Saturday, April 12, 2008

Debt Rattle, April 12 2008: A hundred days

'Okies' on their way to California, 1933

Read also today's earlier post: We have not yet conquered folly

Ilargi: The empty emperors have bleated, oinked and crowed as expected. Whenever it's convenient, all of these geniuses try hard to portray themselves as being as dumb as they are innocent. How else can they explain that they once again proclaim surprise at developments, which for them came “unexpectedly”, while humble blogs like The Automatic Earth and others have been saying for a long time that it would come to this?

What is it that we know and they don’t, and how is it possible that they fail to see what we do while they have access to a brazillion times more data than we do? Looking at their consistently dirt poor achievements in predicting anything further out into the future than the next five minutes, perhaps it’s time for them to step down, and let us take over.

That aside, although it’s hard to see beyond the layer after layer of lying rhetoric, they’re still there, those tiny kernels of truth: “..there were no plans for co-ordinated international intervention to fight the current crisis.” and ”.. nor did it recommend the use of public funds to bail out troubled markets”, plus "They're trying to buy some time for the dollar.".

The biggest story, and the main point, coming out of Friday’s meeting is undoubtedly this one: There is a 100-day plan to make markets more transparent. In particular, ”They urged financial companies to "fully" disclose in their mid-year earnings reports their investments at risk of loss”. In other words, there are voices in the group that demand banks and other financial institutions will open their books, fully, by early July. For now, the wording is that they "urge" this openness.

I suspect that some of the people involved in the talks mean that much more seriously and literally than others. And if one country, even if it’s not a G-7 member, pushes that through, a lot of emperors will be exposed. So yeah, maybe there will be something good coming out of this bad taste theatre. I have a gut feeling that some of these guys are sick of lying to the people who elected them, or even simply sick of lying, period.

Update note: I just see Mish has the same thought I talked about, in: What Exactly Is The G7 plan? "Instead of having dinner with those that caused the problem and have no idea how to fix it, the powers that be should have instead sat down with the top 20 economic bloggers as to what to do. We have been warning about these problems for years."

G-7 Signals Concern on Dollar's Slide, Weaker Growth
Finance chiefs from the Group of Seven nations signaled concern on the dollar's slide and said the global economic slowdown may worsen amid an "entrenched" credit squeeze. "Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability," the G-7's finance ministers and central bankers said in a statement after talks in Washington yesterday.

The officials downgraded their outlook for the world economy from that of two months ago, blaming the U.S. housing recession, credit-market turmoil, commodity prices and inflation pressures. The dollar has lost 8 percent against the euro and 6 percent versus the yen since the G-7 last met in Tokyo in February.

"They ratcheted up the currency rhetoric a notch or so," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. "They're trying to buy some time for the dollar." The new language was the first significant change in the G- 7's view of currencies since a February 2004 meeting in Boca Raton, Florida. The U.S. currency reached a record low of $1.5913 against the euro this week.

"We continue to monitor exchange markets closely, and cooperate as appropriate," the G-7 said. Treasury Secretary Henry Paulson said the change in the G-7 statement on currencies "reflects market developments and changes in the markets." He also said he told the G-7 "in very strong terms our commitment to a strong dollar."

"They're trying to discreetly throw a lifeline to the dollar," said Sophia Drossos, a currency strategist at Morgan Stanley in New York, who used to help manage the Federal Reserve's foreign-exchange holdings. "Had they not said anything, the dollar would have resumed its sell-off. This acknowledges there has been increased volatility."

Policy makers laid out a 100-day plan to strengthen regulation of capital markets. They urged financial companies to "fully" disclose in their mid-year earnings reports their investments at risk of loss. Firms should also establish "fair value estimates" for the complex assets that investors have shunned and boost their capital as needed, the G-7 said.

G7 urges banks to boost capital
The Group of Seven industrialised nations on Friday night endorsed plans to force banks to hold more capital to guard against risks that contributed to the credit crisis, as part of an initiative to strengthen the financial system. The G7 also signalled “concern” about sharp movements in currencies that it said threatened global economic stability.

The new language is a sign of heightened global unease about the weakness of the dollar – and lately sterling – relative to the euro. The moves on capital charges are intended to reduce the incentive for banks to invest in complex credit products, hold such assets in their trading portfolios and create off-balance sheet investment vehicles – three activities at the heart of recent turmoil.

The proposed changes form part of a 65-point action plan prepared by the Financial Stability Forum – the body charged with co-ordinating the response to the credit crisis – and presented to the G7 on Friday. Officials told the Financial Times that the programme would be adopted in full, though changes to capital rules would be phased in gradually to avoid disrupting already fragile markets. But there were no plans for co-ordinated international intervention to fight the current crisis. “Whatever needs to be done in the short run to alleviate problems will be done country by country,” a senior G7 policymaker said.

The G7 nations warned the slowdown might get worse as they endorsed the recommendations to alleviate market turbulence. “The turmoil in global financial markets remains challenging and more protracted than we had anticipated,” it said. “There have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability.”

The FSF called for the creation of a “college of supervisors” from different countries to oversee each of the largest global financial institutions, and urged market participants to create a more robust infrastructure for the over-the-counter derivatives market.

It said regulators should issue guidance on liquidity risk by July, and said banks should make extensive disclosures on their risk exposures by mid-2008. It set out plans to overhaul the credit rating process for structured products and called on regulators and investors to become less reliant on them. The FSF called for currency swap arrangements between central banks to provide offshore liquidity in different currencies to be extended. It said regulators must ensure that bond insurers had adequate capital.

The FSF raised the possibility of rule changes to make capital requirements more counter-cyclical – forcing banks to set aside larger cushions of capital in good times. There was no commitment to do this. Nor was there any proposal to intervene in bankers’ pay. In-stead, the FSF urged banks to tie their pay schemes more closely to long-term profits and said regulators should work with the private sector to develop ways to mitigate the risks associated with pay incentives.

Global Markets Bleaker Than Expected, Say G7 Financial Chiefs
The Group of Seven has warned that the sputtering global economy needs vigorous measures to keep it from crashing. Finance chiefs outlined several immediate steps for improvement at their meeting in Washington.

