The Coming Systemic Bust of the U.S. Banking System: “Dead Stocks Rallying”

Author: Nouriel Roubini · July 20th, 2008 · 2530532008-07-20+19%3A45%3A20Nouriel+Roubini › Share This Print

This past week started with concerns about another systemic meltdown of the U.S. financial system as the insolvency of Fannie and Freddie was revealed and as Indy Mac went bust (this is the third largest bank collapse in U.S. history). But the week ended with a remarkable rally of financial stocks as better than expected results from Wells Fargo, JP Morgan and Citi soothed the fears that major financial institutions were in even more distress than already predicted by market analysts.

Unfortunately, this massive rally of financial stocks in the latter part of the week is just another temporary bear market rally that will fizzle away once the onslaught of bad financial and macro news builds up again.

The views I presented in a recent blog that we will experience a severe financial and banking crisis received the support of many well respected commentators. Alan Abelson – at Barron’s – is one of the most senior and well known commentators on financial issues and on Wall Street. In his latest Barron’s column – aptly titled “Dead Stocks Rallying” he wrote:

WHY WE’RE STILL BEARISH WAS SPELLED out starkly in a dispatch we received last week from Nouriel Roubini. Nouriel is a professor of economics at NYU Stern School of Business (but don’t hold that against him) and runs an economic advisory firm called RGE Monitor that casts a knowing and clear eye on the global financial and economic scene. We think he’s top-notch (which means we agree with him, a lot of the time).

The nub of his argument is that we’re suffering the worst financial crisis since the Great Depression, and he proceeds to give chilling chapter and verse. He predicts that hundreds of small banks loaded with real estate will go bust and dozens of large regional and national banks will also find themselves in deep do-do.

He reckons that, in a few years, there’ll be no major independent broker-dealers left: They’ll either pack it in or merge, victims of excessive leverage and a badly flawed and discredited business model.

The Federal Deposit Insurance Corp., after it gets through picking up the pieces of IndyMac, will sooner or later have to get a capital transfusion, Nouriel asserts, because its insurance premiums won’t cover the tab of rescuing all the troubled banks. He foresees credit losses ultimately reaching at least $1 trillion and anticipates a heap of woe for credit purveyors across the board.

The poor consumer, he contends, is shopped out and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation. The recession he anticipates will last 12 to 18 months. And the rest of the world won’t escape: He looks for hard landings for 12 major economies. As for the stock market, he hazards that there’s plenty of room left on the downside. In fact, he feels the bear market won’t end until equities are down a full 40% from their peaks.

We must say this vision is a mite too apocalyptic even for us. But Nouriel is not a professional fear-monger out to make a splash with end-of-the-world prognostications He’s a sound guy with a solid record and an impressive résumé. We obviously believe his views are worth pondering, even if they ruin your appetite.

That was a very nice summary by Abelson of my views and a kind endorsement of them.

But how to square the views that a large fraction of the US financial system is in trouble with the apparently better than expected earnings results and lower than expected writedowns presented by financial institutions such as Wells Fargo, JP Morgan and Citi that led to the financials’ stocks most recent rally? There are many reasons why those earnings results are misleading and cosmetically retouched upward while the true financial conditions of the financial system are more dire than otherwise presented.

Let us discuss next in some detail the various reasons why financial conditions of financial firms and banks are much worse than those headline figures and why we the US will experience a systemic financial crisis…

First of all, in a week when only a massive and open ended bailout rescued Fannie and Freddie, when IndyMac went bust and when Merrill presented much worse than expected results it is very hard to be optimistic about the health of the US financial institutions. Reports in the next few days will reveal whether reality is closer to Fannie/Freddie/IndyMac/Merrill or rather closer to the Citi/JPMorgan/Wells Fargo outlook.
Most financial institutions are putting increasing numbers of assets in the illiquid buckets of Level 2 and Level 3 assets. While FASB 157 should prevent manipulation of the valuation of such illiquid assets, forbearance by the SEC, the Fed and other regulators allows a massive amount of fudging. An insider told me that in a major financial institution the approach is as follows now: top management decide in advance what the announced writedowns should be and folks dealing with the toxic/illiquid assets come up with totally ad hoc assumptions to make sure that such illiquid assets are valued consistently with the decided-in-advance amount of writedowns and losses. This is not earnings smoothing; this is active manipulation and falsification of financial results aimed at creating even more obfuscation of the true state of financial institutions. This obfuscation is actively abetted by the SEC, the Fed and all other regulators that are now in forbearance crisis management stage where the objective is to avoid at any cost anything that may trigger a financial meltdown. Thus, most of these earnings reports are not worth the paper they are written off.
This earnings manipulation occurs in a variety of ways. First, ad hoc assumptions still used to value and write down level 2 and level 3 assets. Second, banks are leaving aside less reserves for loan losses that are much less than necessary; they do that by using ad hoc assumptions about future losses on mortgages, credit cards, auto loans, student loans, home equity loans and other commercial real estate loans and industrial and commercial loans. Reserves for loan losses have been sharply lagging actual and expected losses, thus padding earnings as decided by the financial institutions’ managers. Third, there is disposal of illiquid and toxic assets in ways that misleadingly reduces the amount of actual writedowns. An example is as follows: suppose a bank wants to dump illiquid MBS or leveraged loans that are worth – mark to market – 70 cents on the dollar rather than 100 cents on the dollar. Then, instead of selling these at a price of 70 and showing a 30% writedown these are sold to hedge funds and other investors to a price closer to par – and thus showing in the balance sheet a smaller writedown – by providing a subsidy to the buyer of the security: so a hedge fund will buy such toxic securities at 80 or 90 cents and receive a loan to finance the transaction at an interest well below the borrowing costs for the funds. Thus, writedowns are then shown smaller than the true underlying loss on the asset and the bank finances that fudged transaction with earning less revenues than otherwise on its credit portfolio. This is an accounting scam- bordering on the criminal – that auditors and
regulators are abetting on a regular basis.
The bailout plan of Fannie and Freddie implies a direct bailout of financial institutions and helps them to report better than expected earnings in two ways. First, since these financial institutions hold massive amounts of agency debt the government bailout of the holders of such unsecured debt props the market price of the agency debt (reduces its spread relative to Treasuries) and thus allows financial institutions and investors to report less mark to market losses on the values of such assets. Second, after the bust of subprime, near prime and prime mortgage markets the market for private label MBS is dead with absolutely no origination of new MBS. Thus, today – as senior mortgage market participant put it – Fannie and Freddie are “THE mortgage market” as the only institutions that securitize and guarantee mortgages are Fannie and Freddie. Without the government bailout plan that last channel for mortgage securitization and insurance would be frozen and the ability of banks to originate even prime and conforming mortgages would be serious hampered and its cost sharply increased. Thus, the Fannie and Freddie bailout is actually a bailout of the mortgage market and of every institution that holds agency debt or the MBS issued by the two GSES and of every institution that is in the mortgage origination business. On top of this Fannie and Freddie have also been used as tools of public policy in order to further grease the mortgage market and the banks originating mortgages: their portfolio limits were increased; their capital requirement reduced; and the limit for what a conforming loans – the only ones that Fannie and Freddie can securitize – increased from about $420K to over $720K.
The Fed has been actively beefing up the earnings and balance sheet of financial institutions in four major ways. First, a 325bps reduction in the Fed Funds rate sharply reduced the cost of borrowing for banks and allowed them to enjoy a nice intermediation margin (the difference between longer terms interest rates at which they lend and the much lower short term interest rates at which they borrow). This steepening of the yield curve is a major subsidy to financial institutions. Second, the Fed has created a range of new liquidity facilities – the TAF, the TSLF, the PDCF – that allow banks and now non-bank primary dealers to swap their illiquid toxic asset backed securities for liquid Treasuries and that provide access for non-banks – and now also Fannie and Freddie – to the Fed’s discount window liquidity. Third, the bailout of Bear Stearns creditors – JP Morgan and many other counterparties of Bear – not only avoided a systemic meltdown and a certain run on the other broker dealers but it has led the Fed to take on a significant credit risk by taking off the balance sheet of Bear Stearns over $29 billion of toxic securities. So the Fed has directly and indirectly systemically subsidized and propped up the financial system and the earnings of bank and non-bank financial institutions. Fourth, a variety of forbearance regulatory actions – starting with the waiver of Regulation W for some major banks – have been used to beef up the profits and earnings of financial institutions and reduce their reported writedowns.
The entire Federal Home Loan Bank system – another GSE system that is another effective arm of the government – has been used to prop hundreds of mortgage lenders. The insolvent Countrywide alone received more than $51 billion of funds from this semi-public system. This is a system that has increased its lending in the last 18 months by hundreds of billions of dollars: Citigroup, Bank of America and most other US mortgage lenders have also been beneficiaries of this public subsidy to the tune of dozens of billions of dollars each.
In 1990-91 at the height of that recession and banking crisis many major banks – in addition to 1000 plus S&L’s that went bust – were effectively insolvent, including, as it was well known at that time, Citibank. At that time the Fed and regulators used instruments similar to those used today – easy money and steepening of the intermediation yield curve, aggressive forbearance, creative – i.e. liar – accounting, etc. – to rescue these major financial institutions from formal bankruptcy. But at that time the housing bust and the ensuing decline in home prices was much smaller than today: during that recession home prices – as measured by the Case-Shiller/S&P index – fell less than 5% from their peak. This time around instead such an index has already fallen 18% from its peak and it will most likely fall by a cumulative 30% before it bottoms sometime in 2010. If a 5% fall in home prices was enough to make Citi effectively insolvent in 1991 what will a 30% fall in home prices – and massive defaults on many other forms of credit (commercial real estate loans, credit cards, auto loans, student loans, home equity loans, leveraged loans, muni bonds, industrial and commercial loans, corporate bonds, CDS) – do to these financial institutions? It challenges the credulity of even spin masters to argue that financial firms are not in worse shape today than they were in 1990-91 when a significant number of major banks were technically insolvent. So, not only hundreds of small banks and a significant fraction of regional banks but also some major money center banks will become effectively insolvent during this crisis.
In spite of the headline figures that showed better than expected earnings at some major financial institutions – Citi, JPM, Wells Fargo – the details were utterly ugly. For one thing, Merrill announced massive writedowns and losses that were much worse than expected. Second, even JPMorgan’s results details were worrisome: for example the recognition of a significant amount of rising losses on prime mortgages. In the case of Citi – a firm that has a presence in over 100 countries and whose revenues come, to a great extent, from foreign operations – there was a sharp increase in the losses on its consumer credit operations, including a large increase in delinquencies on credit cards both in the US and other markets (Brazil, Mexico). Thus, after having already shut down its money losing consumer credit operations in Japan, Citi is now experiencing a surge of delinquencies on unsecured consumer debt both at home and abroad. And the reserves set aside to take care of such expected loan losses are still woefully insufficient as they are based on very optimistic assumptions about the level at which such delinquencies will peak; this is another way to pad earnings and not recognize early on such losses. Systematic use of creative accounting is at work in all of these institutions and other banks and other financial institutions to hide the extent of the incoming losses on assets and loans.
With the excuse of wanting to crack down on “manipulators” the SEC has now imposed restrictions on short sales on the stocks of 19 major financial institutions including Fannie and Freddie. Let us be clear about this new rule: this is a clear and naked attempt by the SEC to manipulate upwards the price of equities of financial firms. The SEC should start investigation and legal action against itself for actively manipulating the stock market. And shame on the SEC for this most un-capitalist and manipulative action: when there is an upward bubble in stock prices and 95% of investors/speakers on CNBC are talking their books in that most public forum t
o manipulate upwards their portfolio the SEC does nothing and allows this charade to go on. But when short sellers are shorting the stocks of firms that are likely to be bust that is considered manipulation. That is a pretty pathetic action by the SEC that has artificially boosted the equity valuations of US financial firms – now up 20% plus in the last part of the past week after the introduction of this manipulative rule. And of course this manipulated increase in financials’ equity prices reduces the mark to market losses that banks and other financial firms holding such equities would have incurred, another additional way to pad upwards earnings.
The few and rare banks and mortgage/MBS analysts that were willing to provide a realistic assessment of the mortgage market and the financial conditions of US banks and brokers have been effectively muzzled by upper management. With the partial exception of Meredith Whitney who benefits from being at an independent research firm, many other analysts have gone into the spin mode that the Fed, the regulators and the senior management of these financial institutions have dictated to them. Sell-side research that was never independent – even after the additional Chinese walls that the corporate scandals of the early part of the decade led to – is even less independent today. So you have financial institutions manipulating at will their earnings and analysts falling for this supreme baloney.
The FDIC will for sure run out of money as hundreds of banks will go bust and their depositors will have to be made whole given deposit insurance. With funds of only $53 billion, already up to 15% of such funds will be used to rescue the depositors of IndyMac alone. Thus, the FDIC is already requesting to Congress that the deposit insurance premia should be raised to compensate for this shortfall of funding. Too bad that this increase in insurance premia – that should be high enough in advance (not ex-post) to ensure that deposit insurance is incentive-compatible and not leading to gambling for redemption via risky lending in banks – is now too little and too late and is requested when the damage is already done as the biggest credit bubble in U.S. history is now going bust. Also the FDIC has done a mediocre job at identifying which banks are at risk. So far there are only about 90 banks on its watch list; and IndyMac was not put on that list until last month! So if the FDIC did not even identify IndyMac as in trouble until it was too late, how many other IndyMacs are out there that that the FDIC has not identified yet? Certainly a few hundred but such honest analysis of banks at risk is nowhere to be found.
As I have argued in previous work all independent broker dealers are in deep trouble and may not survive – in a few years’ times – as independent firms. And some of them are already walking zombies. In a few years time there will be no major independent broker dealers as their business model (securitization, slice & dice and transfer of toxic credit risk and piling fees upon fees rather than earning income from holding credit risk) is bust and the risk of a bank-like run on their very short term liquid liabilities is a fundamental flaw in their structure. I.e. the four remaining U.S. big brokers dealers will either go bust or will have to be merged with traditional commercial banks. Indeed, firms that borrow liquid and short, highly leverage themselves and then lend in longer term and illiquid ways (i.e. most of the shadow banking system) cannot survive without formal deposit insurance and a formal permanent lender of last resort support from the central bank.
While a formal government bailout of most U.S. financial institutions has not occurred yet the U.S. government has avoided such bailout only by making sure that foreign government-owned institutions – the Sovereign Wealth Funds – did that job in lieu of the U.S. government. So instead of the U.S. government recapitalizing U.S. financial institutions we have seen foreign governments doing the job. Too bad that such SWFs have already lost 30% to 50% of their initial investments in such financial institutions. Thus, while U.S. financial firms will need hundreds of billions of additional capital injections to survive this crisis it is not obvious that foreign governments (SWFs) will not require conditions for such recapping (a percentage of equity that implies control, board membership, voting powers, common shares rather than preferred stock, etc.) that may not be politically acceptable in the U.S.

One could go on in more detail – as I have done in recent analyses – in discussing the severity of the current banking and financial crisis in the U.S. and how the official figures on earnings and balance sheets of financial institutions provide a misleading picture of the real financial state of such firms. As I argued before the $1 trillion of credit losses ($300-400 bn for mortgages and $600-700 bn for all the other non-mortgage credit) that I estimated last February are only a floor, not a ceiling, for such expected losses. Such losses are likely to end up being closer to my $2 trillion estimate. And such an estimate do not include the $200 to 300 billion that the rescue of Fannie and Freddie will entail. And such losses don’t even include scenarios where up to 50% of households who will end up underwater will walk away from their homes: that factor alone could entail mortgage losses of $1 trillion (average mortgage of $200k times the 50% loss that a foreclosure/walk away implies on that mortgage times 50% of the 21 million households that are underwater) rather than the $300-400 bn that I originally estimated.

So when you add it all up this will be the worst financial crisis since the Great Depression: not as severe as that episode but second only to it. And the real effects of this financial crisis will be severe and more severe if remedial policy action is not rapidly undertaken. Ditto for the US recession: this will be the worst of such U.S. recessions in decades.

A couple of additional media quotes – that elaborate on my views – to conclude. The New York Times had on Saturday a very nice analysis – by Peer Goodman – of the current US economic recession and financial crisis. As reported in this article:

More than two years ago, Nouriel Roubini, an economist at the Stern School of Business at New York University, said that the housing bubble would give way to a financial crisis and a recession. He was widely dismissed as an attention-seeking Chicken Little. Now, Mr. Roubini says the worst is yet to come, because the account-squaring has so far been confined mostly to bad mortgages, leaving other areas remaining — credit cards, auto loans, corporate and municipal debt.

Mr. Roubini says the cost of the financial system’s los
ses could reach $2 trillion. Even if it’s closer to $1 trillion, he adds, “we’re not even a third of the way there.”

Where will the banks raise the huge sums needed to replenish the capital they have apparently lost? And what will happen if they cannot?

The answers to these questions are unknown, an unsettling void that holds much of the economy at a standstill….

These losses are landing on top of what was, for most Americans, a remarkably weak period of expansion. From 1992 to 2000 — as the technology boom catalyzed spending and hiring — the economy added more than 22 million private sector jobs. Over the last eight years, only 5 million new jobs have been added.

The loss of work is hitting Americans along with an assortment of troubles — gasoline prices in excess of $4 a gallon, over all inflation of about 5 percent, and declining wages.

“In every dimension, people are worse off than they were,” said Mr. Roubini, the New York University economist.

Monday update on banks’ accounting scams:

As reported by “Charlie” a commentator on my blog forum: “Wells Fargo instituted a policy on April 1st, 2008 where HELOCs [home equity loans] wouldn’t be written off until they were 180 days past due. Prior to this, they were written off at 120 days past due. If they hadn’t implemented this policy, their earnings would have been $265 million lower. Instead of beating estimates by 3 cents/share, they would have missed by 6 cents/share.”

Ergo: Since home equity loans are second lien and most of them will go bust – i.e. will be totally wiped out once large mortgage defaults will occur – expected losses on such home equity loans -that are in the hundreds of billions of dollars outstanding – are massive. Thus, banks have no shame to use any accounting gimmick to fudge and window dress their earnings results.

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253053275 Responses2008-07-20+19%3A45%3A20Nouriel+Roubini to “The Coming Systemic Bust of the U.S. Banking System: “Dead Stocks Rallying””

Guest • July 20th, 2008 at 7:57 pm

1st!

Guest • July 20th, 2008 at 8:21 pm

From the last session:JLC: "Dammit Pete, did you have to mention In N Out burger? Since I moved to Washington State from San Diego a few years ago, I have constantly longed for a double double animal style. … Now I’m craving it and the nearest one is in Redding, an 8 hour drive away. … There is just nothing like it in the Pacific Northwest. And standard fast food like McD’s, Jack in the Box, et al is garbage. If In N Out sold franchises, I would open one up here. "Yeah, it is funny how you really feel like one of those, isn’t it? Normally I don’t do burgers much. But I just gotta’ go over to In N Out every now and then.You just identified your opportunity for a good business during the US recession ————–Earlier Comment: "Israel should strive for a diplomatic solution to the problem they have with Iran. … Nevertheless, the bottom line is that a diplomatic solution for the problem requires diplomatic behavior. "If you stop to think about it, then you will realize the problem. What’s missing here is an EXACT knowledge of Iran’s intentions. It has to be exact knowledge. Intelligence gathering is an imprecise art, and leaves open too many uncertainties. We’re dealing with the possibility of nuclear weapons – this leaves no room for error.Let’s imagine for a minute, that the Iranians are in fact telling the truth and they only intend to use nuclear energy for peaceful purposes. Personally, I highly dount it. But let’s consider this hypothetically. What the world needs – and this especially applies to Israel – is a solid assurance that this fact is true. Current approaches are not enough – standard IAEA inspections, political talks, negotiations, UN sanctions are not a sufficient solution.So ????Consider this alternative.What if the UN Security Council authorized a special "aggressive inspections" protocol for the IAEA? Under such a protocol, an IAEA team would be authorized to enter Iran and inspect ANY location at extemely short notice. The location would have to be specified. But the Iranians would NOT have time to clean up the area or to sterilize the site. Under this kind of operation, both the USA and Israel could obtain a much higher sense of certainty that illicit weapons programs were not under development. And it would be understood that if Iran refused, then this is tantamount to a direct confession that an illegal weapons program is underway.Clearly such a protocol would be difficult to implement, and potentially very risky for any IAEA team that tried to enforce it. And do we expect, for even one second, that Iran would actually agree to such a development? I highly doubt it. But this is the kind of extra step that is necessary to provide an ironclad guarantee of security in a tense situation where nuclear technology is at stake. The problem is that the world has not developed such a mechanism for enforcing nuclear compliance, or come up with another satisfactory measure which offers an equal level of assurance. Without prcise knowledge and assurance of intentions, we are left with "reasonable doubt". And when reasonable doubt is combined with missile technology and weapons of mass destruction, it is difficult for the world to have any peace.PeteCA

GSM • July 20th, 2008 at 8:27 pm

Great summary NR and for sure you are right- there is much more pain ahead with the worst to come. But already its clear how it will go- for mine anyway. The vultures are circling but the carcass still has some life in it yet. As the US succumbs to it’s own self imposed financial disease, there will be a good many ready to step in and buy up those cheap as chips assets.Who might those "many" be. The ones cashed up now. Who is sitting on cash piles? SWF’s, large foreign corps, PE etc. What will they be buying? US companies with global brand and reach,US manufacturing co’s, financial services co’s, education type co’s, medical services and medical equipment co’s, airlines etc etc. Therefore I think it’s clear that this relief rally will end as the last did, with lower lows heading into the winter and the US election. Further, the time line NR has outlined seems highly logical although I think the after effects will last years from this US recession ala :L~~~~~~/. The one bright spot? It will be a very major and lasting bottom in place when it is all said and done. A generational bottom during which time equities will despised and banks hated.

