Def Conomy 5 to 1

[Kiwi 16]

Another view:

 

CNN -Glenn Beck

[DbPhoenix 42]

Commentary: Bailing out distressed workers, for a change

 

By Michael Zweig

 

NEW YORK (Reuters.com) -- Treasury Secretary Henry Paulson and Federal Reserve Board Chair Ben Bernanke have been in Washington demanding immediate relief for Wall Street, repeatedly emphasizing claims of impending doom for the United States and the entire globe if we do not accede to their rescue plan.

 

Their behavior is today's equivalent of Condoleezza Rice's infamous evocation of a mushroom cloud as she played her part in frightening Americans in the pre-election (2002) stampede to war in Iraq. Now, as then, the same people who did nothing to protect the country despite many explicit warnings are demanding unlimited authority to dig us deeper into the hole.

 

The Wall Street debacle has had the added effect of diverting Congressional, media, and public attention from the continuing mortgage foreclosure crisis, which is far from over. In the months leading up to the crashing end of the sub-prime mortgage frenzy in April 2007, increasing numbers of these mortgages were issued, with a two-year period until the terms reset. This means that in the coming eight months we will see an accelerating rate of resets and over a million more homeowners facing foreclosure.

 

This coming tsunami of grief is only one aspect of the widespread economic distress working people are experiencing throughout the country. In a study about to be released by the Center for Study of Working Class Life at the State University of New York at Stony Brook, we report that economically distressed working class people account for 20.9 percent of all households in the U.S., nearly double the poverty rate, based on U.S. Census data.

 

They are cashiers, home health care workers, truck drivers, janitors, retail salespeople, secretaries, and many other people we see and rely on every day. They are people whose income is so low they cannot rise above the lowest twenty-five percent of housing stock for a family of their size in the community where they live without spending more than the government standard of thirty percent of income for housing. In short, they are over sixty million people in nearly twenty-three million households with eighteen million kids who can't afford to pay for the basic necessities of housing, food, medical care, and transportation.

 

We must not allow the financial drama now gripping the country to obscure and push aside the need working people have for real and immediate relief. Congress should act to forestall the foreclosures and to increase income support programs like food stamps, housing subsidies, unemployment compensation, and the Earned Income Tax Credit. They should send money to the states to relieve their budget deficits and restore cuts to Medicaid and other state-based programs for economically distressed people. And while they are throwing hundreds of billions of dollars at Wall Street, they can well afford $110 billion to send an average $2,000 check to each of the fifty-five million households earning less than $50,000 a year, half of the country.

 

We need to recognize and alleviate the crisis in working America. .

 

http://www.reuters.com/article/reutersComService4/idUSTRE48O8JD20080926

 

[thrunner 10]

Commentary: Bailing out distressed workers, for a change

By Michael Zweig

Michael Zweig, not to be confused with Martin Zweig.

 

Martin, who once owned the most expensive apartment in NYC.

[DbPhoenix 42]

Michael has a lot more hair than Marty does these days.....

[DbPhoenix 42]

But the biggest unknown is whether the government’s pledge to help homeowners at risk of losing their homes will be any more effective than past efforts to slow the pace of defaults and foreclosures. Until that tide begins to turn, the housing market will continue to be bloated with big inventories of bank-owned houses put back on the market at fire-sale prices. That puts downward pressure on all home prices. And until home prices stabilize, it’s impossible to assign a value to the troubled investments at the heart of Wall Street's problems.

 

http://www.msnbc.msn.com/id/26931454/

[DbPhoenix 42]

Commentary: Bankruptcy, not bailout, is the right answer

 

By Jeffrey A. Miron

Special to CNN

 

Editor's note: Jeffrey A. Miron is senior lecturer in economics at Harvard University. A Libertarian, he was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan.

 

CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

 

This bailout was a terrible idea. Here's why.

 

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

 

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

 

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

 

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

 

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

 

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

 

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

 

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

 

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

 

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

 

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

 

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

 

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

 

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

 

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

 

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

 

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

 

http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/

Edited September 30, 2008 by DbPhoenix

[DbPhoenix 42]

Commentary: Is this the start of another Great Depression?

 

By Barry Eichengreen

Special to CNN

 

Editor's Note: Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley. He is the author of "Golden Fetters: the Gold Standard and the Great Depression, 1919-1939."

 

BERKELEY, California (CNN) -- Every time the economy and stock market turn down, financial historians get predictable calls from reporters.

 

Could this be the start of another Great Depression? Could "it" possibly happen again? My stock answer has always been no.

 

The Great Depression resulted from a series of economic and financial shocks -- the end of a housing bubble in 1926 and the end of a high-tech bubble in 1929 -- but also from truly breathtaking neglect and incompetence on the part of policymakers.

 

It couldn't happen again precisely because policymakers know this history. Fed Chairman Ben Bernanke is a student of the Great Depression. Treasury Secretary Henry Paulson remembers the mistakes of Andrew Mellon, Herbert Hoover's treasury secretary.

 

We can be confident, I always answered, that there will not be another Great Depression because policymakers have read financial histories like mine. At least that was my line until recently. Now I have stopped taking reporters' calls.

 

The first thing that made the Great Depression great, of course, was the Fed's failure to act. It basically stood by as the banking system and the economy collapsed around it. This time, in contrast, the Fed can hardly be criticized for inaction. Not only has it cut rates, but it has rolled out one new unprecedented initiative after another.

Unfortunately, it has reacted more than acted. First, it provided funds to the commercial banks. Then, it targeted broker-dealers. Now, it is desperately propping up the commercial paper market. All the while however, the problem has been infecting new parts of the financial system.

 

One thing that restrained the Fed in the 1930s was the fear that rate cuts might cause capital to flee to other countries and the dollar to crash. The danger was that the same liquidity that the Fed poured in through the top of the bucket might just leak back out through these holes in the bottom.

 

There was a solution: coordinated rate cuts here and in Europe. Unfortunately, central bankers couldn't agree on what was needed. The result was further instability.

That central banks have learned this lesson of history and now see the need for coordinated action is at least one ground for hope. The problem is that they have already used their bullets.

 

U.S. Treasury bill rates have essentially fallen to zero, and the Fed's policy interest rates are only slightly above that level. Central banks are out of ammunition. This is no longer a problem they can solve by themselves.

 

What is needed now is Treasury action to address what has morphed into a global banking crisis. Between 1930 and 1933, not just the U.S. but also Europe and Latin America experienced rolling banking crises.

 

When Austria took desperate measures to prop up its banking system, its banking crisis only shifted to Germany. When Germany did the same, the crisis spread to the United States.

 

This was beggar-thy-neighbor policy at its worst. We have seen some disturbing evidence of the same in recent weeks, as when Ireland unilaterally guaranteed all bank deposits and thereby sucked funds out of the British banking system.

 

G7 leaders, when they meet in Washington at the end of this week [10 Oct], need to explain exactly how they will address this aspect of the problem. They need to commit money to recapitalizing their banking systems -- now, and not next week.

 

The U.K., which has just announced a $50 billion plan for bank recapitalization, has shown how this can be done in a matter of days. But a coordinated initiative will require the U.S. to put up a considerably larger sum.

 

My recommendation would be to abandon the idea of reverse auctions for toxic assets and instead use the $700 billion of the recently passed rescue plan for bank recapitalization. Although the Great Depression started in 1929, it took until 1933 for American leaders to grasp this nettle and recapitalize the banks. We can't afford to wait for years this time around.

 

A final thing that made the Great Depression such a catastrophe was that some of the worst shocks occurred right before the 1932 presidential election. There then followed an extended interregnum between the election and inauguration of the new president when no one was in charge.

 

The outgoing president, Hoover, asked his successor designate, Franklin Roosevelt, to cooperate with him on joint statements and policies, but FDR refused to do so. Meanwhile, the banking crisis deepened. Corporations failed.

 

The economy was allowed to spiral downward. It was this disaster that led us to amend the constitution to shorten the time between presidential election and inauguration from 4 to 2½ months.

 

The implication is clear. The two presidential candidates should be assembling their financial SWAT teams now. Paulson should promise that they will be invited into his office on November 5. This problem cannot wait until Inauguration Day.

 

http://www.cnn.com/2008/POLITICS/10/09/eichengreen.depression/index.html?section=cnn_latest

[DbPhoenix 42]

What comes after the Great Unwinding?

