Grit your teeth, Scrooge

Mark Zandi – chief economist for Moody’s – has calculated which stimulus programs give the most bang for the buck in terms of the economy:


From "Naked Capitalism"

That sinking feeling

(Big figure )
(Little figure)

September 15, 2008: the secret bank run and corralito

According to Paul Kedrosky (htp: Tim Iacono), Hank Paulson and Ben Bernanke scared the wits out of Congress with references to a potential $5.5 trillion electronic cash withdrawal from the US banking system, which would have led immediately to economic and political Armageddon. Electronic money accounts were closed down to stop the flight and collapse.

I said a month later that Paulson looked like a bully. But when Congress threw out the first bailout plan, he had also looked scared-angry, turning his head this way and that, like a bull throwing off dogs.

Perhaps the scare story was true. Perhaps not. Shame it took the ex-head of Goldman to drive the Bill through. I assume that rescuing the banks also rescued much of his personal $500 million wealth.

It's time for us to leave off discussing the affairs of the Gods, and return to our own interests. We ordinary mortals don't have the luxury of that kind of money transaction facility. If the system had gone down, presumably it would have taken our little all with it. And is anyone so brave as to say that it's been fixed?

Be prepared; don't be panicked (as it seems Congress was), but take what sensible precautions you can.

Shoot the B******s

A piece by the columnist and Nobel-prize winning economist Paul Krugman: http://www.nytimes.com/2009/02/02/opinion/02krugman.html?_r=1&em

To me, it gives a strong argument for temporary state ownership.

The banking crisis: did we have a choice?

Could any of the leading nations have retained their moral fibre during the monetary inflation of the last decade and more? Wouldn't prudent, restrained lenders have lost out to foreign sellers of "liar" and "fog a mirror" loans? Wouldn't the currency have risen and crippled exports? Could considerations like this form part of the "don't shoot me" defence of our busted banks and discredited politicians?

Or would it have been a trial by fire, where the virtuous are rewarded at the end? Denninger: "It is also increasingly clear that there are literally hundreds of midsize and smaller banks that are perfectly fine. They did not lever up, they did not write a bunch of crap commercial or residential construction paper that cannot be serviced and they most certainly did not drink the KoolAid of securitized synthetic garbage debt. Even in bad economic times traditional banking is a very profitable business - so long as you lend money to people who can pay you back or you have sufficient collateral so that if they default you don't lose your shirt."

In which case, the original offence of reckless finance has been compounded by the failure to punish it. The bailouts whisk away the deserved reward of the good, and teach a hugely damaging lesson to all onlookers: you can Get Away With It.

Of course, you can't - or rather society can't, though individuals will. And when injustice finally falls, it will take down with it many of the good, the poor and the powerless.

Common Sense?

An open letter that I received via email:
____________________________
To: Troy Clarke President
General Motors North America

Response from: Gregory Knox, Pres.
Knox Machinery Company
Franklin , Ohio

Gentlemen:

In response to your request to contact legislators and ask for a bailout for the Big Three automakers please consider the following, and please pass my thoughts on to Troy Clark, President of General Motors North America.

Politicians and Management of the Big 3 are both infected with the same entitlement mentality that has spread like cancerous germs in UAW halls for the last countless decades, and whose plague is now sweeping this nation, awaiting our new "Messiah", Pres-elect Obama, to wave his magic wand and make all our problems go away, while at the same time allowing our once great nation to keep "living the dream"...

Believe me folks, The dream is over! This dream where we can ignore the consumer for years while management myopically focuses on its personal rewards packages at the same time that our factories have been filled with the worlds most overpaid, arrogant, ignorant and laziest entitlement minded "laborers" without paying the price for these atrocities...this dream where you still think the masses will line up to buy our products for ever and ever.

Don't even think about telling me I'm wrong. Don't accuse me of not knowing of what I speak. I have called on Ford, GM, Chrysler, TRW, Delphi, Kelsey Hayes, American Axle and countless other automotive OEM's throughout the Midwest during the past 30 years and what I've seen over those years in these union shops can only be described as disgusting.

Troy Clarke, President of General Motors North America, states: "There is widespread sentiment throughout this country, and our government, and especially via the news media, that the current crisis is completely the result of bad management which it certainly is not."

