EconoMonitor

Nouriel Roubini's Global EconoMonitor

Will Aggressive Monetary and Fiscal Measures Prevent Stag-deflation in 2009?

Central banks around the world have undertaken a number of measures to forestall deflation and lift the global economy out of economic slump and credit crisis.  Aside from traditional monetary policy tools such as official interest rate cuts and relaxations in reserve requirements, central banks have resorted to alternative unconventional tools.  Quantitative easing has begun in the epicenters of the credit crisis, U.S. and Europe, who may be joined by other central banks as they too head towards zero interest rates in leaps and bounds (Sweden moved the most in the developed world by 175bp in one shot).  With monetary policy transmission broken by the unwillingness of the private sector to lend or borrow, central banks have had to scurry for alternatives to rate cutting in order to restore markets.  They set up an alphabet soup of liquidity facilities that lend funds or purchase assets, offered guarantees on deposits and loans, and established currency swap lines, in addition to a host of fiscal stimulus packages announced by governments.  Check out “Policy Responses to the Global Credit Crisis

So are the pieces now in place to prevent global stag-deflation?  It is too soon to tell.  So far, money market and commercial paper markets have shown tentative signs of easing.  But elsewhere in the private sector credit market, tensions remain as asset prices move shambolically and de-leveraging drags on among households, banks and businesses.  Though money supply has grown, the velocity of money has slowed despite the flood of liquidity from central banks and official interest rates effectively at or near zero.  In other words, we have fallen into a liquidity trap.  Such a blow to consumer demand makes deflation in 2009 a real possibility.

Leading the global effort against the credit crisis/recession/deflation are the Federal Reserve and the ECB.  Since the start of the crisis, the Fed and ECB have cut a cumulative 425bp and 175bp, respectively.  Other central banks in both the developing and developed world have been more aggressive in cutting rates but they started from a higher base or began easing late.  In addition to rate cuts, the Fed and ECB have used more targeted measures, setting up new liquidity facilities, asset purchasing programs and currency swap lines, as well as bailing out systemically critical firms and broadening the range of collateral and extending the term of funds lent out at special facilities.  Several new programs have been added to the Fed’s toolbox since the credit crisis began in August 2007, such as TALF, AMLF, MMIFF, CPFF, TSLF, PDCF, TAF.  In October, the Fed began paying interest on reserves deposited at the Fed to allow for essentially limitless balance sheet growth.  At the same time, the ECB began offering unlimited cash at its weekly auctions.  As a result, the Fed and ECB‘s balance sheets have exploded.

Despite liquidity raining down on the financial system from the Fed and ECB, the financial fires have yet to be extinguished.  Yes, money market rates are off their peaks and the commercial paper market contraction has bottomed.  But a lack of confidence among lenders in potential borrowers (and a lack of confidence among potential borrowers given the profit or income outlook) and falling asset valuations has stymied significant easing in market interest rates, such as for mortgages and car loans.  Rate cuts and quantitative easing notwithstanding, it seems the threat of a liquidity trap is looming on the U.S. (and the EMU).  Central banks still have ammo left to shoot their way out of the trap and forestall deflation.  One option is debt monetization: inflating away the public debt from sharp fiscal expansion to stimulate the economy.  Bernanke recently brought up the option of Federal Reserve purchases of longer-term Treasuries and agency debt.  Check out: “Impact of Fed Rate Cuts and Quantitative Easing” and “Operation Twist: Then and Now

In the U.S., private demand continues to fall sharply as does the string of awful economic and financial news.   The latest employment report surprised on the negative side (with the largest payroll decline since 1974) and job losses are bound to keep mounting.  U.S. GDP is expected to shrink 4% or more in Q4 2008 and the contraction is expected to continue throughout 2009.  Orthodox and unorthodox monetary policy measures are certainly needed but they have to be accompanied by a significant stimulus on the fiscal side to support aggregate demand.  The great retrenchment of the private sector balance is already under way and the new U.S. administration is getting ready to make the largest investment in infrastructure of the last 50 years.  The details of the size and content of the stimulus package are not available yet.  However, there seems to be a general consensus that a package of $300-$400bn dollars is a lower bound to keep the economy moving,.

Let’s make some back of the envelope computations.  The depreciation of the U.S. stock of housing goods brings serious negative wealth effects.  According to our computations a 30% fall in home prices peak to trough (and U.S. home prices might very well fall more than that) could result in a negative wealth effect that could subtract up to $400-$500bn from private consumption over time.  In the same fashion, a painful rebalancing process that would bring to U.S. saving rates back to the levels of a decade ago (around 6%) would be compatible with a decline in consumption of almost $1 trillion.

It is welcome news that the stimulus package will most likely be in the $500-700bn range and that it will target productive investment in infrastructure, public services and green technology.  However, a fiscal stimulus will not prevent a severe recession at this point – the U.S. economy is officially already in recession since Q4 2007 – but will make the recession shorter and less severe than it would otherwise have been.

The EU Commission’s ‘recovery plan’ to be adopted during the EU summit on December 11-12 envisages a fiscal stimulus of around 1.5% of EU GDP or €200bn (approx $260bn).  Most of the money will be drawn from national budgets, with EU countries asked to contribute €170bn (approx $221bn) or 1.2% of the EU’s GDP.  The rest – around €30bn (approx $39bn) or 0.3% of GDP – would come from the EU’s own budget and the European Investment Bank (EIB).  While some large member states such as the UK and France would like to see a larger common effort to maximize the economic impact and reduce cross-border leaks, Germany looks back at 10 years of hard structural adjustment and highlights the need for each country to keep its own house in order.  The same dynamic is also blocking a Common European Bond , which was recently rejected by ECB president Trichet.

Commentators point out that even from a purely domestic perspective, a strong fiscal stimulus is exactly the right medicine for Germany that slipped into recession in Q3 alongside its European partners.  Compare the different fiscal packages in Germany, France, Italy, Spain, and the UK.

The United Kingdom is experiencing a large-scale slowdown similar or even worse than the U.S. economy with a deep correction in the housing sector and clear signs of contraction in demand.  UK’s GDP growth will likely slow towards 1% in 2008 and is expected to contract in 2009.  Next year consumption and business investment are expected to drop as the impact of the credit crunch deepens.  The government is preparing to pump about £39bn (approx $58bn) into three of the country’s largest banks in a broad-based recapitalization that could see the UK government end up with controlling stakes in RBS and HBOS.  The government has been taking major steps to inject liquidity into the system, raising the availability of the Special Liquidity Scheme (SLS) to at least £200bn (approx $296bn) and guaranteeing the issuance of short and medium term debt by banks.  The Bank of England (BoE) cut the benchmark interest rate 100 bps to 2.0% on December 4th, the lowest since 1951, after unexpectedly slashing rates by 150 bps early in November, in the wake of what was seen by the central bank “the most serious economic disruption for almost a century”.  A fiscal stimulus of £20bn (approx $30b or 1% of GDP) was recently unveiled and a new fiscal rule to improve the cyclically-adjusted level of borrowing every year.  Borrowing would rise to £78bn ($115bn) this year and then £118bn ($175bn) in 2009-10 with public sector net debt surging above the current limit of 40% of national income this year, reaching 57% by 2013-14.  Part of the spending would be found through £5bn ($7.4bn) in efficiency savings in 2010-11while public spending would be squeezed after 2011 when the growth rate of spending after inflation would be cut from 1.9% a year to 1.2% a year.  In addition , value-added tax will be cut from December 1 from 17.5% to 15% until the end of 2009, to make goods and services cheaper and encourage growth, in a move that Mr. Darling described as “a measure to help everyone and deliver a much need injection into the economy.”

After some reluctance, Canada too seems to be joining the fiscal stimulus club despite a recent fiscal statement that planned to cut spending and nearly triggered the downfall of the government before a suspension was called till early January. Even without additional spending, lower revenue was already likely to push Canada into a fiscal deficit position, its first in a decade, leading some to worry about a return to an era of structural deficits.  Yet with Canada clearly in recessionary territory–  despite outgrowing the rest of the G10 in Q3 – a fiscal stimulus seems appropriate to support its faltering domestic demand in the face of deteriorating terms of trade.  The Bank of Canada is doing what it can to limit the impact of the recession on the real economy and to meet its primary goal of the 2% core inflation target.  It cut interest rates by a higher than expected 75bp yesterday to 1.5%, taking cumulative stimulus to 300bps and is expected to cut a further 50bp at its next meeting in Jan. 2009.  It has also continued to inject liquidity through purchase and resale agreements. Yet, Canadian dollar depreciation may limits Canada’s deflationary risk.

Stag-deflation accurately describes where Japan is heading.  In Q3, Japan officially entered recession and many analysts do not foresee a recovery in growth until at least 2010.  Meanwhile, deflation is rearing its ugly head once again, as detailed in a recent RGE note by Mary Stokes, although there is some disagreement over how short-lived it will be this time around.

So how do policymakers address this dangerous cycle of falling prices and economic stagnation?  This is, of course, the big question worldwide.   In Japan’s case, the Bank of Japan has almost no firepower left with the benchmark interest rate already at 0.3% (the lowest in the industrialized world).   Meanwhile, Japan has two fiscal stimulus packages on the table, but it’s unclear how much of a contribution they will make in getting the economy back on a growth track.   Reaching further into the policy option toolbox, some analysts are now discussing a return to quantitative easing and whether such a move would improve Japan’s economic prospects.

Almost all Asia and Pacific central banks have now cut policy rates (Philippines and Pakistan are two exceptions) and used other monetary policy measures to contain the liquidity squeeze in credit markets. With exports and relatively weak domestic demand deteriorating, concerns about significant growth slowdown (and contraction in countries like South Korea, Singapore, Taiwan, Hong Kong) are pushing Asia to join the global trend of loosening monetary policy and providing fiscal stimulus, quite aggressively in some countries  now that commodity-led inflation is easing.  China and India have been particularly aggressive.  Some Asian countries are perhaps less able to engage in aggressive fiscal and monetary stimulus, either because they run fiscal deficits or they continue to have elevated inflation.

China’s monetary easing is well under way.  Last week it cut interest rates by 108bps (it always moves in a multiple of 9), the most in 11 years, taking the 1 year lending rate to 5.58% and the deposit rate to 2.52%.  It has also reduced the reserve requirement, reduced its sterilization of the monetary supply by cutting the sale of treasury bills and perhaps most significantly removed all lending curbs which had been deployed to counter overheating and inflation earlier this year.  China is also beginning to roll out a fiscal stimulus to support growth.  Its heralded $586 billion package though repackages other previous spending and it may fail to offset the weakness in the housing and construction sector especially if exports contract.  However, approval of previously frozen projects may speed the spending roll out even if it rewards well-connected regions, providing some support for commodity demand. Despite the inclusion of spending on pensions etc, it is uncertain how much Chinese fiscal stimulus and associated tax policy changes like the introduction of a value added tax will succeed in rebalancing growth away from investment.

Last week India announced a $4bn fiscal package including 200 bn rupees in additional spending, a value-added tax cut export credits for textile, leather and jewelry sectors and sales tax refunds as well as tax-free bonds for infrastructure. However, it may come at the cost of increasing India’s fiscal deficit. The RBI has lowered the repo rate 250 bps since October, made the first cuts in the reverse repo rate since 2003 and eased credit and conditions for restructuring loans directed towards SMEs, corporate sector and housing sector.  Both India and China are planning fuel price reductions which may provide some boost to consumers while still providing profit margins for refiners.

The swift decline in the price of crude oil – now well below the break even point for most oil exporting economies – may lead to some reduction in spending or a slowing trajectory of spending growth in 2009.  GCC countries, as well as Libya and Algeria may be best placed to maintain current spending patterns or substitute for private flows, given their accumulated savings even if some of these stockpiles have shrunk along with global equities.  Countries like Nigeria, Venezuela, Iran and Russia – may be less able to do so and could see sharp declines in growth, particularly with further oil production cuts in the works.  GCC countries have also been easing monetary policy (along with the Fed) and using a range of tools to inject liquidity in the face of elevated interbank rates.  Yet, monetary and fiscal measures may only go so far in supporting growth as both hydrocarbon and non-hydrocarbon output is likely to slow sharply.   Meanwhile other MENA countries seem  to be in a position to provide countercyclical fiscal policy.

Russian policy makers have been quick, if not necessarily always coordinated, in their response to slowing growth and sharp capital outflows.  Russian PM Putin recently suggested additional fiscal stimulus measures including cuts in corporate taxes, a hike in unemployment benefits and pensions as well as more defense and construction spending.  By some accounts, these measures take Russian government spending on economic and financial stabilization to as much as $400 billion or 25% of GDP and may take the budget deficit to well over 2% of GDP next year.  With inflation still elevated and policy rates continuing to be very negative in real terms, few monetary measures are available, particularly as Russia has increased interest rates to discourage deposit outflows.  With Russia’s terms of trade eroding – the current account could shift into deficit as soon as this quarter, and domestic demand beginning to falter, growth could slow very sharply from the 6.2% it marked in Q308 and a contraction is not out of the question in 2009 if oil prices remain at current levels, as detailed in recent notes by Nouriel Roubini and Rachel Ziemba.  Russian attempts to allow only slow depreciation of the rouble contributed to the loss of 25% of its $600 billion in foreign exchange reserves since August and outflows from the domestic banking system – a depletion that led S&P to downgrade the country to BBB on Monday.  Russia may need to follow the Ukrainian example and allow a sharper devaluation.

What economic worries might be keeping Eastern European policymakers up at night?  Right now, stagnation – rather than stag-deflation – seems to be the pressing concern.  Economic growth rates in Central Europe are slowing, though the sharpness of the slowdowns has varied.

Hungary – the economic laggard of the group, which was forced to turn to the IMF and EU for a $25 billion rescue package in late October – is seen contracting in 2009.  Meanwhile, Poland, the Czech Republic and Slovakia are expected to experience positive, albeit sluggish growth.

Easing inflation has given central banks in Central Europe room to maneuver, enabling them to start cutting rates to give their slowing economies a boost.  Going forward, analysts see more rate cuts in the pipeline.  Nevertheless, monetary policy easing is limited in countries with heavy foreign currency-denominated lending, like Hungary or Romania, where a weakening local currency could potentially trigger defaults, thereby impacting financial stability.

As for fiscal policy, Central European policymakers may be reticent to undertake expansive stimulus packages as such moves could further weigh on their current-account deficits and undermine investor confidence. And in stark contrast to expansionary fiscal policy elsewhere, Hungary is engaging in fiscal tightening in conjunction with its IMF agreement.

Exceptions to the rule? Unlike Central Europe’s slowing economies, the so-called gravity defiers Bulgaria and Romania continued to post envy-inducing growth rates of 7.1% and 9.3% in Q2.  Nevertheless, these growth rates seem unsustainable given the accompanying imbalances – double-digit current-account deficits and high inflation.  Consequently, this could be a case of ‘the higher they rise, the harder they fall’ where Bulgaria and Romania not only experience slower growth like much of Central Europe, but could potentially face economic crises.

The Baltic states – the sick men of Eastern Europe – are dealing with a particularly nasty case of stagflation.  Latvia and Estonia are now officially in recessions, and Lithuania could soon join them.  When it comes to options for dealing with the painful economic adjustments in progress, Baltic policymakers’ hands are tied.  That’s because all of them have fixed exchange rates to the euro and therefore no independent monetary policy.  Meanwhile, Baltic governments’ ability to loosen fiscal policy to support growth is limited by massive imbalances.

Among the Latin American countries, the prospects of a slowdown are also widespread, although the intensity of the deceleration and the seriousness of the crises is in many ways distinct within the region. Mexico is definitely on the top of the list of those most affected by the global slowdown with trade flows largely dependent on the U.S. economy but should also be seen at the front line of the region’s defense against the contraction. Despite the challenging credit crunch and the sharp fall in oil prices, which put a dent in fiscal revenues, Mexico has a much better fiscal situation to deal with a US recession compared to previous episodes. The government has approved a budget for 2009 in which fiscal spending is set to grow by 5% and, to stimulate the economy, the government plans to spend an incremental US$7.3bn or 0.7% of GDP in 2009, 72% of which is earmarked for higher infrastructure spending, thus running a consolidated public sector deficit next year for the first time since 2005. In Brazil, a provisional measure bill eased constrains for two public banks to acquire capital of private financial institutions. It also creates an investment bank to acquire capital not just in the financial, but other sectors as well. The BCB also put in place currency swap lines with other international central banks, in a similar way as the Central bank of Mexico. The Chilean government is a very good example of prudent fiscal conduct and the government has now enough ammunition to act counter-cyclically despite the sharp fall in copper prices and tax revenues from a fading economy. In Peru, the government recently announced it will spend as much as USD 3.2bn next year on infrastructural projects to bolster economic growth. Going into the more extreme cases, we should mention that Ecuador is considering a default on its external debt and the market is also worried about Argentina and Venezuela.

222 Responses to “Will Aggressive Monetary and Fiscal Measures Prevent Stag-deflation in 2009?”

MADecember 12th, 2008 at 8:37 am

Gold in the 700-750 range for opportunity and wealth retention…I’d be willing to bet an artificial 1,200 peak is attainable depending on what measure the government takes towards “DEBT”.If they ease the public’s debt burden, Gold will not go too high……but if they choose to keep adding credit (especially at the high end (Wall St)) …gold will run.)Miss America

ORDecember 12th, 2008 at 9:23 am

Looks like you changed your view? U see thinks much worse than a couple of weeks ago I am still not betting on the USD’s demise. But that may change.

