Dr. Roubini, I’m taking the liberty of bringing forward from your last post a discussion thread re: proposed changes to the mission statement of the Fed.    First, thanks to all responders re: the Federal Reserve thought experiment from yesterday’s EcoMonitor post. Some observations about the respondent’s feedback:  a) There was a great deal of diversity of opinion about the actual mission of the Fed. The only thing the answers had in common was the degree of cynicism, and the agreement that maximizing the general welfare was not the Fed’s purpose in life. Rather it was to enhance the welfare of the owners of the Fed (e.g. major banks).  b) Everyone seems to agree that our economic problems stem from mis-allocation of resources (use debt for consumption, wars, etc. – anything but wealth-building purposes)  c) LB mentioned some things that I’d hoped would get more play. In addition to the more mundane function of defending the value of the dollar, he suggested that the Fed prevent banks from taking on too much risk (return to Glass-Steagall constraints), and he went so far as to advocate that the Fed use monetary policy to force Congress to live within its means.  I suggest we springboard off LB’s ideas, and take the fight directly to the problem, which I see as:  1) Resources are being mis-allocated in a colossal way  2) There is no official advocate for the economy – I’m using “economy” in this context as a proxy for the collective economic welfare of the U.S. citizenry.   I propose that the Fed’s role should be changed to this:  a) Educate the public to thoroughly understand what productive behavior is, and its impact on the general economic welfare of the nation. People need to understand the distinction between consumption and production, and to be able to spot and invest in productive activities, whether at the individual, local, state, or national levels  b) Speak out loudly and clearly when the nation’s fiscal, foreign, energy, and environmental policies take us in directions that are economically unsustainable. The Fed should act more like the Supreme Court than the weenies at the FTC. The Fed has the world’s best bully pulpit, but they never use it! The annual State of the Union address should be immediately followed by Fed Chairman commentary about the net economic effect of the President’s proposed policies.  c) Perform the classical monetary functions to maintain a stable value for the currency, etc., etc.  Note the emphasis on public education and policy advocacy. This is what I see as being the most “broken”.   Thanks to all for your thoughtful and timely feedback.   For those that haven’t commented yet, feel free to jump in. Today’s been kind of a slow news day, so maybe there’s some spare CPU cycles available

Professor I still feel you are being insufficiently pessimistic about the chances of a full blown global recession – up above you mention a ‘global near recession’, which seems to me hedging your bets, most unlike you. From the Euro zone (German businees confidence falls), through Japan (yen streghtening, fears of subprime exposure), even to the previously commodity boom insulated Australia (business confidence plunged today), the majority of new data emerging is overwhelmingly bearish. Chindia is slowing now as well – I see recent flotations on the Indian stock market have hit brick walls, which was unheard of just a few weeks ago. I think its time you started beating the global recession drum now…….

 @Octavio: “Lately, we’ve heard a lot about debt excesses. I assert that the debt is not a problem; the problem is what the debt was spent upon (e.g. flat-screen TV .vs. course in advanced thermal design for homes). The point here is not that money was borrowed and spent, but to what effect?”   The danger of debt lies within the Fed’s power to create the money it lends simply by granting bookkeeping credits and to destroy the money by withdrawal, at its discretion.  In this way, a form of national money debt accrues whereby the lender surrenders nothing at all, but which is physically impossible for Americans ever to pay.   Thus, the Fed can undermine all authority with its power of money creation and destruction, carried on in secret for private gain.  Vincent C. Vickers, former director of the Bank of England (1910-1919), in “Finance in the Melting Pot (p.20) wrote, “We have to remember that the value—that is to say, the purchasing power—of money, and consequently the price of goods, can be and has been varied intentionally and deliberately, not by the will or action of the State, but by those individuals who themselves manage and control the money—though they constantly aver that they act for, and on behalf of, the community…  “In consequence of past policy, a farmer who borrowed from his bank, say, in 1920, the money-equivalent of 100 sacks of wheat, might be obliged to sell 200 sacks of wheat a few years afterward in order to repay that same loan, simply because a pound became twice as valuable.”  “Inflation,” as Jeffrey Mark expressed it in “The Modern Idolatry, ”is the web of the financial spider, and deflation the mastication of the human fly.”  Nobody, except dealers in money, profits from the machinery of alternate inflations and deflations.  “The true wealth of a nation,” says Vickers, “does not consist…in the book-entries standing to the credit of merchant bankers. The wealth of the nation lies in its capacity to produce goods and its capacity to consume goods, and its capacity to exchange its surplus goods for necessary importation from other countries.”  Already, much of America’s great wealth has been bartered away. Unfortunately, it lies on the balance books of those who originate and control her volume of money – and thus her every economic operation.  

