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Helicopter Ben goes ZIRP, QE and More…While the Global Economy Enters Stag-Deflation

Author: Nouriel Roubini  ·   ·   › Share This Print

The Fed decision yesterday to cut the Fed Funds range to 0-0.25% formalized the fact that, over the last month, the Fed had already moved to a ZIRP (zero-interest-rate-policy) – as the effective Fed Funds rate was already close to zero -and started a policy of QE (quantitative easing) as its balance sheet has surged over the last few months from $800 billion to over $2 trillion. And – as discussed below – the Fed is now undertaking even more unorthodox policy actions.

These Fed policy actions are occurring while the US and the global economy is now risking a protracted bout of stag-deflation, a disease that I first discussed as early as January 2008 when I warned about the risk of a global deflation and stag-deflation. While it is now fashionable to talk about such deflationary risks – and the latest U.S. CPI figures confirm that we are entering into deflation – some of us were worrying about the coming deflation well before the mainstream – concerned with short-run and unsustainable increases in commodity prices – discovered the deflationary risks in the global economy.

It was clear to those of us that saw early on the risks of a severe US and global recession that, once that recession would emerge, deflationary rather than inflationary pressures would emerge as slack in goods markets, slack in labor markets and slack in commodity markets would emerge. So now we need to worry about stag-deflation, deflation, liquidity traps and debt deflation. Welcome to the world of stag-deflation or, as Krugman would put it, to the world of “depression economics”.

So what is the outlook for the US and the global economy in 2009? And what is the likely policy response to the risks of a global stag-deflation? Let us discuss next these two questions…

The outlook for the U.S. and the global economy is now very bleak and getting worse as the global economy is experiencing its worst recession in decades. In the US, recession started last December, and will last at least 24 months until next December — the longest and deepest US recession since World War II, with the cumulative fall in GDP possibly exceeding 5 percent. In comparison the last two recessions in 1990-91 and 2001 lasted only 8 months each and in 2001 (1990-91) the cumulative fall in GDP was only 0.4% (1.3%). There is also a risk that this deep and protracted U-shaped recession (the mainstream consensus view of a V-shaped short and shallow recession is now out of the window) may morph into a more severe Japanese style L-shaped recession unless aggressive fiscal policy and recapitalization of the financial system is enacted.

The recession in other advanced economies (the euro zone, the UK, other European economies, Canada, Japan, Australia and New Zealand) started in the second quarter of this year, before the financial turmoil in September and October further aggravated the global credit crunch. This contraction has become even more severe since then. I don’t expect growth in the advanced economies to recover before the end of 2009.

There is now also the beginning of a hard landing in emerging markets as the recession in advanced economies, falling commodity prices and capital flight take their toll on growth. Indeed, the world should expect a recession (growth in the -1 to-2% range) in Russia and a near recession (growth close to zero) in Brazil next year, owing to low commodity prices. There will also be a very sharp slowdown in China and India that will be the equivalent of a hard landing (growth well below potential) for these countries. In China the latest figures for electricity use, export and imports suggest that the economy is already close to the hard landing scenario of a growth rate of 5%. The deceleration of growth in China is much more rapid than expected.

Other emerging markets in Asia, Africa, Latin America and Europe will not fare better, and some may experience full-fledged financial crises. More than a dozen emerging-market economies now face severe financial pressures: Belarus, Bulgaria, Estonia, Hungary, Latvia, Lithuania, Romania, Turkey and Ukraine in Europe; Indonesia, South Korea and Pakistan in Asia; and Argentina, Venezuela and Ecuador (a country that has just defaulted on its sovereign debt) in Latin America.

How is the policy response in the US and other countries to this risk of a global stag-deflation?

The Fed decision yesterday to cut the target for the Fed Funds rate to a 0% to 0.25% range is just underwriting what was already obvious and happening in reality: while the target Fed Funds was – until yesterday – still1% in the last few weeks – following the massive increase in liquidity by the Fed – the actual Fed Funds was already trading at a level literally close to 0%.

So the Fed just formalized what was already happening for weeks now, i.e. that the Fed Funds rate was already zero and that the Fed had already moved to quantitative and qualitative easing (QE) in the form of massive increase in the monetary base and aggressive use of monetary policy – via a range of new facilities and tools – to reduce short term and long term market rates that are stubbornly high in a sign that the credit crunch is severe and worsening.

I predicted early in 2008 that the Fed Funds rate “would be closer to 0% than to 1%” in the midst of a severe recession. Now 12 months into this severe recession (that officially started in December 2007) – a recession that will last at least another 12 months (if not, as possible, much longer) – the Fed Funds rate is already down to 0% (the beginning of the zero-interest-rate-policy or ZIRP for the US) and the Fed has moved into uncharted unorthodox monetary policy as a severe stag-deflation is taking place.

And, as predicted here over a month ago, the Fed is now committed to keep the Fed Funds rate close to zero for a long time (as a way to push lower long term Treasury yields), is purchasing agency debt and agency MBS in massive amount; and is even considering purchasing long-term Treasuries as a way to push lower long term government bond yields that are already falling sharply.

More aggressive policy actions may be undertaken by the Fed as a severe credit crunch shows no signs of relenting. In his 2002 speech on deflation the Bernanke spoke even of helicopter drops of money, monetizing fiscal deficits, and even buying equities. The latter actions have already been partially undertaken: the Fed is effectively already monetizing the US fiscal deficits as the purchase of markets assets (agency debt and MBS and other facilities) is financed with the Fed printing presses rather than the TARP program; and now with the Fed considering the purchase of long term Treasuries such monetization of deficits will be made more formal. Also, since the TARP has been turned into a program to recapitalize financial institutions (and thus boost their capital and market value) the U.S. has already effectively intervened indirectly in the equity market (by partially nationalizing a good part of the US financial system); once the Fed starts to buy the US long term Treasuries financing the TARP program this indirect Fed purchase of U.S. equities will be even more clear.

While Fed actions to reduce mortgage rates – via purchases of agency debt and agency MBS – are partially successful as long term mortgage rates are falling most of Fed purchases of private assets have been so far limited to very high grade securities. Thus, the gap between the yield on high grade commercial paper purchased by the Fed and the one that the Fed is not purchasing is sharply rising; ditto for the gap between agency MBS and private label MBS; also while long term Treasury yields are sharply falling the spread of corporate bonds – both high yield and high grade – relative to Treasuries remains huge as a sign of a severe credit crunch. Thus, as a next step the Fed may be soon forced to walk down the credit curve and start buying private short-term and long-term securities with lower credit rating. That would mean that the Fed will take on even more credit risk than is already taking on today while purchasing illiquid private assets. But desperate times lead to desperate actions by desperate policy makers.

In the rest of the world monetary and fiscal easing is also occurring as global policy makers are trying to prevent a global stag-deflation; but the policy response in most countries is more limited and constrained than the aggressive one of the US monetary and fiscal authorities.

In the Eurozone the policy response has been extremely slow. First, the ECB is behind the curve and cutting rates too little and too late. Second, the ECB has been much less creative and aggressive than the Fed in creating new facilities to unclog the liquidity and credit crunch that is becoming as severe in Europe as in the US. Third, the fiscal policy stimulus in the EU is weak: those countries that need a stimulus the most (Italy, Portugal, Greece, Spain, UK) are the ones that can afford it the least given their large fiscal deficits and debts; and those who can afford it the most – Germany – are least willing to have it. Fourth, the recapitalization of financial institutions in Europe is occurring more slowly than in the US and some of the financial firms rescue plans have been partly botched. Also, cross-border financial activities and the lack of cross-border burden sharing in the EU limit the ability of the EU to rescue large financial firms with cross-border activities. Add to this the fact that many banks in Europe are too big to fail but also too big to be rescued (large relative to the fiscal resources of their country’s government). Fifth, the structural rigidities of Eurozone (labor markets in particular) may cause the Eurozone contraction to be as severe as the U.S. one even if the initial economic and financial imbalances were less severe in this region.

While the US and Japan are already into a ZIRP policy other advanced economies’ central banks will in 2009 get very close to it, starting with those in Switzerland and the UK. And more unorthodox monetary policies, such as QE and the other ones adopted by the Fed, may become more popular in a number of advanced economies.