Guest • July 20th, 2008 at 8:34 pm

"A generational bottom during which time equities will despised and banks hated."I’m thinking that too. Well said. That’s no ordinary recession. And it would coincide with a lot of angst in our society – and a much higher level of (permanent) unemployment.PeteCA

Medic • July 20th, 2008 at 8:35 pm

Professor, you do seem to have a very good handle on all of the fraud and manipulation going on in the financial world. Thank you for making your opinions and analysis available to the rest of us.I must admit that I am not a big fan of the current administration, but I wonder if an Obama administration can really bring the needed transparency to the financial system and markets. Until I am convinced, my money will not be invested. I refuse to loan any more of my future to the financial system. Let them find others to support their reckless and dishonest endeavors.

mygarbagemail • July 20th, 2008 at 8:37 pm

Professor:What would your policy recommendations be if you were Bernanke or Paulson or Bair or Bush?Can anything be done at this point?Is Ron Paul correct or what he recommends too painful?NOT INVESTMENT ADVICE

Guest • July 20th, 2008 at 9:02 pm

watch the charts, read the comments——————————————————INSIDERS AGREE: BANK RUNS IMMINENThttp://2cents.dailyreckoning.com/viewtopic.php?t=32386&sid=f241f792f18c48139fc2bf57a0edb34dPosted: Wed Jul 16, 2008 11:18 pm Post subject: INSIDERS AGREE: BANK RUNS IMMINENT ——————————————————————————–I had a very interesting conversation today with a friend who used to be a mortgage broker (until the company he started imploded) and now works at a bank selling REO property. Now, this is a guy who made millions flipping, and when I told him two years ago that the whole house of cards was going to collapse shortly, he laughed at me. He ain’t laughing anymore. I get on the phone with him, and he immediately tells me that his wife just got laid off from Indy Mac, so life is kind of sucking for them right now. Then he proceeds to tell me that both he and his wife (who have very close contacts at banks) have heard from reliable sources that the industry FULLY expect a massive run on savings and loans in the very near future. We’re talking weeks, if not days. We are now officially on Banking System Deathwatch, ladies and gentlemen, because the next big bank that falls will be the domino that unleashes the runs on the other banks. He said WaMu is certifiably D.O.A and will almost certainly be the next victim. He said the industry would be surprised if WaMu makes it another 30 days. Downey Savings and First Federal are the next dogs to die, according to him. If it hadn’t been so sad and scary, I would have actually enjoyed my I-told-you-so moment. But this guy is genuinely frightened now. You can hear the panic in his voice. He told me, point-blank: "It’s all coming down. The whole system is crashing." He is quickly turning into an urban survivalist — outfitting his home with solar, buying biodiesel, stocking up on food. It’s truly fascinating to watch the variations in human behavior as this unfolds. This guy needed some prompting, but after the Fannie/Freddie news broke last week, he immediately got the clue. On the other hand, I work with a lawyer, and he’s married to another lawyer. She banks at WaMu. I’ve been telling him for months, "Man, you’ve got to tell your wife to get her money out of that bank." Even after Indy failed, she was resisting because it was a "pain" to decouple her billpay and set up new auto debits and other crap. It’s just pure laziness. So here you have someone who has SEEN the lines snaking around the corner, has clearly heard that people are having trouble getting their money, and she thinks, "Nah, I’ll just wait and see what happens with WaMu." Finally, he put his foot down and basically demanded that she yank her money out. So she’s beginning the "transition" this week. WTF?? There is going to be a LOT of roadkill before this thing is over. Be prepared to step over the bodies, my friends. They will be littering the streets.

iww • July 20th, 2008 at 9:10 pm

Reading this recent post by NR, one has to conclude that the system is hopelessly corrupt. But will the banks be able to hide their true losses indefinitely, even if SEC and the Fed keep cooperating in these games of obfuscation? Investors are truly playing in the dark now, completely at the mercy of robber barons of WS!

Anonymous • July 20th, 2008 at 9:46 pm

Dr Roubini:This is one excellent piece of work! It nicely ties together everything that has transpired this past week or so, plus it is a really excellent analysiis of what goes on behind the scenes. Fraud would appear to be out of control at this point. The outcome of all of this cannot be good, in event he most optimistic of circumstances.

suecris • July 20th, 2008 at 9:49 pm

Great post. I think there’s a small error, though:conditions for such recapping (a percentage of equity that implies control, board membership, voting powers, common shares rather than preferred stock, etc.) that may not be politically acceptable in the U.S.Shouldn’t it be preferred shares rather than common stock?Or maybe I’m just not thinking clearly.

Nouriel Roubini • July 20th, 2008 at 9:54 pm

Preferred stock, while senior to common shares, does not come with voting rights and is closer to bonds than to stocks. SWFs went mostly for preferred stock in the first stage of recapitalization of US banks but next time around they may prefer to go for common stock and get voting rights and control.

HutCap • July 20th, 2008 at 9:55 pm

Professor:What about the recent comments from Jamie Dimon at JPM regarding their prime mortgage book’s "Terrible" performance? It seems that if losses are now going to come from the substantially larger prime tranches, your estimate of $300B in mortgage losses might be too low.

suecris • July 20th, 2008 at 10:08 pm

Thanks for the explanation.

Nouriel Roubini • July 20th, 2008 at 10:11 pm

Indeed losses on prime mortgages suggest that credit losses on mortgages will be more than $300 bn. That is why i provided the figure of potentially $1 trillon of losses on mortgages if many – including prime and near prime underwater borrowers – walk away and/or are foreclosed.

Matt • July 20th, 2008 at 10:30 pm

I still don’t get a sense of where the "tipping point" is. This and other sites and analyses have identified unresolved risks in the system. Sure, they look big and we’ve had a pretty strange week. I’m just wondering, if you had to point to "it" – and I note one poster reckons the fate of WaMu – is there a canary in the mine for this phase?? What goes, suggesting systemic collapse? (This re companies, not the distributed pain and signals of households…)MD

Gary • July 20th, 2008 at 10:30 pm

Thank you for telling us the truth Professor.

Little Ann • July 20th, 2008 at 10:35 pm

http://online.wsj.com/article/SB121641296022866029.html?mod=2_1569_topbox "FDIC Faces Mortgage Mess" on pg. one in today’s WSJ. Can someone please give a credible reason for bringing up FDIC takeover of Illinois based Superior FSB in 2001? Readers on this site shouldn’t be surprised but why today?Isn’t it a bit late? Thanks!

Average Jane • July 20th, 2008 at 10:49 pm

Do I need to yank out my thousands of dollars (saved for a DP on a mortgage) from my credit union? Help for us little people, please?

kilgores • July 20th, 2008 at 11:19 pm

@ Kerk and AfASo as not to duplicate content here, just wanted you both to know that I did respond to your respective last posts on the previous thread.SWK

Guest • July 20th, 2008 at 11:30 pm

mkts in Asia are running on steroids!!!What the heck is happening??senate doesnt approved nationalization of Freddie and Fannie, so that’s good newsmkts go greenOR,investors are buying puts for tomorrow,well Fannie/Freddie are left to die,mkts go red tomorrow..

Guest • July 20th, 2008 at 11:39 pm

the economy’s broken??well at least WW3 is back on trackhttp://www.washtimes.com/news/2008/jul/20/how-russia-strives-to-dominate-oil/PUTIN, POWER, AND THE NEW RUSSIA By Marshall I. Goldman Oxford University Press, $27.95, 256 pages REVIEWED BY JOSEPH C. GOULDEN For anyone with knowledge of economic warfare, the opening scene in Marshall I. Goldman’s new book evokes a shudder. Russian hosts take him into a darkened room that is the "brain center" of Gazprom, the world’s largest producer of natural gas, in an office building high above Moscow. "In front of me," Mr. Goldman writes, "covering the whole 100-foot wall of the room, was a map with a spiderweblike maze of natural gas pipelines reaching from East Siberia west to the Atlantic Ocean and from the Arctic Ocean south to the Caspian and Black seas. Manipulating this display were Gazprom dispatchers, three men controlling the flow of Gazprom’s gas to East and West European consumers of this Russian natural gas monopoly . . . . " With a flick of switch, these dispatchers sitting in this Moscow room could freeze – and have frozen – entire countries. At the very least, they could send their citizens off in a panic in search of sweaters, scarves and gloves. What an empowering feeling. Should they choose to, these Gazprom functionaries could not only cut off natural gas from the furnaces and stoves of Germany’s houses but also the natural gas that many German factories need for manufacturing a range of products from ammonia fertilizer to plastics. Now, to be sure, as Gazprom officers told Mr. Goldman for his book, "Petrostate: Putin, Power, and the New Russia," "politics never, ever affect their calculations." Sure, and your check is in the mail. The first week in July, Russia sharply curtailed oil exports to the Czech Republic in apparent retaliation for that country’s agreement to host a radar facility associated with a U.S. anti-missile system

Guest • July 20th, 2008 at 11:46 pm

@PeteCA: “Without prcise knowledge and assurance of intentions, we are left with "reasonable doubt". And when reasonable doubt is combined with missile technology and weapons of mass destruction, it is difficult for the world to have any peace.”Peter, You’re creating a war. That’s propaganda. This is not reasoning. There are two sides in this story and we all know each side. Partisans proved with Iraq that we can kill a lot of people when a superpower is engaged against villages, using jet fighters armed with missiles. We can wipe out as many of those villagers as we want. We don’t need to prove that again. The point is, what should a responsible country do?

kilgores • July 20th, 2008 at 11:59 pm

Dr. Roubini:Why, exactly, do you believe, as you’ve stated in this and a number of other posts over the past several months, that this downturn will not get as bad as the Great Depression? I think we’d all be interested in learning why you have maintained this position consistently, and what empirical data leads you to this conclusion.Thank you,SWK

kilgores • July 21st, 2008 at 12:09 am

Is there a public source by which one could readily determine whether Fannie or Freddie had actually borrowed money from the Fed?SWK

London Banker • July 21st, 2008 at 12:43 am

@ Professor RoubiniThis is an amazing and chilling indictment of both the incompetence and complaisance of regulators on the way up the bubble inflation, and the malfeasance and manipulation of those same regulators now that the bubble is deflating.I will need to summarise carefully, but plan to send this around to a few key people this side of the Atlantic. I wouldn’t want us following too closely as the American central bankers, securities supervisors and Treasury elite stride purposefully in lock step over the cliffedge.

London Banker • July 21st, 2008 at 12:59 am

@ PeteCAI couldn’t resist mentally rewriting your BS as I read it:Let’s imagine for a minute, that the Israelis are in fact telling the truth and they only intend to use nuclear energy for peaceful purposes. Personally, I highly dount it [especially as President Carter admitted they have more than 150 nuclear weapons and they are now propagandising their use against Iran]. But let’s consider this hypothetically. What the world needs – and this especially applies to Israel – is a solid assurance that this fact is true. Current approaches are not enough – standard IAEA inspections, political talks, negotiations, UN sanctions are not a sufficient solution.So ????Consider this alternative.What if the UN Security Council authorized a special "aggressive inspections" protocol for the IAEA? Under such a protocol, an IAEA team would be authorized to enter Israel and inspect ANY location at extemely short notice. The location would have to be specified. But the Israelis would NOT have time to clean up the area or to sterilize the site. Under this kind of operation, both the EU and Iran could obtain a much higher sense of certainty that illicit weapons programs were not under development. And it would be understood that if Israel refused, then this is tantamount to a direct confession that an illegal weapons program is underway.Clearly such a protocol would be difficult to implement, and potentially very risky for any IAEA team that tried to enforce it. And do we expect, for even one second, that Israel would actually agree to such a development? I highly doubt it. But this is the kind of extra step that is necessary to provide an ironclad guarantee of security in a tense situation where nuclear technology is at stake. The problem is that the world has not developed such a mechanism for enforcing nuclear compliance, or come up with another satisfactory measure which offers an equal level of assurance.Where Islamic Iran has not attacked a single nation in over 25 years, Israel periodically provokes and attacks its neighbours with unchecked regularity. Olmert has admitted in testimony that he agreed the war against Lebanon in 2006 with Bush and Blair in February of that year. Once all preparations were final, they began sending unescorted teams of soldiers across the border until some were finally intercepted, killed and captured. The soldier "hostages" then became the cause celebre for propagandising the war as "self defense". Meanwhile, all the destruction of civilian infrastructure – electrical plants, sewage works, water treatment plants, and the the carpet bombing of the region’s agricultural lands with cluster bombs afterwards – were all pre-planned strategy to target civilians.I don’t blame the Iranians for being nervous with US occupations either side and 1/4 of the world’s known oil reserves under their territory. The US and Israel have proven time and again that they plan for war and lie for war as a business model.

Guest • July 21st, 2008 at 1:11 am

LB youre one angry bloggerwhat’s up??

Guest • July 21st, 2008 at 1:12 am

something dont jive..wht the hell with all these heavy buying??!!

Guest • July 21st, 2008 at 1:16 am

Follow the charts…this is a spot on repeat of the Great Depression.Bernanke, Greenspan, Paulson, and Bush will go down in history as the buffoons that drove us off the cliff.imo

goldorcash • July 21st, 2008 at 1:21 am

@Written by Guest on 2008-07-21 01:11:07"LB youre one angry blogger what’s up??"LB is presenting a balanced approach. It is very telling to interchange"Israel" and "Iran" to show how ridiculous the posts he is responding to are.

Anonymous • July 21st, 2008 at 1:27 am

@guest, I think they are now referred to as the 4 Horsemen of the Financial Apocalypse.

Ponder • July 21st, 2008 at 2:14 am

@PeterCA @LondonBanker @GuestLet us not forget that one is a signatory to the Nuclear non-proliferation treaty and the other is not. The points for guessing which one.One is within their rights as a signatory while the other is not even a member and is "proven" to have nuclear weapons which are used to threaten others.What we really needs is the abolition of double standards.Thank you LondonBanker for being one of the most balanced individuals I know

London Banker • July 21st, 2008 at 3:24 am

@ Guest on 2008-07-21 01:11:07One million Iraqis are dead and five million are homeless refugees – for lies and oil as Greenspan confirmed. The USA has inflated the world economy in the six years of war by several trillions of dollars in credit, resulting in massive globalised monetary inflation and – now following – massive asset deflation and economic destabilisation.Someone should be angry. Millions of people should be angry. Even Americans should be angry.And I get especially angry at propagandists who try to use the same fraudulent, crapulous war-mongering that got us here to justify the killings of millions more and impoverishment of billions should they succeed.Americans are only 230 million of the 6.2 billion people on the planet. They are no more or less important than any other humans. They need to behave with more consideration of the planet and other humans sharing it.

London Banker • July 21st, 2008 at 3:41 am

@ PonderMany thanks for your kind words. Indeed, Iran is a signatory of the NPT. While their compliance with some terms may be questioned, there is no doubt that they are within their rights in developing peaceful nuclear technologies and nuclear power generation. There is also no doubt that the IAEA is being discriminatory towards Iran, and that the US is massively hypocritical given its clandestine support for nuclear proliferation in Pakistan (and by extension North Korea and Libya and other unsavory regimes)and Israel. And now Bush has promised nuclear technology to Saudi Arabia too.

Jason B • July 21st, 2008 at 4:12 am

Wonderful Article…Chaos and fear never sleep. This morning the first news story I read was a piece from the Los Angeles Daily News about police threatening to beat down and arrest any "disorderlies" trying to get their money out of a failed IndyMac (IMB) bank branch in Pasadena, CA. Apparently, after being turned away Monday, customers began lining up at 1:30 a.m. the next morning to take out any cash they had in excess of the $100,000 maximum insured by the Federal Deposit Insurance Corporation. The scene was reportedly emotional and tense. At another IndyMac branch in Encino, the police were called in after line jumpers threatened to turn an ordinary bank run into a full-on riot.Yes, it’s here. Welcome to the Depression. No, don’t drop whatever it is you’re doing. Don’t get up. It’s not going anywhere. It will wait. It’s just going to sit over here in the corner and read a magazine while you do whatever it is you need to do.http://www.minyanville.com/articles/depression-california-housing-mortgage-time/index/a/18055

Flanders • July 21st, 2008 at 4:56 am

Are we saved?Bernanke, Paulson Pressed to Seek Big-Government Bank Bailout http://www.bloomberg.com/apps/news?pid=20601087&sid=ajKgUAmJ3Rfo&refer=home

Guest • July 21st, 2008 at 5:57 am

@London Banker on 2008-07-21 03:24:25And I get especially angry at propagandists who try to use the same fraudulent, crapulous war-mongering that got us here to justify the killings of millions more and impoverishment of billions should they succeed.I couldn’t agree more. What especially ticked me off during the weeks preceding the Iraq war were the accusations that were brought up against the Iraqi government, only to be discredited in some case within days by investigative journalists and others. Most, if not all, of these accusations came from US or UK. There were two reasons why it was so irritating:1. it was insulting, because the governments outputting the sh*t seemed to think that "you can feed what-ever to the populace! Therefore, let’s feed them this crap so we get them angry about that Saddam Hussein".2. it was inconsiderate against the people living in Iraq, because they were the ones who would be negatively affected if the populace actually believed the lies.Note that I am not saying that Saddam Hussein was "good". However, claimimg that he was "bad" because he was a dictator (a non-democratically elected sole ruler) or that he did not respect human rights would also make the Saudi King bad. Not to mention the president of Kazakhstan (another U.S. ally with a bad human-rights record), and various governments in Africa.A couple of years ago I was in San Diego in IT training, and we had a class discussion about the Iraq war. I told the class that one of the reasons why Americans felt so much more anger against Saddam Hussein (than Europeans) was because he was consistently demonized in the US media during the 10 years between the first and second gulf wars. In EU there was no "single voice" that spoke that line to all member countries. Once EU gets its single voice, who knows what kind of garbage we will hear from it:-)The other part of the problem is that the Americans seem to have a lot of faith in their government and that media. On the other hand I am sure that it is the same thing with every other country, the problem is just that the U.S. government is able to use this fact to cause a lot more problems.Some of this willingness to believe what the government says stems from nationalism, however. Some people say that as the existence of God cannot be scientifically proven, belief in such becomes a matter of faith and thus falls within the realm of religion. The same thing can be said about the "moral goodness" of ones own country; as moral goodness is not something that can be "empirically tested", the belief that ones own country is "morally good" becomes an issue of faith. Nationalism is thus based on faith just as religion is. The only difference is that while religious people usually (depending on the religion) have God as the moral authority, nationalistic people make their own government the moral authority.

Guest • July 21st, 2008 at 6:03 am

Since the Second World War there has been a taboo against the use of nuclear weapons in warfare. It is possible that it is the Israelis who will break that taboo.

Gloomy • July 21st, 2008 at 6:37 am

Nouriel, Great post!!! Isn’t it likely that the U.S. will effectively nationalize large number of banks? Won’t the US dollar collapse and treasury bond yields go through the roof as a result of these actions?

charlie • July 21st, 2008 at 7:08 am

Professor,To add to your list of misconceptions in the past weeks financial results…Wells Fargo instituted a policy on April 1st, 2008 where HELOCs wouldn’t be written off until they were 180 days past due. Prior to this, they were written off at 120 days past due. If they hadn’t implemented this policy, their earnings would have been $265 million lower. Instead of beating estimates by 3 cents/share, they would have missed by 6 cents/share.180 days is the maximum allowed, so starting next quarter, their numbers will be more reflective of reality.

farmboy • July 21st, 2008 at 7:24 am

On the SEC crackdown on naked short sellers. Remember this is "naked" short selling, not short selling.http://www.deepcapture.com/wp-content/uploads/2008/06/deepcapture-the-story-v1.pdfI am unaware of a naked buying scam?

Nouriel Roubini • July 21st, 2008 at 8:23 am

I am not interested to have on my blog forum debates – that are not germane to what i write on economic and financial issues – on the Iraq War and on the conflict between Israel and the Palestinians/Arab states. And every time someone comments on those topics the debate becomes incendiary and insulting whatever the views on any side are. So stay off those topics or I will erase such comments. This is a forum on global economic/financial issues, not on the Middle East politics. So stick to the topics of this forum. I hope this is clearly understood by all. Nouriel

richinar • July 21st, 2008 at 8:33 am

To this point TPTB have contained and averted the "worst possible outcome". Who is to say that they will not be able to continue to do so. Just because we all believe that the house of cards is coming down doesn’t mean that it will.I think TPTB have proven beyond a shadow of a doubt that they will do whatever it takes to protect their position. Do you believe they will give up from here without further distortions?

kilgores • July 21st, 2008 at 8:38 am

@ Anonymous on 2008-07-21 00:22:38 (previous thread)We started down this road in the late 1800s. A lot changed in twelve short years. In 1877, in Munn v. Illinois, 94 U.S. 113 (1877) the U.S. Supreme Court ruled that the 14th Amendment cannot be used to protect corporations from state law. By 1882, in San Mateo County v. Southern Pacific Railroad Company, 116 U.S. 138 (1882), the court was presented with an argument that the drafters of the 14th Amendment intended it to include corporations as legal persons entitled to its benefits. The court did not rule on the issue at that time; however, four years later, in Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394 (1886), the Court, in obiter dicta (non-binding commentary in a court’s written legal opinion), expressed the view for the first time that the 14th Amendment does apply to corporations. The court didn’t cite any legal precedent for its conclusion in this regard, but rather, merely stated that "The court does not wish to hear argument on the question whether the provision in the 14th Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to corporations. We are all of the opinion that it does.” Soon thereafter, in 1889, the Court actually ruled that a corporation is a "person" with constitutional rights to due process and equal protection of the law. Minneapolis & St. Louis Railroad Co. v. Beckwith, 129 U.S. 26 (1889). The court’s ruling was without precedent, literally, but it paved the way for further rulings over the next 119 years that expanded corporate constitutional rights and changed our basic assumptions about the role of corporations in our society. Indeed, we’ve now elevated corporations, the lives of which may continue in perpetuity, to near equality with natural persons. Who bats an eye today when a company is referred to today as a "good corporate citizen?" Since when is a corporation "a native or naturalized person who owes allegiance to a government and is entitled to protection from it?" What allegiance does a U.S.-based multinational corporation owe to the United States? The notion that corporations are persons that should enjoy constitutional rights has become accepted, not just in the U.S., but globally. In ratifying its new constitution, for instance, South Africa expressly recognized the personhood of corporations and they enjoy rights under the South African constitution. This gradual blurring of the distinction between real people – us – and artificial legal persons, such as corporations, presents a real danger to democracy and free enterprise that is, frankly, below the radar screens of most folks. Corporate forms of business are very efficient and should be continued; however, we need to begin to reverse, if we can, the ever-expanding recognition of corporate constitutional rights, and return to something along the lines of the original notion of a corporation as an entity chartered for the good of the public, which may be subject to dissolution should it act in a manner contrary to that public good.SWK

kilgores • July 21st, 2008 at 8:39 am

One major court decision that has enabled corporations to corrupt our political process is the 1978 case of First National Bank of Boston v. Bellotti, 35 U.S. 765 (1978), in which the U.S. Supreme Court struck down, on First Amendment grounds, state restrictions on spending by corporations on political referenda. Until Bellotti, this right previously had been allowed only with respect to news media corporations.The dissent in this case was particularly poignant:“[T]he special status of corporations has placed them in a position to control vast amounts of economic power which may, if not regulated, dominate not only our economy but the very heart of our democracy, the electoral process . . . The State need not allow its own creation to consume it.” Even Justice Rehnquist dissented, stating: “The blessings of perpetual life and limited liability [that corporations enjoy]. . . so beneficial in the economic sphere, pose special dangers in the political sphere.”SWK

richinar • July 21st, 2008 at 8:51 am

I remember reading some time ago, I think it was here that from failure comes innovation. If our financial system is truely in a state of failure then the innovation has already begun. Just look at all of the Fed and Treasury actions since the onset of this crisis.Our opinion does not matter on how the crisis unfolds. It has taken it’s course from the beggining to now and will continue to unfold as directed by TPTB. I truly enjoy this forum and believe that the professor clearly understands the current state of the global economy better than others. That said I also believe that there is a script that is being followed that will lead us to wherever TPTB want us delivered. Just try to stop their manipulation.

