NYT editorial: “whistling past the deficit”

Nov 16, 2009 19:35 UTC

This is the Times editorial page on the NY State deficit. Note how fiscally conservative they are when discussing this issue.

New York’s governor could not have spoken more plainly than he did last week before a joint session of the State Legislature. “Quite frankly, we are running out of money,” he said, as he asked members to help cut the budget. The plea has so far gone unanswered, even though, with each week, the fiscal problems get worse….

Gov. David Paterson has had a few awkward moments recently, but the fact that he’s taking a hard stand on balancing the state’s budget shows real leadership. If he sticks to his guns, he will have earned my vote next year.

Unfortunately, the Democrats running the State Senate seem to think things are not as bad as the governor makes out, and have advanced a plan that is politically palatable but also ludicrous. They would drain rainy-day funds and any other untapped pool of savings to pay the bills until March of next year.

That’s like cleaning out your 401(k) to pay the rent. And it leaves open the question of how the state would really manage once the savings were spent. Senators also want to refinance and extend loans on the tobacco settlement money, a scheme that does two things well — it helps the bond merchants of Wall Street and it forces future taxpayers to pay for today’s expenses.

It is time for the Legislature to face facts. New York spends twice the national average on Medicaid at $2,283 per person. That is the highest average in the country, with Rhode Island a distant second at $1,659. Mr. Paterson wants to scale back the health care budget by $471 million. That seems the least the state should do. Education is even more costly. The national average per student is $9,138; New York spends $14,884. Mr. Paterson’s plan to cut education costs by about 3 percent, or $686 million, is clearly in line with what’s necessary.

Budget issues have to be dealt with decisively. The sooner the better. As the foregoing paragraph emphasizes, the problem here in NY isn’t too-low taxes, it’s too-high spending.

This is equally true at the national level. Many have convinced themselves that the federal government’s ability to borrow money in a currency that it can print removes budget “constraints.” Mechanically, this may be true. But if we follow their prescription — borrowing and printing so long as there’s “an output gap” — latent inflation stored up in dollar-denominated assets overseas could go kinetic rather quickly.


Now I’m really, really scared. When NEW YORK thinks you can’t just pluck all the money you want from the money tree, things must be getting tough.

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Morning links 11-16

Nov 16, 2009 15:27 UTC

Taxpayers on hook as some bailed out firms prove frail (Tse, WaPo) TARP investments in CIT and United Commercial bank were recently wiped out (= $2.6 billion). AIG and GM have received tens of billions they’ll never be able to pay back. Taxpayers may have purchased a bit of breathing room with TARP, but busted balance sheets will eventually have to be recapitalized anyway, as shareholders are wiped out while certain creditors eat their share of losses.

Bankruptcy rise slows with thaw in lending (Spector/Haywood, WSJ) Great article. The writers emphasize how the supposed “thaw” in lending markets is largely a head fake, that junky companies are being allowed to paper over their problems because the Fed is forcing investors to chase risk.

Unemployment rates by county (americanobserver, ht MW) Seeing maps like this, one understands why Krugman and other liberals are calling for another stimulus jobs bill. The trouble is, the reason we have so much unemployment today is because of all the debt we’re trying to work off from yesterday. Adding more debt doesn’t solve this problem.

After a summer of mixed messages, Roubini is back! (Wiesenthal, BusinessInsider)

GM says it will start paying back taxpayers (Isidore, CNN Money) Taxpayers shouldn’t expect to get much back. The $1 billion payment GM says it will make in December would be about 2% of what we put in…

The Great Wallop (Ferguson/Schularick, NYT) Talking Chimerica.

Chinese bank regulator says low rates inflating asset bubble (Zengerle/Choonsik, Reuters) The Fed maintains there’s no pressure on inflation. Trouble is, they don’t measure inflation the right way. They’re looking at things like the cost of goods and labor in the U.S. They’re ignoring the inflated price of assets, for instance junk debt (see again second link). Greenspan also ignored asset bubbles, choosing instead to focus on the unemployment rate and goods prices. How well did that work out?