In the many emerging market economies at the risk of a financial crisis aggressive monetary easing and fiscal easing are not likely. Indeed, many of these countries start with large fiscal deficits and debt, thus requiring fiscal discipline rather than easing. Moreover, many of these countries have large stocks of foreign currency liabilities whose real value would sharply increase if easy monetary policy leads to a sharp depreciation of their currency. Thus, there is less room for monetary easing. Also, many of these countries don’t have the fiscal resources to provide liquidity and capital to their financial institutions that are now facing a sudden stop of capital inflows. The international community – IMF programs, World Bank other IFIs financial support, and the Fed/ECB with their swap lines – can help countries under distress as long as they implement appropriate policy changes but the risks of outright financial crises remain in some of the weakest economies.

In China – that is now at risk of a severe hard landing – it is not clear whether the aggressive fiscal and monetary/credit easing will be able to prevent a hard landing. Can aggressive monetary/credit and fiscal policy easing prevent this hard landing? Not necessarily. First note that China has already reduced interest rates three times in the last few months and easing some credit controls. But monetary and credit policy easing may be ineffective: if capex spending by the corporate sector will start to fall sharply as the fall in next exports leads to a sharp fall in the expected return on new capital spending on exportables a reduction of interest rates and/or an easing of credit controls will make little difference to such capex spending: easing money and credit will be like pushing on a string as the overinvestment of the last few years has led to a glut of capital goods. There is indeed already evidence that but corporate loan demands have diminished sharply while commercial banks have hesitated to lend while choosing to firewall risks. The government can ease money and credit but it cannot force corporate to spend and banks to lend if loan demand is falling because of low expected returns on investment.

Could fiscal policy rescue the day and prevent a Chinese hard landing? The optimists argue yes by pointing out that fiscal deficits and public debt are low in China and that China has the resources to engineer a rapid fiscal stimulus in a short period of time. But the ability of China to implement a rapid and massive fiscal stimulus is limited for a variety of reasons. First, the combined effects of natural disasters, social strife in the West, and the Olympics have created a large hole in the central government budget this fiscal year. The Ministry of Finance may have dipped into various stabilisation funds to avoid the appearance of running a large deficit. For regional and municipal governments, the decline in turnover in local property markets has reduced the flow of fees and taxes, causing them to delay ambitious industrial development plans in some cases. Second, a hard landing in the economy and in investment would lead to a sharp increase in non-performing loans of the – still mostly public – state banks; the implicit liabilities from a serious banking problem would then add to the implicit and explicit budget deficits and public debt. Note that the poor quality of the underwriting by Chinese banks –that financed a huge overinvestment in the economy – has been hidden for the last few years by the high growth of the economy. Once net exports go bust and real investment sharply falls we will see a massive surge in non-performing loans that financed low return and marginal investment projects. The ensuing fiscal costs of cleaning up the banking system could be really high. Third, as pointed out by Michael Pettis – a leading expert of the Chinese economy – a surge in tax revenues in last 4 years has been more than matched by surge in spending so that if revenue growth diminishes/reverses it might not be easy to slow spending growth proportionately. Contingent liabilities from non-performing loans could also reduce resources available for a fiscal stimulus.

In summary, with traditional monetary policy becoming less effective, non-traditional policy tools aimed at generating greater liquidity and credit (via quantitative easing and direct central bank purchases of private illiquid assets) will become necessary in many advanced economies. And while traditional fiscal policy (government spending and tax cuts) will be pursued aggressively, non-traditional fiscal policy (expenditures to bail out financial institutions, lenders and borrowers) will also become increasingly important in these advanced economies.

In the process, the role of states and governments in economic activity will be vastly expanded. Traditionally, central banks have been the lenders of last resort, but now they are becoming the lenders of first and only resort. As banks curtail lending to each other, to other financial institutions and to the corporate sector, central banks are becoming the only lenders around.

Likewise, with household consumption and business investment collapsing, governments will soon become the spenders of first and only resort, stimulating demand and rescuing banks, firms and households.

The long-term consequences of the resulting surge in fiscal deficits are serious. If the deficits are monetized by central banks, inflation will follow the short-term deflationary pressures; if they are financed by debt, the long-term solvency of some governments may be at stake unless medium-term fiscal discipline is restored.

Nevertheless, in the short run, very aggressive monetary and fiscal policy actions — both traditional and non-traditional — must be undertaken to ensure that the inevitable stag-deflation of next year does not persist into 2010 and beyond.

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509 Responses to “Helicopter Ben goes ZIRP, QE and More…While the Global Economy Enters Stag-Deflation”

Guest • December 17th, 2008 at 10:42 am

too important to not carry forward…..imo.” Finance is too important and unstable to be left to the bankers.”http://regulation.revues.org/document5843.html#texteSee the very last sentence… and add – and the politicians and all that is attached to them all.Ho humReply to this comment By PeterJB on 2008-12-17 04:36:23

Steve • December 17th, 2008 at 10:46 am

I’m your biggest fan, Doctor, but you’ve lost me [NYU Finance MBA]. I take it that unemployment will go to 10%, U6 will go to 18%, housing values have another 20% downside, the markets have another 30%+ downside before the real bottom, there will be 8-10 million foreclosures in the US; and the possibility of hyperinflation is impossible to quantify, and so is real. Throw in a few unknowns, of which there are many. And this is not a Depression? P.S. Put a US pandemic, radiological and/or biological terrorist attack on top. What say then?

Octavio Richetta • December 17th, 2008 at 10:48 am

Anatomy of a MeltdownBen Bernanke and the financial crisis.by John CassidyDecember 1, 2008http://www.newyorker.com/reporting/2008/12/01/081201fa_fact_cassidy?currentPage=allThe other event that changed Bernanke’s career occurred in the summer of 1999, at the height of the Internet stock boom, when he and Gertler were invited to present a paper at an annual policy conference organized by the Federal Reserve Bank of Kansas City. The topic of the conference—which takes place at a resort in Jackson Hole, Wyoming—was New Challenges for Monetary Policy. Then, as now, there was vigorous debate among economists about whether central banks should raise interest rates to counter speculative bubbles. By increasing the cost of borrowing, the Fed, at least in theory, can restrain speculative activity and prevent the prices of assets such as stocks and real estate from rising excessively.Bernanke and Gertler argued that the Fed should ignore bubbles and stick to its traditional policy of controlling inflation. If a bubble inflated and burst of its own accord, they said, the Fed could always bring down rates to alleviate damage to the broader economy. To support their case, they presented a series of computer simulations, which appeared to show that a policy of targeting inflation stabilized the economy more effectively than one that targeted bubbles. The presentation got a mixed reception. Henry Kaufman, a well-known Wall Street economist, said that it would be irresponsible for the Fed to ignore rampant speculation. Rudi Dornbusch, an M.I.T. professor (who has since died), pointed out that Bernanke and Gertler had overlooked the possibility that credit could dry up after a bubble burst, and that such a development could have serious effects on the economy. But Greenspan was more supportive. “He didn’t say anything during the session,” Gertler recalled. “But after it was over he walked by and said, as quietly as he could, ‘You know, I agree with you.’ That had us in seventh heaven.”Another expert who dissented from the Greenspan-Bernanke line was William White, the former economics adviser at the Bank for International Settlements, a publicly funded organization based in Basel, Switzerland, which serves as a central bank for central banks. In 2003, White and a colleague, Claudio Borio, attended the annual conference in Jackson Hole, where they argued that policymakers needed to take greater account of asset prices and credit expansion in setting interest rates, and that if a bubble appeared to be developing they ought to “lean against the wind”—raise rates. The audience, which included Greenspan and Bernanke, responded coolly. “Ben Bernanke really believes that it is impossible to lean against the wind on the way up and that it is possible to clean up the mess afterwards,” White told me recently. “Both of these propositions are unproven.”Between 2004 and 2007, White and his colleagues continued to warn about the global credit boom, but they were largely ignored in the United States. “In the field of economics, American academics have such a large reputation that they sweep all before them,” White said. “If you add to that the personal reputation of the Maestro”—Greenspan—“it was very difficult for anybody else to come in and say there are problems building.”IMO, you need to have been an academician in a highly quantitative field in order to understand how narrowly focused PhD thesis research, and even a seasoned academician’s research agenda, is. Usually, the more quantitatively oriented the researcher (e.g., Bernanke), the narrower the focus.Bernanke is one of the smartest persons in the word but math smart does not always translate into real life smart. The simulation stuff above makes me laugh. I used to write HUGE stochastic systems symulations for a living of systems much simpler than the US economy. It is extremely difficult to capture the features of the real system that make simulation reuslts robust. There is a a lot of room for errrors and manipulation of results.Benny’s colleague who says the stuff Bernanke believes in has not been proven in practice is quite right.The bottom line is that Benny is using us, the US/world economy, as a huge lab to test his naive theories. The problem is that we are not just a bunch of white mice:-)yes, be afraid, bery afraid….