Guest • July 21st, 2008 at 9:02 am

LEI down again and last month revised even lower. CFNAI was also down again and this is the 7th month in a row their indicator was below recessionary levels.

Guest • July 21st, 2008 at 9:36 am

@richinarThe problem is they are propping up a failed and corrupted system instead of creating a new one. They may have a script, but it appears they have lost control. Their only option now is wholesale theft of the treasury and the printing of money which cannot last forever. The only way this corruption will end is for the system to completely fails as our dumbo legislators in Congress are clueless as to fixing it and most of the public doesn’t have a grasp of what is happening to them-yet. Unfortunately, there will be massive pain along the way to its collapse.

x00x • July 21st, 2008 at 9:41 am

@ PeteCAPete, the IAEA has had similar additional protocols in the past, so it is nothing new, and the UNSC has no authority to order the IAEA to do anything. However, a lot of the problems with implementing additional protocols like this come from the sovereignty issue, which is the drum the Iranians continue to bang. They are (despite suppositions put forth by the USA and Israel) adhering to their commitments as parties to the NPT. Until they are found in violation of the NPT there is really nothing, legally, that can be done. Considering the NPT has an out clause (used by North Korea prior to its test, although it didn’t give adequate notice), the Iranians are free to withdraw from the NPT and then do whatever they like. The NPT is, let us remember, a two way deal; give up nuclear weapons in exchange for technological help in producing nuclear power. Iran is correct in arguing that the entrenched nuclear powers are not living up to the deal, let alone the spirit of the NPT.You have to remember that in Iraq when a similar inspection regime was put in place the USA placed spies within inspection teams, undermining the whole process and any future inspection regimes. Iran knows this as well, and be reticent to allow Americans on its soil where they could collect intelligence other than what is specifically authorized between the IAEA and Iran (under the type of additional protocol you allude to).

Softwarengineer • July 21st, 2008 at 9:51 am

OIL’S ON ITS WAY BACK UP AGAIN TODAYThis times is the Iran problem and hurricanes to blame.http://www.bloomberg.com/apps/news?pid=20601087&sid=aSnq6oyJGCB0&refer=worldwide

Anonymous • July 21st, 2008 at 9:52 am

Prof Roubini:More Creative Accounting? Something just doesn’t feel right here to me, especially in light of the Countrywide aquisition.http://biz.yahoo.com/ap/080721/earns_bank_of_america.htmlAPBofA 2Q profit shrinks, beats Wall StreetMonday July 21, 10:03 am ET By Ieva M. Augstums, AP Business Writer Bank of America profit falls 41 percent in 2nd qtr, cites weak credit quality; beats estimates CHARLOTTE, N.C. (AP) — Bank of America Corp. said Monday its profit fell 41 percent in the second quarter, hurt by a big increase in bad debts tied to falling home prices and a slowing economy.But it easily beat Wall Street estimates, and shares rose $3.00, or almost 11 percent, to $30.49 in early trading.ADVERTISEMENTThe Charlotte-based bank reported net income of $3.41 billion, or 72 cents per share, on $20.32 billion in revenue, in the April-June period. That compared with net income of $5.76 billion, or $1.28 per share, on $19.63 billion in revenue a year earlier.Analysts on average expected a profit of 53 cents per share on $18.37 billion in revenue.The nation’s second-largest bank by assets said credit quality continued to weaken during the quarter, particularly in markets that experienced the most significant home price declines.Bank of America more than tripled the amount it set aside for bad loans to $5.83 billion, up from $1.81 billion a year ago, largely for consumer and commercial portfolios directly tied to the housing market, including home equity, residential mortgages and homebuilding. The figure surged to $6.01 billion in the first quarter.Net charge-offs, loans it doesn’t think are collectable, jumped to $3.62 billion, up from $1.5 billion a year ago, reflecting housing market deterioration and slowing economic conditions, the company said.Write-downs tied to disrupted capital markets totaled $1.22 billion, down from the first quarter’s $2.81 billion.Profit in consumer and small business banking fell 66 percent to $812 million. The corporate and investment bank saw profit rise 3 percent to $1.75 billion. In wealth and investment management, profit fell 1 percent to $573 million."We are pleased with these solid results in a difficult financial environment," said Chief Executive Officer Kenneth D. Lewis in a statement. "Outside of real estate-related products, our operating results were quite good virtually across all business segments."Bank of America completed its $2.5 billion purchase of Countrywide Financial Corp. on July 1, a deal it now says will add to its profits this year.Second-quarter results included $212 million of merger and restructuring costs.Countrywide, whose results weren’t part of Bank of America’s figures, posted a second-quarter net loss of $2.33 billion, including just under $4 billion in credit-related losses.Bank of America has said it plans to cut about 7,500 jobs as it integrates the company into its own operations. The job cuts amount to about 12.5 percent of the combined companies’ mortgage, home equity and insurance businesses.The cuts will take place over the next two years in locations across the country "in instances where the two companies have significant overlap," the bank said last month.Four of the nation’s five biggest banks have now reported better-than-estimated results, sparking a rally in financial shares last week.Among other companies, JPMorgan Chase & Co. and Wells Fargo & Co. reported smaller-than-expected profit declines, while Citigroup Inc. had a milder-than-expected $2.5 billion loss.Wachovia Corp. is expected to report earnings Tuesday.Bank of America Corp.: http://www.bankofamerica.com

Guest • July 21st, 2008 at 10:01 am

Looks like Ken Lewis (B of A) has joined the rose-colored galsses club. Fake earnings and his economic "sliggishness" vs recession call once again menat to deceive the general public. When are these criminals going to be arrested?? Oh yeah…criminals don’t arrest criminals!

Guest • July 21st, 2008 at 10:07 am

A nice piece from http://www.nytimes.com/interactive/2008/07/20/business/20debt-trap.htmlYou can see there, the beginning of the debt-mess.

AfA • July 21st, 2008 at 10:16 am

BoA:"We have received a lot of questions about Countrywide’s public debt. All I can say at this point is we don’t intend to guarantee the public debt but we understand the ramification of not paying. We will keep you informed as we continue to integrate the country wide transaction."

Dr. Barry Mishra • July 21st, 2008 at 10:29 am

As an Accounting Professor, I am well aware of these fuzzing. But I think the basic problem is there is huge conflict of interest and greed and very poor ethics (sometime outright fraud) in part of profession, politician and managers that leads to all of this. Another problem is of course is of course short term decision making by likes of Greenspan, to Bernanke to Paulson and everybody else I do not care what happens tomorrow I just have to secure my rear today. Others justify by saying why be a party popper. Eventually fat lady sings and every one except for those who made the money and bailed out pays a price. Even professors can not speak there minds in this country any more. The administrators run the universities and can make your life miserable if you do not agree to their view point.I am glad that Nouriel is calling a spade a spade.

Anonymous • July 21st, 2008 at 10:30 am

Let’s look at some facts , "Do as I do not as I say"The incumbant doyen :JPM QoQ Tier 1 rose by 9bn USD , this was from Bear. It came at a cost of 2.4bn. JPM has 45bn of goodwill of 45% of its core capital is not tangible equity.Pre the BSC takevoer JP’s tangible equity was about 44bn, it has a market cap of 138bn. Was the BSC takeover JP’s write’s issue via the back door?Her sister :BAC is walking away from CFC, refusing to guarantee its $40bn of debt ? Somehow thats alright?The cousin :WFC changed the way it accounts its write off’s from 120 days to 180days, ensuring it beat the estimates rather than missed. Wonder what the 30 , 60 and 90 day bucket looks like.All this family carry a massive HELOC and 2nd lien legacy of in aggregate 254bn USD on balance sheet in banking books marked at near as damn it PAR. The Daddy :Freddie Mac announced today it might begin to SELL assets and reduce mortgage purchases to free up capital. Given Freddie is 500 times leveraged off market cap, the amount of sales required to make an impact must be enormous. The sale assets will have to be very high quality for this not to be errosive to capital. This will pressure further on prices at the very top end of the capital structure.So you wouldn’t want to be the poor guy that owns all the stuff immediatley beneath.DOH!Hope is the new strategy…….

Gloomy • July 21st, 2008 at 10:37 am

"I think TPTB have proven beyond a shadow of a doubt that they will do whatever it takes to protect their position. Do you believe they will give up from here without further distortions?Written by richinar on 2008-07-21 08:33:49"No government has ever successfully propped up a failing market, and our current situation is no different.

Gloomy • July 21st, 2008 at 10:44 am

THE JAPANIFICATION OF THE US FINANCIAL SYSTEMWouldn’t that make a good title for NR’s piece above?The Japanese market dropped something like 80% from its peak, which if memory serves me correctly was about 36,000 on the Nikkei in the 1980′s. It is now a bit under 13,000 20 years later. That is the outcome of mummifying the financial system and trying to obscure reality through government manipulation. Imagine Dow 5000 for the next 20 years and you will see the future.

wormyboy • July 21st, 2008 at 10:49 am

Why, with all the "good news" last week, are we not seeing a huge rally based on BofA’s better then expected results. I am glad I am not a day trader or else I would get my clock cleaned on a daily basis.

Stuart • July 21st, 2008 at 10:52 am

The auditors and regulators allowing fraudulent reporting need to be named, publicly, and each one sued to the maximum extent possible. The Partners signing off need to be publicly named as well. Public humiliation is damning in this profession.

Guest • July 21st, 2008 at 11:02 am

FLECKENSTEIN today:http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/FedsCantFixFannieAndFreddie.aspx“Feds can’t fix Fannie and Freddie”"The mortgage giants aren’t short of cash. They’re stuck with bad loans that aren’t going away. Also: Short sellers didn’t bring down the lenders — the lenders did it themselves.” Excerpts –[ Fannie Mae and Freddie Mac] do not have a liquidity problem that can be solved by the Federal Reserve or even by an injection of Treasury capital. It’s a solvency issue. Short-term cash isn’t the real problem. Over time, the mortgage giants’ liabilities are quite likely to swamp their assets… Thus their assets are contingent, but their debts are forever… As for access to the Fed’s discount window, even if Fannie and Freddie use it, that won’t change much. Lehman Bros. (LEH, news, msgs) has had access to the discount window, and that has done Lehman little good. Nor has it healed Washington Mutual (WM, news, msgs), Bank of America (BAC, news, msgs), Citigroup (C, news, msgs), etc… Regarding the SEC move, Fleck says: Turning to wrongheaded finger-pointing…Short sellers didn’t create the housing bubble, which is what caused the unfolding disaster. Nor did they make the bad loans now going sour. Short sellers do not ruin companies, and they are incapable of driving a company’s stock price lower for more than a brief moment. If unscrupulous manipulators decided to pressure a stock lower, that would be a recipe for losing money unless they were extremely quick, not only to sell but also to cover the short position.Likewise, short sellers didn’t cause Bear Stearns to collapse. That was a do-it-yourself job, executed by the arrogant chieftains who let themselves get wildly over-leveraged.And someone might tell Cox that short sellers didn’t ruin Fannie Mae. That was the handiwork of former CEO Franklin Raines and the rest of management (as well as the regulators), whose Enron-like greed caused me to name the company "Fanron" on Feb. 23, 2005…This business of blaming short sellers for lower stock prices (and speculators generically for high oil prices) is getting ridiculous, especially when the real perpetrators suffer minor consequences as they walk away with giant piles of money.

Francisco Almeida • July 21st, 2008 at 11:23 am

.Professor Nouriel Roubini amazingly manages to surpass himself at every other new article.jawdropping..

Guest • July 21st, 2008 at 11:34 am

remember to buy the dips as it is illegal for US stock to be negative!!

Guest • July 21st, 2008 at 11:41 am

Gloomy, Krugman invokes the “L” word. I don’t like Krugman’s solutions, but here’s the skeleton of how he states the problem:“Slumping toward 2010 “by Paul Krugman, New York Times Columnist (July 18, 2008)Home prices are in free fall. Unemployment is rising. Consumer confidence is plumbing depths not seen since 1980. When will it all end?The answer is, probably not until 2010 or later. Barack Obama, take notice.It’s true that some prognosticators still expect a "V-shaped" recovery in which the economy springs back rapidly from its slump. On this view, any day now it will be morning in America.But if the experience of the last 20 years is any guide, the prospect for the economy isn’t V-shaped, it’s L-ish: rather than springing back, we’ll have a prolonged period of flat or at best slowly improving performance. Let’s start with housing.According to the widely used Case-Shiller index, average U.S. home prices fell 17 percent over the past year. Yet we’re in the process of deflating a huge housing bubble, and housing prices probably still have a long way to fall.Specifically, real home prices, that is, prices adjusted for inflation in the rest of the economy, went up more than 70 percent from 2000 to 2006. Since then they’ve come way down — but they’re still more than 30 percent above the 2000 level…If the current housing slump runs on the same schedule [as the late 1980s Los Angeles large localized housing bubble], we won’t be seeing a recovery until 2011 or later. What about the broader economy?… Ending those old-fashioned recessions (“more or less deliberately engineered by the Federal Reserve, which raised interest rates to control inflation) was easy because all the Fed had to do was relent. Ending modern slumps is much more difficult because the economy needs to find something to replace the burst bubble.The Fed, in particular, has a hard time getting traction in modern recessions. In 2002, there was a strong sense that the Fed was "pushing on a string": it kept cutting interest rates, but nobody wanted to borrow until the housing bubble took off. And now it’s happening again. The Onion, as usual, hit the nail on the head with its recent headline: "Recession-plagued nation demands new bubble to invest in."But we probably won’t find another bubble — at least not one big enough to fuel a quick recovery. And this has, among other things, important political implications…If the current slump follows the typical modern pattern, the economy will stay depressed well into 2010, if not beyond —

Miss Italy • July 21st, 2008 at 11:59 am

In these challenging times and with the casino changing the rules at every bet, we need all of our beacons shining some lights (i.e. the Professor and all the smart posters, btw thanks to all)… so the cry is: where’s Octavio?Miss Italy

Gloomy • July 21st, 2008 at 12:30 pm

DON’T TAKE YOUR EYE OFF THE BALLAnd the ball is housing, the epicenter of the financial crisis. The worse housing gets, the worse everything else gets including banks and the general economy. Two items of interest today1. 30 year mortgage rate is 6.42%, compared to 5.90% 3 months ago. This high rate is a direct result IMO of debasement of the US dollar, a process that will accelerate with the de facto nationalization of Fannie and Freddie. These high rates will make for a marked worsening of the housing crisis. The morons in charge have no idea what unintended consequences their actions bring.2.July 21 (Bloomberg) — Freddie Mac, the second-largest U.S. mortgage-finance company, may cut purchases of home loans from banks and bonds backed by housing debt to shore up its capital amid record delinquencies. The government-sponsored company is also considering selling securities and reducing its dividend while it prepares to issue $5.5 billion of stock, McLean, Virginia-based Freddie Mac said in a July 18 filing with the U.S. Securities and Exchange Commission. JPMorgan Chase & Co. analyst Matthew Jozoff said in a report last week that growth in mortgage holdings of Freddie Mac and the larger Fannie Mae will be “weak.” “This just means much less credit availability for mortgage borrowers,” said Paul Colonna, who manages more than $100 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut.

Guest • July 21st, 2008 at 12:41 pm

buying the dips remains a risk free trade thanks to the wall street corruption machine! If you can’t beat ‘em…

Guest • July 21st, 2008 at 12:48 pm

According to my bond valuation model, using such things as the CPI, CRB futures and historical 10 yr yields, the fair value on the 10 year treasury today is 6.98% and yet we trade at 4.10% as of this afternoon! Do you need me to spell out where the next bubble to pop is…

Guest • July 21st, 2008 at 12:53 pm

Last time this bond model was this overvalued, May 2003, (the current reading beats that reading by 12%!)rates rose 53% over the next two years. If that were to happen again now, yileds would rise to 6.27% on the 10 year. That would push mortgage rates up to the 8.5% range. Gee, now how do the fair values of mortgage products look on bank balance sheets???? You see why the govt, treasury and the fed are in a state of panic…

Guest • July 21st, 2008 at 12:57 pm

Also, fair value on the S&P today is 1228.37 FYI.

Gloomy • July 21st, 2008 at 12:58 pm

@Guest on 2008-07-21 11:41:58Thanks for the Krugman piece. My vote is definitely for L__________ shaped!

Guest • July 21st, 2008 at 1:00 pm

the difference between GAAP earnings (fake) and "as reported" or actual earnings estimates for next year now stand at $40.54!!!!!!!! That means GAAP estimates are infalted by 59.92%!!!! When will this fraud be stopped????????????!!!!!!!!!!!!!!!

Guest • July 21st, 2008 at 1:04 pm

When is the world gonna get sick of the imperialist/socialist operation of the US and just dump the US Peso? Everyone else in the world is expected to live by the rules and the US just makes their’s up on the fly…some day the world will say enough is enough…

Guest • July 21st, 2008 at 1:09 pm

From Minyanville…is this a satire of did this really happen? Anyone see it?Two important things happened last night that are deeply interconnected. One, during an interview on CNN, Treasury Secretary Henry Paulson suggested U.S. lawmakers had better pass his rescue plan for Fannie Mae (FNM) and Freddie Mac (FRE) or, he intimated, face embarrassing and ultimately confidence shattering personal probes. Two, although indicating he didn’t want to "speculate about a second stimulus package," he speculated that a second stimulus package would be necessary since the first one had very clearly stimulated consumer spending.

Guest • July 21st, 2008 at 1:52 pm

LOLOL. A stock that is down 80% and this bank thinks Dick Bove was the only one who saw trouble coming??? Now they are going to try and shut up those who speak the truth…this is getting more and more USSR by the day…be careful AMerica..2:45 p.m. [BBX] BankAtlantic sues Richard Bove, Ladenburg Thalmann

Guest • July 21st, 2008 at 1:53 pm

PPT steps in to cement a double bottom in stocks, jsut in time for the witching hour rally!! CRIMINAL!

Danielgk • July 21st, 2008 at 2:03 pm

Bill Gross Says Fannie Mae, Freddie Mac Mortgages `Excellent’ http://www.bloomberg.com/apps/news?pid=20601087&sid=aCZEJbc8WKNM&refer=homenow what?

AfA • July 21st, 2008 at 2:25 pm

Bill Gross is talking his books since few mounths ago when he heavily invested in GSE’s mortgages (61% of total of PIMCO’s Total Return Fund). That is a very big investment even if he thought they were a good deal. He mainly did this in speculation that F&F debt will be bailed out by the government (back in March):"Not only do you have the agency guarantee but you have the mortgage to back you."I think he meant:[Not only you have the mortgage to back you but you also have government (now explicit) guarantee. And the government is determined to save the GSE's and make the agencies holders whole. So you can pocket higher yields (compared to treasuries) with virtually no downside risk]As long as you believe the government will and can bail both GSE’s out, I guess it is a good deal.

Guest • July 21st, 2008 at 2:36 pm

Dear Professor Roubini,With all due respect, it seems that an imminent attack on Iran by Israel is in fact related to the economy, as it would immediately and profoundly affect oil prices as well as geopolitical economic strategies. Second, you have on at least two occasions written posts dedicated exclusively to the question of whether Israel would attack Iran, so it is a topic that has at least on occasion been germane to your economic thinking. Third, your blog is filled with all kinds of arcane discussions on political theory and forms of government, for example, as well as other subject matter exclusive to your specified top at hand. Indeed, it seems that few allowed comments refer directly to the content of any single post. For these reasons, I find it confusing and somewhat disturbing that you have suddenly declared the topic of the possibility of a coordinated attack on Iran suddenly declared forbidden in this forum. With sincere regard,A Regular Reader

Guest • July 21st, 2008 at 2:39 pm

lolPaulson: Telling Wall Street to mark assets to market!!!Paulson in New York says he is meeting with Wall Street CEOs

Sean • July 21st, 2008 at 2:42 pm

London Banker,I could not agree more — 1 million Iraqis were dead. More Precisely, BUSH and American MURDERED 1 million innoncent Iraqis. And American voted to re-elect the murderer BUSH in 2004, despite the apparant facts that BUSH "fake" war evidence. Not sure if American was tooo stupid to be mis-led by Bush administration in 2004 (recalled the weekly changing Threat Level), or American was sooo cold hearted that they peg innocent iraqis LIFE/DEATH at the lowest order of their vote priority. May God **** American. By the way, the NAKED Short Selling issue by SEC was a Complete Crony Capitalism. Those brokers have been naked short selling many other stocks into bankruptcy/delisting for many years, and SEC and DTCC turned a total blind eye on this illegal activity. I wish you could have a chance to dig up something around DTCC . I read somewhere that DTCC was the center of all these illegal Naked Short Selling, and many high rank officers in DTCC/SEC are connected to abusive hedge funds (husband-wife, uncle-nephews) that they never enforce the existing rules to eliminate naked short selling with excuses. I read that NASDAQ used to effectively enforce the covering of naked shorts in year 2005/2006, but was QUICKLY shut down by SEC.Sean

GLOOMY • July 21st, 2008 at 2:52 pm

THE US HAS ALREADY DEFAULTED ON ITS LOANS "Default is the failure to honor contractual obligations; in the case of debt, it’s non-payment of interest or principal payments due the lender. The financial impact of default is the lender’s loss. Those who have made loans to the U.S. government have suffered significant losses – not because of non-payment, but because repayments have been made in a badly debased dollar. Assume a Japanese investor bought 30-year US Treasury bonds in 1985, when the exchange rate was US $1 = Yen 250. Based on a current exchange rate of US $1 = Yen 105, the investor loses 58% of his investment. But the investor can take comfort: At the previous low of US$1=Yen 84, he would’ve lost 66%. European investors who bought US government bonds would also suffer significant losses: Based on the highest US$/ Euro exchange rate (1 Euro = US $0.85) and the current trading levels (1 Euro = US $1.56), the investor would have lost as much as 46%. These losses are comparable to those incurred in a sovereign default, in which the investor typically loses 50% to 80%. Despite official "strong dollar" policies, a case can be made that the US is in the process of defaulting on its obligations via a systematic devaluation of its currency. " http://www.minyanville.com/articles/dollar-euro-yen-Credit-fre-fnm/index/a/18114Look for more of the same in the future.

