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The Daily Double: Martin Mayer on CDS; Nouriel Roubini on the Banks

Once upon a time you dressed so fine You threw the bums a dime in your prime, didn’t you? People’d call, say, “Beware doll, you’re bound to fall” You thought they were all kiddin’ you You used to laugh about Everybody that was hangin’ out Now you don’t talk so loud Now you don’t seem so proud

How does it feel How does it feel To be without a home Like a complete unknown Like a rolling stone?

Bob Dylan “Like a Rolling Stone” (1965)

As we were preparing our remarks for the session today at American Enterprise Institute on credit default swaps, “Everything You Wanted to Know about Credit Default Swaps,” our thoughts turned to the interview we did last year with Martin Mayer (‘The Vigorish of OTC: Interview with Martin Mayer’, June 12, 2008′) 

All of sudden, through the window came an unsolicited manuscript from Mayer, who is the author of numerous books and articles about banking and finance, and a Guest Scholar of The Brookings Institution.  His comments follow below:

Pricing CDS and Other Illiquid Assets

By Martin Mayer

“Price theory,” the UCLA economist Jack Hirshleifer wrote, “is the heart of economics and the key to its application in the world of affairs.” It is also highly susceptible of mathematical analysis, both in the ivory tower and in the real world. In its primitive form, it insists on a price tag, a “law of one price” the same for everybody at each moment in time, which means that people can make fortunes on arbitrage.  In sophisticated form, price theory gives us computers programmed so that the 140 passengers in the airplane are paying thirty different prices to get from the same place to the same place at the same time.

Working on our horrendous banking crisis, unfortunately, we seem to be stuck with the primitive approach. We cannot get the “troubled” assets off the books of our “troubled” banks because we don’t know the correct “price.”

Actually, there is a large and growing cottage industry of experienced and wannabe vulture funds eager to get in the business of pricing and selling this stuff. Lone Star Funds, which paid Merrill Lynch 23 cents on the dollar for some billions of mortgage debt and business loans, has been around for thirteen years, and the Bass family members who helped start it had been big players in the Resolution Trust Corp. auctions that closed out the savings-and-loan mess in 1990-91.

Twenty years ago, Michael Milken of Drexel Burnham and a staff of razor-sharp Wall Street kids set up a hugely successful half-billion-dollar “bad bank” to rid Mellon Bank of its doubtful assets and distribute them to investors without any government support. The deal had a terrible press when new, but Mellon, Milken and the buyers of the stuff all did great.

This well-understood process has not been available in the current crisis, mostly because some $30 trillion of credit-default swaps stand between the owners of the “troubled” loan and debt obligations and anyone’s assessment of what they are “worth.” Each of these hundreds of thousands of swaps is a sort of stand-alone bastardized insurance policy against the prospect that some loan will not be repaid. Anyone can and anyone does write these individual loan guarantees; anyone can a nd anyone does reinsure them.

Whether these contracts will in fact pay off if there is a default, nobody knows. Some no doubt will, and some won’t. They reside off the balance sheet. There is no government regulator or exchange to list them, and no reporting system to drag them out from behind closed doors.

Credit-default swaps were always a bad idea, because they rest on the false premise that statistical sampling from historical evidence can replace knowledge of the borrowers in the creation of bank loan portfolios. Among the lessons taught but not yet learned in the ongoing horror story at the banks is that the insurance of financial instruments is an activity that can be safely conducted only by governments.

In the meantime, these derivatives severely complicate the necessary task of creating a market where private bidders (with some government help) can price the paper that now clogs the plumbing of finance. Separating debt securities from the swaps that were written theoretically to protect them will take ingenuity and persistence (and ruthless exploitation of well-known defects in the systems that trade derivatives), but it doesn’t have to be done all at once. No plan to recapitalize the banks can work unless it lifts the fog of uncertainty from the credit-default swaps.

Now What for the Big Banks?: Interview with Nouriel Roubini

Next we turn to our friend Nouriel Roubini, Professor of Economics at the Stern School of Business, New York University and Co-Founder and Chairman of Roubini Global Economics LLC.

The IRA: First, thank you Nouriel for telling people that we are the top bank analysis shop on the planet. All of us at IRA appreciate the praise. Before we talk about the banks, let’s get some context on the US economy. If you go back several years, even decades, most economists were predicting that our downfall would come as a result of an external shock due to trade and financial flow imbalances. Yet now it seems that the shock has instead come from the financial sector, leveraged to the sky due to derivatives and poor prudential regulation. How do you reconcile the fact that you and many other economists were focused on the trade and current account and did not see the “innovation” coming from Wall Street, the City of London, Paris as a threat?

Roubini: Well, the things we were explicitly worrying about before, like external deficit and trade flows, played a role in how things developed in the financial sector. The immediate causes of the crisis were a series of policy mistakes. The Fed pushed down the Fed funds rate down too low for too long and normalized the rates too slowly. There was poor supervision of the financial sector. There was greed and excessive risk taking within the financial institutions. And there was the poor behavior and conflicts of the rating agencies, who were the enablers of the structure finance bubble.

The IRA: Speaking of monetary policy as a driver of financial excess, there is a really great staff paper entitled “Money, Liquidity, and Monetary Policy,”  that was circulated in draft form in January by two FRBNY staffers, Tobias Adrian and Hyun Song Shin. The last paragraph states: “Balance sheet dynamics imply a role for monetary policy in ensuring financial stability. The waxing and waning of balance sheets have both a monetary policy dimension in terms of regulating aggregate demand, but it has the crucial dimension of ensuring the stability of the financial system. Contrary to the common view that monetary policy and policies toward financial stability should be seen separately, they are inseparable. At the very least, there is a strong case for better coordination of monetary policy and policies toward financial stability.”

Roubini: Precisely. If you ask yourself, how were the global excesses able to occur?  In my view the imbalances are a big part of the story, the excess savings from China, Russia, other parts of the world, enabled the US to finance itself cheaply. That build up of the leverage, the excesses, was facilitated by the flows of savings from abroad.

The IRA: So how much of GDP on a global basis and in the US do you think was illusory? That is, how much of the “growth” which we think occurred in the US over the past several years was simply a function of financing proceeds instead of true wealth creation? The losses in financials suggest that we were actually destroying wealth over this period?

Roubini: Certainly the availability of financing from foreign savers to fund American borrowers allowed the excesses to become bigger and last longer. This was a big contributor to the size of the damage in the financial sector. If the US had been a developing country, by 2004 with the twin deficits, you would have had a financial crisis and the bubble would have been deflated sooner. But the fact that the US is not a developing economy, that there was all of this financial innovation, the rest of the world was willing to finance further excess in the US because the had their own surpluses to invest.

The IRA: So the need of foreigners to invest the paper dollars we print in such great supply fuels our financial collapse? Meanwhile gold is trading over $1,000 per ounce.

Roubini: Look, the fact of the cash from abroad allowed long rates to creep in even after the Fed normalized the Fed funds rate. The bond market conundrum that Alan Greenspan referred to was when short rates were being pushed up but long rates were falling. So easy money, easy credit was facilitated by the global financial flows. There is a growing consensus that the Fed by cutting rates from 6 ½ to 1 percent was a mistake and that the normalization process, again, was too long. Even when we get out of this serious recession we’re in now, when the Fed does start to normalize rates, it should happen not over 24 or 36 months but rather over a very short period of time. Otherwise you risk to create another bubble.

The IRA: But let’s take a step back for a moment. We had a conversation with a very experienced loan officer from one of the big banks last week. He described how Sarbanes-Oxley, not the adoption of the mark-to-market accounting rule in 2008, actually was the start of the process of marking down the assets of the US financial system by 25%. M2M reflects the price = value thesis of the Chicago School.  But in the US, we were adopting all of these rules to “add transparency” in the post-Enron world, even as the quality of earnings from banks and other financials was going down the toilet. We were arguing about fair value accounting even as the fundamentals of the US economy were being so badly compromised by financial innovation that accounting just barely matters.

Roubini: Absolutely right. We had fair value accounting and increased transparency at one level. In the meantime you had the process of securitization adding opacity, where you could take a mortgage and sell it to somebody else with no accountability. And then you convert it into an MBS and you slice it and dice it. And then you covert it into a tranches of a CDO of a CDO or a CDO. And then you end up with food chain that produces ever more exotic, non-standardized, illiquid, mark-to-model assets and you end up with a market where there is no transparency. And yes, all the while you hear the politicians talking about increased transparency.

The IRA: Right, so responsibility ultimately rests with the Congress and an unwillingness to govern. When we hear our friends in Europe or Asia ask whether Americans have all lost out minds, you can understand why.

Roubini: We have created a monster. You cannot convert a bunch of doggy “BBB” mortgages using voodoo financing into broadly “AAA” securities because eventually people will panic. That is precisely what we have now. Nobody knows who holds it or how much toxic assets or where, so we have created a monster.

The IRA: But here is the question regarding political economy: Were efforts such as Sarbanes-Oxley and M2M accounting driven by guilt? Did we know, at least passively, that the policies of encouraging regulatory arbitrage via OTC market structures and “innovation” were bad choices, but we still allowed them to continue out of greed? The market economies constantly seem to create our own problems, then over react to them. Maybe that is the way free markets must operate. We seem to teeter from one expedient to the next, without ever addressing the underlying causes. Does this bother you?

Roubini: Yes it does — especially because I support the calls for stronger supervision and regulation.  But I also am painfully aware that the opportunities for regulatory arbitrage are many.

The IRA: Maybe we need to make regulation dynamic instead of giving the industry groups and lobbyists a static target?

Roubini: There are three problems: First, those who innovate are always quicker than those who regulate. As you said, this is a free market. Second there is jurisdictional arbitrage across countries which makes regulation much less effective. And finally there is regulatory capture, where the regulators become advocates for the industry instead of supervisors. In each case, we need incentive-compatible regulation to make it work.