 

By James Saft

 

CHARLESTON, South Carolina (Reuters) - Yes, Virginia, the banking crisis will one day end, but what comes after promises to be even more arduous.

 

With the solvency of the western banking system seriously in question, there is a temptation to hope that if only the latest bold last ditch rescue plan will work we can go back to the good old days of 2006.

 

But it's possible to construct an argument that the banking crisis is just the cold sweat, not the flu that follows on. The problem is not just that the banking system has been broken by an orgy of foolish lending, but moreover that huge swathes of the global economy are predicated on that foolish lending and the consumption it allowed.

 

The bubble wasn't just in real estate, leaving the financial system holding the bag, the bubble was in consumption.

 

That is not to say that the current scrambling to save the system is pointless; there is a very big difference in the damage that will be done by a disorderly deleveraging compared with a slightly slower, more controlled one.

 

The banking crisis will have very serious negative effects on the real economy, and the cost will grow. This is true even if the ATM machines continue working, our deposits are safe and gold, bullets, canned goods and bottled water don't become 2008's best asset allocation choices.

 

The core of the issue isn't even solvency. It's the way in which the debt which is causing the banking insolvency distorted, distended and hollowed out economies around the world.

 

It caused a massive misallocation in the English speaking economies into property and into consumption that could only seem to make sense to people drunk on property price appreciation. It caused a less huge but still significant misallocation elsewhere; I think we will see that a lot of what was being produced by Europe and Asia's vibrant export industries were products that America and Britain will find they can do without, or with much less of.

 

Don't get me wrong: the banking crisis is extraordinarily dangerous, but the changes in the global economy that are needed are even more profound. Savings rates are going to need to rise in the developed economies of the English speaking world, and consumption drop. Those economies are also going to have to place a higher priority on producing goods and services they can sell abroad.

 

MARBLE COUNTERTOPS AND PERSONAL TRAINERS

 

There are lots of parts of the "service economy" that very likely won't exist in two years time, or only in a very feeble way. Take for example the phenomenon in the United States and Britain of downsized late middle-aged people setting up small service businesses. Very often they used a combination of their redundancy payment plus equity extracted from their houses to provide themselves with working capital, and often to supplement their earnings.

 

So, someone who, for the purposes of argument, used to work for IBM in the Hudson Valley starts a business installing marble countertops. For four of the last six years that has been a good business, but the people paying for it were only able and willing to do it so long as the illusion that consumption is investment could be maintained. That is over, and significant parts of the U.S. economy will need to be repurposed, and will need to do so at a time when we are suffering asset price deflation and may well get real deflation. The recession will be long and probably ugly.

 

Or consider a very typical British story, a woman who hating the grind of her job at an insurance company and possessed of a modest house that is now worth 13 times her annual wage, decides to set up shop as a personal trainer. She's done reasonably well and had a great deal of flexibility and satisfaction. But her clients will likely cut back on personal training as times get tough.

 

Just think about your own lives and the people you know: how many of them do jobs that didn't exist 15 years ago but have nothing really to do with new technology? Many of those jobs are enjoyable and worthwhile offshoots of a credit bubble and will have a very difficult time surviving its demise.

 

Similarly, it will be tough for those English speaking economies' global enablers. China will need to find somewhere else to sell many of its goods. The grand bargain of China buying U.S. Treasury bonds to finance consumption in the United States will come under enormous and dangerous strain.

 

Europe too, as well as other exporters, will hit difficulties; not just in their banking systems, which helped to finance the binge, but in their automotive and consumer electronic industries, just to name two.

 

There is no doubt the needed changes can happen and that these innovative and creative economies can rebalance. But it is going to be very painful.

 

http://www.reuters.com/article/reutersComService4/idUSTRE4993M120081010

[erierambler 10]

What comes after the Great Unwinding?

 

Curious to see how things work out after they settle down..........

erie

[DbPhoenix 42]

How it all began:

 

But the Great Depression chastened consumers. After World War II, and the explosive growth of the suburbs, consumption rose sharply. But the modern era of easy credit really began with the deregulation of the late 1970s.

 

In a 1978 Supreme Court decision, banks won the right to charge whatever interest rate their home state allowed and to do so across state lines. States repealed usury laws capping interest rates. Banks began pursuing consumers in ways they hadn't before.

 

When inflation soared in the early '80s, banks aggressively marketed credit cards to struggling consumers as a good deal. The interest rates were high, but not as high as inflation. In the recession of 1990-91, banks who saw their profits tightening seized on the margins available by lending more to consumers. When Congress eliminated income tax deductions for interest on credit cards, banks pushed home equity loans, encouraging people to take money out of their homes to pay off the credit cards.

 

As families took on debt, they were encouraged to follow a rule of thumb: It's OK as long as you don't devote more than 25 percent of income to borrowing costs.

 

Lenders, though, found a way around that. The 20-year home loan was repackaged as a 30-year loan and lenders stretched three-year car payment schedules to seven, masking the extent of the debt load.

 

Consumers "think they're doing fine by their parents' standards," Manning said. "But boy, have they fallen far behind."

 

The industry came up with subprime loans in the 1990s, then used them to encourage consumers with checkered credit history to buy homes. When very low interest rates early this decade sent home prices skyrocketing, and Wall Street demanded even more lending to feed a market for mortgage-backed securities, lenders went into overdrive.

 

Consumers could buy with no money down and no documentation of income and were encouraged to borrow against the rising value of their homes.

 

Before the housing bubbled popped, many consumers were pulling money out of their houses to pay for expenditures — from boats to big-screen TVs — well beyond ordinary living expenses.

 

Over the years, economists have tried to figure out when, if ever, consumers might finally reach their debt limit. But each time, Americans have proven far more resilient than pessimists imagined, financing their spending by borrowing.

 

The credit crunch, though, may be the breaking point.

http://news.yahoo.com/s/ap/20081013/ap_on_bi_ge/end_of_easy_credit

[Kiwi 16]

Its interesting db that in Australia they keep saying "there are no subprime loans here (or alt a for that matter)" but we had:

- mortgage brokers springing up everywhere

- people maxing out their credit cards as part of the house purchase

- plenty of "buy now or you'll never be able to get in

 

So our houses kept rising into late 2007 in some areas. The strangest thing is that although "average" houses are down now even ignoring currency effects the big drops are at the high end. Beach side properties have been immune until recently and we've just had reports of sales at 1.1 and 4.1 million under the last sale price on two properties in my area. Plus the school trip to Italy is losing students, presumably as parents assess their risk.

 

We have been coasting on the China affect with CEOs and Polititicians saying "China's growth will keep us growing with the Mineral boom." As late as last Monday the Prime Minister was claiming immunity because his pals in China were saying "she'll be right." The funny thing was that the Australian Newspaper carried a small report that the smaller miners were being told by their small Chinese buyers to expect order cancellations. And a week later the hype has died.

[DbPhoenix 42]

Commentary: Is it 1929 all over again?

 

By Maury Klein

Special to CNN

 

Editor's note: Maury Klein is professor emeritus of history at the University of Rhode Island. He is the author of 15 books, including "Rainbow's End: The Crash of 1929" and most recently "The Power Makers: Steam, Electricity, and the Men Who Made Modern America."

 

(CNN) -- Friday marks the 79th anniversary of the day that launched the stock market crash of 1929.

 

As an unprecedented wave of selling threw the floor of the New York Stock Exchange into pandemonium on a day that became known as Black Thursday, a show of organized support by a coterie of leading bankers halted the panic. But on the following Monday, the market collapsed in a tsunami of selling.

 

Every intense convulsion of the stock market raises primal fears spawned by the Great Crash of 1929 and the ensuing Great Depression, which dragged on for a full decade and has haunted Americans ever since.

 

The Panic of 2008 is no exception.

 

In the past year, the market's fall has at times rivaled that of 1929. Are there connections or similarities between those earlier national traumas and our current crisis?

 

First some facts about that earlier experience. The Great Crash and the Great Depression were two separate events. The Crash was a financial panic, the Depression an economic downturn. The one does not necessarily lead to the other; the market has collapsed several times in American history without bringing on a depression.

 

The Crash began in October 1929, and the worst of it was over in three weeks; the Depression did not fasten itself on the nation for another year. To this day, the connection between them remains unclear, which makes it difficult to draw lessons or analogies from them.

 

The Dow plunged 39 percent between October 23 and November 13, 1929, but it regained 74 percent of that loss by March 1930. Only when the economy failed to gain momentum in the spring did the market slip back.