http://tinyurl.com/3c2ztr Feb. 11 (Bloomberg) — Bank of America Corp., Citigroup Inc. and four other lenders will announce new steps tomorrow to help borrowers in danger of default stay in their homes, according to three people familiar with the plans.  The banks will offer, on a case-by-case basis, a 30-day freeze on foreclosures while loan modifications are considered, two people said on condition of anonymity.   More buying time, hoping for a miracle so everything just goes back to the way it was

 @London Banker (previous thread) re OuterBeltway’s challenge to: a) define current mission, and b) re-define mission, of Fed. You said: “(a) The current mission of the Fed is to privatize profits and socialize losses to the maximum benefit of the entitled elites, hypothecating the maximum wealth from all other classes of Americans.    (b) If the Fed were to have a mission of serving the interests of a maximum of US citizens, its top three objectives would be: (1) Preserve the credibility and purchasing power of the dollar to attract and retain foreign credit and investment flows and provide a predictable basis for domestic investment decisions; (2) Apply prudential supervision and regulation to reinforce traditional banking constructs such as tying finance to the productive use of that finance to promote repayment of the debt and the general economic welfare; enforcing lending parameters which reward prudence, caution and productive use of credit; and limiting the scope for conflicts of interest and contagion arising from intermingling of commercial banking with investment banking and other speculative enterprise; and (3) Promote fiscal discipline by using the levers of monetary policy to offset imprudence and poor judgement of the Executive and Legislative branches by hiking interest rates when deficit spending exceeds small, temporary imbalances to restore fiscal discipline.”   First, let me say, I wish you were running for president.  Second, given the fact that the best of men cannot long resist temptation to benefit at the expense of their neighbors if the occasion is put squarely before them, I put forth these monetary changes-–differing in that they take money control out of the hands of the Fed’s private bankers. They are paraphrased from Vickers’ direction of future policy for England just before he died in 1942, never implemented:  a. State control and issue of currency and credit by the U.S. Congress (as stipulated in the U.S. Constitution),  b. A fixed and constant internal purchasing power of money, so that a dollar buys tomorrow what it buys today,  c. Any additional supply of money issued as a clear asset to the State; so that money is spent into existence, not lent into existence,  d. The elimination of slumps and booms,  e. The abolition of the Debt System where all credit is created by the banks and hired out at interest to the country,  f. Absolute State control over all foreign lending; and the adoption of the general principle that America’s foreign trade should be conducted to preserve1) the interest of the Home Market, and 2) the interest of Foreign nations, particularly in Home production and foodstuffs.  

A downgrade of the monolines will never happen. It’s too dangerous and destructive to allow. I feel as confident in saying that as I do in saying that despite all Democratic rhetoric to the contrary,the troops in Iraq are never coming home-that is to say we will maintain a military presence in the region for many, many years to come.

More fictitious capital here set for destruction I would say.  The risks associated with monoline failure are now only starting to be publicly discovered. This article below points to some very cute and dark accounting practices that have clearly inflated Bank earnings in recent years and along with it many Wall St and City bonuses. How convenient? You can be sure that behind the curtain the Banksters are screaming for a “socialize the losses” solution to this neutron bomb.  Negative Basis Trades: Far Worse for Banks than Monolines  This appears to be another example of far more pain to the commercial and investment banks than the monoline insurers themselves. The banks would potentially have to reverse profits on “sure-thing” bets they took in previous years.  First the banks buy safe long-term (often 25 year) utility and infrastructure bonds. The banks buy default insurance from one monoline insurer. This is called getting the bond wrapped to support a triple-A rating. Then for extra measure the banks pay a second monoline insurer to backup the first. All this for less than the interest the bonds pay. All parties view this as a nearly risk-free and the banks book the entire profit upfront. The trouble comes to the banks if or when the monoline insurers lose their triple-A ratings. The insurance the banks purchased would be considered ineffective, and the banks would have to reverse the previously taken upfront profit.”  http://seekingalpha.com/article/64032-negative-basis-trades-far-worse-for-banks-than-monolines 

