"In line to vote at Clarendon, Arlington County, Virginia."
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Ilargi: Let's start off by repeating once again what I still don't think everyone acknowledges: in essence, quantitative easing is a measure that is entirely experimental at best.
If there is any proof regarding its effectiveness, that proof is negative.
Japan's early millennium QE didn't revive its economy. Far from it.
The Fed's QE1, initiated in early 2009 and subsequently vastly expanded, never solved the problems it was alleged to be able to solve.
One may argue that it kept the economy from sliding downward even further, but one can claim that, and many of those with skin in the various games do, for a litany of stimulus measures such as TARP and the "Obama stimulus" as well.
The success of all these measures added together surely can't be seen as anything but ephemeral (re: unemployment and foreclosures), and the claim, if one were indeed made, that QE1 all by itself even just managed to keep the US economy in its present prolonged and drawn-out Wile E. Coyote moment, has no substance at all that is based on actual fact. Or, to put it another way, if QE1 achieved such a thing, which we don’t and can't know, the TARP and other stimulus measures were even grosser failures than we already recognize them to be.
Still, this week brought another round of QE in the US.
Why is that? Are we to believe that Bernanke et al perhaps can't read or do simple calculus? Are they desperate enough to throw the nation's financial future to the sharks, come what may? Has their faith in their particular sect of economics blinded them to such a degree that they can shake off all the evidence to the contrary and goose march ahead believing that even though all they did before has failed, "this will be the one"?
Of course not.
You may think by now that Geithner and Bernanke and Larry Summers and Bob Rubin and all the rest of the pack are miserable failures and two sheets to the wind and all that, but you'd do better to give them a lot more credit than that.
QE2 is here, despite the gigantic failures and behemoth losses of its predecessors, because QE works like a Mother Mary statue in tears' bleeding charm. Of course these guys all know that no proof of a QE ever reviving an economy exists. But they can pretend it does, and so they do: $900 billion, even for them, is real money.
Thing is, they never meant QE2 to do what they publicly claim they intended it for. This is nothing but another move to bail out lethally wounded banks.
A full additional $900 billion and counting was announced this week. Basically nothing but a swap of long term for short term paper, and therefore necessarily a -very- short term measure. What does it achieve, apart from a knee-jerk market reaction?
Wall Street banks get another injection of short term breathing space. That's all. And what was that last number on insider selling vs buying again? 3000 to 1?! Look, these people can't sell all their hygienic paper all at once, there's silly market regulations that prevent it, they need a time window to do it.
Hey, Bank of America rose 2% today, and Citi was up 3.7%. Now, if all is that rosy, why are William K. Black and L. Randall Wray calling for BofA's books to be opened and the entire firm to be nationalized? Well, BofA shares are at $12, an 80% loss from 3 years ago, and Citi's at $4, a well over 90% loss over the same time period.
These are America's largest financial institutions, and finance over the past 10-20 years has become a disproportionally huge chunk of the US economy. And its politics. And that's where the crux is.
I don’t know about you, but I have completely lost interest in trying to figure out which candidate in the midterm elections got how much from Wall Street. They all need their campaign contributions from bankrupt institutions such as BofA and Citi if they want to have a shot at being elected. It's a closed system, it really is. Putting a few guys behind bars wouldn't change that. And besides, none of them paid that kind of money just to be put behind bars to begin with.
But let's not try and solve it all in one go. For now, please understand that QE2 was never intended to jump-start the American economy. It was meant to prolong Wile E.'s 15 minutes of fame, to keep banks like BofA and Citi above water long enough to allow anyone who has some skin in it to get the hell out without triggering any alarm bells.
I mean, I see people triumphantly proclaim that stock prices are almost back to where they were. But look at those two banks! They're barely alive anymore, even in the markets. Citi's $4 a share is gutter territory, if not penny. Yes, sure, Goldman Sachs and JPMorgan have lost much less, percentage wise. And you know why? Because their links to Main Street are much less pronounced than those of consumer banks like BofA and Citi. That’s the difference. And Main Street is vanishing altogether.
There is money being handed out in QE2, which in the end is awfully simply yours, and which is thrown overboard in a way that makes you believe it's in your best interest. Some people see it as a hidden tax, but that's a far too gentle view. Daylight stand-and-deliver robbery or Grand Theft Auto are much more accurate denominations. After all, if this were a tax, it's clear to anyone and their pet parrot that it will never ever be paid off.
QE1, by the way, was to a large extent about the Fed buying up mortgage backed securities. Which, so it turns out, are based on, to put it mildly, highly disputable underlying "assets". What was it, $1.7 trillion?! And what would you think that's worth today? Or rather, what will it be worth once mark-to-miracle accounting can no longer "do the Wile E."?
Between the Fed and Fannie Mae and Freddie Mac, the American people own very very many trillions of dollars in silly paper. It's hard to say what its true value is, but once them whips and chips come down, it’ll be safely below double digits. Which will add up to much more than any hidden tax could ever hope to pay back.
Fannie just asked for another $2.5 billion of your cash, and they will get it too, and there's nothing you can do about it.
And you're right, what's $2.5 billion in the grand scheme of things? Then again, what's 1 in 7 Americans relying on food stamps? What does any of it mean anymore? 17% U6 unemployment? 4 million 2010 foreclosures, many of which are based on at least shaky, and pretty likely illegal, papers?
If that doesn't have enough meaning to move media attention away from rallies to restore whatever it is that apparently needs restoration, what will? 1 in 3 on food stamps? 40% jobless? Tent cities around every major city? $25 trillion in quantitative easing?
Yeah, the markets had a knee-jerk upward reaction. And that, or so it seems, is all anybody needs. Hyperinflation is sure to follow, or so they say. Then again, they said the same when QE1 occurred. Didn't happen, though. Will it this time? Will gold rise to the stratosphere? If so, who will buy? Bank of America? With your QE2 billions? Not very likely, they need that free cash to cover up increasing losses.
Is it that hard to understand, simple calculus? That every dollar spent ostensibly "on your behalf" will have to be paid back by you, even if not a penny of this, your own, money, went towards making your life better?
If that is really so, then QE2 works exactly the way it was meant to work. They're not all that dumb, and they're not making the grand mistakes some folks claim they do. They're robbing you blind in plain daylight, and, as they go along, make you believe that's in your best interest. It’s all nothing but a high-stakes game of pick-pocketing.
Just never even try to tell me again that it's not successful. And i don’t mean delivering economic growth; the US economy won’t see real growth for more years than you care to know. No, QE2 is very simply successful in fooling you.
by Bill Bonner, Daily Reckoning
Poor Ben Bernanke. There was a strange glow on his face as it appeared in Monday's Financial Times...like a bearded St. Joan of Arc; his hands were clasped together as if in prayer, and his eyes seemed to reach up to the gods, if not beyond.
He made his reputation as a master plumber in Princeton, New Jersey, interpreting drippy money supply faucets and deconstructing clogged fiscal drains. And now, he has become the hope of all mankind. Or at least that part of mankind that hopes to get something for nothing.
How came this to be? The answer is simple. The plumbers who came before him botched the job. Applying their wrenches to the recession of '01, they let too much liquidity into the system. Everything bubbled up. The subprime basement overflowed in '07...Ben Bernanke has been on the job ever since.
And this week the financial world held its breath. It waited. It watched. Ben Bernanke was hunched over...sweat on his brow...easing on his mind. Commentators, economists, and the public wondered if he could really create new money...new wealth...out of thin air? If this were true, it was a giant step forward for humanity, at least equal to discovering fire, creating Facebook or blowing up Nagasaki. Jesus Christ multiplied loaves and fishes. But He had something to work with. The Federal Reserve multiplies zeros...creating money - out of nothing at all. If it can really do the trick, we are saved. The legislature can go home. It no longer needs to worry about raising taxes or allocating public resources. Government can now buy all the loaves and fishes it wants. And give every voter a quart of whiskey on Election Day.
During the course of the last three years, the plumbers have spent hundreds of billions of dollars. It's hard to know what the final bill will be, since so much money - more than $10 trillion - is in the form of guarantees and asset purchases. They've pumped. They've bailed. They've squeezed and turned. They scraped their knuckles and cursed the gods.
You'd expect they might think twice before spending so much money. But on the evidence, they haven't even thought once. Quantitative easing has been tried before. Has it ever worked? Nope. Never. Do you dispute it? Give us an example.
Japan announced its QE program in the spring of 2001. The Nikkei 225 was around 12,000 at the time. It quickly rose to 14,000 as investors anticipated a payoff from the easy money. Then, stocks sold off again. Two years later the index was at 8,000. Today, it is still about 25% below its 2001 level.
Did printing money cause an up-tick in inflation? Not even. Core CPI was negative 1% when the program began. It rose - to zero - briefly...and then fell again and now stands at minus 1.1% after going down 19 months in a row.
America's own experience with quantitative easing is similarly discouraging. Between the beginning of 2009 and March of 2010, the Fed bought $1.7 trillion worth of mortgage-backed securities, creating new money specifically for that purpose. Where did the new money go? Into the coffers of the banks. Did it stimulate the economy? Not so's you'd notice. The unemployment rate today is 200 basis points higher than it was when the program began. And despite the flood of cash and credit, core CPI in the US is still only a third of its level in 2008.
Of course, there are other examples where central banks printed money with more gusto. In Germany, during and after WWI, the nation's real money - gold - was used to pay for the war and the reparations following. The central bank felt it had to create additional money - like the Fed - without gold backing. It added about 75% annually to the money supply, from the end of the war until 1922. By late 1923, the US dollar was worth 4 trillion German Marks. Still other examples - from Argentina, Hungary, Zimbabwe and elsewhere - are fun to read about. But they are not exactly the sort of thing you'd want to try at home either.
Even if Quantitative Easing were a precision tool in the hands of a skilled mechanic, it might be little more than a wooden club in Ben Bernanke's dorky grip. This is the same man who missed the biggest credit bubble of all time! There is no evidence that he could fix a bicycle let alone the world's largest economy. But there you have a more interesting question. What if economists were duped by their own silly metaphor? What if an economy were not like a bicycle? What if the gods were laughing at them?
Central planning and cheap fixes have been tried before. When have they ever worked? Give us an example. Perhaps an economy is too complex...like love or the weather...unfathomable...and largely uncontrollable, something you can make a mess of but not something you can improve.
We have no more information as to the fundamental nature of things than anyone else. A toaster oven is designed and built for a purpose. When it doesn't work, it can be fixed. But an economy? Who built it? Who can fix it? It is an organic, evolving system... whose purpose and methods are infinitely nuanced. Does it let banks go broke? Does it back up once in a while? Does it permit falling house prices...high unemployment...and deflation? Yes...so what? Does it always do what politicians and economists want? No? So what?
It has a sense of humor too. Wait until it turns around and kicks the clumsy mechanic in the derriere!
Federal Reserve Rains Money On Corporate America -- But Main Street Left High And Dry
by Shahien Nasiripour - Huffingtonpost
Bill Gross will be one of the few to benefit from the Federal Reserve's announcement this afternoon. The legendary money manager, who oversees more than $1.2 trillion at Pacific Investment Management Co., stands to profit off the plan hatched by the nation's central bank. The Fed announced that it will buy between $850 to $900 billion of U.S. government debt, also known as Treasuries, through June to spur the recovery. Over the coming months, the Fed will then communicate its specific plans well ahead of any such purchases, allowing wealthy investors and firms a chance to buy those assets first so they can sell it back to the Fed at a profit. Folks like Gross will be the biggest beneficiaries.
When it comes to helping Wall Street and corporate America, the Federal Reserve spares no expense.
It expanded its authority and bailed out securities and insurance firms. It tethered the main interest rate to zero. It more than doubled its balance sheet to $2.3 trillion by purchasing mortgage-linked securities and U.S. government debt. To arrest the free-falling economy and jolt it back to life, the nation's central bank has engaged in an unprecedented campaign to ensure banks have cash and corporations access to credit.
That part of the Fed's plan has worked. The economy is progressing through a slow, though not entirely visible, recovery. Employers are gradually adding workers to their payrolls. Industrial production is rising, as is personal consumption. The economy is slowly growing. The problem is that the Fed's actions have served to help just a small, but powerful, constituency: Wall Street, and the firms that do the most business on it.
The rising tide the Fed ushered in with hopes that it would lift all boats hasn't materialized. Now, on the verge of another round of asset purchases and other steps in order to further bring down the cost of credit, questions are being raised over just who, exactly, the Fed would help.
Asked Thursday how he did "so well in the past 18 months," Gross, who runs PIMCO's $252.2 billion Total Return Fund, told Bloomberg Television that in addition to a variety of other investments he's made money "from mortgages, yes, in terms of buying them in front of the Fed and selling them to the Fed over the six- to 12-month period of time." Translation: the man who runs the world's biggest bond fund is profiting from buying securities he knows the Fed will eventually want, and then selling them to the Fed at a premium.
Meanwhile, families are being devastated by historic unemployment and record home foreclosure rates. Households and small businesses can't get credit. A quarter of homeowners with a mortgage owe more on that debt than the home is worth. Borrowers are declaring bankruptcy in near-record numbers. "In my darkest moments, I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places," Richard W. Fisher, president of the Fed bank of Dallas, said last month before a gathering of economists in New York.
As part of its legal mandate, the Fed is required to pursue policies over the long-term that lead to "maximum employment, stable prices, and moderate long-term interest rates." But the extraordinary steps taken to battle the Great Recession's persistently high unemployment rate -- like buying Treasuries, mortgage-backed securities and the debt of mortgage giants Fannie Mae and Freddie Mac -- haven't been enough.
Unemployment has been stuck above 9.5 percent since August 2009, or 14 of the 20 full months Barack Obama has occupied the White House. More than six million unemployed workers, or two of every five, have been out of a job for at least six months, Labor Department data show. A potentially slow decline in the number of Americans without work "is of central concern to economic policymakers because high rates of unemployment -- especially longer-term unemployment -- impose a very heavy burden on the unemployed and their families," Fed Chairman Ben Bernanke said Oct. 15.
The Fed created numerous programs designed to stimulate the flow of credit. They helped avert a Depression, but their programs have not been enough to reinvigorate the job market. Now, with record unemployment and Washington unable to offer meaningful solutions, the Fed is all we have, commentators say. There's no where else to look for help. "It's all we got," said Diane C. Swonk, chief economist at Mesirow Financial, during an Oct. 8 appearance on CNBC.
Tinkering with the cost of money, though, can't overcome structural issues. For example, the American consumer gorged on cheap debt because he was unable to maintain his standard of living during a decade with little income growth. So credit afforded consumers the opportunity to live the life they otherwise could not afford. That era has ended.
"The Fed simply does not have the appropriate tools to deal with the myriad of structural hurdles facing the economy, ranging from housing, to debt, to commercial real estate, to state and local government cutbacks and fiscal disarray, to excessive regulation, and the list goes on," David A. Rosenberg, chief economist and strategist at Gluskin Sheff & Associates in Toronto, said in a note to clients Wednesday.
Bernanke told Congress in June and July that the economy needed fiscal stimulus. He warned lawmakers not to cut spending. A newly-resurgent Republican Party, which took control of the House of Representatives and made significant inroads in the Senate, has vowed to cut spending.
So the Fed will continue its activist approach. Yet experts are questioning whether the Fed has pursued policies that push corporate America to invest at home, or whether those policies have had the perverse effect of driving businesses to hoard cash or invest abroad.
Will "another...cut to the general level of interest rates from their current record-low levels...really convince debt-strapped consumers who are focused on balance sheet repair to go out and borrow and spend more?" Rosenberg wrote Wednesday. "Or will it entice capacity-idled companies that are already sitting on a trillion dollars in cash to go on a spending and hiring spree...? Are the banks, who just sat on excess reserves the Fed plowed into the financial system in early 2009, going to unclog the credit channels when nearly one-in-three American households have a sub-620 FICO score and 25 percent of outstanding mortgages are 'upside down'? Hardly likely."