"The turmoil in global financial markets remains challenging and more protracted than we had anticipated," said financial chiefs from Germany, Britain, Canada, France, Italy, Japan and the US after their meeting in the American capital on Friday, April 11. The Group of Seven finance ministers and banking leaders emphasized their strong commitment to work together and the need for greater transparency in the financial sector.

Ongoing weakness in US residential housing markets, stressed global financial market conditions, the international impact of high oil and commodity prices, and inflationary pressures were the major struggles facing the global economy, said the finance ministers and central bank governors of the G7 major industrial countries.

They noted "sharp fluctuations" in major currencies since their last meeting in Tokyo in February. While saying they were "concerned about the possible implications for economic and financial stability," the officials also called for calm in response to concerns by European leaders over volatile foreign exchange markets.
The expression of its concern represented the first shift in four years in the G7's stance on currencies. "This change in the language … shows a concern we have not seen for some years," said Italian Economy Minister Tommaso Padoa-Schioppa. Major central banks have recently undertaken multi-billion dollar cash injections into turbulent financial markets recently as the dollar has plunged to record lows.
The group, however, did not declare the US economy in recession -- a term experts have been hesitant to use -- nor did it recommend the use of public funds to bail out troubled markets, an idea that had been widely discussed before the meeting. Banks have already written down some $225 billion in assets ties to failing mortgages and loans in 2007 and 2008, said Germany's Finance Minister Peer Steinbrueck. "Numbers like that can cause a lot of fear," he said.

Ilargi: See, I like Apple. I have a graphics/mixed media background, and have always used Apple computers. But it’s still a fringe company when it comes to personal computers, with less than a 5% market share, if I remember well. Yes, there’s iPods, I know, but still.

So to see that Apple is now worth more than the BY FAR biggest bank on the entire planet, that is staggering. And it’s not because Apple is doing so great: they lost 26% of share value this year so far. Man, what does that say about Citigroup, and all the other big banks?

You know, the banks’ main losses to date haven’t been in write-downs and losses, they’ve been in lost market value (while their CEO's rake in record fees). And that is a sobering thought. There is much more in losses to come on Wall Street, and pretty soon the guys who 'shape the future of finance' are worth less than your corner grocery store. Find that a good idea?

Citigroup's Market Value Drops Below Apple's Amid Credit Crisis
At the end of 2006, Citigroup Inc. was the fourth-largest company in the Standard & Poor's 500 Index, with a market value of $274 billion, almost four times that of Apple Inc. Now investors say the maker of iPods is worth $7.7 billion more than the biggest financial services provider.

Citigroup, reeling from the collapse of the subprime mortgage market, has lost 13 percent in value since reporting the biggest quarterly loss in its 196-year history in January. That followed a 47 percent drop last year. Even after a 26 percent decline in its own shares this year, Apple has a market value of $129.3 billion to Citigroup's $121.6 billion.

The shrinking of Citigroup underscores the devastation that has rocked the financial industry, highlighted by the Federal Reserve-managed takeover of Bear Stearns & Co. last month. Apple, on the verge of bankruptcy 10 years ago, has emerged as a technology star under Chief Executive Officer Steve Jobs. Its shares more than doubled last year. "The market looks at what Steve Jobs has done and what he's likely to do," said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. "The market is valuing that far more than the financial assets of Citigroup."

Holland sold his Citigroup shares a year and a half ago because he felt the "prospects were pretty lousy" and instead bought JPMorgan Chase & Co. shares. He also holds Apple and Google Inc., owner of the most popular Internet search engine.
"While we don't comment on our stock price, Citi remains focused on serving customers and implementing the priorities Vikram Pandit has developed, including better managing the firm's capital resources and risk management for improved profitability, stability and future growth," spokesman Michael Hanretta said.

CEO Charles O. "Chuck" Prince stepped down in November and was replaced by Vikram Pandit, who has eliminated about 6,000 jobs and plans more cuts. The bank may be poised to dispose of more than $200 billion of loans and securities to shore up its capital, a person with knowledge of the plans said last month. "Citigroup got itself into a really big mess," said Richard Sylla, a financial historian and professor of economics at New York University. ``Apple is an innovative company, having come up with iPods and iPhones, and they seem to have a lot of promise for the future.''

The slump in market capitalization puts Citigroup behind technology companies that themselves slid this year, including Google and Cisco Systems Inc., according to data compiled by Bloomberg. Bank of America Corp. passed Citigroup last year. Bank of America now ranks ninth and JPMorgan is 11th.

Unbelieveable Stupidity - Whiffs Abound
Yes, stupidity.

First, from the WSJ:

"The Treasury Department reported Thursday that receipts from corporate income taxes fell 16% to $129 billion in the first half of fiscal 2008, which began Oct. 1. The federal deficit during the period hit an all-time high of $311 billion, and was up 20% from a year earlier."
Well if that doesn't tell you everything you need to know....

Let's add a few things up.

  • $311 billion thus far
  • $165 billion for "stimulus"
  • $29 billion for Bear Stearns (contingent)
That's $500 billion, and we're only halfway through the year.

If you start adding into this the proposals floating around Congress, it gets worse. A lot worse. Indeed, we could see our first $1 trillion add to The Federal Debt.

Anyone who honestly believes that we're going to continue to enjoy low rates on debt (e.g. mortgages) with this going on is flatly out of their mind.

Congress is always tempted to deficit spend like a banshee at times like this, but we simply don't have the money.

We are going to face some very, very difficult times in this nation if we don't cut it out.

A couple of days ago I mused on whether Bernanke wants to cause a bond market collapse, and was essentially goading Senator Kennedy into doing stupid things that would ensure that it happens.

A number of people have emailed me and some have said "oh yeah, I see that" while others have called me nuts.

Well, what say you now? How fast can we escalate the Federal Debt without provoking a case of "no mas!" from buyers of our government debt? Do we know where that line is? Are we certain we're not going to cross it?

I don't know where it is, nor am I certain we won't cross it. But I know what happens if we do cross it. What's left of the housing industry will be destroyed. Corporate and personal borrowing will be essentially cut off, having a cost of double - or more - what it is now.

Let me be clear - if we cross this line in the sand there will be no warning and no way to "take it back" once it happens. Consider your daily life - could you survive for more than two weeks if you suddenly had no access to credit of any sort? If you were forced to pay for each and every thing you buy, from gasoline to groceries, with cash from your bank? If your credit card was suddenly reduced to "zero available", irrespective of how much you paid off?