The lie of debt, put clearly in terms I’m sure we all understand. A good read for where things are now and can be in future.;     Ending the debt delusion  The US economy must enter a new paradigm of productivity and demand that is tied to wages, not debt By Thomas Palley  Tuesday, Feb 12, 2008, Page 9         A second big interest-rate cut in a fortnight, along with an economic stimulus plan that united Republicans and Democrats, demonstrates that US policymakers are keen to head off a recession that looks like the consequence of rising mortgage defaults and falling home prices.  But there is a deeper problem that has been overlooked: The US economy relies upon asset price inflation and rising indebtedness to fuel growth.  Therein lies a profound contradiction. On the one hand, policy must fuel asset bubbles to keep the economy growing.  On the other, such bubbles inevitably create financial crises when they eventually implode.  This is a contradiction with global implications. Many countries have relied for growth on US consumer spending and investments in outsourcing to supply those consumers. If the US’ bubble economy is now tapped out, global growth will slow sharply. It is not clear that other countries have the will or capacity to develop alternative engines of growth.  The US’ economic contradictions are part of a new business cycle that has emerged since 1980. The business cycles of presidents Ronald Reagan, George H.W. Bush, Bill Clinton and George W. Bush share strong similarities and are different from pre-1980 cycles.  The similarities are large trade deficits, manufacturing job loss, asset price inflation, rising debt-to-income ratios and detachment of wages from productivity growth.  The new cycle rests on financial booms and cheap imports. Financial booms provide collateral that supports debt-financed spending. Borrowing is also supported by an easing of credit standards and new financial products that increase leverage and widen the range of assets that can be borrowed against. Cheap imports ameliorate the effects of wage stagnation.  This structure contrasts with the pre-1980 business cycle, which rested on wage growth tied to productivity growth and full employment. Wage growth, rather than borrowing and financial booms, fueled demand growth. That encouraged investment spending, which in turn drove productivity gains and output growth.  The differences between the new and old cycle are starkly revealed in attitudes toward the trade deficit. Previously, trade deficits were viewed as a serious problem, being a leakage of demand that undermined employment and output. Since 1980, trade deficits have been dismissed as the outcome of free-market choices. Moreover, the Federal Reserve has viewed trade deficits as a helpful brake on inflation, while politicians now view them as a way to buy off consumers afflicted by wage stagnation.  The new business cycle also embeds a monetary policy that replaces concern with real wages with a focus on asset prices. Whereas pre-1980 monetary policy tacitly aimed at putting a floor under labor markets to preserve employment and wages, it now tacitly puts a floor under asset prices. This is not a matter of the Fed bailing out investors. Rather, the economy has become so vulnerable to declines in asset prices that the Fed is obliged to intervene to prevent them from inflicting broad damage.  All these features have been present in the current economic expansion. Wages have stagnated despite strong productivity growth, while the trade deficit has set new records. Manufacturing has lost 1.8 million jobs. Prior to 1980, manufacturing employment increased during every expansion and always exceeded the previous peak level.  Between 1980 and 2000, manufacturing employment continued to grow in expansions, but each time it failed to recover the previous peak. This time, manufacturing employment has actually fallen during the expansion, something unprecedented in American history.  The essential role of asset inflation has been especially visible as a result of the housing bubble, which also highlights the role of monetary policy. Despite the massive tax cuts of 2001 and the increase in military and security spending, the US experienced a prolonged jobless recovery. That compelled the Fed to keep interest rates at historic lows for an extended period, and rates were raised only gradually because of fears about the recovery’s fragility.  Low interest rates eventually jump-started the expansion through a house price bubble that supported a debt-financed consumer-spending binge and triggered a construction boom. Meanwhile, prolonged low interest rates contributed to a “chase for yield” in the financial sector that resulted in disregard of credit risk.  In this way, the Fed contributed to creating the subprime crisis. However, in the Fed’s defense, low interest rates were needed to maintain the expansion. In effect, the new cycle locks the Fed into an unstable stance whereby it must prevent asset price declines to avert recession, yet must also promote asset bubbles to sustain expansions.  So, even if the Federal Reserve and US Treasury now manage to stave off recession, what will fuel future growth? With debt burdens elevated and housing prices significantly above levels warranted by their historical relation to income, the business cycle of the last two decades appears exhausted.  It is not enough to deal only with the crisis of the day. Policy must also chart a stable long-term course, which implies the need to reconsider the paradigm of the past 25 years. That means ending trade deficits that drain spending and jobs, and restoring the link between wages and productivity. That way, wage income, not debt and asset price inflation, can again provide the engine of demand growth.   Thomas Palley is a former chief economist at the US-China Economic and Security Review Commission.  http://www.taipeitimes.com/News/editorials/archives/2008/02/12/2003400959   