MADecember 12th, 2008 at 9:54 am

Hey OR. I’m not a fan of gold. (I hate its dogmatic existance)…but I won’t fight what I can’t control. (…and that’s where the “flow” will dictate in a 0% return world. That, and useful commods.)What I said in my AltEnergy blog (or maybe it was Trick or Treat???) was that Gold 700-750 was the buy as a hedge.Where I’m at will fluctuate based of policy makers decisions.The ponzi scheme has always existed, so I’ve always been an optimist that the floor could never fall out….unfortunately, TPTB, are failing to put the “floor” under the people. Their hesitation to pull the trigger is flirting with disaster!Literally, I feel the economy is holding its breath right now, and hoping it can hold it long enough to make it to the new administration. …and when the new admin comes in, the “hit the ground running” platform will take on new meaning as the economy… will be bright red in the face!Miss America

PeterJBDecember 12th, 2008 at 5:03 pm

“I hate its dogmatic exist[e]nce”@ MAGold is anything but “dogmatic” so perhaps it is the way you are looking at it – Gold is a future – not an historic.And I believe it is the “real economy” (the people) that is intentionally and correctly pulling the floor from under the secondary – ponzi – economy.Gold is reality and hence prudence – the hedge is silver (read: physical): the people are sending a vote of no confidence in “leadership” across the board while “leadership” is running a cash and power grab scam for the (their) futures.It is those of the secondary economy that are holding their breath – not those of the real economy.Obama (read: new admin)represents a sick joke and only the most gullible and naive would believe that he has any competence at all. But self-agenda?; indeed.Ho hum

GuestDecember 12th, 2008 at 7:02 pm

….. FOR THE RECORD…… significance, determined by consciousness,.. will vary…http://en.wikipedia.org/wiki/Gold……Gold leaf can be beaten thin enough to become translucent. The transmitted light appears greenish blue, because gold strongly reflects yellow and red…..Gold has been known and highly valued since prehistoric times. It may have been the first metal used by humans and was valued for ornamentation and rituals. Egyptian hieroglyphs from as early as 2600 BC describe gold, which king Tushratta of the Mitanni claimed was “more plentiful than dirt” in Egypt.[8] Egypt and especially Nubia had the resources to make them major gold-producing areasfor much of history. The earliest known map is known as the Turin papyrus and shows the plan of a gold mine in Nubia together with indications of the local geology. The primitive working methods are described by Strabo and included fire-setting. Large mines also occurred across the Red Sea in what is now Saudi Arabia….One main goal of the alchemists was to produce gold from other substances, such as lead — presumably by the interaction with a mythical substance called the philosopher’s stone. Although they never succeeded in this attempt, the alchemists promoted an interest in what can be done with substances, and this laid a foundation for today’s chemistry. Their symbol for gold was the circle with a point at its center (☉), which was also the astrological symbol, and the ancient Chinese character, for the Sun. For modern creation of artificial gold by neutron capture, see gold synthesis….The Second Boer War of 1899–1901 between the British Empire and the Afrikaner Boers was at least partly over the rights of miners and possession of the gold wealth in South Africa…..The world’s oceans hold a vast amount of gold, but in very low concentrations (perhaps 1–2 parts per 10 billion). A number of people have claimed to be able to economically recover gold from sea water, but so far they have all been either mistaken or crooks. Reverend Prescott Jernegan ran a gold-from-seawater swindle in America in the 1890s. A British fraud ran the same scam in England in the early 1900s.[16]……Gold has been associated with the extremities of utmost evil and great sanctity throughout history. In the Book of Exodus, the Golden Calf is a symbol of idolatry and rebellion against God. In popular culture, the golden pocket watch and its fastening golden chain were the characteristic accessories of the the capitalists, the rich and the industrial tycoons. Credit card companies associate their product with wealth by naming and coloring their top-of-the-range cards “gold” although, in an attempt to out-do each other, platinum has now overtaken gold.On the other hand in the Book of Genesis, Abraham was said to be rich in gold and silver, and Moses was instructed to cover the Mercy Seat of the Ark of the Covenant with pure gold. Eminent orators such as John Chrysostom were said to have a “mouth of gold with a silver tongue.” Gold is associated with notable anniversaries, particularly in a 50-year cycle, such as a golden wedding anniversary, golden jubilee, etc..Pure gold is non-toxic and non-irritating when ingested.

David in SeattleDecember 12th, 2008 at 7:25 am

No, they will not.Reason: We have reached a debt saturation point. Debt (in terms of fiscal stimulus) has been the drug that has kept the Western economies going when they have had to go to the emergency room, and much like a terminal patient, the debt steroid has lost its effect. Bernanke can provide all the “stimulus” that he wants–the drug simply won’t work on the American consumer any more.Further, we have reached a point where we have all the basic products that we need: TVs, Cars, Computers, and on and on. One could truly see the desperation in the Black Friday ads: don’t buy it because you need it, buy it because it is a good deal.Consumers are tapped out and what they have is “good enough” to keep life afloat. There are very few left with true discretionary incomes to buy the latest and the greatest, and many will lose their jobs or be “underemployed” soon.My advice to Bernanke: your policies won’t work (as they have not so far), and ultimately, you will crash the dollar and the treasury market. It won’t matter how low you cut the rates on the short-end and on the long-end: people without jobs won’t be able to borrow no matter how much money you throw at the sytem.

GlennDecember 12th, 2008 at 2:49 pm

David, you have hit the nail on the head.I find it amusing that SO many people are comparing this economic chaos to prior recessions or even the 1929 depression. While there is academic curiosity to do so, the magnitude of the differences dwarf the comparisons and hence it seems silly to compare. Our world wide economy is light years different from 1929 or even the 70’s or 80’s. And sadly the calamity of financial sector implosion is orders of magnitude more dire. Hence, the convergence of these massive negative factors are impossible to make any comparisons to. The list is so lengthy and they have been described by so many it is redundant to do so in this brief post.In the next 12-36 months there will be a distinct shift in pundits’ and economists’ writings where the emphasis will be to point out (after the fact) the contrasts of this economic tsunami to anything we have previously experienced. And by that time the real affects of this megawave will start to show it’s catastrophic destruction on the world wide economic system.

PeterJBDecember 12th, 2008 at 7:37 am

“Despite liquidity raining down on the financial system from the Fed and ECB, the financial fires have yet to be extinguished.”@ RGE Lead AnalystsIndeed – LOL Yet, “yet” is the wrong word here;try then:’… the financial fires have yet to really catch fire and spread uncontrollably around the World… ‘Ho hum

blindmanDecember 12th, 2008 at 9:08 am

prj, fires is the wrong word too. financial ice cubes, maybe, snowflakes. and liquidity is the wrong word, come to think of it.it could have read. ….despite all the wood being thrown on the pile of excrement, no one with a match cares to be around should this thing catch fire.?

GuestDecember 12th, 2008 at 12:53 pm

My pleasure.. ;-)As for being crazy, far from it. You are observing and thinking for yourself, while most people allow MSM and others to do their observing/thinking for them. In light of that, you are not the one that I would be classifying as ‘crazy’.

jomosDecember 12th, 2008 at 7:49 am

SocionomicsIn 1979, Prechter postulated that social mood drives financial, macroeconomic and political behavior, in contrast to the conventional notion that such events drive social mood.[18] His description of social mood as the driver of cultural trends reached a national audience in a 1985 cover article in Barron’s.[19] Prechter coined the term “socionomics” and in 1999 published an exposition of socionomic theory, The Wave Principle of Human Social Behavior.[4]

GuestDecember 12th, 2008 at 8:02 am

In 1992 Precther was calling for this bear market. Wave structures are great, but they telll you nothing about time. And time is all here.

jomosDecember 12th, 2008 at 8:19 am

You are missing the point. What we are talking about is our mindset and level of optimism to pessimism as people. Markets ( people’s emotions) will not be turned by tweeks in fractional banking. Our collective thoughts of future hopes have been dashed by linear thinkers with only one solution to all national problems, spend more. In order for the people to judge their future more positive, they must see bad practice punished and good practice rewarded as is custom for 6,000 plus years of history. You are not going to change this survival patterned behavior with worthless tokens of binary chicanery.

GuestDecember 12th, 2008 at 8:02 am

In 1992 Precther was calling for this bear market. Wave structures are great, but they telll you nothing about timing. And time is all here.

GuestDecember 12th, 2008 at 8:02 am

In 1992 Precther was calling for this bear market. Wave structures are great, but they telll you nothing about timing. And time is all here.

HenryVIIIDecember 12th, 2008 at 8:03 am

In 1992 Precther was calling for this bear market. Wave structures are great, but they telll you nothing about timing. And time is all here.

HayesDecember 12th, 2008 at 8:39 am

from other thread@ORso do you think you think there’s a chance that you’ll recant and maybe test the market waters later today?I’ve gotta think that this auto thing is going to get a weekend save via the TARP – (just like Friday’s past I think we’ll see some clues today if the market suddenly spikes later today) GM and F will be the canaries to watch (maybe sooner than I thought based on the action in the first 8 minutes)

ORDecember 12th, 2008 at 9:39 am

Diz is it:I am not a good speculator, unless I can fool myself into thinking the move is a good one from a fundamental point of view. Lots of people are geared up for a year end rally. The argument is that with long T bonds at under 3% stocks are undervalued. IMO, the only reason we don’t see the rally is that the news couldn’t be worse!:-)Now in regards to your question. Most likely I will not consider going in heavy until we see lower lows than November. Also, I want to have a happy and quiet holiday season. Lock in my 11.7% for the year for good. I’ve had the golden touch lately but i don’t count on it lasting.

FAMCDecember 12th, 2008 at 8:43 am

In a dynamic system, many variables are interrelated, so that mood influences (is a “cause”) and in influenced (is a consequence) of other variables.In Conquer the Crash Prechter exposes a qualitative analysis of the debt situation (this part is very interesting).However, he tries to be a guru, and his timing is horrible. For example, in his book, he missed completely the commodity colossal increase (2003-2007).

jomosDecember 12th, 2008 at 9:49 am

Grant it, a little early to the game. I, read Conquer the Crash with no previous training back in 2002-03. And saw the bigger picture laid out in laymen terms. Began making changes from others controlling my assets and taking temporary loses in tax liabilities to having the duty to deciding the when,where,what and how of the future. This boldness came from basic lessons learned from COC. I bucked on gold and silver and placed one third of the assets there. Diversifying for inflation and deflation. The degree of confidence in Prechter has only peaked recently as I have seen point by point manifest as outlined. You do go with what works, and jettison old ideas (Keysian) as the model for each system breaks down.

Octavio RichettaDecember 12th, 2008 at 9:35 am

The Auto thing is a real hard problem. In my [former] line of work we would label it NP-complete.U see, the problem is that it is so obvious these companies are not viable that Uncle Sam supporting them basically trows overboard everything this country stands for. Strategically and long term, a bailout of such hopeless companies will be bad for us. We are loosing our identity, we are betraying the principles that made this country great. If I was a republican Senator there is no way I would vote by this bailout, even if they bring out the buggy man as Paulson did with Tarp. BTW, I don’t get involved much in politics but I used to lean republican until GWB destroyed everything the republican party used to stand for. Now we are doing that to the country.But according to the dismal scientists, including the Professor, the auto-bailout is a go. I guess in the dismal science wonderland two wrongs can make it right. I am really glad I didn’t train in economics:-) What the dismal science does to your brain is irreversible:-)

MorbidDecember 12th, 2008 at 11:15 am

Lack of Trust EnhancedI could not agree with you more. Any sane person will see this U-Turn by Paulson as an act of desperation – and thus a further LACK of confidence in our financial system. I guess Bushy gave him the go-ahead, or is he able to act independently?Well, the stage is set. The floodgates have opened. Washington will soon be under siege by almost every segment of the business community – to say nothing of state governments for a bailout. What a TOTAL mess.Like Bushy said, “BRING IT ON.” Let’s just get it over with – see you folks at the other end – in about forty years.

GuestDecember 12th, 2008 at 8:59 pm

You two are idiots! GM and Ford are in emergency dire need of help because of the worst credit crisis and banking collapse in the history of the world, please get off your b.s. capitalistic moral high horse. The amount of money shareholders make on a company does not determine value! This linear formula most people follow is extremely shallow and allows for no relativity. It’s overly simplistic one sided thinking that over looks dynamics and nuisances of an economy. Creating greater and greater efficiencies in pursuit of more profits for shareholders has created a very top heavy economy that now faces extinction because idealists took a good thing and tried making a religion out of it. Put down your bibles and open your eyes before it’s too late.

BretDecember 13th, 2008 at 1:45 am

Your argument might carry a bit more weight if these companies were showing a profit BEFORE the crisis, but they weren’t. The crisis was just the final nail in the coffin.

Octavio RichettaDecember 13th, 2008 at 6:16 am

Your offensive language aside, Even if the auto bailout needs to be done to save the US economy from disappearing (which may be the case, no one can tell you for sure), I hope you agree that there may be long term consequences to the economy coming from this action that may be worse than letting them fail. I for example, believe the bailout will slowdown the recovery as we will carry a dying industry on our back longer. These resources human and otherwise could be best devoted to activities with greater value-added.Once Korea (and soon China) got heavily into the car business, whatever little attractiveness the WW car business had was destroyed. These additional produces have a marginal effect on supply that results in lower prices which destroy the profitability of the business. I have known this for over a decade now, and given that I am an idiot, I am sure the smart people have known it too for even longer than myself.I still clearly remember reading about the Daimler Chrysler merger while waiting for a flight to NYC and smiling about it fully knowing it would now work and that it would come crashing down to earth is it did. The merging of the two cultures was nearly impossible even in a booming business. The fact that making cars is a lousy business was the ideal catalyst for a speediest fall.One of the main reasons I hope I can live a long life is all the stuff one witnesses, how frequently time proves you right as well as wrong:-)

GuestDecember 13th, 2008 at 12:31 pm

“Your argument might carry a bit more weight if these companies were showing a profit BEFORE the crisis, but they weren’t. The crisis was just the final nail in the coffin. “There it is again like a trusty knee jerk reflex the old profits for shareholder defines success for a society. Gosh is anyone smart enough to see through this?

amacflyDecember 13th, 2008 at 2:10 pm

I lived through the total collapse of the British car industry, which was brought about by different circumstances, but the story was the same. A bunch of lame ducks were swept up into a large nationalized entity called British Leyland that didn’t make one decent car, or profit while loosing the tax payers and country billions.Keeping the US auto industry alive will just be another case of deja-vu, this is from Wikipedia, and bears a quick read.The company [British Leyland] became an infamous monument to the industrial turmoil that plagued Britain in the 1970s. At its peak, BLMC owned nearly 40 different manufacturing plants across the country. Even before the merger BMH had included theoretically competing marques which were in fact selling substantially similar “badge engineered” cars. To this was added the competition from yet more, previously LMC marques. Rover competed with Jaguar at the expensive end of the market, and Triumph with its family cars and sports cars against Austin, Morris and MG. The result was a product range which was incoherent and full of duplication. In addition, inconsequent attempts to establish British Leyland as a brand in consumers’ minds in and outside the UK, print ads and spots were produced, causing confusion rather than attraction for buyers. This, combined with serious industrial relations problems (principally, the company’s relations with trade unions; the 1973 oil crisis; the three-day week; high inflation; and ineffectual management meant that BL became an unmanageable and financially crippled behemoth whose bankruptcy in 1975 was assured.

GuestDecember 13th, 2008 at 2:54 pm

What would the cost to government be in terms of lost tax revenue, unemployment benefits, food stamps, health care for children who get dropped etc? And what would the cost be to the financial system with regards to worthless bonds that have flooded the finance industry over time and their respective derivative trades etc.? It’s estimated that a failure of the big3 would be in the several trillions of dollars costs to the taxpayer and yet 15 billion or even 100 billion for that matter (in loans) is too much to ask for? What kind of drugs are you guys taking? You’re willing to see potential mass starvation and misery to protect a disproven faulty ideology out of pride and arrogance. It blows my mind how people would rather die in misery and pain than to ever admit they were wrong. You free market fakes were wrong and now you threaten to take us down to untold levels for the sake of defending your religion-isn’t that what terrorists do?

GuestDecember 12th, 2008 at 1:32 pm

Credit card debt as all other debt that affects the financial markets will be bailed out when the time is critical as this is the practice. The problem with this practice will be during the time period when the US itself will become likened to the auto industry to the rest of the world and its practice of printing to save the economy will be its downfall. Since the US government is the lender of last resort then there is no one else to turn to when the US reaches its own credit default. The end game will be the same, If the US had allowed the weakest companies to fail only stepping in to save the ones that are most critical to the US then the US would have had the ability to save itself from its own financial default. When your house is on fire and you have only a few minutes to retrieve the most important items so you can rebuild. Unlike the US Government in this scenario is trying to remove every piece of furniture and going back in to retrieve the dogs bowl and curtains’. This is irresponsible and reckless, the government also assumes that as soon as the fire that gutted the home is put out then the entire family can move back in and go on about their lives as if nothing has happen. In reality the structure collapsed on Uncle Sam and he was burned to death in the fire.

BrettDecember 14th, 2008 at 2:38 am

“There it is again like a trusty knee jerk reflex the old profits for shareholder defines success for a society. Gosh is anyone smart enough to see through this?”So, your prescription for success is to prop a company that makes cars that no one wants, so that these cars can sit in a lot? How exactly does that benefit society? Perhaps it’s different in your Marxist fantasy land, but in the real world, there’s a profit motive for being in business. And, if you’re such a genius, why don’t you go run GM and show us how it’s done?

GrashoppaDecember 12th, 2008 at 9:13 am

and your outlook for today? Also a question re SSO – is the 10 minute moving average simple / exponential or weighted? Thanks

CMDecember 12th, 2008 at 9:47 am

SImple. I aslo really like the 14 MA, little less whip-saw. There is a lot of “interferance” in the market this a.m. Stocks should close down over 338 points today but teh Treas announcemnt this morning may prevent that type of move.

PeteCADecember 12th, 2008 at 9:25 am

Market going down. End of a bear market rally? One of the really interesting things is the lack of strength in the rallies in this current bear market. There just hasn’t been much volume in the buying, any time this market has tried to reverse course and go up. There is still a tremendous amount of weakness in this economy.PeteCA

JimmyTheBankerDecember 12th, 2008 at 9:43 am

ECRI weekly leading index tanks! Sets new all time record low growth rate!! This should rally the markets green!! LOLOLOL I can’t beleive the Dow is not down 400 points right now.

ORDecember 12th, 2008 at 10:02 am

should not be expected soon, a research group said on Friday.The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell in the week ending Dec. 5 to 106.9 from 109.8 in the previous week, which was revised from 109.9.The index’s annualized growth rate declined to negative 29 percent from an also revised minus 28.6 percent, initially reported at minus 28.5 percent.”With the WLI falling back to its cycle low after a one-week uptick, a business cycle recovery is still nowhere in sight,” said Lakshman Achuthan, managing director at ECRI.The weekly index was pulled down by by declines in measures of all components except interest rates, Achuthan said.

CaponeDecember 12th, 2008 at 9:49 am

“Oil May Crash to $10 a BarrelOil prices may crash as low as $10 a barrel, says Devina Mehra, chief strategist at First Global. She explains her extremely bearish outlook on oil, with CNBC’s Martin Soong & Sri Jegarajah.”oil BUY signal ? ! ? at least for a trade…

CMDecember 12th, 2008 at 9:51 am

Going green, I told you, selling is not allowed today! This market action is simply rediculous-I shake my head.

CMDecember 12th, 2008 at 9:56 am

LOLOL can you believe this stock market? They are making sure there are never any shorts again!!! Suck ‘m in by tanking futures, then BAMM! Goldman takes their TARP funds and blasts the shorts!!! Free market my ASS!

GuestDecember 12th, 2008 at 9:59 am

Proof markets are rigged! Where is the public outrage I ask?Former Nasdaq stock market chairman Bernard Madoff arrested on securities fraud charge, accused of running a fraudulent $50 billion ‘Ponzi scheme.’

aerial viewDecember 12th, 2008 at 9:54 am

AUTO BAILOUT: “under normal economic conditions we we would prefer that markets determine the ultimate fate of private firms,” Perino said, “However, given the current weakened state of the U.S. economy, we will consider other options if necessary-including use of the TARP program-to prevent a collapse of troubled automakers.” And Paulson said “the intent of the TARP was to deal with financial institutions and major systemic issues and getting lending going in capital instituions”. As our govt keeps playing ECONOMIC POKER with each other, the public is about ready to fold their cards and leave the U.S. CASINO for good!

ORDecember 12th, 2008 at 10:23 am

Legal types out there: Is using TARP for non-financial companies legal (i.e., within the framework of the law tarp law congress patched up and then approved)?It seems to me that on top of all our ills, we are headed for a breakdown in our system of government: i.e., the roles of the executive, legislative,and judicial branches.