You're right Mr. Clarke, it's not JUST management...how about the electricians who walk around the plants like lords in feudal times, making people wait on them for countless hours while they drag ass...so they can come in on the weekend and make double and triple time...for a job they easily could have done within their normal 40 hour work week. How about the line workers who threaten newbies with all kinds of scare tactics...for putting out too many parts on a shift...and for being too productive (We certainly must not expose those lazy bums who have been getting overpaid for decades for their horrific underproduction, must we?!?)

Do you folks really not know about this stuff?!? How about this great sentiment abridged from Mr. Clarke's sad plea: "over the last few years ...we have closed the quality and efficiency gaps with our competitors." What the hell has Detroit been doing for the last 40 years?!? Did we really JUST wake up to the gaps in quality and efficiency between us and them? The K car vs. the Accord? The Pinto vs. the Civic?!? Do I need to go on? What a joke!

We are living through the inevitable outcome of the actions of the United States auto industry for decades. It's time to pay for your sins, Detroit ...

I attended an economic summit last week where brilliant economist, Alan Beaulieu, from the Institute of Trend Research , surprised the crowd when he said he would not have given the banks a penny of "bailout money". "Yes, he said, this would cause short term problems," but despite what people like politicians and corporate magnates would have us believe, the sun would in fact rise the next day... and the following very important thing would happen...where there had been greedy and sloppy banks, new efficient ones would pop up...that is how a free market system works...it does work...if we would only let it work..."

But for some nondescript reason we are now deciding that the rest of the world is right and that capitalism doesn't work - that we need the government to step in and "save us"...Save us my ass, Hell - we're nationalizing...and unfortunately too many of our once fine nation's citizens don't even have a clue that this is what is really happening...But, they sure can tell you the stats on their favorite sports teams...yeah - THAT'S really important, isn't it... Does it ever occur to ANYONE that the "competition" has been producing vehicles, EXTREMELY PROFITABLY, for decades in this country?... How can that be??? Let's see... Fuel efficient... Listening to customers... Investing in the proper tooling and automation for the long haul...

Not being too complacent or arrogant to listen to Dr. W. Edwards Deming four decades ago when he taught that by adopting appropriate principles of management, organizations could increase quality and simultaneously reduce costs. Ever increased productivity through quality and intelligent planning... Treating vendors like strategic partners, rather than like "the enemy"... Efficient front and back offices... Non union environment...

Again, I could go on and on, but I really wouldn't be telling anyone anything they really don't already know down deep in their hearts.

I have six children, so I am not unfamiliar with the concept of wanting someone to bail you out of a mess that you have gotten yourself into - my children do this on a weekly, if not daily basis, as I did when I was their age. I do for them what my parents did for me (one of their greatest gifts, by the way) - I make them stand on their own two feet and accept the consequences of their actions and work through it. Radical concept, huh... Am I there for them in the wings? Of course - but only until such time as they need to be fully on their own as adults.

I don't want to oversimplify a complex situation, but there certainly are unmistakable parallels here between the proper role of parenting and government. Detroit and the United States need to pay for their sins.

Bad news people - it's coming whether we like it or not. The newly elected Messiah really doesn't have a magic wand big enough to "make it all go away." I laughed as I heard Obama "reeling it back in" almost immediately after the final vote count was tallied..."we really might not do it in a year...or in four..." Where the Hell was that kind of talk when he was RUNNING for office.

Stop trying to put off the inevitable folks ... That house in Florida really isn't worth $750,000... People who jump across a border really don't deserve free health care benefits... That job driving that forklift for the Big 3 really isn't worth $85,000 a year... We really shouldn't allow Wal-Mart to stock their shelves with products acquired from a country that unfairly manipulates their currency and has the most atrocious human rights infractions on the face of the globe... That couple whose combined income is less than $50,000 really shouldn't be living in that $485,000 home... Let the market correct itself folks - it will.

Yes it will be painful, but it's gonna' be painful either way, and the bright side of my proposal is that on the other side of it all, is a nation that appreciates what it has...and doesn't live beyond its means...and gets back to basics...and redevelops the patriotic work ethic that made it the greatest nation in the history of the world...and probably turns back to God.

Sorry - don't cut my head off, I'm just the messenger sharing with you the "bad news". I hope you take it to heart.

Gregory J. Knox, President
Knox Machinery, Inc.
Franklin , Ohio 45005

Carte Blanche

"... Congress doesn't know how much money he (Treasury Secretary Henry Paulson) has given away to anyone."