aleister perdurabo • December 17th, 2008 at 10:49 am

“You’re up to $1 trillion now and this is still going to run for some time,” said Charles R. Morris, a former banker and software company executive whose book “The Trillion Dollar Meltdown” was published in March. In Sept. 2007 “the first back-of-the-envelope calculation I did came up with $1.1 trillion and this was using really low-default estimates.”http://www.bloomberg.com/apps/news?pid=20601110&sid=asAJjiHQgPEw

Jubilee • December 17th, 2008 at 10:52 am

When bubbles pop, it’s kind of cute, because they’re soft and bubbly.This isn’t any kind of bubble – it’s a pressure cooker – and when pressure cookers blow, there’s nothing cute about it – it’s carnage.TPTB are suicidal, and worse, they’re fratricidal, too. They’re willing to keep increasing the pressure until the whole thing blows, taking out the entire system.There is one sure-fire way to relieve the pressure – forgive the debt!I want my Jubilee!! (Not for me – I don’t need it. For my friends, who made so many poor decisions with their freedom).

Octavio Richetta • December 17th, 2008 at 10:59 am

Ouch! I closed XLE and USO. No more playing around with commodities-related stuff. I am a stubborn kid, aren’t I? I lost a bit less than 0.1% of my capital in the trade (i.e., the trade affects my YTD return by 0.1%. Ouch!)

Ed • December 17th, 2008 at 11:05 am

When there is no food, energy, transportation, public services (fire, police, medicine) plus all of the above, then you have a depression.So far, all we have is the Bush’s “slo-down”

Little Saver • December 17th, 2008 at 11:05 am

Bungee economies, that’s where the though guys in their big offices landed us in. I’m not sure whether the elastics will hold though.

Hayes • December 17th, 2008 at 11:11 am

from previous threadStocks headed to the greener side…just worked through tough resistance. Going to close the downside SSO gap at$27By CM on 2008-12-17 10:03:08GOOD call CM

Bob • December 17th, 2008 at 11:32 am

Steve, I’m in your camp. I clearly don’t see cummulative GDP only at negative 5%. Perhaps if we count government stimulus as in Q2 of this year. Maybe!The reality remains ‘very aggressive traditional monetary and fiscal policy’ has not worked! Further ‘non-traditional’ movers will do much the same!This will be a depression why NR is now afraid of leading the pack in calling it so seems very strange.

Hayes • December 17th, 2008 at 11:37 am

“Once stocks get back to those levels (close the gap) and traders can be made whole, they exit poitions, they feel lucky to break even”that describes me perfectly – a quest for break eventhanks for the explanation

Capone • December 17th, 2008 at 11:42 am

ATTENTION GOLD BUGS! they confiscated gold in the past (and recently!). BUY something ELSE ! OR keep it off the records and hidden!i wonder if OPEC can hear the traders in the oil pits in the US laughing at them. as if their silly moves have any effect on price whatsoever… joke is on you OPEC and Russia! thanks for the sound bite / headline / media clip for the pit of geniuses who trade it to play with though. ha ha – sorry for the rant – choking on oil for the last time at the moment

JGU • December 17th, 2008 at 11:57 am

Professor:1) Is this only a liquidity problem? Is this not a solvency problem on a grand scale? Will injecting huge liquidity really solve a solvency problem?2) Where will the fiscal stimulus money come from? Future tax receipts from the unproductive projects the stimulus will undertake? Or 90% tax bracket for the rich?

Onion • December 17th, 2008 at 12:01 pm

“Likewise, with household consumption and business investment collapsing, governments will soon become the spenders of first and only resort, stimulating demand and rescuing banks, firms and households.”I am ‘Fed up’ to the back teeth of policy wonks deciding that their policy prescriptions will alter my actions in support of borrowing, spending, consuming and generally supporting the 7 deadly sins.Where is the evidence that you, Obama, Geithner, Gordon Brown or any of the usual suspects can ‘stimulate demand’ when your target population are broke? Where’s the evidence? What the **** is so great about ‘stimulating demand’ by letting crooked banks recapitalise (and reload) to rip off their indebted tax-paying depositor base more and more to bail out the crooks and the feckless. Are you insane?Expose the debts, close down those banks exposed as criminal organisations, jail their executives, triage their assets, print money only to cover their depositor liabilities, and reprivatise as new banks with new management operating under laws whereby they can never be allowed to become too big to fail. But expose their debts and their crimes FFS!!!Madoff made off with more and more the more money came flowing into his company – money covers crimes and keeps the crooks going. Why should taxpayers pay bank robbers to rob them blind??

Hayes • December 17th, 2008 at 12:21 pm

Bair is one of the few competent and honest players in this entire tragedy – that’s why Geithner wants her out- the PR machine against her is in full swing

CM • December 17th, 2008 at 12:26 pm

AHAHAHAAHAHAHAHHAHHAHHAHAAHAHAHA!!!!! Markets will never be allowed to fall again!!! AHAHAHAHAHHAHHAHHAHHAHAHHHHAHHAHAHHA!

Anonymous • December 17th, 2008 at 12:41 pm

OctavioBeing an engineer and having attended a PhD program at a reputable US universityI totally agree with you. Very rigorous mathematical training may lead away from real economic understanding. I was impressed with microeconomics but macroeconomics is not much different from ancient medicine.The worst thing is Bernanke, Summers etc are not aware their ignorance.

g Anton • December 17th, 2008 at 12:41 pm

IF AT FIRST YOU DON’T SUCEED, FAIL, AND FAIL AGAINI don’t know whether to laugh or cry. It’s too bad that Ben Bernanke wasn’t around when they filmed the movie “The Wizard of Oz”–he would have made a wonderful wizard.Anyway, the man is completely out of touch with reality (and out of control), and is leading the entire country down the yellow brick road. What he is doing has no contact with current reality, and will eventually do great harm to the US economy. In the great depression that Bernanke is so good at second guessing, FDR actually did too much (and not too little), and it didn’t work. The country got out of the depression thanks to the second world war, and not due to the “New deal”, the WPA, CCC camps, and other Bernanke-esq measures. (And FDR used real honest-to-goodness money, and not the virtual smoke-and-mirrors dollars that Bernanke is so good at handing out).The economy is in recession because it has many problems (like a 50 billion dollar scam), and throwing vast sums of money (“economic stimulus”) at the economy will not solve these problems (but only worsen them), nor will it raise the level to which the economy will eventually fall (although it will greatly extend the time that it will take us to get to the bottom). The logical thing to do is wait until the economy bottoms (and the Aegian stables have been cleaned out), and then apply economic stimuli to assist the economy to raise as rapidly as possible to a “normal” level.And, of course, if Bernanke’s harsh actions result in a crash of the US dollar (OOPS!), we’ll look back on our current economic doldrums as being a really wonderful time.It is said that it’s an ill wind that blows no good. Perhaps Bernanke’s shenanigans will force the UN to issue international gold certificates for puposes of international trade.

aerial view • December 17th, 2008 at 12:45 pm

Absolutely! The problem is that they (govt and banks) are partners in crime and only a public demand for full transparency and independent, honest investigation will expose the corruption at it’s roots!

Fred • December 17th, 2008 at 12:59 pm

This can’t be repeated enough, IMO:”Paulson was one of the five executives who went to the Securities & Exchange Commission in 2004 to plead for permission to lever upward the Wall Street firm businesses even more, like to 30:1 or 40:1 ratios. Without any question, he was an architect in the crisis.”…and now he is giving billions (trillions?) of taxpayer money to the same people who created the biggest ponzi scheme in history…and nobody really seems to care.

