Re: Boycott Foreign Products, Buy American

On Sat, 06 Jun 2009 15:18:34 -0800, John R. Carroll wrote:

Curly Surmudgeon wrote:
Economic Stimulus Payment Q & A


This is a very exciting new program that I will explain using the Q and
A format:

Q. What is an Economic Stimulus Payment? A. It is money that the
federal government will send to taxpayers.

Q. Where will the government get this money? A. From taxpayers.

Q. So the government is giving me back my own money? A. Only a smidgen.

Q. What is the purpose of this payment? A. The plan is that you will
use the money to purchase a high-definition TV set, thus stimulating
the economy.

Q. But isn't that stimulating the economy of China ? A. Shut up.


Below is some helpful advice on how to best help the US economy by
spending your stimulus check wisely:

If you spend that money at Wal-Mart, the money will go to China.

If you spend it on gasoline it will go to the Arabs.

If you purchase a computer it will go to India.

If you purchase fruit and vegetables it will go to Mexico, Honduras,
and Guatemala ..

If you buy a car, it will go to Japan.

If you purchase useless crap, it will go to Taiwan.
.
If you pay your credit cards off or buy stock, it will go to management
bonuses and they will hide it offshore.

Instead, you can keep the money in America by spending it at yard
sales, going to ball games, or spending it on prostitutes, beer or
tattoos, since those are the only American businesses still operating
in the US .
"Character is doing the right thing when nobody's looking. There are
too many people who think that the only thing that's right is to get by,
and the only thing that's wrong is to get caught."
~J.C. Watts


There isn't a single reason America ought to go on the hook to create
jobs
in China, Mexico or anywhere else. That GM must export Chinese
production to repatriate their profits is a problem for GM, not the
American taxpayer and it should not be allowed to become one at our
expense. Not in the numbers GM's latest restructuring plan indicates.
That plan says only one thing to me. GM just doesn't get it and that
means they don't deserve to survive. The amount of debtor in possession
financing needed, fifty billion dollars, will also insure that GM ends
up following a Chapter 11 proceeding with a Chapter 22 and maybe even a
33. The conditions under which $50 Bn dollars can reasonably be repaid
don't now exist and never will. A number that large can't be made to
work in any business plan that is viable in the long term.

Let's review history for a minute here. When gasoline hit $4.00 plus per
gallon, You couldn't get a Prius Hybrid without paying a 25 percent
premium and even then the wait was long.
Honda, Toyota, Hyundai, Smart, Lexus, Aptera, Tesla and a host of others
had either all electric or Hybrids vehicles for sale during this period.
The Roewe 750 Hybrid made it's debut in China at this time.

General Motors, the company that had Hybrid (Stirling/Electric) vehicles
under test as long ago as 1969

http://www.treehugger.com/files/2009/05/gm-hybrid-car-ad-1969-stirling-
engine.php
http://www.treehugger.com/files/2008/09/1969-gm-hybrid.php

and leased units (EV1) in the field in 1999 which they destroyed at the
end of the lease cycle

http://www.greencar.com/articles/20-truths-gm-ev1-electric-car.phpwas

losing more than one billion dollars per month on operations, didn't
have a Hybrid car for sale at all and was losing $2,500.00 per vehicle
on the gasoline powered models they did build that got great gas mileage
andfor which there was demand. GM did, however, make their 2008 Tahoe,
Yukon,Sierra, and Silverado, models available as a V8 Hybrids and Saturn
had their AURA "sort of hybrid" model.

For 2009, GM's Hybrid capacity doesn't exist at all because they
aren'tbuilding vehicles of any sort. Not really anyway. Ford, Honda,
Lexus, Saturn, Mercury, Aptera, Fisker, Bright and Phoenix MotorCars all
have Hybrids in production, many are plug in Hybrids, while GM has
staked its future on the Chevrolet Volt, the automotive equivalent of
vaporware, and will have to compete with things like the 2009 Nissan
Cube for market share with the vehicles they can actually produce.

