Re: OT Pelosi is going down

Don't get diverted by personalities. If Nancy Pelosi had never
been born, we would still be in the same situation.
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On Sat, 16 May 2009 02:19:20 -0700, "John R. Carroll"
<jcarroll@ubu,machiningsolution.com> wrote:


"BottleBob" <bottlbob@xxxxxxxxxxxxx> wrote in message
news:3-CdnYcdtLm1rpPXnZ2dnUVZ_s6dnZ2d@xxxxxxxxxxxxxxxx


Cliff wrote:
On Fri, 15 May 2009 14:50:39 -0700, "John R. Carroll"
<jcarroll@ubu,machiningsolution.com> wrote:

The financial services industry has been sucking more than six hundred
billion dollars per year from the real economy since the turn of the
century

And how can they have indebeted someone for hundreds of trillions of
dollars with credit default swaps & etc. when the total GNP is less
than ~ 15 tillion per year (and ~ 1 trillion would have *paid off*
all those morgtages)?
Check my numbers but ...

Cliff:

Check your numbers? OK, how did "...six hundred billion..." turn into
"...hundreds of trillions..."?
Care to make a correction?

LOL
How do you correct a question that soesn't make any sense in the first
place?

I've merged a couple of previous posts into a single one to put a little
perspective on America's debt.
BTW, it looks like unemployment may be a leading indicator this time around
because growth appears to be coming from income rather than debt. This
http://www.slate.com/id/2216238/ is a time line for unemployment that is
useful.

Anyway, about debt........

The Untied States is mired in the deepest cyclical contraction since at
least World War II, and arguably the depression. Falling home prices led us
into this crisis, and are still falling. The financial crisis in 2008 has
become the economic crisis in 2009, as more than 2 million jobswere lost in
just the first quarter, with another 3 to 5 million likelybefore year end.
With the unemployment rate headed over 10%, and maybe up to12% next year,
the default rate on every type of consumer credit - prime mortgages, Alt-A
mortgages, Option Arm mortgages, sub-prime mortgages, home equity lines,
credit cards, auto loans, student loans - is headed much higher. Commercial
real estate values are plunging, and corporate default rates are set to
soar. ==>Although every bank has 'passed' the government's stress test, some
banks will fail the real world stress test, and need billions more in
capital.<==

If you followed the news on this point, much of the "pass" was
due to bank "negotiation" over what/how much was capital,
what/how much were liabilities, what the odds/potential for
failure were, FASB "thimble rigging," etc. The results were very
much "pencil whipped" to the banks/quasi banks advantage. Even
with the best possible case/spin in every line item, very
considerable additional capital is required, and many of the most
exposed institutions are also major unsecured Chrysler and GM
creditors.

Just this week Treasury has agreed to put billions of TARP dollars
into the insurance industry. Sooner or later, the Treasury Department will
likely have to go hat in hand asking for more money from
Congress. For the first time since World War II, the global economy will
contract in 2009. In addition to the daunting cyclical problems challenging
the economy, there are a number of issues that will make it even more
difficult for a self sustaining recovery to develop in 2010. Between 1982
and 2007, the amount of Total debt grew from $1.60 to $3.53 for each $1.00
of GDP. This was made possible as the cost of money fell from 15% to 20% in
1982 to the lows of the last few years. As interest rates fell, consumers
were able to take on more debt without their monthly payments increasing.

Household debt has increased from $.44 in 1982 to $.98 for each dollar of
GDP in 2007. However, there is no more relief coming from lower rates, so
consumers are going to have to pay for their debt from income. From the mid
1990's until 2007, most consumers had the luxury of believing that their
homes and 401Ks would provide most of what they would need for their
retirement. The saving rate fell from over 8% 15 years ago to near 0% in
2007. The last 18 months has convinced them they need to increase their
savings. The saving rate has rebounded to near 4% in the last six months,
which is one reason why the economy has been so weak. As debt levels
increased over the last 25 years, GDP was boosted as consumer's bought cars,
bigger homes, second homes, went on nice vacations, and asically lived the
good life. However, since 1966, each dollar of additional debt has given the
economy less of a boost. In 1966, $1 dollar of debt boosted GDP by $.93. But
by 2007, $1 dollar of debt lifted GDP by less than $.20.

The law of diminishing returns is alive and well...