 

By fall the country had slipped into a depression, and the market resumed a downward course that did not touch bottom until July 1932. It did not again return to the levels of 1929 until 1954.

 

The Depression did not end until increased military spending revived the economy in the spring of 1940.

 

The bull market of the 1920s was unique in that it marked the first time large numbers of ordinary people participated. The market moved from Wall Street to Main Street and aroused intense interest even among people who were not active in it. The new investors, or "fish" as the pros called them, were prone to panic when the market fell sharply.

 

Could it happen again? History never repeats itself, but historical patterns do -- though always in a new context. Here are just a few of the similarities and differences between the earlier crisis and its modern version.

 

During the 1920s, the financial industry underwent a great expansion, bringing into the business many inexperienced people and new investment vehicles -- most notably the investment trust, the forerunner of the modern mutual fund. Nobody knew what impact they would have on the market with their buying and selling on a large scale.

 

The business world hailed the 1920s as the "New Era," one with new rules in which the old pattern of cyclical depressions would no longer occur and prosperity would be continuous. Compare this delusion with the "New Economy" of the 1990s.

 

The 1920s marked the beginning of the consumer economy, and with it a broad expansion of credit. Installment buying made its debut on a large scale. Credit also was used to buy stocks on margin, greatly increasing the market's volume and volatility.

 

The banking system was shaky throughout the 1920s, and failures escalated steadily after 1929. The Crash exposed many cases of fraud that led to investigations and passage of the most significant banking reform in American history.

 

The Glass-Steagall Act of 1933 created the Federal Deposit Insurance Corp., or FDIC, gave rise to the Securities and Exchange Commission, or SEC, and separated investment banks from commercial banks. The latter reform was repealed in 1999, giving banks free rein to perform both activities once again.

 

Some differences between the eras are worth noting. Prior to 1933, the federal government played virtually no active role in relieving the banking crisis of the 1920s. The stock market did not have giant institutional buyers moving huge blocks of stock. Nor did it operate on a global scale, though it was deeply influenced by international events.

 

After the crash, the banks had plenty of money to lend but no takers, the opposite of today's situation. Deflation became the mortal enemy as people removed their cash from banks and hoarded it.

 

A familiar pattern emerged from these events. Business and the Republican Party in the 1920s demanded and got a "free" market unrestrained by government. Neither Wall Street nor the New York Stock Exchange was regulated by the government.

 

The resulting disaster prompted outraged demands that Washington "do something." Regulation was then forthcoming. Later, as prosperity returned and the market began soaring, the restraints were gradually removed and the pattern of excess began anew until it collapsed once again in our own time. With the fall comes renewed pleas for government to "do something."

 

Finally, it is important to remember that psychology plays a huge role in financial markets. Every panic has been at bottom a crisis of confidence. So too with the economy. As Frederick Lewis Allen observed, "Prosperity is more than an economic condition; it is a state of mind." The trick is always to find out what exactly is needed to restore it. We are still fishing for the answer to that riddle.

 

http://www.cnn.com/2008/US/10/21/klein.depression/index.html

[DbPhoenix 42]

Interesting, and a nice presentation:

 

http://www.msnbc.msn.com/id/26797480

[DbPhoenix 42]

McCain told the Albuquerque crowd that he relished being the underdog in the race.

"Ten days to go, we're a few points down, and the pundits of course as they have four or five times have written us off," McCain said. "And you know what, my friends? They forgot one thing. They forget to let you decide."

 

McCain drew less than 1500 in Albuquerque. Obama, also in Albuquerque, drew 45,000.

[DbPhoenix 42]

A credit crater too big to fill?

By Jon Markman

 

Despite a weeklong surge in stocks, it's becoming increasingly clear that credit has suffered a catastrophic setback.

 

It's as if a set of asteroids hit Manhattan, London and Tokyo, carving a massive hole in the architecture of finance. The initial buildings in the impact crater, Lehman Bros. (LEHMQ, news, msgs), Bear Stearns and Northern Rock, were quickly incinerated. But now the toxic rain and tsunamis that were kicked up are rolling onto the survivors in waves and cutting off their air supply.

 

New data from world money centers suggest the movement of money around the globe has simply ground to a halt, as institutions in the United States, Europe and Asia that are receiving taxpayer dollars from governments are socking it away to shore up their balance sheets, reserve against liabilities expected in the near future and sustain their unprofitable operations.

 

"Governments are not really trying to save the system anymore," said Satyajit Das, a banking expert in Sydney, Australia. "They now realize that's impossible. They are just trying to manage the decline."

 

How low will it go?

 

As a result, once the current rally interlude is over, it's not hard to see the Dow Jones Industrial Average ($INDU) sinking to around 4,000 -- a level it last hit in 1995, before debt started to play such a large role in corporate and personal finance. That would entail a decline of 70% from its 2007 peak, or about the same amount the Japanese stock market has fallen since 1990 in the wake of its own debt unwinding. Or the amount the Nasdaq Composite Index ($COMPX) dropped from 2000 to 2002. Or the amount the Russian market has plunged since June.

 

If that seems too harsh, well, the math is pretty easy to explain. Figure you have a well-regarded multinational company that earns $10 a share and sports a price-earnings multiple of 25 when the U.S. economy is rolling along at its long-term trend rate of 4%, or about twice its normal growth rate.

 

Multiply 25 times 10 and the stock is worth $250. But now take away half the financing of customers, the stock buybacks done with borrowed money, the high-yield cash-management systems of the corporate treasury, the leveraging that allows raw materials to be bought with borrowed money and the leveraging that allows its customers to buy with credit cards and layaway plans.

 

Then ratchet back U.S. economic growth to 0%, which is about the best forecast now for 2009. Figure the company now earns 25% less than at peak (an optimistic estimate), or around $7.50 per share. Because of the slowing growth environment, the market is likely to take the price-earnings multiple down to around 10, which is still more than twice the company's forecast growth rate. Now multiply $7.50 by 10, and the stock is projected to trade at $75, or around 70% lower than the peak.

 

The problem is that this scenario might be too sunny. The economy is losing around 200,000 jobs a month. Just last week Yahoo (YHOO, news, msgs), Merck (MRK, news, msgs), Chrysler, Xerox (XRX, news, msgs), Goldman Sachs Group (GS, news, msgs) and National City (NCC, news, msgs) announced layoffs.

 

Unemployment, now skimming along at a relatively tame 6.5%, is expected to mushroom at least to 8.5% if not 9% or higher by the end of next year. With stock and home prices in a tailspin, consumer net worth is already on track to decline 14.7% year over year this quarter, a record plunge.

Credit card revenues have sunk to their lowest level in five years, and a JPMorgan Chase (JPM, news, msgs) official was quoted this week as stating that "loan volume will keep going down as we continue to tighten credit."

 

Holiday sales are expected to be weak, with same-store sales in November and December projected to sink 2.2% from last year. The lone good news: A decline in the price of gasoline of nearly 50% since June, to around $2.15 per gallon nationwide, will roughly equal a $210 billion tax cut.

 

ISI Group analysts said that when these factors are totaled and sifted, corporate profits are on track to decline 10% in 2008, and that if U.S. gross domestic product stays flat next year, corporate profits are likely to fall 13% more in 2009. That would be the first back-to-back decline in profits in the post-World War II period.

 

Meanwhile, Europe, which is responsible for a third of world GDP, is in no better shape, with manufacturing falling off a cliff. Volvo (VOLVY, news, msgs) reported last week that truck orders are off 55%. Greece is staggering as rental rates for its key shipping industry are down 90% since June. Emerging East European countries such as Ukraine and Serbia are seeing their currencies blow up along with their economies. Ditto India, Argentina, Brazil and even China, where growth is slowing from the low double digits to around 7%.

 

Trying to fill an expanding hole

 

To counter all these effects of credit extinction, the United States, Japan and the European Central Bank are cutting short-term interest rates, injecting taxpayer money directly into the capital structure of banks, providing hundreds of billions in low-interest loans, guaranteeing deposits and more, on an unprecedented scale.So why isn't it working? A couple of reasons. First, early in this debacle, the Federal Reserve and Treasury Department apparently decided that they would declare war on the so-called shadow banking system. These were the hedge funds, structured investment vehicles (SIVs) and other nonbank entities that had grown up since around 1995 to create, leverage, re-leverage and distribute roughly $10 trillion in debt.