DIY glasses for the world’s poor? (Addley, Guardian)

Crocodile attacked and killed by angry hippos (Telegraph) And see below…




Seriously? The photog shopped all the pictures? That’s a pretty fine job of fakery if so.

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Weekend links 11-14

Nov 14, 2009 20:30 UTC

Lawyer crashes after life in fast lane (Koppel/Esterl, WSJ) Big Florida ponzi.

Buffett admits: Burlington not cheap (Frye, Bloomberg) Buffett was so eager to deploy his cash that he was willing to overpay for Burlington. What I think may be going on in his head: in a world likely to experience many more bubbles and busts, lots of paper wealth will be wiped out. Not a bad idea to turn cash into tangible assets.

After spending binge, administration says it will focus on deficits (Allen/Vandehei, Politico) Not sure if I believe this. The Senate is already planning a third stimulus dressed up as a “jobs” bill.

Treasury confident Congress will increase debt ceiling (Christie, Bloomberg)

Deeds, not words, on the US dollar (David Merkel) Well said.

The last of the Bluefin Tuna? (Estabrook, Atlantic)

VIDEO: Balloon boy parents plead guilty (Reuters)

How pumpkin pie is really made (imgur)

For geometry lovers…. (best after the 5:00 mark)


the tuna quota dropped from 22,000 metric tons this year to 13,500 next year. a bit more than what NOAA wanted (8,000).

http://www.noaanews.noaa.gov/stories2009  /20091116_iccat.html

Bank failure Friday

Nov 14, 2009 00:46 UTC

IBERIABANK is busy tonight, acquiring $3.1 billion of failed bank assets. The bank also bought nearly $600m of assets from the estate of CapitalSouth Bank of Alabama back in August.

After these transactions, IBERIABANK will have increased its balance sheet nearly 67% since June.

It’s worth nothing that IBERIA received $90m worth of TARP money, though it exited the program in May.

There are cases in the past when other banks have taken multiple failures, expanding significantly, only to fail themselves later on. One example I recall (though am having trouble Googling the evidence) is Talman Federal in IL.

Is IBERIA too weak to be be growing so quickly? Perhaps not. The bank’s Texas ratio is around 24%, well below the dangerous 100% threshold. If readers have thoughts, please chime in with a comment.


  • Failed bank: Century Bank, Sarasota FL
  • Acquiring bank: IBERIABANK, Lafayette LA
  • Vitals: at 10/31, assets of $728m, deposits of $631m
  • DIF damage: $344m


  • Failed bank: Orion Bank, Naples FL
  • Acquiring bank: IBERIABANK, Lafayette LA
  • Vitals: at 10/31, assets of $2.7b, deposits of $2.1b
  • DIF damage: $615m


  • Failed bank: Pacific Coast National Bank, San Clemente CA
  • Acquiring bank: Sunwest Bank, Tustin CA
  • Vitals: at 8/31, assets of $134.4m, deposits of $130.9
  • DIF damage: $27.4m

2020 is a long way to go, and farbtoo long to wait for any nation. It is simply a date I read some where… Probably on the back of some worthless piece of paper, or something like that.

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Morning Links, Friday the 13th

Nov 13, 2009 16:23 UTC

3D recreation of Sully’s flight (exosphere3D) Everything you ever wanted to know about the crash in the Hudson. Multiple 3D recreations. Different audio streams.

Fed may cause next globabl crisis says Hong Kong leader (Anstey/Dwyer, Bloomberg) Interesting theory: Japan’s low interest rates through the ’90s inflated the tiger bubble that ended in the 1997 Asian contagion. Now the Fed’s ZIRP is inflating new bubbles throughout Asia. The explosion of bank credit in China isn’t helping…

Did the nation overdose on debt (Pragmatic Capitalist) An interesting and detailed paper from Wells Fargo Securities. Click “full screen” and then the printer icon to print out a copy.

Treasurys mixed after 30-year bond sale (Yousuf, CNN Money) Yesterday’s auction didn’t go well. This isn’t yet a trend, but if it becomes one, my bet is it will add to pressure on the dollar (down) and interest rates (up).