That is what will happen if we cross that line. If you're not prepared for it then you are at risk of an immediate bankruptcy caused by the incessant whining about "where's my bailout?"

A while ago I started stating clearly - RAISE CASH. I meant it then and I double mean it now.


Michigan Consumer Sentiment came in at 63.2, from former 69.5, a 26 year low. Yet another huge decline is recorded as we have more evidence stacking up that consumers get it even if Wall Street does not.

Worse, inflation expectations ticked up huge to 4.9% from 4.3% last month. This is a really big deal, as once inflation "expectations" get unhinged they're basically impossible to stuff back into the bottle without dramatic action to tighten liquidity, because once people get into their heads that prices are going higher they start demanding higher wages and that spiral produces extremely bad results in the real economy. The last time we got that meme going was in the 70s and the result was an economic malaise of nearly 10 years duration - stagflation anyone?

Wake up investors!

John McCain has joined the 'bailout fray", which is no surprise. It takes real courage to tell someone that they bought into a bubble and you can't - and won't - help them. McCain, just like the other candidates, doesn't have that courage.

This is an extremely serious matter, because essentially all of the candidates want to find some way to offload those people who have "underwater" homes. The problem is that lenders won't eat it and this leaves the public to do so, which means that those who acted prudently - which, by the way, is 80% of Americans - get screwed.

'Shocking' GE results show size of crisis
General Electric underlined the depth of the global financial crisis on Friday, announcing its worst quarter in five years and slashing full-year forecasts. The news, described as “shocking” by a senior GE executive, combined with data showing that US consumer confidence was at a 26-year low to send shares lower. The S&P 500 fell 2 per cent in New York to 1,332.83.

Shares in GE, which derives more than half its revenues overseas and is seen as a bellwether of the global economy, led the way, falling 12.8 per cent – its biggest loss since the 1987 stock market crash. The results are a blow to Jeffrey Immelt, chairman and chief executive, and could increase pressure for action at the group’s underperforming financial and healthcare divisions.

GE executives apologised for reporting the first fall in quarterly profits since 2003, but said their strategy was sound. “The miss is shocking relative to our performance,” Keith Sherin, chief financial officer, told the Financial Times. “[But] we are not going to change our strategy because of a one-time miss.” Mr Immelt presented an upbeat outlook less than a month ago, saying on a webcast that GE would increase earnings at least 10 per cent this year. GE said on Friday its profits would grow no more than 5 per cent in 2008.

Fielding hostile questions from analysts, Mr Immelt said the collapse of Bear Stearns days after the webcast and subsequent market turmoil prevented GE selling real estate. The group was also forced to take a $270m writedown on stocks, loans and securitised assets.

Mr Immelt, who succeeded Jack Welch nearly seven years ago, told analysts: “I understand your frustration...but I think we’ve got to look at the totality of the company. We earn a lot more money than we did five or six years ago. We generate a lot more cash. We bought back a lot of stock. And I think the franchise of the company is very strong.”

GE’s writedowns are small compared with those at other financial companies. But analysts said continued weakness in GE’s healthcare division and poor results in the industrial and appliances units showed that it was losing ground across its portfolio.

US consumer confidence hits 26-year low
The soaring cost of basic foodstuffs and weakening labour market sent US consumer confidence spiralling to a 26-year low this month compounding the gloomy outlook for the US economy. Consumer confidence as measured by the Reuters/University of Michigan consumer sentiment survey fell to 63.2 in mid-April, from 69.5 in March, the lowest since 1982 and much weaker than a reading of 68 forecast by economists.

One-year inflation expectations jumped by 4.8 per cent, their highest since October 1990, and up from 4.3 per cent in March. “Consumers would appear to be buying into the stagflation theme,” John Ryding, chief US economist at Bear Stearns said.

The US government hopes that its fiscal stimulus package will offset a slowdown in consumer spending and help the economy to recover in the second half of this year. But some economists have warned that if consumer confidence continues to decline then its impact could be limited. ”If consumers are still this miserable when the tax rebates start arriving next month, the fiscal stimulus is likely to be a damp squib,” Julian Jessop, chief international economist at Capital Economics, said.

Rising inflationary pressures were also apparent in the latest reading of US import prices, which rose at the fastest annual rate on record, spurred by surging petrol costs. Surging prices could further strain the Federal Reserve’s ability to keep cutting interest rates to reverse weakening US economic growth.

Discussion of a "Bottom" One Year After a 7 Year Real Estate Market Run Up is Pure Ignorance!
If I hear another pundit (ex. Ara Hovnanian) query or comment on reaching a "bottom" in the real estate market anytime soon, I am going to scream. In the conversation I was having with my father, I explained the current housing like a ball that we usually play with at ground level. Ground level is the equilibrium point.

Now, I said, imagine throwing that ball 50 feet into the sky, then expecting it to suddenly stop in mid-air or 5 feet down in its descent back to the ground - ex. finding the "bottom" that the CNBC crew are in search of and expecting to come sometime next year. Physically, and realistically, this expected stop (or bottom) for the ball just ain't gonna happen. The same can be said for real estate values. When things pop that far outside of historical mean, expect a reversal. The following graph makes this point crystal clear, congealing the entire conversation I had with my pops into one picture...

Looking at the real (inflation adjusted) prices of homes over time and comparing them to the rates that tend to power them and the costs to build the home, that ball that was thrown up 50 feet into the air (the blue line) will have to drop at least 50% before it even comes close to hitting the ground again (the largest distance between the two lines, historically, excluding the 1997 spike, at at a realistic minimum). So all those guys who think the largest historical housing price spike since the US gold rush that lasted at least 7 years will be over after a year or two of relatively minor correction, study your history!

Now there is another way of looking at this. Many people ask me when I think the housing market prices will stabilize. I say the that houses will sell when people will be able to buy them. After the long run up, median prices have outstripped median incomes by so much that the (vast) majority of housing stock is out of reach of the everyday working couple. People like my mon and dad. It's as simple as this - houses won't start selling until people can buy them.

Government Spending Burns the Toast
Probably because I am a paranoid, suspicious, hateful cynic who thinks that governments are all lying, corrupt scumbags, I am sure that this whole "economic emergency" thing is not about saving the financial system, but about the government's tax revenues. When you add up the taxes from the federal, state and local governments, they take about half of the nation's income, and thus they also spend about half of the nation's income.