Guest • December 17th, 2008 at 1:00 pm

and now the good news – the OPEC announcment was cumulative e.g. it included their September cutback – so this one effectively amounted to 2mm barrels/day not 4mm as earlier reported

FAMC • December 17th, 2008 at 1:02 pm

Probably, Keynes himself would fear what Ben and Friends are doing.I like to read Roubini analysis but the “solutions”…If the solution is to buy trash, printing money, please sirs, buy my trash.I want to sell my trash to you.FOMC statement:”The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”——————————————————-Price stability?? When oil went to 140 dollars FED was worried about price stability?Stability of what prices? bank stocks?————————————————Available tools? What is available, now?——————————————–See on CNBC: “Bernanke Businessman of the Year”As Hardy used to say (Lippy the Lion & Hardy Har Har ):”Oh me, oh my, oh dear”

groundzero_MI • December 17th, 2008 at 1:05 pm

Does Karl Denninger’s opionion/blog carry credibility in this group? His post today is to prepare for a remake of “The Panic of 1873″ and all the civil unrest that made that the “Real” Great Depression.

JimmyTheBanker • December 17th, 2008 at 1:15 pm

BEIJING (AFP) China warned Wednesday it would not keep lending money to the US economy indefinitely, even as new data showed it had consolidated its position as the top buyer of American government bonds.”China’s increased purchase of US Treasury securities should not be interpreted as an endorsement of the assumption that the US can borrow its way out of the current financial crisis,” the China Daily said in an editorial.The warning from the state-run newspaper, an English-language daily that mainly addresses a foreign audience, came after the US Treasury Department reported a steep increase in Chinese holding of US Treasury bonds.

Guest • December 17th, 2008 at 1:21 pm

I’ve been lurking on this blog for a while. Thanks to NR and other commentators on this blog, about 8 months ago I shifted my 401(k) to govt. bonds, and lowered my contribution to the minimum amount necessary to get the employer match. While my retirement is relatively unscathed, my colleagues have gotten burned by 20 to 40%.I’m an environmental scientist, and one of the climate change mantras bandied about the profession is that things are changing too quickly for past climate scenarios to predict the future. This seems like an apt analogy for the current financial situation. The current marketplace is so different that the Great Depression is an incomplete analog for the current situation.So as a young guy at the start of my career, with two young children, a modest income and a modest house (I didn’t get greedy during the housing bubble), and a head for hydrology and not finance, I have no idea how to prepare for the future. With any extra cash after bills, my wife and I are paying down debt and saving as much as we can. That’s the extent of our financial planning. But what else should we, or any other average Jose do? At what point should we expand our retirement portfolio beyond paying off debt and stuffing cash into a mattress, ahem, I mean our savings account?

Guest • December 17th, 2008 at 1:22 pm

Someone is gonna take this guy out…NEW YORK A federal judge may have placed accused master swindler Bernard Madoff on ankle-monitored house arrest, but don’t feel too sorry for the former Nasdaq boss.Madoff’s Upper East Side, Manhattan, “jailhouse” is outfitted to the tune of $7 million.And, should the judge allow him weekend release, he’ll have his choice of retreats to think about how he’s going to explain bilking investors out of an estimated $50 billion.The first is a 5-bedroom 6,300-plus square-foot secluded Palm Beach waterfront residence valued at a cool $23 million. And, if he wants a little company, he only has to head down the street to a Palm Beach condo valued at around $1 million.And — depending on how long the case takes to go through trial — when the weather warms up in the Northeast, he can relax on Long Island’s swanky East End, in a modern-design beachfront home in Montauk valued at just over $3.3 million.U.S. District Court Magistrate Judge Gabriel Gorenstein ordered Madoff to remain under nightly house arrest Wednesday, setting a 7 p.m. to 9 a.m. curfew in the Manhattan apartment. Madoff also was ordered to wear an ankle-monitoring bracelet at all times, and his wife, Ruth, was told to surrender her passport by noon Thursday.

Markar • December 17th, 2008 at 1:23 pm

He’s credible to me. He gives Obama 6 months to stop the madness or it will be too late. I agree, once the treasury bubble pops, it’s game up for the US. And sadly, Obama probably won’t figure it out until after the train has left the station

FAMC • December 17th, 2008 at 1:27 pm

Lets pay homage to:1) John Law – Banque Royale2) John Blunt – SouthSea Company3) Richard Whitney – Morgan’s broke that went to Sing Sing4) Robet Vesco – Inverstors Overseas Services (moved to Cuba)and a special homage to5) Charles Ponzi – that inspired a very ingenious scheme that was cited in this blog many many times.—————————————

PeteCA • December 17th, 2008 at 1:28 pm

Hard to believe that oil traders have discounted the new OPEC cut … and it makes no difference to their price today. Since the oil market is very large, it’s generally hard for anyone to engage in price manipulation (certainly for any length of time). So if today’s price for oil represents honest price discovery, it means that either the oil traders don’t believe that OPEC is going to follow through with this deep cut, or that the cut doesn’t make that much difference to supply/demand.Let’s take it a step further.If the oil traders are right, then Wall Street is clearly wrong in seeing an easy way out of this recession. If the oil traders really think that global oil consumption is going to be this bad, then we’re headed for an extremely bad recession – or an outright depression.PeteCA

PeteCA • December 17th, 2008 at 1:32 pm

Suppors my post on the last thread. I’ll re-port again below. It looks very much like Bernanke and Paulson saw this move coming from China, and decided to nationalize US mortgages to make them immune (from a crash in US bonds).PeteCA

Guest • December 17th, 2008 at 1:34 pm

And like all addicts, the public won’t truly demand anything (recover) until the majority hit Rock Bottom. So this is likely to continue for quite some time.

PeteCA • December 17th, 2008 at 1:36 pm

Re-posting from the last blog session.It’s not often that I pay a compliment to Mr Bernanke, but I do here. He was obviously drinking his coffee the morning he figured this strategy out.The post above from JimmyTheBanker appears to support what I’m saying here.—————————–Why Did the Fed Nationalize US Mortgages?Lately I’ve been doing a little thinking about the Fed.Specifically, why did Bernanke decide to effectively start nationalizing US mortgages? That is what they are doing – if the Fed prints $$ and buys US bonds directly. By forcing down the rate on the US bond to 3-3.5%, they make it possible for the Gov’t to offer mortgages at 4.5%.But why did they do this?After all, the US home price market is well into correction territory now. Down something like 20%, it is maybe halfway to Shiller’s target (40% drop). So if home prices are corecting through free market action, why should the Fed get involved?Previously I speculated that the reason was that the Fed is terrified that another 20% drop in home prices will gut the remaining banks on Wall St. It could, of course. Take a look at Bank of America’s stock price today. Then consider what some further big reductions in Level-2 and Level-3 assets might do. So that was my rationale for understanding Bernanke. And it could well be a prime motivating factor.But it dawned on me that maybe Ben and Hank have actually done something smart here.Yep, you did hear me say that.Don’t get me wrong. I’m not happy about the US economy. But check the reasoning.It’s been well known that if China starts dumping US treasuries and bonds that the US credit market will be in deep trouble. In fact, the Chinese don’t even have to start selling their bonds. They only have to stop buying new ones. And they have issued this threat several times – in an effort to force Washington to change its financial behavior. To no avail, I might add.Very recently Chinese spokesmen announced that China might need to “save itself”. A grim warning. Translation: Very likely China will stop adding US bonds and treasuries, and might even dump some holdings. In this nasty recession, it’s every man for himself now. Even if it kills the other guy.Such a move would be catastrophic for the USA right now. It would force bond yields to bounce upwards, driving a stake into the US mortgage market. It occurred to me that Ben and Hank figured all of this out, and decided they MUST insulate the US housing market from any adverse moves by China. So they have effectively nationalized the mortgage system. They are artificially keeping rates at the long end of the curve low, and stopping any sudden spikes in the yields.If this is true … it’s actually a smart move by the Boyz in the Fed and the Treasury. It at least gives them a little bit of control in the situation. It’s better than seeing a crash in bond prices, and the huge knock-on effect on the US housing market.Finally, none of this means I like what’s happening. The US economy is still on the road to Dante’s inferno. It just means that Ben and Hank have a little room to tweak the air conditioning unit in Hell. That’s all.PeteCA

ex VRWC • December 17th, 2008 at 1:36 pm

The OPEC supply cut is hard to implement. With the price down, EMs need to sell all the oil they can to keep the money coming in. I think there will be big stress on OPEC unity.All that aside, Wall St is clearly wrong in their hopes for an easy end to the recession, since deleveraging is only halfway through at best.As I said yesterday, what is interesting to me is that the flight from the dollar seems to have begun, and yet oil stays down. Markets clearly are behaving oddly. I just don’t think their expectations about how things will behave will be fulfilled, especially the consumer and businesses.

