Sunday, October 31, 2010

October 31 2010: Night of the Living Debt

Detroit Publishing Co. Light at the end 1901
"The Firs. Under the firs. New Baltimore, Michigan"

Ilargi: To order the interactive video presentation, ( for only $12.50!! ) of Stoneleigh's "A Century of Challenges", which is receiving rave reviews across Europe and North America, PLEASE CLICK HERE or click the button on the right hand side just below the banner.

Ilargi: There's no doubt something fitting to the fact that we start off a big week, both politically and economically, in the US with a feast of horrors. The mid-term elections will be a major factor in how Washington will function the next two years, and the Fed's decisions on the size and shape of QE2 have the potential to strongly influence the view major investors and foreign governments have of the American economy. Personally, I don't think it will lead to a weaker dollar, if only because that would mean Bernanke and Obama get what they want. What I see is that if other parties start doubting the US grip on its own finances, the dollar will rise.

GDP came in at 2% on Friday, which was just as expected as the downward revisions will be, the first on November 23. A major role was reserved for inventories; and they, ironically, will be subtracted from GDP when they're sold. Also, lest we forget: the US needs about a 2.5% GDP growth rate just in order to not keep losing even more jobs. In other words: during Q2, with a 1.7% growth, and Q3, with a preliminary 2%, unemployment has been rising. The U3 number may or may not reflect that, hard to say with millions not being counted as jobless, but the U6 number certainly should. Non-farm payrolls come in Friday, November 5.

For today, I’ll do some desk clearing, so we can start afresh tomorrow. Not that there's anything wrong with the articles below, mind you. First, Ashvin Pandurangi's latest explores fractals in finance, and concludes that lost redundancy leads to lost resilience leads to much more vulnerable systems, in finance as in nature. Then we have Part 2 of Dan Weintraub's self searching the 'Nominal Man'. And we conclude with the second part of the interview our Czech friend Alexander Ac had with Stoneleigh at the times of the ASPO conference.

Happy horrors.

Ilargi: Ashvin Pandurangi from Simple Planet looks at the way fractals express the lost resilience, and therefore increased dangers, in our financial systems.

Ashvin Pandurangi:

A Fingerprint of Instability in Biology and Finance

Recently, there has been much research into the chaotic dynamics of complex systems in many different fields. Complexity theory provides great analytical insights into the structures of "hard" sciences such as biology and also social sciences such as economics. It can even reveal dynamic properties that will serve as predictive indicators across both of the two fields (and perhaps many others). It should be noted that "predictive" doesn't necessarily mean a specific result will always follow, but that it becomes significantly more likely to occur. The following article will explore a relatively simple indicator which identifies high probabilities of instability in both the human circulatory system (specifically cardiac) and financial markets. Let's start this discussion with a short quiz. Take a look at the following four graphs of heartbeats per minute over a 30-minute interval, and see if you can guess which one(s) belongs to a healthy patient and which one belongs to a patient facing sudden cardiac death:


Many people would presume the first graph belonged to a patient with severe heart problems, but they would be incorrect. In fact, the first one is that of a healthy person at sea level, the second of a healthy person at high altitude, the third of a person with obstructive sleep apnea and the fourth of a person with ventricular fibrillation. [1]. The key observation here is that the variability of time intervals between heartbeats decreases as the subject's cardiac and respiratory functions become more unstable. Variability is not the same as randomness, however, and is actually the product of an underlying complex mathematical structure. We can describe it as "deterministic chaos", where the initial conditions of the sympathetic and parasympathetic nervous systems (influenced by thermo-regulation, hormones, sleep-wake cycles, meals, stress, etc.) [2] give rise to beat time intervals that are locally unpredictable, but exhibit a globally identifiable pattern. It is the intricate "music" that results from a complex orchestra of underlying instruments and notes, rather than the "noise" which would result from random tones. [3].

The time series of a healthy human heartbeat is a fractal structure, since it is an irregular pattern with fractional dimensions that exhibits "self-similarity" at different scales of resolution. We observe fractal structures in many different natural systems, whether it be a continental coast line, branching tree, human circulatory system or even impulses generated from biological processes. The fractal structures that arise from processes of the heart dynamically interact with all other rhythms of the body and help maintain a stable lifeform. Although these rhythms each exhibit a deterministic variability of their own, they also synchronize with each other so that different parts of the body can work together while staying within a bounded range of operation. An unhealthy human heart, on the other hand, is characterized by a collapse of inter-communication with other signals and a return to a regular, intrinsic rhythm that has lost its emergent order. [4].

It is important to understand that complex dynamics leading to emergent order may also endogenously lead to instability and collapse. Human beings with healthy hearts may be able to perform many activities within a given day. Perhaps some of those activities and interactions will lead to significant amounts of stress, which negatively influences the peoples' eating and/or exercise habits. As their circulatory system becomes less efficient, they require more energy to simply maintain the level of activity they have become accustomed to. The people turn to more food and/or other substances to acquire this energy, and eventually they are caught in a destructive cycle which undermines the heart's stability. Of course, this example is just one potential nonlinear path of cardiac evolution, and there are obviously many examples of people maintaining relatively healthy hearts for much of their lives. This endogenous emergence of fragility is much more frequent and evident in complex financial markets where, as Hyman Minsky would say, stability breeds instability. [5].

Didier Sornette produced an excellent report in 2002 entitled Critical Market Crashes [6], analyzing the endogenous patterns that emerge in stock markets before they reach a "critical point" at which a crash is most likely to occur. Most of the report is extremely technical and hard to digest for the average person who is not very familiar with nonlinear statistical mathematics (which certainly includes me!). However, there are a few qualitative points made that are readily accessible to a lay reader. For example, the report shows that asset markets typically crash when "order wins out over disorder", or when the variability of traders' opinions on the future direction of prices decreases to a certain threshold, causing the market to become extremely illiquid. [7, 37]. This dynamic is also the reason why bullish extremes in market sentiment tend to mark a top that will soon be reversed. However, the order that "wins out" in a market crash is a superficial order, rather than the natural order which emerges from the variable behavior of individual agents. The former can be analogized to the regular time intervals between unhealthy heartbeats, while the latter would be the variable intervals which correspond to biological synchronization and stability.

Sornette also explains that dynamic stock market patterns are characterized by "discrete scale invariance", which is basically another way of saying they are fractal in nature. A typical chart of stock prices over any time frame will produce highly volatile, yet non-random patterns that are self-similar to patterns on shorter or longer time scales. Related to Sornette's work is the "fractal markets hypothesis", which has been explained simply and coherently by the Australian economist Steve Keen in a slide lecture he produced and made available to the public. [8]. To summarize, this hypothesis suggests that the stock market exhibits deterministic chaos, making the short-term movements of prices extremely difficult, if not impossible, to predict. Similar to the healthy human heartbeat, the market achieves aggregate stability when investors have variable time horizons and expectations for their investments. In contrast, a speculative bubble is formed when many investors share the same expectations, imitating each other's decisions to buy, and a market crash occurs when they all "rush for the exit" at the same time. [Slide 36]

The reason why variability of time horizons is so important for market stability can be explained with a simple example. Let's compare an average day trader with a five-minute time horizon to an institutional investor (such as a pension fund) with a weekly time horizon from 1992-2002. The average five-minute price change in 1992 was -0.000284% (an overall "bear market"), with a standard deviation of 0.05976 per cent. A six standard deviation drop (-.359%) in price during that time period could easily wipe out the day trader's investment if it continues. The institutional investor, on the other hand, would consider that drop a buying opportunity since weekly returns over the ten-year period averaged 0.22% with a standard deviation of 2.39%. The relatively large drop for the day trader is basically a non-event for the weekly trader's technical/fundamental outlook, so the latter can buy the dip and provide stabilizing liquidity to the market. [Slides 38-39]

As most people in the world of finance know by now, every week in the stock market is characterized by increasingly few actors trading on an increasingly short time scale. Retail investors with relatively long-term time horizons and variable trading preferences have been exiting the market in droves (~$80B equity outflows from domestic mutual funds YTD) [9], while computer-based high frequency traders have dominated the market and buy/sell to each other in time scales best measured by seconds (one of the largest HFT firms, Tradebot, holds stocks for an average of 11 seconds). [10]. A paper by Reginald Smith, from the Bouchet Frankline Institute of Rochester, has confirmed this trend by showing that high frequency trading (HFT) "is having an increasingly large impact on the microstructure of equity trading dynamics". Currently, more than 70% of U.S. equity trading comes in the the high frequency variety. Smith also states that "traded value, and by extension trading volume, fluctuations are starting to show self-similarity at increasingly shorter timescales". [11]. In essence, the robot traders are dominating the market and destroying the natural fluctuations between stocks traded, shares traded, trading volume and time horizons that characterize a "healthy" market.

Given the above information, one may conclude that we are currently on the verge of the stock market equivalent of "sudden cardiac death", but that's not entirely accurate. Although the dominance of HFT in the market has helped destroy healthy variability, it is not the root cause of systemic instability. That designation is more appropriately reserved for the decades-long credit (complexity) bubble which has ensued all around the world, but especially in the United States. The reality is that the "critical point" for U.S. financial markets was already reached in 2008, and as most Americans are aware, the markets almost died back then. Cue the federal government and federal reserve, which provided trillions in "liquidity" to artificially create the variability that had been lost. The politicians and central bankers would like to think of themselves as the defibrillator that has sparked the financial "heart" back into a healthy rhythm. However, that analogy is simply not accurate, as evidenced by the current equity market's painfully boring microstructure. They are more like the artificial respirator that is keeping the brain-dead markets "technically" alive. Their tireless efforts are simply masking the terminal reality that lies underneath, and now we're all just waiting for someone or something to finally pull the plug.

Ilargi: This is part 2 of Dan Weintraub‘s personal crisis account The Nominal Man. Part 1 can be found here.

Dan Weintraub: The Nominal Man: Part II

I graduated from college in 1985 with a degree in history. In 1991 I received my Master's degree in Education. Since that time I have worked as both a teacher and a principal in public and private schools in Massachusetts, New York, Texas and Oklahoma.
In my history classes in Oklahoma City we are studying and discussing the “Panic of 1873”. In a nutshell, the economic collapse of 1873 was caused by years of loose railroad financing, at the end of which time too much speculative investment and credit chased a limited amount of capital. The results were disastrous. Financial and social chaos ensued. Amazingly, today’s credit crisis, in both scope and number, is far more dramatic. As a result, tens of millions of Americans are increasingly forced to confront the twin and daunting phantoms of staggering cost inflation and a simultaneous lack of access to money and credit.

Our political leaders promise recovery. But history tells us that the hard times that follow the collapse of credit “booms” do not end overnight. Over 41 million Americans currently receive “food stamp” subsidies, and an estimated 1 in 5 American children lives in poverty. America is entering an era which will be defined not by economic recovery, but by ever-expanding and increasingly rigid class distinctions. The line between those in the “monied” class and those in the “non-monied” class is becoming increasingly stark, and we who comprise the so-called middle class are quickly finding that we must dramatically alter our vision of the future.
I have two children: a daughter who turns 9 this week and a son who is 7. My daughter is brilliant. She enjoys poetry suffused with alliteration and metaphor. My son has quite significant special needs. He likes Thomas the Tank Engine. My wife and I agree that, all things being equal, he will never be capable of living on his own. My children attend public school. My son receives significant special education support: costs that are primarily borne by middle class taxpayers in our town.

At some point that support is going to end. Either the federal government will end it by scaling back (or eliminating altogether) the fiscal demands placed upon communities via the Individual with Disabilities Education Act, or the citizens will end it by refusing to subsidize the exorbitant special education costs associated with helping such children. People in my home town love my son. At some point however, with their backs against the financial wall, people in my home town may well refuse to hand over their increasingly precious money to pay for educational services for my son.
And frankly, who can blame them? In a world in which 500 trillion dollars in counter-party obligations vis-à-vis trading scams in derivatives and other exotic financials lurk in the shadows of the financial industry, and in which government subsidized gambling casinos most euphemistically referred to as “stock markets” are juiced by cheaters employing HFT software applications, and in which the sham of the Federal Reserve System and the disaster of Friedmanite thinking and policymaking are worshipped on the alter of avarice by men of great wealth who are the sole beneficiaries of such a system, and in which the declining availability of credit and the perversion of fractional reserve banking threatens to destroy any middle class savings that might remain intact, and in which the total and complete failure of fiat currency is an inevitability, and in which all of the banks of the world are, essentially, bankrupt, I can understand why people might find themselves incapable of subsidizing my son’s special education needs.

In fact, I can understand why an entire generation of formerly middle class wage earners might balk at funding anything promoted by a government that treats the “rule of law” like a running inside joke. In a world in which virtually all real capital in the U.S. has been summarily destroyed, while the CEO’s of Wall Street have reaped their billions through rampant bond speculation and governmental check-kiting, fraudulent accounting, fraudulent valuation, and fraudulent mortgage under-writing, I can understand why the middle class may very well balk at participating in this ongoing charade that we so casually refer to as our Constitutional Democracy. But I digress.
This year I’m working in Oklahoma. I spent 18 months looking for work closer to home, but jobs are tough to find. Public school systems have to contend with significant cuts to their operating budgets. Teachers who may at one time have considered early retirement are holding onto their jobs, particularly in light of shrinking pension and 401K funds and plunging home values. The few vacancies that exist are generating hundreds of inquiries and applications. With my twenty plus years of experience, and in light of union labor contracts that stipulate strict pay levels for educators, I am seen as being far too expensive for public school systems to afford. Why hire a seasoned professional for $45,000 when an exuberant, bright college graduate can be paid $20,000 to do more or less the same job? (It’s a fair question.)
Our political leaders tell me that my job outlook will change as the stimulus takes hold. The primary problem with debt-subsidized government spending, however, is that it does little to actually stimulate real productive growth. Government spending may keep critical lifelines for the poor in place for a time, but these monies do nothing to increase the nation’s productive capacity. They do nothing to fix a system that has witnessed the largest credit and debt expansion in the history of civilization. The economic realities that we face today are quite chilling. And despite claims to the contrary, our fraudulent and fatally flawed money-as-debt economic system---of which QEII is but a logical and nefarious extension---benefits an increasingly small percentage of citizens. The overwhelming majority of money created through the Federal Reserve’s policies of quantitative easing makes the rich richer and middle class poorer.
And so, what now? I recently purchased 13 acres of wooded land in far Northern Vermont for $4,000. My plan is to find a used mobile home or camper to place on the property. I will grow some vegetables. In today's economic environment, in which the Scylla and Charybdis of cost inflation (food and energy costs in particular) and lack of access to money (cash and/or credit) puts the squeeze on the middle class, modest monthly paychecks do not go far. Housing costs, food costs, energy costs---it all adds up quickly. This summer my son will come to the woods of Northern Vermont with me. There he will learn how to wash his clothes by hand and how to dry those clothes on a line. He will learn how to plant and harvest carrots and zucchini and radishes. He will not go to camp. We can no longer afford camp. Instead he will come with me to the farmer's market, and he will watch me barter our vegetables for meat and eggs and cheese.
Don’t get me wrong. While it may sound like it, I’m not complaining. Perhaps I will find such a lifestyle comfortable and fitting. The thing is, I didn’t choose this path. And neither are millions upon millions of middle class citizens who are watching their future plans disintegrate before their eyes. I didn’t plan upon living in a trailer in the woods of Northern Vermont. I didn’t expect my job prospects to evaporate in a haze of financial fraud and government duplicity. But my experience is in no way unique. We who comprise the American middle and working classes are getting poorer by the day, and the futures that we imagined for ourselves and for our families are fast becoming far flung fantasies.

