that usually takes a month to finalize. They are still pursuing rapid rehousing assistance. Others at the shelter with no job prospects face a steeper climb meeting the requirements. Every few days, new families arrive. A few hours after the Griffiths got back from the mall, a young woman pushing a stroller with a toddler rang the shelter doorbell, quietly weeping.
Housing Doesn’t Need a Crash. It Needs Bold Ideas.
by Gretchen Morgenson - New York Times
We all know that most of us don’t tackle problems until they’ve morphed into full-blown crises. Think of all those intersections that get stop signs only after a bunch of accidents have occurred. Better yet, think about the housing market.
Only now, after it has become all too clear that the government’s feeble efforts to “help” troubled homeowners have failed, are people considering more substantive approaches to tackling the mortgage and real estate mess. Unfortunately, it’s taken the ugly specter of a free fall or deep freeze in many real estate markets to get people talking about bolder alternatives.
One reason the Treasury’s housing programs have caused so much frustration among borrowers — and yielded so few results — is that they seemed intended to safeguard the financial viability of big banks and big lenders at homeowners’ expense. For example, the government — in order, it believed, to protect the financial system from crumbling — has never forced banks to put a realistic valuation on some of the sketchy mortgage loans they still have on their books (like the $400 billion in second mortgages they hold).
All those loans have been accounted for at artificially lofty levels, and have thereby provided bogus padding on balance sheets of banks that own them. Banks’ refusal to write down these loans has made it harder for average borrowers to reduce their mortgage obligations, leaving them in financial distress or limbo and dinging their ability to be the reliable consumers everyone wants them to be.
Various proposals are being batted around to address the mortgage morass; one is to do nothing and let real estate markets crash. That way, the argument goes, buyers would snap up bargains and housing prices would stabilize. Yet little about this trillion-dollar problem is so simple. While letting things crash may seem a good idea, there are serious potential complications. Here’s just one: Many lenders and some government agencies bar borrowers who sold their homes for less than the outstanding loan balance — known as a “short sale” — from receiving a new mortgage within a certain period, sometimes a few years.
For example, delinquent borrowers who conducted a short sale are ineligible for a new mortgage insured by the Federal Housing Administration for three years; Fannie Mae blocks such borrowers for at least two years. Private lenders have similar guidelines. Such rules made sense in normal times, but their current effect is to keep many people out of the market for years. And as home prices have plunged, leaving legions of borrowers underwater on loans, short sales have exploded. CoreLogic, an analytic research firm, estimates that 400,000 short sales are taking place each year.
More can be expected: 68 percent of properties in Nevada are worth less than the outstanding mortgage, CoreLogic said, while half in Arizona and 46 percent in Florida are underwater. “There is this perception that maybe we should let the market crash and then prices will level off and people will come out and buy,” said Pam Marron, a senior mortgage adviser at the Waterstone Mortgage Corporation near Tampa, Fla. “But where are the buyers going to come from? So many borrowers are underwater and they’re stuck; they can’t buy another home.”
There is no doubt that real estate and mortgage markets remain deeply dysfunctional in many places. Given that the mess was caused by years of poisonous lending, regulatory inaction and outright fraud — and yes, irresponsible borrowing — this is no surprise. Throw in the complexity of working out loans in mortgage pools whose ownership may be unclear, and the problem seems intractable. The moral hazard associated with helping troubled borrowers while penalizing responsible ones who didn’t take on outsize risks adds to the difficulties.
Still, there are real, broad economic gains to be had by helping people who are paying their mortgages to remain in their homes. Figuring out how to reduce their payments can reward responsible borrowers while slowing the vicious spiral of foreclosures, falling home prices and more foreclosures. And it just might help restore people’s confidence in the economy and get them buying again.
With that in mind, let’s recall an idea described in this space on Nov. 16, 2008. As conceived by two Wall Street veterans, Thomas H. Patrick, a co-founder of New Vernon Capital, and Macauley Taylor, principal at Verum Capital, the plan calls for refinancing all the nonprime, performing loans held in privately issued mortgage pools (except for Fannie’s and Freddie’s) at a lower rate. The mass refinancing could have helped borrowers, while retiring mortgage securities at par and thus helping pension funds, banks and other investors in those pools recover paper losses created when prices plummeted. Fannie Mae and Freddie Mac could have financed the deal with debt.
In the fall of 2008, when Mr. Patrick and Mr. Taylor tried to get traction with their proposal, roughly $1.5 trillion in mortgages sat in these pools. Of that, $1.1 trillion was still performing. Instead of refinancing those mortgages, however, the Washington powers-that-be hurled $750 billion of taxpayer money into the Troubled Asset Relief Program, which bailed out banks instead. Though one goal was to get banks lending again, it hasn’t happened.