Guest • December 17th, 2008 at 1:41 pm

People are unsure of the timing but the consensus seems to be that govt. bonds will be a terrible place to have your money.If I had money I’d be in a mix of currencies gold, food and energy commodities, and yes some cash under the mattress, you made it through the first phase of the crash good luck timing the next one.

Guest • December 17th, 2008 at 1:42 pm

If you (purposefully) don’t notice what’s going on, then it’s not really happening. I thought everyone knew that. (tongue in cheek)

Guest • December 17th, 2008 at 1:49 pm

Its also been considered currency for a thousand or so years and can’t be printed. It has many powerful enemies and should those enemies fall the flood gates will open.

2cents • December 17th, 2008 at 2:00 pm

It’s not even disputed that we blew asset values to obscene levels and distorted their natural value. This aided the speculators at the expense of the prudent. Now, we aim to ameliorate the asset problem by adjusting the monetary basis of the obscene values such that the numerical number is maintained while the monetary power of each monetary unit is diminished. This further aids those who speculated at the expense of the prudent.It takes a Ph.D. To formulate a system that allows asset prices to exponentiate themselves relative to their natural value and then to fix the problem by having the monetary measure of value proportionally decay to equalize the situation! This is pretty much the modulus operandi of a 2yr. old (If you have something I like, it’s mine. … If I can take it from you, it’s mine. … If it’s mine, it must never appear to be yours in any way. … If I break it, it’s yours.)It takes am African tribesman with no more than a crude hatchet to realize how to implement natural value. (If I have something you want, do you have something I want? … If you even think about taking something I have, or dishonoring what you gave me then you’ll get whacked!)Oh, where does the wisdom reside?I feel that we are in a real rope-a-dope fight here. Unfortunately, I’m not sure if I’m Ali or Foreman at this point. Yeah, it’s definitely a rumble in the jungle either way.Nouriel, I understand your quest to undertake “aggressive monetary and fiscal policy actions — both traditional and non-traditional.” However, this has been ongoing and unprecedented in many ways. Currently the authorities have taken actions to a tune north of $8 Trillion dollars. I think that we’ve listened to this music long enough. I say you need to put a $ value out there as a final verse and let happen what happens. The rest of us favor the sound of silence.P.S. That’s as in silence of interventionism and not your words of wisdom and analysis.

Guest • December 17th, 2008 at 2:03 pm

1. Be able to defend you family in a time of civil unrest.2. Have a sufficient amount of food available in the event of a major supply chain disruption to transportation fuel or a surprise pandemic/attack.3. Be sure to have cell communication and an evacuation plan.4. Have at least 3 months cash flow on hand…more in the bank.5. Best of luck and happy holidays.

Octavio Richetta • December 17th, 2008 at 2:04 pm

‘All Available Tools’: What the Fed’s Moves Really Mean – Tech Tickerhttp://finance.yahoo.com/tech-ticker/article/147682/’All-Available-Tools’-What-the-Fed’s-Moves-Really-Mean?tickers=%5Edji,%5Egspc,%5Eixic,SPY,TLT,UDN,SHVBarack Obama-sanhttp://online.wsj.com/article/SB122938932478509075.htmlAs January 20 nears, Barack Obama’s ambitions for spending on the likes of roads, bridges and jobless benefits keep growing. The latest leak puts the “stimulus” at $1 trillion over a couple of years, and the political class is embracing it as a miracle cure.Not to spoil the party, but this is not a new idea. Keynesian “pump-priming” in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.In the Age of Obama, we seem fated to re-explain these eternal lessons. So for today we thought we’d recount the history of the last major country that tried to spend its way to “stimulus” — Japan during its “lost decade” of the 1990s. In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa’s Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a “lifestyle superpower.” The country embarked on a great Keynesian experiment:August 1992: 10.7 trillion yen ($85 billion). Japan passed its largest-ever stimulus package to that time, with 8.6 trillion yen earmarked for public works, 1.2 trillion to expand loan quotas for small- and medium-sized businesses and 900 billion for the Japan Development Bank. The package passed in December, but investment kept falling and unemployment rose. By the end of the year, Japan’s debt-to-GDP ratio was 68.6%.April 1993: 13.2 trillion yen. At exchange rates of the day, this was a whopping $117 billion giveaway, again mostly for public works and small businesses. Tokyo erupted into domestic politicking over election practices, the economy went sideways, and the government fell. New Prime Minister Morihiro Hosokawa floated tax cuts, deregulation and decentralization to spur growth. But as the economy worsened — inflation-adjusted GNP shrank 0.5% in the April to June quarter — the political drumbeat for handouts increased.September 1993: 6.2 trillion yen. Mr. Hosokawa announced a compromise “smaller” stimulus of $59 billion, along with minor deregulation. He dropped plans for an income-tax cut. The stimulus included 2.9 trillion yen in low-interest home financing, one trillion yen for “social infrastructure,” and another trillion for business. The economy didn’t respond. By the end of the year, Japan’s debt-to-GDP reached 74.7%.Is any of this beginning to sound familiar? There’s more.February 1994: 15.3 trillion yen. This stimulus included 5.8 trillion in income-tax cuts, 7.2 trillion in public investment, 1.5 trillion for small business and employment-support, 500 billion for land purchases and 230 billion for agricultural modernization. The income tax cut was temporary, effective only for 1994. The economy stagnated and Prime Minister Hosokawa resigned amid a corruption scandal. By the end of the year, debt-to-GDP was 80.2%.September 1995: 14.2 trillion yen. The Socialist government of Tomiichi Murayama, with a wobbly coalition, rolled out a $137 billion whopper, with 4.6 trillion in public works, 3.2 trillion for government land purchases, 1.3 trillion in business loans, and more. Mr. Murayama resigned in early 1996, and in June Prime Minister Ryutaro Hashimoto agreed to raise consumption taxes to 5% from 3%, starting in April 1997, to reduce the fiscal deficit.In 1994 and 1995, Japan spent 3.1% and 2.9% of its annual GDP, and (helped by central bank easing) the economy did respond with modest growth for about two years. Debt-to-GDP hit 87.6%.April 1998: 16.7 trillion yen. When growth starting slowing again, the re-elected LDP turned to old medicine: 7.7 trillion yen for public works. The $128 billion grab-bag also included 2.3 trillion for the disposal of bad loans. The government announced four trillion yen in (again) temporary income-tax cuts, spread over two years. Mr. Hashimoto resigned in July after voters registered their discontent at the polls.1998: 23.9 trillion yen. Desperate to get the economy moving, Prime Minister Keizo Obuchi rolled out the country’s largest-ever stimulus, valued at $195 billion. The giveaway included 8.1 trillion yen in social public works, 5.9 trillion for business loans, one trillion for job-creation programs, 700 billion in cash handouts to 35 million households, and more. By the end of the year, debt-to-GDP hit 114.3%.November 1999: 18 trillion yen. In a “last push,” Mr. Obuchi’s government spent 7.4 trillion yen to prop up businesses, 6.8 trillion yen for social infrastructure projects like telecommunications and environmental projects, and two trillion yen for housing loans, among other things. Debt-to-GDP reached 128.3%.Japan’s economy grow anemically over that decade, but as the nearby chart shows, its national debt exploded. Only in this decade, with a monetary reflation and Prime Minister Junichiro Koizumi’s decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover. Yet recent governments have rolled back Mr. Koizumi’s reforms and returned to their spending habits. But Japan does have better roads.Now we’re told that a similar spending program — a new New Deal — will revive the U.S. economy. How do you say “good luck” in Japanese?