Hedge funds can’t mess up worse than Bob Rubin (Reilly, Bloomberg) The Dodd bill would allow shareholders to nominate directors.

No more too big to fail (Jamie Dimon, WaPo) This op-ed, by the CEO of JP Morgan Chase, is disingenuous in the extreme. In his second sentence he says that his firm should be allowed to fail if some unforeseen event pushes them over the edge. Of course they would have failed last year had the government not stepped in. Still, he goes on to argue that not only do we “need” large financial firms — to support multilateral trade — they should be allowed to grow even larger. Bill Black speaks of executives using a corporate entity as a weapon. Dimon knows his bank’s sheer size makes it unthinkable that the government would ever let it fail. He speaks piously of allowing bank failure, but will make sure his bank remains too large, powerful and interconnected for that to be considered an option.

Still haven’t put all your money in gold? You will when you see this chart! (imgur, Reddit) Clever response to my chart of the day

Trade gap widens by an unexpectedly large amount (Palmer, Reuters) The falling dollar seems no match for Fed-induced demand.

New rules would restrict overdraft fees on debit cards (Labaton, NYT)

Did Texas kill an innocent man? (Economist)

Trippy Mandelbrot (wikipedia)

French-Irish diplomacy (imgur) I have no idea if this is authentic. But it’s pretty funny. (Click on the image to enlarge)

PSA: Just in case you’re held hostage at gunpoint….


“His sentence was subsequently commuted to life in prison WITH THE POSSIBILITY of parole”

You must have misread the article. The article and the debate is over ‘life WITHOUT parole’ as a substitute for the death penalty. Life without parole is the only option that saves both Melissa Northup’s life and Cameron Todd Willingham’s life.

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Defining the “extended period”

Nov 13, 2009 15:51 UTC

Another tidbit from Rosenberg, who offers guidance on what the Fed means when it says it will keep rates low for an “extended period”…


The reason — there is a wave of mortgage refinancings coming in the housing market for one, and not only that, but in the commercial space, there are $2.7 trillion of debt coming due through 2011 and another $1.5 trillion of leveraged loans….In other words, the default rate is going to rise even further and the Fed tightening policy would only aggravate that situation. In other words, the Fed is simply immobile for at least the next two years.

I’ve argued in this space many times that the Fed is trapped. Our monetary system, which is fueled by credit expansion, simply doesn’t work in reverse. To avoid deflation, credit must always be expanding in the aggregate. If the private sector won’t borrow, the public sector must….and vice versa. If they de-lever in tandem, we get deflation.

We’re told to be panicked by the prospect of deflation and yet the solution we’ve been given — unprecedented public credit expansion + inflation of new asset bubble — leaves us worse off than when we started.

Alan Greenspan’s 1% interest rates inflated a disastrous credit bubble. We think 0% rates and quantitative easing will lead to a different result?


Success brings profit; failure brings loss. If that’s a fundamental tenant then it has been profoundly violated.

Error #1 – Excessive credit expansion has brought an economic explosion that resulted in huge failures. America economic managers have deliberately allowed this to happen after 2000.
Error #2 – Much of financial failures were covered up, by transferring them to the government books. This was the deliberate act of Hank Paulson and Congress.
Error #3 – With the government books, which are already loaded in giant debt, bloated in further debt, it now tries to hide it by setting basic interest rate to zero. This is a deliberate Fed policy of Bernanke.

#1-#3 are nothing more than bailouts and cover-ups. The grand managers who were responsible for explosions tried to stabilize the explosion. This game of hiding has now reached a stage of no-more-buck-passing. Interest rate must be maintained at zero because any attempt to raise it will blow up the government and the economy further. This is the Japan Black Hole. It can last for decades – the Lost Decades.

So there you have it. America squandered the benefits of USSR collapse, did not learn from Japan post-bubble mistakes, and destroyed its own industrial base for the quick money. It refused to accept the same painful measures it, under the arm of the IMF, dosed out to Asian countries who blew up in the 1998 Asia Economic Crisis.