Ilargi: This is part 2 of an interview Alexander Ac from Prague did with Stoneleigh at and around the ASPO-USA conference. Part 1 can be found here, below the transcript of the Jim Puplava interview.

Alexander Ac:

Q11) We have created the most complex and interconnected civilization that ever existed on Earth. Does that make us more fragile or more vulnerable to resource exhaustion?

Stoneleigh: That makes us much more vulnerable, because we have so many more structural dependencies. The rate of change in both energy and finance is likely to be rapid enough that adaptation will be very difficult. We will not have time to adjust gradually, which means we face a significant dislocation.

Financial crisis is going to make resource depletion much harder to address, because we are not going to have the money to replace highly energy-dependent infrastructure. Doing so would be staggeringly expensive and would take a very long time even if we did have the money. As it is, we will be forced to conserve both money and resources by going without.

Socioeconomic complexity is very dependent on energy subsidy. With less energy, we will have to have a simpler society. Getting from here to there will be very painful though.

Q12) Politics is another part of the problem. What should an honest politician do in an era of general decline? Should politicians acknowledge peak oil or try to "solve" it quietly.

Stoneleigh: That is a difficult question. Politicians never like to alarm people for fear of creating the very situations they are trying to avoid. Personally I think they should acknowledge the problem, as Jimmy Carter tried to do in the 1970s. That is a thankless task though. People do not like to see their politicians express challenging messages, especially messages with implications for their material standard of living. Hard times have very negative effects on the reputations of politicians, whatever they do or do not do, as people tend to blame their leaders for what happens to them, regardless of fault.

Ultimately, there can be no progress towards addressing the problem through the political process without public acceptance of the need to do so. However, events are going to overtake the political process anyway, and societies will be forced to change.

Q13) How many politicians are ready to talk about peak oil?

Stoneleigh: I do not know of any who are prepared to talk about it. I do know quite a few are aware of it. Matt Simmons spent a lot of time explaining it to the previous administration in the US, who were oil men anyway.

The previous national liberal party leader in Canada, Stephane Dion, had read much of the literature on peak oil, but never addressed it during his tenure.

The military in several countries has been producing peak oil reports, and they would certainly have provided those to their political leadership before making them public. Still, politicians say nothing.

Q14) Which countries in general are more adapted to the post carbon future?

Stoneleigh: Countries with fewer structural dependencies on cheap energy should find adjustment much less painful. In other words, countries which have been poorer and less able to transition to what people typically consider a fully modern lifestyle over the last few decades may well find the future less difficult than wealthier countries. The more entrenched the dependencies, the more difficult the transition to a low-energy future will be.

Also, countries or regions with climates where there is less need for heating and cooling, and a longer growing season, should find a lower energy future easier to manage. An established tradition of family-scale farms should be a significant bonus, since the agri-business model is very vulnerable to both energy and financial shocks. Well developed renewable energy infrastructure should help, as should relatively localized economies which are less 'plugged-in' to globalization.

Ironically, the most economically efficient societies have the least ability to adapt, as buffers have often been trimmed to the bone already on cost grounds. That leaves them much less resilient than they would once have been. Jim Kunstler calls efficiency "the straightest path the hell", and it is this brittleness that he is referring to.

Q15) Do you think that the more complex view of the world one has, the more pessimistic the outcome?

Stoneleigh: Yes, because it becomes obvious that simplistic one-dimensional solutions will not work. We need to understand the world in all its complexity in order to understand what we need to do and why, but in doing so we realize the extent of our predicament.

Q16) What will be the key economic trends in (eastern) Europe in the coming months?

Stoneleigh: All of the European periphery is going to face very significant difficulties. There is far too much debt, both public and private, and the austerity measures that will have to be imposed at some point in order to stay in the eurozone could well be political suicide for any domestic politician. I think this could break up the eurozone and cause a great deal of anger.

I think the speculators will have a field day with sovereign debt default risk in Europe, and that will greatly increase the cost of borrowing for many European countries. I think the effects will be very uneven, which sadly will sharpen regional disparities and inflame regional tensions further.

I think European unity has been a noble goal and I do not not like to see it under threat, but unfortunately I think that is a very real possibility.

Q17) How does your optimism or pessimism scale to the rest of the peak oil and financial community?

Stoneleigh: I am more pessimistic than most, because I am addressing a broader scope of difficulties than most. Few commentators really cover even both energy and finance, and fewer still discuss geopolitics, collective human behaviour, ecological carrying capacity, population, climate change, pollution, resilience etc. Each field represents challenges for all the others.

Q18) Are You more or less pessimistic about the future than 5 years ago?

Stoneleigh: My position has not changed significantly. I have been aware of where we are heading for much more than five years.

Q19) If everybody on Earth had your lifestyle, would one planet be enough?

Stoneleigh: No. I live in a highly industrialized country (Canada). Any kind of life that would be considered remotely normal in such a place is not sustainable. Even a deliberate attempt to simplify as much as possible in one's personal life does not compensate for the over-consumption of the public and corporate spheres that are part of life here, whether one wants to be associated with them or not.

Also, I travel a great deal, and carry with me a number of electronic devices which allow me to function while on the road. This has a significant resource cost. I hope what I am doing justifies this.

Q20) Are you preparing for post peak oil world? If yes, how?

Stoneleigh: We moved to Canada 10 years ago and bought a farm, which we could not have done in England where we lived before. We reduced our energy demand as much as possible and set ourselves up to use locally available energy sources (primarily wood and sun). We installed photovoltaics, a battery bank for energy storage, solar domestic hot water, an outdoor wood-burning furnace and a heated greenhouse for extending the growing season in our northern climate. We try to grow as many vegetables as we can, and also raise some of our own meat and eggs.

Be Careful What You Wish For
by John Mauldin - Thoughts from the Frontline

People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them.
- Jean Monnet, father of the European Union

It's Softer Than It Looks
The GDP number came in at a rather soft 2% growth, up slightly from last quarter's 1.7%. From the standpoint of creating new jobs, 2% just doesn't cut it. We need about 100,000-125,000 new jobs a month just to keep up with population growth, and a 2% GDP will not give us half that, as we saw last quarter. Most economists say you need about 3.5% GDP growth to get solid job reports.

And the prospect for getting that robust a number any time soon is not looking good, as the soft number mentioned above looks even softer when you delve into the details. 70% of the total growth in GDP came from growth in inventories, up by over 40% from the second quarter. Now normally a build in inventories is a positive, as it shows confidence on the part of businesses. But business confidence surveys have not been all that good, which suggests that businesses may be cautious, as this cycle does not seem to resemble past cycles. (Well, except for Apple. Everyone's going to get an iPad for Christmas. You haven't got one? It is so way cool. My new favorite toy and fast becoming an indispensable business tool.)

How likely are we to see that same type of growth in inventories in the last quarter? Not very, I think.

Sidebar: For the non-geek reader, when inventories are increasing, that is a "plus" for GDP. When those inventories are sold, that reduces GDP. That may seem backwards, but that is just the way the math works. So if inventories are sold in the 4th quarter (think Christmas sales), that will be a drag on the GDP numbers.

In every previous post-recession cycle, GDP growth would typically be around 5% at this time. But this is not a business-cycle recession; it's a deleveraging, credit-crisis recession. Thankfully, those do not show up all that often, but sadly one has come home to roost in much of the developed world this decade. The aftermath of credit-crisis recession is a slow growth period of 6-8 years, punctuated by more volatility and more frequent recessions.

What economists call the "final sales" portion of GDP has just been growing at less than 1% over the last 18 months. That is a lukewarm number, to say the least. That is not the stuff of a strong GDP. And export growth is slowing, which rather surprises me, as the dollar has been weaker. If imports rise and exports do not rise as much, as has been the case, that is a drag on GDP. State and local governments reduced GDP by 0.2%, and this12 % of the economy is likely to be under continued pressure, not adding to GDP for quite some time.

It would not surprise me to see GDP growth be closer to 1% in the 4th quarter, unless we start to see evidence of more inventory building. That is not good for jobs, personal income, tax collections needed to cover deficits at all levels, or consumer confidence. My worry is, what if we get some kind of shock to our economic body when growth is so anemic?

Not Finer for the "99er"
I had dinner last Sunday night with David Rosenberg. He is beginning to look at the possible effects from what he calls the "99ers" going off extended unemployment benefits. I knew this was coming but had not really looked into the fine print. He wrote me later:
"The looming expiry of the emergency unemployment benefits in the U.S. poses a very large risk to aggregate personal income over the next few quarters. Currently, combined with state programs, someone who loses their job is entitled to 99 weeks of unemployment benefits (a "99er"). However, the extended benefits are set to expire on November 30th, and our back-of-the-envelope calculations shows nearly a million 99ers will be cut off in December alone, with the remainder (about 3 to 4 million) falling off the rolls by April.

"Given that the average weekly unemployment cheque is about $300/week, this amounts to nearly $80 billion (annualized) loss of aggregate income over the next few quarters. This means that personal income could fall by 1.0% QoQ annualized for each of the next three quarters, starting in Q4. The 2% QoQ real GDP estimates pencilled in for Q4 2010 to Q2 2011, will look far too optimistic if such a loss of income does occur. Given that material downside risk to growth going forward, we intend to do more detective work on this file."

Government checks of one form or another are about 20% of total personal income in the US. Will the lame-duck Congress extend those benefits? Will they extend the Bush tax cuts? I just (literally) got off the phone with Suze Orman. She said she thinks they should raise the limit to $500,000 or $1 million. That higher number would be a reasonable compromise, in my humble opinion. Will the Republican Congress and Senate agree when they come back?

I don't want to get into the small-business person making $300,000 and living in a very volatile business climate where they feel the need to save rather than invest and create new jobs. These guys need all the working capital they can get. And let's be clear, this year's "profits" becomes next year's working capital when you are a small business owner. Your credit line at the bank just isn't cutting it anymore.

Be Careful What You Wish For
Everyone by now is predicting the Republicans to take the House and pick up anywhere from 6-8 Senate seats. We'll see. This is going to be a very interesting election, as there is a whole new dynamic in place.

Let's look down the road. I think we will at best be in a Muddle Through Economy for the next two years. Unemployment is going to be above 8%, best-case, in 2012. If the Bush tax cuts are not extended, in my opinion it is almost a lock that we go into recession next year, unemployment goes to 12%, and underemployment gets even worse. That is not a good climate for Obama and the Democrats in 2012. It is especially bad when you look at the number of Democratic Senate seats up for re-election that are in conservative states. The Republicans could take a serious majority in the Senate.

And then what? Right now Republicans are running on promises that they will not cut Medicare and Social Security, but are going to reduce spending and get us closer to a balanced budget. But everyone knows that the only way to get the budget into some reasonable semblance of balance will be to either cut Medicare benefits or increase taxes. There are only the two options. Yes, you can reform medical care, and I think much of Obamacare should certainly be repealed, but that does not get us anywhere close to dealing with the real issue, and that's a fact. There are tens of trillions of unfunded liabilities in our future, which must be dealt with.

Let me be very clear on this. I am not really worried about the supposed $75 trillion in unfunded Medicare liabilities in our future. That is an impossible number. If something can't happen it won't happen. Long before we get to that apocalypse, we find a bond market that simply refuses to fund US debt at anywhere near an affordable cost. Crisis and chaos will ensue. Remember the quote that led this letter?

The simple reality is that if We the People of the US want Medicare, in even a reformed and more efficient manner, we must find a way to pay for it. It will not be cheap. Raising income taxes on the "rich" is not enough. You have to go back and raise income taxes on the middle class, too. Oh, wait, that will be a drag on the economy and consumer spending. And in any event it will not be enough.

The only real way to pay for those benefits will be a value-added tax, or VAT. And while it could be introduced gradually, let there be no mistake that it will be a drag on economic growth. Government spending does not have a multiplier effect on the economy. It is at best neutral. What creates growth is private investment, increases in productivity, and increases in population. That's it. Tax increases have a negative multiplier.

A significant VAT along with our current income taxes will give us an economy that looks more like the slow-growth, high-unemployment world of Europe. Can we figure out how to deal with that? Sure. But it is not growth-neutral.

Republicans in 2013 will be like the dog that caught the car. What do you do with it? The last time they (embarrassingly, we) really screwed it up. The defining political question of this decade will not be Iraq or Afghanistan, or the environment or any of a host of other problems. The single most important question will be what do you do with Medicare? Cut it or fund it? Reform it for sure, but reform is not enough to pay for the cost increases that will come from an increasingly aging Boomer generation.

There is no free lunch. At some point, you cannot run on "no cuts in Medicare" and "no new taxes" and be honest. At least not this decade. Maybe when we have cured cancer and Alzheimer's and heart disease and the common cold at some future point, medical costs will go down, but in the meantime we have to deal with reality. You may be able to fool the voters, but you will not be able to fool the bond market. Not dealing with reality will create a very vicious response. Ask Greece.