Low Rates Not Leading To Growth
Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., told clients last month that "lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the financial industry." "This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefits are reduced," Grantham, whose firm manages more than $104 billion, wrote in his latest quarterly newsletter. "It is likely that there is no net benefit to artificially low rates."
The noted strategist added that the Fed's low-rate policy is a "large net negative to the production of a healthy, stable economy with strong employment." As Grantham intimated, companies aren't necessarily using the Fed's zero-interest rate policy, or ZIRP, to hire at home. Walmart, for example, spent $9.1 billion on capital expenditures in the 2008 fiscal year, the company said in an Oct. 13 presentation for investors and analysts. That dropped to $5.8 billion in 2009, and $6.6 billion in 2010.
In 2006, 71 percent of the company's cash went to capital expenditures and acquisitions, while 29 percent went towards share repurchases and dividends, Walmart noted in a separate Oct. 13 presentation. That's now flipped. Over the last 12 months, 43 percent of the firm's cash has gone towards building the company and hiring more workers. Fifty-seven percent went to shareholders.
In other words, the world's largest retailer isn't using the majority of its free cash to build or hire on a large scale. Rather, it's giving it back to shareholders. IBM, one of the world's largest technology companies, spent $2.6 billion on long-term improvements in the firm through the first three quarters of last year, and $2.9 billion during the same period this year. But while the firm spent $4.4 billion on share buybacks during that period last year, IBM spent $11.8 this year, according to its recent earnings reports.
Companies with spotty credit aren't using the opportunity afforded by low rates to build, either. Just 21 percent of proceeds from high-yield bond issuance during the three-month period ending in September went to general corporate purposes, leveraged buyouts and acquisitions, according to a Oct. 22 report from Fitch Ratings.
"Firms continue to cut back on their capital expenditures and R&D outlays," analysts at JPMorgan Chase said in a September report. Money spent on long-term investments and research and development represents less than 55 percent of operating cash flow at the non-financial companies that make up the Standard & Poor's 500 index. It's down from a high of more than 85 percent as recently as 2001, the analysts noted.
But money is flowing overseas. The proportion of capital expenditures spent abroad has risen from 18 percent in 2001 to 27 percent in 2008, the JPMorgan analysts wrote. It's likely higher today "thanks to growth opportunities prevalent in emerging markets." On Oct. 29, the Treasury Department reported that U.S. portfolios held some $6 trillion of foreign securities at the end of last year. At the end of 2008, U.S. portfolios held $4.3 trillion in foreign securities.
The trend continues this year. There's been a net outflow of money from domestic equities every month since May, according to the Investment Company Institute. Foreign equities, on the other hand, have been growing.
"[F]ar too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please," Dallas Fed president Fisher said Oct. 19. "This would not be of concern if foreign direct investment in the U.S. were offsetting this impulse. This year, however, net direct investment in the U.S. has been running at a pace that would exceed minus $200 billion, meaning outflows of foreign direct investment are exceeding inflows by a healthy margin.
"[I]f it were to prove out that the reduction of long-term rates engendered by Fed policy had been used to unwittingly underwrite investment and job creation abroad, then the potential political costs relative to the benefit of further accommodation will have increased," he added. In other words, the Fed's next round of asset purchases may not help American families. Rather, it may benefit the citizens of other nations.
Savers Getting Squeezed
Meanwhile, savers, retirees and those living on fixed incomes are getting burned. In November 2008, a month before the Fed lowered rates to near zero, the average bank-offered checking account in the U.S. was paying consumers 0.34 percent interest, and the average savings account was paying 0.49 percent, according to Market Rates Insight, a data provider. Both have been steadily falling since. In September, checking accounts were yielding 0.16 percent; savings accounts were paying a minuscule 0.24 percent in interest.
In the week ending Dec. 10, 2008, just a few days before the Fed lowered the overnight bank-to-bank lending rate to a record low, six-month certificates of deposit were yielding on average 1.93 percent, according to Bankrate.com. They now yield 0.32 percent. One-year CDs were paying 2.30 percent back in December 2008, while five-year CDs were yielding 3.13 percent. They're now at 0.53 percent and 1.57 percent, respectively, Bankrate.com data show. CDs are offered by banks and are FDIC-insured.
Taxable money-market funds, sold by brokerage firms and not FDIC-insured, are yielding 0.03 percent on average, according to iMoneyNet, a research firm. In December 2007, when the main interest rate was 4.25 percent, money funds were offering investors 4.08 percent. These funds typically yield about 50 basis points, or 0.50 percent, below the main interest rate, said Mike Krasner, managing editor of iMoneyNet. The main interest rate is officially called the federal funds rate. But now, with the fed funds rate tied to zero, the yield offered by money funds can't really go much lower.
Facing a volatile stock market and stung by losses in their retirement accounts and on their homes from the financial crisis, retirees are reluctant to take on too much risk, financial advisers say. "It's a challenge to get yield because often times people want the safety, but when you insist on safety there's not much yield out there," said Qi Lu, senior portfolio strategist at New York-based Altfest Personal Wealth Management.
Low interest rates are taking their toll. "It's been a very difficult environment for retirees," said David Certner, legislative policy director at AARP. "We're getting complaints from people who are afraid of the stock market, and about the lack of safe fixed-income investments." Lu, whose firm oversees about $600 million for clients with between $500,000 and $20 million in assets, said that bonds are "not a very attractive investment when everyone is issuing debt, just like it's not good to invest in equities when everyone is issuing shares."
"My clients always assumed they'd get three to four percent off their CDs, and they cant get that," said Mitchell Dannenberg, president of LTCi Marketplace in Florida. "They were always counting on safety in income." Certner said that the seniors association has received calls urging it to lobby for higher interest rates.
Wendell B. Fuller, an investment adviser with Bowen|Fuller Wealth Advisors in Midlothian, Virginia, said his clients, too, are worried about the Fed's keep-rates-low agenda. "My retired clients are the ones who are concerned about the low rates, especially those living on a fixed income," Fuller said. His clients typically have about $500,000 to invest. They include small business owners, doctors, corporate executives, and retired blue-collar workers sitting on healthy savings.
"I have this client, she's 83 years old," Fuller said. "Her mentality is, 'I need income.' But the way my practice is, we're not trying to generate income because with income comes taxes. So my focus is on cash flow so you have cash to pay your bills. "We've always had our savings and money market accounts, where we could get that little bit of interest. But no longer. We're not getting much, but it is what it is."
Molly Balunek, a senior vice president at Inverness Investment Group who primarily works with women, said she recently spoke with a host of retail investors as part of a call-in event where non-clients could call and ask questions. Low interest rates dominated the discussion. "I was really surprised by it," Balunek said. "And they weren't all older people. Some were, but many were younger and they were frustrated by the low rates." One caller told Balunek that she had $50,000 in cash but had earned just $0.10 on it for the whole year.
The callers, and her clients, know there's not much they can do, said the Cleveland, Ohio-area adviser, whose firm oversees about $350 million. If they want the safety of a savings account, they have to give up on interest income. If they want interest income, they have to take on more risk. "They all seem relieved and resigned" when Balunek tells them that, she recounted in an interview. "It's sad because a savings account is supposed to be a safe place and everyone remembers 2, 2.5 percent interest rates, which are the historical average. "They know there's no magic elixir. It stinks."
Corporations Sitting Pretty
For corporations, however, life has rarely been better. Sitting atop a record $1.8 trillion in cash and other liquid assets, non-financial U.S. firms are awash in wealth, Fed data show. Relative to their short-term liabilities, U.S. corporations haven't been this flush since 1956. By that same measure, their balance sheets are twice as strong as they were just 15 years ago.
Thanks to the Fed, which cut the main interest rate -- the rate at which banks lend to each other for overnight funds -- to the 0-0.25 percent range in December 2008, and has kept it there ever since, corporations have been able to borrow at ever cheaper rates. The combined effect of the central bank's zero interest-rate policy and the massive flood of cash the Fed has poured into the system via asset purchases resulted in a lowering of the interest rate the government pays on its debt.
The central bank's zero interest-rate policy and the massive flood of cash it's poured into the system via asset purchases have given banks and investors a ton of free money to play with, but gun-shy financiers have sunk that money right back into low-risk government debt, on the assumption that the U.S. Treasury will be among the last enterprises on Earth to default. This increased demand for Treasuries, plus an across-the-board lowering of interest rates based on the aforementioned Fed policy, has allowed the government to offer less generous interest rates on its debt securities.
Two-year notes yielded 0.3435 percent at the close of trading Tuesday, the fifth-lowest yield ever, Bloomberg data show. The yield on 10-year Treasuries stood at 2.59 percent, slightly higher than the incredibly-low 2.38 percent on Oct. 7. In other words, investors are getting 0.34 percent interest annually to own a piece of two-year government debt, and just 2.59 percent for 10-year debt. On Halloween of 2007, 10-year Treasuries closed the day yielding 4.48 percent; two-year notes yielded 3.94 percent.
Lower yields on Treasures has in turn brought down the interest rate corporations pay investors to buy their obligations. Starved for higher yields, investors are pouring into corporate bonds. The influx of investors, plus strengthened balance sheets thanks to lower labor costs, higher worker productivity, and low interest rates, has enabled corporations to issue debt at some of the lowest rates on record.
Last month, Walmart set new records by offering investors just 0.75 percent interest on its issuance of $750 million of three-year debt and 1.5 percent interest on its $1.25 billion of five-year notes. Both are the lowest yields on record for U.S. corporate debt, Thomson Reuters data show. Investors, desperate for higher yields than Treasuries yet somewhat reluctant to take on too much risk, gobbled it up.
Walmart's record issuance was the third time in as many months that a U.S. corporation broke an all-time low for interest rates, according to records dating back to 1970. In September, Microsoft set the record for all-time lowest yields on three- and five-year debt. In August, IBM set a now-twice broken record by offering what was then a headline-making 1 percent for its three-year notes, while Northern States Power-Minnesota, a subsidiary of Xcel Energy, set the record for its five-year debentures.
In fact, the 10 lowest rates on record for U.S. corporate debt across all maturities -- three-, five-, 10-, and 30-year debt -- have all been issued in 2010, according to Thomson Reuters data. But it's not just corporations with outstanding credit ratings that are benefiting.
In the U.S., corporations with spotty credit have issued nearly $226 billion in so-called high-yield debt this year, according to research firm Dealogic. Better known as "junk" debt because of the issuer's tarnished credit rating and the high interest rate the corporation needs to pay in order to attract investors, these offerings have already surpassed last year's total of $163.6 billion, and more than quadrupled the total from 2008. This year's total is the highest in at least 15 years, Dealogic data show.
Cliffs Natural Resources Inc., a mining and natural resources concern rated BBB- by Standard & Poor's, the absolute lowest investment grade, could sell about $500 million of 10-year notes at 4.8 percent, according to an Oct. 20 note by analysts at S&P. U.S. government debt of the same maturity was yielding 4.8 percent as recently as August 2007.
Banks Nursed Back to Health
Times are so good that Goldman Sachs, the investment bank targeted by regulators and lawmakers in part became it became a symbol of Wall Street excess, issued $1.3 billion in debt last month that won't mature for another 50 years. Investors are getting 6.125 percent in annual interest on it. Despite the low yield for such a long duration -- debt usually only ranges up to 30 years, for banks typically less -- investors couldn't snap up enough.
Goldman isn't the only bank to benefit, though. Banks across the country are sitting on boatloads of free cash, just like the corporations they serve. Through September, banks had $981 billion in excess reserves parked at the 12 regional Fed banks across the country, Fed data show. In February it was $1.2 trillion. In August 2008, just weeks before the financial system nearly imploded, banks had just $1.9 billion in excess reserves.
"[R]ight now the economy and banking system are awash in liquidity with trillions of dollars lying idle or searching for places to be deployed," Kansas City Fed President Thomas M. Hoenig said Oct. 12. Rather than going to households and small businesses that need credit, though, that money instead is going to the biggest borrower of all -- the U.S. Treasury Department.
U.S. banks now own more than $1.5 trillion in Treasuries and taxpayer-backed debt issued by mortgage giants Fannie Mae and Freddie Mac, according to the latest weekly data provided by the Fed. It's a 30 percent increase from the week prior to the Fed's Dec. 16, 2008, announcement that it was lowering the main interest rate to 0-0.25 percent.
Outstanding commercial and industrial loans at U.S. banks have fallen from $1.6 trillion in October 2008 to $1.2 trillion this past September, Fed data show. The $390 billion drop is equivalent to a 24 percent reduction in credit to businesses. For families, it seems that it's never been harder to get a line of credit. For banks, they book an easy profit by borrowing at near-zero cost and lending it back to Uncle Sam.
In a March interview with The Huffington Post, Hoenig said the Fed didn't "have any business guaranteeing Wall Street spreads," otherwise known as the profit generated from the difference between borrowing at low interest rates and at lending higher. Thanks to near-zero borrowing rates, the Fed has nursed the nation's banks back to health and shored up their balance sheets.
According to the Federal Deposit Insurance Corporation, in the three-month period ending in June banks enjoyed their lowest cost of funds in the 26 years the FDIC has kept quarterly records. That cost -- the money banks pay to garner deposits and other funds that are then used to lend, invest or trade -- dropped to 0.97 percent, the first time they've paid less than one percent during a quarter since at least 1984, the bank regulator's records show. Historical records on commercial banks' cost of funds going back to the inception of the agency in the early 1930s show that the last time banks paid less than one percent for the year was 1960.
It may be even lower for the most recent quarter, which ended Sept. 30. But it's the biggest banks that are benefiting the most from the Fed's generosity. Banks with more than $10 billion in assets paid just 0.85 percent for their money. The next class of banks, those with assets between $1 billion and $10 billion, paid 1.29 percent, FDIC data show.
The Fed made its Wednesday announcement at the conclusion of a two-day policy-setting meeting. Prior to the meeting, regional Fed chiefs from Minneapolis, Philadelphia, Kansas City, Dallas and Richmond were bristling at the expected announcement that the Fed will do more. "Dumping another trillion dollars into the system now will most likely mean they will follow the same path into excess reserves, or government securities, or 'safe' asset purchases," Hoenig said Oct. 12.
In June, the Fed's policy makers forecast the unemployment rate next year to be between 8.3 and 8.7 percent. On Wednesday, it said that "progress toward its objectives has been disappointingly slow."
Albert Edwards: QE Failure And The End Of Fiscal Expansion Will Lead To A Mammoth Collapse
by Gregory White - Business Insider
Dylan Grice recently suggested that investors might want to nibble at stocks in the wake of QE2. But don't worry, says his colleague Albert Edwards, the team at SocGen is still wildly bearish.
His defense: Look it's simple, if there's money to be made, we're in, even if it doesn't fit our long-term thesis.
Or, less adroitly (emphasis ours):
Dylan Grice and my erstwhile colleague James Montier have one key point in common when it comes to their investment approach - namely they both recognize the futility of economic forecasting. Dylan's mantra (apart from "make the tea Albert") is there is no such thing as toxic assets, only toxic prices. Hence, like James, he is happy to invest if the asset is cheap enough. This approach also applies to insurance. Where there is a credible risk and insurance IS CHEAP, then one should buy that insurance. Hence his recent note on the high risk of runaway inflation in Japan sending the Nikkei to 63,000,000 in 15 years came to the conclusion that insurance is cheap and it is available.
So, right now there is money to be made in some bets that don't see equity prices collapsing. But don't worry, they're still going to, in the most crushing deflationary recession to date. The trigger? Emerging markets tightening:
The simple fact is that if, as I expect, QE2 fails and fiscal tightening sends the fragile western economies back into recession, we will see the unfolding liquidity driven EM and commodity bubble burst just as violently as it did in the second half of 2008.
His reminder: This has happened before in 2008.