- an estimated $290 billion so far.

Coming your way

Marc Faber: There are two possibilities. Banks go under and the stakeholders are left with nothing, as is the case with Lehman Brothers, or governments pump money into the financial system so that the incompetent financial clowns in Bahnhofstrasse [Zurich's financial centre] and Wall Street can continue to eat in fancy restaurants.

I am clearly in favour of the first because the consequences of these state interventions are massive budget deficits. To finance these, governments have to acquire money. For that they have to borrow money, which makes state debt and interest payments soar. US economists have come to the conclusion from the trends that there will be a US state bankruptcy.

Swissinfo: Do you share that view?

M.F.: One hundred per cent.

(Source)

A big figure

Hard on the heels of the $700 billion US bailout bill comes the UK's £400 billion rescue plan.

Oddly, this latter figure, in dollar terms, is very similar to the one approved by Congress - a little over $692 billion at today's retail conversion rates (and even closer in wholesale terms).

But the really interesting thing is the difference is in its relationship to the size of the population of the country, and the GDP:

Marc Faber recently said that the US needed $5 trillion to resolve the crisis, i.e. 7 times more than the amount approved by Congress. Britain's bailout fund is proportionately 7 times greater, and so, crippling cost to the taxpayer aside, maybe it could work.

And it has political implications. The average Brit is so innumerate that he doesn't know how to calculate 75% of 100, so don't expect him to understand that it wasn't simply "the banks" to blame, but the relaxation of Government monetary controls. Don't discount the possibility that, however undeservedly, Gordon Brown may win the next election.

The Chinese and US mortgage-backed securities

... and while we're discussing the potential in backing the horses that China bought into:

New York Times, 4 September 2008:

China’s central bank is in a bind.

It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.

The $1.7 Billion Payday: How Bill Gross Made a Killing on the Bailout - Seeking Alpha (14 September 2008)

... The upshot is, Treasury Secretary Paulson was happy to make an example out of equity investors like Miller, who knew they were taking a big risk in pursuit of a big return.
But no way, no how was Paulson about to blow out the holdings of one of America’s top creditors (China).

By some estimates, China has now amassed as much as $1.6 trillion in foreign reserves, with more than two-thirds of that parked in U.S. debt instruments (agency debt, treasury bonds and so on). Burn those guys in a bailout plan? You’ve got to be kidding. Fiscally speaking, that would be like shooting ourselves in the foot with a machine gun.

So Gross had a pretty good lock on the situation. He knew it was sharp to align his interests with China’s. And to further ensure a positive outcome, the Bond King took every opportunity by ranting and raving from his soapbox -- a mighty big soap box -- about how government should be on the lookout for mortgage holders, and how letting mortgage owners suffer would be a travesty.

When news came out that the Fannie and Freddie debt holders would indeed be kept whole (as China demanded and Gross knew would happen), the value of those debt holdings soared, giving Gross a $1.7 billion pop in the value of his fund.

Business Week, 27 Sept 2008 (via Fox44 website)

"Perfect" Bond Asset Class?

Bill Larkin, portfolio manager for fixed income at Cabot Money Management in Salem, Mass., advises people to stay away from Fannie and Freddie debt except for shorter-dated maturities, since the agencies' fate remains to be seen. If they become part of the government, investors will win, whereas if they are broken into pieces, investors will lose because the debt will be much less liquid. He recommends other government agency debt such as that issued by the Federal Home Loan Bank or Ginnie Mae. He also suggests people buy these bonds to hold until maturity instead of buying them to trade them.

Aha!

I said in the previous post that I remembered some US official flying to China last year to flog mortgage-backed securities to them. Found it (13 July 2007) on Bloomberg:

... U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is in Beijing to persuade the Chinese central bank to buy more securities from Ginnie Mae, a corporation under HUD that guarantees $417 billion in federally insured, fixed-rate mortgages.

... Ginnie Mae is ``in a better position than most'' to offer mortgage products because, unlike Fannie Mae and Freddie Mac, it provides the full backing of the U.S. government, Jackson said. Mortgage securities offer China's central bank better returns than U.S. Treasury bonds at the same level of credit risk, he said.

Now the chickens are flying back to roost.

Snap! And crackle...