The IRA: To move to the banks, isn’t the silence regarding Basel II deafening? Thirty years of research in financial economics and regulation has been flushed in 24 months. I am still getting comments about our discussion last year with our mutual friend Bill Janeway (‘New Hope for Financial Economics: Interview with Bill Janeway’, November 17, 2008),  where he basically said that a new path must be created where we explicitly calculate risk exposures based on real data, not quant shortcuts and guesses using bastard methodology stolen from the physical sciences.

Roubini: Well, many of the major dealers who helped to develop the final Basel II rule have failed before the rule was event fully implemented, so yes you could certainly call that a repudiation. Basel II did not work in the real world of irrational exuberance and regulatory arbitrage.

The IRA: How would you feel about imposing formal professional limits on economists and investment analysts? Any model that is used for either monetary policy or pricing a security must be published and subject to peer and regulatory review.  That is part of several proposals to fix the ratings mess, make them publish their models, put forward by people like Josh Rosner and Sylvain Raynes.

Roubini: Well, the more basic issue is can you model these risks at all?  The internal risk management models upon which Basel II was supposed to be based clearly did not work. You also have seen significant corporate governance problems within financial institutions, as you have written in The IRA regarding Robert Rubin and Citigroup. The compensation system on Wall Street encourages risk taking and, again, reliance on the rating agencies to make asset allocation decisions was clearly another source of instability. And the capital adequacy standards are pro-cyclical as we all know, so every pillar of Basel II has been a failure. I am not sure that simply publishing the models is a sufficient solution. The IRA:  Agreed.  So, to switch gears, what is your assessment of Obama so far? Roubini: Well, on the one hand I think you have to give them credit for in less than a month they’ve done three things, however imperfect: they passed a large stimulus package that I large. I am critical of many aspects of the stimulus, but in the absence of a large fiscal package, I think the economy will contract more.

The IRA: So you believe the stimulus package will slow the decline in aggregate demand?  The internal assumptions for transactions like Wells Fargo (NYSE:WFC) and Wachovia having a happy ending depends upon stabilizing the economy by Q3 2009.

Roubini:  Precisely. The second this Obama has done is the mortgage plan. In my view, you must eventually have to reduce the face amount of the mortgages, not merely extend the maturities…

The IRA:  Yeah, as suggested by Jim Crammer on CNBC on Friday, who wants to refinance everyone into 40-year fixed but w/o a principal reduction.  Cramer and the other inhabitants of Bubble Land just cannot get their arms around the notion that the valuations of these securities and the underlying collateral cannot be fixed. The 25% asset haircut for the banking industry that our channel source referred to before equates to a $3-4 trillion loss vs. $13 trillion in total assets and that may not be enough for C, BAC, etc.

Roubini: That’s right and this is why I believe we must see a markdown across the board, for securities holders and mortgagees. And third, on the Geithner plan for the banks, it is true that it was not really a plan and many aspects of it were very disappointing. The market reacted negatively to it not only because it was vague but also because the Administration essentially signaled that we are not going to throw trillions of dollars of good money after bad to bail out the shareholders of the big banks. The market was expecting a bailout and instead they got a stress test. That aspect of the plan, at least, is positive.

The IRA: Thank you. We have been telling people that the word “nationalization” is inappropriate and that the word “restructuring” is more apt. The OCC and the FDIC are going to support these institutions and sell assets for a while, but eventually the bond holders are going to take a haircut. Do you agree? What do we do with the bond holders of the big banks?

Roubini: That is a tough one. In my view, if you don’t treat the bond holders as secured creditors the fiscal costs are huge. If you treat them as traditional creditors, then you run the risk in the minds of some people of further systemic damage a la Lehman Brothers. But my view is that now that the Fed is in the market as counterparty, we are not going to see the fear and panic that existed when Lehman failed. We have to treat the bond holder as a secured creditor and give them a haircut in my view, possibly event convert the creditors explicitly into equity claims. If you take over all of the major banks all at once and restructure them, as you and others have been proposing, I think we minimize the risk of a “creeping” problem going from one bank to the next and therefore we can eliminate a lot of uncertainty. At some point you need to take a decision to deal with all of the insolvent institutions at once and make clear that the institutions that are not resolved are fine and can be saved and made stronger with fresh injections of capital.

The IRA: And thereby give investors finality. Again, we keep reminding people that a happy outcome for WFC, BAC and many other banks depends on arresting the increase in NCLs.

Roubini: Yes. Citi and Bank of America are obviously insolvent today, in my view, especially if you factor in the structured finance exposures. How things turn out for the rest of the industry depends on whether we can slow the decline.

The IRA: The difference between BAC and WFC, and JPM on the other hand, is that Jamie Dimon, who we like more and more, bought WaMu for three cents on the dollar of assets. WFC bought Wachovia whole, without a resolution. So JPM does not have to soft-pedal on foreclosures, despite what you read in the newspaper, and they don’t have to write anything down. WFC and BAC are choking on their acquisitions because they were not restructured first.

Roubini: The same analogy you draw applies to auto loans and whole mortgages and many other asset classes. The way to get these markets moving again is to mark the prices down, take the losses and sell these assets into private hands.

The IRA:  Ditto.  Thanks Nouriel


Originally published at The Institutional Risk Analytics and reproduced here with the author’s permission.

131 Responses to “The Daily Double: Martin Mayer on CDS; Nouriel Roubini on the Banks”

kparcellFebruary 25th, 2009 at 12:11 pm

Yes the derivative-spewed credit crisis is an ax hanging over the global economy, but underlying this is the housing bust, and underlying the housing bust is the oversupply of homes. Thus, reducing home inventory is the obvious and immediate solution. Merely a US commitment to do this would define a bottom and start a return to prosperity, and $360 billion would return the supply to the correct level. Here is a more complete discussion: twomillionhomes.net

GuestFebruary 25th, 2009 at 12:53 pm

what about the auto loans? the consumer debt? the trillion dollar deficits? the systemic failure of the global financial markets?I’m not trying to be snarky – I just don’t see how nationalizing the real estate market (temporarily, or course) is going to solve the fundamental issues.

Brett in ManhattanFebruary 25th, 2009 at 12:23 pm

We continually hear about Credit Default Swaps, but never get any details. Who stands to gain and lose if these swaps are triggered? Without the actual positions, the notional amounts are meaningless. It’s like a bookie saying he has taken 1 million dollars of bets on Super Bowl without telling you the amount of money bet on each team. The bookie’s exposure could be zero or it could be a million.

MichelleFebruary 25th, 2009 at 1:24 pm

Brett,You are asking the $64 quadrillion question. Lack of transparency is a problem and I think TPTB want it to stay that way, otherwise a panic could ensue. Most counterparties do not have the capital to withstand losses in the event of a credit event, which is why bank nationalization cannot happen right now. Nationalization could be a severe credit event, effectively causing a financial collapse, so until all the parties agree to what defines a credit event, nationalization is off the table. You can thank global regulators for looking the other way and allowing these things to even exist. Welcome to the shadow banking system! KABOOM!

MorbidFebruary 25th, 2009 at 1:33 pm

It’s the Obi-One Kabama Event……that the ObamaNation will be presiding over. It is then that the fortunes of Obi’s muse and Obi will dovetail. It is then that the Obi presidency will suffer like the Lincoln presidency did. Call it Civil War – Take II!

Wolf in the WildsFebruary 25th, 2009 at 8:26 pm

The information is available to anyone who actually tries to understand what a CDS is. It is incredible that all these people talking about credit default swaps without any sort of knowledge about them. I know a lot about them and frankly, it is not the default swaps that were the problem. It was about unnecessary counterparty risk that the major banks took.Ok, lets start at the beginning and define what is a credit default swap. A CDS is effectively a tradeable guarantee. Because of the contingent nature of a CDS (it is a guarantee after all, which in essence an option), there are 2 “default risk” involved: the underlying credit and the counterparty. If I were to buy a CDS from Goldman Sachs on General Electric for 5yrs, I would have bought a guarantee on GE (underlying credit) from GS (counterparty). In the event of a default in GE, I will get payment from GS. Makes sense? By itself, a CDS is nothing fancy. It is just a tradeable guarantee, like a tradeable bond. HOWEVER, the main risk came about when the banks took unnecessary counterparty risk from a reckless party. Now, for most institutions, they have to put some collateral when the “sell protection” (ie guarantee the buyer). And if the markets move against them, they add collateral. That limits the amount of leverage the seller can get from trade. But in some cases, like AIG, these buyers of protect decide that AIG didn’t need to provide collateral. Of course, that just meant that AIG had UNLIMITED LEVERAGE when they sell protection. Clearly, they would get greedy and lever their position to unsustainable levels. The same for the IBs and the banks. This is not a CDS problem. THIS IS A RISK CONTROL PROBLEM. AND A REGULATORY PROBLEM.In general, the net positions each institution holds is not great. HOWEVER, the counterparty risk positions can be huge, because of this lack of risk control. It is not the size of the market that is the question (there is a lot of netting), it is the amount of collateral each participating institution has put into the trade that determines the (counterparty) risk in the system. This is the systemic risk.Of course, given the lack of regulation with respect to leverage on the CDS, the IBs decided that it wasn’t enough to just get AIG to sell protection. They decided that they should get everyone else on the gravy train. Thus, the synthetic CDO was born. The synthetic CDO was a way to get everyone else not in the interbank/institutional market to leverage up and sell protection on different underlying credits. Given greed is the main driving force of capitalism, clearly the market got out of hand. Credit spreads were driven to ridiculously low levels, which further incentivised investors to lever to ever high levels. It was ridiculous, and anyone who was in the market for a long time could see this. These are the guys who avoided the product and was punished for it because of lower returns. Do you really want the truth? The plain truth is that regulators either deliberarately or incompetently missed this fact and we are now paying the price for it. MIND YOU, THIS IS THE CASE NOT JUST IN CDS. Look are REPOs for cash bonds. They serve the same bloody purpose. You can lever up UST 100% and for most investment grade bonds, it is the same. The only difference is that the leverage comes at the price, which is the funding cost. In the case of the CDS, the funding cost was zero for institutions like JPM, Citi, AIG etc..when it shouldn’t have been.So now that it is clear that CDS itself is nothing fancy, but the risk control was the main issue, who do you blame for the catatrophe we are in?For me, I point the finger at 2 groups: the CEOs of the so called fianncial institutions, and the regulators. The CEOs was supposed to protect shareholder interest and they failed. They let greed and astronomical compensation take over their better judgement. They should be hung. And the regulators, for sleeping at the wheel or being complicit in this regulatory failure.We are now going to pay the price.. for a long time.