Guest • July 21st, 2008 at 3:15 pm

Roubini certainly wasn’t fiddling while America burned. This economic Who Done It is a magnificent piece of financial investigative work.Roubini exposes “the good, the bad, and the ugly” and the Fed comes off, IMO, as public enemy number one.The professor has lifted the curtain on the financial sector’s backstage play, bringing into full view its secrets, and it’s not a pretty scene (do I hear booing already?).It shows most financial institutions “putting increasing numbers of assets in the illiquid buckets of Level 2 and Level 3…” actively manipulating and falsifying earnings – “an accounting scam bordering on the criminal.”It blows away the smoke and mirrors of the Fannie and Freddie bailout and exposes it as a “bailout of the mortgage market and of every institution that holds agency debt or the MBS issued by the GSEs (wonder who that could be?) and of every institution that is in the mortgage origination business.”The Fed is caught in the spotlight using let-me-count-the ways math for “beefing up the earnings and balance sheet of financial institutions,” — such as taking $29 billion of toxic securities off the hands of Bear Stearns; such as dropping the Fed Funds rate 325bps so banks can enjoy a higher yield via subsidy; such as opening wide the discount window to favorite non-bank “primary dealers” to swap illiquid toxic for liquid Treasuries… (The Fed’s contributions to the “Dead Stocks Rallying”?)All this while GSE family member, the Federal Home Loan Bank, is propping up hundreds of mortgage lenders with $51 billion out-of-pocket money here for Countrywide and hundreds of billions more there to such favorite family as Citigroup, Bank of America et al. And, not-to-be-forgotten, Citigroups’ chronically-strapped poster child Citibank is back from abroad for help, center stage, experiencing a surge of delinquencies on unsecured consumer debt at home and in a 100 other far away places such as Brazil, Mexico and Japan…And now (drum roll, please) ENTER LEFT STAGE, Chris Cox, SEC fixer, to “crack down on ‘manipulators…’”The title of this real life financial tragedy (in fiction it would be a farce) is “Supreme Baloney.” And, not to be forgotten, the U.S.Congress is in the wings with free lunches for the cast.(Apologies to Nouriel Roubini for editorial liberties — just my way of saying “Bravo!”)

Guest • July 21st, 2008 at 3:24 pm

@ Miss Italy: “so the cry is: where’s Octavio?”Octavio is enjoying himself for 6 months in the “far boonies” of Latin America and Europe, far from the madding crowd. He returns occasionally to civilization from the outback to post a word or two. Pine on, my dear.

AfA • July 21st, 2008 at 3:57 pm

@ A Regular Reader,Not that I am entitled to respond on behalf of Professor, but I think he is right. Topics such as Iran/Israel easily drifts into "subjective" comments and then transforms into an escalation of (innocently) offensive ‘opinions’. It is very difficult to stay objective and close to the heart of the matter when discussing these issues and, if left, becomes P2P insults, spoiling the candide atmosphere that characterizes this board. I can understand he tolerates some of our hollow and useless comments and anger/fun/exclamation/satir/offtopics including my BS, but he cannot let religious/ warmongering/ ideological/ quasi-racist debate take over his board.I, however, do not think the Professor said you cannot discuss the "possibility of an attack and its repercussions" as long as we stay all calm and focused.On another note, I am wondering, concerning all these "beating Wall Street estimates" if it ever makes sense. In a sense, sell side analyst engage in a "reverse engeneering" of companies’ financial statements. Since financial statements as presented in 10K/Qs are not good basis to make any forecasting and are usually based on biased management assumptions, analysts have to rebuild their own financial statements based on which they make predictions of future earnings. The problem is that (if I have this correct), analysts do not alter their earning forecasts back into "normal" accounting statements, which makes any comparison between analysts earning estimates and actuals a bit flawed even if the analyst got it close. I mean, for the same reason why past reported earnings will not be the same as the ones an analyst compute after some financial statements reconstruction, there is no reason why a forecast made by an analyst be closed to actual earnings, unless the analysts put their models back into "original format", which I doubt they actually (can) do.

Guest • July 21st, 2008 at 4:12 pm

American Express Profit Falls on Higher Defaults (Update1) July 21 (Bloomberg) — American Express Co., the biggest U.S. credit-card company by purchases, said second-quarter profit fell 37 percent on worse-than-expected consumer defaults. The shares dropped 9.6 percent in extended trading.Profit from continuing operations was $655 million, or 56 cents a share, declining from $1.04 billion, or 86 cents a year earlier, the company said today in a statement. The average estimate of 17 analysts surveyed by Bloomberg was 82 cents. American Express abandoned its prior earnings forecast after saying conditions “weakened considerably” and it added $600 million to reserves for U.S. loan losses.American Express, Capital One Financial Corp. and Discover Financial Services shares have dropped by more than a third in the past year amid concern the lenders underestimated the depth of the U.S. slowdown.

Miss America • July 21st, 2008 at 4:20 pm

Dearest Nouriel,How dare you think you’ve got control of this blog.In the Bill of Roubini, it clearly states:Roubini shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the blogging; or the right of the people peaceably straying off topic for a redress of grievances.Professor, it’s my personal opinion that what makes this blog special (beyond yourself and the topics you present) is this blog’s ability to be a living/breathing forum for wanna-be-economists around the world. All too often, politics, religion, and various other social theories help shape the economy. Thus, when a blog “strays off topic”, it’s still technically within the world of relevant financial discussion. (sure, some posters can get preachy… but we readers can just scroll past them.)It’s strictly just my opinion… but I’d say: Let us stray. I’m not saying that “I’m right”, …but what I am saying that there is a major contradiction of theory when you complain in your article above about the fact that the government/corporations/FASB/SEC/FED/TPTB/etc are: “manipulating”, “obfuscating” financial data, financial facts, financial methodology, financial theory, etc… …and then you go out and try to “manipulate the living/breathing blog topics, with:“Decided in advance” topics of conversation.By no means am I “make or break” on your request… but I think it’s a request that might not be in the best interest of the blog, based on how fiery topics sometimes bring out the best in some bloggers, and also get wallflowers involved. (When it brings out the worst… a request to “tone it down” should suffice?)With that said, I’d like to comment on something @ London Banker said earlier.First off American are 300million. (time to update your almanac) Now, with regards to what you said about :“They are no more or less important than any other humans. They need to behave with more consideration of the planet and other humans sharing it”To that I say Rubbish! There are clearly people that are more important than others. It’s fantasyland to not believe this. The entitlement to life is equal… but what you do with it isn’t. To compare yours or my importance to that of Jonus Salk would be an example. He was more important than you or I! Without him, there would probably be less then you 230million Americans you quoted. …so with that said, when it comes down to “what we do with our lives”… beyond our own existence… and what we do for others… Let’s not forget about the good. You say 1 million dead, 5 million homeless in the 5 years we’ve been there… I ask, how does that woman who was next on the list to get stoned to death feel? I ask, how many people would’ve been killed in Iraq over the last 5 years if we weren’t there? (typical annual murder rate was what???) The tyranny of Saddam and his ruling party was well noted. In countries like Iraq, they don’t have a 1% jail ratio because many of the criminals were in charge, and violators of their rules weren’t jailed, but instead, tortured or killed. (I’d prefer jail)So when it comes to doing things for other: How does the world stack up???What percentage do the 300million Americans contribute to charities, relief and aide? What about the rest of the world? Something I read from the: Department of Social Policy, London School of Economics stated:“a comparative analysis of giving ethos and behavior in the United States and the United Kingdom, in particular the relationship of giving to civic life. Obvious disparities between the two countries exist when overall levels of giving are considered. In the United States, individual giving as a percentage of gross national or domestic product has consistently hovered around 2% of Gross Domestic Product. By contrast, charitable giving in the United Kingdom has yet to reach 1% of GDP. The paper identifies the differences in giving ethos and behavior in the two countries in relation to the complexity of the differences between the political structures, social attitudes, and the role of charitable giving in the two countries.”To use your methodology of transposing:British are only 61million of the 6.2 billion people on the planet. (but are a greater percentage of wealth) They are no more or less important than any other humans (but they give less). They need to behave with more consideration of the planet and other humans sharing it. (ahhh sharing is a noble cause)Miss AmericaLB, you know I luv ya… but you also know I get defensive. (…and as a reply… please don’t send me any water boarding videos.)

Guest • July 21st, 2008 at 4:59 pm

War and economics have to be considered in the Crash. Expanded war in the middle East will affect the deflating global economies. Good posts LB. Pete CA…please think about the horrible timing for the economy of a misguided and premature and unjustified attack on Iran.

the Guest • July 21st, 2008 at 5:05 pm

Great analysis NR. But please let’s not restict all the variables in the research…thx

the Guest • July 21st, 2008 at 5:07 pm

That is ‘restrict’ as in eliminating unpleasant variables like war.

Joshua • July 21st, 2008 at 5:16 pm

I would like to know why exactly "London Banker" has been granted the privilege of anonymity by RGE? When he writes a post on this blog, he is doing so with all the authority of an RGE employee, whether or not he is actually paid for his services. This is completely unfair, most especially when he expresses views which are based on little more than bare-faced lies and his own obvious bigotry.By all means, let him continue posting here, but only if he agrees to post under his real name.

AfA • July 21st, 2008 at 5:17 pm

Oh Great Miss America,God knows how much I enjoy your insights and when I do not agree with you how much I respect your ideas.However I have to join LB’s camp. I think he is a balanced man. And as a balanced man, he has to adapt his discourse to the audience. A balanced man, in occasions, may sound partial if he is to establish the balance after the other side creates disequilibrium. I am sure if he was in front of an Iranian audience (funny thought) he would take the defense of Americans. He also cannot deny the involvement of Great Britain (especially during the time of Tony Blair) as well as other governments around the world.The fact that Saddam was executing dissidents does not constitute an excuse or a reply to the fact that Americans slaughtered innocent people. A wrong does not justify an evil. Nor does good intension excuse committing crimes. In this sense, we have to first make a distinction between the peoples and their governments. Second we have to stay away from putting people into boxes and using clichés: We Americans, You British, Them Muslims, The Others … When we start explaining human behavior by what they have of different not based on what they have in common, we have no chance to understand the causes of our illnesses.More importantly, it is a shame, abasement, for a person who still believes in what the US used to stand for, to compare the US to Saddam’s regime. At least, Saddam never claimed that he was an elected president not a dictator. And it is the US of A that is screaming in every corner of the earth that it is for the defense of human rights, freedom and democracy. Well, justice comes with a price that a Just person has to pay. It is not with retaliation and biased excuses to occupy countries and extort their natural resources.I think if there was (is) be a God, it would for a good reason. The fact that I helped few victims on the Indian sea after the Tsunami does not give me the right and entitlement to take other people’s life or deprive them from their fortunes. Nor does the fact that I highly contributed to the benefit of all humanity put me in higher place or give me more rights than an ordinary person.IMHO

Joshua • July 21st, 2008 at 5:21 pm

"That is ‘restrict’ as in eliminating unpleasant variables like war."What is unpleasant is not the discussion of war as such but the anti-Americanism and "anti-Zionism" that motivates so many of the posters here. They do not want an honest discussion. What they want to do is disseminate views that have no place in decent society.

AfA • July 21st, 2008 at 5:27 pm

AlsoMiss America: "LB, you know I luv ya… but you also know I get defensive. (…and as a reply… please don’t send me any water boarding videos.)"I think that is an example of why professor get concerned that discussions turn into rebutals with no objective purposes. Freedom to expression does not mean freadom to offend. I know mature people can keep a mature respect for each others’ ideas, but I doubt everybody can do the same.

Guest • July 21st, 2008 at 5:31 pm

FDIC insurance: If your deposit is partially uninsured that is your problem. The FDIC limit is $100,000. If you go over $100,000 per bank you assume the risk of loss.IndyMac: The run was caused by the release of the Schumer letter by Schumer.The good folks at the Federal Reserve: In order to save the banks, you lowered my interest income by 20%. Mr. Chairman: The Chairman of the House Ways and Means Committee has 4 rent controlled apartments in the same building in Harlem. We would not want such a talented public servant to live under a bridge.The value of the dollar: As long as people believe in the Wizard of Oz and his creative accounting, there is no problem.Superior Bank: If you want to know why the story is on page one of the Wall Street Journal today see the story inside about one of the Pritzker heirs — an Obama backer. Not everyone can make $300,000 a year making nice with the University of Chicago neighbors.The solution? Perhaps the aliens will abduct your leaders and return them to the wrong planet.

Gloomy • July 21st, 2008 at 5:39 pm

DO YOUR PATRIOTIC DUTY!! SHORT A SYSTEMICALLY IMPORTANT BANK TODAY!! Let’s put these money grubbing cheats out of their misery!! Let’s clean up America!!

the Guest • July 21st, 2008 at 5:44 pm

‘…disseminate views that have no place in decent society’. RED FLAG!Censorship/free speech alert! Not all views are the same when it comes to nuking Iran to presumably stop a nuclear war. I think that not nuking Iran may be a reasonable alternative that may even be able to be supported with evidence that an attack is not really necessary at this time. This is ‘honest discussion’.

GLOOMY • July 21st, 2008 at 5:48 pm

Listen folks, how about OCCASIONALLY talking about economics on this blog TOP HEADLINES CURRENTLY ON BLOOMBERG-NOTHING BUT BLUE SKIES AHEAD!!•American Express Profit Drops 37% as More Cardholders Default; Shares Fall •Apple’s Profit, Sales Forecasts Trail Analysts’ Estimates; Shares Decline •U.S. Stock Futures, Dollar Drop Following Apple, American Express Results •Assured Guaranty, FSA May Lose AAA Insurance-Strength Ratings at Moody’s •Pimco’s Gross Says Fannie, Freddie Need Treasury Support to Raise Capital •Australia’s Annual Inflation Rate Probably Accelerated on Gasoline Costs

the Guest • July 21st, 2008 at 5:51 pm

@Gloomy,We know. We know the economic news. It’s real bad! Every day brings more losses, more fear, more lies, more obfuscation, more double talk, more plans for government action, etc. More war will stick the knife in it! That’s a certainty I predict. But let’s be in denial about expanded war and walk on eggshells around it and whisper…

the Guest • July 21st, 2008 at 5:57 pm

@Joshua,’but the anti-Americanism and anti-Zionism that motivates so many of the posters here.’So you equate Americanism with Zionism. If so that’s a huge assumption.Interesting…Back to just plain ole economics folks! War is irrelevant!

kilgores • July 21st, 2008 at 6:00 pm

Thank you, Gloomy. I concur.SWK

the Guest • July 21st, 2008 at 6:03 pm

I think the problem I have is with AMERICAN and ZIONIST HAWKS who do seem to think along the same hawkish lines. If one war is good in Afganistan, then two wars also in Iraq, must mean that three wars now in Iran is good. maybe WWIII will even be better in Hawk strategy. Hey economists, these wars all cost the taxpayers borrowed Federal Reserve money!

Novice • July 21st, 2008 at 6:12 pm

Dear people of the blog, Someone earlier asked the question? What about the "little people" you know the Joe six-packers? What kind of advice does the professor have for them in this current economic crisis? Something tangible and not esoteric. What are we small town folks to do? Those of us who have been economically responsible in our personal lives. Would you tell us to pull our cash out of our banks? No- how could you? This would facilitate panic all the more. Do we prepare for a crisis- stocking up on food and survival gear? Maybe we scope out the best food pantries and homeless shelters, so that when the time comes- we’ll know where the best place to send our friends or ourselves to, when we lose our jobs and our life savings? I believe we are swiftly approaching the point of no return, what practical advise do you have for a novice like me? Saw this on Bill Moyer’s Journal the other day- coming to a neighborhood near you or me soonCredit problems/mortgage mess[URL]http://www.pbs.org/moyers/journal/07182008/watch.html[/url]

PRW • July 21st, 2008 at 6:15 pm

@Average Jane -My advice would be to leave your money in your credit union – its one of the safest places. Dont get a mortgage yet a while though, as house prices have further to fall.

Ponder • July 21st, 2008 at 7:05 pm

@Miss AmericaThis will probably be the last post I will make with regards to this argument on human life. And before I do, I agree with @AfA. I make statements to bring back balance as I believe @London Banker does.Consider your own statements"“They are no more or less important than any other humans. They need to behave with more consideration of the planet and other humans sharing it”To that I say Rubbish! There are clearly people that are more important than others. It’s fantasyland to not believe this. " And then the following statement that you also made"The entitlement to life is equal… but what you do with it isn’t."What right to life do the Iraqis have now since 2003? What sort of justification is this? Can this be done to them because they are clearly less important than we are?

Anonymous • July 21st, 2008 at 7:20 pm

I have never viewed our market or our economy with such clarity and confidence as to what the future will bring. The thing I can’t get my head around is the timing. How long do some of these financial companies think they have to keep rearranging the deck chairs while the band plays on? Thanks NR. Since I found you, I have been right earlier and more often.Winning positions this past 12 months:long OIL early, long FXE early, sold WB early, accumulating cashLosing positions this past 12 months:held onto my diversified portfolio of ETFs in my core portfolio

tutterfrut • July 21st, 2008 at 7:29 pm

@GloomyFrom your Gloomberg page I read that Moody’s is thinking of downgrading FSA(US daughter of French-Belgium bank DEXIA). Hope this will not cause a run on the already battered stock of this bank. Could it be that Buffet is (ab)using his stake in Moody’s to get himself the best parts of the bussiness?No, he has too much…what’s it called again…integrity?

Ernst • July 21st, 2008 at 7:33 pm

An interesting discussion:http://www.hussmanfunds.net/wmc/wmc080721.htmErnst

Gloomy • July 21st, 2008 at 7:42 pm

IS IT PATRIOTIC OR UNPATRIOTIC…to short the banks on the SEC’s naked short protected list. I think it is patriotic. We need to clean up America. How about starting a grass roots movement-SAVE AMERICA, SHORT THE SLEAZEBALL BANKS AND PUT ‘EM OUT OF BUSINESS BEFORE THEY PUT AMERICA OUT OF BUSINESS. LET’S GIVE ‘EM A TASTE OF THEIR OWN MEDICINE. Who’s with me!!

Gloomy • July 21st, 2008 at 7:44 pm

@ tutterfrutThe Gloomberg report- I like the sound of that!!

Guest • July 21st, 2008 at 7:44 pm

@ Novice: we are in the same boat. @PTW, thank you. My little credit union is not in the best of shape, though, financially. It’s just that there is no safe place to go. If there are bank runs, the Fed will print more money and inflation will hit double digits. If TPTB have their way, they will let the market crash (thusly in one fell swoop decimating all those pesky public employee pension/retirement plans and pesky union pension/retirement plans) and none of us will have anything. My dollar is valueless. I’ve saved and saved for a mortgage DP but prices kept going into the stratosphere and that 10% or 20% kept going up as well. Now I may have to look at double-digit interest rates if TPTB don’t let the dollar fall into oblivion. We of modest means are stuck between a rock and a hard place, folks.

Guest • July 21st, 2008 at 8:06 pm

and to top it all,Oil will not be Cheaper in the future,rejoice for the end of human ingenuity is at handhttp://in.reuters.com/article/oilRpt/idINL2187782220080721RPT-Peak oil to hinder world development -UK lawmakersMon Jul 21, 2008 8:56pm IST Email | Print | Share| Single Page[-] Text [+] (Repeats to remove duplication of story)By Alex LawlerLONDON, July 21 (Reuters) – The looming peak in world oil production will set back international development and threatens to hinder efforts to make poverty history, a report by a group of UK lawmakers said.While oil’s rally to a record high is causing economic pain in developed countries, its impact on international development is being overlooked, the report by the All Party Parliamentary Group on Peak Oil and development groups RESET and Practical Action said."The deepening energy crisis has the potential to make poverty a permanent state for a growing number of people, undoing the development efforts of a generation," the report released on Monday said."Communities across the globe are more vulnerable than ever, living in an unsustainable present and facing an uncertain future."A rally in oil prices, which hit a record $147.27 a barrel earlier this month, is leading to more interest in peak oil — the controversial view that supply has reached, or will soon reach, a high point and then fall.The parliamentary group, chaired by lawmaker John Hemming, was formed in 2007 to consider the production outlook and the consequences of declining supply for the British and world economy. It has 20 members.Its report refers to warnings that peak oil is likely to occur "before 2015" and the current jump in oil prices is "a prelude to even more severe increases in the next decade," a statement issued with the report said.

Proudly Anonymous • July 21st, 2008 at 8:27 pm

I find it chilling that a poster here is actually calling for an "outting" of London Banker for expressing courageous, rational, and self-evident views. By accusing him of engaging in "bared faced lies" and "obvious bigotry," Joshua employs the by now decades-old tactic of "criticize Israel, expect threats, smears, and repercussions." We will not be bullied by you, Joshua. If you truly think preemptive nuclear war is a defensible prospect, I suggest you move to Israel and experience the repercussions of your advocacy first-hand.