And the rest of the economy was in, as I gather from Bill Bonner here at The Daily Reckoning, the financial services industry, as, "Finance, as a percentage of total business earnings, went from 10% at the beginning of the boom in '80 to 40% last year." So there you g The economy consists 100% on government spending and the financial markets!

Now that you know what is REALLY at stake, the news becomes grim, indeed, when reports, "The federal government budget deficit widened to a record $175.6 billion in February as a weakening U.S. economy reduced tax revenue for a second consecutive month." The actual terrible news in dollars and cents is that "Revenue last month fell 12.1 percent, while spending increased 17.1 percent." This compares to the previous record of a monthly $120 billion deficit set last year! Wow! Big stuff!

This helps explain why the National Debt jumped $60.6 billion last week. A week! As a little exercise, why don't you multiply $60.1 billion in one week by 52 weeks to get a nice annualized figure for the increase in the national debt at this rate? I would do it myself, you understand, but my nerves are pretty shot from all the upheaval of late, and my fingers are mostly clenched into painful tight knots of fear.

This same bankrupt America is getting ready to send out $160 billion in "economic stimulus" checks, where the government is literally giving people free money even though the government is borrowing like crazy just to keep afloat, which means that we that are truly, truly toast. And not the good kind of toast where the edges of the crust are just starting to turn dark brown and the whole slice is a uniform, golden color, but the other kind of toast when every crumb of bread is burnt black, little flames are licking up at the edges, and all the smoke alarms in the whole freaking house are blaring "Bleeeep! Bleeeep! Bleeeep!"

Reuters rejects the delicious toast metaphor, which I was hoping that they would LOVE, and then I could use that to springboard to a job with them as a cub reporter, sort of like Jimmy Olsen in Superman. Instead, they ignored my resume and stuck with the facts by noting that "The February gap marked a 46.3 percent increase over the previous all-time single-month deficit of $119.99 billion in February 2007", because this time, "February receipts fell to $105.72 billion from $120.31 billion in February 2007."

As would be expected, "both corporate and individual income tax payments slowed", while "February outlays grew 17.1 percent to $281.29 billion, a record for February, from $240.30 billion in February 2007." The result of getting less and spending more? Hahaha! I thought you'd never ask!

In total, the terrifying news is that "For the first five months of fiscal 2008, which began last Oct. 1, the deficit reached a record $263.26 billion, up 62.3 percent from the $162.16 billion for the same period of fiscal 2007." That comes to the federal government borrowing another $631 billion this fiscal year! About 4% of GDP! This is terrible news!

Many More Are Jobless Than Are Unemployed
Those two seemingly contradictory statements are especially true for American men in what should be the prime of their working lives. Those facts may help to explain the stark pessimism of Americans about the economy, and shed some light on the rise of illegal immigration as a political issue. Men in the prime of their working lives are now less likely to have jobs than they were during all but one recession of the last 60 years. Most of them do not qualify as unemployed, but they are nonetheless without jobs.

The unemployment rate paints a less gloomy picture. Among men ages 25 to 54 — a range that starts after most people finish their education and ends well before most people retire — the unemployment rate is 4.1 percent. That is not especially low, but it is well below the peak rate in all but one post-World War II recession. Only people without jobs who are actively looking for work qualify as unemployed in the computation of that rate. It does not count people who are not looking for work, whether or not they would like to have a job.

But there is another rate — called the jobless rate in this article — that counts the proportion of people without jobs. To be sure, some of them do not want to work. Some are raising families on a spouse’s income, or are disabled, retired or independently wealthy. But others may be discouraged workers, who would take jobs if they thought any desirable positions were available.

In the latest report, for March, the Labor Department reported the jobless rate — also called the “not employed rate” by some — at 13.1 percent for men in the prime age group. Only once during a post-World War II recession did the rate ever get that high. It hit 13.3 percent in June 1982, the 12th month of the brutal 1981-82 recession, and continued to rise from there.

To be sure, employment is a lagging economic indicator, and rates higher than this have prevailed after recessions ended. But this rate has arrived at a time when the government still hopes that a recession can be averted.

Taking Moody's to Task
Moody's (MCO) is one of the key enablers in the housing crisis and the sub-prime debacle. Considering the massive damage they are at least partially responsible for, they have escpaed been relatively unscathed -- so far. Their reputation is in tatters, and their stock price is down, but given the culpability, payola, and gross incompetence, one might have thought an Arthur Anderson-like demise was a possibility.

I had forgotten that Warren Buffett was Moody's biggest shareholder; he should consider himself lucky that Moody's situation hasn't tarnished his reputation, either. The WSJ calls Moody's out on their role as objective arbiter of ratings:
"Bond-rating agency Moody's Investors Service used to be an ivory tower of finance. Analysts were discouraged from having a drink with a client. Phone calls from bankers went unanswered if they rang during intense, almost academic debates about credit ratings.

A decade ago, as the housing market was just beginning to take off, Moody's was a small player in analyzing complex securities based on home mortgages. Then, Moody's joined Wall Street and many investors in partaking of the punch bowl.
A firm once known for a bookish culture began to focus on the market share that affected its own revenue and profit. The rating firm became willing, on occasion, to switch analysts if clients complained.

An executive overseeing mortgage ratings went skydiving with a client. By the height of the mortgage-securities frenzy in 2006, Moody's had pulled even with its largest competitor, rating nine out of every 10 dollars raised in these instruments. It gave many of the bonds its coveted triple-A rating.

Profits at the 99-year-old firm, which John Moody started to rate railroad bonds, rose 375% in six years. The share price quintupled. Now, Moody's and the other two major rating firms, the Standard & Poor's unit of McGraw-Hill Cos. and the Fitch Ratings unit of Fimalac SA, are under fire for putting top ratings on securities that ultimately collapsed in value.

Investors, many of whom relied on ratings to signal which securities were safe to buy, have lost more than $100 billion in market value. The credibility of the ratings system is in tatters as new downgrades of mortgage securities come almost weekly. Investigators from Congress, the Securities and Exchange Commission and several state attorneys general are examining the rating firms' practices."

Instead of competition forcing the firm to be cautious in the face of other's recklessness, it actually levered them up further in order for them to stay competitive. The genius of financial engineering and unfettered capitalism in its fullest flower . .