 

Pimco co-chief Mohamed El-Erian has called this the "global liquidity factory," but no matter the name, these unregulated entities created oceans of money that flowed luxuriantly to everyone from credit card users in North Dakota to bankers in Iceland and builders in Thailand.

 

The shadow banking system worked so long as everyone at the base of the system paid their loans on time, but economic stresses of the past year have tested that concept, and it has flunked. Governments have closed the liquidity factory by ordering the SIVs and conduits onto banks' books, smothering the hedge funds by extinguishing their key prime brokers, Bear Stearns and Lehman Bros., and through the September short-selling ban that led to mind-blowing losses.

 

This may have seemed like a good idea at the time, but the government has now been forced to spend taxpayer money to fill in the gaps where private money used to rule. And as it does so, banks are so concerned that they will not have enough money to meet the demands of angry customers of leveraged products wielding return receipts that they're hoarding it.

 

Example: Imagine that a Mr. Watanabe in Tokyo was sold a high-yield collateralized debt obligation in 2007 at $10 million by Merrill Lynch (MER, news, msgs). Since other similar CDOs have traded lower, he's now carrying it on his books at $8 million. But if he were to sell it on the open market he could probably get only $2 million or less.

 

Pressured by his own regulators to button up, he tells Merrill to buy it back or never expect to get any business from him again. Merrill then agrees to buy it at $4 million. Now new Merrill owner Bank of America (BAC, news, msgs) has to both pay the cost and reserve bank capital against it.

 

There are hundreds of Watanabes and as much as $3 trillion to $5 trillion in similar deals coming back onto bank balance sheets from CDOs, SIVs, currency swaps and the like, according to banking expert Das, so you can see that governments' effort to recapitalize banks experiencing a run of deleveraging is not trivial. They will back up banks to the minimum required for solvency, but not anywhere close to their previous free-lending glory. This is why capital is at a standstill and why any business plan dependent on credit is now suspect.

 

'Forcing them to pay through the nose'

 

Credit analyst Brian Reynolds offered a few shocking examples from recent bond deals. Coca-Cola Bottling (COKE, news, msgs) issued debt in July at a spread of 1.69 percentage points over Treasurys. By this week, the spread had widened out to around 3.40 points, a move of historic proportions, Reynolds said. When the company wanted to make another deal this week, bond investors made the bottler pay a stunning 4.68 percentage points over Treasurys.

 

Reynolds notes that the same has happened with telephone giant Verizon Communications (VZ, news, msgs). In April 2007, it issued 10-year debt at 0.95 percentage point over Treasurys. In April of this year, it issued 10-year debt at a spread of 2.60 points, a historic move considering the worst spread for a big phone company had been 3.00 points in 2002. That record was shattered last week, when bond investors made Verizon pay 4.88 points over Treasurys.

 

And the kicker: Reynolds said the bond community was speculating that troubled MGM Mirage (MGM, news, msgs) would have to pay as much as 12% for a bond deal this week, but when it was priced, demand was so weak that the company was forced to pay 15%. And the deal was secured by the company's New York-New York hotel and casino in Las Vegas. Moreover, Reynolds said, the company isn't using the proceeds for growth but instead to pay down another credit facility.

 

"In other words, loan shark bond investors are forcing them to pay through the nose and put up collateral just to keep the balls in the air," he told clients in a note Friday. It's like a consumer who uses a credit card costing 15% a year to pay off a debt owed at 9%.

 

This is the new world companies face -- and you wouldn't know it by just looking at stocks.

 

Das said the bottom line is that deleveraging is like an epic flood. Governments can't hold it back; they can only channel it. The public expects them to actually save the day just as they did after the 1987 equity crash, the 1991 real-estate crash and the 1994 junk-bond crash, yet none of those blowups involved an equity, credit, commodity and currency crash all rolled up in one.

 

It will literally take a miracle to solve this mess. Cross your fingers, and hope that a rollback to 1995 is as bad as it gets.

[erierambler 10]

Saturday » November 22 » 2008

 

Investing online

Armchair trades soar as stocks tumble

 

Donald McArthur

The Windsor Star

 

 

Thursday, November 20, 2008

 

 

 

CREDIT: Nicky Loh, Reuters

Armchair investors should proceed with caution.

 

Tens of thousands of brave or foolish souls are reacting to dizzying volatility in North American stock markets by opening trading accounts so they can make a fortune - or lose one - with a few quick clicks of their computer mouse.

 

"Your pension is down, your house is down, your mutual funds are just pathetic so you yank your money out of mutual funds and you think 'I can do better' and off you go," said Mark Meldrum, a professor at the University of Windsor's Odette School of Business.

 

Meldrum cautioned armchair investors to proceed carefully because they lack the emotional detachment of professional money managers, not to mention the market knowledge and experience.

 

"When you have your own money on the line and you know that with one click of a mouse you control your destiny, you get very worried," said Meldrum. "They start watching it, every second of the day. Fear and greed rule their lives and they eventually lose their money."

 

In the first three weeks of October - a month of double-digit index losses when stocks seemed to shed value almost daily - 75,000 investors opened accounts with TD Ameritrade worth about $2 billion. The three months prior saw 137,000 new accounts open worth about $2.8 billion.

 

"We almost eclipsed a whole quarter of asset traffic in just three weeks," said TD Ameritrade spokeswoman Kim Hillyer.

 

Ameritrade's seven million account holders made an average of 411,000 trades per day in October, smashing the record of 369,000 trades per day set the month before.

 

TD Waterhouse, Canada's largest online broker, reported a similar trend in October, saying applications for self-directed investment accounts were up 80 per cent over the same period the year before. Qtrade Investor and RBC Direct Investing reported a similar surge.

 

Even before the rush associated with this bear market, investors were already opening online trading accounts by the tens of thousands, attracted by discount fees and the ability to manage their own portfolios.

 

"We've seen it over the last five to 10 years continually increasing year over year and I would expect it to continue increasing," said Bruce Seago, the Toronto-based CEO of CMC Markets Canada Inc.

 

"The Internet provides online access to a wealth of information that can be actioned by the investor and it provides more control for people who want that control."

 

Seago said there was a "growing population" of savvy do-it-yourself investors and that some observers believe they account for between 40 and 50 per cent of the marketplace.

 

A 2007 report by Forrester Research, an independent U.S. research firm, predicted 12 million US households would be trading online in 2011, a 48 per cent increase over 2007 levels. Forrester expected 1.54 million Canadian households would be buying and selling investments online by 2012, a 73 per cent increase over 2007 levels.

 

While money - lots of it - can certainly be made exploiting wild swings in stock prices, the odds of amateur investors beating, never mind surviving, this crushing bear market are longer than the Detroit Lions winning this year's Super Bowl.

 

"Don't try to pick a stock, you can't, not in a bear market," said Meldrum, who runs a stock club that meets Tuesdays at 7:30 p.m. at the Knights of Columbus in South Windsor.

 

"Nine out of 10 stocks in a bear market go straight down so your chances of picking a winner are 10 per cent. Your chances of picking two winners are one per cent. No one's that good."

 

Meldrum said this market is a "very dangerous place to be" for uninformed investors, who tend to react based on something they've heard on television or read in the paper.

 

Greenhorns should avoid individual stocks in favour of Exchange Traded Funds, which mimic the performance of indexes like the Dow Jones Industrial Average, Nasdaq and the Toronto Stock Exchange, he said.

 

Seago had more faith in the ability of individual investors to do the legwork and research necessary to make responsible investment decisions. Investors uncomfortable with that kind of responsibility and control can still opt to use a professional broker, although that advice comes with a price, he said.

 

"I don't think either method is right or wrong and I don't think any one of them in particular adds more or less volatility into the marketplace because people are still going to make decisions to invest based on what they know," said Seago.

 

Meldrum warned investors away from trying to time the bottom of this bear market and advised against speculating with any more than 10 per cent of their wealth. He also recommended a 10 per cent stop loss be applied to any speculative investment.

 

CIBC World Markets released a report last Tuesday suggesting the stock market was near the bottom. The S&P/TSX Index finished that day near 9,400 points. The CIBC report predicted it would finish the year at 9,500 and finish 2009 at 12,000.

 

On Thursday, the index endured its second-biggest one-day percentage drop, plunging 9.02 per cent, or 765.8 points, to finish at 7,724.76, the first time it has closed below 8,000 since December 2003.