And that is the national conversation we must have with ourselves. There is a cost to government. There is a cost to extended Medicare benefits. (I am blithely assuming we deal with all the "easy" stuff like Social Security, and make real cuts in other areas.) And for my international readers, this is an issue that the entire developed world must deal with. We all have our problems created from years of very poor choices, overleveraging, and deficits. It will not be easy. I must admit to smiling when I see the protests in France over raising the retirement age from 60 to 62. Really? Amazing.

And while France causes me to smile and shake my head, the refusal on the part of the US leadership to give more than lip service to solutions that might disrupt their slim majority of voters is maddening. This election next week will change very little in real terms, the things that matter, like whether the US economy can grow or will face a very real crisis and a true depression. That potential is in our future, and it is coming at us faster than you think.

Bernanke Is A Zombie Hellbent On Destroying The Economy
by Jeremy Grantham


Jeremy Grantham's October letter is out. You can tell just from it exactly what he thinks about Bernanke and his gang and what they're doing to the economy. But in case it's not obvious, he summarizes his case against the Fed into 18 easy-to-digest points that start with the myth of lower rates, and end with massive bubbles that destroy the economy.

  1. Long-term data suggests that higher debt levels are not correlated with higher GDP growth rates

  2. Therefore, lowering rates to encourage more debt is useless at the second derivative level.

  3. Lower rates, however, certainly do encourage speculation in markets and produce higher-priced and therefore less rewarding investments, which tilt markets toward the speculative end. Sustained higher prices mislead consumers and budgets alike.

  4. Our new Presidential Cycle data also shows no measurable economic benefits in Year 3, yet point to a striking market and speculative stock effect. This effect goes back to FDR, and is felt all around the world.

  5. It seems certain that the Fed is aware that low rates and moral hazard encourage higher asset prices and increased speculation, and that higher asset prices have a beneficial short-term impact on the economy, mainly through the wealth effect. It is also probable that the Fed knows that the other direct effects of monetary policy on the economy are negligible.

  6. It seems certain that the Fed uses this type of stimulus to help the recovery from even mild recessions, which might be healthier in the long-term for the economy to accept.

  7. The Fed, both now and under Greenspan, expressed no concern with the later stages of investment bubbles. This sets up a much-increased probability of bubbles forming and breaking, always dangerous events. Even as much of the rest of the world expresses concern with asset bubbles, Bernanke expresses none. (Yellen to the rescue?)

  8. The economic stimulus of higher asset prices, mild in the case of stocks and intense in the case of houses, is in any case all given back with interest as bubbles break and even overcorrect, causing intense financial and economic pain.

  9. Persistently over-stimulated asset prices seduce states, municipalities, endowments, and pension funds into assuming unrealistic return assumptions, which can and have caused financial crises as asset prices revert back to replacement cost or below.

  10. Artificially high asset prices also encourage misallocation of resources, as epitomized in thedotcom and fiber optic cable booms of 1999, and the overbuilding of houses from 2005 through 2007.

  11. Housing is much more dangerous to mess with than stocks, as houses are more broadly owned, more easily borrowed against, and seen as a more stable asset. Consequently, the wealth effect is greater.

  12. More importantly, house prices, unlike equities, have a direct effect on the economy by stimulating overbuilding. By 2007, overbuilding employed about 1 million additional, mostly lightly skilled, people, not counting the associated stimulus from housing- related purchases.

  13. This increment of employment probably masked a structural increase in unemployment between 2002 and 2007, which was likely caused by global trade developments. With the housing bust, construction fell below normal and revealed this large increment in structural unemployment. Since these particular jobs may not come back, even in 10 years, this problem may call for retraining or special incentives.

  14. Housing busts also help to partly freeze the movement of labor; people are reluctant to move if they have negative house equity. The lesson here is: Do not mess with housing!

  15. 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. It is likely that there is no net benefit to artificially low rates.

  16. Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy. Importantly, by increasing inflation fears, this easing has sent the dollar down and commodity prices up.

  17. Weakening the dollar and being seen as certain to do that increases the chances of currency friction, which could spiral out of control.

  18. In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.

Jeremy Grantham: Gold Is A "Faith-Based" Investment, And There Are Better Places To Put Your Money
by Joe Weisenthal - Business Insider

Okay, so we're not the only ones who think that gold can be characterized as a religion. From Jeremy Grantham of GMO's latest:
Everyone asks about gold. This is the irony: just as Jim Grant tells us (correctly) that we all have faith-based paper currencies backed by nothing, it is equally fair to say that gold is a faith-based metal. It pays no dividend, cannot be eaten, and is mostly used for nothing more useful than jewelry. I would say that anything of which 75% sits idly and expensively in bank vaults is, as a measure of value, only one step up from the Polynesian islands that attached value to certain well-known large rocks that were traded.

But only one step up. I own some personally, but really more for amusement and speculation than for serious investing. It may well work and it may not. In the longer run, I believe that resources in the ground, forestry, agriculture, common stocks, and even real estate are more certain to resist any inflation or paper currency crisis than is gold.

No Mr. President, Larry Summers Did Not Resolve the Financial Crisis for a Pittance, He Just Papered Over the Problem
by William K. Black - Huffington Post

I passed up the obvious title: "Heckuva Job Larry!" That was the moment of President Obama's appearance on The Daily Show with Jon Stewart that set all Americans cringing. Yes, he really said that Summers "did a heckuva job." The candidate that was gifted the opportunity to run against the legacy of one of the worst presidents in U.S. history has, as president, used Bush as his role model to continue many disastrous policies. It was strangely fitting that he would channel Bush's infamous praise ("Heckuva job Brownie") for the FEMA chief who failed New Orleans so badly in the hurricane.

President Obama understandably wishes to focus attention on the economic disaster he inherited from President Bush. But Jon Stewart's question to him, which led to the president's gaffe, correctly asked about the message that Summers' appointment sent about the administration's commitment to fundamental change.

Summers had financial red ink on his hands at the time he was appointed. He was Rubin's chief minion in the successful effort to defeat effective financial regulation and supervision. (Yes, the effort was bipartisan and the Republican leadership shares in the guilt.) Summers was not simply wrong, but also arrogant and brutal, in blocking effective regulation at the SEC and the Commodity Futures Trading Commission. Summers was made rich by Wall Street in one of those sordid consulting arrangements designed to buy influence and reward past and future favors.

President Obama's appointment of Summers as his chief economic advisor made the administration's overall response to the crisis predictable. (Robert Kuttner gives a detailed explanation of the policies that Rubin's protégés championed in his new book, A Presidency in Peril.) The response would follow the disastrous Japanese model that has harmed their economy and damaged their integrity.

The dominant characteristics can be summarized quickly: (1) the government would act for the benefit of the largest financial firms and their CEOs, even when they directed massive frauds, by (2) engineering a cover up of the banks' losses and the CEO's misconduct; (3) the administration would use the fictional reports generated to conduct the cover up to declare victory (due to their brilliance); and (4) the same strategy would impair the recovery.

The strategy was also an assault on integrity, the rule of law, and the core precepts of the Obama campaign for president. This is why we warned from the beginning that the cover upcould enrage the nation and make him a one-term president.

President Obama on Wednesday night told Jon Stewart that the administration had resolved the crisis for a pittance -- vastly less than their measure of the costs of resolution in early 2009. He also claimed that the administration deserved credit for preventing a second Great Depression.

The first claim is too good to be true. Ask yourself the key analytical question: Does the administration claim that the crisis proved far worse or far better than its original estimates? Look at the administration's initial estimates about employment or its initial views about how deep the fall in housing values, and how quick their recovery, would be? The administration has repeatedly emphasized that the housing and employment crises are significantly worse than initially forecast. That means that their initial loss estimates should have proven significantly too low. The losses should be much greater than their initial estimates.

Losses on homes are not driven only by employment and housing values. Mortgage fraud causes dramatically greater losses. How much mortgage fraud did the administration initially estimate? That's almost a trick question, for the administration rarely uses the "F" word (fraud) and gave no evidence at the time of its initial estimates that they took into account fraud losses. Since the time of the administration's initial loss estimates it has become indisputable that fraud was endemic in liar's loans and that liar's loans were not simply enormous, but also far more common than was originally reported. We have discovered since the administration's initial loss estimates that it was common for the SDIs to lie about the liar's loans they originated, sold, and purchased. Fannie, Freddie, Lehman and many others falsely called their liar's loans "prime."

What else could affect losses on liar's loans and CDOs backed by liar's loans? The failure of the secondary market meant that sales of CDOs and packages of liar's loans had to be individually arranged. Has the secondary market in nonprime mortgages been restored since the administration's initial cost estimates? No. That is important because the administration initially claimed that the secondary market's collapse was a temporary liquidity problem. The administration anticipated that the secondary market would soon reemerge. It died more than three years ago. With any luck it will never be resurrected. Once more, the changes since the time of the initial loss estimate should have led to greater losses than the administration's initial estimate.

This leaves us with two analytical puzzles. First, since the administration's anti-regulators have spent nearly two years carefully not looking at the liar's loans and determining their true value and the true incidence of fraud, how is the administration estimating losses without the facts necessary to make estimates? Second, ignoring the first problem for the moment, what miracle made virtually all the losses disappear -- at virtually no cost to the public -- even though every aspect of the administration's initial loss estimates proved too optimistic?

Logically, the losses should be far greater. For the administration's claim to have any merit they must have discovered the ultimate "silver bullet" that slays $2 trillion in losses. So what is it -- and how did it save $2 trillion? It certainly wasn't their brilliant negotiation of the TARP terms. Any commercial lender that provided such an unlimited guarantee would have cut a far better deal.

There was no silver bullet. The administration made the losses disappear the old-fashioned way -- with fictional accounting. I have already explained how the administration allowed the Chamber of Commerce, American Bankers Association, and the Fed to enlist the Congress to extort FASB to pervert the accounting rules so that most of the SDIs' losses disappeared. The Fed also took over a trillion dollars in toxic, largely fraudulent collateral -- and carefully avoided conducting due diligence to discover either the value or the fraud incidence of the collateral. In essence, the Fed took the toxic stuff off the balance sheets.

Creating fictional numbers and hiding losses at the Fed doesn't reduce losses. Unfortunately, it increases real losses.

First, it leaves the looters in charge, lets them pay themselves enormous bonuses, and lets them cause greater losses. Recall George Akerlof's and Paul Romer's title -- Looting: the Economic Underworld of Bankruptcy for Profit. They showed that even without a bailout the fraudulent CEO could grow wealthy by destroying "his" bank. With a bailout -- and the Bush and Obama administration's de facto grant of impunity and an unlimited guarantee to the SDIs -- the CEOs can loot without it leading inevitably to bankruptcy. This has made banking an even more criminogenic environment for accounting control fraud and will cause recurrent, intensifying crises.

Second, accounting cover ups prevent markets from clearing. That prolongs the recession. Japan shows how severe this problem can become.

Third, integrity is important. I really shouldn't have to explain this. It depresses me that I have to argue that it is wrong to lie. Our democracy, our economy, our society, and our souls depend on restoring our integrity and the rule of law. Randy Wray and I have proposed a step that would demonstrate the president's complete repudiation of Summers' strategy and a return to the rule of law: Place Bank of America in receivership for its tens of billions of dollars in fraudulent loans and its multitude of foreclosure frauds. Don't talk about doing the right thing -- do it -- and do it to a major contributor. Don't do it because it's a contributor, but because a bank that commits tens of thousands of frauds should immediately be placed in receivership.

The president told Jon Stewart he was hamstrung by tradeoffs. He said he could not place an SDI in receivership because it could cause 100 banks to fail. Randy and I explained the absurdity of this claim in our two-part essay. Receiverships do not cause one hundred banks to fail. The receiver would continue the bank's operation and pay the checks. Why are 100 banks supposed to fail when their correspondent bank ties remain functional, the checks clear, and the ATMs work? This parade of horribles has never happened.

The administration claimed that it was vital that the Dodd-Frank bill provide it with receivership powers so that it could close a future Lehman without causing cascade failures. Now, the president tells us that he refused to follow the Prompt Corrective Action law and close insolvent SDIs because some official lied to him and told him that operating (not closing) a bank through a receivership would cause 100 banks to fail? That's why Obama has allowed the SDIs to operate with impunity and provided them with an unlimited federal guarantee? And he, a skilled lawyer, cannot see the contradiction in Treasury -- his Treasury -- claiming that the Dodd-Frank bill's grant of receivership powers would prevent such cascade failures?

A presidency heading for a fiscal train wreck
by Nouriel Roubini - Financial Times

What has been the fiscal performance of President Barack Obama? He inherited the worst economic crisis since the Great Depression, as well as a budget deficit that – after much needed bail-outs and a series of reckless tax cuts – was already close to $1,000bn. His stimulus package, together with a backstop of the financial system, low rates and quantitative easing from the Federal Reserve, prevented another depression. Mr Obama also deserves credit that the US, alone among advanced economies, currently supports a “growth now”, rather than an “austerity now” path.

But this is but one half of the picture; we must also judge his first two years on his ability to anticipate what the economy will need tomorrow. Here the picture is much less positive. Given the likely path of fiscal policy after next Tuesday’s election – with the expiration of existing stimulus and transfer payments, and even with most of the 2001-03 tax cuts being kept – the US economy will soon experience serious fiscal drag just when it needs a further boost. Problematically, the administration’s failures leave it relying on the Fed, which is bent on further QE, likely to be announced next Wednesday. But studies show this will have little effect on US growth in 2011, so fiscal policy should be doing some of the lifting to prevent a double dip recession.

In an ideal world Mr Obama would also have been able to move towards reforming and reducing entitlement spending, with commitments to measures that could be phased in over the next few years, therefore avoiding short-term fiscal pain. He would also have committed to increase, gradually over the next few years, less distortionary taxes such as a VAT and a carbon tax. This would have reduced the fiscal deficit, and created a climate in which no investor would worry about additional stimulus.