Let's Set the Record Straight on Bank of America: Open the Books!
by William K. Black and L. Randall Wray
While we welcome Bank of America's response to our two-part essay, "Foreclose on the Foreclosure Fraudsters," it does not actually respond to any of the facts or analytical points we made. Indeed, it does not engage the issues we raised. Bank of America's response contains some useful data on foreclosures that supports points we have made in prior articles, but overwhelmingly it is a plea for sympathy; Bank of America says it is beset by deadbeat borrowers and it is distressed that it is criticized when it forecloses on their homes. Bank of America portrays itself as the victim of an ungrateful public.
Bank of America Should be Placed in Receivership NOW
We argued that the FDIC should place Bank of America in receivership and the federal banking agencies should impose a moratorium on foreclosures until the mortgage servicers correct their systems, which currently often rely on massive fraud and perjury. There can be no assurance that foreclosures are lawful until the banks actually find the mortgage "wet ink" notes signed by debtors to prove they are the true beneficial owner of the mortgage debts, which is required to seize property.
We also called on the banks to identify and compensate homeowners who were fraudulently induced to borrow by the lenders and their agents through a number of fraudulent practices variously marketed by lenders as "no doc", liar, and NINJA loans (all subspecies of what the industry aptly called "liar's" loans). We showed that outside studies by a wide range of parties showed massive fraud by the bank.
The demands by investors that Bank of America repurchase loans and securities sold under false "reps and warranties" may cause exceptional losses if those making the demands document the broader fraud by the lenders. The article "Bank of America Resists Rebuying Bad Loans" shows that Bank of America's potential loss exposure to Fannie and Freddie is staggering: "[Bank of America] said it sold $1.2 trillion in loans to the government-controlled housing giants from 2004 to 2008 and has thus far received $18 billion in repurchase claims on those loans."
The company is fighting the groups that are demanding that it repurchase the toxic mortgages. Its CEO, Brian Moynihan counters their claims with the following analogy:
Such investors are like "people who come back and say, 'I bought a Chevy Vega, but I want it to be a Mercedes with a 12-cylinder [engine],'" Mr. Moynihan said in October. "We're not putting up with that."
One-third of its subprime business is in default and Mr. Moynihan thinks Countrywide was selling Vegas? If one third of Vegas crashed and burned within three years of being purchased the metaphor might be apt and completely incriminating. We argued that putting Bank of America into receivership is the proper remedy for its substantial violations of the law and for its continuing reliance on unsafe and unsound practices. Outside reviews have documented the most extensive and financially harmful violations of law and unsafe banking practices and conditions in history.
As argued in a recent article by Jonathon Weil, the bank is nearing a "tipping point" as markets recognize it is "cooking the books," vastly overstating the value of its assets as it refuses to recognize the true scale of losses on its purchase of Countrywide. Ironically, it still carries on its books $4.4 billion of fictional "goodwill" value created by overpaying for Countrywide (a notorious control fraud), as well as $142 billion of home equity loans that are worth far less. A more honest accounting of "good will" and of the value of home equity loans would take a big bite out of Bank of America's market capitalization ($116 billion), which has lost 41 percent of its value since April 15. The markets are moving ever closer to shutting down the institution, but Moynihan is not "putting up with" the demand by investors for Bank of America to come clean on its fraudulent practices.
Ms. Mairone's Response Verifies Our Claims
Rebecca Mairone replied on behalf of Bank of America to our two-part post. Step back for a moment and consider the context of Bank of America's response. We cite evidence that the bank has committed massive fraud, explain that this provides a legal basis for placing it in receivership, and call on the FDIC to do so. Bank of America chooses to respond publicly, but its response never contests its massive fraud or our demonstration that there is a legal basis for placing it in receivership.
Instead, Bank of America complains that we "do nothing to illuminate the challenges [BofA's home mortgagees] face." This is not our task; nevertheless, the claim is incorrect. We illuminate the problems posed by the fact that nonprime borrowers were frequently victims of mortgage fraud perpetrated by lenders as well as many other operatives in the unprecedented criminal lending and securities fraud of the past decade. This problem is typically ignored -- at least by the financial sector and the mainstream media -- so we did "illuminate" the problem and the cause of action borrowers could bring for "fraud in the inducement."
We showed that the fraudulent senior officers that controlled home mortgage lenders created "liars," and NINJA loan programs designed to induce millions of Americans to take out loans they could not afford to repay. The endemic underlying fraud in the origination and sale of nonprime loans is critical to understanding why loan defaults are massive, why borrowers were typically the victims of the fraud and lost their meager savings due to the frauds, why loan modifications typically fail, and why foreclosure fraud has been so common. The endemic fraud also hyper-inflated the bubble and helped cause the economic crisis and severe loss of employment. Over a million Bank of America borrowers face these "challenges" that we "illuminated."
Bank of America's response is guilty of what it criticizes; it ignores the fraud by nonprime lenders and sellers, particularly Bank of America's frauds in both capacities. It does not seek to "illuminate" the frauds or the problems that arise from endemic mortgage fraud. We did not invent the "epidemic" of mortgage fraud. The FBI began testifying about that in 2004. The FBI predicted that it would cause a "crisis" if it were not stopped -- and no one claims it was stopped.
The mortgage industry's own fraud experts opined publicly in 2006 that the type of loans that Countrywide decided to elevate to its favored product was an "open invitation to fraudsters" and fully deserved the phrase that the lenders used to describe the product: "liars' loans". (Bank of America chose to purchase Countrywide at a time when it was notorious for the awful quality of its mortgage loans.) It is the lenders and their agents, the loan brokers, that directed the lies in these liar's loans and appraisals and it was the lenders that made fraudulent "reps and warranties" in order to sell the fraudulent loans on to others in the form of securities.
Economists and white-collar criminologists share a belief in "revealed preferences." The senior officers that control lenders provide an "open invitation to fraudsters" in the midst of an "epidemic" of fraud because they intend to profit from those frauds.
Instead of contesting its issuance and sale of massive numbers of fraudulent loans, Bank of America writes to provide data on delinquencies and foreclosures in support of its claim that it is the victim of Countrywide's deadbeat borrowers who it tries in vain to help. Bank of America's data, however, add support for the evidence of widespread mortgage fraud, particularly by Countrywide. Accounting control frauds maximize their (fictional) reported income by lending routinely to those who cannot afford to repay their loans.
It is this aspect of the fraud scheme that is most counter-intuitive to those that do not study fraud, but to criminologists it provides the most distinctive markers of fraud. The senior officers that control fraudulent lenders maximize the bank's reported short-term income, in order to maximize their compensation, by growing extremely rapidly through making loans at a premium yield. This strategy creates a "sure thing" (Akerlof & Romer 1993). The lender is sure to report record (fictional) profits in the short term and suffer enormous (real) losses in the longer term.
The Evidence Supports Our Claims of Fraud
If we are correct that Countrywide operated as a fraud we would expect to find the following:
- disproportionately large rates of loan delinquencies and defaults
- huge losses upon default, and
- fraudulent representations and appraisals.
We would also predict widespread fraud in the "reps and warranties" that Countrywide and Bank of America provided to purchasers of nonprime loans originated by Countrywide. As we emphasized in our initial posts, a wide range of financial entities have confirmed the widespread fraud in the reps and warranties. This is why Bank of America is being sued. The data they provided in its response to our blogs supports the first three predictions.
First, Bank of America admits to a 14 percent delinquency rate on its mortgages. That percentage is roughly seven times greater than the normal delinquency rate for prime loans. It is roughly three times the traditional rule of thumb for a fatal delinquency rate (5 percent) for a home lender. Losses upon default during this crisis are dramatically greater than the historic percentages, and loss reserves were at historic lows, so the traditional rule of thumb for fatal losses is unduly optimistic in this crisis.
Second, Bank of America's response states that Countrywide-originated loans have caused 85 percent of total delinquencies. Bank of America was a massive mortgage lender before it acquired Countrywide, so taken together these data suggest that the delinquency/foreclosure rate for Countrywide-originated mortgages must have been well over 20 percent -- over ten times the normal delinquency rate and four times the traditional rule of thumb for fatal losses. These exceptionally large rates of horrible loans, defaulting so quickly after origination, are a powerful indicator that Countrywide was engaged in accounting control fraud. Unfortunately, lenders that specialized in making nonprime loans were typically fraudulent. The result was a massive bubble and economic crisis.
Our conclusions are well-supported by many other analyses, many of which were conducted long ago. For example, Reuters reported in January 2008 that one-third of Countrywide's subprime mortgages were already delinquent:Countrywide Financial Corp CFC.N, the largest U.S. mortgage lender, on Tuesday said more than one in three subprime mortgages were delinquent at year-end in the $1.48 billion portfolio of home loans it services. Countrywide said borrowers were delinquent on 33.64 percent of subprime loans it serviced as of December 31, up from 29.08 percent in September.
Foreclosures are now vastly more common and the losses lenders suffer upon foreclosure, particularly for nonprime loans, are catastrophic. For example, Bloomberg reported at the end of 2009 that foreclosures result in losses amounting to nearly three-fourths of the value of the loan:For subprime loans, losses averaged 73 percent for a foreclosure compared with 59 percent for a short sale, Amherst [Securities Group LP] reported.
Third, Bank of America's data indicate another form of deceit that is a typical consequence of accounting control fraud. Bank of America has delayed foreclosing, sometimes for years, on large numbers of loans that have no realistic chance of being brought current, even with the loan modifications it offered. This behavior would be irrational for an honest lender, for it would increase ultimate losses, but is a typical strategy for a lender controlled by fraudulent senior officers because it greatly delays loss recognition and allows them to extend their looting of the bank for years through bonuses paid on the basis of fictional reported "profits" after the bank has (in economic substance) failed.
Bank of America's response to us admits that, of their 1.3 million customers who are more than 60-days delinquent, 195,000 have not made a payment in two years. Of those loans which have not received a payment in two years, 56,000 are already vacant.
For the foreclosure sales in the period from Jul-Sep, 2010:
- 80 percent of borrowers had not made a mortgage payment for more than one year
- Average of 560 days in delinquent status (approximately 18 months)
- 33 percent of properties were vacant
The traditional rule of thumb is that a home loses 1.5 percent of its value each month it is delinquent but not foreclosed and sold. Those losses are far greater when the property is vacant. The loss of value is not limited to the particular home; all homes in the neighborhood are harmed when homes are left vacant for long periods. Bank of America does not address this issue, but the time from foreclosure to sale has also grown dramatically, which means that the length of time that foreclosed homes remain vacant prior to sale has grown substantially.
The industry calls this huge number of homes, which are not producing income to the lenders because of the extraordinary growth in delinquencies and the delay in sales even after foreclosure, the "shadow inventory." Note that none of the government foreclosure relief programs mandated that Bank of America sit on these delinquent assets for an average of 18 months and allow them to be wasting assets.
The bank's response primarily criticizes its borrowers as deadbeats, yet the data it provides support points we have made in our prior posts, including Bill Black's posts about the banks working with the Chamber of Commerce and Chairman Bernanke to extort the Financial Accounting Standards Board (FASB) in order to destroy the integrity of the accounting rules requiring banks to recognize losses on their bad loans. We have explained why the fraudulent officers controlling many lenders followed a strategy of making bad loans at premium yields in order to maximize (fictional) accounting income and their bonuses. This dynamic drove the current crisis. These frauds hyper-inflated the housing bubble and caused trillions of dollars of losses.
The extortion of FASB was successful; Bank of America was one of the leaders of that extortion. It changed the accounting rules so that banks could often avoid recognizing losses on these fraudulent loans, until they actually sold the home taken back through foreclosure. This dishonorable accounting fiction creates perverse incentives for banks to do exactly what Bank of America has done -- let bad assets waste away and make already severe losses catastrophic.
Setting the Record Straight on Bank of America Foreclosures
by Rebecca Mairone - Default Servicing Executive, Bank of America
Foreclosure is a wrenching personal situation for too many people. In their recent post, "Foreclose on the Fraudsters", William K. Black and L. Randall Wray do nothing to illuminate the challenges they face. When they aren't being merely misleading, the authors are just flat out wrong in discussing Bank of America's actions to help keep the economy moving forward, keep people in their homes, or ensure a fair and consistent foreclosure process if it comes to that. Missing from their presentation are some essential facts, including:
- We stepped up to purchase Countrywide at a time when failure of that company would have been devastating to the economy, the markets, and millions of homeowners.
- Our priority remains to keep people in their homes.
- The vast majority of our portfolio -- 86% -- is current and performing.
- Modification solutions are intensely focused on the 1.3 million customers who are more than 60 days delinquent -- 85% of which are Countrywide originated loans.
- Bank of America has completed nearly 700,000 permanent modifications including more than 85,000 under the government's HAMP program -- the most of any servicer.
Further, the basis for our past foreclosures is accurate:
- Of Bank of America's 1.3 million customers who are more than 60-days delinquent, 195,000 have not made a payment in two years. Of those loans which have not received a payment in two years, 56,000 are already vacant.
- For the foreclosure sales in the period from Jul-Sep, 2010:
- 80% of borrowers had not made a mortgage payment for more than one year
- Average of 560 days in delinquent status (approximately 18 months)
- 33% of properties were vacant
- 15% of loans were non-owner occupied (at point of origination)
- 50% of borrowers were unemployed or severely under employed
Foreclosure is the unfortunate reality of one of the worst economic recessions and housing downturns in history. We take seriously our obligation to the customer, the investor and the economy to manage the process with respect and accuracy. We don't claim perfection and will address mistakes quickly when they arise, but Bank of America is doing all we can to keep people in their homes, or ensure a fair, consistent process if that is not possible.
Fed’s Hoenig on QE2, Low Rates and Future Instability
by Sudeep Reddy
Federal Reserve Bank of Kansas City President Thomas Hoenig will speak before real estate agents Friday as the housing market struggles to recover. His message: interest rates need to go up. He gave The Wall Street Journal a preview.
Hoenig has carried a consistent message — the Fed needs to move away from its zero-interest-rate policy now — throughout the year as a voting member of the Federal Open Market Committee. The longest-serving current Fed policymaker, Hoenig has led the Kansas City bank since 1991 and faces mandatory retirement next year. He’s spending his final time in office warning about the risks of ultra-loose policy, including a long-run inflation threat, creating asset-price bubbles and future financial instability. He advocates for higher short-term interest rates — starting with a move to 1% — as the Fed waits for the economy to recover.
Hoenig draws lessons not just from the recent housing boom and bust, putting some blame on the Fed for its low interest rates earlier this decade, but from his decades at the Kansas City Fed working on bank supervision and watching the sharp ups and downs in land values — as they ravaged banks in his region. “My concern is not just for long-term inflation, but for resource allocation, asset prices and the stability that can be affected around those issues,” he said in an interview. “Having closed 350 banks and seeing the agony to those banks and communities, convinces you that artificial price increases are not the way to go. I see it and I worry about it and that’s what’s behind it.”
Hoenig was the lone dissenting vote Wednesday in the committee’s 10-1 decision to launch a new round of bond-buying, or quantitative easing, to support the economy. He has dissented at all seven meetings this year, and is likely to do so again next month, tying a Fed record for dissents by a single official in one year. “People say, ‘well he’s an inflation hawk,’” he said. “Of course I’m an inflation hawk. But that’s not the only issue. The issue is the allocation of resources. The issue is asset-price movements that create an unstable set of values that then collapse and then cause financial and other crises and then higher unemployment. I don’t want that. No one wants that. But it takes a little bit of patience to see far enough out to see where those dangers lie.”
Following are excerpts from an interview conducted Thursday:
What do you think of the FOMC decision to launch QE2?
I really hope that this works out. I want the economy to improve as much as anyone. I want unemployment to come down as much as anyone. My advantage, I think, is that I have a lot of experience and that experience gives me, in a sense, a longer-term framework and a broader perspective on these issues and I think the consequences of actions. That’s what’s really causing me to take this stand….The consequences, and for some the unintended consequences, is that we can cause greater instability in the future — and I don’t mean in the immediate future. I mean years perhaps, quarters certainly, that can actually make matters more difficult to recover from. So that’s really weighing on me and has influenced my views from the start.