What arrogance, what disregard for sound economics, what irresponsibility to current and future generations! What betrayal to the millions who hold trillions of America bonds. If this is capitalism, America version, then no country in their right mind will want to adopt it. America richly deserves the gift of the economic black hole.

Posted by The Real Deal | Report as abusive

When banks use capital made of sand

Nov 12, 2009 19:04 UTC

Citigroup’s capital position appeared much improved when the bank reported third-quarter earnings, but a look beneath the surface shows that much of its capital is of questionable value.

According to its recent 10-Q, Citi had $38 billion of deferred tax assets as of Sept. 30, more than a third of the bank’s tangible common equity of $107 billion.

Backing that out, Citi’s TCE ratio — the inverse of leverage — is reduced from 5.7 percent to 3.7 percent. And when Citi adopts new accounting rules for off-balance-sheet assets, the ratio will be reduced further to 2.8 percent.

Bank regulators should be concerned. To fortify their balance sheets so they can withstand systemic events without government support, banks need genuine capital available to absorb losses.

Deferred tax assets, or DTAs, don’t fit that bill. Imagine an individual in bankruptcy court asking to pay off his credit card debt with tax-loss carryforwards.

So long as Citi generates profit, its DTAs have value. But earnings could evaporate quickly if the Fed decides it has to prick the new asset price bubble being inflated by near-zero rates, or if an unanticipated systemic event puts stress on Citi’s balance sheet.

There may be another problem with Citi’s ability to realize the value of its DTAs. According to Barclays analyst Jason Goldberg, future transactions in the company’s stock could be considered an “ownership change” that would require some DTAs to be written off. That would be a direct hit to tangible common equity.

Citi’s pile of DTAs may be the largest, both absolutely and as a percentage of TCE, but JPMorgan Chase, Bank of America and Wells Fargo each have their own.

Some regulators are taking action. As Robert Barba reported in the American Banker, the California Department of Financial Institutions last week took the unusual step of instructing Hanmi Financial Corp. to raise common equity as part of an enforcement action.

It’s a promising portent. Bank regulators have a lot of power to force Citi and the other big banks to raise real capital. They should use it while markets are receptive.


Rolfe, I have had a bad American weekend. The tides tend to wash sand away. The US President seems to have announced a dramatic revival in US manufacturing and exports. Presumably that excludes GM foods and IT and Armament and Surfboards. Do you know what will be really nice:- if he would visit the Southern Hemisphere countries for a cup of tea with no strings attached. Even better, if he does a road show in his own country and see the distress that has been caused. The World is tired of the US rhetoric, and quite frankly, the US is destabilizing the World financial systems by trying to baby sit everyone.

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Lunchtime Links 11-12

Nov 12, 2009 18:55 UTC

Wall Street faces “live ammo” as Congress aims to unravel banks (Vekshin/Schmidt, Bloomberg) Yves complains that this isn’t enough, that size isn’t the only problem. She’s right, but I think these are good discussions to have. We’ll have to wait to see what’s in theKanjorski amendment, but I like where his head’s at. To Smith’s point, we desperately need to SIMPLIFY banks, not just shrink them. Ironically, today is the 10 year anniversary of theGramm-Leach-Bliley Act, which repealed the last vestiges of Glass-Steagall. Besides GLB, we also need to dump the CFMA….

Have we reached peak gold? (Evans Pritchard, ht frog) Exploration budgets are up, but results have been poor. On the flip side, William Buiter is not a fan of gold. He makes some good points, though Jesse disagrees.

FDIC helps securitization market (Shrivastava, Dow Jones) Interesting,

The dollar is the most crowded long in history (Johnson, Alphaville) A very good point. I like to think of all the paper we’ve shipped overseas as “latent” inflation.

FHA’s cash reserves down sharply (Streitfeld, NYT) It’s capital reserves have dwindled to 0.53% from 3% a year ago. Given the high quantity and poor quality of loans FHA has been making of late — little down, low doc — it’s a good bet they’ll need a bailout.