GuestFebruary 25th, 2009 at 11:52 pm

Many thanks for your lucid explanation of our current, and soon to be seemingly unending, economic predicament. The penalty you suggest, however, is too kind. I think disemboweling or drawing and quartering may be more appropriate for the perpetrators of what may well be the greatest economic and social crime in world history. May it hold such a dubious record for a long time. Heaven help future generations if worse crimes follow.

GuestFebruary 25th, 2009 at 12:23 pm

ON TRANSPARENCY OF THE FEDby Ron PaulThis week the Federal Reserve responded to the American people’s increased concerns over our monetary policy by presenting new initiatives aimed at enhancing the Fed’s transparency and accountability. As someone who has called for more openness from the Fed for over 30 years, I was pleased to see the Fed acknowledge the legitimacy of this need.The Federal Reserve controls the flow of money and credit in our economy because Congress has abdicated its responsibility over the nation’s currency. This process therefore occurs centrally, and almost completely outside the system of checks and balances. Because of legal tender laws, people are left with no real choice, except to build their lives and futures around this monopoly currency, vulnerable to powerful central bankers. The Founding Fathers intended only gold and silver to be used as currency; however, inch by inch over the decades, this country has backed away from this important restraint. Our money today has no link whatsoever to gold or silver. For many reasons, this is extremely dangerous, and has a lot to do with the boom and bust cycles that have resulted in the crisis in which we find ourselves today.The Fed is now pledging to reveal to the public more about its economic predictions, and calls this greater transparency. This is little more than window-dressing, at best, utterly useless at worst. Many analysts, especially those familiar with the Austrian school of economics, saw the current economic crisis coming years ago when the Federal Reserve was still telling the American people their policies were as good as gold. So while it might be nice to know what fantasy-infused outlook the Fed has on the economy, I am much more interested in what they are doing as a result of their faulty, haphazard interpretation of data. For instance, what arrangements do they have with other foreign central banks? What the Fed does on that front could very well affect or undermine foreign policy, or even contribute to starting a war.We also need to know the source and destination of funds provided through the Fed’s emergency funding facilities. Information such as this will provide a more accurate and complete picture of the true cost of these endless bailouts and spending packages, and could very likely affect the decisions being made in Congress. But with so much of the Fed’s business cloaked in secrecy, these latest initiatives will not even scratch the surface of the Fed’s opaque operations. People are demanding answers and explanations for our economic malaise, and we should settle for nothing less than the whole truth on monetary policy.The first step is to pass legislation I will soon introduce requiring an audit of the Federal Reserve so we can at least get an accurate picture of what is happening with our money. If this audit reveals what I suspect, and Congress has finally had enough, they can also pass my legislation to abolish the Federal Reserve and put control of the economy’s lifeblood, the currency, back where it Constitutionally belongs. If Congress refuses to do these two things, the very least they could do is repeal legal tender laws and allow people to choose a different currency in which to operate. If the Fed refuses to open its books to an audit, and Congress refuses to demand this, the people should not be subject to the whims of this secretive and incompetent organization.http://www.lewrockwell.com/paul/paul508.html

wethepeopleFebruary 25th, 2009 at 1:28 pm

Who owns the Fed? If the Fed member banks do, and they are insolvent, then why wouldn’t nationalizing the Fed member banks create ownership of the Fed by the taxpayers. If the taxpayers owned the Fed member banks, then the taxpayers would then own the Fed. The opponents of nationalization the Fed member banks (even temporarily) realize that those member banks would lose control of the Fed to the rightful owners the American tax payers. The American people should own the Fed. Central banking deserves a white hot spotlight, immediately. I support the audit the Fed legislation.

GuestFebruary 26th, 2009 at 12:51 am

To answer your question, I found the following information, undated, at the link indicated, and additional information from Eustace Mullins from 1983 on the stockholders of the Federal Reserve Bank of New York where all major Fed decisions are made. To update that information, you should look at bank mergers, i.e., JPMorgan Chase et cetera on Wikipedia, etc. (The Federal Reserve Bank is not a publicly traded corporation and is, therefore, not required by the Securities and Exchange Commission to publish a list of its major shareholders, unfortunately. Therefore, Americans cannot know for certain who the men are who control the money and credit of the United States, and, therefore, her commerce and industry – with, unfortunately again, no system of checks and balances of power. To dispel all conjecture and satisfy Americans’ right to know who controls their money supply, the Federal Reserve System should be required by Congress to make public its shareholders and operations.)According to the link below, “The real owners of the Federal Reserve and the Federal Reserve System are (date not given)”:a) Rothschild Banks of London and Berlin;b) Lazard Brothers Bank of Paris;c) Israel Moses Seif Banks of Italy;d) Warburg Bank of Hamburg and Amsterdam;e) Lehman Brothers Bank of New York;f) Kuhn, Loeb Bank of New York;g) Chase Manhattan Bank of New York;h) Goldman Sachs Bank of New York; andi) Approximately three hundred people, known to each other and/or relations of the “owners,” who hold stock in the Federal Reserve System. They comprise an interlocking, International Banking Cartel of wealth beyond comprehension.http://www.apfn.org/Mind_Control/money/money.htmWith this additional note: Professor Carroll Quigley was Bill Clinton’s mentor at Georgetown University. President Clinton has publicly paid homage to the influence Professor Quigley had on his life. In Quigley’s magnum opus Tragedy and Hope (1966), he states: “There does exist and has existed for a generation, an international…network which operates, to some extent, in the way the radical right believes the Communists act. In fact, this network, which we may identify as the Round Table Groups, has no aversion to cooperating with the Communists, or any other groups and frequently does so. I know of the operations of this network because I have studied it for twenty years and was permitted for two years, in the early 1960s, to examine its papers and secret records. I have no aversion to it or to most of its aims and have, for much of my life, been close to it and to many of its instruments. I have objected, both in the past and recently, to a few of its policies…but in general my chief difference of opinion is that it wishes to remain unknown, and I believe its role in history is significant enough to be known.”According to Eustace Mullins in “The Secrets of the Federal Reserve”: “As of 1:05 Tuesday, July 26, 1983, the list of member banks holding Federal Reserve Bank of New York stock includes twenty-seven New York City banks. Listed below are the number of shares held by ten of these banks, amounting to 66% of the total outstanding number of shares, namely 7,005,700:Bankers Trust Company- 438,831 Shares (6%)Bank of New York – 141,482 (2%)Chase Manhattan Bank – 1,011,862 (14%)Chemical Bank – 544,962 (8%)Citibank – 1,090,813 (15%)European American Bank &Trust- 127,800 (2%)J. Henry Schroder Bank &Trust – 37,493 (.5%)Manufacturers Hanover – 509,852 (7%)Morgan Guaranty Trust – 655,443 (9%)National Bank of NorthAmerica – 105,600 (2%).Said Mullins: “Currently, shares held by five of the above named banks comprise 53% of the total Federal Reserve Bank of New York stock. An examination of the major stockholders of the New York City banks shows clearly that a few families, related by blood, marriage, or business interests, still control the New York City banks which, in turn, hold the controlling stock of the Federal Reserve Bank of New York…It is notable that three of the banks holding Federal Reserve Bank of New York stocks, in the amount of 270,893 shares, are subsidiaries of foreign banks…“This information, derived from the latest issue of the tabulation available from the Board of Governors, Federal Reserve System, is cited as current evidence which indicates that the controlling stock in the Federal Reserve Bank of New York, which sets the rate and scale of operations for the entire Federal Reserve System, is heavily influenced by banks directly controlled by “The London Connection,” that is, the Rothschild-controlled Bank of England (tabulated by Chart I pp.92-93 – not shown here).”

PeterJBFebruary 25th, 2009 at 4:09 pm

Mr Paul appears as a simple and respectful man with an honest and clear grasp of the truth; not what you could describe as a common trait amongst “leadership” today.”What the Fed does on that front could very well affect or undermine foreign policy, or even contribute to starting a war.”You need only go back to when Mr Greenspan was talking his ‘book’ and his various interviews and talks on his activities when he was Chairman of the FedRes to find that as Chairman of the FedRes that he WAS openly advocating the eventual invasion of IRAQ. It was noted that he was a regular pre-dawn visitor to Clinton’s White House and also GWB’s White House. SO so much for the above statement by Mr Paul (I suspect that he is very aware of Mr Greenspan’s nefarious activities.It must be also noted that Mr Greenspan was responsible for the economic pumping and that ‘global derivatives base’ that he set in place and which permitted to be built thereupon, huge new leverage positions through ‘financial innovation'(manipulation) and the massive price discovery escalations – such as in ‘home values’ which eventually were clearly built upon the aggregated demand for mortgages – and clearly not the demand for housing, etc., etc.Now, today, as clearly (to me) indicated by Mr Benanke, the FedRes believes that there is only one economic reality which comprises only the Banking and or Finance Industries; obviously merely preference but, there is not doubt that Main Street and Wall Street due exist as the, respectively, the real and the secondary economies, a priori.It is clear to me that asset prices (and home prices) were built on the Greenspan base and now that that has completely collapsed, price discovery will be found at far, far, far lesser values despite Mr Benanke et al determinations to keep them propped up. Clearly, ‘price discovery’ is the key to moving forward and the sooner its done, the sooner the pain of denial will disappear.I therefore posit here then, that Mr Benanke by his actions of sucking out all the resources of the ‘real’ economy to give, a priori, to the ‘secondary’ economy (to some point perhaps x4 generations into the future?) – is that direct action that will create a state much worse than a ‘depression’ within the USA (as well as a global depression and the temporary collapse of the Constitutional Republic of the USA). A sad but necessary outcome, which didn’t need to happen.As regards the Banks – is “nationalization” really the right term to be used for the process being considered as to me, it is abhorrent?Ho hum

GuestFebruary 25th, 2009 at 11:15 pm

They blame us for what they do. As for Bernanke, aka The FedRes, who believes that there is only one economic reality and that is the Banking and/or Finance Industries, I repeat the words of Harold L.Ickes in “America’s House of Lords”: “While they shriek for ‘freedom of the press’ when there is no slightest threat of that freedom, they deny to citizens that freedom FROM the press to which the decencies of life entitle them. They misrepresent, they distort, they color, they blackguard, they lie.”The freedom of the Internet is our bulwark of liberty against the distortions of the financiers and their media: the worldwide web is our defense against despotic government control — the people’s might. Bernanke speaks and PeterJB (aka we) answers!