Now, almost two years later, $1.065 trillion of nonprime loans is sloshing around in private mortgage pools, according to CoreLogic’s securities database. While CoreLogic doesn’t report the dollar amount of loans that are performing, it said that as of last June, two-thirds of the 1.6 million loans in those pools were 60 days or more delinquent. That means one-third of the borrowers in these pools are paying their mortgages. But it is likely that many of these people owe more on their loans than their homes are worth and would benefit greatly from an interest-rate cut.
If Fannie and Freddie bought these loans out of the pools at par and reduced their interest rates, additional foreclosures might be avoided. The only downside to the government would be if some loans it purchased went bad. The benefits of the plan could easily outweigh the risks. Institutions holding these loans would be fully repaid, a lot of borrowers would be helped and additional foreclosures that are so damaging to neighborhoods might be averted.
“Every program that the government has announced was focused on bad credits, but they were trying to fix a hole that is too big,” Mr. Patrick said. “The idea is to try to preserve the decent risks and not let them go bad.” At the very least, this is a sophisticated and realistic idea that’s still worth considering.
Here's Why You Should Be Scared Of Deflation
by Henry Blodget - Tech Ticker
Over the past six months, the main concern among investors and economists has shifted from inflation (rising prices) to deflation (dropping prices). In other words, instead of worrying about how your dollars are going to buy less stuff in the future than they buy today, everyone's now panicked by the thought that your dollars are going to buy more.
But what's so horrible about your dollars buying more? Declining prices would seem to be a good thing for consumers, not a bad one. Well, in that limited respect--stuff costing less tomorrow than it does today--deflation WOULD be good for consumers, especially consumers with savings.
But in other ways, as our guest Greg Ip, US Economics Editor at the Economist, explains, deflation is bad for consumers--especially consumers who have a lot of debt. Specifically, deflation makes the burden of debt grow rather than shrink. If you owe $100 today, you'll have to work harder to pay it back with dollars you earn tomorrow (because you'll get fewer of them for the same amount of work). Fortunately, Greg Ip thinks deflation fears are overblown. Is there a risk of it? Absolutely. But Ip's own forecast is that we'll avoid that fate.
"Socialize It!" Greg Ip's Solution to the Toxic Debt Problem
by Stacy Curtin - Tech Ticker
Bungee jumping is similar to the erratic behavior of business cycles, says Grep Ip, U.S. economics editor for The Economist: “The further you went down, the harder you came back.” But as many would tell you, this isn’t your typical recession or recovery. We are in a “post-crisis recovery,” says Ip who is also the author of the new book, The Little Book of Economics. “When you have a crisis like we have just been through, it’s like you’ve basically snipped the bungee cord. The financial system is unable to deliver lower interest rates to borrowers.”
In Ip’s opinion we won’t necessarily fall back into negative territory, but we will see a very sluggish recovery, spread out over many years. “If the pattern of other countries that have been through this holds true for us, we are going to have several years of sluggish growth" with GDP in the 2% to 3% range. That type of sluggish growth does not bode well for the millions of unemployed Americans. It also cuts and kills the life-span of political incumbents.
Ip doesn’t have a crystal ball to predict the outcome of Novembers elections, but does say that the desperation of politicians to be re-elected during a stalled recovery is something to worry about. “Politicians succumb to populist pressures and they do silly things,” he says. “They raise trade barriers to other countries, and that creates protectionism and everybody suffers. Or maybe they pass laws that make it very difficult to lay off workers. They think they are protecting workers, but they are actually discouraging employers from hiring them in the first place.”
Silly or not, Ip has a fairly controversial policy recommendation he says has been used successfully in other countries following banking crises: America should "make a concerted effort to buy up all the bad loans clogging the banking system; take 'em out of the private sector and in some sense socialize it," he says. "We really haven't done that - we've given the banks extra capital but all they're basically doing is stringing along the borrowers hoping to hide the problems for as long as possible. The longer they do that, the more they starve the growing part of the economy of credit."
The Two Categories of American Corporation - and Why it Matters
by Robert Reich
Some giant American corporations depend on a buoyant American economy and a world-class industrial base in the United States. Others are far less dependent. What comes out of Washington in the next few years will reflect which group has most political clout -- especially if Republicans take over the House and capture more of the Senate this November.
The first group includes national telecoms like Verizon and AT&T that need a prosperous America because most of their sales are here. Same with finance companies like Bank of America and Travelers Insurance whose business strategy has been built around U.S. consumers. Ditto for certain giant chains like Home Depot. Naturally, all these companies were especially hard hit by the Great Recession and its devastating impact on American consumers.
The second group includes companies like Coca Cola, Exxon-Mobil, Hewlett-Packard, Intel, and McDonald's, that get substantial revenues from their overseas operations. Increasingly this means China, India, and Brazil. Ford and GM are still largely dependent on US sales but becoming less so. GM sold more cars in China last year than in the US. Not surprisingly, American companies that are less dependent on American consumers have been showing the biggest profits.