Another Record Year for Lobbying: $2.8 Billion
Corporations, industries, labor unions, governments and other interests spent a record $2.79 billion in 2007 to lobby for favorable policies in Washington, the nonpartisan Center for Responsive Politics has calculated. This represents an increase of 7.7 percent, or $200 million, over spending in 2006. And for every day Congress was in session, industries and interests spent an average of $17 million to lobby lawmakers and the federal government at large.

“At a time when our economy is contracting, Washington’s lobbying industry has been expanding,” said Sheila Krumholz, executive director of the 25-year-old watchdog group. “Lobbying seems to be a recession-proof industry. In some respects, interests seek even more from our government when the economy slows.” CRP, which tracks lobbying spending on its award-winning Web site,, found that, for the second straight year, health interests spent more on federal lobbying than any other economic sector—$444.7 million. The finance, insurance and real estate sector was second, spending about $418.7 million.

Looking more specifically within the larger sectors the Center tracks, the pharmaceuticals/health products industry outspent all industries by shelling out $227 million for lobbying services, or an average of $1.4 million for the 164 days that the 110th Congress met in 2007. The drug industry has spent $1.3 billion on federal lobbying over the last 10 years, more than any other industry. Its reported lobbying increased 25 percent in 2007.

The second-biggest spender among industries in 2007 was insurance, which spent $138 million on lobbying, followed by electric utilities, which spent $112.7 million, the computers/Internet industry, which spent $110.6 million, and hospitals and nursing homes, which paid lobbyists at least $90.5 million. The securities and investment industry, which ranked sixth, spent $87.3 million, increasing its lobbying 40 percent over 2006.

Drilling even further to look at particular corporations, trade associations, unions and other organizations, the biggest spender in 2007 was again the U.S. Chamber of Commerce. Although the business booster’s reported lobbying decreased about 27 percent last year, following a record year in 2006, the Chamber and its affiliates still managed to spend nearly $52.8 million on in-house lobbyists and with K Street firms. 

General Electric was the number-two spender ($23.6 million), followed by three interests in the health sector: the Pharmaceutical Research and Manufacturers of America ($22.7 million), American Medical Association ($22.1 million) and the American Hospital Association ($19.7 million). Other big spenders on the Top 20 list included AARP, Exxon Mobil, AT&T, General Motors, the National Association of Realtors, Verizon Communications and several defense contractors, Northrop Grumman, Boeing and Lockheed Martin.

The amount of money spent on federal lobbying has increased about 8 percent annually since the late 1990s, making last year’s growth typical. But some interests vastly increased their lobbying in 2007. Blackstone Group, the private equity firm lobbying to prevent higher taxes on its profits, ramped up 477 percent to spend $5.4 million. The National Education Association, the nation’s largest teacher’s union, spent $9.2 million last year—up 464 percent—and presumably focused its lobbying on the reauthorization of the No Child Left Behind ac

It’s a Crisis, and Ideas Are Scarce
As the credit crisis has slowly expanded and worsened, there has been a flurry of activity in Washington to reduce the damage from it. There are bailouts and tax breaks, and even checks to parents of school-age children.But there is remarkably little action aimed at getting the credit system functioning again.

In part, that is because there is a scarcity of ideas. Paul Volcker, the former Federal Reserve chairman whose legacy has not crumbled since he left office, was right this week when he said the financial engineers had created “a demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole.” But it is far from clear what should replace it, or if it can somehow be mended.

To be sure, we had a system that worked for generations, based on commercial banks constrained by regulation. But that system is not coming back, as Mr. Volcker noted in his extraordinary speech to the Economic Club of New York this week. “Any return to heavily regulated, bank-dominated, nationally insulated markets is pure nostalgia, not possible in this world of sophisticated financial techniques made possible by the wonders of electronic technology,” he said.

In any case, the banks are not all that healthy anyway, thanks to their losses from the strange securities created under the new system. For the time being, the solutions being pushed would not seem unreasonable to an old-fashioned socialist. Most new mortgages are now guaranteed by the government or by government-sponsored enterprises, whose ability to lend is being expanded.

The Bear Stearns precedent seems to assure that investment banks have joined commercial banks in the Fed’s safety net, and the Fed has now taken control over what Mr. Volcker calls “mortgage-backed securities of questionable pedigree.” Some ideas are obvious, but so far not widely accepted.

The Basel II capital rules for commercial and investment banks clearly need to be strengthened, and regulators need to develop the ability to do their own risk assessments, rather than leaving the task to the banks and the credit rating agencies. That will take time and cost a lot of money, and it will require the derivative markets to be much more transparent.

Regulation needs to be strengthened, particularly for investment banks. Providing a safety net brings, in Mr. Volcker’s words, “a direct responsibility for oversight and regulation.” He forecast that “investment banks are going to end up with a leverage ratio imposed upon them.” And one lesson of this disaster is that having parallel financial institutions — one regulated and one not — simply drives activity to the unregulated area, at least until something blows up.

Ilargi: As I remarked before, all of a sudden the IMF is all over the headlines after a hiatus that seemes to last for years. There must be a reason, teh IMF is being set up to do something in the global finance crisis, maybe just play the target.

Paulson Says IMF Must Improve Monitoring of Markets
U.S. Treasury Secretary Henry Paulson urged the International Monetary Fund to adapt quickly to the growing complexities of the global financial system and improve its monitoring of currency markets. "The IMF must reform to retain its relevance and legitimacy," Paulson said in the text of a speech at the fund's semiannual meeting in Washington.

"The fund must spring quickly and far to adapt to rapid technological change, the rise of dynamic emerging market economies and the increasing internationalization of financial markets." Paulson's remarks came a day after a meeting in Washington of the Group of Seven finance ministers and central bankers, who signaled in a joint statement their concern about the dollar's slide in the past two months.

Paulson today said the IMF must "sharpen its focus" on currency markets. "Fundamental to the IMF's relevance is the vigor with which it carries out its core mission of surveillance over members' exchange rate policies," he said. Monitoring the rising influence of government-run investment funds is also a priority, he said.

The IMF is scheduled in August to release its guide of best practices for sovereign wealth funds to ensure they are guided by commercial and not political interests. "It will be important for the fund to work closely with both sovereign wealth fund countries and recipient countries to ensure a comprehensive, high-quality product," Paulson said.