GuestFebruary 25th, 2009 at 12:29 pm

“President Obama addressed a joint session of Congress last evening. The speech was optimistic, but that optimism failed to spur confidence in stocks as nothing has improved the fundamental picture for the financial sector.” ( MSN Market Report)

blindmuleFebruary 25th, 2009 at 1:11 pm

Words and music by Bob DylanSummer days, summer nights are goneSummer days and summer nights are goneI know a place where there’s still somethin’ going onI’ve got a house on the hill, I got hogs out in the mudI’ve got a house on the hill, I got hogs all out in the mudI’ve got a long haired woman, she got royal Indian bloodEverybody get ready, lift up your glasses and singEverybody get ready, lift up your glasses and singWell I’m standin’ on the table, I’m proposin’ a toast to the kingI’m driving in the flats in a Cadillac carThe girls all say “You’re a worn out star”My pockets are loaded, and I’m spending every dimeHow can you say you love someone else, you know it’s me all the timeWell the fog’s so thick you can’t spy the landWell the fog’s so thick that you can’t even spy the landWhat good are you anyway if you can’t stand up to some old businessman?Weddin’ bells are ringin’ and the choir is beginning to singYes, the weddin’ bells are ringin’ and the choir’s beginning to singWhat looks good in the day, at night is another thingShe’s looking in to my eyes, and she’s a-holding my handShe looks in to my eyes, she’s holding my handShe say, “you can’t repeat the past,”I say “You can’t? What do you mean you can’t? Of course you can.”Where do you come from, where do you go?Sorry, that is nothing you would need to knowWell, my back’s been to the wall so long it seems like it’s stuckWhy don’t you break my heart one more time, just for good luckI got eight carburators and boys I’m usin’ ’em allWell, I got eight carburators and boys I’m usin’ ’em allI’m short on gas, my motor’s startin’ to stallMy dogs are barking, there must be someone aroundMy dogs are barking, there must be someone aroundI got my hammer ringin’ pretty baby, but the nails ain’t goin’ downIf you got something to say, speak or hold your peaceWell, if you got something to say, speak now or hold your peaceIf it’s information you want, you can get it from the policePolitician’s got on his joggin’ shoesHe must be runnin’ for office, got no time to loseSuckin’ the blood out of the genius of generosityYou been rollin’ your eyes, you been teasin’ meStandin’ by God’s river my soul’s beginning to shakeStandin’ by God’s river my soul’s beginning to shakeI’m countin’ on you, love, to gimme a breakWell, I’m leaving in the morning, as soon as the dark clouds liftYes, I’m leaving in the morning, just as soon as the dark clouds liftI’m breakin’ the roof, set fire to the place as a partin’ giftSummer days, summer nights are goneSummer days, summer nights are goneI know a place where there’s still something goin’ on

GuestFebruary 25th, 2009 at 1:38 pm

The American Enterprise Institute – Who, What, Why, When and Where from Wikipedia:AEI is the most prominent think tank associated with American neoconservatism, in both the domestic and international policy arenas. Irving Kristol, widely considered a father of neoconservatism, is a senior fellow at AEI.AEI emerged as one of the leading architects of the second Bush administration’s public policy. More than twenty AEI alumni and visiting scholars and fellows served either in a Bush administration policy post or on one of the government’s many panels and commissions.Among the prominent former government officials now affiliated with AEI are former House Speaker Newt Gingrich, now an AEI senior fellow; former United States Deputy Secretary of Defense Paul Wolfowitz, now an AEI visiting scholar; former U.S. ambassador to the U.N. John Bolton, now an AEI senior fellow; and former chairman of the National Endowment for the Humanities (and wife of former Vice President Dick Cheney) Lynne Cheney, a longtime AEI senior fellow.AEI is often cited as a right-leaning counterpart to the left-leaning Brookings Institution.The two entites have sometimes collaborated: in 1998 they established the AEI-Brookings Joint Center for Regulatory Studies, and in 2006 they launched the AEI-Brookings Election Reform Project.Officers and trusteesAEI’s officers are Arthur C. Brooks, president; David Gerson, executive vice president; Jason Bertsch, vice president for marketing; Henry Olsen, vice president and director of the National Research Initiative; and Danielle Pletka, vice president for foreign and defense policy studies.Its board is chaired by Kevin Rollins. Current notable trustees include:· Gordon Binder, former chairman and CEO of Amgen· John V. Faraci, chairman and CEO of International Paper· Harlan Crow, chairman and CEO of Crow Holdings, the Trammell Crow family’s investment company· Christopher Galvin, former CEO and chairman of Motorola· Raymond Gilmartin, retired chairman and CEO of Merck & Co.· William S. Stavropoulos, former chairman CEO of the Dow Chemical Company· Harvey Golub, retired chairman and CEO of the American Express Company· Roger Hertog, former president of Sanford C. Bernstein and Company and vice chairman of AllianceBernstein· Bruce Kovner, chairman of Caxton Associates· Robert Pritzker, president of the Pritzker Foundation and Marmon Holdings· Edward B. Rust Jr., chairman and CEO of the State Farm Insurance Companies· James Q. Wilson, university professor and author.AEI has a Council of Academic Advisers, chaired by James Q. Wilson, which includes Martin Feldstein, Gertrude Himmelfarb, R. Glenn Hubbard, William M. Landes, Sam Peltzman, George L. Priest, Jeremy A. Rabkin, Murray L. Weidenbaum, and Richard J. Zeckhauser.http://en.wikipedia.org/wiki/American_Enterprise_InstituteRichard Christopher Whalen: writer and investment banker Christopher Whalen. From his web page:He and his wife Pamela live atop Red Hill in the Village of Croton-on-Hudson, New York. Christopher is the co-founder of Institutional Risk Analytics, the Los Angeles based publisher of risk ratings and provider of risk management tools and consulting services for auditors, regulators and financial professionals. He edits The Institutional Risk Analyst, a news report and commentary on developments in and around the global financial markets.Christopher founded newsletters such as The Mexico Report, Washington & Wall Street and The Edge. He is global risk editor of The International Economy magazine and has contributed to Insight on the News and Barron’s. In the early 1990s, Christopher helped found The Herbert Gold Society, an informal group of current and former employees of the US Treasury and the Federal Reserve System. Christopher volunteers as a regional director of the Washington DC chapter of Professional Risk Managers International Association. You may see Christopher in media such as The Globalist, CNBC, Bloomberg, and American Banker and on blogs such as The Big Picture and Seeking Alpha.http://www.rcwhalen.com/

CaponeFebruary 25th, 2009 at 2:06 pm

Capone buy signal – i am sitting here angrily waiting for MCD to go down and it is not. past performance has indicated when my anger reaches this threshold we are going to rally. Apparently, MCD’s arches truly are golden. It is not actually a stock. The MCD paper stock certificates must be laced in gold as the arches are not actually lights but are truly made of gold. Their property must be owned and located on top of natural gas and oil reserves. It is relative strength. It is effectively a PUT on the DOW as it will NEVER EVER go down EVER.Well, the DOW is down 48% and MCD is down 20% so I guess if the DOW went down to nearly zero ? MCD would possibly be down 40%. in March of ’03 it was 12.12 today it is only 350% HIGHER than the 2003 overall market LOW trading at 54.65.Do you think this just MAY possibly be the one they hold in place to keep the DOW above levels where riots would break out.still miserably short it… glad it is warming up soon cause like Forrest Gump I just need to start running again… first marathon last year and the next one can’t come soon enough.technically MCD should already f be lowerthere she goes ! ! !

CaponeFebruary 25th, 2009 at 2:14 pm

O’Bama did it! Yes stocks can go green! Yes they can.Can we rally on a catastrophic consumer confidence number? YES we can.Can we rally on yet another worse than expected existing home sales number? YES we can.Can we rally following his speech when most people expect a sell off afterwards?YES we canHe is the Chosen Onewe can rally for the latter part of the 100 days now…i am not sure what could be worse death by eating 100 Quarter pounders with cheese or shorting the stock through sell off after sell off after sell off after sell off through multi year low after multi year low after multi year low.MCD was 30ish less than 3 years ago people. WTF !!!!

GuestFebruary 25th, 2009 at 2:20 pm

Face it, the problems are solved. Didn’t you listen to the words of great wisdom last night? If you just believe, all will work out for you.