Wall Street gets this. Viewing the 30 giants that make up the Dow Jones Industrial Average, analysts are predicting that the 10 with the largest portion of sales inside the U.S. will show average revenue gains of just 1.6 percent over the next year, while the 10 with the largest portion of their sales abroad will grow by an average of 8.3 percent.
So what does this mean for politics? Big companies hedge their bets and support both Republicans and Democrats. But in my experience, companies in the first group are more responsive to tax, spending, and monetary policies that cause unemployment to drop and wages to grow, and less obsessed by inflation and deficits, than are companies in the second group. The former are also more supportive of new investments in infrastructure and education, which improve U.S. productivity over the longer term.
The problem is that more and more big companies are moving into the second category because that's where the markets and the money are. Years ago groups like the Business Roundtable consisted mostly of large American corporations that were indubitably American, and took largely progressive positions on U.S. jobs and wages. I remember working with the National Association of Manufacturers on measures to improve U.S. education and job training. The American Electronics Association pushed the Reagan Administration for an industrial policy to preserve the nascent industrial base of U.S. computing.
No longer. Large American corporations are going global as fast as they can. That's good for their shareholders. But in a Washington ever more susceptible to their money and influence, that's not necessarily good for most Americans.
The backlash begins against the world landgrab
by Ambrose Evans-Pritchard - Telegraph
The neo-colonial rush for global farmland has gone exponential since the food scare of 2007-2008. Last week's long-delayed report by the World Bank suggests that purchases in developing countries rose to 45m hectares in 2009, a ten-fold jump from levels of the last decade. Two thirds have been in Africa, where institutions offer weak defence.
As is by now well-known, sovereign wealth funds from the Mid-East, as well as state-entities from China, the Pacific Rim, and even India are trying to lock up chunks of the world's future food supply. Western agribusiness is trying to beat them to it. Western funds - many listed on London's AIM exchange - are in turn trying to beat them. The NGO GRAIN, and farmlandgrab.com, have both documented the stampede in detail.
Hedge funds that struck rich 'shorting' US sub-prime have rotated into the next great play of our era: 'long’ soil. "Productive agricultural land with water on site, will be very valuable in the future. And I've put a good amount of money into that," said Michael Burry, star of 'The Big Short'. Needless to say, this has set off a fierce backlash. Brazil has passed a decree limiting acreage held by foreign-owned companies, the latest evidence that our half-century era of globalisation may be drawing to a close.
Authorities are probing whether firms are using local fronts to disguise investment in Mato Grosso and Amazonia. "Brazilian land must stay in the hands of Brazilians," said the farm development minister, Guilherme Cassel. It is starting to feel like the early 1970s when the military regime more or less froze out foreign buyers. Where will this leave the plans of SinoLatin Capital, Goldman Sachs, Harvest Capital, or Berkshire Hathaway? Warren Buffett, wisely, is exploring his $400m venture in soya and sugar with a Brazilian partner.
Argentina is drawing up its own law, pressed by the country's bishops. More than 7pc of national territory is owned by foreigners. The Benetton brothers have 900,000 hectares of Patagonia, some on disputed Mapuche tribal land. George Soros has holdings, so does CNN's Ted Turner, and currency trader Joe Lewis, who made himself a public enemy by blocking public access to the majestic Hidden Lake. "There are many foreigners who don’t buy to produce, but rather to position themselves in places with water, mineral resources and hydrocarbons," said Pablo Orsolini, a sponsor of the legislation.
In Madasgascar, a deal with Korea's Daiwoo Logistics to plant corn on territory half the size of Belgium led to the downfall of the government in 2008. The lease was revoked. "Madagascar's land is neither for sale nor for rent," said the new president. Even Australia's senate has called for an audit of foreign-owned land and water projects. The allure of global land is obvious. The World Bank says industrial and “transition” countries are losing 2.9m hectares of cultivated farmland each year. China is paving over its fertile belt on the Eastern seabord, and depleting the water basin of the North China Plain for crop irrigation.
Cheng Siwei, head of China's green energy drive, told me last week that eco-damage of 13.5pc of GDP each year outstrips China’s growth rate of 10pc. National wealth is contracting. "We have an intangible environmental debt that we are leaving to our children," he said. So does India. Much of the globe is stealing food from the future. The World Bank said we must lift production 70pc by 2050 to meet a triad of converging demands: extra mouths; rising use of animal feed from grains as Asia moves up the affluence ladder to meat-based diets; and the biofuel drive.
This will not be easy. The great leap forward in crop yields is fading. The Bank said rises in wheat and soya yields have declined from 2pc a year to zero since the 1970s in the West. Yield growth for rice and soya in emerging economies has fallen from 3pc to 1pc. "With few break-through technologies on the horizon, the scope for yield gains seems lower than in the past. Irrigation has contributed to past growth in crop yields, but water scarcity in many regions is now a major constraint," it said. The Green Revolution is "exhausted".