© The Windsor Star 2008

 

paragraphs in bold were made on purpose:

erie

[SunTrader 10]

The brains of Wall Street got us into this mess so obviously that means we turn to the brains of the media to figure it out and the brains of the politicos in DC to fix it. Yup.

 

 

Winning formula. Wake me when its over.

[Minis Trader 10]

The brains of Wall Street got us into this mess so obviously that means we turn to the brains of the media to figure it out and the brains of the politicos in DC to fix it. Yup.

 

 

Winning formula. Wake me when its over.

 

They are going to blow it up and start all over again!

[DbPhoenix 42]

Supreme Court Overturns Bush v. Gore

 

December 9, 2008 | Issue 44•50

 

WASHINGTON—In an unexpected judicial turnaround, the Supreme Court this week reversed its 2000 ruling in the landmark case of Bush v. Gore, stripping George W. Bush of his earlier political victory, and declaring Albert Arnold Gore the 43rd president of the United States of America.

 

President Gore, retroactively determined by the Supreme Court to be the winner of the 2000 election, is sworn in for his six-week term.

 

The court, which called its original decision to halt manual recounts in Florida "a ruling made in haste," voted unanimously on Wednesday in favor of the 2000 Democratic nominee.

 

Gore will serve as commander in chief from Dec. 10 to Jan. 20.

 

"Allowing this flaw in judgment to stand would set an unworkable precedent for future elections and cause irreparable harm to the impartiality of this court," said Chief Justice John G. Roberts in his majority opinion. "Furthermore, let me be the first to personally congratulate President Gore on his remarkable come-from-behind victory. May he guide us wisely into this new millennium."

 

Former Texas Rangers owner George W. Bush gets some much-needed rest Monday after his 2000 presidential campaign loss to rival Al Gore.

 

Added Roberts, "The system works."

 

Moments after the court's noontime announcement, Gore was flown to Washington, D.C. aboard Air Force One, sworn in on the steps of the U.S. Capitol, and immediately escorted to a brief victory rally at the National Mall. By 4:30 p.m., his 15 cabinet appointees had been vetted, contacted, and brought to Washington, where they were all simultaneously approved by a majority vote in the Senate.

 

Gore then delivered the first of seven consecutive State of the Union addresses.

 

Shortly after being notified of the court's historic decision, a gracious George W. Bush appeared at a press conference with four hastily packed suitcases to congratulate his 2000 opponent on the decisive victory.

 

"Al Gore has fought a strong and patient campaign, and he has prevailed," said the former Republican candidate and Texas governor. "I wish him nothing but the best, and hope that his leadership will help see this nation through a catastrophic recession, an unending war in Iraq, and the single largest housing crisis in history. Congratulations, Mr. President."

 

In his first and last 42 days as president, Gore will reportedly visit U.S. troops overseas, meet with dignitaries from France, Great Britain, China, Azerbaijan, Japan, and Eastern Europe, formalize a plan to bail out the struggling airline and automotive industries, sign the Kyoto Protocol, take a photo of himself and wife Tipper in front of the White House Christmas tree, and ensure a smooth transition between his own administration to that of incoming president-elect Barack Obama.

 

"Great humility, honor, I'm President," Gore said to a crowd of tourists hastily shuffled into a White House corridor to hear the president deliver his acceptance speech. "Thanks, bye."

 

According to political analysts, the road ahead for President Gore is not an easy one. During his first conference call with House Speaker Nancy Pelosi, NATO, OPEC, and the United Nations, Gore admitted that making good on his campaign promises in the next six to eight weeks might be difficult. The president noted his pledge to provide affordable health care to every single child in the U.S. by 2004 as "specifically in need of possible amending."

 

Gore also withdrew his intentions to pay off the national debt by 2012.

 

Although the president has already instituted a number of impressive environmental initiatives, he has drawn criticism from Republicans who claim that he is completely unprepared to deal with the current national climate.

 

"Throughout the entirety of his 2000 campaign, never once did Gore mention the tragedy of 9/11, or our conflicts in Iraq and Afghanistan," Sen. Arlen Specter (R-PA) said. "Does he not care about our national security? Does Al Gore plan to ignore the needs of our brave men and women on the ground? What kind of world does Al Gore think we still live in?"

 

President Gore will not be the only new arrival in the White House to face criticism, however. Joseph Lieberman—the former independent senator from Connecticut who in just two months has gone from the short list of possible Republican running mates to nearly being ousted from the Democratic Caucus to becoming the first Jewish Vice President—will also have much to answer for.

 

"Uhh," Lieberman said in his first official address Wednesday. "Umm…yeah."

[SunTrader 10]

That truly would be the straw that breaks the camel's back.

 

Dumb following dumber.

 

Who ever says it can't get any worse than ..... Bush or whomever. It can always get worse.

 

Hopefully it won't. But it is going to take a lot more than just hope.

[DbPhoenix 42]

[DbPhoenix 42]

Geithner's first test is a disaster

 

In his initial public pronouncement on the government's financial bailout plans, the best the new Treasury secretary can offer is an uninspiring rehash.

 

By Jon Markman MSN Money

 

You know that awful feeling when you're the new guy and you've been working on a project for three months, and you've made no progress, and then the boss gives you a deadline? First you ask for one more day, but when the time finally comes that you've got to deliver, you've still got nothin', so you talk fast, use a lot of jargon, promise more details soon and hope no one notices you've got squat.

 

It's happened to all of us, but few have failed their first assignment on such an epic scale as Tim Geithner, the new Treasury secretary.

 

On Tuesday afternoon, he delivered the most remarkable "dog ate my homework" excuse in the history of the U.S. financial markets, making it more plain than ever that the government simply has no idea how to end the financial crisis or how to reassure the world that everything will be all right anyway.

 

The big idea was a vaguely described public-private partnership to acquire soured loans from banks that real-money investors have already said they would buy only if offered full guarantees against loss -- and even then only with a gun at their heads.

 

"His speech was totally uninspiring. There was nothing new, no change," said Stan Shipley, a senior analyst at ISI Group in New York. Said David Kotok of Cumberland Advisors: "The proposal was nothing more than a promise to deliver a proposal. People are getting tired of this."

 

Best and brightest come up empty

 

The lack of a detailed plan is important not just for investors but also for the average worker, mom and student because it means there really is no easy way out of the global economic crisis. It means we have assigned the job of fixing the banking system to the smartest guy the government could find and surrounded him with every possible resource, and given him plenty of time to think, and still he came up with bupkis.

 

That is scary to people, as well it should be. No one is going to cry crocodile tears for 30-year-old investment bankers who have lost their million-dollar jobs, but the impact on all Americans will be harsh and long-lasting.

 

Once the government truly socializes the banking system's losses by taking on the ruined loans, there will be little credit left for all the things that were so much fun in the past two decades. It will be hard to persuade banks to lend their precious money to dads for unproductive assets like leisure boats or even to real-estate investors for new apartment buildings, or to farmers for new tractors.

 

Salaries and living standards will come down, as instead of borrowing and spending we will have to develop a culture of saving and waiting.

 

Eventually, we will innovate and grow our way out of this hole, but it will take patience and time. Politicians don't want to tell us this, so they have planned a final $800 billion-plus party paid for with taxpayer appropriation and borrowing.

 

But eventually, when that money is spent, there will be no other choice but to admit our mistakes and buckle down for a world with less credit and lower asset values. Call it a depression, a prolonged recession or a flat spot in the road, but it will likely lead to a string of one-term presidencies and the relegation of the name Tim Geithner to trivia contests.

 

Created from, and vanished into, thin air

 

That's part of the reason investors, who had shown remarkable restraint and hope in recent days as they awaited Geithner's plan, responded in the only way they knew how, which was with a giant raspberry: Shares of big companies were flung to their biggest losses in three months as a shiver of despair ripped through trading floors. There was a slight lag of disbelief that the Treasury secretary had offered nothing but a rehash, a repackaging and renaming of old ideas, before markets tumbled with a great collective sigh in the afternoon, wiping out 10% of the total market value of major banks in four hours.

 

Though it may have seemed to casual observers that Geithner had offered a set of decisive options with a $1 trillion price tag, people in the investment industry realized all his ideas have already been tried and failed or have little support outside Washington intellectual circles.

 

"Geithner showed that not only does the emperor have no clothes, but he has nothing else either," said Satyajit Das, a global banking expert working in Australia. "He showed that the government has exhausted its ability to use monetary policy and has no new ideas to use alternative strategies, so-called quantitative easing, to relieve credit stresses either."