GuestDecember 12th, 2008 at 1:26 pm

Especially the treasury, it has about 7 trillion in guarantees and direct loans, and I wonder what gives it the right to put other people’s money at stake? And they are not accountable now for where the money is going?Lets hail the republicans for taking a principled stand and denying their own president as well. Democrats, as usual, want to throw money at problems, like a good father who has scolded a son but ultimately is going to shower the son with all the money love. With all the given dooms-day scenarios being given, one has to wonder when does the buck stop. Are these companies not capable to fail? So what if the industry fails, the recession is going to prolong for another 3-6 months or whatever amount of time. So what? In the longer-term, what is better?The most ridiculous thing that I have seen through this whole passage of play is the democrats going bonkers on the management of these firms and basically saying why are you making so much money, this that is happening to ordinary Americans, blah blah blah (which is totally wrong by the way, members of congress have no right to imo) but the irony is that on throwing money to these firms, democrats as soon as the talk of throwing money emerges they go nuts and feel wanted and are like aye aye aye..

HousingDepressionDecember 12th, 2008 at 2:01 pm

I am not a lawyer (or a lawyer type) but I remember Paulson wanted to have full control of the money ie. He can give it to anyone he choses to.So Under the TARP, I think he does have the right to hand out the money as he chooses.

ex VRWCDecember 12th, 2008 at 4:49 pm

OR, yes, we are headed for that breakdown.But at least maybe some principled people in the Senate can keep the floodgates of misinformed bailouts held back. There is a small, slim hope. For the next increment of the TARP needs congressional approval to release. And, now the first half is gone, expect some epic debates about whether to authorize any more, since the first funds have been so badly misused in clear violation of the intent of the legistation. And, please, lets not tie the debate to that day’s Dow and ‘the markets’. How shallow can we be in our thinking? What kind of short-sightedness ties billions of our children’s future to a few hundred point swing on the Dow? Please.Will a leader stand up, please, and call for real transparency, real efforts, no more bailouts of bankrupt and crooked companies? How much more of our childrens future will we hand out? How much more will we debase the US name and currency?

GuestDecember 12th, 2008 at 9:06 pm

Saving capitalism at this point means massive starvation, yet the people put capitalism in front of food. By the time the fools wake up we’ll all be dead.

Octavio RichettaDecember 12th, 2008 at 9:59 am

Look at dat! Market almost green. I will cross my fingers it stays this way so that I can use the opportunity to liquidate a small equity leftover I had at TIAA-CREF for which I could not click fast enough to make the 4PM cutoff last Friday.

HayesDecember 12th, 2008 at 10:02 am

As it so happens $335bn of TARP money has been spent so far – that leaves $15bn for a rainy day – like maybe an auto bailout – what a coincidence

GuestDecember 12th, 2008 at 10:03 am

ReutersDecember 12, 2008NEW YORK, Dec 12 (Reuters) A measure of future economic growth in the United States and its annualized growth rate resumed their fall in the latest week, indicating a recovery in the business cycle should not be expected soon, a research group said on Friday.The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index fell in the week ending Dec. 5 to 106.9 from 109.8 in the previous week, which was revised from 109.9.The index’s annualized growth rate declined to negative 29 percent from an also revised minus 28.6 percent, initially reported at minus 28.5 percent.”With the WLI falling back to its cycle low after a one-week uptick, a business cycle recovery is still nowhere in sight,” said Lakshman Achuthan, managing director at ECRI.The weekly index was pulled down by by declines in measures of all components except interest rates, Achuthan said.

GuestDecember 12th, 2008 at 10:09 am

Dec. 12 (Bloomberg) The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, who oversees about $14 billion at New York-based ICP Capital LLC.

vicDecember 12th, 2008 at 11:44 am

Where is the push from the house and senate to disclose this information?Pitchfork time….Keep up the good work Dr. Roubini- keep pushing for transparency!

JimmyTheBankerDecember 12th, 2008 at 10:16 am

Remember, the day-to-day action, although frustrating, is meaningless in terms of where this market ultimately bottoms out. I just update earnings estimates and the street is still looking for 52 week forward earnings growth of 16.23%!!! My leading model for earnins days earnings growth 52 weeks forward will FALL, thats right! FALL by over 2%. That means, if I am right, fair value on the S&P is ultimately 735. Protect your money from the volitility thieves!

London BankerDecember 12th, 2008 at 11:20 am

@ AllI’ve got a post up today, but it’s quite likely that I will stop posting at the end of this year. I’m going back into harness, taking up a challenging new job where I can maybe do some good. I feel rather privileged to have a great new job to look forward to in banking given the ranks of unemployed or soon-to-be-unemployed bankers.I hope to haunt the comments section here, even if I’m not blogging.As ever, Professor Roubini has my gratitude for providing this forum, attracting so many like minded people here to collaborate and discuss, and providing me with a blog to express my own views.

Miss ItalyDecember 12th, 2008 at 12:39 pm

Thank you LB for all the interesting posts and articles. I’ve enjoyed them immensely and appreciated very much both the original point of view you provided on the financial and banking world and the clear honesty of your message and your work. I’m sure this will guide you on the rest of your carrier and engagements. Wish you good luck. Thanks again. Come and visit soon.

villagerDecember 12th, 2008 at 3:09 pm

Thumbs up, London Banker. Maybe instead of doing a weekly, you could consider writing for want of better words, an “Observation”, or commentary, every quarter or semi annually. Your insight is valuable to a wide range of people; and, for some, it confirms a shared reality. Thanks.

Average JaneDecember 12th, 2008 at 4:31 pm

LB, you will be sorely missed but I somehow have the feeling you will be doing more good where you are going. Bless you a thousand times for gracing us all with your presence, the benefit of your priceless thoughts and feelings and your no-nonsense prose. Happy trails. And come back soon as you can.

GuestDecember 12th, 2008 at 11:36 pm

LB–Oh, no, please don’t go!I guess it is for the higher good…and you are entitiled to your own altruistic self-interest.But I will miss you knowedlge and wisdom and graceful writing style.How about an “occasional” piece?Grateful Guest

GuestDecember 12th, 2008 at 11:29 am

Per “debt monitization”. I get this if the Treasuries were mostly owned by Americans, it would just basically messup the American savers and fix things economically. However, how can you get away with “debt monitization” if most of the Treasuries are held by overseas people (ex. China and such like). Aren’t they going to get upset when the value of their US dollars or Treasuries goes down? Who’s going to finance the deficit then? Am I just missing something here?

GuestDecember 12th, 2008 at 11:43 am

whatever the overseas investors have purchased to date, they will be shafted with depreciating assets and will not likely buy more – that’s where debt monetization by the central banks comes in afterwards…only thing sacrificed is the USD

HalDecember 12th, 2008 at 12:44 pm

This s all talk about ‘fixing’ things so that it can go on as before.NOTHING IS REALLY BEING DONE TO CHANGE THINGS SO THIS WON’T HAPPEN AGAIN.If fact, it seems to be ‘expected’ that such crises will always be periodically happening. WHY? Seems to bebecause it is viewed as basic to giving opportunities formaking ‘profit’.It seems to ASSUME that everyone in the world has a a life goal the precipitation in investment capitalism.They do NOT.What is needed is an entire new system for the world economy — one that allows for the participation in an investment capitalism — and other options for those that aren’t interested.Personally my interests are in basic science — but Ido not get to put as much into the field as I would like due to economic problems. The supposed reason for civilization is to allow for specialization. If everyone is REQUIRED to participate in investment capitalism then that subverts the very basis of civilization.

GuestDecember 12th, 2008 at 1:30 pm

2:27 p.m.Ecuador won’t pay interest on 2012 global bonds: report2:25 p.m.Ecuador’s president says it will default on bonds: report

PeteCADecember 12th, 2008 at 1:42 pm

That default is not a trivial issue – it is important. Ecuador has lost significant income because of the tremendous drop in global oil prices. This is causing real problems now, not only with some producers like Ecuador but also with supply destruction. “Demand destruction” has morphed and become supply destruction. Big oil projects like the one off the coast of Brazil cannot go forwards right now. Oil sands extraction efforts will wind down. Within the USA, refiners are seriously considering mothballing some refineries because of the drop in demand for gasoline. This is insane, given that we have no new refineries. Everything is old. Global oil infrastructure is not being replaced – it is being idled or kept running with minimum maintence. So … did every driver in India and China stop driving cars this month? Did Americans cut back driving – YES for a while, but it just started going up again.Huge flows of “fast money” into the derivatives markets are causing rampant mispricing of some key commodities. It is hard to believe that at this juncture the Fed is offering unlimited dollars to these players (through banks) at extremely low interest rates.PeteCA

GuestDecember 12th, 2008 at 3:29 pm

It is imperative that the World Bank and IMF start considering “principal reductions” in the debt obligations of countries such as Peru and (even) Argentina. World trade must not be allowed to freeze up because of “unfavorable” numbers in the books.There is enough demand in the world outside the G8, they are just burdened by debt and a lack of purchasing power.What if we create two foreign exchange systems- one for “petrodollars” and the other the extant one? This would essentially separate the Oil market (today’s Gold) from the rest of the market.Petrodollars can be based on PPP (purchasing Power Parity), thus lowering the Petrodebt and IMO, significantly (and positively) impacting the “other exchange rate” thus driving up purchasing power?

Octavio RichettaDecember 12th, 2008 at 1:56 pm

I finally got around to reading the staff post above. So guys what is your conclusion? IS it the second paragraph?So are the pieces now in place to prevent global stag-deflation? It is too soon to tell. So far, money market and commercial paper markets have shown tentative signs of easing. But elsewhere in the private sector credit market, tensions remain as asset prices move shambolically and de-leveraging drags on among households, banks and businesses. Though money supply has grown, the velocity of money has slowed despite the flood of liquidity from central banks and official interest rates effectively at or near zero. In other words, we have fallen into a liquidity trap. Such a blow to consumer demand makes deflation in 2009 a real possibility.

villagerDecember 12th, 2008 at 3:18 pm

Yes, it is the second paragraph and in particular, the last sentence concluded by: “… deflation in 2009 [is] a real possibility.”The first 6 months of 2009 is going to be severe for a lot of people globally.

ex VRWCDecember 12th, 2008 at 4:36 pm

No the pieces are not in place. Until there is transparency, the pieces will not be in place, and the deleveraging will continue unabated.The central banks and the treasuries can ease and print all they want – they cannot create capital, they cannot create strong, growing economies. They believe in macroeconomic theories and manipulating the financial industry, but there the problems lie.They thought that emerging market economies could say decoupled from the problems in the G8, and they were wrong. Decoupling was a myth.However, the real decoupling is the downfall of their plans. It is decoupling between the financial sector and the real economy. They have trained all their efforts on the financial sector, all the bailouts, all the loan guarantees, etc. But the financial sector is increasingly decoupled from the real economy of consumers and businesses. Result – the velocity of money slows down, as Roubini notes.We recoupled when we should have decoupled as a global economy, and we decoupled when we needed to be coupled between Wall St and Main St. And there is no transparency, so no trust, upon which credit rests.So, no, the pieces are not in place, Dr Roubini.

CMDecember 12th, 2008 at 2:02 pm

BOOOOMMMMMM says the witches of the last hour! They are gonna run this bitch to give every one a breather for the weekend. Who is gonna sue the Fed and Paulson for the stock ponzi scheme?

HayesDecember 12th, 2008 at 2:11 pm

Ecuador Defaults on Bonds, Seeks Restructuringhttp://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5PyWzGVCR7E

HayesDecember 12th, 2008 at 2:55 pm

GS will disappoint big time (intentionally) it may be worth putting in a low ball bid in anticipation of a spike down followed by a huge reversal

David in SeattleDecember 12th, 2008 at 3:12 pm

How did you like the market manipulation today?OK, here is a recap of what happened.1. Negotiations collapsed in the Senate. Why would a Senate that gave Wall Street billions, no question asked, all of sudden claims to “protect the tax payer” and withhold a measly 14 billion from the Big 3? Better yet, why would the Republicans rebel?2. Simple—negotiations broke down since the Big 3 saw this as an opportunity to get concessions from United Auto Workers (bring down wages to parity). This whole soap opera was used to create more money for the Big 3 in the long term by getting wage concessions from UAW.3. I believe UAW saw though this scam, and simply forced the Bush administration to release money from TARP with no conditions attached. UAW correctly sensed that Paulson would rather release 14 billion from TARP than to see the DOW dive several hundred points. The TARP rumor was enough to squeeze the shorts.. Score 1 for UAW.4. I believe that GM will still head into bankruptcy; it is just a matter of time. Both UAW and GM will lose in the end.5. Bernanke, if you are reading this, remember that you and Greenspan bear the full responsibility for this mess. Americans can’t afford to lower their wages even if they wanted to save their companies. The massive asset inflation that you have created, and the increases in healthcare and other basic necessities, make is virtually impossible to do so. You have failed to create wealth for Americans through job growth, and you still think you can instead create wealth through asset bubbles.

GuestDecember 12th, 2008 at 3:52 pm

David,I like your posts, but, I think you are overestimating yourself if you think Bernanke or Greenspan are reading a Roubini Blog.

BerneDecember 12th, 2008 at 5:25 pm

Well, it’s a little tedious, but every now and then I find a nugget that makes it worth the time and effort. Keep plugging away David in Seattle.

BrettDecember 13th, 2008 at 1:54 am

If you take the daily media propaganda barrage at face value, without questioning every premise and assumption, you deserve to get your clock cleaned in the market.Here’s a couple:1. The futures are way down, therefore, the market will be down for the day: There are many examples of the contrary.2. Bad economic news directly causes market movements: Had this Auto Bailout not been on the table, the market still would’ve traded and it would’ve done something.

CMDecember 12th, 2008 at 3:18 pm

Like I have warned in the past, days like this, the close is determined by the volume going into the last hour. If it has been close to, or stronger than the previous day, the market has closed up (like today). If volume is slack, the market sells off (like yesterday). In the “secret society” this is know as “tape painting”. Gets the technical analysts all fired up becuase the market sells of on lower volume than it goes up. Be careful in here. Have a great weekend.

GuestDecember 12th, 2008 at 3:22 pm

Muni Bond Fees Rise at Fastest Pace Since ‘81 as Investors Flee2008-12-12 05:01:00.8 GMTBy Michael QuintDec. 12 (Bloomberg) — Wall Street is raising fees it charges municipalities to sell bonds at the fastest pace in more than 20 years as institutional investors abandon the market for state and local government debt.Borrowers from a New York economic development authority to the state of California paid as much as four times more last month to sell debt than in previous offerings, according to data compiled by Bloomberg. The average fee fell every year but one since 1981 to a record low of $5.27 per $1,000 bond in 2007, Thomson Reuters data show. In November, the charges rose to$5.93 per bond.The higher expenses are another blow to taxpayers already burdened by the highest interest rates in eight years, declining tax revenue and budget deficits amid the worst economic slump since World War II. Banks say they need to charge more because they have to work harder to sell a greater proportion of the securities to so-called retail investors.“Sales to individuals used to be the icing on the cake, but are now the cake,” said Freda Johnson, president of Government Finance Associates, a New York-based adviser to municipalities. With banks, insurance companies and hedge funds forced to conserve cash, “you can’t sell a new issue with five or 10 phone calls,” she said.Municipal bonds lost 8.17 percent this year, including reinvested interest, according to Merrill Lynch & Co.’s Municipal Master Index. That’s the worst showing since the indexes were created in 1989. Sales of the debt have slowed to$51.1 billion in the past three months from $82.9 billion in the same period last year, Bloomberg data show.Rising YieldsAs credit markets seized up, yields on AAA rated municipal debt due in 30 years rose to 2.66 percentage points more than Treasuries of similar maturity, from an average of 0.19 percentage points in the first half of this year, Bloomberg data show. Municipals, whose interest is exempt from federal income tax, typically yield less than Treasuries, which generate taxable interest.“We recommend that borrowers delay their sales if at all possible” because of high yields and weak demand from institutions, Johnson said.The 66-cent increase in underwriting costs for each bond would cost borrowers $198 million in 2009 if sales total $300 billion.Extra fees provide little solace after losses and writedowns at the world’s largest banks and financial institutions rose to $986 billion following the collapse of the subprime mortgage market in 2007, Bloomberg data show.Fairview FeesSome borrowers are accepting the higher fees to sell debt and use the proceeds to refinance auction-rate bonds whose interest rose as high as 20 percent. The $330 billion auction- rate debt market fell apart in February as bond insurers lost their AAA ratings and banks stopped supporting periodic bidding that set yields on the securities.Fairview Health System, which operates seven hospitals in Minnesota, paid banks led by Citigroup Inc. $10.35 per $1,000 face amount of bonds to sell $522.2 million of debt last month, almost twice the $5.53 it gave the New York-based bank when it sold $38.3 million of auction-rate bonds in 2004, Bloomberg data show. Minneapolis-based Fairview’s auction-rate debt paid an average yield of 8.71 percent in the five weeks before it was replaced by new fixed-rate bonds yielding as much as 7 percent.For Fairview, the higher fee was worth it because a month earlier, “nobody was selling bonds” as credit markets froze following the bankruptcy filing of New York-based securities firm Lehman Brothers Holdings Inc. on Sept. 15, said James Fox, the system’s chief financial officer. Selling to individuals “is more tedious and requires a greater selling effort by the banks,” he said.Citigroup declined to comment on its fees, bank spokeswoman Danielle Romero-Apsilos said.Empire StateNew York’s Empire State Development Corp. completed its$672 million sale during the week of Nov. 3 after agreeing to pay banks led by Merrill Lynch $6.38 per $1,000 bond, up 16 percent from the fees for $450 million of similar securities in June.The higher charge “was the result of dysfunction in the municipal bond market,” said Frances Walton, Empire State’s chief financial officer.When negotiating the sale, which the state wanted to complete before next year’s budget is published on Dec. 16, bankers said they needed either higher yields on the bonds, which pay interest as high as 5.75 percent, or an increased fee to defray the cost of marketing to retail investors, Walton said.Individuals purchased 44 percent, or $297 million, of the bonds, up from 17 percent in June, according to A.J. Carter, an authority spokesman. Danielle Robinson, a spokeswoman for New York-based Merrill Lynch, declined to comment.Bank ConsolidationMunicipal borrowers paid about $2.27 billion to banks for $430 billion of new issues last year, according to Thomson Reuters. The fees, known as the underwriting spread, are the difference between what banks pay to buy bonds from issuers and the price at which they sell them to investors.Rising fees coincide with consolidation among some of the biggest banks in the municipal market. Five of the 12 largest underwriters in 2007 announced plans to merge or left the business. The departing firms, which included No. 2 Merrill Lynch and No. 3 UBS AG of Zurich, handled one-third of last year’s record $429.7 billion of sales, according to Thomson Reuters.Less CompetitionWith fewer banks, “issuers have a smaller pool of pre- approved people to pick from, and the remaining firms certainly know that,” said Mark Robbins, an associate professor for public policy at the University of Connecticut.“At least some of the larger underwriter fees are because the remaining banks don’t have as much competition,” Robbins said.Higher fees are biting borrowers just as municipalities grapple with an economy that has shed 1.91 million jobs this year, including 533,000 in November, according to the Labor Department. States’ sales tax collections declined 2 percent in the three months ended in September, according to the Rockefeller Institute of Government in Albany, New York.Projected state budget deficits of $32 billion this year and $65 billion in 2009 are forcing spending cuts and tax increases, according to the Denver-based National Conference of State Legislatures.In New York, losses and layoffs at Wall Street firms cut tax revenue and helped create deficits estimated at $1.75 billion this year and $13.3 billion next year, according to Governor David Paterson in a Dec. 8 interview on National Public Radio.Decades of DeclinesSales to individuals are rising after two decades of decline. Retail investors held 35 percent of the municipal bond market in 2007, not counting investments in mutual funds, down from 59 percent in 1984, according to Federal Reserve data. The reduction came at the same time as bond mutual funds became a more popular way for individuals to by municipal debt securities.At California’s $5 billion sale in October of notes due in seven and eight months, individual investors bought $3.9 billion, or 78 percent, up from about 45 percent of $8 billion of bonds sold earlier this year.“Without them we couldn’t have done the sale, because institutional buyers just weren’t there,” said Paul Rosenstiel, California’s deputy treasurer. Brokers who sell bonds to individuals “have a lot of alternatives, and to get their attention required attractive and competitive compensation,”Rosenstiel said.Paying for IndividualsUnderwriters led by Bank of America collected $2.26 per $1,000 of bonds from the sale, up from 57 cents at a $7 billion note sale a year earlier.When new bonds are sold through brokers to individual investors, sales commissions range from about $2.50 to $6.25 per $1,000 of bonds, according to brokers. Institutional sales typically result in smaller commissions, with more of the underwriting fee going to the bank.The New York Dormitory Authority paid $6.03 per $1,000 bond during a $656.1 million sale in the week of Nov. 10, up 19 percent from $5.08 at a June sale.The Los Angeles Department of Water and Power increased its underwriter fee to $6.26 per $1,000 for $550 million of bond sales in November, from $4.01 in October 2007. The increase was “to incentivize underwriters, to intensify their marketing,”said Terry Schneider, a department spokeswoman.