There is plenty of land in the former Soviet Union, where crop planting has fallen by 30m hectares since the sovkhoz collectives of the Khruschev era. Yields are still barely half Western levels on many Russian farms. Untapped hinterlands lie in Africa (Congo and Sudan) and Latin America. Developing countries are freeing up 5.5m hectares a year. There is a theoretical reservoir of 445m hectares of unforested cropland in the world, on top of the 1.5bn hectares in production.
Rich countries do not face a Malthusian crisis. They face a shift in the terms of trade between country and city, a reversal of urban dominance since the industrial revolution. We are on a thinner margin of food security, just as we are on a thinner margin of oil security. But those who live in poor countries that rely on food imports most certainly did have a Malthusian moment in 2008 when bread riots swept Egypt, Indonesia, and a string of states in Africa.
Last week, 10 people died in riots in Mozambique, set off by Russia's grain export ban. Wheat prices have doubled since June. The World Bank said the number of people who go to bed hungry each night has risen from 830m to more than 1bn over the past three years. The morality of the global land rush is finely balanced. Good projects are exactly what we need to solve the food crisis. They bring investment, know-how, and transport links. They create jobs. Peru's auction scheme on the Pacific Coast has been a success.
Yet the World Bank appears deeply torn. While the report endorses the Bank's open-door globalisation agenda, the sub-text dissents on every page. "Large land acquisitions come at a high cost. The veil of secrecy that often surrounds these deals must be lifted," it said. It warns of a "resource curse" that may enrich a small elite, leaving wreckage behind. Proposals are not properly screened. Peasants are forcibly displaced. Communal grazing lands are closed off. Some investors manipulate opinion with a media blitz of false promises. Nothing has been produced so far on almost 80pc of the land purchased. Benefits are often minimal, "even non-existent". In Africa, the land rush is diverting effort from the core task of helping small farmers raise yields.
The Bank implicitly questions whether it is wise to divert half of the world's increased output of maize and wheat over the next decade into biofuels to meet government “mandates". It will be another decade before the stalks and other inedible parts of plants can be used in bulk. Personally, I am coming to the conclusion that the biofuel drive is misguided, given that mass solar power and throrium-based nuclear reactors – coupled with electric cars - could step into the energy breach with less destructive effects. All it takes is global leadership. As Friends of the Earth reproaches us, every time we make a frivolous journey in an over-powered car we are hurting somebody.
Land is not a commodity. It has an atavistic pull in most cultures, and is semi-sacred everywhere. Absentee landlords who amass chunks of the earth – however well-intentioned - will be expropriated. Politics always prevails.
Humanity’s Defining Moment
by Damon Vrabel
Mish Shedlock has made a well-deserved name for himself, especially since the crash of 2008, as one of the few people who understand the problem we’re facing. I agree he’s way beyond the regular financial media that’s utterly clueless. This means he carries a certain moral obligation. But based on a recent article I’m afraid he has yet to step up to the plate because he’s still endorsing the same archaic left vs. right, union vs. business, capitalist vs. socialist rhetoric from politicians who have no clue about the flaws in our debt-based monetary system.
The 2-tier Economy
Embedded in the article is an unspoken assumption that the lower classes need to take pay cuts and layoffs so global bondholders and Chase bankers can be paid in full. That’s so…uh…20th century. If astute bloggers don’t start educating politicians by injecting into the political debate what they clearly know when they engage in market debate, the coming downward mobility for everyone but the bondholders is going to be galactic.
Mish agrees with NJ Governor Christie that the reason teachers are facing layoffs is because of teacher unions. Of course that’s true within the constraints of our current monetary system where lower class pay cuts are “good for the economy” while at the same time increased rent extraction by the financial class is “good for the economy.” One is the flip-side of the other. Manufacturing workers have learned this in spades, especially since their communities and way of life have been completely destroyed and moved to China. It’s a predator-prey economic relationship, precisely the reason unions exist in the first place. So what’s the real problem: the unions or the nature of the monetary system itself?
In a system where 100% of all money is sourced by going into debt to private capital holders who demand exponential returns, employees in fields like education which are managed on the balance sheet as “cost centers” must live within the austerity of cost reduction metrics. In real life terms, this means in order for the bondholders at the top to maintain their ever-increasing quality of life, millions of employees in cost centers must be happy with continually declining quality of life.
During inflationary periods when capital holders are injecting more liquidity, this translates into cost center employees receiving raises that stay below the inflation rate (these teachers stayed ahead, but systemically across the entire economy, cost centers are managed below inflation–again just look at the offshoring). During deflationary periods when capital holders are removing liquidity, cost center AND revenue center employees take pay cuts and get fired so the capital holders can keep making more money.