Iceland's currency meltdown
Pity David Oddsson, the head of Iceland's central bank. Inflation is currently 8.7%, well beyond the bank's target rate of 2.5%, and well in advance of wage growth of 6.8%. The country's currency, the króna, is plunging and the bank last week raised its benchmark interest rate to a record 15.5% — the second hike in just three weeks.

According to the central bank's rate announcement from Thursday: "Because of the high level of household and business indebtedness, the recent depreciation of the króna will contribute to a contraction of the economy. Persistent inflation will be most damaging to indebted businesses and households and can undermine  financial stability for the long term. It is therefore of paramount importance that inflation be brought under control."

Part of the problem seems to be that the economy in the tiny island nation of 300,000 is, in some respects, too good. Employment is about 1%, which is low enough to be virtually non-existent. According to Bloomberg news report this week, the number of unemployed people in Iceland jumped to 1,674 in March, up 43 from 1,631 in February. Can you imagine an economy where they can actually pin point the precise number people out of work?

Another problem is that Icelanders like to borrow — and they particularly like to borrow from banks in Europe, where interest rates are much lower. This has Icelanders lapping up euros, something that is only serving to aggravate the meltdown in Iceland's currency.

"In some senses, Iceland is like an economic experiment," said Frosti Olafsson, an economist at the Iceland Chamber of Commerce.  "In 20 years or 50 years, economics professors will look at Iceland and say it's possible for a country of that size to have its own currency or not."

Lenders urge Bank of England to provide more cash
Speaking at the Council of Mortgage Lenders’ (CML) annual lunch yesterday, Steven Crawshaw, chairman of the Council, assessed the state of the UK mortgage market and the impact of the credit crisis. He pointed out that funds made available by the European Central Bank had helped UK lenders and expressed the hope that the Bank of England would make a similar facility available “sooner rather than later”.

In his address, Mr Crawshaw suggested that banks’ reluctance to lend to one another was not necessarily a symptom of lack of trust between financial institutions but rather the result of concerns about access to future funding. According to CML data, UK mortgage lenders provided around £108 billion in loans last year.

Mr Crawshaw warned that during the months ahead, homeowners will be finding it more difficult to secure a mortgage and interest rates will continue to rise, unless the Bank of England steps in. The industry is not only urging the Bank to inject more money into the markets but also to follow the lead of the US Federal Reserve and accept a wider range of collateral.

Last week, the Bank agreed to increase its level of funding and will provide an addition £5 billion for auction this month.
However, it has so far declined collateral in the form of loans that, according to the mortgage industry, are less than “prime” but nevertheless still sound.

Saudi money supply surges 26%
Annual money supply growth in Saudi Arabia accelerated to 26.2% in February even as the kingdom tightened lending curbs to control spiralling inflation, central bank data showed on Saturday.

M3, the broadest measure of money circulating in the Saudi economy, grew to 827.35 billion riyals ($220.6 billion) at the end of February compared with 655.83 billion riyals a year earlier, Saudi Arabian Monetary Agency (SAMA) data showed. Money supply growth was 23.9% in January.

Central bank net foreign assets rose 47.1% in February to 1.24 billion riyals, the data showed. Annual inflation in Saudi Arabia reached 8.7% in February, its highest level in 27 years. The kingdom has raised bank reserve requirements three times since November, forcing banks to keep more money in their vaults as the US Federal Reserve repeatedly slashed interest rates since September.

The Saudi central bank gradually raised the reserve ratio from 7% in November to 12% in April. Saudi Arabia, which has been linking its riyal to the dollar for 22 years, lowered its reverse repurchase rate, which guides bank deposit rates, by two percentage points after the Fed cuts. It has kept its repurchase rate, which guides lending rates, steady at 5.5%.

Economic woes hit American stomachs
Steadily rising food costs aren't just causing grocery shoppers to do a double-take at the checkout line -- they're also changing the very ways we feed our families. The worst case of food inflation in nearly 20 years has more Americans giving up restaurant meals to eat at home. We're buying fewer luxury food items, eating more leftovers and buying more store brands instead of name-brand items.

For Peggy and David Valdez of Houston, feeding their family of four means scouring grocer ads for the best prices, taking fewer trips as a way to save gas and simply buying less food, period. "We do more selecting, looking around, seeing which prices are cheaper," said David Valdez. "We are being more selective. We have got to find the cheapest price."

Record-high energy, corn and wheat prices in the past year have led to sticker shock in the grocery aisles. At $1.32, the average price of a loaf of bread has increased 32 percent since January 2005. In the last year alone, the average price of carton of eggs has increased almost 50 percent. Ground beef, milk, chicken, apples, tomatoes, lettuce, coffee and orange juice are among the staples that cost more these days, according to the federal Bureau of Labor Statistics.

Overall, food prices rose nearly 5 percent in 2007, according to the U.S. Department of Agriculture. That means a pound of coffee, on average, cost 57 cents more at year's end than in 2006. A 12-ounce can of frozen, concentrated orange juice now averages $2.53 -- a 67-cent increase in just two years. And a carton of grade A, large eggs will set you back $2.17. That's an increase of nearly $1 since February, 2006.

"The economy is having a definite impact on shopper behavior," said Tim Hammonds, president and chief executive officer of the Food Marketing Institute, a retail trade group. "People are significantly changing what they do.” Nationwide, a family of four on a moderate-cost shopping plan now spends an average of $904 each month for groceries, an $80 increase from two years ago, according to the USDA.

Those who can't absorb the added expenses are increasingly seeking help from food pantries. America's Harvest, which distributes nearly two billion pounds of food and grocery products each year to more than 200 food banks across the country, estimates that its overall client load increased by 20 percent in the fourth quarter of 2007.

Brother Can You Spare 10 Grand?
The grainy footage of Great Depression soup lines and Hoovervilles now in heavy rotation on the major news outlets has been largely counterbalanced by a parade of economists who reassure us that such a protracted downturn is currently inconceivable. Their confidence stems primarily from the belief that government safety nets enacted since the New Deal, together with a Fed chairman who is a self-professed depression buff, will prevent a replay of the 1930s. As usual, this analysis is woefully optimistic and sidewalk pencil sales may in fact be a growth industry.