The message from these facts is clear. Debt levels are high, and any
increase in interest rates will impose a bigger burden on the economy and
quickly stunt growth. Consumer debt is already so high and interest rates
are so low that it will be difficult for consumers to add debt. This means
economic growth will be far weaker than the debt induced growth of the last
25 years. As consumers increase their savings, GDP will be lowered by .70%
for each 1% consumers increase their saving, since consumer spending
represents almost 70% of GDP. In addition, the banking system remains
crippled. Lending standards are high and are not coming down with the
economy remaining weak.

And the "screw job" the administration is giving the secured and
unsecured GM/Chrysler creditors won't help things either. This
is very much a one shot thing. Who in their right mind will lend
any money to the successor corporations, or will buy or roll over
any corporate debt with even a whiff of a problem?

The need for additional capital will lower future
lending by several trillion dollars, as banks work to repair their balance
sheets and lower their leverage ratios from 30 to the low teens. The
securitization markets provide more credit than the banking system, but they
remain on life support. Credit availability will remain constrained well
into 2010, which will counterbalance the lift from any fiscal stimulus.

IMNSHO credit likely to continue be constrained as long as the
SEC, etc. keep playing "whack-a-mole" with the financial services
industry, at the "masters of the universe" can invent "stuff" far
faster than the it can be regulated. The SEC, etc. needs to take
a much more FDA like approach, and require an analysis, and proof
of safety and effectiveness, among other factors, before any more
novel financial instruments are turned lose on the economy.

Indeed, they should go back and evaluate the existing instruments
from the safety, effectiveness, need, social benefit, and also
see if purchase limitations should be imposed, similar to the
limitations on addictive drugs. No legitimate financial need
served? Main effect is tax evasion/avoidance? Then no more can
be issued and the existing instruments/practices phased out as
they mature. Of particular concern are gambling "contracts"
[derivatives] which have no apparent "socially redeeming value"
of any kind, and actively destabilize the economy and financial
system. If allowed at all, these should be limited to Las Vagus
sports bars and the "high rollers.".

The diminishing boost given to GDP from each additional $1.00 of debt since
1966 indicates that adding more debt will not return the economy to
prosperity.

In one sense this was not prosperity at all, but a "binge" based
on the dissipation of capital amassed by our parents sacrifices
in WW2 and their efforts for the 20 years after WW2.

Over the last 60 years, the United States has used a combination of fiscal
stimulus and monetary policy to soften each recession and spur the
subsequent recovery, with apparent success. From 1982 until 2007, the U.S.
only experienced two shallow recessions that
each lasted just 8 months. This stretch of 25 years may be the best 25 years
in our economic history. But much of this prosperity was bought with debt,
as the ratio of debt to GDP rose from $1.60 to $3.50 for each $1.00 of GDP.
Sometime in the last 25 years, we passed the point of no return.

When the only tool you [think you have] is a hammer, everything
looks like a nail and gets pounded.

What this means as a practical matter is that consumers are going to spend
the next few years deleveraging in the same way that financial institutions
are. Every cloud has a silver lining, but of course, the reverse is also
true.
Financial institutions tend to be able to suffer pain better because they
spread the pain over large numbers. Only Russians, East Europeans, Asians
and Africans "downsize" at the family level to do this. Americans are less
likely to layoff or sell a kid to match a reduced budget with overhead. That
is the equivalent.

New research by the Federal Reserve and Boston University of credit spreads
of 900 non-financial companies from 1990-2008 predicted changes in the
economy 'phenomenally' well. Based on their initial research on low to
medium risk corporate bonds with more than 15 years to maturity, the
researchers went back to 1973 and found the analysis still worked well. With
the massive widening of corporate bond spreads last fall, the researcher's
model predicts the economy will lose another 7.8 million jobs by the end of
2009, and industrial production will fall another 17%. In the spirit of
optimism, let's assume this 'phenomenal' model is off by 35%, due to the
extreme nature of this credit crisis. That still results in another 5.1
million lost jobs, and an 11% drop in industrial production. In that
scenario, the unemployment rate climbs to near 12.5%, the underemployment
rate breaches 20%, and another 500,000-750,000 foreclosures result.

The International Monetary Fund (IMF) now estimates the U.S., European, and
Japanese financial sectors face losses of $4.1 trillion. Banks are
confronting losses of $2.5 trillion, insurers $300 billion, and other
financial institutions $1.3 trillion. To date, the banking sector has
written down $1 trillion of expected losses. The IMF estimates that U.S. and
European banks need to raise $875 billion in equity by next year to return
to pre-crisis levels.