Questioning the Status Quo
Unlike politicians, Mish is smart enough to step out of the existing monetary framework and ask himself what might be a better solution given the extreme situation we’re facing. Why doesn’t he? Why don’t most people? Perhaps they haven’t been faced with the type of austerity that forces a person to question the sanity of a system where all money is controlled by private capital.
Or perhaps they’re “survival of the fittest” fundamentalists like Larry Summers, i.e. private sector bondholders deserve to win all the poker chips while everyone else is left with nothing. Or maybe they’ve just been enjoying a comfortable inflationary ride for so long that they can’t fathom the fatal flaw that’s been embedded in the monetary system from the very beginning.
That is…until now. The exponential game is reaching its end as the debt load approaches the point of saturation. If we don’t change the system before that inflection point, we’ll see the biggest austerity program ever as millions of people enter a tomorrow most people can’t dare to ponder today. In market terms, that inflection point is when global capital holders run on Treasuries and the Fed is forced to jack up its short rate to defend its balance sheet. That point may be next year or 10 years from now, but it’s coming if the status quo is not changed. And look out when it does. This is not populist rhetoric, but the basic mathematical fact of our system.
Rather than justifying it, this should make us reevaluate the monetary system we’ve been living under for 100 years. We’ve experienced a lot of development. We’ve already built the brave new world. Does a never-ending stream of new gadgets from Apple, reality shows from Fox, and dead bodies from wars really justify milking more return on capital (ROC) from the lower classes forever? Of course we know that’s impossible. The system is reaching not only its human velocity limits but its mathematical limits. A systemic sabbatical has never been more necessary, so an alternative form of liquidity to supplement our current system is necessary.
Anything Else Has Zero Moral Authority
A structural adjustment in the global monetary system in the spirit of jubilee is clearly the only moral solution at this point. Every major religion and every sane philosophy demands it and compels us to implement it. Anything else is morally deranged and will result in a class-based world war where the capital holders turn violent governments against the masses.
- Academic institutions and economists – you are obligated to develop and implement such solutions.
- Bloggers – focus solely on this issue to educate the politicians
- Wall Street and Silicon Valley employees – take a vacation and walk through the midwestern and mid-atlantic towns your work is destroying.
- Top capital holders – this is your crossroads. Making the right decision will do everyone much good. Making the wrong decision will result in your spiritual and psychological death while many in the lower classes around the world experience premature physical death.
Goolsbee: Unemployment 'Going to Stay High'
by Joshua Miller -ABC News
Unemployment in the United States is "going to stay high" Austan Goolsbee, Obama's chief economic adviser, told Christiane Amanpour this morning on "This Week." "This recession is the deepest in our lifetimes, the deepest since 1929," said Goolsbee, who was just appointed chair of the White House Council of Economic Advisers. "More than 8 million people lost their jobs. It's going to take a significant push on our part -- and time -- before that comes down," he said. "I don't anticipate it coming down right away."
Goolsbee Refuses to Say How Many Jobs Obama's New Stimulus Will Create
President Barack Obama spent last week rolling out new plans to help America's struggling economy -- $50 billion in infrastructure spending and about $200 billion in tax cuts for companies' investments in research and development. But just how many jobs will these pricey proposals create?
Amanpour asked Goolsbee the tough question of what effect it would have on unemployment, which currently stands at 9.6 percent. "It obviously depends on how you do it," he said. "It could have a significant impact on trying to get investment in factories ... by small businesses in buying equipment, research and development and job creation in this country."
"Do you have sort of a target number?" Amanpour asked. "I do not want to speculate on that," Goolsbee said. "The point of those policies, they aren't spending -- they're the government giving tax cuts to businesses to invest in this country, that's what they are."
Goolsbee Tackles Bush-Era Tax Cuts
If Republicans were willing to accept an extension of the Bush-era tax cuts for just the middle class, Goolsbee said "he would be happy," but he has his doubts. "In the past we have seen some of these circumstances in which what appears to be the offer of doing the sensible thing -- in the light of day, there is a little bit of a feeling, 'Well, if the president's for it, I'm against it,' then it falls apart."
Goolsbee was responding to comments made by House Minority Leader John Boehner, R-Ohio, on CBS News in which he said that if he was forced into a corner, he would support extending the Bush-era tax cuts just for people making under $250,000 a year -- what Obama calls the middle class. "If the only option I have is to vote for some of those tax reductions, I'll vote for it. But I've been making the point now for months that we need to extend all the current rates for all Americans if we want to get our economy going again, and we want to get jobs in America," Boehner said today in a pre-taped interview airing on "Face the Nation."
But will wavering Democrats get on board with extending tax cuts just for the middle class? On "This Week," Goolsbee said they likely would. "I'm not a political expert, but I believe there is a broad consensus, a middle ground if you will, that Democrats and Republicans, business people and workers can agree on, to get this economy growing faster, getting people back to work," he said. "We ought to come together."