Average Jane • July 21st, 2008 at 8:56 pm

@ All–I’m so sorry; I forgot to sign my earlier post at 19:44:31. And I meant to type PRW, not PTW–please forgive me.Average Jane

Guest • July 21st, 2008 at 9:08 pm

I will respect Prof Roubini’s request to avoid the subject of USA-Israel-Iran. It is an emotionally charged topic. I don’t mind at all hearing diverse opinions, including those that are quite different to mine. I’m also not really bothered by angry retorts or even vitriolic attacks. You have to accept these as part of free expression. However, in the interest of the general discussion topic of the forum, I’ll follow Prof. Roubini’s guidelines (until he makes further changes).Meanwhile, Sean said:"I wish you could have a chance to dig up something around DTCC"I’ll second that request. I know almost nothing about the DTCC, but apparently they play an important role and have access to some vital market data that most people can’t see.PeteCA

Guest • July 21st, 2008 at 9:26 pm

@ Proudly Anonymous: "I find it chilling that a poster here is actually calling for an "outting" of London Banker…"Joshua, if your comments lead us to lose London Banker and his insights, we all will be the losers. I earnestly request that you withdraw your unbelievably unfair request.

Guest • July 21st, 2008 at 9:57 pm

"A rally in oil prices, which hit a record $147.27"what about retest 147.27 in comming months? wonder if it will consolidate above current level?

Guest • July 21st, 2008 at 10:00 pm

we are in a scary situation. I hope you are right and this dilemma is second only to the great depression. Unfortunately, it may be worse.

AfA • July 21st, 2008 at 10:04 pm

Gloomy, somehow your posts do not scare the sh!t out of me anymore. In fact I find them more … amusing (probably ‘coz I’m half way to madness)."Let’s clean up America!"This is what I call a positiv(ist) thinking.Also, from previous discussion, 2cents wrote:"In the end people will wonder what happened when the dust settles. The PTB will point out that there was obviously no favoritism employed when several of the chosen players go kaput and others suddenly get recapitalized. Exactly, these are not all chosen players. Some are being destined to fail others are being destined to live a new life. It’ll look kind of random in the end maybe “market driven” will be the term used, but preordained is a more apt term here. Now if we just knew which were which?"I think I would go for Family brand names. So, Gloomy to be more specific, I would say:"DO YOUR PATRIOTIC DUTY!! SHORT A SYSTEMICALLY IMPORTANT BANK TODAY – In preference with a family name!!"On a different note, my (virtual) Naked Cox Portfolio (112% long the 19 firms and 100% short the financial/ banking/ RE/ insurance industry) is yielding 5.8% after one week (58% if I was leveraged at the tone of 1 to 10). After only one week, this portfolio has almost the maximum return compared to if it was started any time since October 2007.(if it was started in December it would have lost 10% and if it have been started in March 08 it would have gained 7% today)

Guest • July 21st, 2008 at 10:05 pm

"If there are bank runs, the Fed will print more money and inflation will hit double digits"dont ever doubt inflation will hit double digits, cuz it will. Hyperinflation in China, 1937 – 1949http://dollardaze.org/blog/?post_id=00057&cat_id=11you know it FED and USA gov will not let any firm fail. Starting with bailout of Bear Stern. Follow by FNM and FRE. follow by entire stock market, bond market, and asset. Name one, USA gov and FED will monetize with print press.

OuterBeltway • July 21st, 2008 at 10:06 pm

Dr. Roubini:Thanks for this blog. Are you hearing about any new trends in capital formation for entrepreneurship? The mis-allocation and subsequent destruction of credit is going to have a chilling effect on micro-finance, since many entrepreneurs financed their early-stage ventures via credit cards and HELOCs, etc.This comes at exactly the wrong time for the U.S.; this is when we need innovation the most.London Banker – I raised this point with you not too long ago, wherein I railed at the colossal failure of our (the U.S.’) credit allocation system, and wondered when the "fundamental fix" would manifest itself (as an extinction event, ala the print newspapers).For years I have wondered why retail banks even exist; they offer no differentiating benefit that a bank-by-mail/web-based bank such as Schwab couldn’t offer more competitively. Small banks don’t have the expertise to evaluate innovation risk; they only lend against "traditional" collateral…like homes. It was never a good business model, and now it’s a dead one.The capital formation process is broken at the bottom of the pyramid, where all the new jobs and ideas come from.Dr. Roubini, I hope that you’ll raise this issue with your entrepreneurial students, and ask what they’re experiencing "on the ground". I bet it’ll open your eyes.

Guest • July 21st, 2008 at 10:07 pm

Deflation will come, but not now. Now, we need to go thru hyper-inflation. when currency become useless, then we have deflation.

Guest • July 21st, 2008 at 10:22 pm

"Americans are only 230 million of the 6.2 billion people on the planet. They are no more or less important than any other humans. They need to behave with more consideration of the planet and other humans sharing it."I agree with this, and Miss America need to chill a little.

Guest • July 21st, 2008 at 10:31 pm

Miss America should really chill out.Iraq war was not about freeing Iraqi. It was about oil. Global distribution of toxic waste and worthless dollar is not about making good deed for people of word. It is greed. What America did in couple of decades were not for good of world. It was about interest of America. So chill out.

Maundermin • July 21st, 2008 at 10:42 pm

Israel is not perfect, in fact, Israel is no less, and no more ethically sound, or morally unadulturated than any other nation. All nations have comitted unforgivable sins, yet the more compassionate among this planet are willing to not punish the earths children for the sins of their fathers.Unbrideled criticism is unabatedly levied against the political and military gaffs of eretz Israel, but most of the criticism is born from an intense hatred for Jews. London Banker’s country, if equal standards are to be held to, should be eternally hated by the Irish, yet the compassionate among them are willing to overlook the sins of his fathers on account of his innocense. The american Indians should be given back the entire North American Continent, and America should give back Puerto Rico to the Puerto Rican people. China should go out of its way to inflict massive suffering on the Japanese people because of their trangressions against Manchuria. The french should be destroyed for their sins against the Ivory Coast, and the Japanese should bomb the English to smithereens for closing off free-trade in India on account of the superior competitiveness that Japan brought against them. Quick solution, everybody bomb the world, our fathers would be proud. As the saying goes, like father, like son.

Guest • July 21st, 2008 at 10:44 pm

Paulson Pushes Covered Bonds, Sidestepping Congress (Update1)http://www.bloomberg.com/apps/newspid=conewsstory&refer=conews&tkr=WM:US&sid=aqmmT0hkXfyY July 21 (Bloomberg) — Treasury Secretary Henry Paulson, aiming to create a new source of U.S. mortgage financing, wants banks to start issuing covered bonds without waiting for legislation from Congress. Regulators can provide the guidance that lenders are asking to be set in law, said a Treasury official working on the issue who declined to be identified. Banks want a standardized definition of a covered bond, which requires the lender to make good on payments if homeowners default, and guidelines on bondholder protections.Paulson is promoting the debt as an alternative to mortgage-backed bonds, the securities that sparked more than $426 billion in writedowns and credit losses as delinquency rates soared. Covered bonds also offer a way to diminish the role of Fannie Mae and Freddie Mac, the troubled firms behind more than two-thirds of new U.S. mortgages, according to the Treasury. “If they’d asked for” legislation, there would be “a question whether they could even get it done this year,” said Wayne Abernathy, an executive director at the American Bankers Association in Washington and a former Treasury official. “There is a need today for additional types of forms of providing liquidity and forms of providing funding for housing.”Covered bonds offer banks a way to raise money for new mortgages without either selling the loans or packaging them into securities. Instead, a bank issues bonds that are backed by a dedicated and regularly updated pool of loans. In Europe, covered bonds represent a $3 trillion market that’s a primary source of financing for home loans and municipal debt. The securities have been used in the U.S. since 2006, after introductory offerings by Seattle-based Washington Mutual Inc. and Bank of America Corp. of Charlotte, North Carolina.While a law would be helpful for issuers, it isn’t required, the Treasury official said last week. The department hasn’t yet signaled its next move… Paulson has done “precisely the right thing” by trying to move forward without getting bogged down in the legislative process, said former U.S. Securities and Exchange Commission Chairman Arthur Levitt in an interview today with Bloomberg Radio.“What we’re seeing here is a very proactive secretary of the Treasury recognizing that almost any plan he puts forth will be debated endlessly by the Congress, and we can’t afford endless anything at this time of crisis,” Levitt said. “It’s part of the whole arsenal of activities that Paulson has called upon to try to restore public confidence to our market and gain a measure of liquidity that simply has been so reluctant to appear.” A take-off in covered bond issuance may reduce the role of Fannie Mae and Freddie Mac, which own or guarantee almost half the $12 trillion of U.S. mortgages outstanding. Paulson told lawmakers last week the firms “touch” 70 percent of new loans. Mortgage originations totaled $525 billion in the second quarter, according to a Mortgage Bankers Association estimate…Federal Reserve Chairman Ben Bernanke expressed doubt this month whether covered bonds can take off without action by Congress. “It’s not yet known whether this can be successful without legislation,” he told lawmakers July 10…

Miss Italy • July 21st, 2008 at 10:56 pm

@Joshua,this, like most blogs, already protects anonymity by allowing the use of aka or guest (by the way who is Joshua?). I wouldn’t mind at all to sign with my full name. Actually the standard of some comments would likely improve, once we attach our reputation to them. Nonetheless, even with this kind of rule enforced, rules can have exceptions and to have one blogger or contributor with hidden identity wouldn’t disturb me at all. Please think carefully about what I said. What do you think? Please avoid cheap moralism if you answer. Thanks.Miss Italy

Nouriel Roubini • July 21st, 2008 at 10:58 pm

I don’t mind if folks discuss the economic and financial implications of a war in the Middle East or of an Israeli attack on Iran; and i have written myself about those subject. But I will not accept – and i repeat i will not accept – the kind of insulting debate that has been going on here with people talking inflammatory about the millions of Iraqis being killed or the israelis being killed or the palestinians being killed and the trading of personal insults on issues that are heated and for which there is no black or white answer. Everytime in every forum folks discuss Middle East issues it turns out to be a charade of inflammatory remarks and personal insults. I have said so: i will not accept that. A third of the comments on my latest blog – that debates the most serious financial issues of the day – have been a charade of vulgar insults on iraqis, arabs, israeli and palestinians. This is my forum and i decide the rules; if you dont like them go somewhere else. So stop writing inflammatory remarks on issues that have nothing to do with economics, finance and geopolical issues. it is fine to talk about geostrategic issues and their economic/financial implications; it is not fine to trade insults and throw metaphorical bombs that are aimed only at provoking more insulting remark. Period. And i will enforce such rules strictly even at the cost of being accused of censorship.

marc • July 21st, 2008 at 11:02 pm

would someone please explain how BoA can not be responsible for the financial obligations of country wide

Miss America • July 21st, 2008 at 11:19 pm

Professor, Though I don’t agree the reasoning, i have no problem honoring your request. If for no other reason, as a sign of respect for all that you have taught me, and in appreciation for providing us with a free medium of exchange that is unparalleled to any other I have seen on the www. Thank you.p.s. Can we continue the debate on another site within??? …say LBs blog from Friday? I posted my reply there, and I hope this is OK?Miss America

JLC • July 21st, 2008 at 11:45 pm

Professor, I agree with your position and I submit that it is not censorship if you are merely keeping the blog on topic. There are plenty of places for people to go to fight about Middle Eastern politics. Thank you for providing this forum and continually sharing your wisdom. I have learned very much from you and all the posters here.Regards,JLC

Guest • July 22nd, 2008 at 12:01 am

@AfA: "Bill Gross is talking his books since few mounths ago when he heavily invested in GSE’s mortgages (61% of total of PIMCO’s Total Return Fund)."A contact temporarily sans laptop called from the road today to ask me what Roubini had to say, if anything, about the SEC’s action in his most recent post. His response afterwards: “fantastic points, I really appreciate him saying that, he’s so clear, top-line analysis.” In that the SEC was Roubini’s ninth bullet, I thought perhaps it important to repeat it (paragraphing mine):“With the excuse of wanting to crack down on “manipulators” the SEC has now imposed restrictions on short sales on the stocks of 19 major financial institutions including Fannie and Freddie. Let us be clear about this new rule: this is a clear and naked attempt by the SEC to manipulate upwards the price of equities of financial firms.The SEC should start investigation and legal action against itself for actively manipulating the stock market. And shame on the SEC for this most un-capitalist and manipulative action: when there is an upward bubble in stock prices and 95% of investors/speakers on CNBC are talking their books in that most public forum to manipulate upwards their portfolio the SEC does nothing and allows this charade to go on.But when short sellers are shorting the stocks of firms that are likely to be bust that is considered manipulation. That is a pretty pathetic action by the SEC that has artificially boosted the equity valuations of US financial firms – now up 20% plus in the last part of the past week after the introduction of this manipulative rule.And of course this manipulated increase in financials’ equity prices reduces the mark to market losses that banks and other financial firms holding such equities would have incurred, another additional way to pad upwards earnings.

Boston2theBay • July 22nd, 2008 at 12:09 am

First time poster. I have three questions:1. What is the future of the business of investment banking and thus the stocks of the major players?2. Will the hedge fund industry be smaller 5 years from now?3. Is the glamour and outsized compensation in the IB biz the last 20 years a thing of the past?I think the investment banking, advisory and money management sectors are about to enter a sharp decline as are the majority of the various vertical industry consulting job markets. This will be the Ivy League and otherwise highly educated version of the mortgage broker industry having the rug pulled out from under them. The crippling of this huge consumer class will have long lasting implications. Thank goodness for our high tech and biotech industries and world class universities. Mix in the right tax and fiscal policies and The American economy will re-emerge, stronger and more stable in its foundation.

Henry • July 22nd, 2008 at 12:25 am

Thank you Professor for sharing insight about current economic events by providing this forum. Henry Seattle area

Guest • July 22nd, 2008 at 12:35 am

@ Guest: > "LONDON, July 21 (Reuters) – The looming peak in world oil production will set back international development and threatens to hinder efforts to make poverty history, a report by a group of UK lawmakers said."On a lighter note, maybe Saturday’s column by Ellen Goodman fits into that scenario.“Welcome to the do-it-yourself economy”http://www.dallasnews.com/sharedcontent/dws/dn/opinion/viewpoints/stories/DN-goodman_19edi.ART.State.Edition1.4d8eeb0.htmlJuly 19, 2008 –I finally drew the line at a dinner invitation. My husband wanted to try a much-touted restaurant where they present you with a platter of raw foods and a hot pot. If I want to cook my own food, I answered rather testily, I’ll eat at home.Until then, I had drifted along with the do-it-yourself economy. I bused my own lunch trays. I booked my own movie tickets. I checked myself in at hotel kiosks. I even succumbed when an upscale seafood restaurant expected me to swipe my credit card through a handheld computer as if I were in a supermarket.But maybe it was the election-year rants about the offshoring of American jobs from steelworkers to computer programmers that finally got me. The outsourcing of work to other countries has produced endless ire. But what about the outsourcing of work to thee and me? For every task shipped abroad by a corporation, isn’t there another one sloughed off onto that domestic loser, the consumer? For every job that’s going to a low-wage economy, isn’t there another going into our very own no-wage economy? I’m not just talking about do-it-yourself gas pumping, which is by now so routine that the memory of an actual person washing your windshield has receded into the mists of AARP nostalgia. Now what happened on land is happening in air. We are expected to book our own itinerary, print our boarding passes and do everything at the airport except pat ourselves down for liquids.In this self-service economy, we also serve (ourselves) by having intimate and endless conversations with voice-recognition machines simply to refill a prescription drug or check our bank balance.We are expected to interact with "labor-saving technology" without realizing that it’s labor-transferring technology. The job has not been "saved," it’s been taken out of the paid sector, where employees have a nasty habit of expecting salaries, and put into the unpaid sector, where Suckers R Us.I am tempted to say that customer service has gone the way of the house call, but that reminds me that even medicine has been outsourced to patients, who buy do-it-yourself kits to test and track everything from HIV to blood pressure. The Internet ad for a do-it-yourself eye surgery kit may be, I pray, a hoax. But in an era when every operation short of brain surgery is done on an outpatient basis, nursing care has already been outsourced to family members whose entire medical training consists of TiVo-ing Grey’s Anatomy. The axis of this evil isn’t really globalization; it’s privatization. Consider all the major jobs that have become part of our personal portfolio. We’ve become our own computer geeks, as help lines become self-help lines. We’ve become our own pension planners and financial analysts left to manage our 401(k)s. We are even expected to be health care analysts, determining which star in the galaxy of drug prescription plans covers the ever-changing cast of pills in our medicine cabinet.All of this is framed in the language of free choice. As opposed to, say, free time.An MIT economist assures me cheerily that many Americans are willing to accept less service for lower cost. In a society built on the value of self-reliance, I am told, we may even feel virtuous when we put together our own bookcase or install our own hard drive.But I have yet to find an economist who has figured out the human cost of "lower cost" or tallied up the transfer of labor from companies to customers. I’ve yet to find a consumer who has added, subtracted or multiplied the amount of time we are now spending on the second shift of life management.Welcome to the self-service economy, where we are never without work to be done. Let’s celebrate by dining out together. Bring your carrot peeler.

J. • July 22nd, 2008 at 12:43 am

@Guest on 2008-07-21 20:06:04,please don’t forget that ‘peak oil’ can easily perform as scapegoat for failed policies (and justification for others of at least questionable nature).

Reggie Middleton • July 22nd, 2008 at 12:52 am

I have heard that doo doo bank phrase before somewhere. Hmmm, I wonder where, though.See http://boombustblog.com/component/option,com_myblog/show,The-sell-side-analytical-company-did-it-again.html/Itemid,85/ for more of the same on Amex. I warned of this company’s troubles a few weeks ago. They have much more credit risk than pundits seem to realize.

Reggie Middleton • July 22nd, 2008 at 12:52 am

Guest • July 22nd, 2008 at 12:58 am

true Jbut peak oil is still peak oilits just so happensmajor things are happening at the same timesay im selling ice cream in summer (location central park)unfortunately the weather is unusually cold for that year, rain and all etc etc, the trend lasted for 2 months..to make matter worse i have pre-ordered bunch of ice creams and kept it in storageas a result of the weathermy sales figure is low,i have with me bunch of unsold ice creams that have a life storage of 6 months.. in short im screwed"damn Global Warming"!!yeah i was careless for storing too much inventoriesbut you cant blame me on the unexpected weather..

Guest • July 22nd, 2008 at 1:12 am

July 22, 2008“’The exposure at Freddie Mac is about twice that at Fannie Mae,’ [Credit Suisse analyst Moshe] Orenbuch said in an interview. He said market conditions have deteriorated since Freddie Mac reported $18 billion in “temporary” losses from private label subprime- and Alt-A- mortgage securities"The Congressional Budget Office is working on an assessment of the companies’ capital needs as lawmakers weigh Paulson’s request for unlimited power to fund Fannie Mae and Freddie Mac, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding."http://www.bloomberg.com/apps/newspid=20601170&refer=special_report&sid=aZLroaUCZnt4"Unlimited power?" For some reason, that reminds me of a quote by Collis P. Huntington: "Whatever is not nailed down is mine. Whatever I can pry loose is not nailed down."

Huizer • July 22nd, 2008 at 1:23 am

NR, This is a good piece and I would not disagree with most of what you said. However, there are legal and illegal mehods of forbearance. The suggestion that the Fed is condoning, or even abbetting what I would consider to be corrupt practices may be a bit too colloquial. The story is bad enough by itself.One of the greatest problems I see is ideological. A European country would probably have not let it get so far, but also would have tried to do the unavoidable, temporary nationalization of the banking system (Sweden, Finland) , in such a way that it would be dificult for anyone to make a fast buck out of it. This will become a bailout, no doubt about it, but there will be not only huge losers (and many small ones, including Joe taxpayer) but also big winners. I am afraid that this government is (a) not going to to better tahn with Katrina and (b) lacks any form of credibility to prevent this from becoming a scavenger’s ball. The incoming government will probably wish they had not won and, from the little we know about those individuals without any managerial experience, are likely to be taken for a ride as well. It is a disgrace thatthey let this happen.Incidentally, I like your 10 recommendations. During my many years of involvement (on the business side) with financial sector regulators and regulation, the final shape of Basle II continues to disgust as a model of dysfunctional regulation, based on something that could actually work in the right hands and if not so much money was at stake.

Guest • July 22nd, 2008 at 2:34 am

its not over untill the fat lady sing,owh she’s singing nowbut i like this song betterhttp://video.yahoo.com/watch/208177/1329326———————————————————————–http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aN7OzEAYpVPYU.A.E’s Dirham to Gain 5% in 2009 as Dollar Peg Goes, CFC Says By David Yong and Matthew BrownJuly 22 (Bloomberg) — The United Arab Emirates dirham will appreciate 5 percent in 2009 as faster inflation in the Gulf state forces the central bank to ditch its 30-year peg to the dollar peg next year, according to CFC Seymour Ltd. The central bank of the U.A.E. will drop the dollar peg by June of next year, linking the dirham to a basket of currencies, including the dollar and the euro, Hong Kong-based currency analyst Carol Chan said in a phone interview yesterday. The dirham will rise to 3.49 to the dollar from its peg rate of 3.6725 today, said Chan. Inflation in the second-largest Arab economy accelerated to 11.1 percent in 2007 from 9.3 percent in 2006 as rent surged while the weaker dollar and higher global food prices made imports more expensive. With monetary policy tied to the U.S., the U.A.E. has put price caps on basic foods and building materials in an attempt to control prices. “The people are paying more for a liter of water than oil, and that’s damping the people’s purchasing power,” Chan said. “A change in the currency regime is possible after the second quarter” because the dirham’s weakness added to the higher cost of imports, she said. The U.A.E. has cut its one-day repurchase rate from 5.25 percent to 2 percent since September, following the reduction of the U.S. federal funds target rate.