GuestFebruary 25th, 2009 at 2:22 pm

I’ve mentioned this before–there’s a board I visit, mostly of women, mothers. They, almost all of them, were expecting the market to tank today in response to Obama’s speech. I took it as a contrarian indicator, so no surprise to me that we’re now green. (sigh)

GuestFebruary 25th, 2009 at 2:43 pm

@ Guest on previous thread (25 10:35:11): “Going forward there is just nothing to drive growth? And worse yet the oligarch is preparing and planning to pull all their wealth out of the country after they get it back through government bank bail outs.”Yours is a conjecture of déjà vu.Max Warburg, head of the German Secret Service in WWI whose family banking house was in Hamburg, represented Germany at the Versailles Peace Conference that reduced Germany to destitution and starvation. Warburg remained peacefully in Germany until 1939, during a period when persons of his religion were being persecuted. To avoid injury during the approaching war, when bombs would rain on Germany, Max Warburg was allowed to sail to New York, his funds intact.Warburg’s brother, Paul, is the “father” of The Federal Reserve System – coming to this country specifically to give it birth.On December 12, 1918, the United States Naval Secret Service Report on Paul Warburg was as follows:“WARBURG, PAUL: New York City. German, naturalized citizen, 1911. Was decorated by the Kaiser in 1912, was vice chairman of the Federal Reserve Board. Handled large sums furnished by Germany for Lenin and Trotsky. Has a brother who is leader of the espionage system of Germany.”Deja vu?

GuestFebruary 25th, 2009 at 8:04 pm

I think his point is that this storyline has been played out before? Meaning that Warburg was in banking in Germany, represented Germany in what reduced it to ‘destitution and starvation’, then was allowed to pull out everything he had (“funds intact) and sail elsewhere (to the US), and then proceeded to reinvent himself here in banking (The Federal Reserve System). Or maybe I misinterpreted, in which case someone can correct me.

blindmanFebruary 25th, 2009 at 10:01 pm

g,not a correction but the story of the warburgs is rich and deep. the book “the warburgs:..” chernowis worth reading if you’re into that. i forgot mostof it but one thing.. one of them was the first toarrange international private financing for a national public works project.? western european finance of italian roads and bridges. i’m thinkingthat was max w., can’t remember the year.also max had a anglo german partner in the family mm warburg hamburg bankfor the purpose of continuing to do business during the rise of the nazi regime, mustache.(if that is the right term).but ..http://www.scribd.com/doc/4549903/Sidney-Warburg-Hitlers-Secret-Backers-The-Financial-Sources-of-National-Socialism-1933.read this.. it is just creepy,.Sidney Warburg – Hitler’s Secret Backers – The Financial Sources of National Socialism (1933).the conversation between hitler and sidney.deja vu delux. the story concerning the warburg name and 19th 20th century history, finance is epic. probably unblogable. but revealing and critical to the history of international and global finance.

GuestFebruary 25th, 2009 at 10:06 pm

Thanks for the reading suggestions–I almost reduced your name to a few initials, but didn’t want to be insulting.. 😉

CuriousGeorgeFebruary 26th, 2009 at 3:27 pm

Thanks for confirming that “blindman” explained what you were thinking. So, in order that I understand you completely, who is Warburg in the current version of the situation?

HubbsFebruary 25th, 2009 at 2:46 pm

STRESS TEST????What is all this about the “stress test”? Isn’t this more obfuscation by the govt to make it appear that it is getting to the bottom of the issue on banks viability and therefore justification to keep pumping money into them? This is a most pathetic attempt at “transparency”.The critical banks GS, JPM, CITI, BOA which are too big to fail will obviously pass the test, otherwise they would not be subjected to the “test” in the first place. The govt just doesn’t want to let on that the big players are insolvent.Conversely, no doubt some banks will flunk the test, but they will not be critical ones. They would probably have not survived anyway by any other accounting standard. They will be the sacrifical lambs to make the “Stress Test” look like a reliable screening test. Sounds like the rating agencies (S&P, Fitch, Moodys) revisted.This parallels a post by the Professor over a year ago when he declared that Reinsurers who required an AAA rating to remain viable did not deserve the AAA rating in the first place.

GuestFebruary 25th, 2009 at 2:48 pm

the stress testing in the US should have started 2 years ago – these are the Basel Accord capital adequacy tests that the US has not performed as yet, other countries like Canada started 2 years ago…

GuestFebruary 25th, 2009 at 3:49 pm

they should make sure they have the stress test model take into account a crash of Eastern Europe and a crash on the CDS market

TurtleFebruary 25th, 2009 at 2:47 pm

Hiding in plain sight: Credit default swaps are, inter alia, a clever way of moving money from point A to point B and then on to point C. This is sometimes known as money laundering.

GuestFebruary 25th, 2009 at 4:05 pm

time to milk the cow (USA taxpayer)http://news.yahoo.com/s/ap/20090225/ap_on_go_co/congress_spendinghttp://news.yahoo.com/s/ap/obama_budget

Octavio RichettaFebruary 25th, 2009 at 4:19 pm

Professor: Truly a great post! A couple of points:You say: Roubini: Well, the more basic issue is can you model these risks at all? The internal risk management models upon which Basel II was supposed to be based clearly did not work. You also have seen significant corporate governance problems within financial institutions, as you have written in The IRA regarding Robert Rubin and Citigroup. The compensation system on Wall Street encourages risk taking and, again, reliance on the rating agencies to make asset allocation decisions was clearly another source of instability.On modeling risk:U R rite! There is no way around it. The uncertainty in the economy, markets, security prices, etc; is nearly impossible to capture in stochastic models with a reasonable degree of certainty* (i.e., coming up with a trustworthy suitably narrow confidence interval with a high enough level of confidence is a hard problem).So what is the way around it? It keep simple, [stupid] by building in a extra margin of safety via leverage that is SIGNIFICANTLY lower than we have witnessed in the recent past.On the short term orientation of managers/compensation system:This is a very real BIG problem not only at banks but US businesses in general. Boggle was talking about this yesterday at Bloomberg. The people in charge are no longer the owners, but a bunch of managers who are really no different from incompetent bureaucrats. The problem at banks is compounded! These outfits operated with little capital even back in the days when the banker was the owner of the bank. The limited liability of incorporation was an incentive for the bank owners to take undue risk as they were risking mainly OPM. Can you imagine how this is with todays bankers who have even less at stake? The separation of ownership and management is a tough one for passive investors as these clown managers put their personal interestes ahead of those of stockholders. I don’t have a solution to the problem but, IMHO, this is an area that could benefit from some uncle Sam oversight.*Stochastic modeling and simulation, and stochastic optimization were key areas in my training/research.

Octavio RichettaFebruary 25th, 2009 at 4:24 pm

It is nice to see the Professor is a smart, flexible, fast leerner: He rightfully changed his view on bondholders of financial companies:The IRA: Thank you. We have been telling people that the word “nationalization” is inappropriate and that the word “restructuring” is more apt. The OCC and the FDIC are going to support these institutions and sell assets for a while, but eventually the bond holders are going to take a haircut. Do you agree? What do we do with the bond holders of the big banks?Roubini: That is a tough one. In my view, if you don’t treat the bond holders as secured creditors the fiscal costs are huge. If you treat them as traditional creditors, then you run the risk in the minds of some people of further systemic damage a la Lehman Brothers. But my view is that now that the Fed is in the market as counterparty, we are not going to see the fear and panic that existed when Lehman failed. We have to treat the bond holder as a secured creditor and give them a haircut in my view, possibly event convert the creditors explicitly into equity claims. If you take over all of the major banks all at once and restructure them, as you and others have been proposing, I think we minimize the risk of a “creeping” problem going from one bank to the next and therefore we can eliminate a lot of uncertainty. At some point you need to take a decision to deal with all of the insolvent institutions at once and make clear that the institutions that are not resolved are fine and can be saved and made stronger with fresh injections of capital.

GuestFebruary 25th, 2009 at 5:23 pm

The bank bond holders of large financials will never take a haircut. The major bondholders are the financial mafia now controlling our President, Congress and indeed the entire country.

Steven RamirezFebruary 25th, 2009 at 4:28 pm

If unemployment continues to soar (and it will) and real estate does not stabilize (it’s getting worse) then the losses to the financial system will spiral out of control. Remember when Roubini was considered extreme when he projected losses of $1 trillion? Now, we seem to be pushing the $4 trillion level. But every lost job is a default. And, real estate is in a negative feedback loop with an 18% y/y loss, which is a record.At this point all the money is being sucked up by zombie banks. They are consuming all the oxygen. We must wipe out the shareholder claims and unsecured creditor claims now and just see what happens. We may have to form a new national bank, like Stiglitz suggests.The Obama administration floated a trial ballon that hardly anyone noticed late last week. Its a trillion dollar bailout of the hedge fund industry and private equity firms. http://www.nytimes.com/2009/02/20/business/20lend.htmlWe desperately need direct support for jobs and real estate, and instead we get this turkey?The speech last night was fun, but if you follow the money its trillions for the rich (zombie bankers and hedge funds) and pennies for everyone else.This will not end well.

PeteCAFebruary 25th, 2009 at 6:37 pm

No, it won’t end well. And it will end with public displays of affection (hangman’s noose, guillotining, firing squads) if they start giving bailouts to the hedge fund industry.PeteCA

GuestFebruary 25th, 2009 at 6:40 pm

I value your observations as a professor of law. I culled out the information below from the article you cited on TALF. I particularly was concerned with the statement: “Investors who borrow from the Fed [at roughly 1.5 percent to 3 percent] could enjoy annual returns of 20 percent or more.”I find it very hard to take the disparities in this present economic “system.” The Fed and Congress no longer even try to hide their thievery and favoritism. I take this new move to mean that both entities think the people are helpless, that their means of representation in the Congress are completely severed. The Fed proceeds as if it can commit any atrocity with impunity. Which it can… It is lawless, forcing us into a box canyon with no way out but to fight.We have reached that point described by Guy de Maupassant: “Since governments take the right of death over other people, it is not astonishing if the people should sometimes take the right of death over governments.”Here is an excerpt on TALF.Banking chiefs, who have come under sharp criticism for not making more loans even as they have accepted billions of taxpayer dollars to prop themselves up, say it is the markets, not the banks, that are squeezing American borrowers.The Obama administration hopes to jump-start this crucial machinery by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.The Fed is expected to start the first phase of the program, which will provide $200 billion in loans to investors, in early March…Investors and bankers say the Treasury program, called the Term Asset-Backed Securities Loan Facility, or TALF, could help unclog vital channels of capital, but they add that it is hard to know how big an impact it will have…Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund, said many people might take a dim view of the TALF program because it provided government subsidies to investors like hedge funds. Investors who borrow from the Fed could enjoy annual returns of 20 percent or more.“The TALF,” he said, “raises a lot of questions.”