The dynamic of asset inflation and indebtedness may be coming to an end. Housing is the most widely held asset. I can’t see another widely held asset to inflate. But if this dynamic is over, what is the next one? A healthy dynamic is the classic manufacture, save and invest. But our manufacturing capacity has been dismantled, and won’t reaappear so easily (if at all). Research, innovate, patent? Other countries are turning out more scientistsand engineers, and so we may not be so competitive in this dynamic. Can we devalue the dollar, level the trading playing field and rebuild our manufacturing capacity?   Jason B

@gsm in the long run, we are all dead..

Don’t forget to check out Hussman’s weekly comment.   Comment on coming wave of audited financial statements for companies closing their fiscal year on 12/31 (e.g., AIG yesterday).  Comment on recent DOW transport strength.  Comment on coming recession (milder than most of us expect)  Comment on how bear markets feel like using the one that started in 1973 as an example    Watching for Audit Delays and “Qualified” Opinions   http://www.hussman.net/wmc/wmc080211.htm

@ Outerbeltway;  In reading Palley’s piece I was struck by the time frames involved. China’s opening and modern development kicked off in the early-mid 80′s, just after the big global 80-82 recession period. I remember that recession well, the first in my working life. From the early 80′s recession, Palley notes recoveries have been increasingly more anemic than prior recoveries, with high paid quality US based jobs diminishing as each successive recession reinforced the trend to globalization.   Globalization , poor wage/salary growth, loss of manufacturing jobs and the rapid growth of debt are all linked. Clearly.  In answer to your questions; ”Resources aren’t being allocated to the most productive places. Why the mis-allocation? Why?”  ……. perhaps the resources are being productively allocated, just elsewhere. The big corps are , through the liberaty provided by globalization (and DEregulation) allocating the resources overseas – elsewhere. Where the returns are better ,faster and easier? What is being increasingly allocated to the developed economies is access to what has been passed off as cheap credit and debt. Now it seems it was not so cheap- there IS a significant price to pay after all. It may not be in the interest rate but payment exacted nonetheless. In the form of stagnant wages/salaries, loss in manufacturing jobs etc.  It would seem that far too much freedom has been allowed by TPTB to the corporates and the banks, resulting in the hollowing of the US economy.Chasing the quick buck. Globalization can be seen to have not been sufficiently balanced in providing enough protection to the US economy and its majority of stakeholders- those employed in the US economy- but rather to a relative few. Who are they?- well the financial industry now makes up some 25% of the SP500 weighting- I believe it was below 12% in the 80′s.That is a clue.  Globalization cannot be turned back. It is too late. But, if the mission is to rectify the imbalance of resource allocation to where they are most productive for the benefit of the nation, then the corporations seeming limitless powers and ability to shift productive capacity offshore with impunity needs addressing. Better wages and salaries means better living standards. The developed world knows that. Higher levels of debt means LOWER living standards ultimately- as Palley so eloquently points out.  In some ways the developed world has been conned.By just how much I think we are finding out. 

 Will Buffet’s offer to prop up the monolines break the negative cycle, or alternatively make everyone realise just how bad things are?