Recently, a number of banks have reported first quarter earnings, which was
a pleasant surprise. Citigroup said it made $1.6 billion. One of the ways
Citigroup achieved this gain was booking a profit of $2.7 billion on the
decline in Citi's own debt. Say what? Under accounting rules, Citi was
allowed to book a one-time gain equivalent to the decline in its bonds
because, in theory, it could buy back its debt cheaply and save $2.7 billion
over time. Of course, Citi didn't actually do that. Even though more
consumer loans went bad in the first quarter, Citi reduced its loan loss
reserve from $3.4 billion in the fourth quarter to $2.1 billion in the first
quarter, thereby picking up another $1.3 billion of 'earnings'. And the
recent change in mark to market accounting enabled Citi to book an
additional $413 million in 'profit' on impaired assets. Without theses
one-time adjustments, Citi's $1.6 billion in first quarter profit becomes a
$2.8 billion loss.
Now multiply that by 19 for the other "stress tested"
institutions...

According to a Wall Street Journal analysis of Treasury Department data, the
19 banks that received tax payer funds made or refinanced 23% less in new
loans in February versus last October. Why lend money when all you've got to
do is make a few adjustments and make even more money.

see earlier comment on playing financial "whack-a-mole."

Between 2000 and 2008, the major credit card companies increased the number
of credit cards issued to small businesses from 5 million to 29 million.
During that period, many small business owners increasingly relied on their
cards to provide short term financing for their business. Spending on small
business credit cards increased from $70.4 billion in 2000, to $296.3
billion, according to the Nilson Report. Over the last 15 months, business
bankruptcy filings have risen faster than consumer bankruptcies, with the
average charge-off rising to $11,000 from $7,000, according to Equifax, Inc.
In response, the card issuers have been aggressively scaling back, and have
reduced available credit lines by almost $500 billion. Just another example
of how the availability of credit to the economy is evaporating, despite all
the Fed's efforts.

Again standing on the gas and the brakes at the same time.

A small suggestion for a treatment instead of a treat. Create a
industrial financial services corporation, based on the other
GSEs, to issue business credit cards, and required that banks
transfer the existing credit card accounts on customer request.
With a GSA pay scale for the administrators and other employees
[no private jets, no limos], considerable cost savings should be
realized, and credit on reasonable terms/conditions would again
be available for qualified borrowers.

Industrial production fell 1.5% in March, and is down 12.8% from a year ago.
Capacity utilization fell to 69.3%, the lowest since records began in 1967.
Excess capacity is a powerful dynamic. Companies are forced to reduce or
eliminate budgeted investments in new equipment, compete for every dollar of
revenue, even if it means accepting thinner profit margins, and reduce costs
through job cuts. The amount of excess capacity that has been created by the
depth of this economic contraction is unprecedented. What most inflation
bugs and investors fail to understand is how long it will take to work off
the current over hang of excess capacity. If the output gap grows from the
current 7% to 10% next year, Goldman Sachs estimates it could be 2015 before
all the excess capacity is used up, and that's if GDP grows 4.75% per year,
something that is very unlikely. Ironically, one of the reasons the economy
is not likely to grow that fast is that business investment will be weaker
than in prior business cycles. With so much excess capacity, businesses
won't need to materially increase business investment for the next 2 or 3
years.

The economy needs to create 125,000 jobs each month, just to absorb the
number of new entrants into the labor market. If job growth were to average
325,000 per month in coming years, it would still take four years to replace
all the jobs lost in this recession. With so much excess labor capacity,
wage growth will be weak for the next few years, which will make it harder
for consumers to increase savings and spending. The combination of less
credit availability, weaker business investment and consumer spending will
be headwinds whenever the economy emerges from this recession.

JC

----------
I am rereading Mandelbrot's "The (mis)Behavior of Markets," and
his point that our understanding of economics is about the same
level of our understanding of medcicine/public health was in the
16th and 17 centuries, seems particularly well founded.

His observation that we continue to rely on incantations and
shamans for economic management appears to be accurate, even as
these shamans continue to consult their astrology charts,
numerology calculations, and alchemy tomes. The shamans in power
do however seem to have learned from the "great depression" the
"bleeding the patient" is not a remedy, although a substantial
and vocal minority of shamans and elders continue to press for
this.


Unka' George [George McDuffee]
-------------------------------------------
He that will not apply new remedies,
must expect new evils:
for Time is the greatest innovator: and
if Time, of course, alter things to the worse,
and wisdom and counsel shall not alter them to the better,
what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman.
Essays, "Of Innovations" (1597-1625).
.

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