Finally, GM makes, or at least made, money in every market but North
America. Their Chinese sales are both growing and profitable. Holden and
Opel are solid companies.

Given all of that, GM ought to be able to save themselves by simply
pulling out of North America after having dumped their baggage in
Federal Bankruptcy Court. Vehicle sales are down so there would be a
tough year ortwo but so what. American taxpayer's need not to go on the
hook to the tune of $50 Bn to save GM and if we do we will merely delay
GM's second and possibly third trip through the courts.

"Old" GM is now gone and for good if common sense prevails, and it's
time to release the productive capital of the 19 banks just stress
tested back to the market. This is a step that absolutely must happen
and if it doesn't we will be continuing a pattern of privatizing gains
and socializing losses. We have a mechanism to do what's required and
that mechanism, for better or worse, has been prevented from working.
Bankruptcy is the way Americans release talent and resources back to the
market for productive use, and it works. We have currently turned
capitalism upside down, and have been doing so for thelast 30 plus
years. This is especially true during Republican administrations but
isn't exclusive to one party or the other. Larry Summersa nd Bob Rubin
are both Democrats, for instance. Bill Clinton signed the act of
Congress repealing Glass-Steagal.

Congress, the Obama administration and the American public need to stop
the hand wringing and get on with it.

A non-bank, AIG, would be a very good place to move to next. Congress
should pass the necessary legislation, authorize funding with additional
new legislation and then just bankrupt AIG the way we seize a bank and
reorganize it. By failing to do so, we are encouraging the notion that
the America's laws and regulations really don't work. It's a direct
attack on the integrity of our system of government, our country, and
doesn't inspire confidence".

American's are not the ones that need a confidence transplant, it's
thebanking and financial services giants. The confidence that Citi and
the rest need to have is that when they make mistakes that threaten the
system, the American taxpayer is going to come in, seize and sell their
assets, kill the men, rape the women and then burn what's left to the
ground without batting an eye and then move on. Were the 19 "Stress
Tested" banks to believe that this might be their fate, they would
probably alter their conduct in the direction of prudent behavior. The
banking business might then go back to being the completely dull and
pedestrian enterprise it was in the 40's and 50's.

The financial services industry has been removing more than six
hundredbillion dollars per year from the real economy since the turn of
thecentury, more or less, and you can't remove that much capital
withoutconsequences. It is worth considering how financial services
became so"exciting" in the first place. "Exciting", by the way, is the
term used inthe banking and financial services industries for clerical
help that receives a $90,000.00 bonus or a junior account executive
getting a million bucks at the end of the year.What's not to be excited
about?

We started down this road not in August of 2008, but in March of 1982,
and what seemed clever at the time is now ingrained habit. The
consequences of failure have become systemic.

In 1980/81, Savings and Loans were collapsing.

The initial S&L crisis was dealt with using tax policy and revisions to
regulatory legislation. The advantage of formulating or modifying tax
laws over having the Federal government just write a check is that
nobody understands tax law. The benefits can be substantial but they are
indirect. It's easy to pass a tax cut and very hard to put money
directly into someone's hands without voters noticing. Long term debt,
mortgages returning six percent, was being supported by short term
borrowings a rates well above six percent. Mortgages didn't have to
default in order to be toxic assets, they were toxic by definition.
Usury laws prevented interest rates on short term debt from exceeding
certain levels -about 18 percent - but these were State, not Federal,
laws. The Federal Reserve raised interest rates dramatically under Paul
Volker, a Reagan appointee, to get inflation under control and the cost
of money skyrocketed. Prime plus one meant 21 percent interest in 1982.
You couldn't get a mortgage at all really, and the economy suffered with
high unemployment as a result.

Inflation, however, was tamed.