GuestDecember 12th, 2008 at 3:24 pm

4:23 p.m.[LEN] Fitch cuts Lennar’s default rating to junk status of ‘BB+’4:21 p.m.[KBH] Fitch cuts KB Home’s issuer default rating to ‘BB-‘4:19 p.m.[DHI] Fitch downgrades D.R. Horton to ‘BB’ from ‘BB+’

GuestDecember 12th, 2008 at 5:32 pm

The fundamentals are so screwed that all predictions have an equal probability of occurrence. That’s what MA meant when he said it feels like the economy is “holding its breath.” So you just have to pick a spot and stand your ground. For me it’s gold, come hell or high water.

PeteCADecember 12th, 2008 at 6:12 pm

Colin: You’d have to check the futures price to see if gold is still in backwardation. The trend developed very briefly, but I don’t know if it persisted. A much better case for gold is simply by looking at $HUI and %GDM on stockcharts.com Notice that stock prices on gold companies are advancing quite nicely now, and have broken the 50day moving averages. If the HUI breaks and holds above about 270 then it will mean a significant breakout (which should attract attention). Whether people happen to “like” gold or not, the simple fact is that the gold miners are becoming quite profitable now – since gold is above $800/oz and energy costs (their main costs) have dropped significantly. So with the rest of the stock market rather lackluster (to say the least) the folks on the HUI are likely to get a lot of attention. It’s all about profit potential.PeteCA

Wild BillDecember 12th, 2008 at 4:30 pm

Some help please. Someone named Octavio something, I didn’t catch the last name, from a financial group named Celent, appeared on CNBC this afternoon. He said he analyzed government data through October 2008, and concluded “there is no credit crunch.” According to the data provided by the federal government, banks are lending at a greater rate than ever, both to private corporations and individuals, and to each other.In the meantime, every economist constantly is referring to the credit crunch. Who the hell do I believe?

Wild BillDecember 12th, 2008 at 5:49 pm

If Octavio Marenzi, founder of Celent Research Group is correct, then using the credit crunch as a rationale for TARP and all of the other bailouts, is nothing more than the “Weapons of Mass Destruction” of the current economic war. The bankers win big time. The rest of us get it in the neck.If I’m being overly simplistic, please tell me. The credit crunch that Octavio Marenzi is denying, has been eloquently described by Professor Roubini and other credible sources. Have we really been hoodwinked so blatantly again?

ORDecember 12th, 2008 at 5:56 pm

Exelent analogy:-) But, IMO, this Marenzi fella is telling only half the story.If he is right, then you are 100% in the money. These guys completed wrecked the US economy for no good reason.

HayesDecember 12th, 2008 at 9:55 pm

I posted the Marenzi link – I am Guest who has recently come out of the (guest) closet but out of habit neglected to enter my name (Hayes)- I too was surprised at this fellows statements and have not taken/had the time to investigate his sources. But what clicked when he made his statements was another interview on (the very frustrating CNBC network) Thursday with Dimon of JPM — he essentially stated the same thing — here are the links – Discussing the current state of the economy, with Jamie Dimon, JPMorgan chairman/CEO JPMorgan Chase chairman/CEO Jamie Dimon discusses how the bank will be using TARP money. Insight on JPMorgan’s fourth-quarter outlook, with Jamie Dimon, JPMorgan chairman & CEO; Jeffrey Harte, Sandler O’Neill managing director in… I forget which part had him stating that JPM was lending lots of dough etc etcNotwithstanding that all of these bankster folks have the best interest of joe 6pak at heart, I suspect that they (the banks) are concerned about an increasing chorus that is suggesting that they are not behaving in the spirit of the TARP

FAMCDecember 12th, 2008 at 5:44 pm

Should Govt spend?Frist, where the bulk of govt money comes from?1) Taxpayer – the direct transparent method2) Inflation – the indirect method (Govt friends spend the money first)3) Debt. But who pays the debt?Answer: You, your family, your children, your grandchildren.So that what means govt spending?It means that they get your money (now or for several years) and tax your children (to pay the monstruous debt) for investing in what they judge that is “important”.If you know what exotic options mean you know that many bankers like to gamble with your money. When they lose the money with their “smart” bets it is your problem!So that, if govt must spend this spending should be in really important, essential things and not to buy trash assets from greed irresponsible guys.

redlegDecember 12th, 2008 at 10:14 pm

Amen.From my experience in public works projects, the water, sewer, and transportation projects built in the 1930’s are numerous, well built, and generally still in service in the cities that I work in. However, the service life of these is usually 75 years (give or take a few decades). Investing in infrastructure, even if it is out of desperation, is really good timing.Oh, the irony of flushing bailout money down the toilet, using infrastructure that was built by the WPA…

ptmDecember 12th, 2008 at 5:49 pm

JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS – FLASH UPDATE – December 12, 2008Recent Economic Growth Overstatements Evident In Post-Election Revisions – Retail Sales Series Signals Worse Times Ahead – November Inflation to Take Heavy Oil-Related HitAs reported this morning (December 12th) by the Bureau of Labor Statistics, November’s PPI year-to-year inflation fell to 0.4% from 5.2% in October. Details will follow the CPI reporting on Tuesday (December 16th).If this trend continues we may see quantifiable deflation in December 2008 or January 2009!

Octavio RichettaDecember 12th, 2008 at 6:00 pm

If deflation is bad because people do not spend, invest, etc. Then the government is shooting itself in the foot since CPI statistics are biased toward the under-reporting of the CPI. Perhaps they will reverse their cheating ways and now fake the numbers on the upside:-)

AfADecember 12th, 2008 at 6:35 pm

We live in sorry times. When we blow whistles and ring bells over the fact that consumers are not taking on more debt, paying off some of it, trying to default on the rest, trying to save as they should, and consider these as menaces to the economy and the nation. Running deficits and taking on unpayable debt, OTH, is however a source of rejoice and cheer even by economists.Sometimes, the absurdity of the truth is just infallibly mind boggling each time simplified. Even for a person that tries not to “moralize” what I try to analyze, I find this repugnantly sinful, evil and Machiavellian. To paraphrase J.K. Galbraith, the process is so simple that the mind is repelled.

AfADecember 12th, 2008 at 7:30 pm

No, it has been chased, crucified, hunted worse than witches have been in the Dark Ages.No that I’m equating common sense and witches but the latters at least had broomsticks.

GuestDecember 12th, 2008 at 7:47 pm

Oh, I don’t know that it needed much ‘discouragement’. Common sense is closely related to self-reliance and responsibility, and it’s just so much easier (at least in the short run) to blame others and let someone else take care of everything–we don’t have to think, because if we “weren’t thinking” or “didn’t understand”, someone will always take pity and fix it.. after all, we couldn’t be expected to know, and we have a right to have every little thing explained to us and regulated for us as though we’re only 3 years old.. we’re entitled to whatever benefits we can squeeze out of the system, based on naivete and apathetic ignorance if necessary.. it’s smarter to play dumb, you know.. (eyeroll) ..what a society we have created for ourselves. 🙁

FAMCDecember 12th, 2008 at 6:49 pm

Does anyone knows why Henry Ford once said“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” ?

blindmanDecember 12th, 2008 at 7:22 pm

f, because a private central bank can create money out of nothing and then receive interest on that money and pocket it. this they are guaranteed, just for breathing, while mortals have to go into debt. by mortals i mean the treasury, the people in a representative “democracy” and all taxpayers. something along those lines. google “money masters”. think about it.

GuestDecember 12th, 2008 at 9:16 pm

I have a friend he’s nuts of course but he thinks this is perfectly fine as long as there are checks and balances he says, he also has no problem with these bankers making a spread off of unearned phony paper, he says, ” they’re creating a service, managing money and calculating risk”.This is why we’re in big trouble because unfortunately 99 out of 100 people I meet or talk to are complete idiots including my friends.

blindmanDecember 12th, 2008 at 10:23 pm

g,.i blame it on the Queen. ” god save the queen, she ain’t a human bein’. she made me a moron.” was the sex pistols, johnny rotten……the original ……God save our gracious QueenLong live our noble Queen,God save the Queen:Send her victorious,Happy and glorious,Long to reign over us:God save the Queen.O Lord, our God, arise,Scatter thine enemies,And make them fall:Confound their politics,Frustrate their knavish tricks,On thee our hopes we fix:God save us all.Thy choicest gifts in store,On her be pleased to pour;Long may she reign:May she defend our laws,And ever give us causeTo sing with heart and voiceGod save the Queen… and then ….Sex PistolsNever Mind the Bollocks Here’s the Sex… (1977)God Save The QueenGod save the Queenthe fascist regime,they made you a morona potential H-bomb.God save the Queenshe ain’t no human being.There is no futurein England’s dreamingDon’t be told what you wantDon’t be told what you need.There’s no futurethere’s no futurethere’s no future for youGod save the Queenwe mean it manwe love our queenGod savesGod save the Queen’cos tourists are moneyand our figureheadis not what she seemsOh God save historyGod save your mad paradeOh Lord God have mercyall crimes are paid.When there’s no futurehow can there be sinwe’re the flowersin the dustbinwe’re the poisonin your human machinewe’re the futureyou’re futureGod save the Queenwe mean it manwe love our queenGod savesGod save the Queenwe mean it manthere is no futurein England’s dreamingNo futureno future for youno future for me ..we instinctively realize the destructive impact the truth has on illusion and therefore avoid it, even to our own detriment. this is ignorance and difficult to overcome but we are capable of realizing either illusion or… the unknown..just a thought. don’t shoot, i’m only the banjo player.

FAMCDecember 12th, 2008 at 7:45 pm

I am provoking you. I wrote before about this.(fractional banking, etc. etc….)But I would like to know what SPECIFIC fact motivated Edison to write these words.See the online book above for a really angry man.

Average JaneDecember 12th, 2008 at 6:54 pm

I can’t figure out why, when earlier this summer, gasoline was at $4.00/gallon-plus, grocery prices went up ostensibly because the truckers and haulers and shippers had to pay more for their fuel. Now that the gasoline price has dropped precipitously, grocery prices are still going up. What gives?

blindmanDecember 12th, 2008 at 8:06 pm

a,.the debts of the retailers have not been declining. they are over time and these expenses are still with them, labor, utilities, rents, taxes etc.. deflation in fuel is one component in the “price” of an item. of recent an unexpected and undeniable burden. relief due to falling fuel costs is perhaps an unforeseen opportunity for them to get out from under other pressing debt burdens to which they have previously seen fit to commit.if the retailer has to borrow money to do business this is also going to figure into the “price” of the item… as will volume of product moved..while fuel prices increase and worked their way into the price, at a later time, a lag, taxes, rents, etc. costs… and increased secondary fiduciary requirements of the operator or retailer figure into the pricing of any particular item which may or not be for sale. price stability or increase indicates continuing demand..don’t buy crap and the price drops until the item disappears. continue to purchase and the item remains and the price stabilizes or increases, in general and in principle. market at work. that’s my guess.

Average JaneDecember 12th, 2008 at 10:19 pm

Thank you, blindman, for taking the time and effort to respond to my idiotic question. This makes sense to me. We consumers really are paying to consume in more ways than one.

blindmanDecember 12th, 2008 at 10:36 pm

a, the questions i ask myself, and of other people, are much more idiotic. i have wondered the same thing that you asked and took a wild guess. that is what i wrote in response..it seems consumers and producers may soon realize they have both been slaves to financiers.? we’ll see.

Wild BillDecember 12th, 2008 at 7:50 pm

The following is oneof Aesops fables.The Eagle and the ArrowAn Eagle was soaring through the air when suddenly it heardthe whizz of an Arrow, and felt itself wounded to death. Slowlyit fluttered down to the earth, with its life-blood pouring out ofit. Looking down upon the Arrow with which it had been pierced,it found that the shaft of the Arrow had been feathered with oneof its own plumes. “Alas!” it cried, as it died,”We often give our enemies the means for our own destruction.”

Mother of GodDecember 12th, 2008 at 7:45 pm

The below is from Mother of God (who first thanks you all for the kind messages of condolence). It is chapter 6 of a book I hope will be published someday, a product of collaboration between my brilliant-but-unknown teacher and myself. I hope it answers to questions I was asked about pay justice and fairpay, and I hope it has something important to say about the issues of unity, market manipulation, business risk, job specialization, and saving our children…issues which have all been raised in the past few days in this community.Chapter 6The irrationality of the reasons for higher-than-average hourly pay.To get an idea of the maximum just fortune, we need to establish the maximum hours of work per individual, and the maximum fairpay per hour per individual, and then multiply them together.The maximum hours per individual is easy. No one can work more than about 100 hours a week for 50 years, which is 250,000 hours per individual per lifetime. Very, very few people indeed work harder than this. There may be no one who has worked that many hours. So 250,000 is a very generous upper limit for number of hours. A graph of the lifetime average hours per week would peak somewhere around 60 to 70 hours a week and decline to nothing or almost nothing at 100 hours a week. 2 billion housewives may work up to over 90 hours a week, but their lifetime average would be lower than this. Broadly speaking, the underpaid work longer hours per week. Generally speaking, the more underpaid, the longer the hours. The Swedes have for decades had a 32-hour official work week, before overtime rates kick in. The Kalahari bushmen people get by on 12 hours a week. Winston Churchill sometimes worked 120 hour weeks during the war, but he was good at catnapping. In Japan, working over 100 hours a week causes overwork death. Medical Interns are for some obscure bad reason forced to work 100 hour weeks, but it is bad for them.Paying for gifts of nature like talents, skills, brains, beauty, brawn, aptitude for leading, etc is universally accepted as sensible, but is irrational. The person does no work, makes no sacrifice to get these gifts of nature.Payment for study, training, practice, etc, is proper, because it is work, sacrifice of time. But it is not a rational excuse for limitless overpay after studying. Tertiary students should in justice be paid for studying. It is sacrifice. It is time spent in which the student cannot work to keep himself. But paying a premium for life for the services of a student after studying cannot be justified rationally. That is, it cannot be justified. If we pay students for studying, we do not need to pay people for having studied. Paying people for qualifications beyond their deserts for time spent studying is legal theft. It is a false excuse for higher-than-average hourly rates of pay, and society causes its self-destruction by injustice in permitting it. It is pay without work, which must mean, which cannot NOT mean, work without pay for others, which must mean ever-escalating anger and danger and suffering and social breakdown. Inequality ever-grows.Once again, the support for payment without limit for qualifications, beyond the fair compensation for having studied, is supported by people seeing the upside of payment for qualifications, and being blind to the downside, financing the overpay and financing the violence engendered, with money, life, order, social and global survival and happiness. Seeing the close-up connections, seeing the easily imaginable gains and not the more distant connections to loss. Letting the pleasure principle obscure our awareness of the tremendous loss side. To avoid stepping in dog doo, you have to see it. It is far less unpleasant to see it than to step in it. We are so sensitive, we can’t bear to see the downside, and so we have suffered the downside for centuries without learning.Paying tertiary students for studying may seem strange, but in fact we already pay them for studying. They don’t live on air. But the parents or scholarships pay them for studying, whereas society is the beneficiary of this studying. It is another legal theft. Society gets a gift from parents.The society paying tertiary students for studying instead of hoisting the cost on parents will mean also that all bright people can study, which will enrich society 10-fold, since at the moment 90% of bright people’s talents are wasted by poverty. Science will go ahead 10 times faster from this cause alone. Medical science will go ahead 50 times faster, because at the moment 80% of research money is wasted on finding generics to get around patents.Of course, society will have to limit the number of students in each area of learning that it funds, but that is fair, because why should society pay for more students than it wants to buy? And when no one is overpaid for having studied, there will not be such a rush to study as now. Numbers will not be excessive. And students will be more genuine, studying for sincere reasons, not for the overpay.Business risk is another excuse for higher-than-average hourly payrates which is universally but incorrectly swallowed.Our compassion and empathy seems to be in proportion to money. Our irrational desire to compensate for risk has evaporated when it comes down to the streetvendor, the prospector, the fisherman, and the worker. Risk and workers hardly seem to go together in our minds, although 1000s of workers die yearly because of their work, and virtually no businessmen do. The underpaid pay for all, in pay and lives, and are too meek even to know that they do. Protection for the worker in mines, in the fishing industry, protection for the worker against layoffs, danger, unemployment, is slow and ever-too-little. But compassion for the brave and heroic businessman, willingness to allow him unlimited profits because he is taking a risk, is boundless. The poor businessman, venturing his own capital for our benefit, taking risks that we are more scared to do. Saviour of us all. Kingpin of the system. Let his reward be liberal, unconfined.We do not see that 99% have to pay financially for this payment, and 100% have to pay in loss of 99% of happiness for this payment.It seems to us that we do pay for business risk and that we ought to pay for business risk. Whereas the facts are clearly and simply that we do not pay for business risk, we cannot pay for business risk and we ought not.It is true that there is business risk, and that businessmen make profits, but there is no causal connection between the two. In the first place, we would have to be able to measure risk, we would have to measure risk, and we would have to assess a proper reward per unit of risk. None of which we have done or can do.There are high risk, low risk, high rewards and low rewards. But no causal connection between risks and rewards. The very meaning of risk prevents there being any connection, any correlation between risk and reward. Risk is risking losing ‘your’ money. I say ‘your’, because capital in unlimited-fortunes systems, like communism and present capitalism, is mostly others’ earnings, capital is mostly overfortune.Do we have any intention of paying the riverside fisherman for his risk? Do we have loving compassion for the lonely prospector who returns with empty bag? The businessperson is risking a sprat to catch a mackerel, as they say. He is engaged in the pursuit of money, often without proportionate work. His aims are for himself alone. And yet we treat him as a hero who deserves our unstinted support, and pay him without knowing we pay him. The egotism of the businessman, his assumption of his heroism, infects and brainwashes us into support. Which we don’t feel for the smaller player. Who is more likely to be risking his own earnings, his own life and health. We feel for the merchant who sends a ship out on stormy seas to win a fortune, but we have no thought or care for the sailor who climbs the mast in freezing weather around the wild Cape Horn, who was often thrown from freezing mast to freezing sea with frozen thumbs.We don’t give knighthoods and other honours to little girls dragging coal through freezing tunnels, nor to the child chained to a carpet loom, nor to the world’s workers, whose wealth-creation is greater, but to the top man, whose contribution is smaller and merely symbolic.Is there any correlation between risk and reward? To answer that, we would have to be able to measure risk. By the definition of risk, we are unable to measure the risk. We lock on to the instances where there seems to be risk and profit, and assume a correlation. We ignore the instances where there are high risk and low returns, low risk and high returns, which weaken the correlation to nothing.In addition, the plums of low risk and high reward are reserved for the big players, and the higher risk and lower rewards are the lot of the small players, the 99% suckers.There is always some degree of inside information, which makes investment safer for those in the know. The gross tendency of the stockmarket is to shift money from the small players to the big players. Just as in gambling. The small player has less information, slower information, and mis-information put out by the big players. As we see portrayed in the film Trading places.The English Rothschild makes sure he receives news of Waterloo first, and then very visibly starts unloading his English shares, convincing everyone that England has lost the battle, and then secretly buys up English shares at rockbottom prices, which then rocket. This is clearly big money for very little work. Which means a lot of work for very little money for others.Can we afford to allow a fool and his money to be so easily and limitlessly parted, when we are all money-fools relative to the most money-smart person? Can we be smart enough to put a cap on overfortune at the maximum that one person can earn by his own work in a lifetime, and thus limit overfortunes to the maximum just fortune?In this Rothschild example, the risk is very low, the rewards very high. And what is true in this example is true in all markets in all places and times. The small player can never be sure that the information he receives is true or is misinformation put out by big players. I say, let such legal theft and all legal thefts be limited to the maximum self-earnable fortune, and not escalate to infinite violence, universal misery and global extinction.The big player has enough money-muscle to control the market. The big player can buy and sell in sufficient quantity to affect the stock price. So he can buy in, thus raise the price, sell out, thus lower the price, buy in again, and so on endlessly. Simply a money pump.And the same applies to private control of the money supply. And to public control of the money supply without intelligent and effective vigilance against price manipulation for private gain. There is no use in putting a lower functionary in charge of inspecting the work of a higher functionary. The higher functionary will just pull rank, and go on doing what he likes. The more powerful the individual, the more reluctance there is to inspecting his work. This failure to effectively monitor high-ups is just issuing them a license to commit theft.Stocks go where the big institutional money managers send them. Buybacks boost share value, and CEO income. American companies are putting more money into buybacks than into R & D.The French Rothschild had enough overfortune to be able to plunge the stockmarket by selling his shares, in order to force his acceptance into high society.There must always be someone or some group who receives stockmarket-affecting news first. And these are generally those with most money to buy information, and with more money to hire people to follow the market for them. And the ones who have more money are those who can get greater benefit from the information by investing more. Those who have most get most. Everything conspires to drive inequality, legal theft. More money grows faster, less money grows more slowly, or shrinks to fund the overpay or legal theft.When you think of it, money makes money has to mean that the person didn’t make the money, which has to mean others made the money. But people are chanting money makes money as if it was salvation instead of catastrophe. Get rich quick and aid global catastrophe. Open season on the social pool of wealth, grab all you can and be a dead hero. There is no doubt that the current philosophy is: Everything I can grab is mine, whether by private inheritance, gambling, unjust profits, interest, or lottery. Interest is the product of profits. Equally, there is no doubt that overfortune is injury and that injury is not tolerated.It is logically impossible, that is, selfcontradictory, for risk to be rewarded, since risk means risk of losing money.And risk is a personal affair, in which others are not at all obligated to reward, nor to allow legal theft.But how much hard thinking by how many people will be sufficient to dig out the universal misconception of the right to reward for risk, and avoid global catastrophe? How many people have the mental courage to allow themselves the liberty of testing the wheels of private inheritance, profits, etc, with the silver hammer of thought? The fate of humanity hangs on the answer to that question.to be continued…