Although Bernanke may have spent much time studying the Great Depression, his understanding of it is anything but sound. That epic slowdown resulted from a series of policy mistakes, first by the Federal Reserve and then by the Federal Government. Bernanke's view is that these mistakes were simply not large enough. What the current Fed chairman does not grasp is that the seeds of the Depression were sown during the "roaring" 1920s when the Fed, in an effort to support the British pound, kept interest rates much too low.

It was this unnaturally cheap money that fueled a raging stock market bubble. In 1929, when the Fed finally came to its senses and raised rates, the bubble finally popped. In his reading of this history, Bernanke ignores the effects of the overly easy policy and simply lays blame on the tightening. As the recession progressed, both Hoover and Roosevelt, in politically inspired efforts to ease the pain, repeatedly interfered with free market forces working to correct the imbalances.

This ultimately turned what would have been an ordinary, though perhaps severe recession, into what we now call the Great Depression. This time around, the Greenspan/Bernanke Fed blew up even bigger bubbles and both the Fed and the Federal Government now show an even greater commitment in preventing free market forces from rebalancing our economy. As a result, similar to the way that the "War to End all Wars" had to be rechristened after 1939, future historians may need to come up with a new term for the Great Depression.

Rather than acting as safety nets, the programs now being devised by government will act more like snares, further impeding market forces from righting the ship. But for those who insist that a new "New Deal" is needed, it is important to retain a sense of scale. Prior to the massive expansion of Federal programs in 1933, the government was very small relative to the economy of that time.

Though I believe that many of the economic policies of the New Deal were unwise and simply prolonged the Depression, at least back then we could afford them. Today of course, the Federal Government is already enormous, and any increase in spending will either have to be financed by further borrowing from abroad or though additional money printing by the Fed.

For his part, Bernanke blames the Depression on the Fed not printing enough money. Had the Fed done precisely what Bernanke now thinks they should have, the Great Depression would have been much worse. Had the Fed tried to re-inflate the stock market bubble or keep it from bursting in the first place, it's the dollar that would have collapsed, and Depression-era America would have looked liked Weimar Republic Germany. As bad as the Great Depression was, hyperinflation would have made it even wors

British Ounce, US$, Toppled by Tumbling Home Prices
Economic events in the United States often provide a preview of what's around the corner for the British economy. Both countries run large external trade deficits, and much like the US, the British economy has been expanding on little else than the availability of easy credit and asset price inflation in the housing market. The ties between the US and UK run even deeper. About half of the profits for FTSE companies come from overseas, and 15% from US-based affiliates.

Imaginative lending practices fueled a doubling of British home prices over the past six-years, the key engine of growth for the world's fifth largest economy. But British borrowers now face a perilous situation where their home values are tumbling, and the local banking oligarchs are lifting their lending rates, in order to recoup big losses of up to 20 billion pounds in toxic sub-prime mortgages.

Little of the Bank of England's (BoE) three rate cuts since December have been passed on to debt strapped consumers, now locked in a genuine credit crunch. "Credit conditions have tightened and the availability of credit appears to be worsening. The disruption in financial markets could lead to a slowdown in the economy that is sufficiently sharp to pull inflation below target," explained the BoE in order to justify its quarter-point rate cut to 5.00 percent.

In December 2003, then Chancellor of the Exchequer Gordon Brown instructed the BoE to keep a lid on the consumer inflation at 2% or less, by adjusting interest rates upward, whenever inflation rose above target. Brown told the BoE to target the harmonized index of consumer prices (HICP), adopted by the Euro zone, measuring the retail prices of goods and services, but excluding volatile housing costs.

Yet the BoE lowered its base rate to 5% this week, even though inflation is above the 2% target and BoE chief Mervyn King has predicted rising food prices and energy prices could lift the inflation rate higher to 3 percent. Britain's major gas and electricity suppliers raised their prices by 15%, and the cost of a basket of groceries is up 12%, increasing the average family food bill by 750 pounds per year. "Because we've got low inflation, we can cut interest rates," British PM Gordon Brown told the BBC.

Under heavy political pressure, the BoE has abandoned "Inflation Targeting," and instead, is pursuing a radical policy of "Asset Targeting," or adjusting interest rates in order to influence the direction of home prices and the stock market. The BoE has been a champion of "Asset Targeting" for quite some time. In 2001, the BoE slashed interest rates alongside the Greenspan Fed, with both central banks attempting to inflate home prices and arrest the slide in equity markets.

The BoE began to reverse its rate cuts a year earlier than the Fed, when British home price inflation was sizzling at a 26% annualized clip in late 2002. Hiking rates in slow motion over the next four years, the BoE finally broke the back of real estate inflation, when it lifted its base lending rate to 5.75% on July 5, 2007, adding heavy pressure on households shouldering 1.3 trillion pounds of debt.

The Bernanke Fed has also adopted "Asset Targeting," and is slashing the fed funds rate at a frantic pace in reaction to the sliding S&P Case Shiller Home price Index, which is 11.7% lower from a year ago. The Fed is desperately trying to put a floor under US home prices, by pegging interest rates far below the inflation rate, rapidly expanding the MZM money supply (+17% yoy), and swapping hundreds of billions of US Treasuries with bankers, in exchange for toxic AAA sub-prime mortgages.

However, BoE chief King has rejected requests from British bankers to swap for toxic mortgage-backed securities. "I want to assure you that the Bank will provide the liquidity assistance that the system needs in order to restore confidence. Such lending can be only a temporary measure, but it can be a useful bridge to a longer-term solution. The BoE is not proposing schemes that would require the taxpayer, rather than the banks, to assume the credit risk."

British bankers are now in a mini-panic, after the International Monetary Fund said on April 5th that home prices in the UK and Ireland are vulnerable to a sharp 30% correction. "Home prices that look particularly vulnerable to a further correction are in Ireland, the United Kingdom, the Netherlands, and France. In these economies, it is difficult to account for the magnitude of the run-up in house prices."


biologist said...

You wrote that, as bad as the great depression was, hyperinflation would have made it worse. This is not true, because in a hyperinflationary environment, all debt is basically cancelled. Only real estate and producing assets remain. Therefore, for example, farms are not foreclosed, the farmer just fills a truck with bank notes and dumps the stuff in the backyard of the bank. In the deflationary great depression, the opposite happened, the real value of the debt increased and broke the farmer's back.