Sadly, this has not happened. In fact the opposite will now take place. The term stimulus is already a dirty word, even within the Obama administration. After the Republicans make significant electoral gains further stimulus is even less likely. Medium-term consolidation, meanwhile, will be all but impossible as the 2012 presidential election begins to loom large.

In truth the only window of opportunity is 2011. Here the president deserves credit for setting up a bipartisan debt commission, which is most likely to propose a sensible combination of entitlement spending cuts and increases in taxes. But sadly the chance that these recommendations will be implemented in 2011 is close to zero. Republicans will veto any tax increase, while Democrats will resist unpopular entitlement reform.

The upshot is that the current gridlock in Congress will soon get much worse. Of course, Mr Obama cannot entirely be blamed for his limited progress, when the Republicans take that Leninist approach of “the worse the better”, and offer no co-operation on any issue. That they now see Mr Obama as a one-term president will soon mean the worst open warfare inside the Beltway in 30 years.

The coming stalemate will only be made worse by the lack of a reason to act on the deficit. The bond vigilantes are asleep, while borrowing rates remain unusually low. Near zero rates will continue as long as growth and inflation are low (and getting lower) and repeated bouts of global risk aversion – as with this spring’s Greek crisis – will push more investors to safe dollars and US debt. China’s massive interventions to stop renminbi appreciation will mean purchasing yet more treasuries too. In short, kicking the can down the road will be the political path of least resistance.

The risk, however, is that something on the fiscal side will snap, and the bond vigilantes will wake up. The trigger could be a debt rollover crisis in a major US state government, or perhaps even the realisation that congressional gridlock means bipartisan solutions to our medium-term fiscal crisis is mission impossible. Only then will our politicians suddenly remember that, on top of our federal debt, the US suffers from unfunded social security and Medicare liabilities, state and local government debt, and public pension bills that add up to many multiples of US GDP.

A bond market shock is thus the only thing likely to break the impasse. Mr Obama may take some comfort from the fact that the worst of the coming fiscal train wreck will be prevented by the Fed’s easing. But the risk is he will then preside not over a bout of inflation but a Japanese style stagnation, where growth is barely positive, and deflationary pressures and high unemployment linger.

The Obama administration did the right thing early, and avoided another depression. He is still doing the right thing now in pointing out the risks of early austerity. And he is limited by an unco-operative Republican party trapped in a belief in voodoo economics, the economic equivalent of creationism. Even so, he and his party have been unwilling to tackle long-term entitlement spending. Two years in, and this means the US remains on an unsustainable fiscal course.

The result will soon be the worst of all worlds: neither short-term stimulus nor medium-term fiscal sustainability. Fiscally the only light at the end of the tunnel may be that which causes the upcoming crisis. With two years of gridlock in prospect, it will fall to the next president in 2013 – whoever he or she may be – to start fixing America’s fiscal mess. Whether that is Mr Obama or not, that he may leave this challenge may become the worst of his legacy.

Godzilla QE
by Joseph Cotterill - Financial TImes

Either Willem Buiter is setting out to shock, or he really is worried about Japanese deflation this time. Because Citi’s chief economist really is thinking BIG on what to do about it:
The 5trn yen ($60bn) additional QE announced recently by the BoJ is far too small to achieve anything, in our view. The UK did £200bn ($300bn) worth of QE in 2009, for an economy less than half the size of Japan. To give a UK-size stimulus would mean, for Japan, additional QE worth 50trn yen. Given the worse circumstances of Japan, 100trn would be more appropriate, in our view.

Which is, ooh, only about $1,200bn or so. That’s not all. Buiter has gone back to a recent theme and is advocating that Japan does this Godzilla QE through a monetary-fiscal alliance:
Boosting inflation or eliminating unwanted deflation should be very easy. Just have the MoF send a cheque for, say, ¥100,000 to every adult in Japan, fund this by selling to the central bank [Japanese government bonds] JGBs equal in value to the amount of the cash transfer from the Treasury to the household sector, while making a solemn promise never to reverse either the transfer or the funding through the Bank of Japan. If Japanese consumers refuse to spend the cheque and save it instead, either attach an expiry date to the cheque (requiring it to be spent on goods and services by a certain day or become worthless) or send another cheque, this time for ¥ 1,000,000. Repeat this, adding zeros, until the consumer gives in and starts spending. Alternatively, the government could itself spend on infrastructure or current programmes.

Expiring money. Very modish. And it would appear Buiter thinks the time for reservations is past, firstly with regard to the asymmetric risks of deflation:
We recognise that the last time something like this second ‘helicopter money drop’ scenario was tried in Japan was during World War II, when the Bank of Japan was forced to monetise government military expenditures. Hyperinflation was the result. Does this mean that any proposal for helicopter money drops is dangerous and should be rejected?…
That would be the same kind of logic that would lead a man to refuse to drink a glass of water when he is thirsty just because people have been known to drown in water; or that would lead one not to take two tablets for a headache because it is possible to overdose on a bottle of the stuff. Any policy to reverse deflation and to create a low but positive rate of inflation is at risk of getting the dosage wrong. But that is no reason not to try, say, by clearly stating what the inflation target is and by deliberately engaging in QE or helicopter money drops, gradually but steadily increasing the scale and scope of these measures and then stopping once the target is achieved.

And secondly, with regard to Japanese sovereign risk and fears that domestic investors won’t be happy to hoover up JGBs for much longer:
Japan is not Greece, but it is in trouble. The sovereign has the means to redress the situation, either by monetising public sector deficits and debt (an option not open to Greece) or by eliminating the public sector deficit through spending cuts or tax increases, something Greece is unlikely to be able to do on a large enough scale for a long enough period. Japan’s authorities should act of their own accord soon, in our view, lest they are forced by the markets to act suboptimally at some later date.

Note also that while Buiter is talking about Japan, there is pretty clearly an implicit message here for the US just as the Fed revs up the QE2 engine:
In the current economic climate, we would argue that the effect of lower long-term Treasury bond yields in countries like Japan (or the US) would be minor, holding other asset prices constant. It is not the cost of capital, and certainly not the risk-free component of it, that is stopping business investment from growing strongly, as non-financial corporates have quite strong balance sheets and cash flow positions. It is lack of confidence about future demand, concerns about social security (health costs in the US) and uncertainty aversion…
Lower long-term yields also boost the valuations of stock and other long-term assets like land and real estate. This will boost investment through ‘Tobin’s q’ channels and household consumption through wealth effects and through an increase in the amount of collateralisable wealth. Again, these effects are likely to be quantitatively minor under current economic conditions in Japan… if households were to be willing to borrow against the increase in the value of their assets, this could provide a sizeable boost to consumption, especially of durables and discretionary spending items, but we regard this as an unlikely prospect for Japan and, under current conditions, with households still deleveraging, also in the US.

Somehow, we sense Buiter won’t be very impressed with Ben next week.

Ilargi: Funny, I was wondering if anyone had used the title of today's post before, and Google came up with just this one -very fitting- instance:

3D Fiscal House of Horrors!: Now in 2D!

Bernanke Gets His Pink Slip
by Mike Whitney - Eurasia Review

Question: What is the difference between a full-blown Depression and an excruciatingly "slow recovery"?

Answer--Inventories and a bit of fiscal stimulus.

On Friday, The Bureau of Economic Analysis (BEA) reported that 3rd Quarter GDP rose by 2% meeting most analysts expectations. The real story, however, is hidden in the data. Inventories added 1.44 percentage points to the 3Q real GDP, which means that--absent the boost to existing stockpiles-- GDP would be well-below 1%. If it wasn't for Obama's fiscal stimulus (ARRA), the economy would be sliding back into recession.

Improvements in consumer spending were too meager to indicate a "rebound", and residential investment dropped off sharply following the expiration of the firsttime homebuyer credit. The economy is in a coma and desperately needs more government support. But if Tuesday's midterm elections turn out according to predictions--and the GOP retakes the House of Representatives--there won't be any more stimulus. Instead, the economy will sputter along at a snail's pace until festering bank woes (this time, the foreclosure crisis) trigger another contraction.

There's no doubt now, that the Fed's efforts to engineer a sustained recovery have failed. The fact that Fed chairman Ben Bernanke is planning to resume his dubious Quantitative Easing (QE) program is an admission of failure. That said, I expect the Fed to “go large” on November 3, and purchase another $1.2 trillion of long-term Treasuries adding roughly $100 billion per month to the money supply. That should placate Wall Street and keep stock markets sufficiently “bubbly” for the foreseeable future. After 12 months of QE, unemployment will still be stuck at 10%, the output gap will have narrowed only slightly, and confidence in the Fed will have plunged to historic lows. Monetarism alone cannot fix the economy.

The fiscal remedies for recession are well known and have effectively implemented with great success for over a half century. QE is a pointless detour into uncharted waters. It is like treating a hangover with brain surgery when the bottle of aspirin sets idle on the bedstand. Why bother?

Bernanke is convinced that pouring money into the system will produce the results he wants. This is how the Fed chair pays homage to the great monetarist icon, Milton Friedman. Friedman had unwavering faith in the power of money. Here's what he said about Japan in 1998:

"The Bank of Japan can buy government bonds on the open market…" he wrote in 1998. "Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand…loans and open-market purchases. But whether they do so or not, the money supply will increase…. Higher money supply growth would have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately."

So, how would Friedman explain the fact that the Bank of Japan implemented many rounds of QE and came up snake-eyes—no measurable improvement at all? The economy is still in the grips of deflation nearly 20 years later. This is from Bloomberg today:

Government reports today reinforced signs of a worsening economy that indicate the Bank of Japan needs to do more, with September consumer prices and industrial production sliding more than forecast. Japan’s inflation-linked bonds signal investors don’t anticipate the nation will end deflation, with prices seen falling an average of about 0.78 percent in the next eight years.

“The BOJ is totally behind the curve,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo, who used to work at the central bank.

“Japan will likely need ‘helicopter money drops’ to ensure a full escape from the Great Deflation,” Citigroup Inc. Chief Economist William Buiter. (Bloomberg)

There won't be any helicopters because that would provide money to ordinary working people rather than bankers and speculators. That's a no-no. On top of that, the Bank of Japan is planning to purchase privately-owned securities as well as government bonds in its next phase of QE. That will keep asset prices artificially high and prevent stockholders and bondholders for taking losses on their bad bets. The program is designed to transfer the red ink onto the public in terms of a depreciating currency and years of needless agony.

Is there any doubt as to why Japan is still mired in a depression after all these years? When capital is diverted into broken financial institutions, personal consumption and private investment invariably suffer. The same rule applies to the Bernanke method. QE will prevent restructuring of debt for underwater banks, but hurt households and consumers by lifting commodities prices and perpetuating high unemployment.

In the next few months, jobless benefits will end for more than 1.2 million workers. QE will do nothing for them nor will the Republican-led House of Representatives which is already on the record as being opposed to emergency extensions. This is from the National Employment Law Project:.

“Of the 1.2 million workers at risk of losing federal benefits, 387,000 are workers who were recently laid-off and are now receiving the six months (26 weeks) of regular state benefits. After exhausting state benefits, these workers would be left to fend for themselves in a job market with just one job opening for every five unemployed workers and an unemployment rate that has exceeded nine percent for 17 months in a row—with no federal unemployment assistance whatsoever.”

At the same time, housing prices have resumed their downward plunge wiping out billions in home equity and leaving another 5 million homeowners facing the prospect of foreclosure.

Typically, personal consumption and housing lead the way out of recession. This time, the rebound was spurred by gigantic injections of fiscal and monetary stimulus, dodgy accounting practices (blessed by the SEC) and unlimited funding guarantees by the Central Bank. Now the stimulus is running low, the equities markets are tilting sideways, retail investors are exiting the markets in droves, wages are contracting, businesses are hoarding over $1 trillion (for lack of profitable outlets for investment), and deflationary headwinds are beginning to gust with increasing ferocity. So, what is Bernanke's remedy?

Rather than push for more fiscal “pump priming” so households can continue to pay-down debts and rebuild their savings, the Fed chair is planning to flood emerging markets with hot money, increasing currency volatility and forcing trade partners to clamp down on capital controls so they don't drown in the surge of greenbacks fleeing the US. He's merely adding to the turmoil.

This week, interest rates on 5-year inflation-protected bonds went negative for the first time while two-year Treasury yields set a record low. What does it mean? It means that investors are so utterly flummoxed that they're betting on inflation and deflation at the same time. No one really knows what the hell is going on because the policy is so muddled. And, when uncertainty grows, long-term expectations change and investment slows. QE is undermining the prospects for recovery. It's time to fire Bernanke.

How the Banks Put the Economy Underwater
by Yves Smith - New York Times

In Congressional hearings last week, Obama administration officials acknowledged that uncertainty over foreclosures could delay the recovery of the housing market. The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.

This chapter of the financial crisis is a self-inflicted wound. The major banks and their agents have for years taken shortcuts with their mortgage securitization documents — and not due to a momentary lack of attention, but as part of a systematic approach to save money and increase profits. The result can be seen in the stream of reports of colossal foreclosure mistakes: multiple banks foreclosing on the same borrower; banks trying to seize the homes of people who never had a mortgage or who had already entered into a refinancing program.

Banks are claiming that these are just accidents. But suppose that while absent-mindedly paying a bill, you wrote a check from a bank account that you had already closed. No one would have much sympathy with excuses that you were in a hurry and didn’t mean to do it, and it really was just a technicality.

The most visible symptoms of cutting corners have come up in the foreclosure process, but the roots lie much deeper. As has been widely documented in recent weeks, to speed up foreclosures, some banks hired low-level workers, including hair stylists and teenagers, to sign or simply stamp documents like affidavits — a job known as being a “robo-signer.”

Such documents were improper, since the person signing an affidavit is attesting that he has personal knowledge of the matters at issue, which was clearly impossible for people simply stamping hundreds of documents a day. As a result, several major financial firms froze foreclosures in many states, and attorneys general in all 50 states started an investigation.

However, the problems in the mortgage securitization market run much wider and deeper than robo-signing, and started much earlier than the foreclosure process.