The looming problem of corporate debt (Marketplace, ht Clusterstock)

Unsolicited principal reduction offer from B of A (CalculatedRisk)

Miracle whip vs. Colbert (imgur) Click to enlarge.

Awesome wheelbarrow race move (Youtube)

Carrie Prejean walks off Larry King (Youtube) Why can’t Larry be this tough with all his guests?

Dog greets owner coming back from war


Odyssey, XVII

There lay the hound Argos, full of vermin; yet even now, when he marked Odysseus standing near, he wagged his tail and dropped both his ears, but nearer to his master he had no longer strength to move. Then Odysseus looked aside and wiped away a tear….

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TARP may pay down debt

Nov 12, 2009 14:31 UTC

From Deborah Solomon and Jonathan Weisman at WSJ:

The administration wants to keep some of the unspent [TARP] funds available for emergencies, but is considering setting aside a chunk for debt reduction, according to people familiar with the matter. It is also expected to lower the projected long-term cost of the program — the amount it expects to lose — to as little as $200 billion from $341 billion estimated in August.

The idea is still a matter of debate within the administration and it is unclear how much impact it would have on the nation’s mounting deficit levels. Still, the potential move illustrates how the Obama administration is trying to find any way it can to bring down the deficit, which is turning into a political as well as an economic liability.

Borrowing money over here to pay down debt over there doesn’t sound to me like real “debt reduction.” Sounds more like giving back an appropriation to avoid debt expansion.

It would better to retire the program entirely while letting outstanding loans run off.

But the administration does seem to be getting a bit more serious about making cuts:

The Office of Management and Budget has asked all cabinet agencies, except defense and veterans affairs, to prepare two budget proposals for fiscal 2011, which begins Oct 1, 2010. One would freeze spending at current levels. The other would cut spending by 5%.

OMB is also reviewing a host of tax changes. The President’s Economic Recovery Advisory Board will submit tax-policy options by Dec. 5, including simplifying the tax code and revamping the corporate tax code.

White House Chief of Staff Rahm Emanuel is pressing for substantial spending cuts to go with any tax increases to try to avoid the “tax and spend” label that has bedeviled Democrats, according to administration and congressional officials.

Forget the freeze Rahm. Go for the 5% cut.


We borrow money for all federal spending.

The right would argue that buying military programs on credit is a symbol of our strength and might. No taxes are good taxes, and we can borrow ad infinitum to pay for things, and future generations will pay for them.

The left would argue that using that credit to buy a social program is a better use of credit and we can keep creating new social programs and future generations will pay for them.

The far right, and the far left believe we can continue to make minimum monthly payments and we’ll be ok whether we buy guns or social programs.

Someone in the middle might say, isn’t real economic might and strength the ability to pay for it yourself upfront without resorting to expensive and costly credit that future generations have to pay for?

Someone in the middle might say, hmmm…I like living in a country that can protect itself and that has a strong military, and I like social programs that help others, and that increase the quality of life for all of us, we need both.

This idea that you can simply keep cutting taxes gets you in the position of not being able to pay for the things our society needs.

It’s a simple equation, keep lowering taxes, and we have less money to pay for things our society needs for the purchases of the left or the right.

If we have to rely on credit to get the things we need, somebody in the future has to pay for it.

Eventually, they are so busy paying off someone else’s debts that they don’t have the money for the things people on the left or the right of their generation need to provide a good standard of living.

Then, they have to make hard choices about what they going to buy on limited credit, one or the other. That is where we are now… Arguing about what we are going to use our credit cards for, rather than paying for everything we actually need to have a good standard of living.

America is now simply printing money to pay even the minimum payments and has limited credit to pay for the necessities of living in a great society.

Someone in the middle might think “You can’t keep lowering taxes and having all these spending programs on both sides of the isle, because then you aren’t taking in enough revenue to pay your debts without resorting to long term credit.

Could it possibly be that we should fix our tax system so we can pay for things we need now, rather than buying things we can’t afford on expensive long term credit.

Could it possibly be that the ideologies of the far left and the far right are false arguments that only empower the politicians on both sides of the isle to continue spending money we don’t have?