GuestFebruary 26th, 2009 at 8:29 am

I agree with your post. However, if you are going to use the phrase ‘feedback loop’ in the context that you are using it (control theory), a negative feedback loop is self correcting control system, i.e. the thermostat in your water heater (simplest). A positive feedback loop is one where feedback signal will cause the system to move in the direction of the feedback, as in your housing example.

AnonymousFebruary 25th, 2009 at 4:54 pm

The IRA: So how much of GDP on a global basis and in the US do you think was illusory? That is, how much of the “growth” which we think occurred in the US over the past several years was simply a function of financing proceeds instead of true wealth creation? The losses in financials suggest that we were actually destroying wealth over this period?Roubini: Certainly the availability of financing from foreign savers to fund American borrowers allowed the excesses to become bigger and last longer. This was a big contributor to the size of the damage in the financial sector. If the US had been a developing country, by 2004 with the twin deficits, you would have had a financial crisis and the bubble would have been deflated sooner. But the fact that the US is not a developing economy, that there was all of this financial innovation, the rest of the world was willing to finance further excess in the US because the had their own surpluses to invest.excuse my ignorance, but does this answer from the professor mean that since 2004 it’s ALL been illusory growth in global GDP? all was growth that we only think was ever there?

SoftwarengineerFebruary 25th, 2009 at 4:55 pm

I LIKE THE WALL STREET JOURNAL GUY ON CNN LAST NIGHTHe suggested replacing the current uncontrolled growth bankster banks with a big brand new “We the People” bank. No ties to the toxic waste “what-so-ever”; if its taxpayer money we’re lending out.Let the other ones go down in flames [including Fannie and Freddie].At least our grandchildrens’ tax money won’t be going down in flames, in the name of trying to fund this impossible uncontrolled population growth debt that ou media/government/economists refuses to specifically address in America. But we all know I’m right.Homes could be purchased with our “We the People” bank [probably for half price or less]; but at least American RE will be back on track again to grow in price again and the stock market can breath a sigh of relief.Its time to swallow the medicine.

GuestFebruary 26th, 2009 at 4:37 am

hey that is a neat idea…but yes like the other commentor says, it will not save the rich so it will not happen.But this would allow all the tax payers to open accounts in the new bank and everyone (mainly: the US government) to just forget the bad banks and their trouble…they would eventually sink because of being so deeply in red and not getting more money from the government.

GuestFebruary 27th, 2009 at 3:45 pm

In the same vein, why not offer baby boomers a Social Security “early retirement package”, in which a person at 62 can retire from the workforce with the Social Security benefit they would receive had they waited until age 65, at 63 the benefit at age 66, etc…The money would flow directly into the hands of Consumers, the work force would see millions of jobs open up and that much less would flow into the hands of those whose greed created this mess in the first place.

GuestFebruary 25th, 2009 at 5:05 pm

Feb. 24 (Bloomberg) — Confidence among U.S. consumers plunged to a record low in February, signaling spending will slump further as unemployment soars.

ChazFebruary 25th, 2009 at 5:10 pm

“…you must eventually have to reduce the face amount of the mortgages”. Does anyone understand how this would work? Does this mortgage holder reduce the amount of the mortgage by X percent and the homeowner simply gets a gift? And who takes the hit? Do the Feds reimburse the mortgage holder for the difference? What would be the criteria for which mortgages get “face value reduction?

ex VRWCFebruary 25th, 2009 at 6:28 pm

Simple, if you get your mortgage reduced, you are now a renter. We the People own your house, possibly in conjunction with the bank. You may buy it back if you are able someday, or when you move out or stop paying rent, We the People will rent it out again or sell it if there is a profit to me made.If the bank goes down, We the People own the house.

GuestFebruary 25th, 2009 at 6:30 pm

Yea they should just take it out of the bond holders hide but instead the tax payer takes the hit for their failed investment.

GuestFebruary 25th, 2009 at 5:31 pm

We are in a declining cycle of Western Civilization. The people who’ve decided to use us as slaves have co-opted all of the incredible advances of Western Civilization. What we’re going through now is the result of the constant work they’ve done transferring this wealth and power to themselves.The capitalism of the Founders depended on individual action and individual work. Through the years, it has been systematically changed through commerce law, direct election of senators, voter change, lobby manipulation, monopoly law, massive government and welfare. America’s present system of “capitalism” has no resemblance to the type of capitalism of our forefathers. This is not the capitalism of the 1800s that led the inventor Robert Hall McCormick to work for 28 years on a horse-drawn reaper, the reaper his son Cyrus perfected and demonstrated in tests in 1831 and patented in 1834 – now a part of International Harvester Company.America is faltering because this handful of elites – the Wall Street and London investment bankers, the private Fed banking cartel and their corporate connected — want to steal a huge percentage of what you and the nation have produced and own. Think of the standard of living Americans would now have without this albatross of 95 years around their necks! America has changed significantly. It has changed particularly since the Soviet Union broke up. These people, who no longer have an enemy, have now started to eat each other.I’m sorry we’re in this situation and I’m sorry for the hardships coming, but the hold these people have on the nation needs to break if man is to survive. I see it breaking …because of their excesses.

GLOOMYFebruary 25th, 2009 at 5:33 pm

So now the truth is slowly emerging. The stress tests are just a means to find out how much money the banks will need as preventatives to prevent sudden unexpected collapse. They have nothing to do with weeding out weak banks. The shareholders will not be wiped out. The bondholders will not take haircuts. They will go on endlessly. And for every 10 dollars the banks get, the citizens of this country will get 1. Never has looting been attempted on this scale without even trying to cover it up. Of course nothing is surprising about this to readers of this blog. But….WHERE IS THE PUBLIC OUTRAGE!! WHEN WILL THE PEOPLE TAKE TO THE STREETS!!!

GuestFebruary 25th, 2009 at 5:42 pm

They won’t until it reaches them personally. As long as the perception exists that The Price is to be paid somehow, some way, ambiguously in the future, few will take notice or try to do something about it. It’s only when it starts reaching them on a personal, immediate, in-their-face level, that they will finally take noticeable, definitive, in-the-govt’s-face action. In other words, they have to feel the pain first. They’re still not feeling it–it hasn’t reached their wallets in enough of a tangible, seeing-is-believing way yet.

publiusFebruary 25th, 2009 at 9:22 pm

I concur, G.I am not an economics type of guy – I took a couple courses in grad school, but don’t get even the basic concepts, in my opinion. I see what’s happening, and I liken myself to those folks who watched the tsunami when it was still waaaaay “out there” – I’m curious, but my alarm bells are going off, but I’m paralyzed, because if that’s what I think it is, there’s no point in moving anyway.Gloomy, I don’t know what to say. I’ve lived a good life – done my very best. Worked hard, went to good schools (enslaved myself to them through student loans), mortagated my life away (wanted to stay married, had to buy a house). Got a good job, make about half what I should. Have a beautiful wife, a beautiful daughter, and a son on the way. But what do I do?This, in my opinion, is the end of America as we know it. We are a constitutional republic, and the Constitution now hangs by a thread. The government has no use for it, and big business despises it. The people don’t understand its principles, and THAT’S why you don’t see people in the streets. They have no idea what they’re in danger of losing.When liberty is lost and freedom is a stranger in the land, when grandfathers tell grandchildren stories about the “land of the free and the home of the brave”, and those stories light up the dreams of those young men and women, filling their breasts with a desire to know what it means to be citizens and not slaves, then you will see people in the streets.

GuestFebruary 25th, 2009 at 6:28 pm

To be honest people are stupid, how else do you explain “free trade” and “trickle down economics” electing Bush etc. I wish it wasn’t so but it is undeniable, try having a conversation about this stuff with someone on the street and they get a glazed look in their eye and immediately shut you off like they’re about to over load and fry all circuits.

paul94611February 25th, 2009 at 6:54 pm

100% correct.I suppose the change we could believe in is the 2 bits getting tossed our way. Which is 2 bits more than the previous administration ever thought of as necessary.

jugglingcdosFebruary 25th, 2009 at 9:36 pm

gloomy i dedicate this song to youhttp://www.youtube.com/watch?v=B1T8xgHdMEMWWAAAAAKKKEEEEE UUUUUUPPPPPP

GuestFebruary 26th, 2009 at 1:15 am

When they shipped off the textile jobs, I didn’t say anything, because I didn’t work in a clothing factory, and I wanted cheaper clothes.When they shipped off the electronics jobs, I didn’t say anything, because I didn’t make TV’s, and I wanted cheaper TV’s.By the time they came and packed up my job, who was left to say anything for me?

GuestFebruary 25th, 2009 at 7:09 pm

“Nothing we do is for the banks,” Secretary of the Treasury Timothy Geithner told NewsHour’s Jim Lehrer today.This, from the money monopoly private investment bankers’ handpicked representative.

GuestFebruary 25th, 2009 at 7:29 pm

Obama had the nerve of saying the same thing in his address. When he said it he said it with such nerve it was sickening, he said something like “all our efforts are for the people we’re not doing this to help the banks”.