When mortgage securitization took off in the 1980s, the contracts to govern these transactions were written carefully to satisfy not just well-settled, state-based real estate law, but other state and federal considerations. These included each state’s Uniform Commercial Code, which governed “secured” transactions that involve property with loans against them, and state trust law, since the packaged loans are put into a trust to protect investors. On the federal side, these deals needed to satisfy securities agencies and the Internal Revenue Service.

This process worked well enough until roughly 2004, when the volume of transactions exploded. Fee-hungry bankers broke the origination end of the machine. One problem is well known: many lenders ceased to be concerned about the quality of the loans they were creating, since if they turned bad, someone else (the investors in the securities) would suffer.

A second, potentially more significant, failure lay in how the rush to speed up the securitization process trampled traditional property rights protections for mortgages.

The procedures stipulated for these securitizations are labor-intensive. Each loan has to be signed over several times, first by the originator, then by typically at least two other parties, before it gets to the trust, “endorsed” the same way you might endorse a check to another party. In general, this process has to be completed within 90 days after a trust is closed.

Evidence is mounting that these requirements were widely ignored. Judges are noticing: more are finding that banks cannot prove that they have the standing to foreclose on the properties that were bundled into securities. If this were a mere procedural problem, the banks could foreclose once they marshaled their evidence. But banks who are challenged in many cases do not resume these foreclosures, indicating that their lapses go well beyond minor paperwork.

Increasingly, homeowners being foreclosed on are correctly demanding that servicers prove that the trust that is trying to foreclose actually has the right to do so. Problems with the mishandling of the loans have been compounded by the Mortgage Electronic Registration System, an electronic lien-registry service that was set up by the banks. While a standardized, centralized database was a good idea in theory, MERS has been widely accused of sloppy practices and is increasingly facing legal challenges.

As a result, investors are becoming concerned that the value of their securities will suffer if it becomes difficult and costly to foreclose; this uncertainty in turn puts a cloud over the value of mortgage-backed securities, which are the biggest asset class in the world.

Other serious abuses are coming to light. Consider a company called Lender Processing Services, which acts as a middleman for mortgage servicers and says it oversees more than half the foreclosures in the United States. To assist foreclosure law firms in its network, a subsidiary of the company offered a menu of services it provided for a fee.

The list showed prices for “creating” — that is, conjuring from thin air — various documents that the trust owning the loan should already have on hand. The firm even offered to create a “collateral file,” which contained all the documents needed to establish ownership of a particular real estate loan. Equipped with a collateral file, you could likely persuade a court that you were entitled to foreclose on a house even if you had never owned the loan.

That there was even a market for such fabricated documents among the law firms involved in foreclosures shows just how hard it is going to be to fix the problems caused by the lapses of the mortgage boom. No one would resort to such dubious behavior if there were an easier remedy.

The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.

Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?

There are alternatives. One measure that both homeowners and investors in mortgage-backed securities would probably support is a process for major principal modifications for viable borrowers; that is, to forgive a portion of their debt and lower their monthly payments. This could come about through either coordinated state action or a state-federal effort.

The large banks, no doubt, would resist; they would be forced to write down the mortgage exposures they carry on their books, which some banking experts contend would force them back into the Troubled Asset Relief Program. However, allowing significant principal modifications would stem the flood of foreclosures and reduce uncertainty about the housing market and mortgage securities, giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.

The people who so carefully designed the mortgage securitization process unwittingly devised a costly trap for people who ran roughshod over their handiwork. The trap has closed — and unless the mortgage finance industry agrees to a sensible way out of it, the entire economy will be the victim.

Warning: Retirement Disaster Ahead
by Brett Arends - Wall Street Journal

Don't let the rally in the stock and bond markets fool you. Many Americans are still hurtling towards a retirement disaster. Few realize it. Even many of those running the big pension funds don't know. That's the conclusion of John West and Rob Arnott at Research Affiliates, an investment management firm, in Newport Beach, Calif. In their latest report, "Hope Is Not A Strategy," they have some numbers to back it up.

"I worry a lot about people reaching their golden years and discovering, 'Oh, I should've saved more,' and 'Oh, I don't qualify for Social Security any more because it's means tested'," says Mr. Arnott, a widely respected market strategist. "We're headed for a retirement train wreck," he adds, "and it's going to get really ugly over the next 15 years." Alarmist? Perhaps. But follow the math.

The returns you will get from your stock funds can only come from four things, they note: Dividends, earnings growth, inflation and changes in valuation. Right now the dividend yield on U.S. stocks is about 2.2%, they note. Historically, earnings have only grown by a surprisingly low 1% a year in real, inflation-adjusted terms. Mr. Arnott tells me the average since 1900 is only about 1.2%, and in the last half century just 0.6%. Will we get more in the future? With the U.S. population ageing and heavily in debt? It's hard to imagine. Throw in a 2% inflation forecast–more on this later–and Research Affiliates forecasts a long-term return of 5.2%.

What about changes in valuation? Some generations are lucky. They invest in the stock market when it's depressed and shares are cheap in relation to earnings. This was the case in the 1930s and the 1970s. Then they retire and cash out when the market is booming and shares are expensive in relation to earnings–such as in the 1960s and 1990s. People today are not so lucky. The stock market's latest rally has lifted shares already to pretty high levels in relation to average cyclically-adjusted earnings.

This so-called "Shiller PE" (named after Yale professor Robert Shiller, who popularized the notion) has been an excellent indicator of market value. Right now it's at about 22–well above its historic average of 16. The only time the market has boomed from these levels, was in the late 1990s bubble–an atypical moment unlikely to be repeated any time soon. Now look at bonds. Thanks to the recent boom, the picture for investors here looks even worse. And there is less room for ambiguity, because bond coupons and the repayment of principal are fixed.

Based on the yields of prices across all investment grade bonds, Mr. West and Mr. Arnott calculate likely long-term bond returns from here of about 2.5%. So an investor with 60% of his portfolio in stocks and 40% in bonds, a standard, if conservative, allocation, can expect a weighted average return from here of only about 4.1%. To put this in context, they notice that the typical big pension fund is still expecting to earn about 7% to 8% a year. When you strip out 2% inflation, that means pension fund managers are expecting 5-6% percent a year in real, inflation-adjusted terms.

But by Mr. West and Mr. Arnott's numbers, investors can only expect about 2.1%. Gulp. Here's what this means for you. Someone who saves $10,000 a year for 30 years and invests the money at 5.5% a year will end up with $760,000. Someone who only manages to earn 2.5% on their investments: Just $420,000.

If you're running a pension fund, this kind of shortfall leads to a funding gap that must be made up by the plan sponsor. For a private investor trying to build their own savings, it leads to a dismal retirement.

Is there any hope? I asked Mr. Arnott about two possible sources of higher returns.

The first: Stock buybacks. Will they help? Many companies are trying to return more money to investors, on top of dividends, by buying back stock. In theory, at least, this ought to boost returns, because it reduces the number of shares, and therefore increases the value of those that remain. But Mr. Arnott cautions against relying on it. We don't know how big these buybacks will be, and we don't know if they're sustainable, he says. Furthermore, the gains are usually offset by the issue of new stock and options to management. "Most buybacks are done to facilitate the exercise of management stock options," he says.

The second possible source of better returns: Emerging markets. Investors have been throwing money into emerging market funds recently like a hail mary pass–a last, desperate bid to snatch a decent retirement from the jaws of defeat.

But they may be substituting hope for reason. By Mr. Arnott's math, even the most heroic calculations cannot plausibly predict that earnings growth in emerging markets will be more than a couple of percentage points faster than in developed countries. And there are plenty of people who argue it won't be markedly higher, over time, at all. Why? Where economies grow more quickly, new capital flows in. Current investors find their returns diluted by new enterprises and new stockholders.

Meanwhile, look at the valuations. Stock markets in emerging economies have skyrocketed in the past two years. Hot markets like Brazil and India have nearly recovered their 2007 manic peaks. As a result, your dividend income is even worse than in the U.S. The yield on the Indian stock market is down to about 1%, according to FactSet. Brazil has dipped below 2% and China, 1.6%.

Bottom line? Neither pension funds nor private investors seem to have fully absorbed the grim lessons of the past decade. Returns are going to be much lower. People need to save more, much more, for their retirement. If the market rally this year has given them false hope, it will have turned out to be a curse more than a blessing.

State Attorneys General Take Helm In Mortgage Mess
by Joe Nocera - New York Times

Have you noticed that the lead dogs investigating the mortgage foreclosure mess are not any federal prosecutors or national bank regulators, but rather the state attorneys general? I sure have. I can’t think of a more encouraging development.

Yeah, yeah, a handful of federal investigations have also been announced, but we all know that they’re not going to amount to a hill of beans. Ever since the financial crisis began two years ago, the federal overseers of the banking industry have been consistently unwilling to take the rod to the institutions they regulate. The robo-signing scandal — and it is, unquestionably, a scandal — hasn’t changed that attitude one iota.

The Treasury Department and the Federal Reserve have made it clear that they are more concerned about keeping the foreclosure mill going full speed than they are about determining whether the banks broke the law. Somehow throwing people out of their homes quickly is supposed to help the economy. Or so they keep telling us.

Ah, but the states. They’re a different story. Soon after tales of robo-signing began making headlines, the state attorneys general, led by Tom Miller of Iowa, mobilized their forces. Practically overnight, all 50 of them agreed to conduct a joint investigation into the bank practices that led to the scandal.

Unlike the feds’ tepid efforts, this will be a serious investigation, led by a handful of assistant attorneys general who’ve worked together for years, and who see this as their chance to finally do something for beleaguered homeowners. They’ve got resources, subpoena power and a justifiable suspicion that the robo-signing shenanigans are just the tip of a very ugly iceberg.

And best of all, they have a very clear idea of what they are trying to accomplish. They don’t want to merely reform the foreclosure system (though that would be nice, wouldn’t it?). Nor do they particularly want a big financial settlement, which would be meaningless for a giant like Bank of America.

Rather, they hope to use their investigation as a cudgel to force the big banks and servicers to do something they’ve long resisted: institute widespread, systematic loan modifications. “Instead of paying a huge fine,” Mr. Miller posited to me the other day, on his way to an election rally, “maybe have the servicers adequately fund a serious modification process.” Getting the banks and servicers to take loan modification seriously is another in a series of areas where the Obama Treasury Department has failed miserably.

There’s one more reason to cheer the involvement of the states. During the bubble, it was the state attorneys general who first saw the problems in subprime lending. But whenever they tried to do something to halt the predatory lending and outright fraud, they were stopped cold by the federal bank regulators, who consistently sided with the banks in court. It is not too much to say that if the states had succeeded, the subprime crisis might never have occurred. Now, with the mortgage foreclosure mess, they’re back — and the feds can’t stop them. It’s about time.

It should be obvious why state attorneys general were more attuned than the feds were to the problems with subprime lending: they weren’t cocooned in Washington. “The A.G.’s are much closer to these problems,” said Prentiss Cox, a professor at the University of Minnesota Law School. “They live in these communities. They know what the reality is on the ground.”

During the subprime bubble, homeowners who felt victimized by a mortgage originator or a bank could walk in the door of the attorney general’s office. Often, that’s exactly what they did. Employees in the A.G. offices looked at homeowners’ documents and interviewed them face-to-face — giving them a first-hand understanding of how bad things were. By contrast, the Office of the Comptroller of the Currency set up an 800 number in Houston for aggrieved consumers.

Not that the O.C.C. ever really worried about the exploitation of consumers. On the contrary, the O.C.C. and the Office of Thrift Supervision, the two primary federal regulators of the banking industry, viewed their role, incredibly, as protecting banks from consumers rather than the other way around.

They consistently went to court to block efforts by states to put a stop to predatory lending. Their primary weapon was the doctrine of pre-emption, which said, in effect, that because the national banks were governed by federal rules, they were immune from state consumer protection laws. The success of both agencies in asserting pre-emption — which they also used as a marketing tool to make their charters more attractive to potential bank “clients” — actually forced some states to roll back their antipredatory lending laws.

“The federal regulators should have been listening to us instead of trying to shut us down,” said Mr. Cox, who at the time was an assistant attorney general in Minnesota in charge of consumer enforcement. “They weren’t interested in our perspective. They viewed our concerns as trivial.”

Though unable to touch national subprime lenders like Washington Mutual and Wachovia, the state A.G.’s weren’t completely neutered. Some of the worst subprime offenders, like Household Finance and Ameriquest, operated outside the national bank system — and the states were able to start significant investigations against them.

In 2002, for instance, a coalition of attorneys general and the Federal Trade Commission settled a predatory lending suit against a subprime lender called First Alliance; it called for the company to pay up to $60 million to reimburse homeowners it had victimized. That same year, the A.G.’s reached a settlement with Household Finance for $484 million.

And in January 2006, the same coalition of A.G.’s reached a settlement with the worst bottom-feeder of them all, Ameriquest, which agreed to pay $325 million and reform its lending practices. So dependent was Ameriquest on fraudulent lending practices that it couldn’t survive once it had to stop using them. It shut down in the fall of 2008.

As impressive as these victories were, however, they had little impact beyond the individual institutions that had been brought to heel. Although the coalition of A.G.’s that went after Household Finance and Ameriquest absolutely understood how widespread predatory lending was, there was nothing they could do about that larger problem. All the mortgage institutions that came under the regulatory purview of the O.C.C. and the O.T.S. could keep on making the same kinds of predatory subprime loans even after Household and Ameriquest had been forced to stop. Their regulators were their enablers.

Today, that same coalition of state prosecutors is the one driving the investigation into the mortgage foreclosure scandal. The key members of the coalition include Iowa — Mr. Miller headed up both the Household and Ameriquest investigations, just as he is heading up this one — as well as Washington State, Arizona, Texas, Illinois and Massachusetts. Because they know and trust one another, the coalition members can move quickly — as indeed they have. One advantage they have this time is that foreclosure is a state matter, not a federal one. The O.C.C. couldn’t intervene even if it wanted to.

Of course they have another advantage this time around: times have changed. No federal regulator would have the nerve, post-financial crisis, to try to block the states from investigating the mortgage foreclosure scandal.

The law has changed too. As a result of the Dodd-Frank law, it will be much harder for a federal regulator to use pre-emption to shut down a state investigation into a financial institution. Under the new law, states can enforce their own state consumer laws against nationally chartered banks — even when those laws are stronger than any parallel federal law. And state attorneys general have been given the explicit right under the new law to enforce the rules and regulations that will soon emerge from the new Consumer Financial Protection Bureau. They might even get some federal money from the agency to help them do it.