Mother of GodDecember 12th, 2008 at 7:49 pm

Mom of G continues chapter 6Similar arguments apply to the notion that people are paid for responsibility in jobs and that they ought to be so paid.And what is there in responsibility that it ought to be paid for? Does the responsible person in a responsible job sacrifice anything in the responsibleness that should therefore be compensated? Does the responsible person use up more calories, so that he needs more money, a finer whisky, to replenish his responsibility? Or is responsibility a natural gift, a gift of character, or merely an accident of fortune, that therefore costs the person nothing to have and to use? If responsibility is a burden, can money compensate for whatever it is that is lost in carrying that burden? And is responsibility a burden only to those who are unfit to be carrying it, to those who have taken on the responsible position for the money, not because they are naturally fit for responsibility? If we do not pay for responsibility, the ones who take it on will be those whose nature equips them to carry it without effort. Just as money might tempt a weaker man to try to do a physically demanding job he is not fitted to do without unnatural effort.And then, what guarantee do we have that persons in responsible jobs are acting responsibly? People could never agree on what constituted responsible behaviour. Is the CEO focussed on maximising legal theft, with no regard for global sustainability and conservation, for acting responsibly?Again, we have no measurement of responsibility, and no way of establishing the proper compensation per unit of responsibility. And the costs of measuring responsibility would be very great, and would invite bureaucratic corruption.The person in the responsible job is not necessarily acting any more responsibly than anyone else further down the hierarchy. Everyone is acting with equal responsibility. Every block in the pyramid is contributing equally.Again, we focus on cases where jobs that seem to be more responsible jobs are paid more highly, and ignore cases which erode the correlation to nothing. What is the responsibility of a busdriver, a car mechanic? The busdriver has more lives in his hands than the surgeon has under his scalpel. But we assume that lowpaid jobs involve less responsibility, and then we use that conclusion to confirm our belief that people are being paid for responsibility. A circular argument, that is, using the conclusion in the premises. We think: People are paid for responsibility, because people in lowpaid jobs are in less responsible jobs. How do we know that people in lowpaid jobs are in less responsible jobs? Because we know that people are paid for responsibility.In reality, higher hourly payrates create irresponsibility in high places. The greed factor makes the greedy elbow their way into higher-paid jobs, elbowing out those with natural gifts of being truly responsible. Jeffersons and Lincolns are few. At the very least, the more responsible and ethically aware and sensitive will have, as part of their job, the constant fighting off of greedy people without responsibility. Like Abraham Lincoln’s labours against place-seekers. And this is another example of the fighting at the top.Nature gives a variety of gifts, which are quite possibly a proper balance of variety of abilities. Unequal hourly payrates introduce a distortion into this natural balance, encouraging everyone into the wrong jobs for them, lowering the quality of work, and lowering job satisfaction. With equal hourly pay, everyone will gravitate to the in-demand work they are naturally most made for. Overpay forces out nature’s choice of people to do the job, and replaces them with the greedy. That is, with the least aware that overpay is unhappiness for them, not happiness.But righteous rulers will be increasingly rare where wealth-power is concentrated. Money like manure is best when spread. The bigger the heap, the more flies. The standard of American Presidents is ever falling as overpay-underpay increases. The truest leaders were in the relatively egalitarian beginning of the American dream of freedom from tyranny. There has been ever less concern about wealth-poverty range as the range has increased.Again, people think it is in their interests to be paid for skill and experience. But paying for skill and experience opens the floodgates to unlimited pay on these excuses, thus net impoverishing most of the workers who are being paid for skill and experience. And there is no reason to pay for skill, which is either natural gift, or training, which should have been paid for. And no reason to pay for experience, which is gained while being paid, and so costs the worker nothing. Removal of these excuses for unlimited overpay will stop workers’ earnings sucking up to the overpaid, and will increase the pay of most people, and will make everyone’s pay just, and make everyone’s lives 99% free of war and other violence.So, in short, it is clear that, provided we pay tertiary students for studying, there are no reasons for higher than average hourly payrates.This conclusion then allows us to discover the maximum self-earnable fortune, by simply multiplying the maximum possible number of lifetime workhours by the world average hourly payrate. As approximate as this figure must be, with the millions of details that are involved in any reality, it does give us a usable idea of the general area in which the maximum self-earnable fortune lies. And it is of the order of US$3.75 million in 2007 dollars, less minimum lifetime spending. Which means a lot less for the 1% overpaid. And a lot more for the 99% underpaid. And that means a lot more equal distribution of political power, and that means a lot more democracy and freedom, a lot more of the American dream and the human dream. And a lot more freedom from violence for all. And a great deal more happiness for all. That is, safety, peace, order, survival, education, health, wisdom, progress.Once again, it is very simple. We have erroneously allowed earnings and political power to depart from us. If we but see the error, we get our happy. We get back a future, and a far, far happier future. Overpay comes down, when these excuses for overpay are seen to be false. Underpay comes up. Level seas for all. Pacific sailing forevermore.We can all immediately, right now, know that it will be a far, far happier future, because we all already know how devastating to happiness it would be for a government to commit the injustice of taking 90% of aftertax income off 90% of citizens and giving it all to 1%, and we know that we have far worse injustice than that in the world today, after thousands of years of accumulating legal theft, of unjust money drift from all to few.We can all immediately, right now, see how easy it will be to convince almost all, because we ourselves can already see how simple it is.Can we, at this very late stage of the corruption of everything in culture by misinformation and erroneous thinking, dig ourselves out from the rubble of non-sense?Minimum wage is putting the cart before the horse. As long as the money-sucking system of unlimited fortunes exists, companies will be forced, not to pay minimum wages and employ all, but rather to employ fewer people, and work them harder. It is like trying to get a branch into the right place without trying to get the trunk in the right place. The branch will snap and die. Whereas maximum fortune and maximum income, and equal, direct, electronic distribution of overfortunes to all, will inevitably mean the more just and happy distribution of pay. Maximum fortune and wage will mean that the lowest hourly payrate will automatically be far higher than the minimum wage, which is after all an insult.If everyone comes to see the existence of legal theft, everyone will see the justice and sense in limiting fortunes to the most a person can earn in a lifetime.The overfortunes can, for the sake of the administrative simplicity and the bureaucratic cost-saving of the simplicity, be distributed equally among all world workers, because 1. 99% of people are underpaid, and, 2. overfortunes are being trimmed anyway, so that the shares going back to the 1% overpaid will be being trimmed away.Or the overfortunes could with relative simplicity be redistributed only to those below the world-average hourly payrate. But that would involve vast files and universal inspections of income. Which would be a huge waste of lives serving that bureaucracy, and a huge waste of taxmoney.One enormous advantage of much more equal hourly pay for all jobs will be that people will not be tempted away by higher pay from the work that gives them most intrinsic satisfaction. This will mean far more job satisfaction, and will mean quality of workmanship will be higher. People will not only have the happiness of being better paid, they will have the happiness of being in jobs that give more intrinsic satisfaction, and of producing goods that give them satisfaction. Doctors will be real doctors. Politicians will be real politicians. Lawyers will be real lawyers.It doesn’t mean that everyone will be free to get paid for doing whatever they like. It means that they will be free to choose the work they like most, from among the jobs for which there is human demand for the job-products.Also, it makes sense that capital in unlimited-fortunes systems will tend to concentrate around products of highest profit, and thus starve products of lower profit of a fair share of capital. And jobs will tend to be in production where unjust profits are greatest, and not so much in products people want. That is, the distribution of capital and jobs will be shaped by unjust profits, not by human want. An obvious example of which is global food.Many will be alarmed at the idea of getting rid of higher-than-average hourly payrates, but this is once again because of seeing the false upside, more money more happiness, and not the far greater, true downside, namely, less money, less happiness for 99%, and ever-escalating violence and misery for all, ever-higher defense taxes, repair costs, ever-lower wages for 99%, and ever-higher medical and legal costs, for example. They are looking only at the loss of the upside, and not the gain of the removal of the far greater downside. They are doing this because of the tendency to look at the pleasant and ignore the unpleasant, the tendency to see the small and not the large, and the tendency to see the higher and not the lower. And the upside which they have come to think of as pleasant, is not as pleasant as it seems from the other side of the fence.Grass looks greener on the other side of the fence because you see it at a low angle, so that the grass hides the dirt areas. When you look straight down on the ground, there are many bare areas between the grass blades.And, once again, it is not a matter of imposing equal hourly payrates, nor of limiting profits, gambling, interest, lottery, etc, but, through the just limitation of fortunes and income, and distribution of overfortunes, naturally automatically causing far more equal hourly payrates, and hence causing human survival and far more global peace and friendliness. And over-profit, over-gambling, over-interest will fade away.As long as people have failed to put the trunk of the system in the right place, society has engendered an endlessly growing bureaucracy trying and necessarily failing to get and keep all the branches in the right place. Every empire, from before the Egyptian and after, has suffocated to death on its relentlessly growing bureaucracy. Higher pay for the heads of bigger departments has meant encouragement to heads to increase the size of their departments, and to prevent the rise of better heads and hearts. So pay justice also means far less law and bureaucracy, far less government interference, and far lower legal costs. Hence far lower taxes.It is easier for people to see small things than large, and they see branches and not the trunk.one more part to come…

Mother of GodDecember 12th, 2008 at 7:51 pm

Mom of G finishes chapter 6Even before the happiness of getting unlost, is the happiness of knowing one has the right map to get unlost.Is there one person on the planet who would choose a world in which there was a range of pay for a fortnight’s work from $1,000,000,000 to $1, where there was a 99% chance of getting less than the average, and a 90% chance of getting between a 10th and a 1000th of average pay per hour, and a 100% chance of the society accelerating violence and weaponry to self-extinction, over a world in which there was a 100% chance of equal pay for equal work, and plenty for all, and perpetual peace?I think not one. Therefore we are all very nearly agreed that we want limited-fortunes social systems.Is there one person who would choose the first option, even if they knew that they were going to be the one paid $1,000,000,000 a fortnight, or knew that they were not going to be among the 99% underpaid?I think not one who thinks a little.Since we are very near to agreement, we are very close to the colossal happiness that justly limited-fortunes systems will unleash. The only conflict will be with those who would rather die than think. The incorrigibly selfdestructive. The incorrigibly unthinking. Those who are stubbornly, unthinkingly attached to the status quo. Those who adamantly refuse to believe that it is possible for us to have been wrong. Those who get wildly passionate, angry and murderous at anyone having ideas. Remember there is no force in this. Either the idea is true or it isn’t. If everyone agrees, we are free to do it. If not everyone agrees, then perhaps the idea is wrong, or people didn’t think. No doubt, when the law against murder was first proposed, there were people who objected violently just because it was a change. Some people, without any reason or thought, find any proposal for change highly offensive. Like tribes killing any stranger without examination.I hope, and I think it is reasonable to hope, that very few people would rather die than think a little. However, it would take some quality thought and grit for people to realise and face the fact that they are in global misery and heading for extinction, so that they know that the real choice facing us at the present time is between misery now, followed by extinction soonish, and 100-fold happiness. Head-in-the-sand may soon kill every living thing on the planet.And the transition can be effected very smoothly and quietly, with no disruption of present societies. Smoothness and quietness will begin to increase immediately, will increase for a long time, and will level off at the return of natural levels of happiness, about 100 times present levels.But I hear a cry of: Pay the surgeon for studying, and then pay him the same as a janitor?! Absurd!So let us see. First, let us remember that the surgeon’s pay will be what the janitor will get under fairpay, will be much higher than waht the janitor gets now. Next, let us take away the mindless confidence we get from mindless custom. Let us imagine that the custom is exactly that, to pay the surgeon the same as the janitor, and that we have to argue for a change in the custom, from paying the surgeon the same as the janitor. We have to find reasons for paying the surgeon more, on top of paying him or her for studying.And we will take away the emotional force of the mindless bias in favour of men, and in favour of alpha males, by making the surgeon a woman.The janitor is only pushing a mop, the surgeon has lives under her scalpel, some will say. But the surgeon is only standing there, pushing a scalpel. Her brain is full of knowledge and her hands are full of skill, perhaps, but she has already been paid for this, insofar as her knowledge and skills are from study and previous paid work, and she doesn’t deserve compensation for those things insofar as they are nature’s gifts, which she is given free. Is the more mental work of surgery more exhausting than the more physical work of janitoring? No one knows. And the cost of replenishing any presumed greater energy sacrifice is very small. What is left? They both have equal needs and desires for food, comfort, democratic share of political power and social standing. They have equal sacrifice of themselves per hour. They are both human. They are equally sensitive to social slighting or inferiorisation. They have equal right to equal compensation for equal sacrifice. It benefits everyone to put everyone on an equality, it horribly degrades everyone to put everyone in a hierarchy of superiority and inferiority. The truly superior have no desire to be on pedestals. The truly superior wish to be among the human tribe, neither above nor below. In mutual respect. Inferiorisation puts everyone in a state of tension, of fear, because it is driving wedges among the members of the tribe. Superiorisation abets arrogance, which is a degree of insanity. The human tribe is the greatest, surest wealth for humans, and driving wedges within it is destruction of the greatest wealth, the comfort and trust of the tribe by the tribe. It is of enormous happiness-value to be able to look out the window and see people we have in no way cheated.Remember the anti-intellectual element of Nazism, and the cultural revolution in China, the destruction of the mandarin class, of those who thought having more gifts of nature entitled them to higher pays, more power. These show us that inferiorisation of people produces a backlash, produces deep hatreds, horrible revenges. 40% of the Nazis were primary-school teachers. See Male fantasies, by Klaus Theweleit. Fear the inevitable backlash from those you assign to poorer houses for life. It is easy to say: I deserve more. It is a little harder to say: He, or she, deserves less. We ought to look down on people who want to be paid more highly than their equals in humanity.Do we see inferiorisation among animal tribes? We see fights for alpha position, but I don’t think we see inferiorisation. Alphas may indeed eat first, but they don’t deny omegas their necessary share of the killing made. The alpha does not assume the omega’s lesser rank cancels his survival needs. Animal alphas are only alphas by being best at providing for and protecting the tribe.And is our understanding so good that we always recognise superiority? We can measure IQ, but we can’t measure intelligence. We have yet to measure social intelligence, emotional intelligence and other forms of intelligence we haven’t even yet thought of.There is another argument.For some reason that I can’t yet fathom, I am only 90% happy with the argument, or the expression of it. I am still brooding on it.Job specialisation is a social phenomenon. There is no job specialisation without society. Job specialisation is a community effort. So in some sense, specialised jobs are the property of all the members of the society equally. Specialised jobs are created by everyone contributing. The natural ownership is everyone owning bits of every job. The benefits of job-specialisation are intended for all. All contribute equally. Everyone gives up every bit-job except one, and receives bits of one job from everyone else. Job specialisation is a community product. One person takes over the surgeon’s lettuce-growing so that the surgeon can concentrate on surgery. The surgeon gets paid so she can buy lettuces. So we may say that no one can take their specialised job personally, and take special rewards for it. In nature, before job specialisation, the surgeon person, doing all her own jobs, is unlikely to be very much more productive than another. So, in justice, her reward in society should be the same as her production in nature, multiplied by the efficiency factor of job specialisation. If the production of goods becomes twice as efficient with job specialisation, the surgeon’s just recompense is twice what she would produce doing all her own jobs. The same recompense of everyone. Job specialisation is not an excuse for beginning the endless growth of inequality and violence. Specialised jobs are not the property of the individual, but of the society that produced the specialised jobs, that is, of everyone equally.People above us in money-power have freedom and power to hurt us. People below us have a will to hurt us, and still have some power to hurt us. Some people, getting nervous about the power of those below us, push them down further, as for instance, the lynching in America, and the racial brutality in apartheid South Africa. This decreases those people’s power to hurt us, and increases their will to hurt us. Perhaps we overpay the powerful above us in the hope of reducing their will to hurt us, but paying them more increases their power and freedom to hurt us.Unequal pay per hour is self-harming.The large point is as simple as this. Two children, two school lunches. If one takes the other’s lunch, he gains: One more lunch than he can use. He loses: Amity, peace, friendship, play, freedom from constant fighting with the other trying to recover his lunch. He gains practically nothing, he loses almost everything. He even loses his own lunch, because he has no peace to eat it. The fight, which must go on as long as the theft continues, must in time use all the energy he gets even from his own lunch.Theft is a lose-lose situation.Therefore nontheft is a win-win situation.Therefore we can all be much happier.