SEC Homes In on Lehman, 'Funds of Funds'
by Kara Scannell and Carrick Mollenkamp - Wall Street Journal
The Securities and Exchange Commission's investigation into the collapse of Lehman Brothers Holdings Inc. is zeroing in on an accounting maneuver used to give the appearance that the company had reduced its debt levels, according to people familiar with the situation. Agency officials also are probing whether former Lehman executives failed to adequately mark down the value of the huge real-estate portfolio acquired in the securities firm's takeover of apartment developer Archstone-Smith Trust or to disclose the resulting losses to investors, these people said.
The narrowing probe could move the SEC closer to bringing civil charges related to Lehman's collapse in September 2008, though a decision doesn't appear imminent. In recent weeks, SEC officials have questioned a number of former Lehman employees, according to a person familiar with the situation. Additional interviews have been scheduled for this fall, but the agency hasn't indicated whether its probe will result in formal charges, according to people familiar with the matter. The U.S. attorney's office also is investigating Lehman's demise.
In another sign that the investigation is revving up, former Lehman executives have hired armies of lawyers, including some of New York's best-known criminal-defense lawyers, to fight off potential regulatory charges and related civil lawsuits. Those lawyers include Lewis Liman, a specialist in white-collar defense at Cleary Gottlieb Steen & Hamilton LLP, representing Ian Lowitt, a former finance chief at Lehman.
Mr. Lowitt is one of the former Lehman executives being scrutinized over their roles in the accounting move known as Repo 105, which allowed the company to shift as much as $50 billion in assets off its balance sheet. Other former executives being probed over the technique include Chief Executive Richard Fuld Jr. and finance chiefs Erin Callan and Christopher O'Meara, people familiar with the matter said.
The accounting sleight-of-hand was denounced in March as "misleading" by a court-appointed examiner. Repo 105 enabled Lehman to paint "a misleading picture of its financial condition," examiner Anton R. Valukas concluded. The accounting transactions often were done in a financial quarter's final days, shortly before Lehman reported earnings. The examiner also cited an interview with Lehman's former global financial controller, who confirmed "the only purpose or motive for [Repo 105] transactions was reduction in the balance sheet." He added that "there was no substance to the transactions."
The Repo 105 transaction was never disclosed to Lehman's board, regulators or investors, according to Mr. Valukas. As part of its probe, the SEC also is investigating the role of Ernst & Young, Lehman's outside auditing firm. The examiner concluded that Ernst & Young "took virtually no action to investigate the Repo 105 allegations." A representative for the firm declined to comment Thursday. Lawyers for the former Lehman executives have previously denied any wrongdoing related to the accounting moves, while Ernst & Young said it complied with generally accepted accounting principles.
The SEC and other U.S. regulators are under pressure from lawmakers who want to know why more individuals haven't been severely punished for their culpability in the financial crisis. At an April hearing, Rep. Al Green (D., Texas) said: "My concern is that no one to date has been arrested....It's about as close as you can get to fraud."
In his March report, Mr. Valukas wrote that the Repo 105 bookkeeping would yield more evidence of outright wrongdoing than the Archstone transaction if charges were brought. While Lehman's valuation of one Archstone position was "unreasonable" in the first, second and third quarters of 2008, for example, the examiner said he "did not find sufficient evidence to support a colorable claim for breach of fiduciary duty in connection with any of Lehman's valuations."
According to a recent court filing, the cost to defend the former Lehman executives is expected to reach $55 million by October. The expense has caused Lehman to tap liability insurance from four insurers so far, and an additional $15 million likely will come from a fifth insurer.
Spectre of deflation kills the mood at Jackson Hole
by Henny Sender- Financial TImes
The mood at the annual gathering of the world’s central bankers at Jackson Hole a few weeks ago was grim, particularly for central bankers from the developed world. That was in stark contrast to last year, when the mood was one of relief. The elite group has good reason for their anxiety. They know better than most the limits of monetary policy.
It is hard for any central banker to walk the tightrope between instilling confidence in the future and maintaining credibility. And many of them believe that Ben Bernanke, Federal Reserve’s chairman, may have lost his balance by trying to suggest that monetary policy at this point can make a significant difference. Officials at the Bank of Japan have come to believe that, while monetary policy can play a big role in influencing inflation, it cannot by itself stem deflation in a world of zero interest rates. Now some central bankers in the US are arriving at the same conclusion.
“We can’t create growth ourselves,” says one senior US central banker, “all we can do is create the conditions that make growth possible.” Many hedge fund managers are joining these central bankers in assuming that, for the time being, deflation is a bigger threat than inflation. They also assume that the steps that the Fed has taken won’t make much difference to the real economy but may provide more artificial signals in the Treasury market.
Yields continue to fall in the bond market, a trend reinforced by the Fed’s decision to renew purchases of Treasuries. That should help keep interest rates down. But there is little reason to believe that any marginal difference in rates will lead to further investment in capacity. Companies are already flush with cash and there is no sign that many plan to spend on capital and equipment either from their own piggy banks or those of their bankers, at least at home in the US.