DOn Knowland • December 17th, 2008 at 2:05 pm

The majority may do something before they hit rock bottom if they stop with false illusions in the Democrats/Obama who are in on it and organize politically in their own interests rather than in those of the few, the swindlers, etc. the problem is that the system tended more or less inexorably to this result. The system has to go, I’m sorry yes we need world socialism democratically controlled by the masses to end the insanity. Cleaning out the aegean stables just to let it happen all over again later is no solution. Not to mention all the military conflicts that result from economic chaos and the decline of the US and other powers.

FAMC • December 17th, 2008 at 2:10 pm

See Peter Shiff’s Article (Madoff+Ponzi)In Madoff We TrustAs the multi-billion dollar Ponzi scheme orchestrated by Wall Street insider Bernard Madoff unravels in the media spotlight, the nation is being presented with a rare opportunity to understand the true nature of many of our most cherished financial structures. Hopefully we have the wisdom to connect the dots.

ptm • December 17th, 2008 at 2:11 pm

Your metaphor hit home closer than you may realize. Some see the work of fiction to be an alogory of the Gold Standard in the 1890′s

… scholars have theorized that the images and characters used by Baum and Denslow closely resembled political images that were well known in the 1890s, specifically the debate of the day regarding monetary policy: the “Yellow Brick Road” represents the gold standard, the silver slippers (which were ruby slippers in the film version) represent the sixteen to one silver ratio (dancing down the road). Many other characters and story lines represent identifiable people or circumstances of the day. The wicked witches of the east and west represented the local banks and the railroad industry, respectively, both of which drove small farmers out of business. The scarecrow represents the farmers of the Populist party, who managed to get out of debt by making more silver coinage. Unfortunately, the farmers did not understand that introducing more coin into circulation reduced its value (Dorothy eventually losing her silver shoes). The Tin Man represents the factory workers of the industrialized North, whom the Populists saw as being so hard-pressed to work grueling hours for little money that the workers had lost their human hearts and become mechanized themselves. (See Second Industrial Revolution) Toto was thought to be short for teetotaler, another word for a prohibitionist; it should be noted that William Jennings Bryan, the fiery popular candidate (possibly the Lion character) from the Populist Party, was a teetotaler himself. Bryan also fits the allegorical reference to the cowardly Lion in that he retreated from his support of free silver after economic conditions improved in the late 1890s. However, it has also been suggested the cowardly Lion represented Wall Street investors, given the economic climate of the time. The Munchkins represented the common people (serfdom), while the emerald city represented Washington and its green-paper money delusion. The Wizard, a charlatan who tricks people into believing he wields immense power, would represent the President. The kiss from the Good Witch of the North is the electoral mandate; Dorothy must destroy the Wicked Witch of the West—the old West Coast “establishment” (money) with water (the US was suffering from drought). Moreover, “Oz” is the abbreviation for the measuring of these precious metals: ounces.

http://en.wikipedia.org/wiki/The_Wonderful_Wizard_of_Oz#The_Gold_Standard_representation_of_the_storyhttp://en.wikipedia.org/wiki/Political_interpretations_of_The_Wonderful_Wizard_of_Oz

Don Knowland • December 17th, 2008 at 2:15 pm

Cleaning out the Aegean stables all you Austrians and ultra-free marketers won’t work because it will just happen again on a bigger scale later, if war doesn’t get us all first. The truth is that the economic system, capitalism, tends inexorably to this situation. It pushes to the top the swindlers, the speculators, the incompetent, all of who are hailed as the smart, the paragons of investment and economic rectitude, the competent… Yes sorry to say it but only a planned world economy democratically controlled by the masses of people is a historically viable solution. And don’t give me that crap about socialism can never work, man’s nature, etc. Those nostrums should be now discredited as economic illusions too, really propaganda. Socialism was never tried on a world scale with access to all humankind’s advanced technology and the world division of labor, only in poor, backward countries pursuing economic autarchy rather than globalization.

2cents • December 17th, 2008 at 2:17 pm

@ORGreat compilation, but I can hear the counterpoint right now… Yeah, but can you imagine what would have happened if we hadn’t done it!Because there is no way to perform an economic controlled experiment, we come down to rules of thumb, experience and PIOYA logic. Somehow we need to counter the above counterpoint.

Steve • December 17th, 2008 at 2:33 pm

I guess I’m saying the Doctor seems very sanguine when we are in very bad shape already, yet just now entering completely uncharted fiscal and monetary waters with some “gotchas,” economic and otherwise, _sure_ to come. X–the unknown. Unprecedented. We are in Alice in Wonderland territory. Or to put in another way, the center can not hold.

Steve • December 17th, 2008 at 2:35 pm

I guess I’m saying the Doctor seems very sanguine when we are in very bad shape already, yet just now entering completely uncharted fiscal and monetary waters with some “gotchas,” economic and otherwise, _sure_ to come. X–the unknown. Unprecedented. We are in Alice in Wonderland territory. Or to put in another way, the center can not hold.

Guest • December 17th, 2008 at 2:35 pm

The UK should put up interest rates thereby speeding up the collapse of venerable companies and over stretched householders. Prices will collapse very quickly and new opportunity to borrow and revitalise the economy will occur. This will happen over 12 months, or the alternative is a long slow, cheating yourself death with an even longer recovery stage. Quick and fast shock will be better psychologically to keep people interested in doing business. A long drawn out process to the same point will even fool some good business people who are needed for the revitalisation, and hence make any future recovery even more difficult. Raise Interest Rates to 7%

devils advocate • December 17th, 2008 at 2:50 pm

not even the Great Roubini has a crystal ball…just that it IS BAD AND GETTING WORSEperhaps, that’s why he is interviewing a lotto get his ideas across because he (and the me and most people)ARE GETTING SCAREDTHE MAJOR POLICY OF PRES OBAMA HAS TO BE PUBLIC RELATIONS TO RESTORE CONFIDENCE

Octavio Richetta • December 17th, 2008 at 2:50 pm

I guess we have no choice but to witness the train wreck develop. Thank god I have no debt, I am now in 100% USD cash and about 30% 5%+ insured cds 5-10 year. I will just sit and wait for a while as Jesse Livermore suggests when one does not better. I greatly exceeded my return expectations for the year. I was aiming for a happy 5%, but would really have liked to get 8% t(That is why I used BG, he has done it before in declining rate environments). And ended up with 11.4% despite a -1% return with BG for 35% of my capital. I am happy! Now, will get some rest and prepare for the new year.

JimmyTheBanker • December 17th, 2008 at 2:54 pm

You folks have to remember, the stimulus in the system is incredible. Add to that a $300 Billion stimulus from falling gas prices and the threat of an Obama stimulus package over $1 Trillion and you have the makings for a hellofan inflationary recovery in the US sometime next year. Stocks below 800 were factoring in 0 earnings growth fo rnext year so that is why we are working on a bottom here. We are going to need somthing like an auto bankruptcy to revisit the lows, otherwise, the more news that meets or beats in going to carry this market hihger.

Hayes • December 17th, 2008 at 2:55 pm

It depends on your belief system – if you accept the theory then once the prescribed remedy is in place, the outcome is predictable. It is called faith or perhaps science.

devils advocate • December 17th, 2008 at 3:00 pm

if China won’t buy US debt, then the US Govt will buy its own debt= print the $ to trade for debtI suppose this $$$$ ends up causing inflation?because somehow, the Govt has to spend it to circulate it amongst its consumersto bottom the prices and start the spending/raising the consumption upto rebuild the economy

Hayes • December 17th, 2008 at 3:01 pm

I was in and out so many times today my head is spinning – $120k in trading value and I’m up $4. That swan dive after 2pm did me in. But thanks for the input and advice, tomorrow is another day.