What kinds of bubbles and financial instability do you envision? Where do you see those develop and can’t the Fed deal with those through other tools?
In the period of the ’70s and then the ’80s, where we had negative interest rates for the decade of the ’70s about 40% of the time, we ended up having to take some really dramatic actions at the end. I was involved in the closing of about 350 banks in a region that had experienced the immediate upside — the boom — of energy, of agriculture, of residential real estate and commercial real estate. Those bubbles collapsed. Yes, we dealt with it. But there are no shortcuts on those and there was a very dear price to pay.
And again in the decade of the 2000s we had interest rates negative about 40% of the time, we kept them there lower even as the economy was recovering at first modestly, and we even lowered them as they were recovering. As a result we have a very serious real-estate crisis that we’re suffering from today. So yes, we deal with them but you don’t want to be dealing with them in a crisis mode. I think the mandate is for meeting our long-run potential in terms of production, and to meet our moderate long-term interest rates and to encourage maximum employment, but in the long term. And I think financial instability is counter to that.”
How did the committee get to the $600 billion figure for new asset purchases?
Other people’s estimates are maybe a 20, 25, maybe 30-basis point reduction in long-term interest rates. You get these relative price shifts and you get an increase perhaps in the stock market and these are all desirable goals. But I fear, given our experiences, given that this is forcing interest rates below their long-run equilibrium, it means there will be givebacks. When all these very important decisions were made in 2003 to bring interest rates to 1%, it was because unemployment was 6.5% and thought to be too high. As a consequence of that — not immediately but in time — we now have 9.6% unemployment.
The fact is that if I ask people, professionals, was the consumer in the United States overleveraged? I get almost 100% acknowledgment that the consumer was overleveraged and that they need to rebalance. The fact is, that takes time. … I wish it could be done immediately. But that takes time and the rebalancing takes time. But if we try and short-cut it, we sow the seeds for the next series of problems and we want to avoid that.
What’s the risk of this move looking like the Fed is monetizing the debt?
I think it’s a legitimate risk because we are monetizing the debt, call it whatever you will. It is buying long-term or intermediate-term Treasurys in substantial amounts, that is by any definition monetizing the debt. What the consequences of that are, we can agree on or disagree on. The position would be that it’s temporary and that we would reverse all this. My concern is that if my experience is a reasonable base, then we will be slow to reverse it. And that means leaving it in there longer than — in hindsight — we will think was appropriate, we will create the next series of problems, whatever those are.
When you look at Congress and not having any significant movement on dealing with the deficit and the debt, how much of a concern is that for you in light of Fed policy?
I actually talk with a lot of senators and congressmen and their staffs. My experience is they understand these issues pretty well. We’ll see what this recent change implies, but they are well positioned. They understand it. …. I don’t think we should suggest that they cannot, should not and will not. I think they will. I think what you have to be careful of is presume they won’t and then use the wrong tool to fix the problem. And if you do, it often makes the problem worse in the longer run and maybe even in the short run. We just can’t fix everything. We can’t fix unemployment overnight. We’ve actually added 850,000 net private jobs. That’s not anything like we’ve lost. But it’s a slow climb out. We’re making progress. Let’s keep that going. Let’s not take a chance in creating the next problem.
Do you ever worry about the cacophony of voices coming from the committee? Does that hurt the effectiveness of Fed policy or the public’s understanding of it?
I have very strong views on that. A committee is a deliberative body. If you didn’t have differing views, you don’t need a committee. You really need to have those different views. I think it helps the public think about it, to ask the questions, to hear another view, to think it through. I give an enormous amount of credit to the public. Now, I’m not talking about Wall Street or someone who’s talking their book. I’m talking about the public. When you inform the public in a systematic way, I’m not suggesting they agree with you. But I think they do listen. But I don’t worry about that all. I have not felt at all that we undermine policy by having a good debate.
You’ve been the lone dissenter for seven straight meetings. What difference do you think it’s made in the policy that’s come out?
I’d like to think at least it’s added to the debate. It’s caused people to think carefully, to ask themselves the questions I’m asking, at least in that sense test their own concepts. I think that serves a very useful purpose and I feel very good about it. Going along to get along is not something that’s healthy for any deliberative body. It is very unhealthy. So we’ve engaged in it. The majority has carried it. I hope they’re right. I hope things turn out extremely well. But I do think that there are risks. Obviously we’ve weighed the risks differently. I respect that but I still think my experience suggests that we need to be thoughtful about this and I feel pretty comfortable with my position.
You’ve held a fairly consistent position throughout the year. After the problems in Europe in the spring and the renewed stress in housing, has your outlook changed at all? Is it any different now than it was at the beginning of 2010?
It is not any different. [Percentage] point estimates of what the outlook is going to be is one thing. But I’ve said from the beginning this is going to be a modest recovery. We have many imbalances to deal with. But we need to allow those to occur and make sure we have positive growth. It will perhaps flatten out, which it did. I think knowing that we have these imbalances we have to correct is why I’ve advocated for patience so that we can have a longer sustained outcome.
I think the fact that Australia did increase rates … and the ECB staying the same — I think that’s been an important factor in the global economy’s growth. I think we need to be patient ourselves, and that’s been my view since the beginning. The theory of central banking, at least part of it is, is that in a crisis you flood the markets with liquidity, which we did, and then you pull it back in a careful but systematic form. I agree with that. We didn’t in 2003. We left interest rates at 1% far longer than in hindsight we should have, we paid a very dear price for that.
If the Fed were to tighten its policy even slightly, you’d see a sharp reaction in the markets. Do you worry at all about the consequences of that and the effects on the economy?
Of course I do. The issue is how do you prepare the markets. If you prepare the markets for major additional accommodation and you then go a different direction, of course you’re going to get a significant negative reaction. But if you prepare them for the fact that the economy is growing, we do have significant amounts of liquidity and that we are going to carefully renormalize policy very carefully. I’ve said over and over again I’m not for high interest rates, I’m for nonzero. I keep asking other people, tell me a market, tell me a commodity, tell me a service that trades appropriately, that allocates properly at zero. You can’t name any. So why should we suddenly assume that it will do so when parts of credit are priced zero. It’s how you communicate with the markets, it’s how you build the expectations.
On banks and bank lending, we see a $1 trillion on bank balance sheets. Are they lending, and what needs to be done there?
There’s not a whole lot of incentive to do it right now. They are rebuilding their balance sheets systemically. The economy is recovering slowly. We are seeing in some of the banks a slowing in the reduction in lending and in other banks we’re seeing an increase in business lending — small, but it is beginning. And that’s how recoveries work. You go through the crisis, you readjust, you rebuild your capital, you begin then to lend. There is plenty of liquidity. I don’t think that’s the issue.
And I don’t think changing relative prices, frankly, is going to accelerate this greatly. It will increase some areas but I think the danger is you’ve introduced new imbalances. I think that the banks are positioned over time to increase lending. And I think companies are also building and will increase their borrowing. I think we would help that if we could get off of zero where we have no market signals for allocating credit. And we have incentives to say, borrow at zero, take the zero and invest it in government securities where you have a guaranteed spread and no credit risk. So there are things that will take place over time if we allow it.
You’re going to speak with Realtors to tell them rates need to go up. I trust some people will want to throw things at you. What’s that experience like when you try to impress this upon people who have an interest in keeping rates lower?
As a regional president I speak with lots of groups in our area — ag groups, real estate groups, small business groups — and it’s part of the job. As you know, I spoke earlier this fall with a group that’s affiliated with the tea party. I was very candid with them. In housing, we’ll see. We’ll see if they throw tomatoes. Basically, here are the facts. Here’s what we have.
Here’s what we’ve allowed to occur. Do you really want this to continue? Do you want to have booms and busts? I will be talking about how we think about long-term stability in housing, just like I’m trying to talk about long-term stability in the economy. If you don’t have the guts to talk your views, then you shouldn’t be in the job. I’m quite confident that I can carry the view forward. I’m also confident that people will disagree with me. That’s quite all right. That’s good for dialogue.
Backlash against Fed’s $600 billion easing
by Alan Beattie, Kevin Brown and Jennifer Hughes - Financial Times
The US Federal Reserve’s decision to pump an extra $600bn into the economy has galvanized emerging market central banks into preparing defensive measures and sparked criticism from leading global economies. The Fed’s initiative, in response to rising concern about the weakness of the US economy, has fuelled fears of a sharp drop in the dollar and a fresh flood of capital inflows into emerging markets.
China, Brazil and Germany on Thursday criticised the Fed’s action a day earlier, and a string of east Asian central banks said they were preparing measures to defend their economies against large capital inflows. Guido Mantega, the Brazilian finance minister who was the first to warn of a “currency war”, said: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter.” Mr Mantega added: “You have to combine that with fiscal policy. You have to stimulate consumption.” Germany also expressed concern.
An adviser to the Chinese central bank called unbridled printing of dollars the biggest risk to the global economy and said China should use currency policy and capital controls to cushion itself from external shocks. “As long as the world exercises no restraint in issuing global currencies such as the dollar – and this is not easy – then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament,” Xia Bin wrote in a newspaper under the Chinese central bank.
Korn Chatikavanij, Thailand’s finance minister, said the Thai central bank had told him it was “in close talks” with regional central banks over measures “to prevent excessive speculation.” The renewed tension is likely to complicate US efforts to get leaders of the world’s leading economies countries meeting in Seoul next week to press China to sign up to a new accord promising to limit current account balances.
Dan Price, partner at the law firm Sidley Austin and formerly George W. Bush’s White House representative at the G20, said: “The US may find it increasingly difficult to galvanize countries to push China on [renminbi] appreciation when many think the Fed’s quantitative easing policy is itself a major contributor to currency misalignment and imbalances.” Neither the Federal Reserve nor the US Treasury commented on Thursday. The tension over exchange rates has created fears of a wave of protectionist trade and investment actions in response, a reaction that so far has been markedly absent from the global economy during the recession and recovery.
The World Trade Organisation, in association with other international institutions, released a regular report which said that new restrictions on trade, direct investment and capital flows had remained subdued. But blocks on trade imposed since 2008, such as “anti-dumping” duties on imports deemed to be unfairly priced, are largely still in place. The WTO said that the percentage of G20 imports now covered by such restrictions had crept up to 1.8 per cent. Pascal Lamy, director-general, warned on Thursday that tensions over currency could be the issue which finally unleashed a real surge in protectionism.
The Fed’s initiative, however, boosted markets, with equities rising in Europe, London and the US following the lead set in Japan, where the Nikkei 225 Average gained 2.2 per cent – its best day in nearly two months. “The no-asset-market-left-behind approach is officially endorsed,” said Steven Englander, at Citigroup. “If the intention is that US households and investors buy US assets, there is also little to stop them from buying foreign assets as well.” Oil hit a six-month peak above $86 a barrel and gold rallied to $1,883.7, just shy of its all-time peak. The euro hit $1.428, its highest since January. Measured against its major trading partners, the dollar has fallen more than 3 per cent this week.
Treasuries, the actual target of the $600bn, endured the most mixed trading. Initially sold in disappointment that the Fed was not buying more, they began to rally as analysts digested the Fed’s plans, which will involve it buying more seven- to 10-year notes than the Treasury will actually sell. Yields on benchmark 10-year Treasuries were down 7.7 basis points at 2.49 per cent.
Bernanke Confirms That QE2 Is Focused On Wall Street, Not Main Street
by Cullen Roche - TPC
The most interesting development in today’s FOMC announcement came from the details released by the NY Fed. Specifically, they noted that they will focus on shorter duration bonds via the new QE program. The ten year yield is surging on this news to 2.62%. The five year is tanking to 1.12%. This is very odd because short rates are already very low. There’s really no need to focus on shorter bonds if the Fed is truly trying to stimulate loan growth. If the Fed is intending to reduce borrowing costs and really generate an economic impact they should be targeting long bonds – the bonds that home loans and most auto loans are based on. If the Fed were trying to target households via this program they would have targeted the 7-10′s and 10-17′s. But their focus is in the 5-6 range.
Of course, one of the unintended consequences of QE is that recent expectations of long dated maturities purchases is driving down the yield curve and negatively influencing net interest margin at banks. Unless I am missing something (which could very well be the case) it appears to me as though Mr. Bernanke is trying to keep the curve steep. In doing so, he is directly communicating to us all that he is not worried about reducing our borrowing costs, but is instead worried about keeping the bank net interest margins intact. QE2 was never intended to boost Main Street. It is entirely focused on helping the banks. Mr. Bernanke continues to believe that he can generate economic recovery if he gets the banks back to full strength.
The Fed Bought Fraud
by Greg Hunter - USAWatchdog
In the wake of the financial meltdown of 2008, the Federal Reserve announced it would buy mortgage-backed securities, or MBS. The January announcement by the Fed said it would buy MBS from failed mortgage giants Fannie Mae and Freddie Mac in the amount of $1.25 trillion. At the time, the Fed said in a press release, “The goal of the program was to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.” (Click here for the full Fed statement.) It did provide “support” to the mortgage market, but did it also buy fraud and cover the banks that sold it? The evidence shows, at the very least, it bought massive amounts of fraud.
We now know the Fed definitely bought valueless MBS because it has joined other ripped-off investors to demand Bank of America buy back billions in sour home debt. A Bloomberg story from just last week, featuring Philadelphia Fed President Charles Plosser, reports, “The New York Fed, which acquired mortgage debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc., has joined a bondholder group that aims to force Bank of America Corp.to buy back some bad home loans packaged into $47 billion of securities. On the one hand, the Fed has “a duty to the taxpayer to try to collect on behalf of the taxpayer on these mortgages,” Plosser said today at an event in Philadelphia.”
Mr. Plosser lamented the “difficult spot” the central bank is in because it is both bank regulator and plaintiff. He said, “Should we be in the business of suing the financial institutions that we are in fact responsible for supervising?” (Click here to read the complete Bloomberg story.) To that question, I ask shouldn’t the Fed have done a much better job of supervising the big banks in the first place? The whole financial and mortgage crisis from sour securities to foreclosure fraud is in the process of blowing sky high. The entire mess is clearly the biggest financial fraud in history! It looks to me like the regulators were just supervising their pay checks being deposited into the bank.
And remember, the $1.25 trillion of mortgage-backed securities the Fed bought from Fannie and Freddie? How much of that is fraud? William Black, the outspoken Professor of Economics from the University of Missouri KC, says all the big banks were committing “major frauds”in the mortgage-backed security market. Black says, at Citicorp, for example, “. . . 80% of the mortgage loans it sold to Fannie and Freddie were sold under false representations and warranties.” (Click here for the complete Black interview.) Black claims the frauds increased at some banks, and it is sill going on today! (I admit I used this same video in a recent post. I use it again, because it is the single most important and damning indictment of the big banks out there. Professor Black defines the size of the entire fraudulent mortgage mess.)
If he’s right, and I think he is, that means the Fed just spent the last 20 months (the program ended in August 2010) buying a trillion dollars in mortgage fraud! That is a staggering amount even for the most powerful central bank in the world. Could the Federal Reserve have bought that amount of fraudulent MBS and not have known it? Could the Fed have been buying that amount of rotten worthless debt to cover the banksters in the syndicate? Who knows if we will ever find that out because the Federal Reserve cannot be independently audited. And who knows what else it bought in sour debt to bail out their banking syndicate buddies because the Federal Reserve cannot be independently audited! It has never been audited in its 97 year history. I know one thing, if the Fed is going to keep its banking cartel alive, it is going to be forced to print massive amounts of money out of thin air to buy a heck of a lot more fraudulent mortgage-backed securities. That’s what worries and scares me the most.