London Banker • July 22nd, 2008 at 3:02 am

@ Professor RoubiniI apologise unreservedly. You are right to be upset that your amazing and comprehensive summary of the mismanagement of the financial crisis is hijacked by ME issues. I knew I was close to the line on off topic posting, and I am sorry I crossed it.@ All (except Joshua)Thanks for your kind words of support. I value the community here, and that is why I will respect the Professor’s wishes. He wants our community to focus on the financial and economic issues that affect all our futures, and he is right to drive us back to that focus. We can’t contribute to resolution of ME issues here, but we can make a difference if we address our collective efforts to understanding and addressing the serious economic implications of past, current and future financial mismanagement – of whatever origin or motivation. @ Miss AmericaI won’t continue ME or I/P issues even on my posts. You are incorrect in several of your assertions, but I will address these offline. And I luv ya too, big guy!@ JoshuaChilling discussion with implied threats is not appropriate or in spirit with this blog as I understand it. If I post here it is because I respect and value the Professor’s efforts and the community on this blog. I try to be honest and act with integrity, but I have reasons for valuing my anonymity (as do you, I presume). If we disagree, let’s do it honestly, openly, rationally and without abuse or implied threats.

Guest • July 22nd, 2008 at 3:13 am

……..http://business.smh.com.au/business/australian-oil-production-has-peaked-report-20080722-3j63.htmlAustralian oil production has peaked: reportEmail Print Normal font Large font July 22, 2008 – 2:54PM Oil production in Australia has already peaked and the alternative fuels industry needs to be dramatically ramped up in response, an expert research group says.After years of a stop-start approach to ethanol production, Australia is fast running out of time to end its love affair with crude oil, much of which is imported, the NRMA Motoring funded Jamison Group says."Oil production in Australia has already peaked,” the group’s report, A Roadmap for Alternative Fuels in Australia, warns."Meanwhile, Australia’s demand for petroleum is increasing at a rate of two per cent a year, from 750,000 barrels per day currently to 800,000 barrels by 2009/10.”The domestic arrival of peak oil means more and more crude will be imported from the Middle East.————————————————————————http://www.bloomberg.com/apps/news?pid=20601087&sid=aLLrhZOGOD_M&refer=homePemex Oil Production Falls 11% in June on Aging Field (Update2) By Andres R. MartinezJuly 21 (Bloomberg) — Petroleos Mexicanos, the state-owned energy company, said oil output fell 11 percent in June from a year earlier as new wells failed to keep pace with a four-year decline in the aging Cantarell field, the nation’s largest. Production dropped to 2.839 million barrels a day in June from 3.206 million a year earlier, the Mexico City-based company, known as Pemex, said today on its Web site. At Cantarell, where a drop in pressure is making it more difficult and costly to extract oil, the company pumped 1.017 million barrels a day, down 35 percent from a year earlier and the fastest rate of decline in 12 years, Pemex said. The company is pumping 33 percent more from the Ku-Maloob-Zaap field to make up for the decline at Cantarell. A four-year drop in production and reserves put pressure on Pemex to spend more on exploration at a time when oil prices are the highest ever. The company estimates the drop in output costs about $20 billion in lost revenue annually, and President Felipe Calderon has proposed reforms that seek to give Pemex more freedom to manage the state’s resources and choose projects.

Prt1stAskQLater • July 22nd, 2008 at 4:01 am

Reggie, Referring to http://media.corporate-ir.net/media_files/irol/64/64467/Q208_Earnings_Slides.pdfIt appears that 2005, 2006, 2007 vintages have progressively steeper write-off curves on page 20. These vintages have gone way past the 2001 curve. What’s even more interesting is that the 2003 curve has angled upwards again unlike the 2001 curve with dips down after 36 months of tenure. I think this means that veteran borrowers with long tenure are falling off the cliff. If this is the condition with AmEx, God help the other issuers. And check out the average acquisition FICO on page 21; that FICO tightened significantly to 750 for lending. The above facts show that we’re looking at deflation in the face.Ben and Hank, what are you thinking? Load up the space station; the chopper just won’t do.Print First Ask Questions Later.

Alessandro • July 22nd, 2008 at 5:05 am

Prt1stAskQLater: "The above facts show that we’re looking at deflation in the face."Welcome on board!And, I’ll give you one more piece of breaking news: the dynamic duo has no chance to stop it, short of nuking the US economy with hyperinflation. But even they should be able to see that hyperinflation is not going to save neither the banks nor the presidential election, so hopefully it should be off the table.

yankee • July 22nd, 2008 at 6:23 am

So I guess my comment that Harman pellet stoves’ back log is now until next JUNE is a verboten post.Oh well.THAT alone says something about sentiment….off the grid, anyone?

Guest • July 22nd, 2008 at 6:29 am

"to have one blogger or contributor with hidden identity wouldn’t disturb me at all"i luv guest or anonymous posts.

Free Tibet • July 22nd, 2008 at 6:52 am

Re:“The capital formation process is broken at the bottom of the pyramid, where all the new jobs and ideas come from.”Exactly! Say it again! “The capital formation process is broken at the bottom of the pyramid, where all the new jobs and ideas come from.” And again, “The capital formation process is broken at the bottom of the pyramid, where all the new jobs and ideas come from.”I was writing about this 15 years ago as companies began “outsourcing” because of the need to turn cost centers into profit centers. I’m reminded of the Fortune 500 company that axed its entire accounting dept. (Or contemplated doing that. I’m not sure if they ever went through with it.)When production is globalized, or perhaps it’s better to say commoditized, margins on production are often insufficient to cover indirect manufacturing costs. Just as banks found themselves unable to pass costs through in the margins they were making on loans and went to fee-for-service revenue structures, those manufacturing cost centers must earn their way. How better to do that than to outsource accounting or customer service to a specialist that can do it at a profit. But R&D, which is a cost center too, is a bigger problem. When production can no longer cover those R&D costs someone has to do those things in his garage. And capital has to be able to support those projects. I always thought that was the opportunity for venture capital / private equity – build those businesses up and sell them off to production companies. I was a foremost proponent of that model. But it hasn’t worked. Capital has preferred to make the “safe” bets slicing up the same familiar assets in more bizarre ways. And it won’t change as long as financial institutions hire only MBA’s & M&A specialists, etc. Wrong background. Wrong mindset. Wrong analytical ability. Gotta get your hands dirty.

Free Tibet • July 22nd, 2008 at 7:09 am

Sorry, quote from my previous post should have been attributed to Outerbeltway

Prt1stAskQLater • July 22nd, 2008 at 7:32 am

Alessandro on 2008-07-22 05:05:30 wrote: the dynamic duo has no chance to stop it, short of nuking the US economy with hyperinflation.Alessandro, Hyperinflation against what? Euro? Gold? Oil?http://www.fas.org/man/crs/crs-asia2.htmThe Asian financial crisis was initiated by two rounds of currency depreciation that have been occurring since early summer 1997. The first round was a precipitous drop in the value of the Thai baht, Malaysian ringgit, Philippine peso, and Indonesian rupiah. As these currencies stabilized, the second round began with downward pressures hitting the Taiwan dollar, South Korean won, Brazilian real, Singaporean dollar, and Hong Kong dollar. Governments have countered the weakness in their currencies by selling foreign exchange reserves and raising interest rates, which, in turn, have slowed economic growth and have made interest-bearing securities more attractive than equities.By that logic, we should sell foreign exchange reserves (dollars) to counter the weakness in our currency (dollars). Huh? Sell dollars to counter weakness in dollars? I feel that hyperinflation can’t happen because the merchantilists hold dollars. There is no gold standard. The Dollar is the new gold. Guess what? We have a mine that provides ‘gold’ in unlimited quantities – all backed by the full faith and credit of the carrier battle groups. It’s the US Dollar printing press. Print First Ask Questions Later.

Alessandro • July 22nd, 2008 at 7:50 am

Prt1stAskQLater: "By that logic, we should sell foreign exchange reserves (dollars)…"Foreign exchange reserves means reserves of other currencies, the one you don’t hyave the printing presses for. The US has next to no reserve currency, apart from gold (as long as you accept that as a currency)With the printing presses (and by lowering the fed fund rate) you can depreciate your own currency, but the only way to appreciate it is by removing money (and credit) from the system. Selling foreign exchange is only a temporary option.The US dollar is no gold exactly due to the presence of the printing presses. This charade is going on simply because the central banks of the world got cough in the giant US Ponzi scheme and are scared to death.

Guest • July 22nd, 2008 at 8:17 am

LOLOL Once again, horrible news after the close last night, futures tonk overnight, then magically, they get bought up this am. Futures losses cut inhalf in the last hour!

OuterBeltway • July 22nd, 2008 at 8:19 am

@FreeTibet: gratified to see that you’ve been on this trail a while. Curious about your background and what you’ve said, seen, learned to date. Please expound.========I have been wondering why the general idea of innovation never seems to make it into the conversation on these ‘economics’ blogs. While its understandable that our attention – now that the roller coaster is at the top of the peak – is riveted on the canyon before us, some intrepid thinkers might be wondering to themselves what’ll happen when the cars reach the valley. Do they continue straight into the ground? Do we idle along on the "L" like this L_________________ for an indeterminate amount of time?If, indeed, this actually is a discussion of economics, at what point does the conversation turn from day-trading toward the question of what the economy will consist of once the clutter of financial-derivative food-processing gadgets hits the dumpster?I’ve asked London Banker, who seems bright, what he posits to be the "new capital allocation mechanism" that rises from the current wreckage. There seems to be a considered silence on this from him, and I’d have expected his trip across the North Sea would have clarified his thinking some But in general, there seems to be a great capacity to focus on the immediate artifacts of implosion, while spending little time reflecting on the fundamental causes (got nothing to trade; gave away productive capacity and didn’t replace it with something new, got distracted by the three-card-monte man) and the fundamental fix: build new productive capacity.Haven’t seen a single post lately on "what we have to do to rebuild the economy".How is this germane to finance? Well, the finance system just shot itself somewhere quite vital. It’s out of the game for several years to come. We need to start investing in the new economy now. There is a yawning gulf between the capital allocation system we have and the one we need.Helloooooooo???my e-mail is outerbeltway@yahoo.com if you’ve got more-than-blogsized ideas to share. Love to hear from you.

AfA • July 22nd, 2008 at 8:28 am

Yes Alessandro. In the face of an insolvency, governments are too predictable. At some point they will resolve to the monetization of all debt since default/ deflation is politically unacceptable. The world is also trapped in their dollar denominated assets, investments and reserves. But at this point, I think he who panics first, does this at the lowest cost. Many countries think they can untie their dependence to the dollar gradually without provoking a crisis, but I think that is a lexurious wish that will vanish as soon as a new catalyst exposes the Ponzi scheme. Then it is the death of the Bretton Woods II and to $ defaults which will be exacerbated by panic. At that point, I do not think that monetization will do any good. Once foreigners (merchantilists) lose all faith in the dollar they would not accept interest payments in dollars. However, technically they do not have any other choice since the US has no reserves (and not enough gold). Defaults then will not serve the best interests of debtors/lenders who do not want dollars, and the US will not accept foreign takeover and ownership of its assets.The safest guess I think is to expect a "big event" a la New Deal where all game rules will be changed, where the dollar will be revalued to a much higher value or tied back to the gold again, or the creation of a new "international" currency backed by a basket of strongest world currencies (I doubt no one currency (including Euro) currently has the ability to replace the dollar as reserve currecy)…The depression occured when the world was all broke outside the USA which was not running such deficits and leverage as it currently does. That if we assume that TPTB and governments keep control on the flow of events. Otherwise, it would be moderately high inflation, then deflation.

ptm • July 22nd, 2008 at 8:34 am

Guest on 2008-07-22 03:13:07 – http://www.bloomberg.com/apps/news?pid=20601087&sid=aLLrhZOGOD_M&refer=home Pemex Oil Production Falls 11% in June on Aging Field (Update2)A while back I posted an email asking an engineer friend with 20 years in the oil business (with the early years on off shore platforms) to confirm if the peak oil buzz inside an oil services company was plausible, he said it was.But this article reminds of an earlier conversation I had with him about Mexico’s oil. Even though it has roughly the same estimated reserves as Saudi Arabia, the oil is interspersed in the strata rather than pooled. This means one must be cautious in oil extraction. Techniques developed in the USA using back pressure and preheating are required. And if these techniques are not used then not only is a fraction of the oil is recovered, but it also makes the majority of the oil very difficult to recover or impossible to recover with today’s extraction techniques.As a general rule, Pemex does not used these advanced extraction techniques.

quintum • July 22nd, 2008 at 8:46 am

@FreeTibet&OuterBeltway. it seems the "invisible hand" is now showing us the finger…the finance system has a limited real creation of value added inputs and the economy "outsourced" itself to death while apparently there’s no common sense limitation on the matemathical creation of profit, one cannot indefinitely overlook the disconnect with the real economy.

kilgores • July 22nd, 2008 at 8:52 am

@ quintum on 2008-07-22 08:46:23Priceless encapsulation of the whole sordid mess! I just laughed out loud when I read it. Thanks.SWK

Guest • July 22nd, 2008 at 8:56 am

Dow going green…this is just amazing….

Guest • July 22nd, 2008 at 9:04 am

DOW GREEN!!!!!

quintum • July 22nd, 2008 at 9:09 am

@kilgores on 2008-07-22 08:52:09thanks for the appreciation.it’s humor as a last defense against the frustration of feeling powerless vis a vis the manipulation of the markets by the financial clique… this invisible hand is visibly going deeper down the taxpayer’s pocket to pay for the profits of the few.

Guest • July 22nd, 2008 at 9:14 am

10:13 a.m. U.S. plan for GSEs has $25 billion price tag: CBO10:10 a.m. AmEx falls as economy chokes growth10:10 a.m. Moody’s cuts Wachovia to ‘A1′ on ARM portfolio

Man • July 22nd, 2008 at 9:19 am

Dr. NRThanks for posting such informative and decisive posts over time. It gives a new meaning to same numbers which we hear from regulators, media and companies. More so I like your approach to take a decisive stand on these issues, hats off to you!!!But I just wonder and not sure why Government cant see this thing coming, when you could do it 2 years back. Can I hypothesize that they know it very well, and they may be up to something other than just trying to help in fudging balance sheets of these companies. Who knows they may actually go to war with Iran just to prop up economy or may be taking over the rights of people in some ways….. I am not sure, but something is certainly not digestible, Government machinery not able to see these things coming and doing nothing except helping Banks to fudge balance sheets?Man

Guest • July 22nd, 2008 at 9:21 am

The market has spoken, this is the bottom. Today’s new should have brought the markets down 2%-3% easily but the dow is now up 30 points and the S&P and NASD are about to turn positive. It is not the news itself but the reaction to the news that says enough is enough. STOCKS WILL NOT BE ALLOWED OT GOL LOWER SO GET LONG!

London Banker • July 22nd, 2008 at 9:28 am

@ Outer Beltway[Sigh!]: I’ve asked London Banker, who seems bright, what he posits to be the "new capital allocation mechanism" that rises from the current wreckage. There seems to be a considered silence on this from him. [Like I've got nothing better to do!]This will probably get me in trouble too, but here goes. The answer to what will replace the investment banking system in capital formation supporting real (rather than debt-inflation) economic growth and resurgence is social networks. By the end of the coming recession, you would sooner trust a used car salesman with your life’s savings rather than an investment banker or fund manager. They will have zeroed out the balance in your pension, 401k and investment accounts by then – with the help of a hefty dose of inflation and some nasty taxes to pay off the $8 trillion in debt they want to get out from under before they head offshore to join their carefully hidden assets.So what will replace them to finance new growth? Social networks that engender trust based on common understanding, experience or enterprise. Think families. Think neighbourhoods. Think myspace.com. Why do some families thrive? Why are some ethnic groups more prosperous and entrepreneurial than others? Why do some universities or coaches get reputations for driving excellence and others mediocrity? In general it comes to a dynamic process of behavioural shaping towards desired behaviours (honesty, hard work, integrity, teamwork), a sense of shared purpose or enterprise ("I helped you so you can help someone else.") and social networks that are supportive over time ("Don’t worry about paying me until you’re on you’re feet").To some extent the current crisis epitomises how these factors were stripped away from the securities markets and intermediated financial markets. When securities were sold locally by a business (think 40 years ago when the USA had 20+ stock exchanges all over the country) to neighbours and families and workers at the plant, then executives were a lot less likely to run a business into the ground and lay off workers to the detriment of a community or to rob the shareholders blind. When shareholders were in a firm for the long term, they didn’t sweat a couple quarters of bad performance if the management could convince them that they were making improvements that would pay off down the road.To a great extent, the intermediation, atomisation and anonymisation of investment through tiered, intermediated collective investment markets has undermined the social capital constraints necessary to ensure that the compact between management and equity holders was respected. Instead of wanting to do well for everyone, it became a game of winner takes all until the whole world now loses.The old models will re-emerge. If you have a great business idea, you’ll have to convince that rich uncle or neighbour to invest. He’ll keep an eye on you, give you the benefit of his advice, make you employ his idiot grandson in the mailroom, and otherwise make your life a living hell until you’re a success. Add a flavour of new technology from the web, if you like. I could pitch my business idea on a VC chat room and possibly, if I could establish credibility, get those who felt comfortable to invest. They might have gone to the same school, or live nearby, know my family, or trust me because I’ve blogged with them since before the bubble burst . . . .So social capital connections are going to be important. Be nice to that rich uncle. If he’s still rich after the recession, maybe he can help you invest in that chainsaw to cut logs for Medic’s pellet stove.

Alessandro • July 22nd, 2008 at 9:31 am

AfA: "At some point they will resolve to the monetization of all debt since default/ deflation is politically unacceptable"The point is: in the present conditions it is not possible to monetize the debt without triggering hyperinflation.And the simple reason is that basically all debt in the US is rolling debt. Public debt, corporate debt and household debt are all expanding (with some transfer from private to public via stimulus checks and the various bailout schemes), that is no one is actually paying back the debt. Everybody is scrambling to paying the minimum interest and refinance. This means that any attempt to monetize debt will shot the interest rates up for everybody and everybody will actually end up in MORE debt, not in less debt.This is exaclty the reason why the FED has been so careful in not printing one dollar since the beginning of the crisis. THE FED HAS ACTUALLY REMOVED DOLLARS FROM THE ECONOMY SINCE AUGUST 2007! Foreign central banks might be trapped in the US debt Ponzi scheme, but they know how to recognize the end of the scheme.The only way to reduce debt are:1. default on it (hyperinflation is just another name for default)2. pay it back with goods and services (aka deflation)3. pay it back with assets (reverse colonialism?)IMHO the most probable outcome is a mix of 2 and 3. In any case the US standard of living needs to scale back huge time.Written by Alessandro

K in TX • July 22nd, 2008 at 9:46 am

@ AfA on 2008-07-22 08:28:17The safest guess I think is to expect a "big event" a la New Deal where all game rules will be changed, where the dollar will be revalued to a much higher value or tied back to the gold again, or the creation of a new "international" currency backed by a basket of strongest world currencies (I doubt no one currency (including Euro) currently has the ability to replace the dollar as reserve currecy)…This is what I’ve been expecting. Everything is in play, spinning free. A new system is bound to be set up so that it is advantageous to the "in crowd". What would happen if the U.S. currency was deflated en masse? I recall reading that the dollar has lost something like 97% of it’s original value. Could we deflate at a rate of 100 to 1, or would 10 to 1 be more likely?Probably more like 2 to 1 really…something to put us on par with the Euro. It wouldn’t be hugely costly either since so much money now is just numbers in computers…presto, you now have $500 NewDollars instead of the $1000 you did have. I feel sure consumers wouldn’t see retail prices drop by a full 50%. The poor public will be so confused trying to figure out what they are "really" paying for things…most will just give up.Actually, that 2 to 1 is to simple isn’t it? Better make it some fractional number like 1.89 to 1.

Guest • July 22nd, 2008 at 9:47 am

"AmEx decries ‘superprime’ woesCard giant’s results underscore dire state of the U.S. economy, as even some customers with good credit histories fall behind on bills." Hey but this kind of dire news doesn’t matter to wall street because the new govt decree is "none of my big campaign contributors fail!" so it is rally time, let the rest of the worlds markets tank, but not the US…

Alessandro • July 22nd, 2008 at 9:49 am

@London Banker and OuterBeltwayand don’t forget the power of the internet. We have idea of what’s going on, because of the inane power of free communication, and we might manage to preserve our wealth because of that. But once you have some credibility the internet can be use to raise start up capital from ‘socially networked’ people all around the world.I’d sure lend money to London Banker should he present me with a sound business plan (BTW even without the need to know his first name). Heck, I’d vote for him, should he run for anything I’m entitled to vote!And social network are already becoming a huge resource where to access capital. Think Open Source. My little company has a track record of under-bidding much larger enterprises thanks to our ability to use the huge amount of Open Source Software (that is basically free capital once you learn how to use it). This is something new and it has happened because of the internet.

Guest • July 22nd, 2008 at 9:51 am

test

randy • July 22nd, 2008 at 9:53 am

@NRThanks again for keeping the blog on topic. @ all otherswe all need to stay focused because I feel the next few weeks and months are going to be very turbulent and I for one, want to be ready to position myself to protect my assets.

Guest • July 22nd, 2008 at 10:06 am

You see-all green so lets just ignore the bad news and bubble on!

quintum • July 22nd, 2008 at 10:15 am

@London Banker on 2008-07-22 09:28:21thank you for that wonderful insight that speaks dearly to me about the (now considered "obsolete") values of trust, common sense, honesty. I am not entirely sure about the contribution of the social networks (but agree that they will be a factor in) to successfully provide funds for ventures in a recession time but fully agree that the personal touch and community involvement will play a more important role in the day to day business. maybe that’s what we lost when the village went financially global and impersonal?