 

The problem, of course, is that there really is no neat, easy way to clean up the mess left behind by a multidecade orgy of credit. Investors have suspected that, but now it's finally sinking in as true. Starting in the mid-1990s, mathematicians came up with incredible new ways to create money from thin air. Banks turned the theories into loans, dupes at ratings agencies blessed them as risk-free, and salesmen chopped them up and sold them to gullible investors.

 

These cheap, easy-to-get loans allowed people around the United States to buy much more home than they could really afford, as well as second homes, furniture, snowmobiles and the like, allowed businesses to expand much more than they could really afford and allowed governments to extend a lot more benefits to citizens than they could really afford. In essence, the new loan theory financed a false prosperity that went on for so long that people came to think of it as normal.

 

The underlying engine for all this credit growth was escalating home prices, and when that stopped, the tower of credit came crashing down, leaving homeowners without the ability to pay their loans and banks holding the bag. The roughly $5 trillion in losses that financial institutions have on their books now are directly a result of this incredible error of judgment made when government regulators failed to rein in investment banks who competed with each other to make those loans and reward themselves richly in the process.

 

Realistic experts -- at least the ones without political agendas -- all agree that the only way to seriously deal with this colossal blunder is for the government to force banks to admit they screwed up and write the value of these loans down to zero. That would wipe out the assets of most major banks, making their equity worth nothing and their bonds worth little. They would be forced into bankruptcy, a process that would allow them to be recapitalized over time and then, later, re-privatized.

 

Waiting is hardest -- and best

 

Nationalization would not be the end of the world, but it is a concept that is so anathema to Americans that it seemingly cannot be said in polite company. So instead we have this long, dragged-out Kabuki theater in which the banks have essentially been nationalized in everything but name, and yet no one will admit it to the American people. And the cost of this denial is another trillion-dollar program that will do nothing, most experts agree, except buy time until nationalization must be done later. Government officials and economists hold up the example of the "lost decade" in Japan -- a post-credit bubble era in which banks were allowed to cling to life but never regained enough strength to lend and help grow the economy -- as an example of what they wish to avoid. The mantra in Washington is that policymakers won't make that mistake again.

 

Yet New York private fund manager Craig Drill, who has studied the lost decade for years, says the situation we face today is really no different.

"Three years from now, people will decide that Japanese policymakers weren't so stupid after all," he said. "We're going to discover that there really was no solution, no way to snap your fingers and make it all better. The only solution is time."

[DbPhoenix 42]

This is almost a parable for the country as a whole:

 

---------------------------------------

 

Death of the Dream

 

California has come back before, but 'hysterical greens' aren't helping.

 

Joel Kotkin

NEWSWEEK

From the magazine issue dated Mar 2, 2009

 

For decades, California has epitomized America's economic strengths: technological excellence, artistic creativity, agricultural fecundity and an intrepid entrepreneurial spirit. Yet lately California has projected a grimmer vision of a politically divided, economically stagnant state. Last week its legislature cut a deal to close its $42 billion budget deficit, but its larger problems remain.

 

California has returned from the dead before, most recently in the mid-1990s. But the odds that the Golden State can reinvent itself again seem long. The buffoonish current governor and a legislature divided between hysterical greens, public-employee lackeys and Neanderthal Republicans have turned the state into a fiscal laughingstock. Meanwhile, more of its middle class migrates out while a large and undereducated underclass (much of it Latino) faces dim prospects. It sometimes seems the people running the state have little feel for the very things that constitute its essence—and could allow California to reinvent itself, and the American future, once again.

 

The facts at hand are pretty dreary. California entered the recession early last year, according to the Forecast Project at the University of California, Santa Barbara, and is expected to lag behind the nation well into 2011. Unemployment stands at roughly 10 percent, ahead only of Rust Belt basket cases like Michigan and East Coast calamity Rhode Island. Not surprisingly, people are fleeing this mounting disaster. Net outmigration has been growing every year since about 2003 and should reach well over 200,000 by 2011. This outflow would be far greater, notes demographer Wendell Cox, if not for the fact that many residents can't sell their homes and are essentially held prisoner by their mortgages.

 

For Californians, this recession has been driven by different elements than the early-1990s downturn, which was largely caused by external forces. The end of the Cold War stripped away hundreds of thousands of well-paid defense-related jobs. Meanwhile, the Japanese economy went into a tailspin, leading to a massive disinvestment here. In South L.A., the huge employment losses helped create the conditions conducive to social unrest. The 1992 Rodney King verdict may have provided the match, but the kindling was dry and plentiful.

 

This time around, the recession feels like a self-inflicted wound, the result of "bubble dependency." First came the dotcom bubble, centered largely in the Bay Area. The fortunes made there created an enormous surge in wealth, but by 2001 that bust had punched a huge hole in the California budget. Voters, disgusted by the legislature's inability to cope with the crisis, recalled the governor, Gray Davis, and replaced him with a megastar B-grade actor from Austria.

 

Yet almost as soon as the Internet bubble had evaporated, a new one emerged in housing. As prices soared in coastal enclaves, people fled to the periphery, often buying homes far from traditional suburban job centers. At first, it seemed like a miraculous development: people cheered as their home's "value" increased 20 percent annually. But even against the backdrop of the national housing bubble, California soon became home to gargantuan imbalances between incomes and property prices. The state was also home to such mortgage hawkers as New Century Financial Corp., Countrywide and IndyMac. For a time the whole California economy seemed to revolve around real-estate speculation, with upwards of 50 percent of all new jobs coming from growth in fields like real estate, construction and mortgage brokering.

 

As a result, when the housing bubble burst, the state's huge real-estate economy evaporated almost overnight. Both parties in the legislature and the governor failed miserably to anticipate the impending fiscal deluge they should have known was all but inevitable.

 

To many longtime California observers, the inability of the political, business and academic elites to adequately anticipate and address the state's persistent problems has been a source of consternation and wonderment. In my view, the key to understanding California's precipitous decline transcends terms like liberal or conservative, Democratic and Republican. The real culprit lies in the politics of narcissism.

 

California, like any gorgeously endowed person, has a natural inclination toward self-absorption. It has always been a place of unsurpassed splendor; it has inspired and attracted writers, artists, dreamers, savants and philosophers. That's especially true of the Bay Area—ground zero for California narcissism and arguably the most attractive urban expanse on the continent; Neil Morgan in 1960 described San Francisco as "the narcissus of the West," a place whose fundamental asset was first its own beauty, followed by its own culture of self-regard.

 

At first this high self-regard inspired some remarkable public achievements. California rebuilt San Francisco from the ashes of the great 1906 fire, and constructed in Los Angeles the world's most far-reaching transit system. These achievements reached a pinnacle under Gov. Pat Brown, who in the 1960s oversaw the expansion of the freeways, the construction of new university, state- and community-college campuses, and the creation of water projects that allowed farming in dry but fertile landscapes.

 

Yet success also spoiled the state, incubating an ever more inward-looking form of narcissism. Even as the middle class enjoyed "the good life"—high-paying jobs, single-family homes (often with pools), vacations at the beach—there was a growing, palpable sense of threats from rising taxes, a restless youth population and a growing nonwhite demographic. One early expression of this was the late-1970s antitax movement led by Howard Jarvis. The rising cost of government was placing too much of a burden on middle-class homeowners, and the legislature refused to address the problem with reasonable reforms. The result, however, was unreasonable reform, with new and inflexible limits on property and income taxes that made holding the budget together far more difficult.

 

Middle-class Californians also began to feel inundated by a racial tide. This was not totally based on prejudice; Californians seemed to accept legal immigration. But millions of undocumented newcomers provoked fear that there were no limits on how many people would move into the state, filling emergency rooms with the uninsured and crowding schools with children whose parents neither spoke English nor had the time to prepare their children for school. By 1994, under Gov. Pete Wilson, the anti-immigrant narcissism fueled Proposition 187. It was now OK to deny school and medical services to people because, at the end, they looked different.

 

Today the politics of narcissism is most evident among "progressives." Although the Republicans can still block massive tax increases, the predominant force in California politics lies with two groups—the gentry liberals and the public sector. The public-sector unions, once relatively poorly paid, now enjoy wages and benefits unavailable to most middle-class Californians, and do so with little regard to the fiscal and overall economic impact. Currently barely 3 percent of the state budget goes to building roads or water systems, compared with nearly 20 percent in the Pat Brown era; instead we're funding gilt-edged pensions and lifetime guaranteed health care. It's often a case of I'm all right, Jack—and the hell with everyone else.