Fannie seeks $2.5 billion from U.S. after 3rd-quarter loss
by Al Yoon - Reuters
Fannie Mae, the largest U.S. provider of financing for residential mortgages, on Friday said it needed an extra $2.5 billion from the U.S. Treasury after a third quarter loss on foreclosure and other credit expenses. While the $3.5 billion loss narrowed from $19.8 billion a year earlier, the government-sponsored company said it needed more government funds to plug a net worth deficit, most of which was due to dividend payments back to Treasury.
Fannie Mae and rival Freddie Mac are at a crossroads where Congress is debating changes to their businesses -- or their very existence -- after decades of providing the lion's share of U.S. home loan funding. Both political parties say their current models are costing taxpayers billions of dollars and must be abolished.
The parties are split on the level of future government support. Including the requested capital for the past quarter, Fannie Mae will have drawn $88.6 billion from Treasury. It has paid $8.1 billion in dividends as of September 30. The Obama administration has signaled backing some form of ongoing government support. Republican Spencer Bachus, a frontrunner to chair the House Financial Services Committee, this week asserted the companies should be in liquidation.
Fannie Mae said credit-related expenses, which include provisions for losses and foreclosed property expense, rose to $5.6 billion in the quarter from $4.9 billion in the previous period. Among factors, it lowered the value of repossessed homes it owns, it said. The company also said it expected credit losses would rise due to the pause in foreclosures after some loan servicers found "deficiencies" as they processed delinquent borrowers.
Errors -- including alleged faulty affidavits -- at mortgage companies including GMAC Mortgage and Bank of America Corp have drawn sharp criticism from lawmakers and states' attorneys general, who have opened an industry probe. Fannie Mae reminded its servicers it may seek damages where their failures have increased its credit losses, it said in a Securities and Exchange Commission filing.
Fannie Mae is also pressuring lenders to buy back loans that failed to meet its standards, yet were packaged into bonds with its guarantee. The so-called "repurchases" are creating friction with banks that are disputing many and responding with more stringent verifications on loan applications. Fannie Mae recorded $1.6 billion in repurchases last quarter, and had $7.7 billion in requests outstanding.
Like Freddie Mac, Fannie Mae saw a surge in its inventory of foreclosed homes last quarter, partly as servicers have exhausted reviews of troubled borrowers for loan modifications, and moved ahead on foreclosures, Thomas Lawler, founder of Lawler Economic & Housing Consulting, said in a research note.
Fannie Mae said it held 166,787 properties as of September 30, up from 129,310 in the second quarter. The company is having trouble selling the homes, many of which are in redemption periods, still occupied or being repaired, it said. Offsetting credit expenses was a 13 percent rise in revenue to $5.1 billion, it said. Its new business acquired since the beginning of 2009 is strong in credit, it said.
Doubts grow over wisdom of Ben Bernanke 'super-put'
by Ambrose Evans-Pritchard - Telegraph
The early verdict is in on the US Federal Reserve's $600bn of fresh money through quantitative easing. Yields on 30-year Treasury bonds jumped 20 basis points to 4.07pc. It is the clearest warning shot to date that global investors will not tolerate Ben Bernanke's openly-declared policy of generating inflation for much longer. Soaring bourses may have stolen the headlines, but equities are rising for an unhealthy reason: because they are a safer asset class than bonds at the start of an inflationary credit cycle.
Meanwhile, the price of US crude oil jumped $2.5 a barrel to $87. It is up 20pc since markets first concluded in early September that 'QE2' was a done deal. This amounts to a tax on US consumers, transferring US income to Mid-East petro-powers. Copper has behaved in much the same way. So have sugar, soya, and cotton. The dollar plunged yet again. That may have been the Fed's the unstated purpose. If so, Washington has angered the world's rising powers and prompted a reaction with far-reaching strategic consequences.
Li Deshui from Beijing's Economic Commission said a string of Asian states share China's "deep bitterness" over dollar debasement, and are examining ways of teaming up to insulate themselves from the tsunami of US liquidity. Thailand said its central bank is already in talks with neighbours to devise a joint protection policy. Brazil's central bank chief Henrique Mereilles said the US move had created "excessive dollar liquidity which we are absorbing," forcing his country to restrict inflows. Mexico's finance minister warned of "more bubbles."
These countries cannot easily shield themselves from the inflationary effect of QE2 by raising interest rates since this leads to further "carry trade" inflows in search of yield. They are being forced to eye capital controls, with ominous implications for the interwoven global system. In London and Frankfurt the verdict was just as harsh. "In our view, this is one of the greatest policy mistakes in the Fed's history," said Toby Nangle from Baring Asset Management.
"The Fed is gambling that the so-called 'portfolio balance channel effect' – pushing money out of government bonds and into other assets – will lift risk asset prices. The gamble is that this boosts profits and wages, rather than simply prices. We remain unconvinced. How will a liquidity solution correct a solvency problem?" he said. "A policy error," said Ulrich Leuchtmann from Commerzbank. The wording of the Fed statement is "potentially dangerous" because it leaves the door open to a further flood of Treasury purchases if unemployment stays high. "It is a bottomless pit," he said.
Of course, it is precisely this open door that has so juiced risk trades, from Australian dollar futures, to silver contracts, and junk bonds. Goldman Sachs thinks QE2 will ultimately reach $2 trillion, with no exit until 2015. Such moral hazard is irresistible. It is the Bernanke 'super-put'. Yet the reluctance of investors to leap back into the US Treasury market as they did after QE1 is revealing. The 30-year segment of the Treasury market is too small to matter, but symbolism does matter. Vigilantes sniff stealth default. "If long bond investors continue to throw their collective toys out of the cot, it risks upending the Fed's policy," said Michael Derk from FXPro.
Mr Bernanke is targeting maturities of 5 to 10 years with purchases of Treasuries. These bonds have behaved better: 10-year yields fell 14 points on Thursday to 2.48pc. However, Mark Ostwald from Monument Securities said foreign funds may take advantage of QE2 to dump their holdings on the Fed, rotating the money emerging markets rather than US assets.
Bond funds are already restive. Pimco's Bill Gross says the great bull market in bonds is over, denigrating Fed policy as the greatest "ponzi scheme" in history. Warren Buffett has chimed in too, warning that anybody buying bonds at this stage is "making a big mistake", Fed chair Ben Bernanke uses the term 'credit easing' to describe his strategy because the goal is to lower borrowing costs. If he fails to achieve this over coming months - because investors balk - the policy will backfire.
No clear rationale for fresh QE can be found in orthodox monetarism. Data from the St Louis Federal Reserve show that M2 money supply stopped contracting in the early summer and has since been expanding at an accelerating rate, topping 9pc over the last four-week bloc. The Fed has used the 'Taylor Rule' on output gaps as a theoretical justification for QE, but Stanford Professor John Taylor has more or less said his theories have been hijacked. "I don't think (QE) will do much good, and I also worry about the harm down the road," he said.
It has not been lost on markets that the Fed's purchases of $900bn of Treasuries by June (with reinvested funds from mortgage debt) covers the Treasury's deficit over the same period. The slipperly slope towards 'monetization' of public debt beckons. Global investors mostly accepted that the motive for QE1 was emergency liquidity, and that stimulus would later be withdrawn. But there are growing suspicions that QE2 is Treasury funding in disguise.
If they start to act on this suspicion, they could push rates higher instead of lower, and overwhelm the Bernanke stimulus. That would precipitate an ugly chain of events for the US.
David Stockman Says The Fed Is Injecting High Grade Monetary Heroin Into The Financial System
by Tyler Durden - Zero Hedge
Today's absolutely must watch clip comes from David Stockman, director of the OMB under Ronald Reagan. "An independent Fed is what we had when I was in the government. Volcker was the head of it...Today the Fed is scared to death that the boys and girls and robots on Wall Street are going to have a hissy fit. And therefore these programs, one after another, are simply designed to somehow pacify the stock market, and hoping to keep the stock indexes going up, and that somehow that will fool the people into thinking they are wealthier and they will spend money.
The people aren't buying that. Main Street is not stupid enough to believe that engineered rallies as a result of QE2 stimulus are making them wealthier and so they should go out and buy another Coach bag. This is really crazy stuff that I can't say enough negative about...The Fed is telling a lot of lies to the market... it is telling all the politicians on Capitol Hill you can issue unlimited debt cause it doesn't cost anything. We have $9 trillion of marketable debt. Upwards of 70% of that has maturities of 5 years or less down to 90 days.
All of those maturities are 1% down to 10 basis points. So from the point of view of Congress, the cost of carrying the debt is essentially free. When you tell politicians they can issue $100 billion of debt a month for free, how do you expect them to do the right thing, and ask their constituents to sacrifice... I think the Fed is injecting high grade monetary heroin into the financial system of the world, and one of these days it is going to kill the patient."
QE2 Sets Sail on an Inflationary Binge
The QE2 left New York harbor yesterday, on its voyage to ports all around the globe. Captain Ben Bernanke has promised to shower the inhabitants of such diverse locales as Brazil, India, and China with up to $600 billion of free money. Following his departure, central banks in these countries announced that they did not want the money and will enact regulations to forbid the QE2 to land in their country.
Such is the bizarre state of monetary policy in the United States that the second round of Quantitative Easing by the Fed is already being feared and rejected by economists and financial analysts around the world before it is even implemented. It may be that the market has come to realize that QE1 did not perform as promised. Job creation remained anemic, economic growth declined, commodity inflation accelerated, and bubbles popped up in a variety of markets.
A second matter of concern could be that Ben Bernanke this time around has pulled open the Fed’s cloak of secrecy to reveal a dirty secret: the Fed has been actively targeting a higher stock market as one of its monetary policy goals. In an op-ed published yesterday in the Washington Post, Bernanke wrote that a higher stock market has resulted merely from the speculation that QE2 would be implemented (this is true), and that because consumers will feel wealthier, spending will pick up (this is highly dubious not least because consumers have been ditching the stock market all year).
Then of course there is the fact that all this liquidity is supposed to wind up in the pockets of Americans, but it somehow does not. Through a mechanism called the carry trade, hedge funds and banks borrow super-cheap dollars and invest in Brazil, India, China, Australia and elsewhere because interest rates are so much higher in these countries. This is why Americans never see any of this money. The carry trade works well as long as the dollar deteriorates on the foreign exchange markets, which has been the case ever since the Fed announced it was thinking about QE2.
These are reasons enough to question the competence of Ben Bernanke and his fellow Fed governors and presidents who voted for QE2 (only one person dissented). Don’t these men know the nasty history of central banks which monetize government deficits as the Fed is now doing? Can’t they see the asset bubbles that are getting out of control in corn, copper, sugar, wheat and of course the precious metals? Don’t they realize a bubble is underway in the junk bond market, and the last time this occurred was right before the credit crisis of 2008?
Haven’t they read the Flash Crash reports that show US stock markets are broken to the point that 70% of trades are done by computers and the average trade is now held for less than two minutes? Don’t they see that their favorite inflation indicator – the GDP price deflator – is at 2.2% and already exceeds the upper bound of their accepted range? What about the fact that real GDP itself came in during the third quarter at 2.0%, hardly a level justifying a dangerously speculative monetary policy? Is there anyone at the Fed who remembers the currency wars of the 1970s and how quickly they got out of control?
Either one of two things is going on here: the people running the Fed are grossly incompetent to the point of malfeasance, or they are fully aware of the risks they are running but are going ahead for some unstated purpose, probably having to do with the need to continue to pour capital into the Big Four American banks which are closer to collapse than the public is allowed to know. These are the banks, after all, which have been making hundreds of millions of dollars off free money and the carry trade, and these are the banks which are at risk of insolvency as the foreclosure crisis grinds on.
As of this moment, the markets continue to be schizophrenic now that QE2 is official. Some markets dread the inflationary potential of this policy, which is why gold is up, the dollar is down, and the US Treasury bond market is selling off. Some US stock markets set new highs for the year yesterday, on the belief that only a fool would stand in the way of free money being poured into stocks by the Fed. “Don’t fight the Fed” has been a hallmark of stock traders for decades now, so why not follow what has always worked in the past, especially now that the Fed has explicitly stated that its goal is to get stock prices higher.
U.S. stocks have shot higher and higher since September 1 when QE2 was first announced, and there has been no significant correction to this advance. More unusual still is the fact that corporate CEOs have been relentlessly selling their stock for months now; the ratio of insider stock sales to purchases each week has been running as high as 1,000:1, which has never been experienced before. Insider selling is always a reliable sign of a stock market at its peak. At the same time, retail Mom and Pop investors have been deserting this market every week since Spring, which is again a highly unusual circumstance and one the stock market would never have ignored in the past.
There are so many other unusual circumstances to this stock market that it is hard to pick out the most alarming, but one that everyone has noticed is that we have gone the longest period on record where the stock market is rising but the bond market is falling. Always in the past, the stock market could not advance if the bond market was expressing fear about inflation or the economy, which it has been for months now.
These type of discrepancies always get rectified, and the longer they go on the worse the reaction for the stock market. We are very overdue for that reaction by almost every technical and sentiment indicator that is published, and we have gone so long now without even a modest correction that the sell-off is going to be brutal. It is going to look as if the market is rejecting QE2, or at least it will look that way temporarily if the sell-off is a short term correction rather than a new leg down in a bear market.
Here are some of the things to watch for that could trigger a sell-off:
- a complete rout of the dollar leading to a currency crisis that can only be solved with higher interest rates in the U.S.,
- a collapse in the U.S. bond market as traders respond to fears of hyperinflation,
- a blow-out acceleration of the price bubbles underway in commodities,
- a return to $100/bbl oil, which already crossed above the $85/bbl level yesterday,
- a major credit default affecting the junk bond market,
- a statement by the new House of Representatives leadership that Republicans will not vote for an increase in the debt ceiling, implying a possible default by the U.S.,
- a massive lawsuit against a TBTF bank for tens of billions of dollars in damages due to fraudulent activity in mortgage securities transactions,
- capital controls imposed by a major country like Brazil, and possibly involving large-scale selling of Treasuries and agency securities (Fannie and Freddie) by these central banks, or
- a failure in Europe by Greece, Ireland or some other heavily-indebted country to roll over its public debt.
This list could be longer still, but you get the idea. So much could go wrong given how over-stretched these markets are around the globe. If any of these things happens, it will expose the fragility still extant in the markets and the global economy, and it will make people understand that QE2 isn’t able to solve these problems. That’s when the realization will dawn on everyone that the Federal Reserve is not simply powerless to improve the economy, it is making things much worse.
In U.S., 14% Rely on Food Stamps
by Sara Murray - Wall Street Journal
A huge number of American households are still relying on government assistance to buy food as the recession continues to batter families. Food stamp recipients ticked up in August, children consumed millions of free lunches and nearly five million low-income mothers tapped into a government nutrition program for women and young children.
Some 42,389,619 Americans received food stamps in August, a 17% rise from the same time a year ago, according to the U.S. Department of Agriculture, which tracks the data. That number is up 58.5% from August 2007, before the recession began.
By population, Washington, D.C. had the largest share of residents receiving food stamps: More than a fifth, 21.1%, of its residents collected assistance in August. Washington was followed by Mississippi, where 20.1% of residents received food stamps, and Tennessee, where 20% tapped into the government nutrition program. Idaho posted the largest jump in recipients in the past year. The number of people receiving food stamps climbed 38.8% but their rolls are still fairly low. Just 211,883 Idaho residents collected food stamps in August.
The average benefit size per person nationwide in August was $133.90. Per household it was $287.82.
Food stamps have become a lifeline for workers who have lost their jobs, particularly among the growing share of unemployed Americans who have also exhausted their unemployment benefits. Lines at grocers at midnight on the first of the month have signaled that, in many cases, those benefits aren’t tiding families over and they run out before their next check kicks in.
Even during the summer children returned to schools to take advantage of free lunch programs where they were available. Nearly 195 million lunches were dished out in August and 58.9% of them were free. Another 8.4% were available at reduced prices. That number will surge when the fall data are released because children will be back in school. Last September, for example, more than 590 million lunches were served, nearly 64% of which were free or reduced price.