Alessandro • July 22nd, 2008 at 10:21 am

@AfA and K in TXInternational currency? And who would control money supply of this new international currency? A world central bank? And how exactly would an international currency have less problem than the Euro?I don’t think central banks of the world would ever surrender their power to steal wealth from their own people. In Europe we somehow managed to let them partially agree on the good times, but you see what’s happening when the crisis hit.If we will ever go back to some kind of international currency, the only way that I see is that people refuse the paper money and go back to gold and force the central banks out of business.

kilgores • July 22nd, 2008 at 10:55 am

Posting Huge Loss, Wachovia Tries to Purge Lending WoesBy ERIC DASHMoving quickly to put an end to the constant spill of red ink, the Wachovia Corporation, the banking giant, booked an $8.9 billion loss and slashed its dividend in its first quarter under new leadership….See, http://www.nytimes.com/pages/business/index.htmlSWK

Guest • July 22nd, 2008 at 11:16 am

This should rally the Dow antoher 100 points:12:12 p.m.Corporate bond default rate rises in first half of 2008

Guest • July 22nd, 2008 at 11:17 am

More socialist hiding of data…I have a data porovider that has ceased providing bank balance sheet information, gee, imagine that. Improtant govt data not being made available anymore….

WAWAWA • July 22nd, 2008 at 11:40 am

Failure of Central Banking leads to Debt Capitalism Self Destruction By : Henry C.K. Liu http://henryckliu.com/page164.html

Gloomy • July 22nd, 2008 at 11:40 am

@Alessandro, LB, MA, and anyone else who may wish to comment.I’ve been trying to figure out what to recommend to my 85 year old parents. In December, I persuaded them to put all their money in short term treasuries and bank cds (less than 100k per account). They do not have enough financial sophistication to short the market. With all the bailouts in progress and coming and massive amounts of treasuries and equivalents in foreign reserves which may be dumped any moment, IMO a dollar collapse (gradual or sudden) is likely. So the question is: If I get them out of dollar based investments, what should they get into? If the US goes down hard, what economy will be spared a similar fate? All the Asian economies are export based and will not fare well. The Eurozone seems to me to be rapidly failing and have as many problems as the US. I don’t know enough about Switzerland to properly evaluate its currency, but it seems unlikely to me that if all of the above go down, it will hold up. The coming depression will likely markedly reduce demand for commodities, leading to lower prices. That leaves gold, which seems a dicey proposition. On the one hand it may be perceived as real money and do well. On the other hand, it is widely perceived as a hedge against inflation and in a deflationary world might crump. To me, the only sure protection is to short the market, but as I said they are not sophisticated enough to accept this answer. I’d love to get some suggestions.

Flanders • July 22nd, 2008 at 11:46 am

"To me, the only sure protection is to short the market." I agree.

kilgores • July 22nd, 2008 at 12:03 pm

Gloomy:My Dad just turned 80, and my Mom’s not far behind. I have had to take over all of their financial affairs in the past few months because they no longer have the capacity to manage things themselves. I’ve finally managed to move them out of equities entirely, and now everything is down to cash in FDIC-insured banks (SWK

kilgores • July 22nd, 2008 at 12:04 pm

Gloomy:For some reason, a big chunk of that last post was lost. Here it is again:My Dad just turned 80, and my Mom’s not far behind. I have had to take over all of their financial affairs in the past few months because they no longer have the capacity to manage things themselves. I’ve finally managed to move them out of equities entirely, and now everything is down to cash in FDIC-insured banks (SWK

kilgores • July 22nd, 2008 at 12:06 pm

Gloomy:Sorry, now I realize I absent-mindedly included an HTML code character in the post. Let me try yet again:Gloomy:My Dad just turned 80, and my Mom’s not far behind. I have had to take over all of their financial affairs in the past few months because they no longer have the capacity to manage things themselves. I’ve finally managed to move them out of equities entirely, and now everything is down to cash in FDIC-insured banks (less than $100K per account), short-term treasuries, and a little in GSE bonds. The focus now is on getting them to bring their expenses in line with their income so that we invade the principal of their retirement savings as little as possible. SWK

Guest • July 22nd, 2008 at 12:07 pm

the price of diesel fuel, which costs more than gasoline yet is cheaper to refine.Diesel prices range from $1.31 to $1.55 per litre across the province. "It’s affected everybody," he said. "There are companies that are just hanging on by their fingernails."the Ontario Trucking Association (canada) said fuel now accounts for 40 to 50 per cent of a trucking company’s operating costs.A few years ago, it was 15 to 30 per cent.If there’s a silver lining to higher fuel prices, it is that they may force some manufacturing to return home from Asia, Einwechter said. The cost of shipping a freight container from China has risen from $3,000 in 2000 to $10,000 today, he said.

lenny • July 22nd, 2008 at 12:11 pm

@gloomyi’m an inexperienced investor who wanted to get out of the dollar…couldn’t find any financial advisers who could help… after looking into it…so far i’ve come up with these investments:1. offshore bank account holding swiss francs2. some gold and silver bullion held at perth mint; some bullion and coins in a safe deposit box3. foreign government bonds: aussie, brazilian, norweigian, and swiss as well via an annuity4. shorting the market using inverse etfs bought via scottrade, which makes them easy to buy and sell even for a technophobe like me5. i also bought some currency options…euro, pound and aussie dollar puts based on recommendationsin an interview, the professor mentioned bonds indexed to inflation…other than TIPS, i’ve yet to find these bonds……hope that gives you some ideas…i would like my parents to move more into foreign government bonds…but they won’t do it…if any of the experienced investors see problems with these investments feel free to let me know…as i said, i came up with these allocations without much outside advice…

kilgores • July 22nd, 2008 at 12:18 pm

Gloomy:It seems to me that if the dollar really does plunge catastrophically against foreign currencies — I don’t really anticipate that myself — it will be difficult, if not impossible, for the average American to purchase many commodities from abroad. Goods produced in the U.S., however, will continue to be priced in dollars, so having dollars during a domestic deflationary period is probably a good thing, as the domestic value of those dollars should increase with the passage of time. Furthermore, I’d imagine the demand for U.S.-produced necessities such as food, clothing, and so forth, and hence the supply of those necessities, would rise as foreign goods become too expensive. All in all, then, barring domestic hyperinflation — a possibility that I also don’t buy into at this point — it seems to me that being retired and holding everything in dollars might not be such a bad thing, not to mention the fact that Dr. Roubini has consistently declined to embrace the view that the current crisis will be as bad as the Great Depression.SWK

London Banker • July 22nd, 2008 at 12:21 pm

@ GloomyYou have done enough to protect them. Don’t try to guess the moves or the timing or reach for every cent that may be on the table at some point. Your parents will be better off than almost all of their peers. They will tell glowing tales about your foresight and wisdom. Leave it at that and turn your attention elsewhere.

Guest • July 22nd, 2008 at 12:23 pm

Probably more like 2 to 1 really…something to put us on par with the Euro. It wouldn’t be hugely costly either since so much money now is just numbers in computers…presto, you now have $500 NewDollars instead of the $1000 you did have. I feel sure consumers wouldn’t see retail prices drop by a full 50%. The poor public will be so confused trying to figure out what they are "really" paying for things…most will just give up.Actually, that 2 to 1 is to simple isn’t it? Better make it some fractional number like 1.89 to 1.Written by K in TX on 2008-07-22 09:46:48———————————-How would this help pay the US deficits?

Guest • July 22nd, 2008 at 12:24 pm

Just an FYI for those in panic about where to hide assets and protect capital…at an average ernings yield of 5.45% since 1988, and a 52 week cumulative earnings estimate for the S&P of $99.61, that equates to an S&P value of 1828 by June of 2009…that is a 45% run from today’s level…

Guest • July 22nd, 2008 at 12:28 pm

stocks getting rady to explode higher…

Alessandro • July 22nd, 2008 at 12:32 pm

@Gloomymost of the way you can short the market without some kind of threshold (LEAP PUTs, inverse ETFs) relays on a counter party being able to fulfill their trades. I’d not bet all my retirement money on JPM or even GS being alive and well three years from now. And you still get the currency risk of a US denominated security.My personal choices are mainly government bonds of northern Europe, even if I feel nervous to my extreme exposition to the Euro, we European do not seem at risk of a currency collapse in the mid term. And PM in various forms.Keep in mind that is the dollar collapse for real, you need a minor exposition to PM or foreign currency to be the richest person of the block and probably of the whole subdivision. So I’d plan allocating for various scenarios, so that in no event they are completely wiped out.Just my €0.02

Guest • July 22nd, 2008 at 12:38 pm

GOOD

MA • July 22nd, 2008 at 12:39 pm

Gloomy,IMO – it’s all about energy (especially Alt), technology and useful consumption products and commodities. …That’s it. Really basic. Not much else you and the family can do other then being prepared. Those who adjust fastest will thrive. …and those who were prepared will likely make the fastest adjustments. Besides, “luck favors the prepared.”Miss America

Guest • July 22nd, 2008 at 12:40 pm

The countdown to socialism….11:59 a.m. Bill to rein in energy speculation clears procedural hurdle

kilgores • July 22nd, 2008 at 12:45 pm

@ Guest 12:23:26>How would this help pay the US deficits?It’s been a long time since I studied international economics. With that caveat in mind:Wouldn’t this work a bit like inflation? In the 1970s, it was great to have a house and a mortgage because as the dollar declined in value due to inflation, repayment of the mortgage debt, which was denominated in dollars that had greater value, became cheaper, since you were paying off the mortgage debt in dollars that were worth less than at the time you took out the mortgage. Your real value was captured in the asset, i.e., your home.If the dollar depreciates relative to foreign currencies, then it seems to me that if you’re paying off debts held by foreigners that are denominated in dollars that were worth more at the time the debt was incurred than at the date of payoff, it’s also cheaper. The foreign investors wind up getting half the value of what they thought they were going to get from the debt instrument, at least in terms of their own currency (against which, I assume here, the dollar has depreciated).SWK

Gloomy • July 22nd, 2008 at 12:45 pm

@LB, Alessandro, MA, othersThanks for your comments.@MAWhen we get to severe recession/depression how can you expect energy prices to keep rising in the face of plummeting global demand?

Gloomy • July 22nd, 2008 at 12:55 pm

@LBMy concern for my parents is that they will be "Argentina’ed". My understanding is that the middle class was sort of wiped out when their currency collapsed. Isn’t the same scenario likely here given our government’s propensity to de facto nationalize the financial system?

Guest • July 22nd, 2008 at 1:08 pm

2:01 p.m.2 Fed banks wanted discount rate hike in June

Guest • July 22nd, 2008 at 1:10 pm

Funny how the market didn’t tank on this news:1:43 p.m. Assured Guaranty shares crushed as Moody’s may cut Aaa rating

Guest • July 22nd, 2008 at 1:15 pm

Gloomy, we all have been "Argentina’ed" already! We, as consumers have already lost what, 90% of our purchasing power since the Feds’ inception in 1913.

Guest • July 22nd, 2008 at 1:16 pm

Written by kilgores on 2008-07-22 12:45:42As I understand, inflation is largely due to the devaluation of the dollar. More dollars in circulation eases the ability to pay past depts as they become less significant.

Guest • July 22nd, 2008 at 1:28 pm

A Cry for Help The nation’s convenience stores are nailing up “Pumptopper” posters on their walls starting August 1 to tell customers of their plight and outrage over devastating credit card fees that are causing most to lose money on every gallon of gas paid for by credit card. Credit card fees topped 10 cents per gallon of gas in 2008, while the markup for the store’s owner is averaging only 11 cents a gallon. After paying operating expenses, stores owners — most one-owner operators (56%) — are losing money on every gallon.Only 2% of the nation’s 115,000-plus convenience stores are owned and operated by the major oil companies, yet convenience stores sell up to 80% of the country’s gasoline, says the National Association of Convenience Stores (NACS) letter.In 2007, credit card fees cost these convenience stores $7.6 billion…double that of the stores’ profits of $3.4 billion.And, now, says NACS President Hank Armour, the credit card companies are in Washington “using their outrageous profits at the pump” to fund a massive lobbying effort to prevent fixing the broken system. “It is impossible to match their virtually unlimited resources, so we need to take the message straight to where this pain is occurring – at the gas pump.”Credit card interchange fees, says NACS, represent a fixed fee and a percentage of each transaction that Visa and MasterCard and their member banks collect every time a card is used. The “fee” averages 1.8 percent in the United States, the highest of any industrialized country.My question: What do these bankers do for that money? Are they producers… or just moneychangers? My second question: What does Congress do for its money?(written off my deli gal’s newsletter)

kilgores • July 22nd, 2008 at 1:29 pm

Cost of Loan Bailout, if Needed, Could Be $25 BillionBy DAVID M. HERSZENHORNWASHINGTON — The proposed government rescue of the nation’s two mortgage finance giants will appear on the federal budget as a $25 billion cost to taxpayers, the independent Congressional Budget Office said on Tuesday even though officials conceded that there was no way of really knowing what, if anything, a bailout would cost.http://www.nytimes.com/2008/07/23/business/economy/23treasury.htmlSeems a bit low…SWK

Alessandro • July 22nd, 2008 at 1:35 pm

@SWKin the ’70s you had fixed rate mortgages, now you’ve got ARMs.The reason the banks pushed for ARMs is that they protect the creditor from interest rate changes and the whole risk is transferred to the debtor. So anybody on a ARM will not benefit from inflation, because they were designed exactly to avoid the advantage people had over banks in the ’70s.People on fixed rate that are able to pay the mortgage and don’t ever need to refinance might get an advantage with moderate inflation IF their wage rises as fast as the CPI. Willing to bet on that one?In the mean time anybody with adjustable rate debt or in the need to refinance will get murdered (the US government among the others).

kilgores • July 22nd, 2008 at 1:38 pm

@ Guest 13:16:27Exactly. Inflation can be thought of as a rise in the general level of prices and goods over time, or otherwise as a decrease in the real value of the currency used to purchase those goods and services. If you double the money supply, you’ll cut the purchasing power of the currency in half. If you think of foreign currency as a good purchased in dollars, the same principle applies. If the value of the dollar is cut in half relative to a particular foreign currency, then you can only purchase half as much of that foreign currency. Conversely, a foreigner will only receive half the real value of an investment in dollars if the value of those dollars relative to his home currency if the value of the dollar relative to that home currency has been halved.SWK

kilgores • July 22nd, 2008 at 1:43 pm

@ Alessandro 13:35:12Point well taken. Of course, it is precisely because most mortgages were fixed rate in the 1970s that I used them as an example of how a debtor could benefit from rising general prices for goods and services by using a house as a hedge against inflation. Obviously, as you have rightly pointed out, this benefit does not exist where the interest on debts can be adjusted for inflation, because you can’t ever pay less than the real cost of borrowing.SWK

kilgores • July 22nd, 2008 at 1:53 pm

@ Alessandro 13:35:12>People on fixed rate that are able to pay the mortgage and don’t ever need to refinance might get an advantage with moderate inflation IF their wage rises as fast as the CPI. Willing to bet on that one?Your guess is as good as mine. My recollection is that in the 1970s, it took a while before wages began to rise in response to general increases in prices for goods and services, so I suspect there will always be a lag. Of course, it still seems to me that any current inflationary pressures are principally exogenous, based on increases in the price of imported oil, but this may be only temporary. If recessionary forces were to continue to gather momentum, I could envision circumstances in which general price levels, and perhaps even wages, begin to fall. That, of course, would create crushing pressure on anyone with debt of any kind.SWK

Guest • July 22nd, 2008 at 1:54 pm

WaMu Shows Paulson Mortgage Rescue Plan Is Perilous (Update1)July 22 (Bloomberg) — Treasury Secretary Henry Paulson’s plan to revive U.S. mortgage financing depends on investors buying the same kind of bonds they’re shunning in Europe.Paulson wants to create a version of Europe’s market for covered bonds in the U.S. just as sales of the debt have fallen to a six-month low and prices have dropped 2.5 percent this year. While the securities are backed by loans and bank assets to get AAA ratings, most are valued, on average, as if they were three levels lower.The extra yield on covered bonds sold in Europe by Seattle- based Washington Mutual Inc., the biggest U.S. savings and loan, has jumped 13-fold since the sale two years ago to 3.16 percentage points over government notes. The premium for debt of Bank of America Corp., the largest home lender, has quadrupled since June 2007.“This is absolutely not going to be an instant fix for the U.S. mortgage market if you see how tough it is and how expensive covered-bond funding currently is for established markets in Europe,” said Florian Hillenbrand, an analyst who follows the securities in Munich for UniCredit SpA, Italy’s largest bank.http://www.bloomberg.com/apps/newspid=conewsstory&refer=conews&tkr=WM:US&sid=aAAbDzCsg9O4

GLOOMY • July 22nd, 2008 at 1:59 pm

A BETTER (OR SHOULD I SAY BITTER)ESTIMATEI posted this a few days go- this was published in April. Now I’m sure rating’s agencies would never dare cross the government by downgrading debt from AAA, but the market will do it for them by selling treasuries off. Also I’m sure S&P will now take these estimates back, due to implicit/explicit threats from out government.NEW YORK (CNNMoney.com) — Among the nightmares lurking around the corner for the already battered housing and credit markets would be a meltdown at mortgage financing giants Fannie Mae and Freddie Mac.Although few are predicting an imminent need for a bailout just yet, credit rating agency Standard & Poor’s recently placed an estimated price tag on this worst case scenario — $420 billion to $1.1 trillion of taxpayer’s money. http://money.cnn.com/2008/04/21/news/economy/fannie_freddie/?postversion=2008042217SEE ALSOFed, Comptroller of the Currency Due Diligence Sham for Fannie, Freddiehttp://www.nakedcapitalism.com/2008/07/fed-comptroller-of-currency-due.html

kilgores • July 22nd, 2008 at 2:02 pm

@ GLOOMY 13:59:20>…worst case scenario — $420 billion to $1.1 trillion of taxpayer’s money.Now THAT’S a loss estimate with some hair on it…SWK

Gloomy • July 22nd, 2008 at 2:02 pm

AND BY THE WAY…Fannie is currently down 11%.

Alessandro • July 22nd, 2008 at 2:07 pm

SWK: "If recessionary forces were to continue to gather momentum, I could envision circumstances in which general price levels, and perhaps even wages, begin to fall. That, of course, would create crushing pressure on anyone with debt of any kind."I think we agree on most of the big picture. My point was that it is a widespread misconception that debtors are easily bailed out by printing more money. Debtors that are well positioned may get a relief if their income react to inflation faster than their expenses, but most of the debtors will be as screwed with inflation as with deflation. And this is even more valid for public debt.BTW: it is a pleasure to discus with you.

kilgores • July 22nd, 2008 at 2:09 pm

Seems to me one result of all this trouble for the U.S. economy is that at some point, foreign concerns with liquid assets denominated in foreign currency that has appreciated substantially over the dollar will begin moving in to the States to acquire businesses and other goodies at fire sale prices. SWK

kilgores • July 22nd, 2008 at 2:10 pm

@ Alessandro 14:07:27> I think we agree on most of the big picture. I agree.> BTW: it is a pleasure to discus with you.Thanks. Likewise, I’m sure. SWK

Play On • July 22nd, 2008 at 2:15 pm

Here comes the McCain rally: Oil down to $90 by Halloween and the S&P back to 1400! Makes no sense to give the thing away to Obama who will REMOVE the cap on FICA. That would be tantamount to a 6.75% tax increase to millionaires and we cant have that!

Guest • July 22nd, 2008 at 2:16 pm

@ July 22 (Bloomberg) – “Treasury Secretary Henry Paulson, trying to persuade Congress to approve his rescue plan for Fannie Mae and Freddie Mac, said U.S. financial market stability is at stake and international investors are awaiting the outcome.”Who does Paulson work for, anyway? Isn’t that the U.S. treasury he’s secretarying – the place where I send my taxes? Is it now my job to bail out international investors? Who are “awaiting”?http://www.bloomberg.com/apps/news?pid=20601068&sid=aIktnsyc83UA&refer=home

Guest • July 22nd, 2008 at 2:16 pm

CNBC states analyst are forecasting a loss for WaMu at $1.04/share when it reports after the bell. What’s the chance it will report a better than expected loss (like-0.98 cents/share)? The stock will then explode higher in the warped world in which we live.

quintum • July 22nd, 2008 at 2:22 pm

"Seems to me one result of all this trouble for the U.S. economy is that at some point, foreign concerns with liquid assets denominated in foreign currency that has appreciated substantially over the dollar will begin moving in to the States to acquire businesses and other goodies at fire sale prices.SWKWritten by kilgores on 2008-07-22 14:09:00"Such as InBev buying Anheuser Busch? the question is how much of this will be allowed to happen from a protectionism / political standpoint. and what would you do with the US military might in a depressed economy?

kilgores • July 22nd, 2008 at 2:32 pm

@ quintum 14:22:18>Such as InBev buying Anheuser Busch? Actually, I was thinking about Russian investors pumping dollars into rebuilding U.S. roads, bridges, and other infrastructure; Chinese investors coming in to buy up real estate á la the Japanese in the 1980s), etc. I imagine there would be more hand-wringing than any sort of legislative backlash to prevent such sales.SWK

Guest • July 22nd, 2008 at 2:34 pm

Once again, the witching hour rally to new highs of the day is alive and well! The con game continues…

Guest • July 22nd, 2008 at 2:37 pm

WHat a miricle the S&P broke above its 20 DMA sucking in all of the technical traders right at the end of the day….

Guest • July 22nd, 2008 at 2:40 pm

More great news for global growth!3:39 p.m.Toyota reportedly cuts worldwide sales forecast

Pickle • July 22nd, 2008 at 2:42 pm

Alessandro: "Debtors that are well positioned may get a relief if their income react to inflation faster than their expenses"Does that actually ever happen, that is to people, not CEO’s?

Guest • July 22nd, 2008 at 2:46 pm

What a friggin joke! Financila have turned around over 8% from the low this morning!!! Once again, 2:30 hits, and stocks magically go verticle to take out a key resistance level on one of the worst earnings news days in recent memory.

Guest • July 22nd, 2008 at 2:46 pm

What a friggin joke! Financials have turned around to rally over 8% from the low this morning!!! Once again, 2:30 hits, and stocks magically go verticle to take out a key resistance level on one of the worst earnings news days in recent memory.

Guest • July 22nd, 2008 at 2:54 pm

"What a friggin joke"it is not a joke. system is not allowed to fall. invisible PPT hand.

Guest • July 22nd, 2008 at 3:02 pm

The bank index rallied 15.05% off the low today, 15.05%!!!!!!