 

The most recent ascendant group are the gentry liberals, whose base lies in the priciest precincts of San Francisco, the Silicon Valley and the west side of Los Angeles. Gentry liberalism reflects the narcissistic values of successful boomers and their offspring; their politics are all about them. In the past this was tied as much to cultural issues, like gay rights (itself a noble cause) and public support for the arts. More recently, the dominant issue revolves around environmentalism.

 

Green politics came early to California and for understandable reasons: protecting the resources and landscape of the nation's loveliest landscapes. Yet in recent years, the green agenda has expanded well beyond that of the old conservationists like Theodore Roosevelt, who battled to preserve wilderness but also cared deeply about boosting productivity and living standards for the working classes. In contrast, the modern environmental movement often adopts a largely misanthropic view of humans as a "cancer" that needs to be contained. By their very nature, the greens tend to regard growth as an unalloyed evil, gobbling up resources and spewing planet-heating greenhouse gases.

 

You can see the effects of the gentry's green politics up close in places like the Salinas Valley, a lovely agricultural region south of San Jose. As community leaders there have tried to construct policies to create new higher-wage jobs in the area (a project on which I've worked as a consultant), local progressives—largely wealthy people living on the Monterey coast—have opposed, for example, the expansion of wineries that might bring new jobs to a predominantly Latino area with persistent double-digit unemployment. As one winegrower told me last year: "They don't want a facility that interferes with their viewshed." For such people, the crusade against global warming makes a convenient foil in arguing against anything that might bring industrial or any other kind of middle-wage growth to the state. Greens here often speak movingly about the earth—but also about their personal redemption. They have engaged a legal and regulatory process that provides the wealthy and their progeny an opportunity to act out their desire to "make a difference"—often without real concern for the outcome. Environmentalism becomes a theater in which the privileged act out their narcissism.

 

It's even more disturbing that many of the primary apostles of this kind of politics are themselves wealthy high-livers like Hollywood magnates, Silicon Valley billionaires and well-heeled politicians like Arnold Schwarzenegger and Jerry Brown. They might imagine that driving a Prius or blocking a new water system or new suburban housing development serves the planet, but this usually comes at no cost to themselves or their lifestyles.

 

The best great hope for California's future does not lie with the narcissists of left or right but with the newcomers, largely from abroad. These groups still appreciate the nation of opportunity and aspire to make the California—and American— Dream their own.

 

Of course, companies like Google and industries like Hollywood remain critical components, but both Silicon Valley and the entertainment complex are now mature, and increasingly dominated by people with access to money or the most elite educations. Neither is likely to produce large numbers of new jobs, particularly for working- and middle-class Californians.

 

In contrast, the newcomers, who often lack both money and education, continue in the hierarchy-breaking tradition that made California great in the first place. Many of them live and build their businesses not in places like San Francisco or West L.A., but in the increasingly multicultural suburbs on the periphery, places like the San Gabriel Valley, Riverside and Cupertino. Immigrants played a similar role in the recovery from the early-1990s doldrums. In the '90s, for example, the number of Latino-owned businesses already was expanding at four times the rate of Anglo ones, growing from 177,000 to 440,000. Today we see signs of much the same thing, though it often involves immigrants from the Middle East, the former Soviet Union, Mexico or South Korea. One developer, Alethea Hsu, just opened a new shopping center in the San Gabriel Valley this January—and it's fully leased. "We have a great trust in the future," says the Cornell-trained physician.

 

You see some of the same thing among other California immigrants. More than three decades ago the Cardenas family started slaughtering and selling pigs grown on their two-acre farm near Corona. From there, Jesús Sr. and his wife, Luz, expanded. "We would shoot the hogs through the head and sell them off the truck," says José, their son. "We'd sell the meat to people who liked it fresh: Filipinos, Chinese, Koreans and Hispanics … We would sell to anyone." Their first store, predominantly a carnicería, or meat shop, took advantage of the soaring Latino population. By 2008, they had 20 stores with more than $400 million in sales. In 2005 they started to produce Mexican food, including some inspired by Luz's recipes to distribute through such chains as Costco. Mexican food, notes Jesús Jr., is no longer a niche. "It's a crossover product now."

 

Despite the current mess in Sacramento, this suggests some hope for the future. Perhaps the gubernatorial candidacy of Silicon Valley folks like former eBay CEO Meg Whitman (a Republican), or her former eBay employee Steve Wesley (a Democrat), could bring some degree of competence and common sense to the farce now taking place in Sacramento. Sen. Dianne Feinstein, who's said to be considering the race, would also be preferable to a green zealot like Jerry Brown or empty suits like Los Angeles Mayor Antonio Villaraigosa or San Francisco's Gavin Newsom.

 

But if I am looking for hope and inspiration, for California or the country, I would look first and foremost at people like the Cardenas family. They create jobs for people who didn't go to Stanford or whose parents lack a trust fund. They constitute what any place needs to survive: risk takers who are self-confident but rarely selfish. These are people who look at the future, not in the mirror.

 

Kotkin is a presidential fellow in Urban Futures at Chapman University and executive editor of newgeography.com. He is finishing a book on the American future for Penguin Publishing.

[DbPhoenix 42]

How savers could doom the economy

 

The mainstream theories that are guiding efforts to fix the broken US economy assume people will react rationally. Uh-oh.

 

By Jon MarkmanMSN Money

 

[NB: bold mine]

 

Pramod Kadambi wakes up every morning fearing the world has come to an end. He and his wife don't spend money on anything but essentials. Friends who have lost their jobs visit and cry. He sees war or revolution coming. Gold coins and guns are new additions to the household.

 

An unshaven, out-of-work survivalist in the backwoods of Georgia? Not at all. He's a young medical professional in California earning more than a million dollars a year -- and the new face of the wealthy in America. That makes him the Obama administration's worst nightmare: someone who could help revive the nation's economy but instead has shut down his wallet in stark dread.

 

Over the next few months, a searing debate over paying for the nation's trillion-dollar deficit with new tax increases on the rich will divide the country by class and political ideology. Yet it's becoming increasingly clear that the dispute will be moot as the economy is poised to sink more deeply into a recession and bear market that will provide shockingly less income for authorities to tax.

 

How much less? Maybe as little as half, and fretful savers like Kadambi are part of the reason. Most analyses of the $787 billion fiscal stimulus package and President Barack Obama's spending priorities so far have assumed all the economic theories embedded in the plans by Harvard and Princeton economists in the White House are accurate and unassailable, and will direct federal money to work like magic to restore order if only recalcitrant Republicans and naysayers would get out the way.

 

What's hasn't really been challenged is whether the assumptions underlying the plans' model fit any sort of reality that exists outside the hallways of Ivy League economics departments and whether emotional individuals acting in their own self-interest to save money -- rather than as robotic consumption machines that spend like crazy -- can mess them up.

Saving for (and creating) a rainy day

 

Fresh evaluation from Wall Street analysts steeped in economic traditions outside Boston and the Beltway is focusing on the idea that the government's recovery efforts depend too much on people acting rationally in a way that fits historical patterns of calmer times. If people instead ramp up their savings rates to a degree not anticipated by the economists' models, then consumer spending will decline at a rate that that will crush corporate earnings and, in turn, push stocks a lot lower. The resulting loss of confidence will then reflexively cause people to save more, leading to a vicious downward spiral.To understand this scary effect, an obscure but well-regarded model of economic behavior called the Levy-Kalecki formula has begun to gain favor in some circles in part because, since its creation 70 years ago, it has done an unusually good job of forecasting how high levels of saving and a decline in borrowing can lead to the devastation of profits.

 

Plugging current U.S. output figures into a classic version of the Levy-Kalecki formula shows that if households save as little as 7% of their incomes over the next year, the S&P 500 Index could plunge as low as 550, which would amount to a 21% decline in value from the current level. The equivalent for the Dow Jones industrials would be about 5,300.

 

If the wealthy are taxed at higher rates, as currently contemplated by the Obama administration, and savings rates go to 10% per annum, the formula suggests corporate profits will be cut in half from their peak two years ago. Because earnings at the companies that make up the S&P 500 totaled $84.70 a share in 2007, that would mean forecasts of the stock market need to start with the assumption that earnings will sink to about $42 per share.