AfADecember 12th, 2008 at 10:35 pm

OK, now that I lost my appetite.MOG, that was an outstanding work (well up to the first half I read anyway). To go to the heart of the matter, I have a couple of remarks:Where do you get your percentages and definitions?Don’t you ever use statistics, quotes …?More particularly, I noticed that you are using the wrong definition of what risk is (but I cannot blame you much, since even bankers seemed to get it wrong). Risk stands for the uncertainty, the possibility that the future will be different than what was expected in our scenarios (be it to the upside or the downside). It is the degree of unpredictability, it clearly has a relationship with return and reward, but not the way you imagined it. [Caution, this is only my own interpretation]. The required rate of return is dubbed as such because of a reason. It is the “demanded” level of reward by investors/buyers/capital providers in compensation in case profits does not match the promises made by management. Return and risk do not correlate like that (a risky project has higher return not because it is necessarily profitable, but because weary investors would not put their money until they get proportionate reward). Notice that, here, I am making a clear distinction between profitability and return, both are linked but not the same. Return is related to risk, but profitability is not. They match only if capital providers are the same as asset operators – of lack of a better word (i.e. no agency problem). In this case alone, as profitability and return become the same thing, can we say that return and risk are unrelated. And since (1)risk can never be completely eliminated in business affairs (I am specifically talking about operating risk) (2)capital owners are rarely capital operators, therefore a mismatch between profitability and return (i.e. the + risk that next periods profits will depart from what was promised) cannot be borne by capital providers unless return is higher than profitability proportionally to the perceived level of that departure (i.e. risk) and as a result, no company, project would ever see the light unless of course the capital providers=capital operators, which significantly reduces the business (and working) chances.I tried to talk about capital providers and capital operators to accommodate for work and workers and then hypothesize. Capital providers are workers and capital operators is the company or any other organization employing that worker. As before, it is perfectly conceivable that both be the same person (i.e. self employed or business owner). The story about profitability, risk and return can be extended to work also.Until know, I was talking about risk that is more or less normally distributed over positive and negative territory – you don’t know if you will make better or worse than expected. But when “risk” becomes a pronounced tendency to a certain direction (either up or down) – it ceases to be risk, it becomes quasi-certainty of ruin (aka masochism) or quasi-certainty of profits. Then there is the third type of risk, the one that accepts only values 0 or 1 (harm or no harm, accident or no accident, but not “win or no win” because the risk is meaningless in this case, and not “win or lose”) – risk in insurance. That risk cannot be “returned upon”, it can only be insured against – from the point of view of the insurer, it can be profitable only if total policy fees are higher than claims.In your statement “It is logically impossible, that is, self-contradictory, for risk to be rewarded, since risk means risk of losing money.” and other places, you seem to confuse the third meaning of risk (0 or 1), with the notion of return attached to the first meaning of risk (positive or negative).

Mother of GodDecember 12th, 2008 at 9:49 pm

“…You mean to see we have been hadding a sound night’s sleep? You may so. It is just, it is just about to, it is just about to rolywholyover. Of all the stranger things that ever not even in the hundrund and badst pageans of unthowsent and wonst nice…to be have happened! The untireties of livesliving being the one substrance of a streamsbecoming.Totalled in toldteld and telltold in tittletell tattle. Why? Because, graced be Gad and all giddy gadgets, in whose words were the beginnings, there are two signs to turn to, the yest and the ist, the wright side and the wronged side, feeling aslip and wauking up, so an, so farth. Why? It is a sot of a swigswag, systomy dystomy, which everabody you ever anywhere at all doze. Why? Such me. Where did thots come from? It is infinitesimally fevers, resty fever, risy fever, a coranto of aria, sleeper awakening, in the smalls of one’s back presentiment,…a flash from a future of maybe mahamayability through the windr of a wondr in a wildr is a weltr as a wirbl of a warbl is a world.Tom.It is perfect degrees excelsius…..Anemone activescent the torporature is returning to mornal. Humid nature is feeling itself freely at ease with the all fresco.”James JoyceFinnegans Wake(but i took liberties with the passage)(JJ will forgive me; we are having a love affair)

Octavio RichettaDecember 13th, 2008 at 5:18 am

Early Xmas present:http://www.stockvision.org/books/Edwin_Lefevre-Reminiscences_of_a_Stock_Operator-EN.pdfREMINISCENCES OF A STOCK OPERATOR by Edwin LeFevre scanned with tons of photos of Jesse and Family. It is a gem! The scan is perfect it looks just like the real book! size: 1,784 KB (this is small)He ended up killing himself but he did enjoy the good like! Here are the captions for some of the photos:Livermore’s mansion “Evermore” at King’sPoint Long Island. The dining room tablesat 46 for dinner. There was a barbershopin the basement with a live-in barber. His300-foot yacht was anchored in the backyard. The mansion was the scene of manygrand parties—finally auctioned off—June27th, 1933.Jesse Livermore, the legendary “BoyPlunger” and “Great Bear of Wall Street” inhis office in 1929 just after the “Crash”–when he went short the market and madeover 100 million dollars. His powers wereat their highest. His life slid downhill fromhere–ten years later he would kill himself.Jesse Livermore stands on the porch of theBreakers Hotel in Palm Beach where hetook a large apartment every winter. Hetraveled to the Breakers in his privaterailway car and had his yacht sent down toPalm Beach ahead of his arrival.Jesse Livermore loved beautiful women.This caused him much grief during hislife. He is pictured here with his thirdwife Harriet during a party for eightypeople in their ten room apartment onPark Avenue.Jesse and Dorothy March 3, 1926, lookingdapper at a costume ball at their mansion”Evermore.” Jesse Livermore lovedbeautiful women and his wife Dorothy lovedthrowing parties often for 100 people ormore.The Breakers Hotel in Palm Beach onfire March 18th, 1925. DorothyLivermore sent the bell boys back to theapartment to save her 24 pieces ofLouis Vuitton luggage from the flames—and the bell boys did it.Jesse Livermore, Dorothy Livermore andfriends at their vacation home in LakePlacid. Livermore hunted and played golfhere.Livermore was subject to deep blackdepressions all his adult life, during successor failure. This photo was taken onNovember 26, 1940, two days before “TheGreat Bear” of Wall Street took his own life.Paul Livermore, Dorothy Livermore, andJesse Junior in front of the Livermoremansion. Both sons were very handsome.Jesse Jr., started having sex with hismother’s friends—without her knowledge—when he was fourteen—the same age hestarted drinking.Jesse Livermore and Ed Kelley, his friend,on Livermore’s yacht after a day’s fishing inthe launch. Livermore had a passion forfishing. Being on the water gave him achance to think. He often came up with”great market ideas” on the ocean.Wat a nice catch! 5 marlins 4 of which are taller than Jesse!

Octavio RichettaDecember 13th, 2008 at 6:25 am

IMO, the exchange in one of my posts above (kicked off by Hayes) is important enough that it is worth reposting:The Auto thing is a real hard problem. In my [former] line of work we would label it NP-complete.U see, the problem is that it is so obvious these companies are not viable that Uncle Sam supporting them basically trows overboard everything this country stands for. Strategically and long term, a bailout of such hopeless companies will be bad for us. We are loosing our identity, we are betraying the principles that made this country great. If I was a republican Senator there is no way I would vote by this bailout, even if they bring out the buggy man as Paulson did with Tarp. BTW, I don’t get involved much in politics but I used to lean republican until GWB destroyed everything the republican party used to stand for. Now we are doing that to the country.But according to the dismal scientists, including the Professor, the auto-bailout is a go. I guess in the dismal science wonderland two wrongs can make it right. I am really glad I didn’t train in economics:-) What the dismal science does to your brain is irreversible:-)Octavio Richetta on 2008-12-12 09:35:42Lack of Trust EnhancedI could not agree with you more. Any sane person will see this U-Turn by Paulson as an act of desperation – and thus a further LACK of confidence in our financial system. I guess Bushy gave him the go-ahead, or is he able to act independently?Well, the stage is set. The floodgates have opened. Washington will soon be under siege by almost every segment of the business community – to say nothing of state governments for a bailout. What a TOTAL mess.Like Bushy said, “BRING IT ON.” Let’s just get it over with – see you folks at the other end – in about forty years.Morbid on 2008-12-12 11:15:02You two are idiots! GM and Ford are in emergency dire need of help because of the worst credit crisis and banking collapse in the history of the world, please get off your b.s. capitalistic moral high horse. The amount of money shareholders make on a company does not determine value! This linear formula most people follow is extremely shallow and allows for no relativity. It’s overly simplistic one sided thinking that over looks dynamics and nuisances of an economy. Creating greater and greater efficiencies in pursuit of more profits for shareholders has created a very top heavy economy that now faces extinction because idealists took a good thing and tried making a religion out of it. Put down your bibles and open your eyes before it’s too late.Guest on 2008-12-12 20:59:42Your argument might carry a bit more weight if these companies were showing a profit BEFORE the crisis, but they weren’t. The crisis was just the final nail in the coffin.By Bret on 2008-12-13 01:45:00Your offensive language aside, Even if the auto bailout needs to be done to save the US economy from disappearing (which may be the case, no one can tell you for sure), I hope you agree that there may be long term consequences to the economy coming from this action that may be worse than letting them fail. I for example, believe the bailout will slowdown the recovery as we will carry a dying industry on our back longer. These resources human and otherwise could be best devoted to activities with greater value-added.Once Korea (and soon China) got heavily into the car business, whatever little attractiveness the WW car business had was destroyed. These additional produces have a marginal effect on supply that results in lower prices which destroy the profitability of the business. I have known this for over a decade now, and given that I am an idiot, I am sure the smart people have known it too for even longer than myself.I still clearly remember reading about the Daimler-Chrysler merger while waiting for a flight to NYC at Logan and smiling about it fully knowing it would now work and that it would come crashing down to earth is it did. The merging of the two cultures was nearly impossible even if business was booming . The fact that making cars is a lousy business was the ideal catalyst for a speedier fall.One of the main reasons I hope I can live a long life is all the stuff one witnesses, how frequently time proves you right as well as wrong:-)By Octavio Richetta on 2008-12-13 06:16:34Credit card debt as all other debt that affects the financial markets will be bailed out when the time is critical as this is the practice. The problem with this practice will be during the time period when the US itself will become likened to the auto industry to the rest of the world and its practice of printing to save the economy will be its downfall. Since the US government is the lender of last resort then there is no one else to turn to when the US reaches its own credit default. The end game will be the same, If the US had allowed the weakest companies to fail only stepping in to save the ones that are most critical to the US then the US would have had the ability to save itself from its own financial default. When your house is on fire and you have only a few minutes to retrieve the most important items so you can rebuild. Unlike the US Government in this scenario is trying to remove every piece of furniture and going back in to retrieve the dogs bowl and curtains’. This is irresponsible and reckless, the government also assumes that as soon as the fire that gutted the home is put out then the entire family can move back in and go on about their lives as if nothing has happen. In reality the structure collapsed on Uncle Sam and he was burned to death in the fire.Guest on 2008-12-12 13:32:29

HayesDecember 13th, 2008 at 9:09 am

The same post by guest above on “Credit card debt as all other debt” was also posted on RGE Analysts’ EconoMonitor under an article by Mathias Kruettli.Guest’s (A.K.A. “Central alabam”) comments are excellent – the article under which the comments appeared is an important read, both the summary and the full paper .

Octavio RichettaDecember 13th, 2008 at 6:39 am

Lots of stuff in the MSM about the Mad-Off Ponzi (read all the stuff on it in the WSJ, NYT, and WP). IMO, Mad-Off takes away the Subprime King crown of away from Wamu’s Mozilo. These share an equally cheap look that would be enhanced further by a faked gold crown:-)http://www.judiciaryreport.com/images/Angelo-Mozilo%202.jpghttp://www.postchronicle.com/news/breakingnews/article_212192658.shtmlI feel like posting a few famous quotes on greed and stupidity but I will let others indulge themselves. Me, I am gonna start reading Barron’s now.

PeteCADecember 13th, 2008 at 9:44 am

OR: They have not released a lot of details yet. In time, they will probably come out. It looks like Madoff did well for several years – but then started taking some bad losses over the last few months. Instead of calling it quits, he made the bad mistake of using new investment money to keep making payouts to a few established clients – hence the Ponzi scheme.I doubt he’s the only hedge fund manager who’s taking liberties with securities laws right now – as a result of bad losses in the current market.PeteCA

blindmanDecember 13th, 2008 at 9:03 am

o,.my impression to date. incomplete information warning inserted here. madoff fund required a minimum 5 million dollar entry fee. stop. some working “rich”, thought they could be “rich”, prayed they would one day be “rich” “investors” trusted him. an acquaintance of mine pooled his money, his father’s money, his brother’s money, his children’s money and who knows who else’s money to “invest” with mad-off..this acquaintance spent the day on friday, in his office, on his knees and hands beating the floor with his fists, screaming fu..,. his co workers thought someone died?.we’ll see how it turns out as this is no single aberration. just one of thousands to come. imo.

ORDecember 13th, 2008 at 9:17 am

It is sad he screwed both, unsophisticated and sophisticated investors. I guess we will be able to test Shilling’s cockroach under the sink theory, there is always more than one; just like in spouse cheating: there is always more than once/one.

HayesDecember 13th, 2008 at 9:37 am

It will only be a matter of time before investors in Mad(off)Money will be calling for a bailout. Notwithstanding the working rich, the very rich/powerful will exert significant political pressure whilst hiding behind the charities that were also victims.When you think about it how much difference is there between a rescued bankster receiving a bonus (when none would have been paid if the bank failed) and a well intentioned investor getting ripped off.

ORDecember 13th, 2008 at 10:17 am

I was just thinking there isn’t much difference between Mad-Off’s blackbox and LTCM’s. I guess John Meriweather and Co. got off the hock using a naïvité line of defense: “We never intended any harm”. He is happily back in business! Amerika is a great country! People who fail as miserably as he did shoulld be barred from the securities industry forever, inclusing his Nobel-Prize former partners.http://en.wikipedia.org/wiki/John_MeriwetherMeriwether now runs JWM Partners LLC, a Greenwich, Connecticut, hedge fund he started with about $400 million under management in 1999, and with approximately $3 billion under management in 2007.[1] As of March 19th, 2008, the JWM Partners fixed income hedge fund was down by 24% YTD.[2]

blindmanDecember 13th, 2008 at 10:24 am

yous two’s have a wicked sense of humor. what i imagine is many more hedges hitting a similar wall with thousands more investors hitting similar floors and then, having no income. i’m just saying it looks like there will be a tremendous amount of new anger on the street and on the links, among other things. ??

Octavio RichettaDecember 13th, 2008 at 12:09 pm

Could the victims claim this happened because the SEC was “asleep at the wheel” and get their money back on this premise? Bet you a good lawyer may win a lawsuit against the SEC using this argument. After all, Uncle Sam is easy with his money. It doesn’t cost much to print it.And god forbid, the US economy and equity markets were to go down the drain because we did nuthing about diz! Better safe than sorry: bail then out too!:-)

PeteCADecember 13th, 2008 at 1:12 pm

You can see why some people wind up committing suicide during a depression (or Great Recession). There’s nothing left.PeteCA

Octavio RichettaDecember 13th, 2008 at 7:15 am

A quote on stupidity from Abelson’s column:Madoff is a veteran Wall Street trader and asset manager who purportedly relieved his investors of billions of dollars via a $50 billion Ponzi scheme (by comparison, poor old Ponzi was a piker). What his investors lacked in numbers, they more than made up in wealth. Which proves that cupidity and stupidity are as rife among the rich as among us peons.

Octavio RichettaDecember 13th, 2008 at 7:21 am

Another good one from abelson:IF IT’LL ASSUAGE THE PAIN ANY, you’re not alone in taking a big hit in the stock market. Mr. Paulson’s outfit, the Treasury Department, has been getting its lumps from this mean old bear, as well. As part of the bank bailout, the Treasury wound up with options to buy up to 1.2 million shares of common stock of sundry beleaguered institutions with an aggregate value of $27 billion. A little over a month later, according to an AP analysis, the options are worth about $19 billion.When queried, a Treasury official was undaunted, informing the news service a tad huffily, “We’re not day traders.” To which we say, too bad.

HayesDecember 13th, 2008 at 12:12 pm

from the December 13, 2008 Barron’s article in the above link”Those at greatest risk are folks who bailed out of deflated stock portfolios and are sitting in Treasuries earning just 1%.”____________You could not be more correct and with that contrarian indicator, here are some excerpts from Barron’s just about a year ago in their December 17, 2007 magazine (perhaps you should consider canceling your subscription to that rag)A Bullish CallWall Street’s seers forecast more gains for stocks next year.Barrons | MONDAY, DECEMBER 17, 2007

IN 2007, WORRIED INVESTORS LUNGED for the safety of bonds. Treasuries may hold less appeal next year, the Street’s leading strategists say. Many of those we surveyed see the yield on 10-year Treasuries, now near a three-year low of 4%, increasing in 2008, albeit at a genteel pace that won’t spook the market.

We expect the U.S. economy to show the strains of the deflating housing market and credit-market disruptions in early 2008,” says Goldman Sachs strategist Abby Joseph Cohen. But “recession likely will be avoided, due to strength in exports and capital spending by corporations and government.”

Credit Suisse equity strategist Jonathan Morton agrees. “Conditions for a hard economic landing — like slack in the labor market and weak balance sheets — are still largely absent,” he says.