What’s Buffet’s angle?  What does he know that we don’t?  Is it may be a horsesh!t offer that none are willing to take. (but meanwhile Buffet has spread his money across the finance industry? …especially to places that have been hit by the monolines???)  The offer alone pumps the market for the day?  My view… I’d expect a nervous run up, with a bit of a sell at days end. It will run fast and far though!   Damn do I want to see the details of this offer!?!?!?!  Rich H 

@Octavio, thanks for this link – http://www.hussman.net/wmc/wmc080211.htm  i guess we are just one quarter pass the bear market…   [As I wrote in April 2000, bear market psychology typically evolves something like this:  "This is my retirement money. I can't afford to be out of the market anymore!"  "I don't care about the price, just get me in!!"  "It's a healthy correction"  "See, it's already coming back, better buy more before the new highs"  "Alright, a retest. Add to the position - buy the dip"  "What a great move! Am I a genius or what?"  "Uh oh, another selloff. Well, we're probably close to a bottom"  "New low? What's going on?!!"  "Alright, it's too late to sell here, I'll get out on the next rally"  "Hey!! It's coming back. Glad that's over!"  "Another new low. But how much lower can it go?"  "No, really, how much lower can it go?"  "Good Grief! How much lower can it go?!?"  "There's no way I'll ever make this back!"  "This is my retirement money. I can't afford to be in the market anymore!"  "I don't care about the price, just get me out!!"]   mrskeptical

Why is the futures up on the buffet news???…   Buffet’s offer to buy the profitable portfolio for 5bil… which will be gulped down by the subprime losses… these bond insurers are doomed for sure…   also new muni bonds will go to buffet, starving these bond insurers of good/profitable risks…   whats mr market thinking??!!   mrskeptical

alot of short covering going on

A little argument for the decoupling side:  http://online.barrons.com/article/SB120251567080555245.html?mod=yahoobarrons&ru=yahoo  Nouriel, I also wonder if you give adequate weight to productivity and technology expertise in the US. I recently moved from one high tech job to another, from Dallas to Atlanta. Neither city is suffering the drastic housing recessions of more bubbly areas. Demand for media, broadband, IT, telecom and internet technology will continue to support the global economy and infrastructure. Still, I believe you’ve accurately identified the strongest economic forces and headwinds in a macro sense. But have you seriously considered the unexpected, hard to predict effects of productivity and technology, much of which is created in the US, and how it will play out in the months to come? 

Perhaps the Buffet buyout is setting the stage for the ultimate demise of the monolines. There are varying estimates on what effect the implosion of the monolines would have on the ability of municipalities to raise and service debt. Everyone knows the monolines are doomed, yet the municipal bond portion of their business appears to be sound. Why throw the baby out with the bathwater?  Buffet is exploiting the situation like any good capitalist would, but he is also providing a service by saving the viable portion of the bond insurance business from destruction. Municipalities are going to need the ability to raise more debt when their tax receipts plunge due to the recession.

@GSM:  Good points all. Here’s some feedback:  Yes, much of the foreign investment in BRIC nations came from the U.S. No doubt. But look at the run-up in debt at all levels in the U.S. – and a lot of that debt is held by foreigners. We have had a perfectly enormous amount of the world’s savings lavished upon us this past two decades.  You make the point that globalization resulted in major job loss (still not done yet, either) for the U.S. – I agree. Long ago, when I was in college, my intnl econ prof predicted that the principle of comparative advantage would eventually work to disperse wealth (relatively) evenly around the world. He was right; it is, and it will.   The question returns to “what now for the U.S.?” Ride the curve down to the point of income equilibrium, or invent some new rules for a game we can win?  I’m advocating a whole new game, with new rules.   The game’s got two sides, which any turnaround specialist will instantly recognize: wring out the waste (cut costs and quit digging the hole we’re in) and concentrate all functional thrusters on new products and new markets (build the ladder out of the hole).  There is no shortage of possible “sunrise industries” for the U.S. This is mainly an imagination and an execution problem. The imagination aspect is the toughest one, apparently, since I hear nothing from our so-called leaders about this topic…and you’d think they’d bring up the point when they were campaigning recently in … Michigan, for example.  But, one must not fall into the mental trap of expecting others to do one’s thinking. GSM, if you’re still with me on this, I’d like to hear back from you, and any others that have opinions, about which sunrise industries we select (what is the principle we’re following here) and how do we use (pick your technique here) to marshal the nation’s movers and shakers upon it?  For now, ignore the fact that whatever we do, other nations are already/will soon do, too. We’ll deal with the competitive situation next, but separately. 