Garn-St. Germaine, meant to help S&L's compete, was a key legislative
alteration in the financial landscape. S&L's entered all sorts of areas
with products they hadn't been able to offer and interest rate caps were
removed.The complete "cure" under the Reagan administration was to allow
S&L's to sell off mortgages with low returns, sustain the losses, and
then apply those losses directly against taxes paid to the Federal
government over the preceding ten years. Initially, there was neither a
mechanism to accomplish such sales or a meansto dispose of the offloaded
mortgages. This defect was corrected by the creation of mortgage backed
securities in the form of bonds. The sale of these instruments to
Federally chartered banks was illegal initially and had been for 50
years but that was rectified in short order. Fannie and Freddie promptly
blessed or "Franked" the things and we had the first example of the
moral hazards involved with the GSE model.

The S&L industry didn't just get well, they made a lot of profit on
these tax abetted transactions.S&L's were chock full of money in an
environment where demand for their product, mortgages, was low. Before
anyone could say "Boo", entire mortgage portfolios had been sold and the
IRS/Treasury Department had filled the coffers with yesterdays tax
payments.. This is where the money came to fund the explosive growth of
the next bubble andbust - High Yield Bonds.That "boom" busted out and
the taxpayers bailed out the S&L's with actual cash at that point
through the FSLIC and REITC. The cost of failure hadn't been either
avoided or even shifted. It had grown significantly, however,and the
American taxpayer shouldered a burden of $200 Bn that was originallyl
ess than twenty five.

This cycle has repeated several times since. The financial services
sector sucks one vein dry only to move on the next, and with a larger
bore needle for each subsequent vein, always with the support of bought
and paid for politicians ( on both sides of the aisle ) and with the
full knowledge that the Republican Party had adopted the pattern as one
of its formal, underlying policies. If only the markets were truly
free, so went the mantra, and beginning in 1999, the markets were so
freed, or at least the major impediments removed. The repeal of
Glass-Steagal, a seminal event, went almost unnoticed. By the end of the
first Bush term, banking rules and regulations had been rewritten to
allow pensions to invest directly in hedge funds, hedge funds to own
banks, investment banks to own chartered banks,hedge funds and so forth.
This was something that had been completely illegal - for the obvious
reason.

Congress, in it's infinite wisdom, had passed the Graham amendment to
the Commodity Futures Trading Act with language that specifically
precluded any government regulatory agency from either regulating, in
anyway, or even asking about derivatives. It was literally against the
law, as an example, for the SEC to ask AIG what was going on inside
their financial products subsidiary. Furthermore, to add a little
gasoline to the fire, Henry Paulson restated the regulatory cap on
leverage as one of his first acts as Secretary of the Treasury. What had
previously been capped at $1 dollar in cash for $10 in borrowed money
was officially raised to $1 dollar in cash or assets to $35 dollars in
borrowed money and these ratios were just guidance. Some people went as
high as 60:1, intra quarter, without having a regulator complain. The
rationale, once again, was that markets would self correct if things got
out of hand or, stated another way, *** out - we know what we are
doing.

This is the very definition of a license to steal. The question being
asked in the industry was "is this actually legal?" not "is this a good
idea andsurvivable?".
The result has been predictable. America's business schools,
Harvard,Wharton, and the like, admit selectively, and they specifically
select in favor of sociopaths. It shouldn't come as a surprise to anyone
when the graduates, upon rising tothe pinnacle of their respective
professions, create havoc in their wake, but that indeed seems to be the
case.
I'm shocked that anyone would be shocked. Repeating a process and
expecting alternative results on a regular basisisn't a sign of a higher
power or greater intellect. It also doesn't mean anyone knows what they
are doing at all. It means they are literally insane, even if they do
happen to know what they are doing.