Meanwhile, investors could do worse than read a report from JPMorgan’s Jan Loeys, who suggests trading strategies for those who believe that deflation is the next big, if not best, thing. “The risk is rising that the mature economies of Europe and North America are joining Japan into a decade of low growth and deflation,” he writes. “We suspect that [Mr Bernanke] was trying to allay fears rather than gauge probabilities when he said he did not consider this risk significant.” Although Mr Loeys adds that deflation is not his base case.
Mr Loeys recommends being overweight in regions, sectors and companies that are least vulnerable to deflation. “Most vulnerable are clearly economic agents with high nominal debt relative to real assets,” he adds. That means underweighting currencies of borrowing nations (the US and New Zealand, for example, against Japan or Switzerland) and the credit of indebted companies, smaller governments and local authorities.
Many fund managers have already positioned themselves in this way, running to places where balance sheets are healthy. That is one reason why emerging market bonds have done so well this year, gaining in value in the wake of the European sovereign debt crisis, rather than succumbing to the threat of contagion as they have in the past. By contrast, in 2008, they were hit hard.
“Emerging market debt has passed the test,” says one prominent macro hedge fund manager, who says he is enamoured of Brazilian government debt these days. Emerging market debt “keeps hitting new highs because there isn’t much around and the governments have better balance sheets”, he adds.
Moreover, to the extent that the Fed engages in any further quantitative easing, resulting in even more liquidity, there is no guarantee that the money will even stay in the US. Why should it? Many strategists such as Chris Wood of CLSA believe that Asian markets would be likely to benefit from such flows. Which is why one Australian attendee at Jackson Hole was overheard to sigh with relief at returning down under where, he said, people were so much more optimistic than in the western hemisphere.
Forget going green -- Earth doesn't care
by Paul B. Farrell - MarketWatch
Cover story: "The Earth Doesn't Care If You Drive a Hybrid!" Or recycle. Or eat organic food. Or live in a green house powered by solar energy. Or squander commodities. The Earth just doesn't care how much you waste.
Was that a cover story in Mother Earth News? Or The Onion? No folks, it was the cover story in the elite American Scholar Journal by Nobel physicist Robert B. Laughlin of Stanford University. I bring it to your attention because in today's resurgence of Know-Nothing party politics few care what scholars say about anything.
But you better care. Laughlin pinpoints the key reason a global crisis is coming soon: What he says has everything to do with America's global warming policies, our deficits, hot commodities, investment strategies and how to live in an age of increasing warfare. The Scholar's editor hammers home Laughlin's warning that "humans have already triggered the sixth great period of species extinction in Earth's history." The what? Yes, we are in an age of species extinction. And it's happening fast. The last extinction was 65 million years ago, at the end of the 250 million year Mesozoic era. But this one is very different. Ask yourself: Will the human species be the new dinosaurs, which vanished long before we arrived?
Your brain needs to shift into a new mindset to think like Laughlin, a physicist who thinks in geologic time, in hundreds of millions of years, about a planet that's been around over five billion years. Yes, geologic time is very long. But get this: The end may catch us by surprise. A sudden accelerating geologic quickie, like the asteroids that wiped out the dinosaurs. Or like the Earth's beginning, a sudden Big Bang.
But can anyone prepare? No. But not for lack of warnings. Why? Because our human brains can't see past our noses, let alone plan for obvious catastrophes. Same when it comes to climate change and energy futures. Laughlin warns that our collective judgment is "fogged by misunderstandings about the Earth. Experts are little help in the constant struggle to separate myth from reality, because they have the same difficulty, and routinely demonstrate it by talking past each other."
We're committing suicide -- and our leaders are the executioners
And the experts will all miss it: "Respected scientists warn of imminent energy shortages as geologic fuel supplies run out. Wall Street executives dismiss their predictions as myths and call for more drilling. Environmentalists describe the destruction to the Earth from burning coal, oil and natural gas. Economists ignore them and describe the danger to the Earth of failing to burn coal, oil and natural gas. Geology researchers report fresh findings about what the Earth was like millions of years ago. Creationist researchers report fresh findings that the Earth didn't exist millions of years ago."
So the warnings just cancel out one another. Laughlin's advice: "The only way not to get lost in this awful swamp is to review the basics and decide for yourself what you believe and what you don't." No, no, no. With the reemergence of Know-Nothing political discourse, myth and ideology beat reality and the facts.
Earth warns humans, you started the new species extinction
As anthropologist Jared Diamond put it in his classic "Collapse," our fate depends on leaders with "the courage to practice long-term thinking and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions" Unfortunately, "this type of decision-making is the opposite of the short-term reactive decision-making that too often characterizes our elected politicians, focusing only on issues likely to blow up in a crisis within the next 90 days." Even if our leaders see a disaster coming, they'll ignore it, till it's too late.