 @ OuterBeltway: “There was a great deal of diversity of opinion about the actual mission of the Fed…. (If you were to re-define their mission… [previous thread])”    A racket re-defined is still a racket.  The problem is a chap has to be big to work the Big Time. And he don’t take to no re-definin’.  Some of these big guys have been a part of the financial underground for years, i.e. Goldman Sachs. Writes Ben Stein in The New York Times December 2, 2007: “From what I have observed over the years, Goldman has a fascinating culture. It is sort of like what I imagine the culture of the K.G.B. to be…”   http://www.nytimes.com/2007/12/02/business/02every.html?pagewanted=all Says Stein:  …More thoughts came to me as I read a recent piece in Fortune by my colleague Allan Sloan, a veteran financial writer. Mr. Sloan traces the life and death throes of a Goldman Sachs-arranged collateralized mortgage obligation. He shows how truly toxic waste was sold to overly eager investors who now have major charge-offs, and he also points out that some parts of the C.M.O. were indeed safe and were either current or had been paid off.  But what leaps out at me from this story is that Goldman Sachs was injecting dangerous financial products into the world’s commercial bloodstream for years. My pal, colleague and alter ego, the financial manager Phil DeMuth, culled data from a financial Web site, ABAlert.com (for “asset-backed alert”), that Goldman Sachs was one of the top 10 sellers of C.M.O.’s for the last two and a half years. From the evidence I see, Goldman was doing this for years. It might have sold very roughly $100 billion of the stuff in that period, according to ABAlert. Goldman was doing it on a scale of billions even when Henry M. Paulson Jr., the current Treasury secretary, led the firm.   The Goldman spokesman would not comment on this except to note that other firms sold C.M.O.’s too.  The point to bear in mind, as Mr. Sloan brilliantly makes clear, is that as Goldman was peddling C.M.O.’s, it was also shorting the junk on a titanic scale through index sales — showing, at least to me, how horrible a product it believed it was selling.  The Goldman Sachs spokesman said that the company routinely shorts the securities it underwrites and said that this is disclosed. He noted candidly that Goldman is much more short in this sector than usual.   From what I have observed over the years, Goldman has a fascinating culture. It is sort of like what I imagine the culture of the K.G.B. to be. You always put the firm first. The long-ago scandal of the Goldman Sachs Trading Corp., which raised hundreds of millions just before the crash of 1929 to create a mutual fund, then used the fund’s money to prop up the stocks it owned and underwrote, was a particularly sad example. The fund, of course, went bust…  Here is a query, as we used to say in law school: Should Henry M. Paulson Jr., who formerly ran a firm that engaged in this kind of conduct, be serving as Treasury secretary? Should there not be some inquiry into what the invisible government of Goldman (and the rest of Wall Street) did to create this disaster, which has caught up with some Wall Street firms but not the nimble Goldman? 

 @London Banker: “It is more accurate to say that the leadership of both parties in the United States and the vast majority of political appointees in any US administration are corrupt under the current system… Not all public servants are corrupt. Not all political systems are corrupt. If they were, you would be wrong to wish me president as I would just turn as corrupt as the worst of the current lot…” .   That’s it in a nutshell.  As to the latter, I contend you don’t know yourself. I think you would be a representative, a statesman. You have that rarity few have – an open mind with a sense of justice. It enables you to evaluate all sides.  But, if as you say, you’d “turn as corrupt as the worst of the current lot,” at least you’d be an honest crook.  

Ken Lewis if B of A is complaining of all the “Jingle Mail” he is receiving.He says there “is a change in social attitudes towards default”. Maybe he should have thought about this when he was filling our mailbox with new credit cards every week. http://jtaplin.wordpress.com/2008/02/12/jingle-mail/

Gentlemen: I have seen no discussion of The Telegraph article by Ambrose Evans-Pritchard and the possible 300 billion in subprime securities held by Japanese banks! If this  is true, then the BOJ will lower rates in GROUNDHOG DAY STYLE. Let us suppose it is true and BUFFETTT is handed the municipal bond insurance market, and the monolines are allowed to go bankrupt on the CDS. The monolines were probably insuring the Japanese bank CDOs and the Japanese Banks will deal with their losses in their own way! I know there is also an issue of commercial, credit card, auto, and other CDS, but I assume the Japanese have some of that too! IF(BIG IF)this is true, then the investment banks may have less exposure than we thought! I think the markets are moving in response to Buffett and Evans-Pritchard! I am an  EMPIRICAL SKEPTICIST and I welcome criticism to falsify my dubious thesis!