The single remaining bastion in 2004 was The Social Security Trust
fund.That money would have provided a fresh vein - the additional fuel
to keep what is really a giant Ponzi scheme, rolling. Unfortunately for
the Bush administration and Wall Street, Americans were beginning to
understand that they had been repeatedly played for fools. Thank the
deity of your choice that the administration of George W. Bush had
incompetence and deceit as it's hallmarks. The Bush administration's
plan to privatize SS was met with what can only be called a resounding
THUD, largely because the President of theUnited States wasn't trusted
to tell anything resembling the truth or believed capable of exercising
good judgment. A fortunate happenstance, on the one hand, and a terrible
condemnation on the other.

As a practical matter, this isn't even a political judgment, it's just
the obvious truth. In the event, America dodged a bullet.

At this point, American's needn't worry that the guys running the show
areWall Street insiders colluding with their peers. They are not. They
are, however, the product of the culture of bail outs that has grown
upover 30 years or so. Given that the only tool they know and can use is
a hammer, every problem looks like a nail. Bernanke, Paulson, Geithner
and Kashkari run around forcefully making the case that there was
nothing else to do when the real truth is that there wasn't anything
else that THEY knew how to do. Their response has been entirely
Pavlovian.

The peasant class has also responded in kind, repeating and voting a
mantra that they don't understand and is actually contrary to their own
best interests.

The failure of the domestic automobile industry was said to be due to
the costs of union labor and pension benefit overhead. What this
analysis overlooks is the $2,500.00 per vehicle disadvantage GM had
which would only have dropped to $1,000.00 or so if the labor and cost
differential were removed completely. In other words, they still
wouldn't have made money on sales of the vehicles people wanted to buy
in the face of $4.50 per gallon gasoline.I n fact, the losses would have
continued at a grand per vehicle and the costs that they had divested
would just have been shifted to the State and Federal governments. The
other consequence is that the American standard ofliving would have
taken another hit. Taken to it's logical conclusion, the last thing GM
or anyone else ought to be cheering is labor cost reductions to the
point of profitability. You end up looking just like Chinese then, and
everyone knows Chinese, in China, can't afford cars at all. This is
where Ronald Reagan's firing of the striking Air Traffic Controller's
hasl ead us as an unintended consequence.

In order to understand what's happened in the current context, you have
to look at guys like Dave Li, whom I have referred to a couple of times
aspatient zero. Dave is a smart guy but hardly an intellectual. Educated
at MIT, he's a mathematician and it's a shame he went to work on Wall
Street instead of Mound Road but you know, when you offer a guy a choice
between Wall Street "Shooting Star" and working for the auto industry
and having your friends ask you "What went wrong?" at class reunions,
you go with the money and prestige. Dave did, and you can hardly fault
his choice.

Mathematically modeling the financial universe is as old as mankind. So
is fortune telling. Both are undertaken by amateurs with an interest or
reason and professional mathematicians, like David Li, or economists
like Paul Krugman. The goal, at least in his case, is to precisely
estimate risk.Doing so is especially important if what you want to do is
sell unregulated risk that isn't backed up with a reserve. You
absolutely must properly value default products correctly because you
only really get one bite at the apple if the risk market fails.

The model Dave created went further even, than that. It supported
theproposition that you could not only resolve risk down to a single
value, butthat you could use the model to test pools of risk and
formulate securitiesfor which risk had been driven to zero. It's the
greatest thing if you cando this because you get to charge by the
individual risk product but neverhave to PAY anything. It's not "like"
free money, it IS free money. I saw the Li model while it was being
written because I was working on something similar but using different
topology . I only had a couple of comments and I pointed out that
thinking that you could express something complex as asingle value
seemed unlikely and that any risk analysis that excluded a behavioral
component was just wrong. This was the reason I was using a fractal
based model for what I was doing. I even showed my work, the underlying
studies and data and, as I later learned, that was the actual reasona
nyone was interested in what I was doing - Fractal geometric economic
modeling. Some guys tinker with old cars.

In the end, they finished their work and I gave up on mine. I thought at
the time that my model didn't work and I didn't know how to get it
fixed. What I know now is that it was working, it just didn't produce
the result I was interested in seeing. My model kept crashing my virtual
economy.As it turns out, the real world behaved in a similar manner and
I, being an amateur, just didn't draw the appropriate conclusion.