Ilargi said...


I didn't write that, Peter Schiff did. Still, I would agree with him that following the Weimar Republic example might have added some pain in America.

Stoneleigh said...

I disagree with Peter Schiff that hyperinflation would have been possible at the time of the Great Depression, just as as I disagree with him that it is possible now. However, currency hyperinflation is possible following the credit deflation I believe is inevitable. That didn't happen after the Great Depression, but I think it may well this time, giving us the worst of both worlds.

My view is that deflation and depression, which reinforce each other through positive feedback, will probably persist for a number of years. It takes time to wring all the leverage out of a system as complex as ours, but of course nowhere near as long as it took to build it in the first place. Expansions fueled by hope and greed necessarily take longer to play out than declines or crashes driven by fear.

I think we'll see the collapse of the international debt financing model, at which point countries left to their own devices will very likely resort to the printing press and take the Zimbabwe route. While we still have some form of international debt financing, any serious attempt to inflate would be severely punished in the bond market. The cost of government borrowing, and shortly thereafter all borrowing, would go through the roof.

Anonymous said...

This is a niave comment/question about the Market-ticker article you linked to, however, here it is:

Denninger on Market-Ticker writes about the dangerous possiblilty that buyers of our government debt will stop buying because of the amount of debt we have, lower interest rates, etc. I can't help but wonder, though, whether Paulson, Bernanke, and others in the government are in communication with the major holders of our debt (Japan, China, etc) about how far we can go, and what they will tolerate before pulling out their investment big time. Our gov went to such lengths to save Bear Sterns, and they must be aware of the possiblilty that Denninger describes. Many others have written about it. Would they really be playing this game of "chicken" with these foreign governments blind?.... without back-channel communication? Isn't in the foreign governents' interest to keep the US economy going?

Another brief question I have is about the comment I hear others say when confronted with the national debt figures: that as a percentage of GDP, it isn't really that much. I don't know enough to evaluate, and am curious about people's thoughts...

Thanks in advance for any replies!!


super390 said...

The difference between Germany's early '20s hyperinflation and its early '30s hyperdepression is that the latter led to the election of Adolf Hitler, not the former. Basically, deflations are harder on the poor than inflations, which every right-winger on the internet refuses to acknowledge because they want the poor deflated into peonage and disenfranchised. Many of these guys want to revoke the 13th Amendment, allowing states to restore property and racial restrictions on the right to vote. They continually deny that America was on the verge of class revolution in 1933, or that capitalism, private property or conservatism carry the slightest iota of blame. They simply believe that anyone too poor to act "white" is a subhuman and shouldn't have a voice.

Stoneleigh said...


I agree that deflation is much harder on the poor (and in fact on almost everyone) than inflation. I also agree that reducing the masses to disenfranchised abject poverty, as I would argue is about to happen, serves a purpose for a small and detached elite.

Freedom for the masses serves a purpose only for so long as it is possible for elites to make more money by taxing the free activities of ordinary people than by directly enslaving them. With a thriving economy, the masses also have collective bargaining power. However, with economic activity facing collapse, that will no longer be the case. Your freedom will no longer be in the interests of the powerful.

We have an enormous global population - far above the carrying capacity of the Earth - at a time when looming resource shortages are likely to make it impossible to sustain anything like our current numbers. When there is a large surplus of anything, it's value decreases substantially. The masses will have no bargaining power at all, as in fact is already the case in many parts of the world. Under those circumstances, life is cheap (as tragic as that is).

scandia said...

I've been daydreaming, running away to paradise! On a site about life in Panama I learned the currency is US dollars and dollars are tanking. I wonder what that will do to Panama's current economy? One blogger says the hits on his site have trebled since Bear Stearn. Guess I'm not alone in wanting to find a hiding place.Many of their resident expats are from Britain with sterling losing value as well.
Rather disturbing to read an expat's complaint about a $12 per hr rate charged by a local tour guide/fixer! A man who speaks 4 languages,proven trustworthy to handle large amounts of a clients money, knows the Panamian legal system and can facilitate safe,legal passage through that system! Also handsome, elegant,reputed to be totally reliable...$12 is too much! The story supports Stoneleigh's comments that others will be viewed as competition for declining resources. The classic film from the 60's Soylent Green resonates....I had figured I'd be dead before the shit hits the fan. Now I'm not so sure!As a member of the single, aging female " working poor " I feel quite vulnerable . There is a most perverse comfort taken in that I won't suffer alone.

Ilargi said...

Anon cheers,

Sure, the Fed talks to China and Japan, but they won't trust them, so what's the use?

I don't really know why people keep assuming that China depends on the US economy, and will try to keep some kind of status quo in trade. China's economy is blowing up with all those dollars flowing in. That is something they know very well, and they have prepared their next steps, rest assured.

As for the US, they don't need the outside capital nearly as much now as they did before Wednesday. I dedicated a post to it, but I don't feel at all that many people have understood what happened. Not when I see the comments here nor looking at what has been said in the media. They'll all learn yet.

In that post, While you were sleeping: A financial coup d'état, I sought to explain, with the help of three Wall Street Journal articles, that the Fed will from now on no longer borrow from China, but from its "own" US citizens, and their kids.

It will effectively have an unlimited credit line, "financed" through unlimited taxation of the US population. It is truly a coup, creating a lame duck political system. And a far more serious development than has been presently recognized.

yoyomo said...

My understanding of Schiff's position on inflation is that it would apply to commodities and tradable goods. Even under high rates of inflation he still expects asset prices to fall. Only under extreme hyperinflation would asset prices reverse upwards.

For what it's worth he's also big on decoupling with the US being the caboose as opposed to the engine of the global economy. The key to everything is China; does it have an end game plan? If it has a viable plan the global economy might bounce along a few more years before facing the oil collapse. If not the downward spiral will start sooner but perhaps resource supplies will be stretched out a little longer.

Given the unpayable levels of debt that have been allowed to accumulate it is inevitible that alot of creditors are going to get stiffed. The consequent loss of confidence will shrink the credit markets especially across borders. What Korean retiree will want to lend to western consumers who can so easily have their debts discharged?

I don't see what can stop global deleveraging; Green energy is too expensive for the vast amount of fuel that Americans are accustomed to using to serve as the vehicle for the next bubble.