It will be interesting to see whether the US does actually escape from a Japan-style trap or worse. I am not so sure it will. There is a strong constituency who believe that had the bad debts been written off quickly by the Japanese financial system, the 15-year period of stagnation and deflating asset prices would have been avoided. My own view is that the Japanese managed to keep their financial system intact in the face of a literal collapse in asset prices (equities and real estate). If the banks had been forced to write off their bad debts I am sure some would have gone under, precipitating something even worse. My understanding of Japan was that as fast as the banks wrote off bad debts/loan losses new ones appeared as asset markets continued to fall. So in essence they were playing catch-up rather than simply camouflaging their losses. Anyway, now is what might be called the supreme test of the idea that the best thing if for financial institutions to come clean and that in so doing they will lay the basis for an eventual recovery (though it may be a year or more in the future).   

Get ready for a full court press to support the dollar and gin up the US economy for the election season. The IMF announced that it will be selling some of its gold reserves, possibly as soon as April. The G7 economic ministers must have decided that competitive devaluations against the sinking dollar were getting them nowhere, and tanking the gold price provided a better alternative (as they have done before).   This will pretty much put an end to the gold boom over the summer, which was topping out anyway as Chinese and Indians stopped buying so much – preferring electrical goods to jewelry like everyone else. The gold price normally bottoms out each year in August.  If Bush’s Saudi buddies bring down the price of oil over the summer going into the election too, as they generally do in election years, we could see some dollar strength return for a while.  I appreciate this is inconsistent with what I said a couple days ago, and I still believe the dollar is on a long trip down, but election years are always full of irrational and inexplicable aberrations – like the election of Bush twice for example.

IMHO, more than anything, this stupid piece of news is what is driving the market today:  Fed’s Poole Says `Best Bet’ Is Economy Will Avoid a Recession   By Vivien Lou Chen and Anthony Massucci  http://www.bloomberg.com/apps/news?pid=20601068&sid=aRRQAwJ.LKQY&refer=economy  and this one second:  German February Investor Confidence Unexpectedly Rose (Update3)   By Christian Vits  http://www.bloomberg.com/apps/news?pid=20601068&sid=aZOw2TmMwLgg&refer=economy  But then again, the market was a bit oversold. Smart people (long and short) will sell into this rally.

 @Outer Beltway: “Long ago, when I was in college, my intnl econ prof predicted that the principle of comparative advantage would eventually work to disperse wealth (relatively) evenly around the world. He was right; it is, and it will..”   Paul Craig Roberts in “Offshoring Interests and Economic Dogmas Are Destroying the US Dollar” says U.S firms are in pursuit of absolute advantage, not comparative advantage at home.  http://www.vdare.com/roberts/071211_offshoring.htm  Says Roberts:   …for many economists free trade has become an ideology, and they have ceased to think.  Such economists have become insouciant shills for the offshoring interests that fund their research and institutes. Their interests are tied together with those of the offshoring corporations.  Free trade economists have made three massive errors:  1. they confuse labor arbitrage across international borders with free trade when nothing in fact is being traded,    2. they have forgot the two necessary conditions in order for the classic theory of free trade, which rests on the principle of comparative advantage, to be valid, and    3. they are ignorant of the latest work in trade theory, which shows that free trade theory was never correct even when the conditions on which it is based were prevalent.   When a US firm moves its output abroad, the firm is arbitraging labor (and taxes, regulation, etc.) across international borders in pursuit of absolute advantage, not in pursuit of comparative advantage at home. When the US firm brings its offshored goods and services to the US to be marketed, those goods and services count as imports.   David Ricardo based comparative advantage on two necessary conditions: One is that a country’s capital seek comparative advantage at home and not seek absolute advantage abroad. The other is that countries have different relative cost ratios of producing tradable goods. Under the Ricardian conditions, offshoring is prohibited.   Today capital is as internationally mobile as traded goods, and knowledge-based production functions have the same relative cost ratios regardless of the country of location. The famous Ricardian conditions for free trade are not present in today’s world…  While free trade economists hold on to their doctrine-turned-ideology, the US dollar and the American economy are dying… 