Children whose families have incomes at or below 130% of the poverty level — $28,665 for a family of four — can access free meals. Those families earning between 130% and 185% of the poverty level — $40,793 for a four-person family — are eligible for reduced-price meals that can’t cost more than 40 cents.
RBS falls to £1.4 billion loss
by Jill Treanor - Guardian
Royal Bank of Scotland fell back to a £1.4bn loss in the third quarter of the year as it revealed it would incur a £250m charge from George Osborne's bank levy next year. The state-controlled bank also risked stoking a row over bonuses in its investment banking arm by admitting that while revenue in this division was down 20%, staff costs were broadly flat, indicating that bonuses were being accrued at a faster rate than revenue was falling.
Stephen Hester, chief executive of the bailed out bank, preferred to focus on the operating line of the results which stripped out the £825m cost of insurance provided by the taxpayer through the asset protection scheme and an £856m charge associated with the value of its debt. This showed profit of £726m for the third quarter – up from £250m in the second quarter and a £1bn loss a year ago – and a profit of £1.8bn for the nine months, compared with £4.4bn a year ago.
The pre-tax loss of £1.4bn compared with a profit of £1.1bn in the second quarter, but was better than the loss of £2bn recorded in the third quarter of 2009. In the nine months to end-September the loss was £243m, compared with a £2bn loss a year ago. For the coming months, Hester said: "We don't see it raining hard but we keep our rain coats on."
He added: "The accounting treatment of some balance sheet items is volatile and can sometimes obscure our underlying story. We are delivering what we set out to achieve. "The core bank is becoming stronger. As we focus on serving customers better, profitability is also improving and rebalancing towards a more sustainable mix of business contributions. At the same time, the legacy risks and losses in non-core are being worked out effectively and our ambitious restructuring efforts continue apace."
The investment bank has tended to cause controversy at RBS because of the bonuses it pays to many of its staff. RBS revealed that the compensation ratio – which measures how much is being accrued to pay staff relative to the amount of revenue generated – has risen to 34% from 25% a year ago. In the third quarter the ratio was 40% – higher than might have been expected. Some £2.1bn has been accrued to pay staff their salaries, benefits and bonuses compared with £2.2bn a year ago at a time when revenue has dropped from £9bn to £6.3bn.
Hester defended the relative rise in the investment bank staff costs by insisting the cash was being accrued, rather than paid out now. "The final number will be determined at the end of the year," Hester said. "If the results are down so should pay be." He insisted that the flow of staff out of the division was still "damaging" but not yet "destructive".
The bank must sell off a number of key assets to appease EU regulators because of up to £54bn of state aid pumped into the bank. One of those is the insurance arm which includes Churchill, Direct Line and Green Flag, which the bank said today would be primed for flotation in the second half of 2012.
Hester stressed that the bank was on track to meet the target it had been set by Labour of lending £50bn by the end of March – it has so far lent £30.9bn. He also tried to demonstrate that the bank had been lending in the mortgage market, where net UK mortgage balances were up 6% to £2.6bn in the third quarter although this was impacted by the amount of loans being repaid as the gross figure was £5.3bn during the third quarter.
In terms of the bank levy, which the chancellor is targeting to bring in £2.5bn a year, RBS estimated it would incur a £225m-£250m charge in 2011, rising to approximately £350m-£400m in 2012. The bank stressed that the wholesale funding market conditions had "improved significantly during the quarter" and RBS has issued £18bn of bonds during the quarter to try to improve its funding profile. Hester said that the bank levy "penalises non-insured liabilities, including deposits from our corporate customers, as well as other wholesale funding".
Parachuted in to turn around RBS after its near-collapse in October 2008, Hester has steered the bank from a £24bn loss for 2008 – the biggest in British corporate history – and is aiming to return the bank to sustainable profitability so that the government can sell off its 84% stake. "We will emerge successfully with good results for shareholders after applying our medicine," said Hester.
Housing market gridlock must be swiftly resolved
by Gillian Tett - Financial Times
This week, the topic of political gridlock is dominating the agenda in Washington. But while investors fret about policy inaction, a second type of gridlock is becoming increasingly important – in the housing and mortgage market. Since the summer, a flurry of revelations have emerged about abuses in the US foreclosure process, including, most notably, the role played by so-called “robo-signers” (or employees who automatically sign repossession orders).
This is damaging for banks: the Royal Bank of Scotland estimates that US banks face $4.3bn bills to settle looming fines, $25bn losses from being forced to purchase faulty loans from investors and $13bn of costs from buying loans from government entities. Others estimate the hit to be more than $100bn. But to my mind, the more interesting impact of the saga may lie in the subtle realm of psychology and price expectations. As the robo-signer scandal grows, it is forcing banks to suspend foreclosures. Thus, whereas a foreclosure used to take six months, in places such as Florida, 50 per cent of delinquent borrowers are still living in their homes after two years.
This pattern prompts many civil groups and some politicians to cheer. But it is also delaying any sense of resolution to the housing woes. After all, nobody knows whether those delinquent borrowers in Florida, say, will eventually be turfed out, when that decision might occur, what that foreclosed house might eventually be sold for, or if it will be sold at all. There is, in other words, gridlock. The size of this is certainly not trivial: some 6.7m homes are deemed to be delinquent, or (supposedly) in a state of foreclosure. And with that much of the market now sitting in limbo, this could potentially have a subtly corrosive impact on price attitudes.
Think about what happened in the 1990s in Japan. Back then (when I was working in Tokyo as a journalist), the Japanese financial system was plagued with bad loans, which the banks and politicians refused to acknowledge or deal with. At the time, many policymakers argued that this policy of forbearance was essential to prevent a damaging property price crash. But while forbearance did avoid any sudden, dramatic plunge in prices, in its place it created a climate of deeply ingrained cynicism and unease.
By the late 1990s, most investors and consumers knew that the Japanese banks were sitting on toxic waste; they also suspected that prices were being artificially propped up. And while nobody could quantify the scale of that quasi subsidy, there was a gnawing suspicion that prices might fall in the future if (or when) more bad news emerged. The consequence was a mood of corrosive distrust and unease, which was hard to articulate or measure but which fostered a deflationary mindset.
Ironically, during that period, American policymakers repeatedly urged the Japanese to remove this unease, by recognising the bad loans and introducing measures to establish “clearing prices”. The template that was often waved about was the Resolution and Trust Commission, or the body created after the US Savings and Loans crisis, to conduct auctions of bad assets at firesale prices and thus “clear” the market.
But while the RTC worked pretty well in the 1990s, the American government has not embarked on this firesale approach during 2008 and 2009. Officials argued that they could not do this since the toxic assets are more widespread than in the S&L days, and banks are now marking their books to market prices. And while this reluctance to establish clearing prices was, perhaps, understandable, the lesson from Japan remains valid: namely, that without clearing prices, it is hard to rebuild real trust and confidence. In the mortgage world, as elsewhere.
After all, these days and in contrast to 2008, say, house prices are no longer plunging. But they are not surging either (the S&P Case Schiller index of metropolitan home prices fell 0.2 per cent in August). And most forecasts expect this weakness to continue for the foreseeable future. That partly reflects high unemployment. However, I would bet that another key – albeit hard to quantify – problem is that there is still such uncertainty about when any resolution to the housing woes might be reached.
That does not mean, let me stress, that I think banks should be allowed to proceed with abusive foreclosure practices; I can see a case for loan modifications. But the key point is that whatever policy is imposed, be that foreclosure or universal modification, it needs to be imposed swiftly and clearly and that seems unlikely to happen now. Or not, at least, in a world dominated by political gridlock. Little wonder the Fed is so uneasy; this type of corrosive unease is not the kind of problem that can be fixed with cheap money. Just ask the Japanese.
Ireland is running out of time
by Ambrose Evans-Pritchard - Telegraph
Ireland has been desperately unlucky.
The bond crisis is snowballing out of control before the country has had enough time to let its medical, pharma, IT, and financial services industries (don’t laugh, some of it is doing well) come to the rescue. Yields on 10-year Irish bonds surged this morning to a post-EMU high of 7.41pc.
Yes, Ireland is fully-funded until April – and has another €12bn in pension reserves that could be tapped in extremis – but that is less reassuring than it looks. The spreads over German Bunds are mimicking the action seen in Greece in the final hours before the dam broke. Once a confidence crisis takes root in this fashion it starts to contaminate everything, as we are seeing in punitive borrowing costs for Irish banks.
The uber-strong euro does not help. Under the IMF’s rule of thumb, currencies should fall by 1.1pc to offset every 1pc of GDP in fiscal tightening, ceteris paribus. Given that Ireland is going through the most wrenching fiscal squeeze ever conducted in a modern economy – though Greece is catching up – it needs a devaluation to match. Instead, the euro has risen by 18pc against the dollar since June. (less in trade-weighted terms).
UCD professor Karl Whelan, a former Fed economist, told me this morning that there is a “reasonably high probability” that Ireland will have to turn to the EU-IMF even though this will be resisted until the bitter end as a horrible humiliation. The Fianna Fail government has one last chance to avoid tutelage. He advises draconian cuts of €7bn when the 2011 budget is unveiled in coming days, rather than the €3bn previously agreed.
“Yields on government bonds have priced in a high likelihood of default. If this continues, Ireland may not be able to continue borrowing on the sovereign bond market,” he said in an article posted on The Irish Economy website, a good source for anybody following this Gaelic tragedy.
He rebuts the oft-repeated claim (including by me, I confess) that Ireland had shown admirable courage in getting a grip early. “They have taken far too long to admit the scale of the fiscal problem that we are facing”
His UCD colleague Colm McCarthy said Dublin has until January or February at the latest to return to the bond markets after suspending all auctions when yields exploded. “The €1.5bn not borrowed in October plus the €1.5bn not borrowed in November represent borrowing postponed, not borrowing avoided,” he said in the Irish Independent.
“What if the re-entry to the bond market doesn’t work? The amount required is not offered or the rate of interest demanded is just too high to be affordable. In either case early resort to a bailout would be unavoidable.” “We cannot do `fiscal stimulus’, nor can we devalue our exchange rate, since we do not have one. It is perfectly reasonable to ask how we got into this mess, to allocate blame and to demand retribution. But no amount of ranting can expand the limited range of choices available to the Government.”
(If I may interject: Ireland got into the mess because real interest rates set by the ECB for German needs were minus 2pc for much of the last decade, with utterly predicitable and calamitous results. Could any Irish government have adopted policies – financial repression, fiscal tightening, etc – to offset such idiotic interest rates? Perhaps, at a stretch. But the unbearable truth is that EMU itself caused this crisis).
Back to Prof McCarthy: “The only factor the Government can do anything about at this stage is the budget deficit. If they do too little to convince the markets, the game is up and the Irish Government will be unable to finance itself, which means an IMF/European bailout and economic policy dictated from outside the country. How bad would that be?”
That is open to debate.
I notice that Fianna Fail is playing the treason card, insinuating that anybody opposed to Dublin’s economic policies is handing Ireland’s sovereignty to the EU inspectorate. What they really mean is that a bail-out would be political death for Fianna Fail. Prof Whelan said events may force the outcome. “No Irish government in its right mind would want to go cap in hand to the EU but we have four by-elections coming and the government is going to lose every one of them, so there goes its majority. They might not be able to pass a budget,” he said. “I think there will have to be a general election by January, and that will cause spreads to explode,” he said.
Greece was able to borrow from the EU at 5pc under its €110bn rescue in April. This rate is no longer available. Prof Whelan said the EU’s charge under the newly-created rescue fund (EFSF) would be more like 6pc. “It would not be a soft-touch,” he said.
The trigger for Ireland’s bond hell this week was of course the Franco-German deal preparing the way for orderly defaults and bondholder haircuts for eurozone states that get into trouble. This shift in policy changes the game entirely. Why would pension funds step into distressed debt markets after they have been told that the EU will, suddenly, no longer stand behind the debt?
Chancellor Merkel’s demands are entirely justified, in the long run. But she is playing with fire by raising the issue of haircuts at this delicate moment when Ireland is battling for its life. If she keeps upping the ante in this way we may find out soon whether Europe’s rescue €440bn fund can cope with a fast and dangerous escalation. Any need for an Irish bail-out will put Portugal in instant jeopardy, as is already obvious from the latest surge in Portuguese yields. The EFSF would face the risk of two simultaneous bail-outs from a diminishing number of donors. Contagion would spread instantly to Spain.
On balance, Spain looks strong enough to resist such an ordeal by fire. But don’t bank on it. The economy has not yet stabilized. Unemployment rose again in October for the third month to 4.1m. Car sales fell 38pc. The car association ANFAC said there will have to be a cut in auto production levels unless the car market recovers. The knife is nearing the bone here.
In theory the EFSF could handle a triple rescue for Ireland, Portugal, and Spain. I find it hard to believe that this could possibly work in practice. The rescue fund itself would surely be stripped of its AAA rating unless Germany, France and the residual core put up fresh collateral, which would lead to a political storm in Germany.
Italy would find itself having to raise large sums to meet is share of rescue costs, bringing its public debt back into focus. A triple bail-out is not credible. There are limits to intra-EMU solidarity, as Angela Merkel showed by dragging her feet for months over Greece, and has shown all too clearly again this week. The EU bail-out fund is a bluff that cannot safely be called.
Government Debt And Deficit Update
by Karl Denninger
October is now in the books from a Treasury perspective.
We borrowed $107.2 billion more last month. This follows $112 billion in September, and brings the total thus far for this calendar year to $1.357 trillion.
This is a run rate of $1.629 trillion for the year.
There has been no backing off on the "borrow and spend" game in Washington. And while the third quarter GDP "preliminary" numbers were positive, let's not cheer too much over this chart's apparent improvement:
because doing do means we must forget about the revisions that were put into the GDP series earlier in the year. Remember those? I do, because I still have them. Here's the chart with revisions elided:
When you get to it, GDP is not actually expanding by more than 1% annualized - that's the revisions. But even with them, true GDP is still contracting at 6% annualized rate, when one subtracts out government borrow-and-spend - and you have to, because that's unsustainable in the intermediate and longer term.
The Fed's threat to monetize (which they claim to be making good on at 2:00 ET today) is just more kicking of this can - a can that is increasing in size and being filled with cement. That deficit is not sustainable. Nor is the GDP "growth" real.
We can either deal with reality, or it will deal with us.
The time to deal with it, post-election, is now.
Stiglitz: Throw the bankers in jail or the economy won't recover
by George Washington
As economists such as William Black and James Galbraith have repeatedly said, we cannot solve the economic crisis unless we throw the criminals who committed fraud in jail.
And Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals – and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future. See this, this and this.
Nobel prize winning economist Joseph Stiglitz just agreed. As Stiglitz told Yahoo’s Daily Finance on October 20th:
This is a really important point to understand from the point of view of our society. The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that’s really the problem that’s going on.
A lot of the predatory practices in automobile loans are going to be able to be continued. Why is it OK to engage in bad lending in automobiles and not in the mortgage market? Is there any principle? We all know the answer to that. No, there’s no principle. It’s money. It’s campaign contributions, lobbying, revolving door, all of those kinds of things
The system is designed to actually encourage that kind of thing, even with the fines [referring to former Countrywide CEO Angelo Mozillo, who recently paid tens of millions of dollars in fines, a small fraction of what he actually earned, because he earned hundreds of millions.].
I know so many people who say it’s an outrage that we had more accountability in the ’80’s with the S&L crisis than we are having today. Yeah, we fine them, and what is the big lesson? Behave badly, and the government might take 5% or 10% of what you got in your ill-gotten gains, but you’re still sitting home pretty with your several hundred million dollars that you have left over after paying fines that look very large by ordinary standards but look small compared to the amount that you’ve been able to cash in.