Bear Stearns sees short-term rates falling to 4% — enough to rekindle growth and force the Fed to lift interest rates again, to 4.75%. Merrill Lynch, however, expects the U.S. economy to find itself “on the precipice of the first consumer-led recession since 1991,” and predicts the Fed will have to cut interest rates to 2% by 2009 just to keep the economy alive and breathing.

and finally this link from that December 2007 Barron’s article a wall of shame (my title)

OuterBeltwayDecember 13th, 2008 at 9:49 am

Brain Trust Progress ReportThe results of the “What’s The Problem With Our Economy” debate are now available. They represent a terrific outpouring of effort and ideas from 43 different people. I consolidated the input you’ve provided over the past two weeks into one 55-page document.What follows is my effort to:* condense the material into a set of one-line problem statements* sort those problem-statements into these three themes:Economic design issues which prevent the economy from functioning effectively.Social system failures concern how the society manages the behavior of economic players in order to maximize the economy’s positive impact on all members of society (maximize the average person’s benefit)Individual deficits which are individual traits that may contribute to sub-optimal economic behaviorBelow please find three posts, one for each of theme. I’ve included the problem statements and the proponents of each problem statement, so that you can make sure I ascribed your contributions appropriately. Please let me know if any corrections need to be made.

OuterBeltwayDecember 13th, 2008 at 9:50 am

Theme 1: Design of the Economy is FlawedThese issues prevent the economy from functioning optimally. Each problem can be rectified by change in the function of a major player or class of players.JasonB

Finance industry not performing allocation function effectively.

Facts of Life

Delegation of money issuance and money supply management to private interests is a bad idea.

RanMan,ex VRWC

West must regain producer/seller .vs. consumer/buyer status via innovation.

Lord Sidcup

Massive over-supply of labor causing structural re-balancing of world economies.

GSM

Economic policy penalizes savers.

Toby

Focus on high profits causes errors and is not sustainable.

MotherOfGod

The system we’re using to allocate production isn’t working; the imbalances are too great, and the core problems of society aren’t being solved.

David Walker % Ralph

Integrity of rating agencies is severely compromised.

David Walker % Ralph

A disconnect exists between those who benefit and those that bear the risk/costs.

David Walker % Ralph

Inadequate transparency.

Guest3

System doesn’t price-in “externalities” like environmental impact.

Mark, SubGenius

Our economic system is not sustainable. Permagrowth is not possible.

Guest4

Government is in business of allocating resources, and it’s not good at it – e.g. bailouts.

Payam

Government’s role is to build for the future, and that’s not happening.

Lord Sidcup

Global economy is not working in average person’s interests. Rewards go to top players only.

Aerial View, EconomicsMinor, YahItMatters, MotherOfGod, Hubbs, ex VRWC

Winner-take-all concentration of economic benefits – “casino effect”.

Ralph

Economy built on misconception of human nature.

ex VRWC

Profits being siphoned out to remote HQ instead of being used to advance the welfare of communities in which those profits are earned.

amacfly

Banking system needs to be re-designed to reduce tendency toward concentration of wealth / debt slavery.

Cahill, Lord Sidcup, Theta, Guest9, Guest10, Blindman, Hubbs

We don’t know how to equitably and efficiently allocate over-production.

Dr. Steph, Lord Sidcup

Too much of the “work” being done is unnecessary. We’re using make-work to deal with a lack of effective policy for allocating over-production.

Blindman

Producers induce excess consumption because of over-capacity

OuterBeltwayDecember 13th, 2008 at 9:51 am

Theme 2: Social System FailuresThese are problems concerning how the society manages the behavior of economic players in order to maximize the economy’s positive impact on all members of society (maximize the average person’s benefit). This is a summary of the general types of problems within this theme:* Regulations aren’t coping effectively with dysfunctional economic behavior by individuals / corporations* Regulations aren’t maintaining level / fair access to political decision-making process* Incentives to individuals to engage in constructive economic behavior are not appropriate* Appropriate levels of knowledge or information not available to individuals* Thinkers not united and empowered in order to have maximum impact on the economyThe problem statements are:PeterJB

We need to empower the thinking 5% of the population. Concept of autopoiesis.

DoesItMatter

We’re dissipating our power fighting against the wrong thing instead of increasing our power working together for the right thing.

DoesItMatter

Characterizing outdated or dysfunctional socialization as “human nature” prevents that dysfunctional socialization from being dis-continued. Improve the socialization (training).

EconomicsMinor, Lance, Does It Matter, AverageJane

People must unite and mobilize in their own interests.

ASA

We must identify the fundamental values on which our society’s prosperity was based, and return to them.

EconomicsMinor

We currently share an obsolete vision of our “national lifestyle”.

Guest5

Government has always been about resource allocation; it’s just doing it badly at present.

Ralph,RanMan, James

Human nature is weak, and needs regulation

redleg

There’s not enough long range thinking going on in our society. We don’t share a long-range view of where we’re going.

Guest1, Blindman, Amacfly, RanMan, JasonB, EconomicsMinor, Aerial View, BrooklynPete, Lord Sidcup

Banks and corporations are too powerful. They are interfering with the proper operation of our government and our society in general.

Leo70, EconomicsMinor, P & L, Aerial View, Jomos

People are not educated enough about economic affairs, and therefore cannot make valid decisions about economic policy at any level personal, national, world.

V1_Brazil

Society doesn’t understand the limits of geometric progression.

EconomicsMinor

Moral hypocrisy. We say one thing, do another.

EconomicsMinor

Special interests play on the emotionalism of un-informed to advance agendas counter to the public interest.

Blindman, EconomicsMinor, Redleg

Consumerism misleads the under-informed into dysfunctional economic decisions.

CRIS

We have ignored God.

Guest8

It’s still OK to exploit thy neighbor.

redlegDecember 13th, 2008 at 1:54 pm

@ OBYou are correct, sir.If politicians were to address sustainability issues, which by their very nature involves long-range planning, they think they would never get elected, or re-elected since they are looking at 2,4,6 year election cycles.I think they are right, since most people do not think of the long term consequences to their actions (e.g. current economy, state of infrastructure, and financial situations). I really hope I am wrong. That’s why society is cyclical (I suppose) – lessons are learned and then forgotten a few generations down the line.

OuterBeltwayDecember 13th, 2008 at 9:51 am

Theme 3: Individual DeficitsThese problems which are individual traits that may contribute to sub-optimal economic behavior, and generally center on a lack of information, knowledge or motivation:Leo70, EconomicsMinor, P & L, Aerial View, Jomos, AfA

People aren’t educated enough about economic affairs. Knowledge, access to information, motivation differences have a major impact on income disparities.

EconomicsMinor

Individual-level mis-allocation of resources. People don’t really understand / value the difference between consumption and production.

Ex VRWC

People tend to trust financial advisors whose knowledge and intentions were sometimes questionable.

Guest2, GSM, Lord Sidcup

People took on too much debt.

RanMan

People tend to think and act in herds; they need to learn to think more for themselves.

redlegDecember 13th, 2008 at 2:20 pm

AllThis is a fine compilation of issues. What can we do about them?I think that the solution has to lie in debate and moderation. Economic equality is unrealistic, but fairness should the law.Recommendation (long term):A vigorous debate with all factions to tray and get a fair (and thus sustainable) vision for our society, leaving room for both innovation and failure. Gaming the system is unsustainable. Sound bite spinning is gaming the system.Disagreement it vital to innovation, so intellectual disagreements should be seen as positive and healthy, where today you can hardly speak about some topics without inciting violence. I understand that for short term crises, too much debate can be counterproductive.Personally: I think that the Constitution of the US works well in the US, and that other places should decide for themselves how they are governed (for better or worse – see above). The role of gov’t in the US should be to ensure trade, security, and liberty. It has to be acknowledged that 1) this has a cost, 2) one person’s liberty ends where another’s begins, and 3) (drawing fire for this one) corporate liberty is not the same as personal liberty.Compromise can be both positive and negative, so the debate is important to the learning process. If each side can convey their concept of risks and rewards, and then show at some point that they were correct, the status quo can be changed for everyone’s best interest.I’ll leave things here for snipin- er, discussion…(And the only vision of Utopia I have, BTW, involves Todd Rundgren)

blindmanDecember 13th, 2008 at 10:04 am

“”””Hail to Chicago, Beacon of American ValuesBy ALEXANDER COCKBURN.http://www.counterpunch.org/……Of course the good government crowd is aghast. “I was speechless and sickened,” wails Cindi Canary, executive director of the Illinois Campaign for Political Reform. “In all of the millions of indictments I’ve read over the last years, I can’t remember anything as vile as this.” Another reformer moans about “the damage to the state,. It’s going to take a long time to dig out.” Nonsense. This is exactly the sort of scandal Americans understand and appreciate. Good government is the province of states animated by the social democratic ethos of prim Nordics, like the Dakotas, or Washington in the Pacific Northwest. In the riper ethnic cauldrons of Illinois, Louisiana, Massachusetts, Rhode Island and of course New Jersey, corruption reigns in all its intricate and creative forms, In these states no politician is beyond the reach of an indictment, and this political certainty is the truest form of Americanism and the soundest check and balance against the arrogance of power……….The Washington Post congratulates Obama for steering clear of the slime of Chicago politics, but what actually happened is that Obama moved to richer pastures. Not for him Tony Rezko’s dingy billfold, but the dignity of anticipatory bri. . . uh, campaign contributions from the Pritzkers, the Crown family, the big ethanol interests in the Midwest, the nuclear industry, Wall Street financiers, the biggest of big time money, now gratefully acknowledged in the form of Obama’s cabinet appointments. Obama raised more money than any presidential candidate in the history of American politics, and here we are getting excited about Rod Blagojevich?..Structural Greed:The ‘Credit Crunch’John Barker…http://www.variant.randomstate.org/32texts/barker32.html…….. There have been economic and financial ‘crises’ ever since I remember. For most people in the world financial crises are anything from an hourly to, possibly a more privileged, monthly experience. But this is not what is being talked of now which is instead a ‘major event’ in the richer part of the world involving sums of money beyond our ken; billions and trillions. The fetishistic notion of ‘economic collapse’ then gets floated. What does this mean when there are millions of malnourished people, and when vast numbers of people are continually scrabbling for a living in the ‘informal economy’?Such ‘crises’ in the richer world are often dramatized as fundamental, even terminal to capitalism by anti-capitalist socialists, and sometimes by excited financial journalists. So far it’s been a history of crying wolf which makes a person wary about exaggerating what is happening now in this ‘sub-prime/credit crunch’ sequence. Most major banks, even those that have had to write-off bad debts often in the billions, have still made profits in the billions. Equally, corporate profits in the US-epicenter have been, in capitalist terms, healthy. And yet this ‘crisis’ is different to others of the last fifty years, both in reality and in the way it has been presented to the public: ………………• The expansion and extension of usury, seen in the sheer scale of credit in an era of securitization, much of it ‘non-productive’ but all assuming steady cash flows from those who borrow………• Many of the bones of modern capitalism are now showing, such as the fragility of the valuation of collateral assets and their cash-flow ‘assumptions’. How shaky its normally hidden infrastructure becomes when banks are afraid to lend to other banks………. footnote ..19. JP Morgan has played this role as government –backed leader to both enforce and represent the collective interest of banks before. It was they who took centre stage in the Situations Room of the White House at Christmas 1997 in organizing the ‘bail-out’ of South Korea.20. It has been recently dubbed “Club Fed”, a piece of wit that has for a long time described Federal prisons as opposed to state ones, on the grounds that such prisons are relatively cushy. This is the Fed in the Greenspan + era..21. It should be amazing that this free market fiction should still be maintained despite the sheer size of Export Credit Guarantees, and of that R&D and profit that comes through military contracts……………………http://articles.moneycentral.msn.com/Investing/Extra/businesses-see-rise-in-emplolyee-theft.aspx.Businesses see rise in employee theft.Employers suspect workers are pilfering from them to cope with tough financial times. One surprise: Often the most trusted employees are the guilty parties..In 2007, companies lost an average of $2.4 million to fraud, the majority of it by employees, up from $1.7 million in 2005, according to PricewaterhouseCoopers, which conducts biannual surveys of around 5,400 companies of all sizes worldwide………..Employers are hot targets for theft because workers “know their systems, controls and weaknesses, and they can bide their time waiting for the right opportunity,” says Mark R. Doyle, the president of Jack L. Haynes International, a provider of workplace crime-prevention services. “”””…..like watching a slow motion train wreck, somebody said it….see links for complete stories..

HayesDecember 13th, 2008 at 11:17 am

“like watching a slow motion train wreck”…and then comes the moment when disbelief is replaced by an overwhelming despair that a way of life is vanishing.

OuterBeltwayDecember 13th, 2008 at 10:11 am

BrainTrust ParticipantsWe’ve completed stage 1 of this analysis. We’ve got a fairly good universe of problems on the “whiteboard” set out above.Now it’s time to move to Stage II of the analysis, and start filtering the problems according to “some logic”.This “some logic” aspect is vital to get right. If we select the correct filtering criteria for grouping/ranking/narrowing these problems, we go a long way toward picking a fruitful course of action for the group.We could filter these problems according to criteria such as:* What it would take to change that particular problem. Is the “fix-ee” amenable to change?* How much impact would it have on the overall economy if that problem were to be fixed* How committed the group would be to fixing that problemIf we are to be effective, we must focus, and we must focus on something we can actually change, and we must have the group’s commitment to effect that change.When I think about changing the behavior of a large group, I ask myself:* Who are the people that are amenable to change? The ones suffering pain.* What behaviors are easiest to change? The ones that require the fewest number of people to say “yes” to.Before I go further down this track, I’d like to invite each of you to set out how you’d develop this analysis to the next level. What is the “controlling logic” we’d use to narrow down the problem-set to something that’s “actionable” by a new and small group?This is a very important question. What do you think about it?

Lord SidcupDecember 13th, 2008 at 4:20 pm

Spectacular work OB.I am very pressed for time at the moment, but actually logged on to make a very similar point about filtering / that “some logic” has to take into account what final actions and aims can be.I had the word *achievability* in mind (though not wanting to damped down possibilities with a lot of “yeah buts…”).I also thought it useful to have a parallel discussion to find out what skills/time/other resources can be committed by the group.

OuterBeltwayDecember 13th, 2008 at 7:50 pm

LS: Right on-track. Keep developing those topics. If I heard right, you’re advocating that one filtering criteria be “achievability”.Good. Now, what about “strategic”?What part of the system – econ design, social systems, individual knowledge is the target, and why?LS and all readers – please give this some thought over the next day or 2.

Lord SidcupDecember 20th, 2008 at 5:19 am

I know there’s a lot of conspiracy theories out there, but this gives a compelling arguement showing how incompetence and panic is creating a conspiracy between banks and the government in the UK

“I believe that what we are witnessing is an appalling conspiracy. I believe that the government is planning to use printed money to finance the banking system, and as a quid pro quo, the banking system will finance the government borrowing with the printed money. The repeal of the provision of the 1844 Act is an attempt to cover up the actions of the government. If I am right, we do indeed have a conspiracy.The most tragic part of all of this is that the conspiracy, the idea of printing money, will just make the final catastrophe even greater. It is a an economic Ponzi scheme. It will finally end in tragedy, and makes the government no less criminal than the now infamous Madoff fraud. Printing money to lend to banks to then lend to the government is completely unsustainable, and will lead to hyper-inflation. In the case of the US they are still getting away with money printing, because the $US has not weakened significantly, meaning that they are not yet importing inflation. In the case of the UK, the £GB is collapsing, and inflation will therefore be imported. There will be a lag in the importing of inflation as there is a time lag as contracts are renewed, and as previous contracts run their course. However, we have already seen the inflationary effects in the increase in the price of food, which is a far more responsive sector than, for example, imported electronic products from Asia.Now, to return to the Ponzi scheme. Part of me hopes that I am wrong, but there is just too much coincidence and, when combined with the inevitable weakness of individuals trying to hide their failures/incompetence, we do have the makings of a potential conspiracy. The situation can be summarised as follows:The government has taken stakes in many banks, allowing them a direct line into the operations of the banksThe banks are increasingly reliant on government finance for survivalThe £GB is already collapsingGovernment finances are in tatters, and the government is finding it increasingly difficult to raise financeThe BoE has admitted consideration of printing money, and then there is the repeal of the 1844 Act”

The whole article is worth reading.http://cynicuseconomicus.blogspot.com/2008/12/conspiracy-and-collapse-of-uk-economy.html

redlegDecember 13th, 2008 at 7:53 pm

DaylightIf the decision making process, including debate, is held in public for all the world to see, then it is more likely to succeed.If a conspiracy theory can be attached to the process, it will not succeed.Finally, everyone must realize that compromise is essential to any sustainable solution.

blindmanDecember 13th, 2008 at 11:34 am

ob,.i have a bunch of thoughts in response to all you have done. unfortunately i do not have the skills required to effectively communicate them concisely and in their entirety. my mind is not linear.??…first, see i’m trying, you amaze me with your capacity.to attempt to solve a dynamic problem of nearly, if not infinite, complexity on the go through a rolling blog requires a dedication and capacity for synthesis of information that is a bit unimaginable for me… suggestion. find a permanent home. i think you need your own site , bt site. this re posting thing will, if it has not already, wear you down i imagine? there is no reason why you should throw yourself under a bus. and this project you have taken on is a big bus….second, still trying, i would love to see your white board. not the one you post, the one you must have somewhere that the posted one comes from? you seem to be so organized but that other board has got to look like a big mess. no?..third, i’m getting there, links. once bt has an identity the strength of it will be in it’s links. all social power comes from the chain and groups become links in the chain. the identity question is critical as it will determine what chain you can link into and you don’t want to link up on the “chain of fools.” chain, chain chain… you know the song.. this is where all people go to sell out their personal belief system, their moral compass, their individual insight and radiance to conform to an agenda of immediate and cheap personal gratification and advantage…four, rolling, social systems work when the process has become part of the subconscious. accepted without review or inquiry. the “given” becomes self evident even if it is an illusion. what your talking about is shattering an illusion. the system that is currently failed or failing may shatter the illusion itself, then again, it may not.time will tell. what is important in my view is remembering that the “truth” is among other things also totally destructive pertaining to illusions. this is real important and throughout history has proved to be a source of conflict. people have never lived in groups without illusions. introspection is required. as pjb says, “mileage will not vary.”..fifth, i can’t take this linearity, think about the “project”, projected into next year. will n.r. still offer his blog space to bt should it become, as they say, “off the chain”? not saying it should, but can you think independently without that independence? the world might look very different in six to eighteen months. in a week?..sixth, last one, individually we need to grow fast. everyone is on a learning curve and time is speeding up, so let’s grow truer to the truth, but gently as it is destructive, but necessary and for the good…seven, sorry, i hope i’m not wasting your time. you already have too much to think about.peas. ( i used to sign off like that before i went blind. ) and thanks. ob,.i have a bunch of thoughts in response to all you have done. unfortunately i do not have the skills required to effectively communicate them concisely and in their entirety. my mind is not linear.??…first, see i’m trying, you amaze me with your capacity.to attempt to solve a dynamic problem of nearly, if not infinite, complexity on the go through a rolling blog requires a dedication and capacity for synthesis of information that is a bit unimaginable for me… suggestion. find a permanent home. i think you need your own site , bt site. this re posting thing will, if it has not already, wear you down i imagine? there is no reason why you should throw yourself under a bus. and this project you have taken on is a big bus….second, still trying, i would love to see your white board. not the one you post, the one you must have somewhere that the posted one comes from? you seem to be so organized but that other board has got to look like a big mess. no?..third, i’m getting there, links. once bt has an identity the strength of it will be in it’s links. all social power comes from the chain and groups become links in the chain. the identity question is critical as it will determine what chain you can link into and you don’t want to link up on the “chain of fools.” chain, chain chain… you know the song.. this is where all people go to sell out their personal belief system, their moral compass, their individual insight and radiance to conform to an agenda of immediate and cheap personal gratification and advantage…four, rolling, social systems work when the process has become part of the subconscious. accepted without review or inquiry. the “given” becomes self evident even if it is an illusion. what your talking about is shattering an illusion. the system that is currently failed or failing may shatter the illusion itself, then again, it may not.time will tell. what is important in my view is remembering that the “truth” is among other things also totally destructive pertaining to illusions. this is real important and throughout history has proved to be a source of conflict. people have never lived in groups without illusions. introspection is required. as pjb says, “mileage will not vary.”..fifth, i can’t take this linearity, think about the “project”, projected into next year. will n.r. still offer his blog space to bt should it become, as they say, “off the chain”? not saying it should, but can you think independently without that independence? the world might look very different in six to eighteen months. in a week?..sixth, last one, individually we need to grow fast. everyone is on a learning curve and time is speeding up, so let’s grow truer to the truth, but gently as it is destructive, but necessary and for the good…seven, sorry, i hope i’m not wasting your time. you already have too much to think about.peas. ( i used to sign off like that before i went blind. ) and thanks.