On Thursday, I noted that, in the last 12 months, America has paid over $400 billion in interest payments on "the debt", AND increased the debt outstanding by around $1 trillion, making a total of $1.45 trillion. (I know I'm adding apples and oranges, but both elements are burdensome obligations.)

Now, noting the drop on the Dow and the cost of rider-bribes to the bailout bill, Karl Denninger is at the fruit-summing game:

Bailout Bill $700 billion
Additional Pork $150 billion
Dow (-484) in 3 hours $600 billion
Total carnage to you, The Taxpayer $1.45 trillion

The government is feeding the woodworms. Mish is convinced that deflation is inevitable ("There has never been hyperinflation in history with falling home prices.")

So you'd be forgiven for thinking, "What's the point in destroying even more money on this bonfire? Cut out and burn the rotten wood first, then rebuild the house."

Not so easy. The situation is especially bad because it's spilling over into international relations. Some American official (I forget who) flew over to China last year to get the Chinese to buy into mortgage-backed securities. Did the US really think a powerful partner would allow itself to be cheated when the package turned out to be rotten? (And didn't the Chinese know that, anyway? Isn't it possible they bought the rubbish because they were confident they could force the US Government to make good on it?)

I would almost say, buy into the packages the Chinese bought; but I expect there are ways to make the Chinese the preferred creditors and stiff everybody else.

Remember that Denninger has been saying recently, buy a good home safe and get your cash out of the bank? Let's see how unreasonable his doomster position turns out to be.

Well, you got what they wanted

The Saviour Bill is passed, and with a sigh of relief, the Dow... DROPS 157 points, as the dealers begin to realize that 200m American taxpayers have shelled-out $3,500 each for nothing at all. Look at the "panic" on Monday when the Bill was thrown out, and the "joy" now.

Financial white-water dead ahead

Jesse reports on an FT article from Wednesday, which suggests that the "hurry-up-and-give-us-$700bn" is to do with the need to renew credit default insurances on Fannie, Freddie and Lehman this month - the first two immediately after this weekend.

Maybe I was right, then, when I thought I saw panic in Hank Paulson's demeanour the other night, as he responded to Congress' rejection of the bailout proposals.

Oh, and London Banker reflects bleakly: "The crash in equities will still happen."

Existing debts and the Bailout Bill

Treasury debt information

If this is the pitch, the answer is "No".

I've just watched Democrat Senator Harry Reid try to sell the revised bailout bill, live on BBC News 24. He may have unfortunate body language, and until this minute I knew nothing about him; but I wouldn't buy a certified gold bar from him for an obviously forged red cent.

He refers to a major insurance company allegedly under threat, and a hypothetical example of a local Nevada bank safeguarded by increased deposit insurance. And as I've been typing this, I've been hearing Senator Hillary Clinton enunciating, in her hectoring, braying, bored voice, all the good reasons why "I" want this, that and the other and so should you.

Maybe they're just the world's worst salespeople, but I don't buy. Sorry.

The $700 billion is to appease foreign investors?

I said in August that I thought powerful foreign creditors would refuse to be cheated, and now Karl Denninger tells us that the $700 billion bailout is to compensate these parties.

And that probably doesn't mean us Brits, either.

Boing!

Dow and FTSE back up again. Thought so. But unlike 1987, I don't think this will be over by Christmas. Bear market rally, don'tcha know?

Super post by Denninger today, too. He points out, among other things, that the Dow started falling yesterday when everyone (himself included) expected the Bill to pass. And as he says, Bernanke upped the money in the system by vast amounts anyway, and it still hasn't fixed the problem. Just how much petrol do you need to throw onto a fire to put it out?

The BBC perspective

After yesterday's "No!" in Congress, BBC "business editor" Robert Peston refers to a "breakdown in the US political system."

To me, it's the very opposite: it's a prewar Lagonda that has spent years with its axles on bricks, and it's just had a new set of tyres put on; after long disuse, the engine has finally turned over. Maybe it will seize up again, but for now there is a hint of democratic accountability.

For example, is it not interesting that more Democrats voted against the Bill, than Republicans for (both as a percentage and in absolute numbers)?

I watched Peston on TV last night and said to my wife, "I should be in front of that microphone." I heard him on the radio this morning and still want his job.

The MSM: one despairs.

Horton heard a Who

Congress just heard from the voters. Let's hope Horton listens closely.