 

If investors are confident that a decline to that level is just a temporary aberration, they will apply a price-earnings multiple similar to what we see today, around 18, and then you get a forecast of 755 for the S&P 500, which is a little higher than where we are now. But if investors fear earnings will continue to slip, then they'll cut the multiple to as little as 9 or 10, as they did in the 1970s, and if you do the math you get a projection of 420 for the S&P 500, or around Dow 4,000.

 

Yow. Talk like this used to be strictly in the realm of grumpy old men and cuckoo birds, but it's occurring now in smart circles because mainstream economic theories are not adequately explaining consumer and government behavior in this cycle. Wall Street practitioners are thus turning to alternative theories, and the Levy-Kalecki formula -- independently developed by New York physicist-entrepreneur Jerome Levy in 1914 and Polish economist Michal Kalecki in 1935 and then unified by American economist Hyman Minsky in the 1960s -- is helping to better elucidate the relationship among debt, savings and profits.

Le freak, c'est chic

 

A key difference between the theories animating the work of Obama's economists and the theories behind the Levy-Kalecki formula are that the former assume people will act rationally in accordance with government prodding and the latter consider the possibility that people will freak out. Contrary to mainstream economics beliefs that people operate with perfect knowledge, Levy-Kalecki assumes that economic participants -- families, officials, workers, investors and executives -- grope about their lives in an atmosphere of uncertainty, develop false beliefs and make mistakes, especially when surprised. While mainstream economics argues that markets and people tend toward a harmonious equilibrium that can be guided by didactic government action, Levy-Kalecki suggests behavior instead tends toward disequilibrium. The difference in policy that must be developed in each case is profound, for the former tends to rely on inflexible formulas while the latter would seek to constantly adjust.

 

The rubber meets the road now in two views of how individuals will react to incentives embedded in the stimulus package. The Obama team apparently believes enough dollars are being applied via government credits, direct spending and state grants to overcome the deep erosion of individual Americans' consumption. Yet Wall Street practitioners who follow Levy-Kalecki tell me that the package falls short by a whopping $1 trillion.

Without directly creating private jobs via public-works projects to give laid-off workers new income streams -- and thus help people stop obsessing about a bleak future -- the Levy-Kalecki model forecasts the next year will feature a steep climb in saving, plunge in spending, wipeout in corporate earnings and disintegration of the stock market.

 

Anticipating a collapse

 

One Levy-Kalecki adherent who runs a credit portfolio at a New York investment bank told me he believes that complacent policymakers don't seem to realize the nation faces a grave financial crisis on par with war. If people react to weakening job prospects by stiffing their credit card and mortgage lenders in order to save at a level that will let them survive a financial meltdown, he sees the potential for $6 trillion in lost spending over the next two years."This is what commodity, bond and stock markets are trying to price in right now," said the manager, who asked not to be identified. "Investors gave up waiting for the government to act effectively and are taking down the value of everything in anticipation of collapse."

 

If we were dealing with only a global banking crisis, current policy might have been effective. But the credit drought has sparked what economists call a Fisher debt-deflation spiral, in which companies' long-term cost of funds is too high to provide a reasonable rate of return, so they cut both their borrowing and their investments. The less big companies borrow, the worse banks perform, the less they can lend to smaller companies and the less can be invested in expansion. Rinse and repeat until total implosion in a cycle already beset with individuals similarly disinclined to borrow and spend, as happened in the Great Depression.

 

Levy-Kalecki followers believe the answer to this is massive direct government public-works spending totaling up to 30% of gross domestic product, even if the national debt rises to greater than 100% of GDP from 60% today -- something along the lines that British economist John Maynard Keynes recommended in the Depression.

 

Since the Obama team has shunned that path, the fear now is that only an event similar to the one that bailed out the United States from the Great Depression will vanquish the six-headed beast of rising unemployment and savings rates, falling spending and earnings, debt deflation and corporate dis-investment. That was the intense manufacturing demands of World War II.

 

Hopefully a saner alternative will emerge.

 

 

 

 

Edited March 6, 2009 by DbPhoenix

[DbPhoenix 42]

The Frugal Family Guide

 

Steve Tuttle

NEWSWEEK From the magazine issue dated Mar 16, 2009

 

Last summer I was at my parents' cabin in rural Virginia and I noticed a dead mouse in a rusty old trap. I tossed it in the trash. Later that day I told my dad about the mouse, and he asked, "Where's the trap?" I told him it looked as though it were falling apart, and I'd thrown it out with the mouse still attached. He looked at me as if I'd punched him in the face. My mom chimed in: "We've had that trap since we got married!" I wasn't sure she was joking, and they got married almost 50 years ago. I sheepishly dug it out of the garbage and loaded it up with cheese again. Now it's become one of those perennial things they bring up every time I go home: "Remember when Steve threw out the mousetrap, mouse and all!?" This is followed by shuddering and head shaking, as they silently wonder where it all went wrong.

 

In today's cratering economy, my parents are looking pretty smart all of a sudden. President Obama talks a lot about personal sacrifice, and we all need to look for ways to cut costs these days. Maybe he ought to consider Bill and Joyce Tuttle as the nation's first thrift czars, because when it comes to pinching pennies and saving for the future, my parents are extreme.

 

Here are some real and true examples: my mom does not use a clothes dryer. "Why would I ever need that as long as we have the outdoors?" she says. (I'd like to answer that: there's nothing like pulling on a pair of frozen Fruit of the Looms straight off the line on a sleeting January morning. Thanks, Mom.) They don't own a credit card. They buy a new car only when they've saved up enough cash to pay for it in full, about every 10 years or so. They have never had cable or satellite TV, even though where they live they get only a handful of channels over the air.

 

They heat the house with wood from trees that my dad cuts down himself. They don't have air conditioning. They buy almost all their clothes at thrift stores. Mom was angry last week because Dr. Phil did a show about shopping at consignment stores. "Oh, no. They'll be all over the Goodwill now," she lamented.

 

My parents definitely don't have the Internet or a computer, and caved on a cell phone only recently. They of course bought the throwaway pay-as-you-go kind for $15 at Wal-Mart so they're not locked into a monthly bill. (When I reached my mom on their cell phone recently, I could hear my dad shouting in the background. "Hurry up. Don't use all the minutes!")

 

During my sophomore year at college, my dad made a special trip down to William & Mary to see me. I thought he was coming to help me buy my first car. I had my eye on a little red Volkswagen. When he left town two days later, I was the proud owner of a blue five-speed bicycle. He persuaded my brother, Chris, not to waste his money on a color TV. Black and white was just as good. We learned not to take him shopping after that.

 

Now this might make them sound cheap, but they are most definitely not. They are thrifty. Know the difference. Last year they treated seven members of our family to a full week at Disney World. They give very generous gifts and collect expensive antiques. But my dad would rather gouge out his own eyes than spend $4 on a latte at Starbucks. Or say the word "latte," for that matter.

 

Our family built the house I grew up in, one section at a time, as my parents saved up enough money. I was about 10 years old when they bought those five acres. After school we'd clear brush and burn it in piles. When it started to get dark, we'd sit on a log in front of the crackling fire and celebrate with little green bottles of Coke and Tastykakes, the chocolate-éclair kind. That has nothing to do with my story, but man, were they good.

 

My mom, who is in her 60s, has been a hairdresser most of her life, and my dad, 72, was a game warden for 38 years. Neither of them ever made giant salaries, yet they've amassed a shocking pile of savings. I would ask exactly how much, but my dad would refuse to answer, and instead would offer to kick my ass for asking. And he could, because he's so ripped from chopping all that wood.

 

They put two kids through college, and they don't have much in the way of expenses now. Groceries cost less because a lot of what they eat is homegrown vegetables and game my father kills.

 

Come to think of it, maybe my parents shouldn't start packing their bags to join the Obama administration just yet. The truth is, you couldn't do a lot of these things unless you live in the mountains, and you like hard work and lots of it.

 

But there are still valuable lessons to be gleaned from their example, which boils down to this: the people who have been living the thrifty life all along, doing the right thing—crazy stuff like buying houses they can afford and saving up money for things they want to buy—are the smart ones now. And they'll be the ones who adjust most easily to a leaner time. While the rest of us watch and worry, my parents, with their paid-for house and their old rusty mousetraps, have peace of mind to spare. It reminds me of the line from "Sharecropper's Son," a bluegrass song I knew growing up: "Landlord told me that hard times were near/Didn't mean a thing 'cause they're already here."