Laughlin's no activist like Bill McKibben warning "that it might be too late. The science is settled, the damage has already begun." Laughlin's an academic scholar. You even sense he's talking to a dear old friend, Earth, in a special language both understand, a grumpy old friend who doesn't really give a damn whether you drive a hybrid, recycle, eat organic or live in a greenhouse fueled by solar power; a dear old friend who periodically (on its geologic timetable) gets extra grumpy and simply wipes out species that threaten its survival, including humans if we get too threatening. Listen to Laughlin:"A considerable amount of evidence shows that humans are causing what biologists call the sixth mass extinction, an allusion to the five previous cases in the fossil record where huge numbers of species died out mysteriously in a flash of geologic time."
Like massive asteroids wiping out the dinosaurs "with the power of a million 100-megaton hydrogen warheads. The damage that human activity presently inflicts, many say, is comparable." Then he reminds us that "Earth didn't replace the dinosaurs after they died, notwithstanding the improved weather conditions and 20,000 ages of Moses to make repairs. It just moved on and became something different than it had been before."
The real problem? By 2050 we'll add too many cute new babies
So what's Earth now telling its old friend, Nobel physicist Laughlin? Earth is exposing the real problem that's forcing us into the sixth species extinction, the elimination of toxic species threatening Earth's survival: The "real problem is human population pressure generally -- overharvesting, habitat destruction, pesticide abuse, species invasion and so forth." So what's the solution? "Slowing manmade extinctions in a meaningful way would require drastically reducing the world's human population. That is unlikely to happen." Get it? Population growth will continue inexorably from six billion to nine billion. Earth doesn't want 50% growth. So the sixth species extension is in progress.
Whether you're an activist or a climate-denier, you can rant and rave all you want -- for or against all the politically correct campaigns to cut carbon emissions, recycle plastic water bottles, eat locally grown organic food, tax breaks for solar energy, buying hybrids or greenophying urban skyscrapers. At best, all that jockeying around may delay the endgame -- the inevitable sixth species extinction -- by a few seconds on the geologic time-clock. But it won't stop the clock. Fifty percent growth guarantees extinctions.
Yes, you can delay ... but you cannot stop the inevitable
Yes, you can delay Earth's endgame scenario, says Laughlin. But nothing can change the Earth's trajectory on the new path of the sixth species extinction ... as long as China, India, Africa, Asia, the Americas and the rest of the world keep adding more babies, blowing up the population bubble from roughly 6 billion today to more than 9 billion by 2050. Remember, if all 6 billion Earth inhabitants used resources and generated as much waste as America today, we'd already need six Earths. With a 2050 population of 9 billion, it's "game over."
Laughlin's geologic-time equation says population is the key problem that renders all recycling-hybrid-organic-green-solar-energy solutions ineffective in stopping the inevitable species extinction. Population growth is the one key variable in the Earth's economic equation that actually accelerates all other problems.
Laughlin concludes like a conductor building to the grand climax of an orchestral masterpiece: "The great ice episodes were not the only cases of natural climate change, however. Six million years ago the Mediterranean Sea dried up. Ninety million years ago alligators and turtles cavorted in the Arctic. One hundred fifty million years ago the oceans flooded the middle of North America and preserved dinosaur bones. Three hundred million years ago, northern Europe burned to a desert and coal formed in Antarctica. The great ice episodes themselves were preceded by approximately 30 smaller ones between one and two million years ago."
This time is different. Why? The first 'species extinction' with people
"Nobody knows why these dramatic climate changes occurred in the ancient past. ... One thing we know for sure is that people weren't involved. There weren't enough people around during the ice episodes to matter, and there weren't any people around before the ice episodes." So can we do anything to stop the "sixth species extinction?" No.
Climate change "is a matter of geologic time, something that the Earth routinely does on its own without asking anyone's permission or explaining itself," warns Laughlin. Earth "doesn't include the potentially catastrophic effects on civilization in its planning. Far from being responsible for damaging the earth's climate, civilization might not be able to forestall any of these terrible changes once the earth has decided to make them ... climate ought not to concern us too much ... because it's beyond our power to control."
So if climate change is "beyond our control," why not accept it and enjoy life? Yes, forget about recycling, hybrids, solar cells, wind power, clean coal, desalination and living green. They're ineffective, can't stop the "sixth species extinction" ... as long as population continues growing out of control from six billion to nine billion.
In the end, however, no matter what Laughlin says, we are still masters of our fate, captains of our souls. Yes, we did light the fuse on the next "Big Bang," the population time bomb. Yes, we set in motion the "sixth species extinction." Yes, the "geologic time bomb" is ticking away. But we made the decision. Not Earth. Admit it. Take responsibility. Go enjoy life, live for today. And stop wasting time, money and energy on ineffective solutions to reverse the inevitable ending that we already set in motion.