Hubbs • December 17th, 2008 at 3:12 pm

A very interesting and thoughtful analysis as usual, PCA.At this point, are US government money markets (a la Vanguard) the last part of the Titanic above the water line as opposed to intermediate term treasuries?Redeem Janus and Harbor Intl funds to pay off last bit of a HELOC? Or just sit and sweat it out?This is what is so frustrating. Any of the traditional advice to income average, invest for the long haul, save 10% of income, blah blah blah now appears to be a chump’s errand.So fed up with everything that I went out today and bought(invested in) a fully restored authenticated M1 Garand, arguably one of the greatest battle rifles of WWII.

Octavio Richetta • December 17th, 2008 at 3:52 pm

But not even a world war can keep the stock market frombeing a bull market when conditions are bullish, or a bear market when conditions arebearish. And all a man needs to know to make money is to appraise conditions.I didn’t mean to get off the track like that, but I can’t help it when I think of my first fewyears in Wall Street. I know now what I did not know then, and I think of the mistakesof my ignorance because those are the very mistakes that the average stock speculatormakes year in and year out.After I got back to New York to try for the third time to beat the market in a StockExchange house I traded quite actively. I didn’t expect to do as well as I did in thebucket shops, but I thought that after a while I would do much better because I would beable to swing a much heavier line. Yet, I can see now that my main trouble was myfailure to grasp the vital difference between stock gambling and stock speculation. Still,by reason of my seven years’ experience in reading the tape and a certain naturalaptitude for the game, my stake was earning not indeed a fortune but a very high rate ofinterest. I won and lost as before, but I was winning on balance. The more I made themore I spent. This is the usual experience with most men. No, not necessarily with easymoneypickers, but with every human being who is not a slave of the hoarding instinct.

Octavio Richetta • December 17th, 2008 at 3:54 pm

Some men, like old Russell Sage, have the money-making and the money-hoardinginstinct equally well developed, and of course they die disgustingly rich.

Hayes • December 17th, 2008 at 3:55 pm

MA and OR are two frequent posters here who both share candidly their strategies for investment – MA is also an RGE contributor – my suggestions is to try and extract some of their posts and MAs columns. The other regulars offer great insight for example PeteCA on currency, jimmythebanker etc … too many to name. Unfortunately there does not appear to be an efficient way to extract posts. Also visit London Bankers blog for some good insight.There was an excellent thread link two days ago that is worth reading (note the links on that thread especially the one that summarizes Gary Shilling’s current commentary)I agree with your assessment of the dynamic of how fast things are happening, as I have said things are happening faster and sharper than even the most astute forecasters have predicted.

Guest • December 17th, 2008 at 4:01 pm

Government buying its own debt.. somehow, that reminds me of a snake consuming its own tail. Ah, ‘consumerism’..

Octavio Richetta • December 17th, 2008 at 4:01 pm

For instance, I had been bullish from the very start of a bull market, and I had backedmy opinion by buying stocks. An advance followed, as I had clearly foreseen. So far, allvery well. But what else did I do? Why, I listened to the elder statesmen and curbed myyouthful impetuousness. I made up my mind to be wise and play carefully,conservatively. Everybody knew that the way to do that was to take profits and buy backyour stocks on reactions. And that is precisely what I did, or rather what I tried to do; forI often took profits and waited for a reaction that never came. And I saw my stock gokiting up ten points more and I sitting there with my four-point profit safe in myconservative pocket. They say you never grow poor taking profits. No, you don’t. Butneither do you grow rich taking a four-point profit in a bull market.

Guest • December 17th, 2008 at 4:08 pm

“If there’s one thing we’ve learned this year, it’s that not even the bears have been bearish enough. The hope among bulls is that the Fed’s zero-interest-rate policy will mark the end of this deflationary debt unwind, effectively punishing savers.But hope is not a viable investment strategy. Instead, what the Fed has done is push all their chips into the pot, gambling everything on one final card. Stocks are no longer being priced according to fundamentals, because they’re now simply pawns in the Fed’s giant credit market gamble.Unfortunately, this reckless gesture sets the stage for a more likely negative outcome, and that’s full-blown deflationary collapse and a subsequent crisis of confidence in the central bank itself.”http://www.minyanville.com/www.minyanville.com/articles/GS-AXP-GE-C-Fed-ms/index/a/20374

Capone • December 17th, 2008 at 4:16 pm

quick everyone get into tech stocks they are going crazy, everybody in? crash !oh no, paper stocks crashed! quick everyone run into “hard” assets – real estate and commodities, everybody in? crash !what now panicked, frightened scared little sheeple including moronic wealthy folks that I work for, quick everyone run into the safety of us dollars and short duration us fixed paper!5 4 3 2 1Great, Great, Great Grandmother of all CRASHES! US Dollar RIP 2009the more things change the more they stay the same…maybe Farmer Bob and Farmer Bill should offer shares in the physical corn stored on their farms to local folks for REAL, TRUE, PURE retirement savings and skip the entire scandal the Fed, Wall Street and global banking system have become altogetheri have started my search for a job at a commodity company today whether it be an investment firm or producer. either way, it is the place to be over the next decades… i can’t believe after all of these years. I REALLY truly want to be a “bean counter.” The term has lost its negative bias and gained a bright shiny new spin… ha ha

Cahill • December 17th, 2008 at 4:16 pm

I have been trying to say very similar things. The government is looking at this from a purely macroeconomic level. They have to consider the microeconomics and buil a model up from that to macro to find a way to hopefully fix this. This would hopefully help the common man survive this turmoil with something left to show for years of hard work.

Anonymous • December 17th, 2008 at 4:19 pm

http://michiganmessenger.com/10419/breaking-chrysler-shutting-down-all-30-plants-for-1-monthMultiple financial news outlets now report Chrysler will extend its previously announced two week shutdown to four weeks, beginning Friday Dec. 19.Facilities that make Jeep Liberty, Dodge Nitro and Jeep Wrangler will be closed a week longer, until Jan. 26. Two other facilities that make the Dodge Viper and mini-van will be closed a total of six weeks.The auto industry historically had a scheduled shutdown between Christmas and New Year’s Day, during which maintenance work was performed. The longer shutdowns are a response to plummeting demand for vehicles — off by as much as 47% in November — and a need to reserve cash.

Guest • December 17th, 2008 at 4:21 pm

@ aerial view: “The problem is that they (govt and banks) are partners in crime and only a public demand for full transparency and independent, honest investigation will expose the corruption at it’s roots!.”Transparency. That’s it. The main problem in this “crisis” is lack of transparency. If the Fed cartel and the Congress were serious and honest about the need for liquidity in the system and the lack of credit for business, then there would be transparency in 1) how much money is involved and for what, and 2) how much money is coming directly from taxpayers and how much indirectly from the taxpayers through currency/credit inflation.This is our money Bernanke is holding close to his chest. The money in his hands and in those of Congress’ is the money we worked for, sacrificed for, were taxed on, squirreled away for our futures. Congress is using tax money for Wall Street bailouts that it demanded from us at the threat of a gun and jail, if we didn’t pay up. Wouldn’t it be nice to know what we bought?But Bernanke and his congressional enablers won’t reveal how much they are taking, who are the receivers, what they are buying or trading it for, who is profiting and who is losing, who they are protecting and who they are destroying Nor will they allow issue of any proof. The Fed’s books have been closed since it began operations: they are still closed. For anyone to pretend to know what is on the Fed’s balance sheet is laughable. And the Democrats have blocked House investigations of Freddie and Fannie and all other investigative efforts into the bailouts and giveaways.Thus, using deductive reasoning and the evidence before our eyes, it is logical to conclude Bernanke is giving our money to crooks.Who’s responsible? Congress is responsible. Congress abdicated its constitutional duty to issue all money and regulate its value when it gave its stamp of approval to a private cartel of bankers to do its job, with no oversight. Thereafter, if that private cartel of bankers steals the money, Congress is responsible.Obviously, stealing is a good reason to insist on cover-up, or, euphemistically, lack of transparency.

ex VRWC • December 17th, 2008 at 4:32 pm

Roubini speaks of European Banks that are too big to fail, and too big to save because it exceeds the ability of the countries resources to do so. He then says:And while traditional fiscal policy (government spending and tax cuts) will be pursued aggressively, non-traditional fiscal policy (expenditures to bail out financial institutions, lenders and borrowers) will also become increasingly important in these advanced economies.It seems to me there is a disconnect here. Either advanced economies can bail out their banks, their businesses, and their consumers or they can’t.I submit they can’t, especially with the monster CDS bubble lurking. Therefore, unconventional means will increasingly mean every country for itself, beggar-thy-neighbor policies, etc. Including when governments try to unilaterally wish away their bank’s obligations.Again,in summary, Roubini see’s risks longer term after all of this unconventional policy ‘works’. I am not sure it will even work at all. Even just look at markets (equity, oil, currency). They do not even match short term predictions for their behavior. We have opened up the fuel lines, but we may not even get off of the launch pad before the engines explode.