Someone in the middle might think: Face the problem. We aren’t taking in enough revenue at the federal level to pay our bills.

Fix the tax structure and make it fair. Remove the lobbyist’s power over politicians by removing the politicians’ ability to create tax loopholes for corporations and individuals. Set a flat tax with no loopholes high enough so that we could pay off our national debt in a few years, and then because we know what we are taking in, we know what we can afford to spend as a country on programs for the left and the right.

Then when the debt is paid off, we would have positive revenues coming into the treasury which we could then use to rebuild our military and our social programs, and create jobs, and increase our standard of living.

If America keeps buying things on long term credit and continues to pay the minimum payments by simply printing more money like we are doing now, eventually, we won’t be able to pay the minimum payments for the programs of the left or the right, and our standard of living and economic might and power will be truly gone,
unfortunately, so will our ability to do anything about it.

The America I am so proud of consists of both the left, the right, and everyone in between, and standing together, we can address the problems of our country, and we can continue to believe in things like “Freedom, with Liberty and Justice for All,” rather than just the far left, or the far right.

Posted by Michael Shircliff | Report as abusive

Palin speech a syntactical comedy of errors

Nov 11, 2009 19:42 UTC

And now for something completely different. Jonathan Martin covered a speech by Sarah Palin for Politico last week. Comedy gold.

On healthcare:

“What may they feel about an elderly person who doesn’t have a whole lot of productive years left?….In order to save government money, government health care has to be rationed… [so] than this elderly person that perhaps could be seen as costing taxpayers to pay for a non-productive life? Do you think our elderly will be first in line for limited health care? And what about the child who perhaps isn’t deemed normal or perfect per someone’s subjective measure of their use or questionable purpose in the eyes of a panel of bureaucrats making our health care decisions for us,”

Also this:

“It is so bogus that society is sending a message right now and has been for probably the last 40 years that a woman isn’t strong enough or smart enough to be able to pursue an education, a career and her rights and still let her baby live.”

And the pièce de résistance:

Noting that there had been a lot of “change” of late, Palin recalled a recent conversation with a friend about how the phrase “In God We Trust” had been moved to the edge of the new coins.

“Who calls a shot like that?” she demanded. “Who makes a decision like that?”

She added: “It’s a disturbing trend.”

Unsaid but implied was that the new Democratic White House was behind such a move to secularize the nation’s currency.

But the new coins – concerns over which apparently stemmed from an email chain letter widely circulated among conservatives – were commissioned by the Republican-led Congress in 2005 and approved by President Bush.


The expansion of global companies in the areas of countries after the collapse of the communist years 1990-2002 set at a maximum rate.

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Chart of the Day: The Dow priced in gold

Nov 11, 2009 16:07 UTC

Gold’s recent behavior strikes me as similar to oil circa July ’08. With it leaping to another new high today — $1,119 — I thought I’d offer the following chart for reader comments:

(Click chart to enlarge in new window)


Thanks to Nick Laird of Sharelynx for the data.


The US gov. continues to manipulate the gold price through lending some of their 8,000 tons to the Majors part. Morgan.
Kind of the reverse of the contango run by Barrick who just absorbed a chunk of write-off on their books and have much more to go.
Price is presently driven also by Public demand with the Indian 200 tons bought from IMF just a symptom.
This is likely to end badly as the US did make it illegal to own or hold gold in the 30s under Roosevelt.
The Debt levels are out of all sight historically or should we say hysterically, fundamentally totally out of control.

Rosenberg: Unemployment headed to 12-13%….

Nov 11, 2009 15:30 UTC

…but that doesn’t mean the overall employment picture will get a lot worse.

From today’s “Breakfast with Dave” e-mail:

There are serious structural issues undermining the U.S. labour market as companies continue to adjust their order books, production schedules and staffing requirements to a semi-permanently impaired credit backdrop. The bottom line is that the level of credit per unit of GDP is going to be much, much lower in the future than has been the case in the last two decades. While we may be getting close to a bottom in terms of employment, the jobless rate is very likely going to be climbing much further in the future due to the secular dynamics within the labour market.