Although the bureau won’t be up and running until next July, its current leader, Elizabeth Warren, has already signaled that she plans to encourage the states to take full advantage of their new powers. Mr. Miller has been in contact with her, as has Roy Cooper, the attorney general of North Carolina, who currently heads the National Association of Attorneys General.

“We have a very good relationship with them,” Mr. Miller said, referring to Ms. Warren and the other officials involved in setting up the new bureau. “We’re going to do great things for the American consumer,” he added enthusiastically.

Even though her bureau is not yet functional, Ms. Warren has already offered public support to the A.G.’s as they pursue the banks over the foreclosure mess. In other words, the state attorneys general finally have something in Washington they haven’t had in decades: an ally.

Not surprisingly, the prospect of an alliance between Ms. Warren’s new bureau and a handful of activist attorneys general gives the banking industry the heebie-jeebies. At a panel at the Chamber of Commerce this week, Andrew Pincus, a lawyer with Mayer Brown, articulated their voluminous concerns.

Would the new “federal cop,” as he called the consumer bureau, and the state A.G.’s go after institutions far smaller than the likes of Wells Fargo and Bank of America? Would their efforts hurt entrepreneurship and damp the availability of credit? Would an overly ambitious attorney general stretch the new rules to go after fraud when none truly existed? Wouldn’t there likely be a lot of duplication of effort?

“The bureau doesn’t even have the power to tell a state that it can’t take an enforcement action because it is misinterpreting the rule,” Mr. Pincus complained to me the day after the panel.

Well, maybe. But to my mind, we’re a long way from worrying about the potential abuses by state prosecutors. It’s the abuses by the banks we should be worried about. There’s nothing “potential” about them. They’re as real as they come. And if the mortgage foreclosure scandal is finally the event that causes the banks to account for their sins, it will be because of the efforts of the state A.G.’s You know what I say to that prospect? Hip-hip hooray.

Title insurers drop demands on mortgage lenders in foreclosure cases
by Elizabeth Razzi - Washington Post

Mortgage servicers have successfully pushed back an attempt to make them explicitly responsible for title problems resulting from their handling of foreclosure paperwork and legal procedures. Three major title insurance companies - First American Financial, Old Republic International and Stewart Information Services - told Wall Street analysts in conference calls Thursday that they had decided not to demand written indemnifications from lenders re-selling foreclosed homes. Combined, the three companies account for 52 percent of the title insurance market.

Such indemnification agreements were drafted earlier this month with input from Fannie Mae and Freddie Mac and their regulator, the Federal Housing Finance Agency, along with the title industry's trade group, the American Land Title Association. They were seen as a way to keep the market for foreclosed properties working despite legal uncertainty.

Title insurance guarantees that the chain of ownership is clear, unblemished by missing documents, outstanding liens or other factors that would impede an owner's right to sell the property. Lenders require buyers to pay for title insurance coverage that protects the lender against those risks. Buyers have the option of paying extra to have such coverage for themselves.

An indemnification would cover the title insurer's legal fees and other expenses if a court overturned a foreclosure because the lender had mishandled paperwork or followed incorrect legal procedures. But some banks and other mortgage lenders had resisted taking on the additional liability and threatened to take business to title insurers who didn't require it.

Earlier this week, the nation's largest title insurance company, Fidelity National Financial, announced it would cancel its indemnification requirement, which had been scheduled to go into effect for all lenders Nov. 1. Fidelity is continuing to require the agreement when doing foreclosure business with Bank of America, however.

The title insurers said they would evaluate home-sale records on a case-by-case basis before writing a title insurance policy covering the new lender and owner. "We have concluded that it is prudent to continue to insure sales of REO [real estate owned] properties," said First American Financial chief executive Dennis J. Gilmore. He said one reason for the decision was push-back from lenders who service mortgages. "It's our understanding that in the marketplace, some servicers have indicated under no circumstances will they provide an indemnification," Gilmore said.

Executives at Old Republic International told investors Thursday that they thought protections already written into their policies would be sufficient to shield them from significant losses on foreclosure sales. They said they would continue to "revisit indemnifications" as the foreclosure crisis unfolds.

Ted C. Jones, director of investor relations for Stewart, said in an interview, "We have not asked for indemnifications at all." The company will issue policies to buyers of foreclosed properties from lenders that confirm that they have followed all applicable legal processes, according to a company memo. While lenders would most likely have to compensate title insurers - and buyers - if a court overturned a foreclosure, indemnification would have covered the title company's legal fees as well.

Hugh Hendry - UK Economy & Q3 GDP

JPMorgan Suspending Foreclosures
by David Streitfeld - New York Times

In a sign that the entire foreclosure process is coming under pressure, a second major mortgage lender said that it was suspending court cases against defaulting homeowners so it could review its legal procedures.

The lender, JPMorgan Chase, said on Wednesday that it was halting 56,000 foreclosures because some of its employees might have improperly prepared the necessary documents. All of the suspensions are in the 23 states where foreclosures must be approved by a court, including New York, New Jersey, Connecticut, Florida and Illinois. The bank, which lends through its Chase Mortgage unit, has begun to “systematically re-examine” its filings to verify that they meet legal standards, a spokesman, Tom Kelly, said.

Last week, GMAC Mortgage said it was suspending an undisclosed number of foreclosures to give it time to take a closer look at its own procedures. GMAC simultaneously began withdrawing affidavits in pending court cases, throwing their future into doubt. Chase and GMAC, in their zeal to process hundreds of thousands of foreclosures as quickly as possible and get those properties on the market, employed people who could sign documents so quickly they popularized a new term for them: “robo-signer.”

In depositions taken by lawyers for embattled homeowners, the robo-signers said they or their team had signed 10,000 or more foreclosure affidavits a month. Now that haste has come back to haunt them. The affidavits in foreclosures attest that the preparer personally reviewed the files, which those workers acknowledge they had no time to do.

GMAC and Chase say that their lapses were technical and will soon be remedied with new filings. But defense lawyers are seizing on these revelations and say they will now work to have their cases thrown out.

Beyond the relative handful of foreclosure cases being contested are many more in which the homeowner did not have legal counsel. Potentially, hundreds of thousands of cases could be in doubt.

GMAC’s initial disclosures prompted challenges or investigations from attorneys general in Iowa, Illinois, Colorado, California and North Carolina. The Treasury Department, which became the majority owner of GMAC after providing $17 billion in bailout money, has directed the lender to correct its procedures. The pressure on the lender, which began as the auto financing arm of General Motors, is continuing to increase. Senator Al Franken, Democrat of Minnesota, asked Wednesday for the Treasury, the Justice Department and other regulators to collaborate on “a thorough investigation into the alleged misconduct.”

Defense lawyers have consistently complained that the lenders’ law firms were sending through cases that were at best sloppy. The Florida attorney general’s office says it is investigating four so-called foreclosure mills. “The GMAC announcement was the mushroom cloud,” said one Florida defense lawyer, Matthew Weidner. “The fallout will burn through the entire mortgage servicing industry.”

Judges who oversee a lot of foreclosure cases increasingly agree that there is a serious problem. “I don’t want to say that every one of these cases is wrong and a fraud on the court, but it is a big concern for us,” J. Thomas McGrady, chief judge of the Sixth Judicial Circuit in Florida, said in an interview last week after GMAC’s announcement.

Judge McGrady predicted that the foreclosure process in Florida, which the Legislature has been trying to speed up, would have to slow down. “Everyone is going to have to look at these cases more closely,” said Judge McGrady, whose circuit includes St. Petersburg.

The foreclosure process in many states is already torpid. This benefits delinquent homeowners, who can live in their properties free for years, as well as lenders who do not have to write down the value of the original loan. But it also threatens to prolong the housing crisis for many years.

Chase said that unlike GMAC, it had not withdrawn any affidavits in pending cases. It also said that if foreclosures were completed, it was allowing its agents to proceed with the sale of the properties. GMAC has stopped its sales. Chase followed the lead of GMAC in playing down the impact of the situation. “Affidavits were prepared by appropriate personnel with knowledge of the relevant facts based on their review of the company’s books and records,” the spokesman, Mr. Kelly, said.

But many questions are unresolved. One is whether completed foreclosures will be vulnerable to what GMAC is calling “corrective action.” If those former homeowners press their claims, they could conceivably dislodge the new buyers. Such cases are probably not imminent. The more immediate consequences for the lenders using robo-signers will be determined by the homeowners who are fighting their cases in court.

Lilliana DeCoursy, a real estate agent in Safety Harbor, Fla., has a rental property in foreclosure with GMAC. Now that the lender has withdrawn the affidavit in her case, Ms. DeCoursy said she was determined to press every advantage. “I think they should have to answer for this,” she said.

'Austerity Will Hit America Like An Eight Pound Sledgehammer'
Charlie McGrath of Wide Awake News warns that things are going to change after the election - for the worse. While the movement across America to stop an out of control Congress in its tracks will likely lead to Republican victories and control of at least the House, the idea that this will somehow change the economic outlook for the better is conjecture. While our regular readers already understand we’re in a depression, most Americans have no clue of the severity of the problem. According to McGrath, they will know very very soon.
Look at what’s going on around the world. We have riots in Greece, riots in France, we have massive job cuts in England [which are] probably going to lead to social unrest there. It is our time to have austerity flung upon us. That’s what this election is going to be used for.

A week from now when Republicans control the house, maybe the Senate, it really doesn’t matter. Everything’s going to come to a grinding halt. Every talk of extending unemployment benefits is going to come to a grinding halt and austerity is going to be implemented on the American people. Like it or not, it’s coming.

This is the plan. We’re going to know that we are in a great depression, very very soon.

There’s going to be a lot of people in your life, maybe even yourself, who are facing these difficult, tough decisions when it comes to how to make ends meet…

…The fact is, economic hard times [are] coming your way - like it or not. You have to change your mindset. You have to wrap your head around the fact that it might be your only option to strategically default on your house. It might be your only option to go ahead and file bankruptcy.

When austerity becomes vogue in this country, it’s going to hit like an eight pound sledgehammer and a lot of people are not going to be able to take it.

…They would have no problem whatsoever walking away from you and letting you wither and die on the vine. You can not have a heart for these people. You need to have a heart for your family. You need to make strategic decisions that benefit yourself and your family. The crime of shifting their debt on to you is complete. It’s time for you to look out for you and your own.

A lot of personal economic decisions in the very near future will be made out of desperation. Congress, be it democrat or republican, cannot stop the coming wave. Whether we print more money a la Paul Krugman and Keynesian economics, or cut spending through austerity measures, the shit is about to hit the fan.

Watch Charlie McGrath:

Time for a New Theory of Money
by Ellen Brown - Yes

The reason our financial system has routinely gotten into trouble, with periodic waves of depression like the one we’re battling now, may be due to a flawed perception not just of the roles of banking and credit but of the nature of money itself. In our economic adolescence, we have regarded money as a "thing"—something independent of the relationship it facilitates. But today there is no gold or silver backing our money. Instead, it’s created by banks when they make loans (that includes Federal Reserve Notes or dollar bills, which are created by the Federal Reserve, a privately-owned banking corporation, and lent into the economy). Virtually all money today originates as credit, or debt, which is simply a legal agreement to pay in the future.

Money as Relationship
In an illuminating dissertation called "Toward a General Theory of Credit and Money" in The Review of Austrian Economics, Mostafa Moini, Professor of Economics at Oklahoma City University, argues that money has never actually been a "commodity" or "thing." It has always been merely a "relation," a legal agreement, a credit/debit arrangement, an acknowledgment of a debt owed and a promise to repay.

The concept of money-as-a-commodity can be traced back to the use of precious metal coins. Gold is widely claimed to be the oldest and most stable currency known, but this is not actually true. Money did not begin with gold coins and evolve into a sophisticated accounting system. It began as an accounting system and evolved into the use of precious metal coins. Money as a "unit of account" (a tally of sums paid and owed) predated money as a "store of value" (a commodity or thing) by two millennia; the Sumerian and Egyptian civilizations using these accounting-entry payment systems lasted not just hundreds of years (as with some civilizations using gold) but thousands of years. Their bank-like ancient payment systems were public systems—operated by the government the way that courts, libraries, and post offices are operated as public services today.

In the payment system of ancient Sumeria, goods were given a value in terms of weight and were measured in these units against each other. The unit of weight was the "shekel," something that was not originally a coin but a standardized measure. She was the word for barley, suggesting the original unit of measure was a weight of grain. This was valued against other commodities by weight: So many shekels of wheat equaled so many cows equaled so many shekels of silver, etc. Prices of major commodities were fixed by the government; Hammurabi, Babylonian king and lawmaker, has detailed tables of these. Interest was also fixed and invariable, making economic life very predictable.

Grain was stored in granaries, which served as a form of "bank." But grain was perishable, so silver eventually became the standard tally representing sums owed. A farmer could go to market and exchange his perishable goods for a weight of silver, and come back at his leisure to redeem this market credit in other goods as needed. But it was still simply a tally of a debt owed and a right to make good on it later. Eventually, silver tallies became wooden tallies became paper tallies became electronic tallies.

The Credit Revolution
The problem with gold coins was that they could not expand to meet the needs of trade. The revolutionary advance of medieval bankers was that they succeeded in creating a flexible money supply, one that could keep pace with a vigorously expanding mercantile trade. They did this through the use of credit, something they created by allowing overdrafts in the accounts of their depositors. Under what came to be called "fractional reserve" banking, the bankers would issue paper receipts called banknotes for more gold than they actually had.

Their shipping clients would sail away with their wares and return with silver or gold, settling accounts and allowing the bankers’ books to balance. The credit thus created was in high demand in the rapidly expanding economy; but because it was based on the presumption that money was a "thing" (gold), the bankers had to engage in a shell game that periodically got them into trouble. They were gambling that their customers would not all come for their gold at the same time; but when they miscalculated, or when people got suspicious for some reason, there would be a run on the banks, the financial system would collapse, and the economy would sink into depression.