HayesFebruary 25th, 2009 at 8:19 pm

the spin, which is being repeated throughout the MSM today is that the bailouts are not for the banks, they’re for the people

MM CAFebruary 25th, 2009 at 8:03 pm

Obama cited the same four things the past two presdients said in every sate of the union address..1. Redcue the deficit/balance the budget2. Reform health care3. Get off oil – invest in alternative energy4. invest in educationthe same things we have been hearing for 16 years. why does he think he is different…. Yes he said it better than Bush and even Clinton, but he cannot get succeed just by being a great orator…the problem lies with the ineffective and ignorant, if not stupid entire congress… they spin this stuff over and over… and here we are just in a bigger hole… unless Obama beats and whips congress nothign will change….only this time it is worse than ever… Obama has to use whatever money we have left for the people and not one bank, company or congressman looking for pork….he is a lame duck by Sept if things are not better…. and we the people do not get rid of 95% of the idiots in congress in the next 2 elections we are just as stupid… i say term limits of no more than 8 years for all these jerks…On a lighter note, if not humorous one, I would luv to see Barney doing it with Pelosi… now that would be worth watching just for pure entertainment

Tom KFebruary 25th, 2009 at 10:21 pm

Yes the Big 4 – deficit, health, oil, educationAmerica has screwed itself on these 4 matters over a period of 20 years. While no other developed country stupid enough to do same on even one. Unscrewing any one of these in 4 years will be a virtual impossibility. Doing all 4, however, is very possible. Even easy. Because then it will take a social revolution with a bit of civil war thrown in. That’s how big problems are solved.

GuestFebruary 26th, 2009 at 6:53 am

We screwed ourselves on these 4 issues because of the people’s religion-like blind faith in the wonders of the “free market” and the evils of government.

GuestFebruary 26th, 2009 at 4:48 am

what’s all this talk about getting rid of the “idiots” in the congress…what are you planning to have there then? Get a very small congress or have everyone through an IQ test? Then you should start IQ testing the Prez, the Vice-Prez and all of the people voting for the “idiots” as well.Or get rid of congress and end up with a Presidential dictatorship – that would probably not be much better.

MM CAFebruary 26th, 2009 at 8:54 am

Hello- term limits, can’t run on contribtuion funds (none at all) get 450 avg Joes in there like Pete from CA on this board or me. people that are not corrupt or raised to be corrupt…. i didnt say get rid of congress, just replacee them… i agree no 1 person dictatorship in form of a president…

GuestFebruary 26th, 2009 at 4:48 am

what’s all this talk about getting rid of the “idiots” in the congress…what are you planning to have there then? Get a very small congress or have everyone through an IQ test? Then you should start IQ testing the Prez, the Vice-Prez and all of the people voting for the “idiots” as well.Or get rid of congress and end up with a Presidential dictatorship – that would probably not be much better.

GuestFebruary 25th, 2009 at 8:04 pm

Seems like everyone’s ganging up on the professor Jim Cramer took a hard shot at him today. People are truly nuts they somehow they believe the stock market is a reflection of the economy and at this point there’s very little connection left, people on main street are killing right now and Cramer thinks putting in the uptick rule will save us. There’s simply no jobs, stores are dead except for Walmart every other house is vacant and we’re no way near the end of this.This is not a recession it is the end of economic prosperity in the U.S. we maybe a couple months away before people realize this.

GuestFebruary 25th, 2009 at 8:10 pm

Cramer is a jackass. That he is given any airtime at all is proof as to whom owns the networks. I agree with your take on the economy, although it may take more than a couple months for it to fully sink in.

MM CAFebruary 25th, 2009 at 8:18 pm

Total vlaue of S&P 500 is roughly 6 Trillion now- Stock market is now irrevelant to the porblems in this country… people need to stop worrying about the stock market- that train has left and that game is over… its about the people, housing, jobs, food and medical care- NOT THE ZOMBIE STOCK MARKET and all the ZOMBIE TALKING HEADS who TALK about the ZOMBIE STOCK MARKET….

GuestFebruary 25th, 2009 at 8:25 pm

I agree, but think about it. The people over the past few decades, through their (essentially forced, more or less) 401Ks and other retirement accounts, have been trained & conditioned to pay attention to the markets. Look at the watch, back & forth, back & forth, listen to the sound of my voice, watch the market, watch the market, everything else is meaningless..Why do you think everyone continues to pay more attention to what the market does than to the actual things that are happening around them, and in the rest of the nation and the world?

GuestFebruary 25th, 2009 at 8:22 pm

TODAY WE HAVE NO EXCUSES NOT TO KNOW THE SCAM! THEREARE NO MORE IMPONDERABLES! WE ARE NOW JAPANESEAND WE WILL LIKE IT OR ELSE!The banking vested interests have invested serious money in campaign contributions and they want theirROI. The Japanese Banks were able to influence theirpolitical system enough to survive after the government spent 170% GDP to help the zombie banks. The Japanese people had much lower private debt than we do, but the government was not the responsible for the reserve currency of the world. The banking vested interests are obstinate in taking the sovereign debt to the limit. Bernanke has already told us that hisprinting press is infinite, and he totally denied anyintentions to wipe out the shareholders today.They will not allow any nationalization of the majorbanks. They will allow the competition to be declaredinsolvent by the FDIC. The top 10 banks will monopolize the market while being insolvent zombies.Who is going to stop them? Geithner and Summers aregoing to run perpetual stress tests to justify new capital injections, but not to declare insolvency.Obama has already been warned by Rupert’s cartoon.Obama has to pay to play, just like in Chicago.The irony is that the change from Tier 1 to TCE willallow the banks to be given more injections in theoverpaid convertions of preferred to common. The banks will save the dividend and the five year clauseon the preferred dissapears. The banks will get theirmoney with cosmetic conditions of restrictions. Theywill be incentivized to gamble, because they have nothing to lose. When you are insolvent, there is nothing left to lose. The Financial Stability Planwill give tons of money away to suck in some privatemoney to assist the banks. All avenues of money willjust stream into the major banks and they will tryto come out the other end the winners. They visualizethat after all of their manipulations, all money willbe in the financial sector, and then they will loan itback to us at 30% interest. Big Paullie will come inonly after they take advantage of the National Banking Exceptions to charge usurious rates. Free money coming in and usurious rates will give themanother avenue. Their avenues of additional incomeare only limited by their imagination. The fact thatderivatives have been exempted from Bankruptcy Stays,tell me that their counterparty debt contracts willtrump bonds in bankruptcy sequence of safety. Theyare akin to cancer. We have banking cancer and DoctorsGeithner and Summers are part of the disease.If you ask them? They will tell you that we owe it tothem. They manufactured the power of the United Stateswith the leverage of 20th century war debt of warring european imperial ambitions. The banking interests were key in having the Europeans seal thepower of the United States after WWII. They onlygave all the power to the U.S. Institutions in exchange for minimal debt relief and assistance.

GuestFebruary 25th, 2009 at 9:08 pm

http://www.npr.org/blogs/globalpoolofmoney/images/2009/02/podcast02.25.09.mp3Listen to Geithner being interviewed by Adam Davidsonof NPR. If it wasn’t an important life or death issue,I would be rolling on the floor laughing! He danced the questions around and did not answer a thing. I felt like I was listening to Greenspan, but more homespun.I know have not one iota of doubt in my mind that thisman is going to protect the monopoly banks at all cost. No monopoly banker left behind!

AfAFebruary 25th, 2009 at 10:12 pm

I believe Geithner needs to call ex- LTCM executives (John Meriwether, Myron Scholes and Robert Merton) for help to design his new bank stress tests…. or Xzibit. He might do a much better job at “Pimp My Bank”

P1AQLFebruary 26th, 2009 at 12:47 am

Prof. Roubini makes the crucial observation:

You cannot convert a bunch of doggy “BBB” mortgages using voodoo financing into broadly “AAA” securities because eventually people will panic. That is precisely what we have now. Nobody knows who holds it or how much toxic assets or where, so we have created a monster.

The real question is: Why shouldn’t a SAFE investment operation yield a happy return?Pricing theory completely goes to crap when you start suggesting a higher risk should be compensated by a higher return. i.e. no amount of reasonable credit enhancement will turn the BBB pig into AAA lipstick.You can earn a lot by just playing safe.e.g. If the monthly payment on a mortgage is $1000 and you’re renting for $1300 then buying the house is SAFE investment since the monthly interest cost of owning the home can ONLY go DOWN when held to maturity.e.g. You can work and earn more in a low risk air-conditioned office than by working at a high risk construction site.I think it’s probably impossible to sell a risky security (AAA coated BBB CDO) as an investment unless you introduce the concept of risk adjusted return. Once you introduce this concept then you allow a pool of safe investments (e.g. first mortgage bonds of 750+ FICOs) to be polluted by the likes of bonds backed by 2nd mortgage / NINJA loans.And that is the start of the slippery path.If it ain’t SAFE it is speculative and the speculation MUST BE REGULATED.Final question: Where are the regulators?Print First Ask Questions Later.P1AQL.

NailbenderFebruary 26th, 2009 at 12:55 am

This is EXACTLY what I have been saying for the past weeks. “the myth of globalization” and “protectionism”This is a MUST READ…——————————Ex-Treasury official confirms gold suppression schemehttp://www.gata.org/node/7197——————————Doomed by the Myths of Free Trade: How the Economy Was LostBy Paul Craig RobertsTuesday, February 24, 2009http://www.counterpunch.org/roberts02242009.htmlThe American economy has gone away. It is not coming back until free trade myths are buried 6 feet under.America’s 20th century economic success was based on two things. Free trade was not one of them. America’s economic success was based on protectionism, which was ensured by the union victory in the Civil War, and on British indebtedness, which destroyed the British pound as world reserve currency. Following World War II, the US dollar took the role as reserve currency, a privilege that allows the US to pay its international bills in its own currency.——————————-IMO, this article says it all.