@ Guest on 2008-02-12 12:52:35  Long ago when I was at university, my free market economics professor assured us that in theory terms of trade benefitted developing countries by offering them export markets for their labour and resources. When I pointed out that reality had consistently impoverished developing countries with higher levels of external debt (this was just as the Third World Debt Crisis was getting rolling), I was told that result was due to “exogenous variables”. I wrote at the top of my notes: “Reality is an exogenous variable.”  With all due respect to the Professor and his colleagues, that note still seems to sum up the disconnect between theory and observation. 

London Banker: I wrote at the top of my notes: “Reality is an exogenous variable.”  LOL! Looks like a long lasting lesson, I’ll sure keep it as one.  BTW, having a background in theoretical Physics, I can tell you Economics is not the only discipline disrupted by those nasty ‘exogenous variables’.

@LB   re “Reality is an exogenous variable.” You nailed it and I found my motto.

Who thinks the Buffett offer to monolines today is THE “bailout plan” that Dinallo, et al have been working on? Or is there more to come from them? If there is another plan that has been agreed to, would Buffett step in front of it? I am thinking he would not.  Also, if this is the sum total of the plan, then the stock market is in deep trouble, soon, when the reality sinks in that the monolines will lose their AAA ratings and, therefore, more bank losses are in the offing.  Thoughts? 

Mish said: “A bear market rally is like a shark. If it stops… it dies.”

“A little bit of inflation is a good thing, because it acts as a tax on idle money. It persuades people not to leave their cash under the mattress or in low-interest accounts, but to put it to productive work.”   so a “jobless recovery” was productive?  

 Steven M. Sears on Barron’s Feb. 8 column “Shorting John and Jane Consumer”   http://online.barrons.com/article/SB120242231658751779.html?mod=9_0039_The  Wal-Mart Stores said Thursday that gift cards received for Christmas were redeemed for household staples. Think food, diapers and laundry detergent. Fancy electronics stayed in the store. In many towns, Wal-Marts also contain grocery stores, so imagine the choices people make. They walk right past all the displays for sporting goods and electronics and push their carts to aisles filled with goods to sustain basic needs.  Wal-Mart’s January sales were below expectations, but strength was reported in grocery, health and wellness categories.  Gift-card redemptions were below expectations. Wal-Mart said people are holding the cards longer, and using them more often for “food and consumables rather than discretionary purchases.” As the biggest retailer around, this observation tucked into the January sales report is a valuable data point. 

whose idea was the cashless society?

I knew Buffett’s offer was bogus even before seeing the details!  I said the market would balloon on that news alone, …but then deflate by days end. (At 9am, the was REEEEAALLY BAD news across the board)   Midday while the markets were up 1.75% (I said DOW would go negative in it’s downturn), The DOW never reached that plateau, but the broader S&P actually breached the negative mark at 3:30. …and NASDAQ actually finished negative. I’m not 100% sure on what kept the DOW from following the same % path as the S&P, but either way I’m pretty fine my interpretations. (I give myself a silver star for the day.)  So how or why, did the Blue Chips avoid the trend fate of the S&P and NASDAQ? Buffett? (I don’t think so… the market saw through this) I believe there was something else in Blue Chip world that didn’t reach the general public!  Hmmmmmmmm…….  Rich H 

WATCH THE PAULSON VIDEO>>>>> S C A R Y !!!!!! its the 2nd one. the first one is also of concern  http://calculatedrisk.blogspot.com/2008/02/is-bofa-willing-to-write-down-loans-30.html

Rich H, I wish I would of sold more out at the top per your call. However, have to keep somewhat balanced at all times. I am looking at the Dow… This is a long shot, BUT does anyone know where real-time LCDX information may be obtained intra day ? The markit site gives a midday and final update only. This would be GREATLY appreciated ! It is probably a feed you have to subscribe to receive…

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