The David Li model, on the other hand, did seem to work and was rolled
out as the "Gaussian Cupola". That model, its clones and derivatives,
was what gave the government, as well as the financial "Masters of the
Universe", the confidence to remove the barriers previously in place
that barred certain asset pools and cash flows from being invested
inappropriately. Some of the worlds best economists looked the Gaussian
Cupola and laughed. The mathematics, however, were sound and could be
demonstrated. That was the road show, or sales pitch, and it was
persuasive enough to steam roll the economists misgivings. Mathatematics
is a science, economics is guessing. The math Geeks ruled theday,
largely because they had produced equations supporting something that
was highly desired, revenue streams which produced income but not value.

Credit Default Swaps are an excellent tool and a way needs to be found
to continue their use.
In their simplest form, CDS's are insurance against loss. When a home
owner takes out a mortgage, they and obtain privatemortgage insurance.
Should the owner expire, the mortgage is paid off. Lenders take that
mortgage and, along with others, put a "wrapper" on them and sell these
securities as bonds to private and institutional investors. Those
investors protect themselves from loss by purchasing a CDS which pays
off in the event the bond defaults. One difference between your private
mortgage insurance policy and a CDS is that when you contract for
private mortgage insurance, the insurer has to place actual money in
reserve to cover a possible loss. A CDS has no such requirement and is
just a promise to pay. That is a poor idea and we know from history that
the result is failure - we've been through this more than once. That is
why we regulate insurance companies.

This is a real good place to remember again that a Republican House,
Senate,and President passed/signed a law specifically forbidding
regulation or oversight of products like Credit Default Swaps. They
aren't called insurance, even though they really are, and it's against
the law to regulate them, by an Act of Congress no less.

Even these transgressions would have been pretty straightforward to
address. What came next isn't and won't be.

A CDS that is on the other side of a mortgage is tolerable. You have
amortgage of $X and a CDS with a face value of $X as insurance. The
amounts are at least known. Using the Gaussian Cupola, however, people
started creating and selling unlimited credit default swaps on the same
debt instruments. In some cases, $X in face value for a mortgage backed
bond generated $1,000X dollars in CDS notional value and groups of CDS's
were bundled together with other things to close the loop on the
Gaussian Cupola.The resultant products are called CDO's and SIV's, or
Collateralized Debt Obligations and Securitized Investment Vehicles.
Catchy names, both.

This only had value because issuers created a market and began to
actively trade these thingswithout either regulation or even
suprevision. The system was completely opaque.
Because you run out of counter trade when there is more CDS involved
that bond value, these things (CDO's andCDS's), became purely
speculative. They were just gambling in the simplestf orm. A billion
dollar GM bond might end up supporting 100 billion dollars in
"insurance" and none of that "insurance" was backed up with even a
little bit of real money the way actual insurance would have been.

That doesn't mean the owners won't expect to be paid if GM defaults.
They will, and a one billion dollar default could trigger one hundred
billion dollars in payment obligations if there is enough money around,
and that is the rub.There isn't any requirement for money to, in fact,
be anywhere and it just isn't. What you end up with instead is a lot of
unpaid "insurance" claims.

The economy of the United States generates $13 trillion dollars per year
in value. We call this our Gross Domestic Product. Reasonable estimates
put the notional value of existing CDS's, CDO's, and SIV's at $62
Trillion dollarso n the low side, and $255 trillion dollars on the high.
Remember, there isn't a single thin dime backing them up. This is the
real reason that the judge in the Chrysler bankruptcy forced the
minority bond holders to take the settlement they were offered. Their
billion dollars in Chrysler bonds could very well be supporting a
trillion dollars in insurance that has no reserve to cover payment.
Those "insurance policies" didn't have to pay because the bond holders
cut a deal and the bonds, therefore, didn't actually default. That's
pretty slick and was only necessary because David Li's model said risk
could be driven to zero if you were smart enough. People bought
hugeamounts of CDS's on Chrysler bonds - HOPING that Chrysler would
default.