OuterBeltwayDecember 13th, 2008 at 11:55 am

Blindman:You and I need to be in better touch. Please e-mail me at outerbeltway at yahoo dot com.You have a wonderful mind and you understand this process, both the linear and the non-linear really well. I want us to work more closely together.All you said is so.My whiteboard is a mess, as it properly should be at this point of the analysis. It needs to become somewhat messier and more disjoint due to lightening bolts-in from the BT crowd. PeterJB, GSM, Aerial View, Wolf In the Wilds, WillBill, MA and OR (just to name a few) have associative-think magneto-brains that can slam linear-think sideways if asked properly.I’m asking.I hope others read and consider Blindman’s remarks; he’s demonstrated that he can hit the ball, and we need to make use of his talents.Lastly, it is our duty to demonstrate to RGE that what we’re doing has merit and that it will be done correctly, and give them the chance to accept/decline the oppty to host this affair. If they decline, we’ll move it to another platform. But the BT is largely derived from their audience, they should properly get right of first refusal. It is not proper yet to force them to make this decision as they don’t have enough data yet.I will defer that decision for a few more weeks, suffering the consequence of extra effort and compromised utility, until we’ve done our duty to our hosts.

MarkarDecember 13th, 2008 at 1:02 pm

The Madoff story unfolding is truly amazing but hardly surprising as our entire economy has been a giant Ponzi scheme for the last 20+ years. This will be only the tip of the iceberg as more hedge funds are revealed to have done the same thing. The rich and uber rich are facing staggering losses due to the large percentages of their wealth they invested in these funds. Anecdotal evidence abounds here in greater Palm Springs, playground of the rich.I suppose on the bright side, this will be an equal opportunity depression.

ORDecember 13th, 2008 at 1:35 pm

Add to dat the HUGE redemtion notices even “good” hedge funds will get because of this. Ups! The deadline for notices to pull funds out of most hedge funds is gone – November 15. Someone in the biz please confirm.

HayesDecember 13th, 2008 at 1:17 pm

The Owner’s Name is on the Door

In an era of faceless organizations owned by other equally faceless organizations, Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner’s name is on the door. Clients know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm’s hallmark.Bernard L. Madoff founded the investment firm that bears his name in 1960, soon after leaving law school. His brother, Peter B. Madoff, graduated from law school and joined the firm in 1970. While building the firm into a significant force in the securities industry, they have both been deeply involved in leading the dramatic transformation that has been underway in US securities trading.Bernard L. Madoff has been a major figure in the National Association of Securities Dealers (NASD), the major self-regulatory organization for US broker/dealer firms. The firm was one of the five broker/dealers most closely involved in developing the NASDAQ Stock Market. He has been chairman of the board of directors of the NASDAQ Stock Market as well as a member of the board of governors of the NASD and a member of numerous NASD committees.One major US financial publication lauded Bernard Madoff for his role in “helping to make NASDAQ a faster, fairer, more efficient and more international system.” He has also served as a member of the board of directors of the Securities Industry Association.Reflecting the growing international involvement of the firm, when Madoff Securities opened a London office in 1983, it would become one of the first US members of the London Stock Exchange. Bernard Madoff was also a founding member of the board of directors of the International Securities Clearing Corporation in London.

http://www.madoff.com/dis/display.asp?id=203&mode=1&home=1#owner

PeteCADecember 13th, 2008 at 1:28 pm

Since Madoff’s company was performing market-making activities on the NASDAQ exchange, it follows that there could be some mix-ups or turmoil until those deals are sorted out. It goes further than just the people who lost $$ in the investments themselves. Although there are limitations on what the SEC investigates for hedge funds – it’s a little surprising they didn’t dig deeper when a market-maker was involved. Looks like personal connections still mean a lot … in terms of who gets the scrutiny.PeteCA

blindmanDecember 13th, 2008 at 1:48 pm

pca,.the prosecutions and lawsuits have just begun. that is my guess. the investigations are ongoing and just begun. as time goes by on this one, i foresee a legal bloodbath the likes of which the world has never seen. absolutely monumental. just a thought?will the right people and institutions be properly and justly identified? we’ll see. ?some very powerful parties must have been violated, parties with standing among those with standing so to speak. we are talking about stealing billions of dollarsin broad daylight. it is hard to even imagine.??unless, of course, it was your money.tarp cannot cover this. not in the real world.

ORDecember 13th, 2008 at 4:31 pm

There have been some doubts on the 50 billion number Bernie Mad-Off himself provided as the total loses to investors under the Ponzi. To me, this is just a bunch of nonsense. Of course Bernie is right! Assuming the guy knows how to add, he just added the value he reported on 11/31 for each account and then subtracted the few hundred million USD he had when he was turned in by his sons(if there is that much left); the number he got was in the ballpark of 50 billion.One may argue that the amount the investors put in could be a lot lower than what they got in their November statement (e.g. 1 million placed 7 years ago compounded at 10% grows to 2 million for an investor who never took money out). But who cares? Come on, how do you count your loses:1)from the price you got in.2) from the top value the investment ever got to.3) From the value in the latest monthly statement.I like pain so I use 2. 3 seems the most reasonable one. I doubt many poepl are happy with 1)*BTW, lota people paid taxes in money they never made. How do you solve the tax issue? They may get a tax credit which they will recover over time but I doubt they will be able to amend their returns and get taxes back.If 1) were the right choice, someone who put in 1 million bucks of retirement money in the SP500 in 1982 and never took any money out, should be a happy camper today since his account would still be worth more than a million bucks!:-)

kilgoresDecember 13th, 2008 at 1:57 pm

Dr. Roubini:Is the term ‘stag=deflation’ somewhat redundant? I mean, does deflation really ever occur in a growing economy? When the term ‘stagflation’ was introduced in the 1970s, everyone recognized that it captured the notion of what was thought to be an unusual set of circumstances: a stagnant economy coupled with inflation (which theretofore was thought to occur typically in conjunction with an overheating economy only).Comments from anyone else would also be welcome. ;-)SWK

ORDecember 13th, 2008 at 4:11 pm

I believe what U r trying to say is that the “stag” part is redundant. Your argument seems valid. However, I look at “stag” as being there for emphasis, so in that regard I do like it (like the stag in stagdeflation, I am using the redundant “do” for emphasis)

PeteCADecember 13th, 2008 at 2:44 pm

OR mentioned John Mauldin’s latest commentary which can be found here and is worth reading:Let me extract a couple of salient quotes:1. “The corporate bond market is assuming an Armageddon Scenario. Barclays Capital writes that one would have to assume that US GDP will contract by 15% to make sense of the current bond spreads.”2. “Deutsche Bank and a private consulting firm called PFC, based in Washington, have determined that Venezuela needs the price of oil to average $97 a barrel to balance its accounts, while in 2000 that South American country only required the price to be $34. Look at this chart, courtesy of Dennis Gartman. It shows the price of oil that various countries need to balance their budgets in 2009:Venezeula: $97, Nigeria $71, Iran $58, Saudi $62, Kuwait $48, UAE $51, Russia $70, Algeria $35.”My Comments:Folks, the commentary here does not lead me to beleive we are at the bottom of a recession. Major parts of the credit markets, esp. corporate bonds, are falling apart. Negative rates on T-Bills and ridiculously low rates on UST’s make these investments a “No-Go” except for people whose arms are twisted. And as I have commented several times before here, oil prices are at levels that will cause major political instability and global debt defaults.Which raises a major question. Why hasn’t OPEC cut supply? They’re not idiots. I can only suspect powerful political forces acting behind the scenes that give key members in OPEC a reason to tolerate this situation.It sure smells like we’re headed towards a Black Swan event. But what kind of crisis would cause the price of oil to surge?PeteCA

ORDecember 13th, 2008 at 4:03 pm

Folks, the [Mauldin] commentary here does not lead me to beleive we are at the bottom of a recessionI reached the same conclusion after reading Noland’s piece, the second link at safe haven (my post is below)

Jason BDecember 13th, 2008 at 4:17 pm

What are you getting at, an event triggering mid-east instability and higher gas costs in the very near future?Israel hitting Iran?

GuestDecember 13th, 2008 at 5:08 pm

What surprises me is the India Pakistan situation and how it appears to have been contained -The Sunday TimesDecember 14, 2008 Pakistan blinks in India standoffBRITAIN and the United States are engaged in a frantic diplomatic battle to stop the row between India and Pakistan over the Mumbai terror attacks escalating into war.Relations between the old enemies, both nuclear powers, are so fragile that conflict remains a constant threat.Gordon Brown arrived in Delhi last night to try to calm Indian anger at Pakistan’s role as the launchpad for the attack. He will promise continuing support for an Indian campaign to bring the Pakistani masterminds of the raid to justice.His visit comes after Pakistan finally gave in to intense Anglo-American pressure to arrest the leaders of the Al-Qaeda-linked terrorist group Lashkar-e-Taiba (LeT).

Octavio RichettaDecember 13th, 2008 at 3:52 pm

I just read Doug Noland weekly piece at Safe Haven where the formatting makes it a lot easier to read. Go ahead and read Doug’s work and then reach your own conclusions on what even reputable bears like cute Stephanie Pomboy ( http://online.barrons.com/article/SB122912505428802977.html?mod=b_hps_9_0001_b_this_weeks_magazine_home_left are ) are telling you about about the “power” of the FED and Treasury in turning things around, stocks and bonds being attractive, etc.Goldilocks will argue the dreadful news in Noland’s piece are all lagging indicators. To this I reply: check out the WLI (weekly LEADING indicator) at ECRI which is plunging at a negative 29% annual rate!With lots of bulls, and now even bears, salivating about all the money they could make by getting early into “incredibly cheap” stocks and bonds, it looks like all the greed, the fear of being left behind in the “next big move up” is still intact from tech bubble times. Thus, I strongly doubt we have reached a bottom in either the markets and/or the economy.At every turn in this crisis, Goldilocks have always thought things were “self-contained” (remember Benny?*). Now it is not just Goldilocks, Da’ bears (including yours truly at times) believe things cannot be nearly as bad as in the depression because “all the heavy duty stuff” the FED and Treasury are doing; that the we are reaching bottom and we will turn the corner sometime next year. Some people will never learn:-)I think the speed of the internet, where now even WB lives, is making people so anxious we are all jumping the gun too fast; nobody wants to give things time, we want instant resolution!Me tink we are still a few long blocks from turning the corner and have a few miles of freefall before hitting concrete:-)* http://www.newyorker.com/reporting/2008/12/01/081201fa_fact_cassidy?currentPage=allAnatomy of a MeltdownBen Bernanke and the financial crisis.by John CassidyDecember 1, 2008Great article! some quotes follow:…As recently as Labor Day, he believed that the strategy was working. The credit markets remained open; the economy was still expanding, if slowly; oil prices were dropping; and there were tentative signs that house prices were stabilizing. “A lot can still go wrong, but at least I can see a path that will bring us out of this entire episode relatively intact,” he told a visitor to his office in August.By mid-September, however, the outlook was much grimmer. On Monday, September 15th, Lehman Brothers, another Wall Street investment bank that had made bad bets on subprime mortgage securities, filed for bankruptcy protection, after Bernanke, Paulson, and the bank’s senior executives failed to find a way to save it or to sell it to a healthier firm. During the next forty-eight hours, the Dow Jones Industrial Average fell nearly four hundred points; Bank of America announced its purchase of Merrill Lynch; and American International Group, the country’s biggest insurance company, began talks with the New York Fed about a possible rescue. Goldman Sachs and Morgan Stanley, the two wealthiest investment banks on Wall Street, were also in trouble. Their stock prices tumbled as rumors circulated that they were having difficulty borrowing money. “Both Goldman and Morgan were having a run on the bank,” a senior Wall Street executive told me. “People started withdrawing their balances. Counterparties started insisting that they post more collateral.”…….The most serious charge against Bernanke and Paulson is that their response to the crisis has been ad hoc and contradictory: they rescued Bear Stearns but allowed Lehman Brothers to fail; for months, they dismissed the danger from the subprime crisis and then suddenly announced that it was grave enough to justify a huge bailout; they said they needed seven hundred billion dollars to buy up distressed mortgage securities and then, in October, used the money to purchase stock in banks instead. Summing up the widespread frustration with Bernanke, Dean Baker, the co-director of the Center for Economic and Policy Research, a liberal think tank in Washington, told me, “He was behind the curve at every stage of the story. He didn’t see the housing bubble until after it burst. Until as late as this summer, he downplayed all the risks involved. In terms of policy, he has not presented a clear view. On a number of occasions, he has pointed in one direction and then turned around and acted differently. I would be surprised if Obama wanted to reappoint him when his term ends”—in January, 2010……. In October, 2002, a few months after joining the Fed, he gave a speech to the National Association for Business Economics, in which he [Bernanke] said, “First, the Fed cannot reliably identify bubbles in asset prices. Second, even if it could identify bubbles, monetary policy is far too blunt a tool for effective use against them.” In other words, it is difficult to distinguish a rise in asset prices that is justified by a strong economy from one based merely on speculation, and raising rates in order to puncture a bubble can bring on a recession. Greenspan had made essentially this argument during the dot-com era and reiterated it during the real-estate boom. (As late as 2004, Greenspan said that a national housing bubble was unlikely.)As house prices soared, many Americans took out home-equity loans to finance their spending. The personal savings rate dipped below zero, and the trade deficit, which the United States financed by borrowing heavily from abroad, expanded greatly. Some experts warned that the economy was on an unsustainable course; Bernanke disagreed. In a much discussed speech in March, 2005, he argued that the main source of imbalance in the global economy was not excess spending at home but, rather, excess saving in China and other developing countries, where consumption was artificially low. Lax American policy was helping to mop up a “global savings glut.”“Bernanke provided the intellectual justification for the Fed’s hands-off approach to asset bubbles,” Stephen S. Roach, the chairman of Morgan Stanley Asia, who was among the economists urging the Fed to adjust its policy, told me. “He also played a key role in the development of the ‘global savings glut’ theory, which the Fed used as a very convenient excuse to say we are doing the world a big favor in maintaining demand. In retrospect, we didn’t have a global savings glut—we had an American consumption glut. In both of those cases, Bernanke was complicit in massive policy blunders on the part of the Fed”.Another expert who dissented from the Greenspan-Bernanke line was William White, the former economics adviser at the Bank for International Settlements, a publicly funded organization based in Basel, Switzerland, which serves as a central bank for central banks. In 2003, White and a colleague, Claudio Borio, attended the annual conference in Jackson Hole, where they argued that policymakers needed to take greater account of asset prices and credit expansion in setting interest rates, and that if a bubble appeared to be developing they ought to “lean against the wind”—raise rates. The audience, which included Greenspan and Bernanke, responded coolly. “Ben Bernanke really believes that it is impossible to lean against the wind on the way up and that it is possible to clean up the mess afterwards,” White told me recently. “Both of these propositions are unproven.”Between 2004 and 2007, White and his colleagues continued to warn about the global credit boom, but they were largely ignored in the United States. “In the field of economics, American academics have such a large reputation that they sweep all before them,” White said. “If you add to that the personal reputation of the Maestro”—Greenspan—“it was very difficult for anybody else to come in and say there are problems building.”I keep on selecting everything I read and wanting to make it bold, so me tink it is best that you just read the whole article:-)

ORDecember 13th, 2008 at 4:37 pm

OK. What is the protocol? The new thread is a BS new thread with no “real” new content. Do we move there anyways? I believe my post above is important enough to re-post but I will not do it myself. I will leave the judgement/decision to others:-)

HayesDecember 13th, 2008 at 4:58 pm

I agree the above thread should be required reading – (I said the same thing on the new thread)I think I am going to stay here – e.g. I will suggest on the new thread that ther is still a good conversation carrying on in this one.

PeterJBDecember 13th, 2008 at 5:22 pm

Thank you for this post OR – it informs greatly and I apologize to you for posting on the new thread without first commenting here.But what I see here is pure and unadulterated pseudo-intellectual arrogance of office that has been permitted to grow in the hierarchical cum reductionist regime of religion founded science. I have been exposed to this widely and I can qualify it to one category; disease.thank you again, but I will move on to the next page as switching back and forth is rather tiresome.

ORDecember 13th, 2008 at 6:15 pm

I think yours is the right approach so I will “move up” too. I have read most posts here and coming back is hard. Hayes and myself made the point there that there is good stuff here so those interested can come back. I guess the right protocol is to move up to a new thread regardless of content sorry about generating confusion.

GloomBoom.comDecember 13th, 2008 at 9:32 pm

Madoff was a crook and now he is in jail. He will die there. All the people and institutions he stole from will be hurting for many years to come. I don’t think they will recover much at all because he had to pay out so much in double digit earnings each year. What a pity.Check out gloomboom.com – it will make your day!

Jethro BodineDecember 14th, 2008 at 8:03 am

“The Madoff story unfolding is truly amazing but hardly surprising as our entire economy has been a giant Ponzi scheme”In 2005, Bush wanted to keep the party (Ponzi scheme) going by proposing his Social Security plan of diverting tax money into personal investment accounts.

tahutchDecember 15th, 2008 at 7:25 pm

I haven’t seen anybody comment about the failure of the banks to start the ball rolling by lending out the TARP funds. As I recall this was one of Prof. Roubini’s major planks to get the economy back on its feet. Something about leverage(15 to 1). It doesn’t seem like it’s working. I guess this idea ignored the human factors of fear and greed.

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