So the system is set so that even if you’re caught, the penalty is just a small number relative to what you walk home with.
The fine is just a cost of doing business. It’s like a parking fine. Sometimes you make a decision to park knowing that you might get a fine because going around the corner to the parking lot takes you too much time.
I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That’s the point. There were victims all over the world.
So do we have any confidence that these guys who got us into the mess have really changed their minds? Actually we have pretty [good] confidence that they have not. I’ve seen some speeches where they said, “Nothing was really wrong. We didn’t get things quite right. But our understanding of the issues is pretty sound.” If they think that, then we really are in a sorry mess.
There are many aspects of [deterring people from committing crime]. Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.
And that’s why, for instance, in our antitrust law, we often don’t catch people when they behave badly, but when we do we say there are treble damages. You pay three times the amount of the damage that you do. That’s a strong deterrent. Unfortunately, what we’ve been doing now, and more recently in these financial crimes, is settling for fractions – fractions! – of the direct damage, and even a smaller fraction of the total societal damage. That is to say, the financial sector really brought down the global economy and if you include all of that collateral damage, it’s really already in the trillions of dollars.
But there’s a broader sense of collateral damage that I think that has not really been taken on board. And that is confidence in our legal system, in our rule of law, in our system of justice. When you say the Pledge of Allegiance you say, with “justice for all.” People aren’t sure that we have justice for all. Somebody is caught for a minor drug offense, they are sent to prison for a very long time. And yet, these so-called white-collar crimes, which are not victimless, almost none of these guys, almost none of them, go to prison.
Let me give you another example of where the legal system has gotten very much out of whack, and which contributed to the financial crisis.
In 2005, we passed a bankruptcy reform. It was a reform pushed by the banks. It was designed to allow them to make bad loans to people to who didn’t understand what was going on, and then basically choke them. Squeeze them dry. And we should have called it, “the new indentured servitude law.” Because that’s what it did.
Let me just tell you how bad it is. I don’t think Americans understand how bad it is. It becomes really very difficult for individuals to discharge their debt. The basic principle in the past in America was people should have the right for a fresh start. People make mistakes. Especially when they’re preyed upon. And so you should be able to start afresh again. Get a clean slate. Pay what you can and start again. Now if you do it over and over again that’s a different thing. But at least when there are these lenders preying on you should be able to get a fresh start.
But they [the banks] said, “No, no, you can’t discharge your debt,” or you can’t discharge it very easily.
This is indentured servitude. And we criticize other countries for having indentured servitude of this kind, bonded labor. But in America we instituted this in 2005 with almost no discussion of the consequences. But what it did was encourage the banks to engage in even worse lending practices.
The banks want to pretend that they did not make bad loans. They don’t want to come into reality. The fact that they were very instrumental in changing the accounting standards, so that loans that are impaired where people are not paying back what they owe, are treated as if they are just as good as a well-performing mortgage.
So the whole strategy of the banks has been to hide the losses, muddle through and get the government to keep interest rates really low.
The result of this is, as long as we keep up this strategy, it’s going to be a long time before the economy recovers ….
The Volcker Rule After the Midterm Elections
by Simon Johnson - New York Times
The Obama administration saved the deeply troubled megabanks in the United States in early 2009 with a bundle of rescue measures that, compared with similar financial crises elsewhere, stands out as extraordinarily generous — particularly to the bankers at the epicenter of the disaster.
The banks responded to this magnanimity with — by all accounts — extraordinarily generous support for the Republicans leading up to this week’s midterm elections. Why would they do this?
The answer is straightforward: The Republicans have promised generally not to tighten restrictions on the financial sector, which means specifically that they will seek to make the recent Dodd-Frank financial regulatory legislation less effective.
The Dodd-Frank Act is not strong legislation to start with. The administration started with overly modest goals, and the banks then devoted considerable effort to weakening the bill as it passed through the House. But some pieces that survived have the potential to make a difference — including the Volcker Rule, which in principle would force big banks to get out of the business of betting their capital in ways that can bring down the entire financial system.
Paul Volcker, the former Fed chairman, came up with the ideas and helped shape the original proposed rule. This provision was pushed hard by Senators Jeff Merkley of Oregon and Carl Levin of Michigan, who prevailed against the odds in getting it into the bill, but now find regulators less than uniformly enthusiastic about applying the rule.
This brings us to the details — where all relevant devils reside. That your eyes may glaze over, is, as far as the banks are concerned, a desirable feature, not a bug. Comments to the Financial Services Oversight Council on how to put the rule into effect are due tomorrow; a few are already in, and more may be submitted at the last minute, in the hope of deterring rebuttal.
One comment, from State Street (on behalf of itself, Northern Trust and BNY Mellon), is instructive with regard to both substantive issues being debated before regulators and the broader political debate going forward.
The State Street argument is that the relevant section (§619) of Dodd-Frank could prevent a bank “from providing traditional directed trustee or similar services to its pension fund and other institutional clients.”
The issue, State Street points out, is “potential banks’ support for the investment performance of the fund” — that is, whether a bank would feel obliged to prop up the performance of a fund that is struggling. The problem with such propping up is that it will help a fund show better performance on average – and therefore help it attract more money — but it would also mean a bigger collapse, with much more devastating consequences, should subsequent problems arise (which is not so uncommon). Propping up is a fairly common phenomenon around the world.
State Street and its co-signers argue that banks such as themselves frequently do not have investment authority over plans for which they are trustees. But this is not the issue.
The real question is whether a custodial bank of any kind would have the incentive to prop up performance of a fund (of any kind). This is the way that banks can find themselves committing capital, whether they originally intended to or not. The sounder relationship between bank and fund is that when bad things happen, the bank is content to let the fund fail (or just show disappointing performance).
State Street and the other big banks mostly just want to be left alone. “We’re big boys and we can take care of ourselves” is their refrain – and you will now hear this echo far and wide, at least in the House of Representatives as we head into 2011.
This was exactly the operating philosophy of Alan Greenspan as Fed chairman, circa 1997: “As we move into a new century, the market-stabilizing private regulatory forces should gradually displace many cumbersome, increasingly ineffective government structures” (quoted in “13 Bankers”).
The new century has not, so far, gone well, precisely because “market-stabilizing private regulatory forces” turns out to be an oxymoron.
And the specifics at stake here are far from hypothetical. Remember that Citigroup had large “off-balance sheet” housing-related liabilities that it ended up bringing back onto the balance sheet — thus absorbing the losses and forcing itself closer to insolvency. And even State Street had to prop up some of its “stable value funds.”
The designers of the details of the Volcker Rule — and their political masters — should not repeat Mr. Greenspan’s tragic and costly mistake. We need a real firewall between custodian banks and the funds with which they are connected in any form. The Volcker Rule, if properly and rigorously applied, can do just that.
The Federal Reserve Is Holding A Conference On Jekyll Island To Celebrate 100 Years Of Dominating America
by Michael Snyder - Economic Collapse
The Federal Reserve is going back to Jekyll Island to celebrate the 100 year anniversary of the infamous 1910 Jekyll Island meeting that spawned the draft legislation that would ultimately create the U.S. Federal Reserve. The title of this conference is "A Return to Jekyll Island: The Origins, History, and Future of the Federal Reserve", and it will be held on November 5th and 6th in the exact same building where the original 1910 meeting occurred. In November 1910, the original gathering at Jekyll Island included U.S. Senator Nelson W. Aldrich, Assistant Secretary of the Treasury Department A.P. Andrews and many representatives from the upper crust of the U.S. banking establishment. That meeting was held in an environment of absolute and total secrecy. 100 years later, Federal Reserve bureaucrats will return to Jekyll Island once again to "celebrate" the history and the future of the Federal Reserve.
Sadly, most Americans have no idea how the Federal Reserve came into being. Forbes magazine founder Bertie Charles Forbes was perhaps the first writer to describe the secretive nature of the original gathering on Jekyll Island in a national publication....
Picture a party of the nation's greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundred of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a few servants, living there a full week under such rigid secrecy that the names of not one of them was once mentioned, lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance. I am not romancing; I am giving to the world, for the first time, the real story of how the famous Aldrich currency report, the foundation of our new currency system, was written... The utmost secrecy was enjoined upon all. The public must not glean a hint of what was to be done. Senator Aldrich notified each one to go quietly into a private car of which the railroad had received orders to draw up on an unfrequented platform. Off the party set. New York's ubiquitous reporters had been foiled... Nelson (Aldrich) had confided to Henry, Frank, Paul and Piatt that he was to keep them locked up at Jekyll Island, out of the rest of the world, until they had evolved and compiled a scientific currency system for the United States, the real birth of the present Federal Reserve System, the plan done on Jekyll Island in the conference with Paul, Frank and Henry... Warburg is the link that binds the Aldrich system and the present system together. He more than any one man has made the system possible as a working reality.
It was a system that was designed by the bankers and for the bankers. Now, the bureaucrats running the system are returning to Jekyll Island to congratulate themselves. Those attending the conference on November 5th and 6th include Federal Reserve Chairman Ben Bernanke, former Fed Chairman Alan Greenspan, Goldman Sachs managing director E. Gerald Corrigan and the heads of the various regional Federal Reserve banks. You can view the entire agenda of the conference right here. It looks like that there will be plenty of hors d'oeuvres to go around, but should the Federal Reserve really be celebrating their accomplishments at a time when the U.S. economy is literally falling to pieces?
Today, 63 percent of Americans do not think that they will be able to maintain their current standard of living. 1.47 million Americans have been unemployed for more than 99 weeks. We are facing a complete and total economic disaster.
Today, the Federal Reserve has more power over the economy than any other single institution in the United States. It is the Fed that primarily determines if we will see high inflation or low inflation, whether the money supply with expand or contract and whether we will have high interest rates or low interest rates. The President and the U.S. Congress have far less power to influence the economy than the Federal Reserve does.
As this election has demonstrated, the American people are absolutely furious about the state of the U.S. economy, but American voters have been mostly blaming our politicians. They just don't understand that it is actually the Federal Reserve that has the most control over the performance of the economy.
It would be hard to understate how powerful the U.S. Federal Reserve really is in 2010. U.S. Representative Ron Paul recently told MSNBC that he believes that the Federal Reserve is actually more powerful than Congress.....
"The regulations should be on the Federal Reserve. We should have transparency of the Federal Reserve. They can create trillions of dollars to bail out their friends, and we don’t even have any transparency of this. They’re more powerful than the Congress."
So how has the Federal Reserve performed over the years?
Well, since 1913 inflation has been on a relentless march upwards, U.S. government debt has increased exponentially and the U.S. dollar has lost over 96 percent of its value.
That is not a record to be celebrating.
The truth is that the Federal Reserve was created to enslave the United States government in an endlessly expanding spiral of debt from which it would never be able to escape. As I wrote about yesterday, that is exactly what has happened. The U.S. government debt is escalating at an exponential rate. It is a trap from which the U.S. government will never be able to get out of under our current system.
Now many at the Federal Reserve are touting more "quantitative easing" as the solution to our economic problems. But anyone with a brain should be able to see that creating a gigantic pile of paper money out of thin air and dumping it into the economy is only going to make our long-term problems even worse.
But the Federal Reserve system was never designed to benefit the American people. It was designed to make massive amounts of money for the banking establishment. As I wrote about in "11 Reasons Why The Federal Reserve Is Bad", the Federal Reserve was created to transfer wealth from the American people to the U.S. government and from the U.S. government to the super wealthy.
The sad truth is that the Federal Reserve is at the very core of our economic and financial problems, and that is nothing to celebrate.
Deutsche Bank Memo Notifies Securitized Loan Servicers And Their Attorneys That They May Have Broken The law
In an October 25, 2010 letter from Deutsche Bank to “All Holders of Residential Mortgage Backed Securities For Which Deutsche Bank National Trust Company or Deutsche Bank Trust Company Americas Acts As Securitization Trustee”, DB reports on “alleged deficiencies” in certain foreclosure proceedings and advises of the prior issuance, by the DB Trustee, of an “Urgent and Time-Sensitive Memorandum” dated October 8, 2010 to its Securitization Loan Servicers regarding servicing foreclosure procedures, demanding that the servicers “comply with all applicable laws relating to foreclosures”. The October 8, 2010 “Urgent and Time Sensitive” Memorandum attached to the October 25, 2010 Memo makes things even more interesting. Here are some select quotes:“The Governing Documents typically require the Trustee to furnish the Servicer with powers of attorney that allow the Servicer to sign documents and institute legal actions, including foreclosure proceedings, in the name of the Trustee on behalf of the Trusts in connection with these servicing activities…. Recent media reports suggest that the Alleged Foreclosure Deficiencies may include the execution and filing by certain servicers and their agents of potentially defective documents, possibly containing alleged untrue assertions of fact, in connection with certain foreclosure proceedings.
The reported scope of such alleged practices raises the possibility that such documents may have been filed in connection with foreclosure proceedings relating to mortgage loans owned by the Trusts and may have been executed under color of one or more powers of attorney granted to Servicers pursuant to the Governing Documents. Any such actions by a servicer or its agents would constitute a breach of that Servicer’s obligations under the Governing Documents and applicable law.”
So what we have here is DB tacitly admitting that its servicers and attorneys “possibly” filed fraudulent foreclosure documents (which we all know did in fact happen, with “robo-signer” assignments, backdated notaries, etc.), which if done “under color of” required powers of attorney, is illegal on more than one front.
When unemployment extensions end, a movement rises: the 99ers
by Margaret Price - Christian Science Monitor
Out of full-time work since 2006, LaDona King says she's nearly penniless, having used up her retirement savings, exhausted unemployment benefits, and tapped relatives for as much help as possible. Before long, she may have to move in with one of her two sisters.
But Ms. King, of Escondido, Calif., is far from giving up. Even as she spends 40 to 55 hours a week looking for work, she's founded a swelling national grass-roots movement to aid people like her: the so-called 99ers. Named for the maximum number of weeks the jobless can now collect unemployment insurance (UI), these long-term jobless are clamoring for faster job creation and extended jobless benefits.
In the short term, many activist 99ers are pushing for passage of the Americans Want to Work Act, a Senate bill that would provide 20 additional weeks – a so-called Tier V – of unemployment insurance. The 99ers, who often find each other through social media, also talk about organizing around other related issues. Although their ranks are growing, they face an uphill battle persuading Congress to act. "There are superpolitical head winds now for any advocacy for the unemployed," says Andrew Stettner, deputy director of the National Employment Law Project, a research and advocacy group in New York .
Out of work since January 2008, Gregg Rosen of Bucks County, Pa., has had only two job interviews. "Both times, I was told I was overqualified," says the former marketing executive for a large Philadelphia-based teleservices firm. The longer he's out of work, the less desirable employers find him. Mr. Rosen exhausted his UI benefits at the end of March and is now seeing his savings evaporate, he says.
By contrast, Rosen's activism is expanding. In March, he created an informational website, tier5.webs.com. In September, he cofounded the American 99ers' Union, a collection of 18 groups, representing some 100,000 people, focused on getting the Americans Want to Work bill passed, Rosen says.
Once Congress reconvenes after the Nov. 2 elections, such legislation will face resistance, many experts predict. For one thing, the current maximum UI coverage of 99 weeks is already 34 weeks longer than during the 1974-75 recession, previously the longest stretch of coverage. For another, Congress seems disinclined to boost spending on social programs, especially if Republicans make gains in the elections. Some observers say Congress may have trouble renewing even the existing extensions of unemployment insurance when they expire Nov. 30.
"It's hard to see Congress letting the whole [extension] program drop at the end of November," says Chad Stone, an economist at the Center on Budget and Policy Priorities, a policy research group in Washington. Still, he foresees "pressure to scale back [benefits] rather than expand them."
Typically, UI programs start with up to 26 weeks of standard benefits. Those still jobless can seek up to 53 weeks of federally funded Emergency Unemployment Compensation and, in states with high unemployment, up to 20 weeks of extended benefits. In this summer's most recent extension of UI programs, Washington dropped the $25-a-week additional compensation that had been available since February 2009.