Increasing reserves and stress testing by Daddy Warbucks is really just
tinkering around the edges. Financial institutions can't bring
themselves toface their situation head on and so far, they haven't had
to. The American economy can't work without the secondary credit
markets. Two thirds, approximately, of lending is supported there. That
market, and the banks that hold linked derivative products won't work
again until all of the flaky, zero risk products are isolated and the
wealth destruction they represent monetized.

Period.

Everything undertaken so far has been an effort to keep the patient
alive long enough to figure out how to do the surgery. Everyone knows
what to cut off but since this limb can't be seen, it isn't certain how
big a piece we'd be amputating and it could be ten times the size of the
remaining body. Everyone is wondering how to dispose of a huge piece of
biohazardous wastethat might be the size of New York.

Seizing the banks would make the entire reality impossible to avoid. You
couldn't just show part of your hand and ask for help with a specific
problem and in the end, Americans are going to be on the hook for the
losses anyway, it's unavoidable, so we ought just to get on with it.
It's a bill our kids will have to pay, like it or not. That will be
easier for them todo if we leave them a vibrant and growing economy to
do it with and the sooner America sets foot on that path, the better.

You will know something is going to happen when Bernanke, Geithner and
our President start to use the phrase "Hold to Maturity", a length of
time as long as forty years in some cases. That is what we are going to
have to do because Li was wrong, the risk coefficient can be preordained
but peoples perceptions ad how they act on them can't and that, in the
end, is what counts.

The Treasury Department is beginning to put forth a program to oversee
and regulate derivative products and the derivatives market. That is
necessary.

What I'll be interested in learning, and what is important, is how they
address the tremendous quantity of these things already in existence
through the current, unregulated system. Even a modest reserve
requirement might break the financial system. Nobody knows, which is
exactly the point and brings the discussion full circle.

The Untied States is mired in the deepest cyclical contraction since
atleast World War II, and arguably the depression. Falling home prices
led usinto this crisis, and are still falling. The financial crisis in
2008 hasbecome the economic crisis in 2009, as more than 2 million jobs
were lost injust the first quarter, with another 3 to 5 million likely
before year end.With the unemployment rate headed over 10%, and maybe up
to 12% next year, the default rate on every type of consumer credit -
prime mortgages, Alt-Amortgages, Option Arm mortgages, sub-prime
mortgages, homeequity lines, credit cards, auto loans, student loans -
is headed muchhigher. Commercial real estate values are plunging, and
corporate default rates are set to soar. Although every bank has
'passed' the government'sstress test, some banks will fail the real
world stress test, and need billions more in capital. Treasury has now
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 mid1990'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% in2007. 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, took vacations,
and basically 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 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 ratesa re 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. 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. 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.

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.

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 that 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'smodel 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 another5.1 million lost jobs, and an 11% drop in industrial
production.

In that scenario, the unemployment rate climbs to near 12.5%, the
underemploymentrate 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
wasa pleasant surprise. Citigroup said it made $1.6 billion. One of the
waysC itigroup 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 anadditional $413 million in 'profit' on
impaired assets. Without these one-time adjustments, Citi's $1.6 billion
in first quarter profit becomes a $2.8 billion loss. 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.

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 $296.3billion, 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
exampleof how the availability of credit to the economy is evaporating,
despite all the Fed's efforts.
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, which 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 overhang of excess
capacity. If the output gap grows from the current 7% to10% 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 more than four years to
replacea ll 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 harderf or 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.

Nice, did you write that? I can take issue with some details but overall
I agree with most. Especially the statement that we've passed the point
of no-return.

--
Regards, Curly
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Now it's time for War Crime Trials at the Hague for Bush/Cheney
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