But in a nutshell, to be calling for a 12.0-13.0% unemployment rate is meaningless except that it is very likely going to be a headline grabber. The most inclusive definition of them all, the U6 measure of the unemployment rate, which includes all forms of unemployed and underemployed, is already at 17.5%. The posted U3 jobless rate that everyone focuses on is at 10.2% (though if it weren’t for the drop in the labour force participation rate, to 65.1% from 66.0% a year ago, the unemployment rate would be testing the post-WWII high of 10.8% right now). The gap between the U6 and the official U3 rate is at a record 7.3 percentage points. Normally this spread is between 3-4 percentage points and ultimately we will see a reversion to the mean, to some unhappy middle where the U6 may be closer to 15.0-16.0% and the posted jobless rate closer to 12%. This will undoubtedly be a major political issue, especially in the context of a mid-term elections and the GOP starting to gain some electoral ground.

Think about it. We haven’t yet hit bottom on employment but that will happen at some point. Employment is not going to zero, of that we can assure you. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.

So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over — perhaps even years.

This last bit explains why the cyclical pressures on inflation are likely to stay low for some time. But wage-push isn’t the kind of inflation we need to be worried about.

To sign up for Rosenberg’s e-mails, go to Gluskin, Sheff’s website.


It seems to me that there are forces at work artificially aiding the stock market in this current rise. As I talk to my daughter (a banker at Wells Fargo) the stories of forclusures are not abaiting. My son (a private stock broker) attempts to comfort me, but is worried regarding the low dollar–which is why I think the stock market appears to be on the rise. I am 52 years old and I cannot remember a time when so many of my contemporaries have been out of work. I have an attorney friend that cannot finance a commercial building that he recently finished (and he has good credit). My point is that this rollercoaster is coasting and it can only coast downhill. I don’t believe that anyone in congress can really believe that when we hit bottom how low it will be. U3 or U6…it won’t matter.

Posted by Gerald Dietz | Report as abusive

Afternoon Links 11-10

Nov 10, 2009 21:44 UTC

Mishkin defends bubbles (Yves Smith) Yves tears apart former Fed Governor Frederic Mishkin’s op-ed in FT, for good reason.

Bank told to raise more common equity (8-k filing, ht frog) Hanmi bank in CA was told to raise capital, tangible capital in particular. Hopefully regulators continue in this direction with other banks.

FDIC’s “merit” reviews preceded failures (Sterngold, Bloomberg) At least three U.S. banks failed in the past year after the Federal Deposit Insurance Corp. deemed them healthy enough to qualify for a program that reduced the time examiners spent on reviews by at least 20 percent.

F150 the most common purchase in Clunkers program (Felix)

Dodd proposes bold financial overhaul (Drawbaugh, Reuters) Like the original systemic risk bill in the House, this one would have taxpayers front the cost of resolutions. Sheila Bair and Tim Geithner are on opposite sides of this argument. Geithner says a standing fund for financial resolutions would feed moral hazard. He’s right. Her argument is that financial firms would never pay back taxpayers. She’s also right. To me, this gets to the heart of why relying on resolution authority to solve the TBTF problem isn’t enough. You need to get medieval on these guys, breaking them up and simplifying their biz models so that they don’t pose a systemic risk in the first place.

Schabowski shrugged (Meyer, Slate) The unanswered phone calls and misunderstood memos that helped bring down the Berlin Wall.

NASA on crusade to debunk 2012 apocalypse myths (AFP)

Miss England gives up crown over brawl reports (Holden, Reuters) Eat your heart out Carrie Prejean.

Subway stops inches before woman on tracks (Break)

(Click to enlarge…)



World’s Luckiest Train Track Inspector….
http://www.youtube.com/watch?v=IBD3fMNGI 98

Posted by glory | Report as abusive

The inflation time bomb

Nov 10, 2009 19:15 UTC

The public debt will likely pass $12 trillion this week, up another trillion since March. With Obama’s left flank calling for a second stimulus – which is really a third stimulus if you count George Bush’s tax rebates – there’s still no serious discussion about how to deal with debt. The bond market is telling us not to worry. But if history is any guide, the bond market is wrong.