The 99ers are growing fast. Some 2 million to 4 million Americans have already exhausted their benefits, according to Michael Thornton, writer/editor of an online publication, the Rochester Unemployment Examiner. This month, some 91,000 UI claimants join their ranks every week, he estimates.
Many 99er activists aim to keep fighting for UI benefits until jobs start growing robustly. "We are desperate," says Mignon Veasley-Fields of Los Angeles, who exhausted her UI benefits in June. King says she became a "zealot for the unemployed" as an antidote to her previous "deep depression" caused by joblessness. A former legal compliance officer at a San Diego mortgage-lending firm, she couldn't land any full-time work before her UI benefits ran out this March.
"I said I'm not going down without a fight," she says. Last year, learning about the possibility of legislation extending unemployment benefits – what became Tier 3 and Tier 4 of the Emergency Unemployment Compensation program – she got involved. Her activism eventually led to her joining examiner.com to produce a blog, launch a blog-talk radio show, and create the website Jobless Unite Tier 5 to Survive!!!!, among other projects.
"I am back to having a happy persona," she says. "Even though I'm scared to death, I am able to keep a joyous attitude, and through contact with others in my position, I can keep a perspective on how blessed I am." Even if the Americans Want to Work Act doesn't get passed, Rosen plans to keep soldiering on: "Our minds have not diminished. This activism is another outlet helping us to remain creative and take different approaches to try to bring about change."
JP Morgan and HSBC Face RICO Charges in Silver Futures Class Action Lawsuit
by PR Newswire
JP Morgan Chase & Co. and HSBC Securities Inc. face charges of manipulating the market for silver futures and options in violation of federal commodities and racketeering laws, according to a new lawsuit filed Tuesday in the U.S. District Court for the Southern District of New York.
The suit – which alleges violation of the Commodity Exchange Act and the Racketeering Influenced and Corrupt Organizations (RICO) Act – alleges that the two banks colluded to manipulate the market for silver futures starting in the first half of 2008 by amassing huge short positions in silver futures contracts they had no intent to fill, but did so to force silver prices down to their benefit.
The suit was filed on behalf of Carl Loeb, an independent investor in silver futures and options, by Seattle-based Hagens Berman Sobol Shapiro LLP, a class-action and complex litigation firm. "The practice of naked short selling has long been a serious issue on Wall Street," said Steve Berman, co-counsel and managing partner at Hagens Berman. "What we know about the scope and intent of JP Morgan and HSBC's actions in this short-selling scheme dwarfs any other similar attempt to manipulate a commodities market."
According to the complaint, JP Morgan amassed a sizeable short position in silver futures and options in part through its March 2008 acquisition of investment bank Bear Stearns. By August 2008, JP Morgan and London-based HSBC controlled more than 85 percent of the commercial net short position in silver futures contracts. The suit alleges that, starting in early 2008, the two banks began manipulating the silver futures market by accumulating unusually large "short" positions and then secretly coordinating enormous sales of silver futures contracts on the Commodity Exchange, which is known as "COMEX" and is part of the New York Mercantile Exchange.
According to the lawsuit, JP Morgan and HSBC used a variety of methods to coordinate their manipulation of the market for silver futures contracts, signaling when to flood the COMEX market with short positions, which caused the price of silver futures and options contracts to crash. The suit describes two "crash" events that were set in motion by JP Morgan and HSBC, one in March 2008, and the other in February 2010, after defendants had amassed large short positions. In the wake of both events, the suit alleges, COMEX silver futures prices collapsed.
"We believe that JP Morgan and HSBC's scheme was carefully conceived and coordinated to maximize their profits at the expense of innocent investors who believed that they were trading in a market free from manipulation," Berman said. The complaint also contains allegations that in September 2008, the U.S. Commodity Futures Trading Commission launched an investigation that would eventually consider allegations made by a London-based independent metals trader named Andrew Maguire that the silver futures market was being manipulated.
The complaint alleges that Maguire disclosed to the CFTC on Feb. 3, 2010 that he received a signal from the two banks of their intent to drive down the prices of silver futures two days later, on Feb. 5, 2010. Maguire's information was correct and the price of silver dropped dramatically between Feb. 3, 2010 and Feb. 5, 2010. In addition, the lawsuit states that both JP Morgan and HSBC still maintain highly concentrated holdings in short positions in silver futures and options, giving both banks the ability to continue manipulating the price of silver.
Plaintiffs' attorneys have asked the court to certify the case as a class action and enjoin JP Morgan and HSBC from continuing their alleged conspiracy and manipulation of the silver futures and options contracts market. Attorneys also ask the court to award damages and attorneys' fees to the class.
'Borrowing In Disguise': For Pension Funds, Lowering Expectations Could Cost Billions
by William Alden - Huffington Post
Public pension funds could be in a much bigger hole than they're admitting. And facing up to more realistic numbers won't be easy.
Across the country, pension funds have set unrealistically high expectations for future income, experts say, projections that could strain already tight city and state budgets. The typical public pension fund projects an 8 percent annual return, a figure that's held steady even after the financial crisis decimated funds' value nationwide.
Over the past 10 years, any investment with consistent 8 percent returns, compounded annually, should have seen an increase of about 116 percent. By comparison, the S&P 500 during that period dropped about 13.5 percent. Despite the weakened economy, funds have retained a pre-crisis optimism.
But lowering expectations by even a small amount could inflate funds' liabilities by billions of dollars, each. When pension funds calculate the size of their liability -- the amount of money they must set aside in order to pay what they've promised to pensioners -- they subtract the returns that they expect to earn on their assets, called the discount rate.
Setting this expectation too low represents the liability as unrealistically large, putting an extra burden on taxpayers. But setting the rate of return too high creates the opposite problem, as it makes the liability appear unrealistically small. In such a case, a government would owe more to its pension funds than it thinks.
New York City, whose largest fund has the most members of any municipal fund in the nation, faces an emblematic problem. As the city comptroller John Liu said last week at The Economist's Buttonwood Gathering in Manhattan, lowering the expected 8 percent rate of return by even half a percentage point "would be a tremendous hit to our annual budget." It would, according to a pension expert's calculation, increase the pension liability by about $9 billion.
Some city leaders are worried. "It's overstating it a little bit to say the only one who's done that well is Bernie Madoff," mayor Michael Bloomberg said last month, according to Bloomberg news. "But 8 percent for a long period of time is not something that very many pension funds have ever achieved."
The median expected annual returns at 77 large municipal funds examined in a recent study is 8 percent, a figure that has remained consistent for the past decade. According to the National Association of State Retirement Administrators, this 8 percent median rate is the same as it was in 2001 -- years before the financial crisis wiped out 29 percent of funds' value.
Pension experts say expecting 8 percent annual returns on public pensions is unrealistic. From the end of 2007 through the beginning of 2009, the Dow dropped about 46 percent, and the S&P 500 dropped about 48 percent.
"It's just borrowing in disguise," Northwestern University finance professor Joshua Rauh told HuffPost. "Basically all that you're doing is you're saying, O.K., we're going to make these promises and we're not going to fund them...and we're going to ask future taxpayers to make up the difference -- basically to write insurance on our investment policies."
If Rauh is right, then the problem is widespread. "There's a trend, and a lot of pressure, for plans to reduce that [8 percent rate] to seven and three quarters or seven and a half," said Steve Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees. "The trend has certainly been to reduce it, not increase it."
But how feasible would a rate reduction be? For New York City, according to University of Rochester professor Robert Novy-Marx, who did the calculation for HuffPost, reducing the rate even half a percentage point would swell the liability by about $9 billion.
Novy-Marx, who co-authored with Rauh an October study on pension fund liabilities, used the latest comprehensive annual financial reports (CAFR) for each of the city's five pension funds (available online) to determine that, with the 8 percent expected rate of return, the city's total stated pension liability is $155.85 billion. If the city were to use a rate of 7.5 percent, the liability would jump almost $9 billion, to $164.78 billion. The city's budget deficit, by comparison, according to the latest statement, is about $96.7 billion.
To pay down that increased pension liability over a period of 30 years, Novy-Marx said, the city government would have to increase its annual contribution by about $300 million, starting in the first year. Considering that would almost certainly require an increase in taxes, it is, at this point, likely a political impossibility.
Liu, the New York City comptroller, who oversees the funds, acknowledged this issue during a question-and-answer session earlier this month at The Economist's Buttonwood Gathering in Manhattan. In response to a question about whether he would reduce the rate, Liu said, "That's quite a question," adding, "You asked a hot question." He said, "there's a movement to reduce this long-term rate of return," but did not say whether he would support such a step. "The challenge for us as a municipality is that it would be a tremendous hit to our annual budget," he said. "Just lowering it half a percentage point...would introduce a strain of several hundred million dollars a year into our service budget."
Novy-Marx thinks even 7.5 percent is too high. "I think they should be using something quite a bit lower than that," he said. New York state, for its part, announced in September that it would reduce its expected rate of return from 8 to 7.5 percent. "In today's investment environment, the actuary thought it was best to lower the assumption rate by half a percent," Dennis Tompkins, a spokesperson for state comptroller Thomas DiNapoli told HuffPost. "In light of changing markets and volatility, it was a good time to lower it down."
When Sharon Lee, spokesperson for New York City comptroller Liu, was informed that the liability would increase by about $9 billion if the rate were reduced half a percentage point, she expressed surprise. But after repeated requests from HuffPost, the city comptroller's office would not produce a calculation to challenge Novy-Marx's figure and directed requests to Robert North, the city's chief actuary. North said he will make a complete review of all the pension assumptions and methods in the next year.
If pension funds' assets do in fact yield 8 percent, then this potentially increased liability won't be an issue. And as Liu noted last week, the funds' investments are long-term, so a couple bad years shouldn't matter. The 8 percent figure is not supposed to represent a single year's returns but rather a smoothed-out picture of annual returns over the course of decades.
During the past 20 years, the Dow has climbed about 359 percent. During the past 10 years, though, it's increased only about 5 percent. The S&P 500, during that time, dropped about 13 percent. "We don't react to one year," Tompkins, the DiNapoli spokesperson, said. "We look at long-term prospects and we try to measure that way." "Public pension plans are long-term investments," Kreisberg, of AFSCME, said. "And that's the beauty of them."
Liu summarized the debate concisely: "Lots of people say, if you look at the last eight years, the last 10 years, how can you possibly expect an 8 percent annual rate of return on assets?" he said last week. "Others would say that, well, the duration of these pension liabilities are very long. They last for decades. And so if you look at the last 30 or 40 years, is 8 percent that far off from the annual average?"
Banks Face $31 Billion Loss On Mortgage Buybacks
The top U.S. banks could face up to $31 billion in losses from buying back bad mortgages, Standard & Poor's said in a report on Thursday. Large U.S. banks are facing pressure to buy back soured home loans that they packaged into mortgage bonds and sold to investors.
Bank of America Corp and JPMorgan Chase & Co have the most exposure to such potential repurchase obligations, followed by Wells Fargo & Co, Citigroup Inc, US Bancorp and PNC Financial Services Group, S&P analyst Vandana Sharma wrote on Thursday. The six companies could face up to $43 billion in total losses from mortgage buybacks through 2012, but they have already accounted for about $12.4 billion of those potential losses, according to the report, which cited a recent S&P study.
The potential mortgage buyback losses would affect the banks' future profits, but are "not likely to affect our view of the banks' capital adequacy," Sharma wrote. But those losses on mortgage buybacks, combined with the effects of increased regulation and an expected decrease in net interest income, "will likely hamper the financial recovery of the U.S. banks in 2011 despite declining credit costs," Sharma concluded.
Shares of the six banks were trading up on Thursday afternoon. Bank of America was one of the top performers among bank stocks, trading up 3.7 percent at $11.95.
India: Economic power house or poor house?
by Mary Albino - Toronto Star
India’s economic miracle is a perfect example of how appearances can be deceiving. The dominant narrative on the country goes like this: as the fourth largest economy in the world, with a steady annual growth rate of close to 9 per cent, India is a rising economic superstar. Bangalore is the new Silicon Valley. Magazines such as Forbes and Vogue have launched Indian editions. The Mumbai skyline is decorated with posh hotels and international banks.
There are numbers to back up this narrative. The average Indian takes home $1,017 (U.S.) a year. Not much, but that’s nearly double the average five years ago and triple the annual income at independence, in 1947. The business and technology sector has grown tenfold in the past decade. Manufacturing and agriculture are expanding, and trade levels are way up.
India is also on the up and up in terms of human well-being. Life expectancy and literacy are steadily rising, while child mortality continues to decline. The poverty rate is down to 42 per cent from 60 per cent in 1981. While 42 per cent still leaves a long way to go, India’s situation seems rosy compared with that of, say, Malawi and Tanzania, which have poverty rates of 74 per cent and 88 per cent, respectively.
If we examine these statistics in real numbers, however, a different narrative emerges, one the Indian government likes less. With a population as big as India’s, 42 per cent means there are some 475 million Indians living on less than $1.25 per day. That’s 10 times as many facing dire poverty as Malawi and Tanzania combined.
It means India is home to more poor people than any other country in the world. To put it another way, one of every three people in the world living without basic necessities is an Indian national.
The real number is probably even larger. The recently launched Multidimensional Poverty Index (MPI), a more comprehensive measure of deprivation than the current “poverty line” of $1.25 per day, uses 10 markers of well-being, including education, health and standard of living. The MPI, developed by the Poverty & Human Development Initiative at Oxford University, puts the Indian poverty rate at 55 per cent. That’s 645 million people — double the population of the United States and nearly 20 times the population of Canada. By this measure, India’s eight poorest states have more people living in poverty than Africa’s 26 poorest nations.
A 10-year-old living in the slums of Calcutta, raising her 5-year-old brother on garbage and scraps, and dealing with tapeworms and the threat of cholera, suffers neither more nor less than a 10-year-old living in the same conditions in the slums of Lilongwe, the capital of Malawi. But because the Indian girl lives in an “emerging economy,” slated to battle it out with China for the position of global economic superpower, and her counterpart in Lilongwe lives in a country with few resources and a bleak future, the Indian child's predicament is perceived with relatively less urgency. One is “poor” while the other represents a “declining poverty rate.”
What’s more, in India there are huge discrepancies in poverty from one state to the next. Madhya Pradesh, for example, is comparable in population and incidence of poverty to the war-torn Democratic Republic of Congo. But the misery of the DRC is much better known than the misery of Madhya Pradesh, because sub-national regions do not appear on “poorest country” lists. If Madhya Pradesh were to seek independence from India, its dire situation would become more visible immediately.
As India demonstrates, having the largest number of poor people is not the same as being the poorest country. That’s unfortunate, because being the poorest country has advantages. In the same way a tsunami or earthquake garners an intense outpouring of aid and support, being labelled “worst off” or “most poor” tends to draw a bigger share of international attention — and dollars.
When Bangladesh became independent from Pakistan in 1971, it was the poorest country in the world, so poor most economists were skeptical it would ever succeed on its own. But being labelled “dead last” worked in its favour: billions of dollars in aid money flooded in, and NGO and charity groups arrived in droves. The dominant narrative of Bangladesh at the time was of a war-ravaged, cyclone-battered and fledgling country on the brink of famine. That seemed to help rally the troops.
No doubt India’s government wants the world to perceive the nation in terms of its potential and not its shortcomings. But because it’s home to 1.1 billion people, India is more able than most to conceal the bad news behind the good, making its impressive growth rates the lead story rather than the fact that it is home to more of the world’s poor than any other country.
Still, at least part of the blame should be placed on the way poverty is presented on the international stage. If the unit of deprivation is a human being, then the prevalence of poverty should be presented in numbers of lives. If we know precisely how many billionaires India has — 49 in 2010, double last year’s number — than we should also know precisely how many people live without basic necessities.