Today, paper money is no longer redeemable in gold, but money is still perceived as a "thing" that has to "be there" before credit can be advanced. Banks still engage in money creation by advancing bank credit, which becomes a deposit in the borrower’s account, which becomes checkbook money. In order for their outgoing checks to clear, however, the banks have to borrow from a pool of money deposited by their customers. If they don’t have enough deposits, they have to borrow from the money market or other banks.

As British author Ann Pettifor observes: "the banking system... has failed in its primary purpose: to act as a machine for lending into the real economy. Instead the banking system has been turned on its head, and become a borrowing machine."

The banks suck up cheap money and return it as more expensive money, if they return it at all. The banks control the money spigots and can deny credit to small players, who wind up defaulting on their loans, allowing the big players with access to cheap credit to buy up the underlying assets very cheaply.

It's a Wonderful Life, screenshot That’s one systemic flaw in the current scheme. Another is that the borrowed money backing the bank’s loans usually comes from shorter-term loans. Like Jimmy Stewart’s beleaguered savings and loan in It’s a Wonderful Life, the banks are "borrowing short to lend long," and if the money market suddenly dries up, the banks will be in trouble. That is what happened in September 2008: According to Rep. Paul Kanjorski, speaking on C-Span in February 2009, there was a $550 billion run on the money markets.

Securitization: "Monetizing" Loans Not with Gold But with Homes
The money markets are part of the "shadow banking system," where large institutional investors park their funds. The shadow banking system allows banks to get around the capital and reserve requirements now imposed on depository institutions by moving loans off their books.

Large institutional investors use the shadow banking system because the conventional banking system guarantees deposits only up to $250,000, and large institutional investors have much more than that to move around on a daily basis. The money market is very liquid, and what protects it in place of FDIC insurance is that it is "securitized," or backed by securities of some sort. Often, the collateral consists of mortgage-backed securities (MBS), the securitized units into which American real estate has been sliced and packaged, sausage-fashion.

Like with the gold that was lent many times over in the 17th century, the same home may be pledged as "security" for several different investor groups at the same time. This is all done behind an electronic curtain called MERS (an acronym for Mortgage Electronic Registration Systems, Inc.), which has allowed houses to be shuffled around among multiple, rapidly changing owners while circumventing local recording laws.

As in the 17th century, however, the scheme has run into trouble when more than one investor group has tried to foreclose at the same time. And the securitization model has now crashed against the hard rock of hundreds of years of state real estate law, which has certain requirements that the banks have not met—and cannot meet, if they are to comply with the tax laws for mortgage-backed securities. (For more on this, see here.)

The bankers have engaged in what amounts to a massive fraud, not necessarily because they started out with criminal intent (although that cannot be ruled out), but because they have been required to in order to come up with the commodities (in this case real estate) to back their loans. It is the way our system is set up: The banks are not really creating credit and advancing it to us, counting on our future productivity to pay it off, the way they once did under the deceptive but functional façade of fractional reserve lending. Instead, they are vacuuming up our money and lending it back to us at higher rates. In the shadow banking system, they are sucking up our real estate and lending it back to our pension funds and mutual funds at compound interest. The result is a mathematically impossible pyramid scheme, which is inherently prone to systemic failure.

The Public Credit Solution
The flaws in the current scheme are now being exposed in the major media, and it may well be coming down. The question then is what to replace it with. What is the next logical phase in our economic evolution?

Credit needs to come first. We as a community can create our own credit, without having to engage in the sort of impossible pyramid scheme in which we’re always borrowing from Peter to pay Paul at compound interest. We can avoid the pitfalls of privately-issued credit with a public credit system, a system banking on the future productivity of its members, guaranteed not by "things" shuffled around furtively in a shell game vulnerable to exposure, but by the community itself.

The simplest public credit model is the electronic community currency system. Consider, for example, one called "Friendly Favors." The participating Internet community does not have to begin with a fund of capital or reserves, as is now required of private banking institutions. Nor do members borrow from a pool of pre-existing money on which they pay interest to the pool’s owners. They create their own credit, simply by debiting their own accounts and crediting someone else’s. If Jane bakes cookies for Sue, Sue credits Jane’s account with 5 "favors" and debits her own with 5. They have "created" money in the same way that banks do, but the result is not inflationary. Jane’s plus-5 is balanced against Sue’s minus-5, and when Sue pays her debt by doing something for someone else, it all nets out. It is a zero-sum game.

Community currency systems can be very functional on a small scale, but because they do not trade in the national currency, they tend to be too limited for large-scale businesses and projects. If they were to grow substantially larger, they could run up against the sort of exchange rate problems afflicting small countries. They are basically barter systems, not really designed for advancing credit on a major scale.

The functional equivalent of a community currency system can be achieved using the national currency, by forming a publicly owned bank. By turning banking into a public utility operated for the benefit of the community, the virtues of the expandable credit system of the medieval bankers can be retained, while avoiding the parasitic exploitation to which private banking schemes are prone. Profits generated by the community can be returned to the community.

A public bank that generates credit in the national currency could be established by a community or group of any size, but as long as we have capital and reserve requirements and other stringent banking laws, a state is the most feasible option. It can easily meet those requirements without jeopardizing the solvency of its collective owners. State-owned banks could be a way for states to bypass Wall Street, balance their budgets, and get local economies moving.

For capital, a state bank could use some of the money stashed in a variety of public funds. This money need not be spent. It can just be shifted from the Wall Street investments where it is parked now into the state’s own bank. There is precedent establishing that a state-owned bank can be both a very sound and a very lucrative investment. The Bank of North Dakota, currently the nation’s only state-owned bank, is rated AA and recently returned a 26 percent profit to the state. A decentralized movement has been growing in the United States to explore and implement this option. [For more information, see]

We have emerged from the financial crisis with new clarity: Money today is simply credit. When the credit is advanced by a bank, when the bank is owned by the community, and when the profits return to the community, the result can be a functional, efficient, and sustainable system of finance.

Will the Democrats Take the Fall for Wall Street?
by Les Leopold - Huffington Post

Please, dear fingers, don't let me type a blog that knocks the Democrats -- at least not now, with so much at stake. We can flail away after next Tuesday. This is the time to type the obvious: No matter how bad the Democrats are, the Republicans are worse, far worse. If the GOP gains control of either chamber they'll gridlock every liberal proposal, slice away at social spending, cater to corporate elites and gut our modest attempt at health insurance reform. Think of the many decent Democrats who are in danger. Think of all those wing-nut Tea Partiers who might win office. Think of what's really good for the country.

There, I've done my duty. I should stop here...but I can't.

I've just got to ask this question: Why is the Democratic Party losing support from the people who are usually its most ardent supporters -- everyday working people who are deeply anxious about their economic well-being? Blaming Citizens United, the Koch brothers and Fox News doesn't disguise our dirty little secret: The Democratic Party has ceased to be the Party of Jobs.

In truth, we've seen it coming for years. The political and financial elites are enthralled with each other. They see in each other's eyes the same fascination with our power-driven world. They can't help but respect each other's ability for landing on top. (Gordon Gekko is always back.) But in 2008, this romance between Wall Street and Washington had an air of desperation: Wall Street needed an enormous infusion of cash and trillions in asset guarantees to avoid total collapse. If AIG went down after Lehman Brothers it was goodbye Goldman Sachs -- and JP Morgan Chase and Morgan Stanley and Bank of America. And goodbye to the thousands of hedge funds that moved their money through those institutions. The best and the brightest of finance would be no more.

As for Washington, Obama and the Democratic leadership felt a different kind of desperation. If Wall Street imploded, the real economy would slide into the Great Depression II. They had to strike a deal and fast.

Or so they believed. Those who weren't so enamored with the Wall Street titans thought no deal was necessary. The government could nationalize the banking system, give investors a hair cut, clean out the toxic assets and then resell the "good" banks to private investors. And at the same time institute a badly needed financial overhaul. That was the time to shrink the Wall Street monster, end "too big to fail" banks, and close down the casino games that had brought the system down. And to pay for the mess Wall Street had created, place steep windfall profits taxes on future profits and bonuses and discourage them from making such a mess again. With Wall Street's big boys on their knees all this was achievable, and more.

But no. The Democrats refused to press their advantage -- even though their failure to act alienated not just liberal bloggers, but their core working class constituents. What accounts for this colossal failure?

1. The economic rescue program didn't rescue regular Americans. Obama's advisory team, whose ties to Wall Street were obvious, came up with a straightforward plan: a) bail out the banking system; b) bolster investor confidence; and c) prime the pump with a sizable stimulus program. Regardless what the spin doctors are now saying, this plan was designed not just to prevent the Great Depression II. It also was sold as a way to dramatically reduce unemployment to below 8 percent just in time for the mid-term elections. (So much for that!)

The plan certainly worked for Wall Street, reassuring investors that the system was functioning again. The stock market is up and Wall Street is again making record profits and bonuses. Tragically, though, it didn't work for the more than 30 million Americans who now are without jobs or forced into part-time work -- a post Depression record.

Obama had supposedly hired the best economists in the world. Why did they so misread the unemployment situation? Paul Krugman argues that the stimulus package the Obama crew concocted was too small and relied too much on tax cuts that were intended to prime the pump with consumption, but didn't (since Americans banked most of that money instead of spending it). So why didn't Summers, Geithner and Bernanke see this coming? After all, they had access to the very best econometric models. Shouldn't they have noticed that a $770 billion stimulus package would not make up for a multi-trillion dollar economic crater?

2. Our political leaders won't admit that Wall Street siphons wealth from the real economy. For decades, leaders of both parties have been downing the free-market Kool Aid, getting high on the idea that Wall Street's financial games create real value for the real economy. They enabled Wall Street to deploy fantasy finance instruments to gain a larger and larger share of our economy -- financial industry profits constituted almost 40 percent of all U.S. profits just before the crash. The politicians seemed unconcerned that most of this financial wealth came from bubbles.

And then the bubbles burst. After the crash, we all see the enormous hole Wall Street's reckless gambling created in the real economy. We all see how the bankers made billions off fantasy financial instruments that had little or no value. It should be clear to all that Wall Street's most profitable products - subprime mortgage securities and derivatives based upon them -- had sucked value out of the real economy. (Please see The Looting of America for the details of this sad story.) So it should have been obvious that rescuing Wall Street would not resuscitate the real economy.

But American political leaders just didn't -- or wouldn't -- get it. They stuck to the myth that if we could just get Wall Street back to business as usual, the recovery would soon trickle down to the rest of us. Geithner, Summers and Bernanke were convinced that their trillion-dollar bailouts would jolt the economy back to life. For them, the health of the new American economy is inextricably entwined with the health of the financial sector. They believe that the financial industry will assume the role manufacturing once played in our economy, generating good jobs and real wealth. What they seem incapable of believing, or even considering, is that maybe, just maybe, much of the financial sector produces no value at all.

3. Washington fell into the "investor confidence" trap. Once you decide that building investor confidence is the centerpiece of your economic strategy, you've given Wall Street the keys to the castle. The administration hoped that reassured investors would pump up the stock market, restoring some of the vast sums middle-income Americans had lost in their pensions, 401ks, and mutual funds. But middle-class Americans are not the main beneficiaries of the "investor confidence" strategy. Mainly you're catering to the most powerful investors -- the super-rich who use hedge funds and proprietary trading desks to extract super-returns, often at the expense of small investors. Even worse, to win and maintain the "confidence" of these big boys, you've got to be a deficit hawk. They want you to reduce social spending and pare down those pesky "entitlements." God forbid you should raise taxes on the super-rich! And if these policies translate into sky-high unemployment for years to come (which they do), so be it.

4. Tragically, the Democrats forgot how to be the Party of Jobs. During the decades following the New Deal, the Democratic Party largely stuck to its unwritten compact with working people by pressing for full employment. But that started to change in the 1970s, when America's financial industry began outpacing our once almighty industrial sector. Party leaders, in particular, fell in love with money and easy Wall Street wealth. They bought into the idea that tax cuts for the super-rich would bring prosperity to all. They joined the deregulation crusade designed to unleash "financial innovation." The party's leading lights got rich themselves. They drifted from Congress to industry lobbying firms and Wall Street banks and hedge funds, trailing cash in their wake. Money was everywhere if you were connected. It was only human to want a piece of the action -- especially when you saw those Wall Street 30-somethings making tens of millions simply by moving other people's money around. It was smart, and not unusual, to be an esteemed Democratic financier. And, the rationalizing came easy: If we help the rich guys generate more wealth, they'll create new jobs, won't they?

If the quest for full employment was still in the Democrats' genetic code, we would have seen the signs by now. Clearly many Democratic leaders have already turned into financial mutants. They no longer twitch with a sense of urgency about jobs. Instead, they vibrate over deficits. They're not calling for a massive jobs program paid for by taxes on Wall Street billionaires. In fact, they're not proposing anything that working people really can get excited about.

Instead of helping the unemployed, a lot of Democrats are joining Republicans in blaming them. Troubled that the Wall Street bailout and stimulus hasn't shortened unemployment lines, Tim Geithner actually trotted out this old theory: Unemployment is high because workers don't have "the skills to adequately compete in the 21st century." How convenient! The only trouble is that there's no evidence that high unemployment stems from low educational levels. Working people aren't too stupid to find jobs. The jobs aren't there. And the reason they aren't there is because Geithner and his pals on Wall Street eliminated them.

What a sorry mess. American working people (and especially the hard-strapped unemployed) need a political party that will fight for decent, sustainable jobs. Right now we need 22 million new jobs to get close to full employment (5 percent or below). That's the equivalent of creating 650 Apple Corporations all at once. There is absolutely no way that the private sector can work this miracle on its own -- no matter what the conservative charlatans proclaim. It will take massive public job creation paid for by steeply higher taxes on Wall Street billionaires -- or it won't happen at all.

The party of Roosevelt knew how to fight this fight (as do some stand-up Democrats in the House and the Senate-think Russ Feingold). FDR didn't worry about offending the super-rich or building "investor confidence." He was too busy responding to real pressure from the left and from below -- including Huey Long's "Share the Wealth" program, Upton Sinclair's "End Poverty in California" campaign, and the new CIO labor movement, which was mobilizing workers all over the country. That pressure forced the Democratic Party to push through everything from tough financial regulations and steep progressive taxes to Social Security, wage and hour laws, and the right to organize. And without question, that's how we built the largest middle-class in history.