(Click chart to enlarge in new window)


I’m referring to Treasury Inflation Protected Securities, TIPS for short, in particular those that reflect long-run inflation expectations. The current spread tells us to expect annual inflation averaging a bit over 2 percent for the next 30 years. That would be fairly benign. And fairly wrong.

Why? Because it assumes U.S. political leadership will put the country on a sustainable fiscal path. I highly doubt it will happen.

In a note to clients last month, Société Générale strategist Dylan Grice explained the connection between debt and inflation. Turning Milton Friedman on his head, Grice argued that “inflation is always and everywhere a fiscal phenomenon.” Money printing may be the vehicle, but the “root cause” of inflation tends to be “a government unable to pay its way.”

You see the real inflationary threat isn’t the $12 trillion public debt, which on its own is serviceable. The problem is $63 trillion worth of unfunded obligations for healthcare and social security. Putting these figures in context, the U.S. government’s total liabilities are 19 times current tax receipts. “Bear in mind that the U.S. consumer is widely seen as dead in the water with debt at 1.3 times income,” says Grice.

There are three ways to confront this mountain of debt.

Scenario 1: We essentially default, like Argentina, refusing to pay our debts once they’ve become too burdensome to service. The dollar would crash as the United States loses access to capital markets. The government would be forced to print money to pay expenses.

Unlike Argentina, however, we print the currency in which our debt is payable, so this scenario most likely won’t happen.

Scenario 2: We default through inflation. Policymakers are so desperate to avoid Japan-style deflation that the Fed will keep printing money to buy risky assets while Treasury pours on the stimulus to keep people employed. The Fed says it won’t run the printing press to pay the debt, but if the only alternative is default, they’ll have no choice.

Scenario 3: We put Medicare and Social Security on a sustainable path, cutting benefits or raising taxes dramatically. This would require a level of political will we’ve never demonstrated.

Right now, TIPS are betting on Scenario 3. I hope they’re right, but just in case, I’m planning for Scenario 2.


When speaking of unfunded liabilities, why is there no mention of defense spending? Isn’t it better to care for our own people instead of paying for global empire?

Posted by Joe Sheperd | Report as abusive

Bookstaber, hater of CDS, to advise SEC

Nov 9, 2009 21:12 UTC

Rick Bookstaber announced on his blog yesterday that he will joining the SEC’s “Division of Risk, Strategy and Financial Innovation.”

This is a welcome development. Bookstaber is the author of A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation.

He was part of an Oxford-style debate on that very subject at the Economist’s Buttonwood Gathering last month. I was lucky to be in the audience. Below is the video. (Here’s a link too…..go to “debate on financial innovation.”)

Watch it through just to see Jeremy Grantham. He was on fire. (His first comments being a third of the way in.) His rhetoric successfully flipped the audience from being 80:20 in favor of the proposition that “financial innovation boosts global growth” to a similar margin against.

It’s highly ironic that Myron Scholes was chosen to argue for the proposition. An inventor of the Black-Scholes options pricing model, he was also a partner at LTCM, the famous hedge fund firm that blew itself up mixing mathematical hubris with leverage.

Scholes’s life story should be a cautionary tale AGAINST the idea that financial innovation creates great wealth. Yet here he is, having learned nothing.

Not that it’s unexpected. Nothing encourages cognitive dissonance quite like the absence of consequences. Bailed out bankers on Wall Street who feel they’ve “earned” the bonuses they plan to pay themselves this year are just the latest example…


Alan Greenspan admited that he was wrong about the ability of those running the markets to contain behaviors that are destructive – to police themselves.

Actually, he was right all along. In the end the people will curb those behaviors when the markets force them to. The problem is not that the destructive behaviors will not be corrected – we are in that very correction right now. No the problem is the COST of that correction – a cost that is born more by others than by those whose foolishness was the cause.

Posted by jmmx | Report as abusive