Guest • July 22nd, 2008 at 3:05 pm

The VIX has fallen 26% in 7 trading days…

JLarkin • July 22nd, 2008 at 3:11 pm

Kilgores – "Cost of Loan Bailout, if Needed, Could Be $25 Billion" – NY TimesBetter than a 50% chance we won’t have to use it? What a laugh! Same kind of specious accounting that Nouriel mentioned the banks are using (wink, wink). Lots of forebearance and whistling through the graveyard, putting our heads in the sand I guess. The media can’t sound like doom and gloom, for sure. It would be irresponsible to start a revolt.Kudlow last night, "I don’t want a recession – I believe in the free market". Is that stream of consciousness?? There’s no escape, Larry. You’re doing a heck of a job.

Guest • July 22nd, 2008 at 3:12 pm

So much for "dead stocks rallying"! Market says it has priced in the worst. These financial stocks are trading in their own little mania right now…

KJ Foehr • July 22nd, 2008 at 3:14 pm

DJ Washington Mutual 2Q Loss/Shr $6.58 Vs EPS 92c >WMDJ Washington Mutual 2Q Loss $3.33B Vs Net $830M >WMTrading lower AH, but probably higher tomorrow!

Guest • July 22nd, 2008 at 3:14 pm

This ought be worth 300 points to the upside tomorrow!!!4:12 p.m. [WM] WaMu Q2 net loss $6.58 vs 92c profit

Guest • July 22nd, 2008 at 3:15 pm

And another 100 points!4:14 p.m.[WM] WaMu Q2 loan loss provision $5.91 bln vs $372 mln

Guest • July 22nd, 2008 at 3:20 pm

Once again, congress looks like the stupid idiots they are!!! "Ohhhh, those nasty speculators, we need to kill ‘em"….4:19 p.m. CFTC study finds oil prices pushed up by supply/demand

Guest • July 22nd, 2008 at 3:21 pm

Now WaMu up in AF! I must be living in The Twilight Zone.

KJ Foehr • July 22nd, 2008 at 3:24 pm

Wamu Shares Up 16% After Earnings ReportThere, that’s more like it!No fear; no failure!

Guest • July 22nd, 2008 at 3:24 pm

WHAT A FARCE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!4:20 p.m. WaMu lateshares reverse course up 6% at $6.20

Guest • July 22nd, 2008 at 3:28 pm

Ohhhh, Wamu only takes a $5.91 BILLION provision, give their CEO a $10 MILLION bonus!!!!!

Guest • July 22nd, 2008 at 3:30 pm

APWashington Mutual reports 2Q loss of $3.3 billionTuesday July 22, 4:24 pm ET Washington Mutual swings to 2nd qtr loss has set aside more than $8 billion for bad loans SEATTLE (AP) Washington Mutual says it swung to a loss in the second quarter as it increased to more than $8 billion its reserve to cover sour loans.For the April to June period, the Seattle based bank says it lost $3.33 billion, or $6.58 per share, which compares with a profit of $830 million, or 92 cents per share in the year ago period. Results include a previously disclosed, one time reduction of $3.24 per share related to the company’s capital raising in April.Thomson Financial says analysts, on average, were expecting a loss of $1.05 per share.The bank says it increased its loan loss reserves by $3.74 billion to $8.46 billion during the quarter, as it continues to face mounting losses stemming from bad mortgages.

Guest • July 22nd, 2008 at 3:31 pm

Who is buying the financials? Are they all in collusion to buy each others stock to benefit all?

Guest • July 22nd, 2008 at 3:32 pm

Well, Nouriel, so much for "dead stocks rallying"…

Guest • July 22nd, 2008 at 3:33 pm

"The company also said that the remaining cumulative losses in its residential mortgage portfolios will be towards the upper end of the range it disclosed in April. Excluding one-time items, earnings would have been $3.34 a share in the second quarter. WaMu was expected to lose $1.05 a share, according to the average estimate of 12 analysts in a Thomson Reuters survey."

Prt1stAskQLater • July 22nd, 2008 at 3:34 pm

Written by kilgores aka SWK on 2008-07-22 13:53:40 wrote: If recessionary forces were to continue to gather momentum, I could envision circumstances in which general price levels, and perhaps even wages, begin to fall. That, of course, would create crushing pressure on anyone with debt of any kind.SWK, That is precisely why having an ARM is crucial. The ARM comes in use not in inflationary times, but in DEFLATIONARY times. With an ARM, the debt burden can be brought down by pushing the Funds Rate to near zero (assuming the Fixed part of the ARM is done and maturity of the ARM instrument is less than one year). Instead of having crushing debt during DEFLATION (as that happened in the GD), blood letting can happen to relieve the pressure by lowering the monthly payment with the rate indexed to the short end of the yield curve.If I as a consumer had to manage my credit risk, I would pick an ARM any day of the week to hedge against the black swan of deflation that can completely put me on the street.Print First Ask Questions Later.

Guest • July 22nd, 2008 at 3:38 pm

4:37 p.m. [ETFC] ETrade late traded shares fall 16% to $3.40

Guest • July 22nd, 2008 at 3:41 pm

4:40 p.m. [PTV] Pactiv lowers 2008 EPS outlook to $1.58-$1.74 range

Guest • July 22nd, 2008 at 3:43 pm

Here is another 150 points for tomorrow:4:42 p.m. Nabors Industries profit falls 15% 4:42 p.m. Toyota warns of lower 2008 vehicle sales

kilgores • July 22nd, 2008 at 3:44 pm

@ Guest 15:32:50>Well, Nouriel, so much for "dead stocks rallying"… They ARE rallying, but that hardly makes them alive… I think ‘ZOMBIE STOCKS’ is the operative phrase here…they’re moving, but there’s no future in them.SWK

kilgores • July 22nd, 2008 at 3:49 pm

@ Prt1stAskQLater 15:34:37>If I as a consumer had to manage my credit risk, I would pick an ARM any day of the week to hedge against the black swan of deflation that can completely put me on the street.You know, that thought had crossed my mind as I was writing the last sentence of that post, but I didn’t bother to say it myself. Thanks for highlighting that idea. Fixed interest rates may be good for consumers in inflationary times, and ARMs may help them in deflationary times (assuming, at least, that the debt was taken out at a relatively high interest rate).I love this blog…SWK

Alessandro • July 22nd, 2008 at 3:51 pm

@Prt1stAskQLaterAccording to Bloomberg FFR goes for 2%, 1-Year ARM goes for 6.33%. Mmmm.Even assuming that this is a distortion, ARM rates are linked to 10 year treasuries (if I understand correctly) so it is not short term money and it is not directly controlled by the FED.Furthermore if you get an ARM for buying any asset you end up underwater during deflation because the value of the asset (proportional to the principal) decreases while on the liability side only the rate goes down.Bottom line: stay away from debt if you can.

Danielgk • July 22nd, 2008 at 4:09 pm

@AlessandroARM rates are linked to LIBOR. 30 yr Mortagages are linked to 10 yr Treasuries

Miss America • July 22nd, 2008 at 4:29 pm

A long time ago, in a stock market far far away…It is a period of Financial War. Rebel hedge funds, striking from unregulated markets, have won their first victory against the TPTB. During the battle, Rebel PE’s managed to steal secret plans to the TPTB’s ultimate weapon, the Death Stock, an armored financial institution with enough power to destroy an entire financial system. Pursued by the TPTB’s sinister agents, Miss America races home aboard her LIRR, custodian of the stolen plans that can save her people and restore freedom to the Stock Market…. There is a disturbance in the force. The Sith Lord Greenspan, has dispatched his storm troopers throughout the trading world. Darth Paulson and Darth Bernake have waived their RightSabers, and dispatched Rightwing fighters at anyone attempting to take back their wealth and power. (Jar Jar Bush has unknowingly enabled the Sith Lord Greenspan to take control of the Market)With the help of London Skybanker, Aless-Solo, Chewboctovio, Lando Capone, Gloom3PO and R2PTM … we will once again bring balance to the force. …but not before a 10-15% drop that is following this sucker rally! Time to buckle up folks… cause it’s not far off. We’re about to go into WARP drive! Punch it Chewie!Help us Nori-Wan Roubini, you’re our only hope. May the force be with you.Rich H – Yoda “do, or do not, there is no try”

Prt1stAskQLater • July 22nd, 2008 at 4:36 pm

Alessandro on 2008-07-22 15:51:24 wrote: According to Bloomberg FFR goes for 2%, 1-Year ARM goes for 6.33%.I think in a 1/1 year ARM, the 1st year is fixed at a spread to the 10 year UST. It could even be at a lower negative ‘teaser’ spread (which is mostly gone now). Add 250 bps to the 10 year UST of 4% and you get 6.5% which is in the ball-park of what you saw. After the fixed rate period, the rate will switch annually to a floating index. You can check additional details at the link below. Note that its not the 1-year T-Bill but the Treasury Constant Maturity index that’s the base (now near 2.15% in the link). Add a spread of 250-300 bps to arrive at 4.65%-5.15% when the ARM switches to float.http://www.erate.com/1_year_t-bill_index_adjustable_rate_mortgage_arm.htmCiao,Print First Ask Questions Later.

Tony • July 22nd, 2008 at 4:38 pm

It looks like the collapse in the price of oil and the weakening in the price of oil is further evidence that we are heading for a HYPERDEFLATIONARY burst.Tony

Prt1stAskQLater • July 22nd, 2008 at 4:45 pm

@Rich H, When the Empire Strikes Back on the icy planet of Defloth, look to young SkyBanker ask for a ‘hand-out’ via a freshly minted (or printed) hand!!Sorry! But couldn’t resist! I’m a SW fan too!May the USD be with you,Print First Ask Questions Later.

Alessandro • July 22nd, 2008 at 4:45 pm

ROTFL!!! Miss America u da man!

kilgores • July 22nd, 2008 at 4:59 pm

@Tony 16:38:41Hyperdeflationary burst? Does that mean my accounts receivable will increase in value? Assuming, of course, I can collect.. SWK

Alessandro • July 22nd, 2008 at 5:04 pm

I’m still rolling. "Darth Paulson"! I will never be able to call him by any other name!BTW: and your RGE reputation on the line once more.

Gloomy • July 22nd, 2008 at 5:06 pm

@MAPriceless!!

Alessandro • July 22nd, 2008 at 5:17 pm

@Miss Americaso you basically hold on your first target around SP 1100. Control is not lost in your opinion.(and I’m Harrison Ford, WOW!)

London Banker • July 22nd, 2008 at 5:20 pm

On behalf of the young SkyBankers, I offer the wisdom of Weird Al: http://www.youtube.com/watch?v=lPyxstgk8oM"I'm not dumb but I can’t understand how he can [inflate] me just by raising his hand.""Miss A, stay away from the darker side and if you start to go astray let the Force be your guide."

SAM • July 22nd, 2008 at 5:28 pm

WHAT WILL HAPPEN TO AMERICA COME NEXT JUNEU.A.E’s Dirham to Gain 5% in 2009 as Dollar Peg Goes, CFC Says By David Yong and Matthew BrownJuly 22 (Bloomberg) — The United Arab Emirates dirham will appreciate 5 percent in 2009 as faster inflation in the Gulf state forces the central bank to ditch its 30-year peg to the dollar peg next year, according to CFC Seymour Ltd. The central bank of the U.A.E. will drop the dollar peg by June of next year, linking the dirham to a basket of currencies, including the dollar and the euro, Hong Kong-based currency analyst Carol Chan said in a phone interview yesterday. The dirham will rise to 3.49 to the dollar from its peg rate of 3.6725 today, said Chan. Inflation in the second-largest Arab economy accelerated to 11.1 percent in 2007 from 9.3 percent in 2006 as rent surged while the weaker dollar and higher global food prices made imports more expensive. With monetary policy tied to the U.S., the U.A.E. has put price caps on basic foods and building materials in an attempt to control prices. “The people are paying more for a liter of water than oil, and that’s damping the people’s purchasing power,” Chan said. “A change in the currency regime is possible after the second quarter” because the dirham’s weakness added to the higher cost of imports, she said. The U.A.E. has cut its one-day repurchase rate from 5.25 percent to 2 percent since September, following the reduction of the U.S. federal funds target rate. U.A.E.’s oil-rich economy expanded 16.5 percent to 698.2 billion dirhams ($190 billion) in 2007, or 1.3 percent of the size of U.S. economy, according to data compiled by Bloomberg. Monetary Union Governor Sultan Bin Nasser al-Suwaidi will likely abandon its current fixed-exchange regime because it’s limiting the central bank options to temper inflation amid surging prices of wheat, rice and other grains, Chan said. “There’s a high probability” the U.A.E. will link the dirham to a basket of currencies after Abu Dhabi’s Department of Planning and Economy signaled the country should abandon the peg, Chan said. U.A.E.’s inflation will accelerate to 12 percent in 2008 given that imported food such as rice and wheat have increased at an annual pace of 41 percent, she said in a separate report on July 17. Kuwaiti Dinar The Kuwait dinar has appreciated 8.1 percent since the central bank scrapped its five-year dollar peg on May 20, 2007 to help contain inflation. Kuwaiti consumer prices rose an annual 10.1 percent in February, as the stronger currency failed to stem rising rents. Al-Suwaidi, reappointed as Governor to a fifth term on July 14, last year advocated reviewing the dirham’s peg to the dollar, sending the U.A.E. currency to a 20-year high. He announced in January that a review had taken place and said in April the dollar’s slump hindered the Gulf nation’s fight against inflation. Traders are betting the dirham will rise to 3.63 per dollar in 12 months, according to non-deliverable forwards contracts. They had expected the exchange rate to reach 3.5573 on March 20. Gulf central bank governors will meet in September to finalize a draft of the Single Currency Agreement, a framework for monetary union by 2010, before passing it onto finance ministers and eventually to heads of state in December. The agreement will then need to be ratified by governments including Saudi Arabia, the United Arab Emirates, Qatar, Kuwait and Bahrain. Oman, which makes up the six-state Gulf Cooperation Council, pulled out last year.

AfA • July 22nd, 2008 at 5:38 pm

@ GloomyRe: Theoretically, people can protect themselves from the destruction in the dollar by holding real and productive assets or storable commodities in the US although that means a longer investment horizon. Once you buy an asset, you are no more committed to its value in dollar terms and 5 years from now, as the asset holds its intrensic value, it should sell for more either to domestic market if demand is still strong or to foreigners through lower exchange rates. Now the question is which asset/commodity, how liquid it should be, what is your investment horizon … In all cases there is more to investment than equity markets.

Gloomy • July 22nd, 2008 at 5:48 pm

@LBThanks for your kind response earlier. But I would like your opinion on what you think the risk of an Argentine style currency meltdown is given our propensity to de facto nationalization of the financial system. Thanks.

Gloomy • July 22nd, 2008 at 5:50 pm

@AfaWhat’s to keep commodity prices up in a depression?

Wild Bill • July 22nd, 2008 at 6:12 pm

Stop handicapping! Throw away your tip sheets! Ignore the touts! Ignore past performance data! If you want to survive, bet with the fix.

Bear Weevil • July 22nd, 2008 at 6:25 pm

I think this shows a great republic like ours will not die with a whimper. It WILL die, and die vanquished by sword of justice, but a lot of combatants will never see another day. Another rotation in a good v. evil moral play. Now when or where will ever be the land of milk and honey aka paradise?

AfA • July 22nd, 2008 at 7:44 pm

@ Gloomy"What’s to keep commodity prices up in a depression?"Answer: (chase currency/money from your mind first), the relative pricing compared to other products/commodities. Remember that money is only a medium of exchange (since it already failed its function as store of value) and it serves as long as you can sell one thing, get the money then buy something else. This of course assumes that what you need will come from within the country, not imported (a big assumption I admit)First as I said valuable commodities, they will always have higher value and be demanded and needed in all cases. I say, especially in the case of a depression: products/commodities that have a negative elasticity of demand to income (the lower the income, the more the demand) and hopefully inelastic demand to prices. However, even if the price of this commodities will (relatively) go down, the question is what can you buy/barter against them during a depression(I believe more than you currently could). Also, as I said, in the case of a depression, and thanks to low exchange rates, you have more chance to attract foreign buyers.I believe it is along this lines why some OPEC countries are "hoarding" and keeping their oil in the ground – as soon as it is extracted, their price, in dollars is locked up today and they will lose value with the depreciation of the dollar, while if they don’t, their oil will always have the same value – ceteris paribus.So characteristics of the asset/commodity: negative elasticity to income, inelastic to prices, valuable, storable, transferable, relatively liquid and in preference divisible …Enough theory

AfA • July 22nd, 2008 at 8:21 pm

Interview with Roubini on Y! tech tickerhttp://finance.yahoo.com/tech-ticker/article/41423/Roubini-More-Than-1-Trillion-Needed-to-Solve-Housing-Crisis?tickers=FNM,FRE,XLF,WM,WB,WFC,BAC"But $25 billion — or even the GAO’s worst-case $100 billion estimate — pales in comparison to the cost of doing nothing, says Nouriel Roubini, NYU professor and chairman of RGE Monitor."We have to find a solution where government intervention prevents a disorderly outcome" in the housing market that leads to a "systemic banking crisis," Roubini says."

kilgores • July 22nd, 2008 at 8:34 pm

New thread (in case you hadn’t noticed)…SWK

Guest • July 22nd, 2008 at 8:37 pm

"What’s to keep commodity prices up in a depression?"who says we are in depression? with unemployment below 6%, we are in depression? you are crazy. and we are still in commodity bull market until it break the trend.

Matt • July 22nd, 2008 at 10:42 pm

Have to say I agree with the intention to keep Middle East geopolitics out of the discussion. Not that I think it’s unimportant, but there are other forums for this debate. Re my own interest, and dozens of other commenters, as I will blithely assume, the key value of this site has been bringing together disparate, unusual, undisclosed, and potentially significant economic and financial commentary. We’re not going to get that, with today’s entries, or tomorrow’s or the day after’s if the ec/fin priority get subordinated. Stick to your knitting, folks. My market response is to go straight to Krugman’s site, but this here is the one that I’d prefer to offer up some ideas. The more divisiveness and rancor on the ME that infest this site, the more I will go elsewhere for primary post. It’s called "competition". And what could be wrong with that? MD

Juan • July 22nd, 2008 at 10:54 pm

ptm; As a general rule, Pemex does not used these advanced extraction techniques.Another general rule: Pemex = institutionalized corruption which measures in billions per annum. High prices have more than compensated for sliding production even while continuing to grease bureaucratic pockets. Internal conditions may become quite tense when the commodities/oil bubble finally deflates.Real economic conditions are not quite so ‘nice’ as headline numbers suggest.Guest on 2008-07-22 20:37:50,Best to look at the more comprehensive U-6 unemployment rate provided by the BLS. Not seasonally adjusted, this was 10.3% in June 2008 while 9.9% was the seasonally adjusted figure, and, since the methodological and definitional revisions enacted in ’94, both are understated. Real economic conditions are not quite so ‘nice’ as headline numbers suggest.

J. • July 22nd, 2008 at 11:15 pm

kilgores on 2008-07-22 12:45:42,Yes but recall that people were also being paid less and less in real terms. This 1964-2008 real earnings chart from Andrew Samwick is a stark reminder: http://picasaweb.google.com/lh/viewPhoto?uname=asamwick&aid=5195760215722236945&iid=5200404157632314674

J. • July 22nd, 2008 at 11:31 pm

Does that actually ever happen, that is to people, not CEO’s?Written by Pickle on 2008-07-22 14:42:16Not usually but it can if people are organized, which does not mean behind complicit and give-away union bosses as happened during the 1970s and 1980s.

Yung Keun Park • September 12th, 2008 at 9:12 am

Counter-argument??Case-Shiller’s Case: Housing May Be Near a BottomWellesley College economist Karl Case, the “Case” in the widely followed S&P/Case-Shiller index of U.S. housing prices, thinks that the housing market may be near a bottom. If he’s right, financial firms may be able to breathe a sigh of relief.At its most recent reading for June, the Case-Shiller index was 19% below its July 2006 peak, and many observers believe the decline is far from over. The inventory of unsold homes on the market is still very high, they point out, and until that excess is absorbed it’s a buyers’ market. What’s more, with financial firms, hobbled by mortgage debt gone bad, are trying to rebuild cash reserves, making them less willing to extend loans to would-be buyers.Finally the combined effects of the housing and credit crises have damaged many household’s balance sheets and credit worthiness, giving them a high hurdle to buying a new home. Yale University professor Robert Shiller, the co-creator of the Case/Shiller index, is among those who think it will be some time before prices stabilize.But in a paper presented before the Brookings Institution in Washington, D.C., Thursday, Mr. Case argues that there is cause for optimism. He notes that of the 20 metropolitan areas covered by the Case/Shiller index, nine have shown prices slightly improving in recent months. He also says that the relationship between incomes and home prices has neared a level seen at the end of past housing slumps.How far home prices fall matters greatly for financial institutions, Goldman Sachs economist Jan Hatzius argued in another paper presented at Brookings. If the Case/Shiller index stays at its June level, total mortgage losses will come to $473 billion, Mr. Hatzius estimates — more than the $400 billion in losses he projected in an earlier study conducted with economists David Greenlaw at Morgan Stanley, Anil Kashyap at the University of Chicago Graduate School of Business and Hyung Song Shin at Princeton University. He estimates that a further 10% decline in home prices would lead to losses of $636 billion and a 20% decline would lead to $868 billion in losses.Mr. Hatzius used state-level data from the Mortgage Bankers Association between from 1998 through the second quarter of this year to analyze the relationship between home price declines and foreclosures in the current environment. That means that he isn’t extrapolating from earlier periods, as he did in his previous study, when lender and borrower behavior may have been different. It also allows him to account for differences in the performance of different types of mortgages.Under the scenario where home prices fall another 10%, leading to $636 billion in mortgage losses, Mr. Hatzius calculates that lenders will cut the credit they extend to final borrowers by nearly $2 trillion, knocking 1.8% off of gross domestic product growth. While that’s sizable, a weak dollar, low overnight rates and fiscal stimulus are helping mitigate the damage Mr. Hatzius points out. The situation would be much direr if Fannie Mae and Freddie Mac cut back on the amount of mortgages they guaranteed. One virtue of the government takeover of the two mortgage giants this week is that that business doesn’t look as if it will be curtailed, says Mr. Hatzius. – Justin Lahart