You have to feel for the tens of thousands of party faithful who at this very minute are staffing the phone banks and knocking on doors. There was a time when they could count on enthusiastic rank and file support for their Party of Jobs. Now they have to resort to a different message we hope will save us from catastrophe: Vote for the Party of Not-as-Bad-as-the-Disatrous-Republicans.

Consumers to shop smart and save up in 2011
by Paul Casciato - Reuters

Consumers still reeling from the global economic crisis will shop for bargains, buy online for deals and convenience, and plan to work beyond retirement age and boost savings in 2011, global market research firm Mintel said on Wednesday. Mintel offered nine predictions about consumer behavior in Britain and America over the coming year from "rainy day" savings and smartphone usage to gender roles at work and home as well as the struggle between indulgence and obesity in its "Consumer Trends for 2011" report.

It said that online buying will increase, that students will weigh the cost of higher education against earning prospects and that employees will strive for education and learning as part of their corporate benefits. Service providers and retailers, it added, should re-think their offerings for working women. "These consumer trends for 2011 are a legacy created by economics, but now gathering their own momentum and are set to influence the global consumer mindset for a long time to come," said Mintel Global Trends Analyst Alexandra Smith in a statement.

Under headings such as "Prepare for the Worst," "Garden State" and "The Big Issue," Mintel demonstrated that a renewed emphasis on prevention will drive consumers to think defensively about all aspects of money in their lives, including where they get their food from, what's in it and how much of it they eat. "In the UK, 43 percent of consumers say 'trying to add to my rainy day savings/emergency fund' is a priority for this year, up 15 percent from last year," the report said. "In the US, a third of consumers say they're using debit rather than credit, and debit transactions are forecast to rise nearly 60 percent between 2000 and 2010."

Under the heading "Garden State," Mintel said a growing love of gardening and a desire for fresh organic produce among modern city dwellers will drive seed sales to grow-your-own buffs. In the United States, 26 percent of internet users bought vegetable seeds in past year, 19 percent bought vegetable/flower garden fertilizer and 27 percent like to grow vegetables at home, the report said.

One in five British consumers grow their own fruit and vegetables and the waiting list for allotments in Britain has grown 20 percent in 2010, Mintel said. "In 2011, rural tourism, working farm holidays and garden leisure may benefit -- while rising food and commodity prices may see a boost for seed sales," the report added. It said women are earning and learning more than men, creating new gender roles in business and consumerism, where age is no longer an easy marker for lifestage in 2011.

Opportunities lie for brands to focus less on the year the female consumer was born, and more on where she's at with her life now, the report said. More U.S. men (32 percent) reported in 2010 that they were the sole cleaner in their household when compared with 27 percent in 2008 and in Britain more women than men researched financial products online. People are also working beyond retirement -- either due to financial need or because they have grown attached to a lifestyle of leisure and pleasure, the report said.

When vital drugs run out, patients pay the price
by JoNel Aleccia- MSNBC

Cancer patient Bob Dierker had just finished eight of 12 chemotherapy sessions when technicians broke the news. Next time, they said, he'd get no leucovorin, the generic medication long used to battle his type of aggressive Stage 3 colorectal cancer. The drug was in short supply across the nation and he'd have to go without. "It was like getting shot in the stomach," said Dierker, 64, a lawyer from Fairfax, Va. "My odds just dropped dramatically because I can’t get this drug."

Exactly how Dierker’s chances of beating the cancer will be affected is unclear, said his oncologist, Dr. Alexander Spira. Leucovorin has been used to boost the effectiveness of cancer drugs for decades, so no one knows how badly patients will fare without it. But Dierker is not alone. Across the United States, life-saving or medically necessary drugs are running low — or running out — endangering care and increasing the odds of medication mistakes for a broad swath of patients.

Health officials say drug shortages pose a growing public health crisis, fueled in large part by financial motives of drugmakers who’ve watched low-cost generics erode their profits. Numerous drugmakers contacted by either refused to comment on the shortages or confirmed only that they exist. None would discuss financial considerations.

Unprecedented numbers
"It’s disaster management, daily," said Erin Fox, manager of the Drug Information Service at the University of Utah Health Care, who has tracked drug shortages for a decade. "The numbers are unprecedented." In 2005, Fox recorded 74 drug shortages in the U.S. By 2009, the number had jumped to 166. As of Sept. 10 this year, Fox had logged 150 new shortages — in addition to 30 drug shortages still unresolved and more being reported every week.

Worse, the drugs that are in short supply are often the ones needed most. This year has seen shortages of common drugs used for basic treatments: morphine for pain relief, propofol for sedation, Bactrim injections for infections. Sterile injectables, including the pre-filled epinephrine syringes used in emergencies for heart attacks and allergic reactions, have been particularly hard to get. "Our usual, everyday workhorse drugs are no longer available," said Fox. "It’s just the unavailability of everything that we need every day."

About 40 percent of the shortages are caused by manufacturing problems, including safety issues, said Valerie Jensen, associate director of the Food and Drug Administration's drug shortage program. Nearly 20 percent are caused when firms simply stop making drugs and another 20 percent are due to production delays. The rest are chalked up to raw material shortages, increased demand, site issues and problems with parts such as syringes or vials. But underlying them all is the profitability problem, said Jensen. "Normally, it’s a business decision. That does lead to shortages," said Jensen. "These are just not usually money-makers."

FDA can't require drug production
Despite the concerns of doctors and pharmacists — and the distress of patients — no one can force the drugmakers to address the problem. The FDA has no authority to compel drugmakers to continue producing a certain drug, or to require them to make a drug that’s in short supply, Jensen confirmed. And companies aren’t required to inform the agency about impending shortages unless the drugs don't have an alternative. Even then, there are no sanctions if they don’t.

When firms do tell FDA about a problem, the agency can’t publicly divulge proprietary information, Jensen said. Shortages on the FDA’s website are often chalked up to mysterious "manufacturing delays," or frequently, no reason at all. That has created a system in which pharmacists, doctors and patients may not know that a shortage exists until a drug is needed — and even then they don’t know how long it will last.

"There has been a lot of 11th hour scrambling," said Dr. Richard L. Schilsky, a professor of medicine and chief of hematology/oncology at the University of Chicago. "We literally don’t know from week to week who’s going to be able to be treated." The problem has reached such a peak that four leading groups representing cancer doctors, anesthesiologists, pharmacists and safety advocates have convened an invitation-only meeting in Bethesda, Md., on Nov. 5. They’re asking drugmakers and supply chain representatives to join health experts and observers from the FDA to hammer out solutions.

"I’m going to give these folks the benefit of the doubt and assume they don’t know the impact at the patient care level," said Bona Benjamin, director of medication-use quality improvement at the American Society of Health System Pharmacists. But a nationwide survey of 1,800 health care workers conducted this summer by the Institute for Safe Medication Practices left little doubt about the impact on patients.

Two deaths blamed on morphine shortage
"It’s really a mess out there," said Michael Cohen, director of ISMP, a nonprofit group that aims to reduce medical errors. "It is making us compromise the way we do things normally." More than half of the respondents to ISMP said that in the past year they had "always" or "frequently" encountered shortages of a list of common drugs.

One in three reported that the shortages caused medication errors that could have harmed patients and one in four said the mistakes reached patients. One in five said patients were actually harmed. "We had two deaths where there was a morphine shortage," Cohen said, explaining that a much more potent replacement drug, hydromorphone, was given at the level of the original, overdosing the patients. Another patient woke up mid-way through surgery because medical crews trying to conserve the sedative propofol had given too little medication for the patient’s weight.

Such critical mistakes are bound to happen when shortages of so many drugs start to add up, said Thomas Burnakis, clinical coordinator of pharmacy services at Baptist Medical Center in Jacksonville, Fla. "If I am the best centerfielder in the world, you can hit me a pop fly and I’ll catch it. You can hit me two or even three and I’ll catch them," he said. "If you start hitting me 15, I’m going to start dropping them."

It’s not just the mainstream drugs that are the problem.  Shortages of niche drugs or those used for rare conditions have occurred, too. In January, sufferers of a potentially blinding condition called birdshot retinochoroidopathy uveitis learned that Zenapax, the best drug for keeping symptoms at bay, had been discontinued by drugmaker Roche. "I cannot tell you the panic I felt," said Lynn Shaw, a 60-year-old nurse from Franklin, Mass., who was diagnosed with the disease 2 ? years ago. "I was positive I was going to lose my vision. I thought, ‘Oh, my god, I’m going to go blind because of these jerks.'"

Chris Vancheri, a spokesman for Roche, said the company decided to stop making the drug, which is normally used in kidney transplant patients, because there were alternative treatments available. The problem, Shaw and other patients said, is that alternative drugs are either less effective or pose unacceptable side effects such as life-threatening high blood pressure and liver damage.

Drug companies won't talk
Shaw believes that Roche, like many manufacturers, stopped production when generics undercut the brand name price. Vancheri would not comment on the profitability of Zenapax. Nor would representatives for Teva Pharmaceuticals and Bedford Laboratories, the makers of leucovorin, discuss the reasons for the shortage of the generic drug that has left Bob Dierker, the Virginia lawyer, with depleted cancer treatments.

Bedford representatives did not return repeated calls and e-mails from Teva representative Denise Bradley would only confirm what patients have known for months, that the drugmaker halted production at its Irvine, Calif., plant in April. "I do not have an estimated date of when we will resume manufacturing at this time," Bradley wrote in an e-mail.

Representatives for the drug manufacturers’ trade group, PhRMA, declined to discuss the largest-ever drug shortage in the nation, referring questions to individual manufacturers. But Dierker thinks he knows what’s behind the recent shortage of generic leucovorin, the second since 2008. In some regions, a 50-milligram dose of generic leucovorin costs 98 cents; a newer brand-name alternative called Fusilev costs $184.08. But many insurance companies, including Dierker's, won't pay for it.

"It’s money, pure and simple," said Dierker, a new grandfather who fears he won’t see 6-month-old Rhett grow up. He’d like to do something about the shortage: organize a class action lawsuit, get a colleague to pursue a criminal case. But for now, he’s just angry. "To have some faceless, nameless coward running a pharmaceutical lab decide he wants a bigger BMW and isn’t going to make your drug — I feel helpless," Dierker said. "That’s the really frustrating thing, not to be able to do anything about it."

Time traveler
A European filmmaker claims to have found evidence of real time travel in a 1928 Charlie Chaplin film. According to a video posted on YouTube, George Clarke claims to have found previously unreleased footage of Chaplin’s 1928 film ‘The Circus’. The Internet is buzzing because the shot appears to feature a woman (or man) chatting away on a mobile phone

U.S. Says Genes Should Not Be Eligible for Patenting
by Andrew Pollack -

Reversing a longstanding policy, the federal government said on Friday that human and other genes should not be eligible for patents because they are part of nature. The new position could have a huge impact on medicine and on the biotechnology industry.

The new position was declared in a friend-of-the-court brief filed by the Department of Justice late Friday in a case involving two human genes linked to breast and ovarian cancer.

“We acknowledge that this conclusion is contrary to the longstanding practice of the Patent and Trademark Office, as well as the practice of the National Institutes of Health and other government agencies that have in the past sought and obtained patents for isolated genomic DNA,” the brief said.

It is not clear if the position in the legal brief, which appears to have been the result of discussions among various government agencies, will be put into effect by the Patent Office. If it were, it is likely to draw protests from some biotechnology companies that say such patents are vital to the development of diagnostic tests, drugs and the emerging field of personalized medicine, in which drugs are tailored for individual patients based on their genes.

“It’s major when the United States, in a filing, reverses decades of policies on an issue that everyone has been focused on for so long,” said Edward Reines, a patent attorney who represents biotechnology companies.

The issue of gene patents has long been a controversial and emotional one. Opponents say that genes are products of nature, not inventions, and should be the common heritage of mankind. They say that locking up basic genetic information in patents actually impedes medical progress. Proponents say genes isolated from the body are chemicals that are different from those found in the body and therefore are eligible for patents.

The Patent and Trademark Office has sided with the proponents and has issued thousands of patents on genes of various organisms, including on an estimated 20 percent of human genes.

But in its brief, the government said it now believed that the mere isolation of a gene, without further alteration or manipulation, does not change its nature. “The chemical structure of native human genes is a product of nature, and it is no less a product of nature when that structure is ‘isolated’ from its natural environment than are cotton fibers that have been separated from cotton seeds or coal that has been extracted from the earth,” the brief said.

However, the government suggested such a change would have limited impact on the biotechnology industry because man-made manipulations of DNA, like methods to create genetically modified crops or gene therapies, could still be patented. Dr. James P. Evans, a professor of genetics and medicine at the University of North Carolina, who headed a government advisory task force on gene patents, called the government’s brief “a bit of a landmark, kind of a line in the sand.”

He said that although gene patents had been issued for decades, the patentability of genes had never been examined in court.

That changed when the American Civil Liberties Union and the Public Patent Foundation organized various individuals, medical researchers and societies to file a lawsuit challenging patents held by Myriad Genetics and the University of Utah Research Foundation. The patents cover two genes, BRCA1 and BRCA2, and the over $3,000 analysis Myriad performs on the genes to see if women carry mutations that predispose them to breast and ovarian cancers.

In a surprise ruling in March, Judge Robert W. Sweet of the United States District Court in Manhattan ruled the patents invalid. He said that genes were important for the information they convey, and in that sense, an isolated gene was not really different from a gene in the body. The government said that that ruling prompted it to re-evaluate its policy.

Myriad and the University of Utah have appealed.

Saying that the questions in the case were “of great importance to the national economy, to medical science and to the public health,” the Justice Department filed an amicus brief that sided with neither party. While the government took the plaintiffs’ side on the issue of isolated DNA, it sided with Myriad on patentability of manipulated DNA.

Mr. Reines, the attorney, who is with the firm of Weil Gotshal & Manges and is not involved in the main part of the Myriad case, said he thought the Patent Office opposed the new position but was overruled by other agencies. A hint is that no lawyer from the Patent Office was listed on the brief.