P1AQLFebruary 26th, 2009 at 2:15 am

It isn’t all that bad. Fixed Costs can kill the stability of EBIT (i.e. Interest Coverage) and ruin the stability of a company. For example if a firm makes a top line of $100 and has a fixed cost of $90 with an EBIT of $10, then a 5% fall in revenue (to $95) will result in a 50% fall in EBIT (to $5).Look at South Korea and Taiwan, their GDP has imploded by double digits because they’re carrying all the fixed costs. Manufacturing is a classic fixed cost. So is IT.The US is on a variable cost model – so it will suffer the least damage to its EBIT i.e. least damage to coverage of US debt.May the USD be with you.Best,P1AQL

P1AQLFebruary 26th, 2009 at 2:32 am

Overhaulhttp://www.whitehouse.gov/blog/09/02/25/Overhaul/

President Obama today took that problem head on by laying out 7 key principles for transforming the nation’s regulatory system. We must:<ol><li>Enforce strict oversight of financial institutions that pose systemic risks<li>Strengthen markets so they can withstand both system-wide stress and the failure of one or more large institutions<li>Encourage our financial system to be open and transparent, and to speak in plain language investors can understand<li>supervise financial products based on “actual data on how actual people make financial decisions”<li>Hold market players accountable, starting at the top<li>Overhaul our regulations so they are comprehensive and free of gaps<li>Recognize that the challenges we face are global

Prof. Roubini, Please can you enable the ‘ol’ tag. I picked the snippet off the whitehouse blog but it appears wierd here.P1AQL

plongka10February 26th, 2009 at 4:31 am

Whilst the DTCC remains loose, there is no hope of resolving the corruption in the system. Quite why anyone would think they are actually buying “stocks” when they call up their broker beats me. DO any of you physicaly hold share certificates or bonds? Or are you really holding printouts that indicate you are the “owner” of said stocks?It will be a long time before anybody in their right mind will invest in US companies, given the total, systemic corruption that exists. There is no hope for your market until the corruption is dealt with. I know this is preaching to the converted, but the system is CORRUPT.

GuestFebruary 26th, 2009 at 4:41 am

ol-tag test, please excuse<ol><li>Enforce strict oversight of financial institutions that pose systemic risks<li>Strengthen markets so they can withstand both system-wide stress and the failure of one or more large institutions

GuestFebruary 26th, 2009 at 4:45 am

and this is not P1AQL, by the way, I was just trying to see if they ol-tags were accepted in some other format.

GuestFebruary 26th, 2009 at 4:49 am

UK to insure 1/2 trillion in toxic debt, so the UK is going to sock it to their tax payers too and pick up the tab for the bond holders. I wish people would finally start over throwing the governments of the world.

PeterJBFebruary 26th, 2009 at 5:33 am

Part 2: from above (PeterJB)”I therefore posit here then, that Mr Benanke by his actions of sucking out all the resources of the ‘real’ economy to give, a priori, to the ‘secondary’ economy (to some point perhaps x4 generations into the future?) – is that direct action that will create a state much worse than a ‘depression’ within the USA (as well as a global depression and the temporary collapse of the Constitutional Republic of the USA).”As prices of assets and houses are falling from the mezzanine floor i.e. the ‘Greenspan base’ – which has completely collapsed and as Benanke deflates the real economy to pass its resources (inflate) to the secondary (Wall Street) economy (stimulate), one is asked to believe that such a move is to be classified under the guise of “stimulus”(?).Obviously I use a widely different dictionary (lexicon?) to Mr. Benanke et al.Back to basics then:1. First comes the real economy; it’s about people; families, children, work, sweat, houses, food, music, arts, culture, adventure, learning and pioneering, etc.; er, motion and rest.2. Secondly come the secondary (camp followers) economy which claim, and are given the rights to pursue investments of risk – at their own risk, per se; on top of, out-of, in conjunction with, in parallel to, independent of and free of obligatory risk to, the “real” economy’ it’s called (by the illiterate), “democracy”, but whatever – freedom.3. Now, we are at that place in time (current) that the camp followers have gone broke, so they demand that the real economy give them everything they have under a “future” contract (about 4 generations or so).4. The Pope and Chief Camp Follower Mr Benanke and his warrior Priests under consultation with the toadies that represent the “real” economy, believe that item 3 above is a good idea.5. So, one can predict that as the resources from the “real” economy are withdrawn and given to the “secondary” economy, the “real” economy deflates or goes into depression.6. Question: Is the “real” economy dependent upon the “secondary” economy or vice versa?7. Prediction: Once the “secondary” economy has all the resources of the “real” economy, the “real” economy goes into depression and worse.Oh dear ….. then the heroes of the “secondary” economy, that is, those that hold all the global resources, sit back and relax. Whatever, it doesn’t matter what they do as their activities are totally dependent upon the “real” economy and while they hold all the resources, there is NO “STIMULUS” in place that can lure them into activity.Alas: Depression – Dark Age – Civil Unrest – Re–organization – RevolutionOr, in other words; incompetence and stupidity.You see, this is basically a result of those “elite” that hold themselves as “leadership” really have no idea of that which they do! No idea, at all.Hanlon’s Razor.Ho hum

GuestFebruary 26th, 2009 at 7:07 am

Obama Expected to Kill Hedge Fund Tax Break Hallelujia if this passes!

If there is one tax loophole that looks dead in the water, it’s the law that lets hedge fund and private equity managers pay a 15-percent capital-gains rate on the multimillion-dollar fees they collect — substantially less than the top income tax rates paid by their secretaries, chauffeurs, and the pilots of their private jets.On the surface, the stars are aligned. There is a newly elected Democrat in the White House who is desperate to raise revenues. Killing this tax break would raise $31 billion over five years. In addition, there are Democratic House and Senate majorities – representing the party of working people – and what could more unfair than letting billionaires pay taxes at a fraction of the rate of the guy with the lunch pail ?

Jason BFebruary 26th, 2009 at 7:21 am

from generationaldynamics.comReported corporate earnings crash 44% since JanuaryMost likely result: A further substantial stock market plunge.In mid-January, I wrote “Collapse of corporate earnings portends imminent stock market plunge.” At that time, the collapse of corporate earnings was only estimated.Now the actual reports are out. Since January 1, reported earnings per share have gone from $48 per share to $27 per share. The bulk of that collapse occurred within the last two weeks.This is an enormous collapse, and it’s having a dramatic effect on price/earnings ratios (also called “valuations”).For simplicity, let’s assume that the S&P 500 stock index has been at 760 since January 1.Then, on January 1, the P/E ratio was 760/48 = 15.8.On February 13, the P/E ratio was 760/27 = 28.1.To see this graphically, take a look at the following chart. There’s a price/earnings ratio chart at the bottom of this web site’s home page, and it gets updated automatically every Friday. Here’s last Friday’s version of the chart:——————————————————————————–S&P 500 Price/Earnings ratio and S&P 500-stock Index as of 20-Feb-2009. (Source: MarketGauge ® by DataView, LLC)——————————————————————————–If you look at the far right side of this chart, where the red circle is, you can see a huge spike in the last week, sending the P/E ratio up to 28.As I’ve pointed out many times, P/E ratios held steady at around 18 for the entire years 2006-2007. This happened despite the fact that stock prices (shown on the bottom half of the chart) varied wildly.The only way that this could have happened is if investors purposely held stock prices at the right levels, and that means that the buy/sell algorithms in their computers made decisions based on whether a stock’s price was above or below 18 times earnings. There’s no other reasonable explanation for how P/E could have held steady at 18 for over 2 years.Now those same buy/sell algorithms have to deal with a collapse in reported corporate earnings, and the only way to do that is for the S&P index to fall to below 500 (and the Dow to fall below 5000).I do not know any other way to interpret this collapse in reported earnings.

Santa ClausFebruary 26th, 2009 at 7:54 am

On another hand I do not know what Roubini, Obama, and others talk about when they refer to “fixing the economy”. The U.S. economy is not broken – this is how it normally acts like when there is no lending money available. Are the so oblivious to the fact that people cannot buy all those things with their salaries???? (Unless they have salaries like some hedge fund manager)Besides the other fact is that are they hoping / wishing / trying to get the economy back to the 2004-2006 era? That is not possible without Simply Frivolous Lending. I repeat, it is not possible without Simply Frivolous Lending. Unless they want to do something about peoples real incomes that have been declining since 1970 or perhaps even 1950’s.The 2004-2006 era was a mirage – to try “get the economy back” to that is trying to get the economy back to a mirage.

GuestFebruary 26th, 2009 at 8:20 am

Questions:1)life insurance is potentially the most succeptiblebusiness model to a ponzi scheme due to the fact thatpayments are collected and payouts are deferred.Why is nobody talking about AIG imitators?Insurance executives all play golf and envy each other’s bonuses. Who here believes that life insurance is not a total ponzi today?2)I would love to know why Derivatives are exempt fromfederal bankruptcy stays?3)I would love to know why naked shorting is prohibited, but naked CDS is allowed?(besides regulation issue)4)Fractional reserve from inception was a ponzi scheme of the Goldsmiths. We know the banks haveoff balance sheet problems and level 3 accounting.What makes anybody think that the Central Banks canprint enough money to cover all the tightly coupled and reinforcing ponzi schemes that we call theworld of finance and investment?I see ponzi ad infinitum! I suggest we hire BernieMadoff to invade another planet and use them as thenext layer in the borrow from Peter to pay Paul hustle!We have ponzied every human except the pigmies andthe amazon tribes! Anybody know any pigmies that wouldadopt me?

GuestFebruary 26th, 2009 at 9:19 am

I know some pigmies that would adopt you but the only requirement is that you know how to repair old money printing machines from Zimbabwe!

CaponeFebruary 26th, 2009 at 9:28 am

you mention AIG – one reason for necessity of bail out was to make sure the people do not lose their term life insurance right? what good does an insurance policy do for you when the dollars it pays are worthless?we are spiraling into to a hyperinflationary depression. got milk? got gun? got butter?

GuestFebruary 26th, 2009 at 9:39 am

Capone, when are you and your boys going to take this market down?And the stock market irrational exuberance continues:DOW futures up 144 on terrible Durable goods and jobless claims!

CaponeFebruary 26th, 2009 at 10:00 am

the casino operators make the most money when they take things UP on worse than expected numbers. don’t argue with them on a minute by minute, hour by hour basis… the flow is up on bad numbers latelyon the other hand – what is this is i see ? relative WEAKNESS beneath the golden arches of MCD. this is a first…

GuestFebruary 26th, 2009 at 5:05 pm

We have let ourselves become a nation of criminals with high ideals (collectively, though probably not individually). Twain called Congress America’s only natural criminal classs, but they are just the facilitators of our greed to bend the laws until we don’t know right from wrong anymore.