Angry Man • December 17th, 2008 at 4:37 pm

From the online book Economic Rape of America (conspiracy??)President Abraham Lincoln was assassinated after issuing the Greenback, which was a non-interest-bearing note. President James A. Garfield expressed his concern about currency problems just before his assassination.On June 4, 1963 President John F. Kennedy signed Executive Order 11110 providing him with the authority “to issue silver certificates against all silver bullion, silver, or standard silver dollars in the Treasury not then held for redemption of any outstanding silver certificates, and to coin standard silver dollars and subsidiary silver currency for their redemption…” This seems like an attempt to bypass the Federal Reserve System by issuing real, silver-backed money to replace counterfeit Federal Reserve Notes. Kennedy was assassinated on November 22, 1963.There is a rumor that the “Kennedy silver certificates” were actually printed and that one of the first things President Lyndon B. Johnson did after assuming power was to have the “Kennedy silver certificates” destroyed. In 1964 Johnson, serving as the voice of the Federal Reserve bankers, said, “Silver has become too valuable to be used as money.” This amounted to a brazen boast that the bankers would eliminate any money with intrinsic value. On November 22, 1963, the day of Kennedy’s funeral, the first 50 million “no-promise” Federal Reserve Notes were released into circulation. The symbolic celebration of the Federal Reserve bankers?

wah fkir • December 17th, 2008 at 4:51 pm

Zionist charities are enlisting as victims:Diversion by peemptive anticipation.One should fetch how many have indeed attended the Wall Street fund raising orgy.

DoctoRx • December 17th, 2008 at 4:57 pm

The diagnostic brilliance of the good doctor Roubini is unparalleled.Not every diagnostician has the optimal recommendation for cure.Economies are like people. After overexertion, they need a rest. This economy and the world economy had an amazing growth spurt. All the overuse of credit and leverage were like whipping a flagging horse. The economies were like Stakhanov in Soviet hagiography. Enough! The economy needs to rest; the corrupt/stupid institutions that repeatedly become insolvent need to be put out of their misery. Protect depositors but not preferred stock and bond holders of these institutions. Keep the financial system alive w/o prejudice to the many smaller financial institutions that were prudent.Re “stimulus”, chronic overstimulation has led to this mess. Simply aid the states and the needy. That will be stimulus enough. Making lives of drivers worse by building or repairing more roads will take years to work, and will continue and add inflationary fuel in the up-cycle.The merchants of debt have gone too far. Dr. Roubini is too optimistic that the Gov’t will get it right after getting it so wrong, when the excessive monetary stimulus needs to be reversed. Either it will be reversed too soon or too late. Simply let the economy do what is natural- it will heal and the Gov won’t have to keep making so many decisions.Ultimately we need more equity and less borrowing and lending.

Guest • December 17th, 2008 at 4:59 pm

Today was a watershed moment for the dollar.More significant than the rate cut is the fact that the Fed announced a massive debt monetization program (ie swapping crap debt for freshly printed dollars). If you look at past cases of hyperinflation/currency collapse, they all began with debt monetization.Those who say the Fed is powerless to stop deflation clearly do not understand how a fiat monetary system works. The fed can create 100 trillion dollars just as easily as it can creat one dollar.

Phalanges • December 17th, 2008 at 5:04 pm

I think its a set up. Obama is in on the game. Socialism with a smile; a new draft; war. Its all in the plan.

blindman • December 17th, 2008 at 5:11 pm

c, bean counting has always placed the counter in near proximity of the bean!smart move. beans and peas are under rated.

phalanges • December 17th, 2008 at 5:14 pm

There are 100 loaded tankers waiting to deliver; that’s oversupply in the market that needs to be cleared. They’re planning short/medium term at the moment.Q1 09 will be interesting.

Guest • December 17th, 2008 at 5:20 pm

“the fact that the Fed announced a massive debt monetization program”Do you have a link on the specifics of this? Thanks.

blindman • December 17th, 2008 at 5:24 pm

@nr.”But desperate times lead to desperate actions by desperate policy makers.”.implied or assumed. the fed is an independent, honest broker and represents the interests of the treasury of the people of the united states of america. …acting in desperation, we the people, are backing international ponzi activity.true or not?the tongue has no bone..”Thus, as a next step the Fed may be soon forced to walk down the credit curve and start buying private short-term and long-term securities with lower credit rating. That would mean that the Fed will take on even more credit risk than is already taking on today while purchasing illiquid private assets. But desperate times lead to desperate actions by desperate policy makers.”.who’s policy is this? ours? bush’s? obama’s? j.p. morgan’s?

Guest • December 17th, 2008 at 5:27 pm

The UK should put up interest rates thereby speeding up the collapse of … over stretched householders

Would that not cause a large amount of people with bad credit record, thus making it difficult for at least them to borrow again? It would mean that banks would have to get their new borrowers from somewhere else. But those new borrowers would already be available now would they not? If they are not available somewhere now they will not be available after a collapse.Of course these over stretched householders who then would collapse could eventually repair their credit record. How long would this take in UK? And new borrowing would also require new downpayments which would perhaps be rather high (as lending with low down payments was one of the factors in this crisis anyway).

Octavio Richetta • December 17th, 2008 at 5:28 pm

Grant Says SEC Irrelevant; Fed Moves to Retard Recoveryhttp://www.bloomberg.com/avp/avp.htm?N=av&T=Grant%20Says%20SEC%20Irrelevant%3B%20Fed%20Moves%20to%20Retard%20Recovery&clipSRC=mms://media2.bloomberg.com/cache/vjtDLTHoTLsA.asf

Cahill • December 17th, 2008 at 5:30 pm

Is anyone else considering purchasing a little bit of farmland. Corn may get old but it’ll keep your belly full.

Guest • December 17th, 2008 at 5:44 pm

…But just as the past 22 months have shown that the markets do not act exactly as Fed official have anticipated, we cannot see that the Fed, Treasury and other government programs will work as designed. While we don’t rule out that an inflationary boom is possible, once the liquidity is starting to be mopped up, we are afraid, economic growth is likely to collapse once again. Unless real wages can be improved, consumers must de-leverage. Propping up a broken system will simply make the later crash even more severe.Similarly, if Asian governments continue to support the dollar, they will seriously weaken their own position; in a best-case scenario, we will then face the same challenges again in 10 to 15 years, but then a country like China won’t have $2 trillion in reserves, but have great difficulty to stabilize its economy. The U.S. has taken the attitude that other countries must support the dollar because it is in their interest. But there’s a limit to what other countries can do; there’s also a limit when it seizes to be in their interest. In particular, it is irresponsible for the U.S. to pursue a policy that is destructive to the dollar while counting on Asian governments to prop it up. In the meantime, responsible savers in the U.S. have their savings put at risk due to all the bailouts….

(from: http://www.merkfund.com/merk-perspective/insights/2008-12-02.html)

2cents • December 17th, 2008 at 5:55 pm

@JTBSo let me get this straight. We’re going to pump it up now (stimulate) so that we can forgo a nasty downturn/bankruptcies. Then she’s going to rocket skyward and we’re going to reign her in by yanking back and pulling back funds and forcing things back down causing other bankruptcies.Just brilliant, just brilliant!(JTB I know it’s not your opinion but just an observation)

Guest • December 17th, 2008 at 6:26 pm

That’s right just look at the Rink E Dink change we have in our pockets. It’s like the play money your parents use to buy for you at the five and dime. I remember when we use to put garters on the rail road tracks back in the 70’s to make necklaces for our girl friends; don’t let a train run over one of these things. It sticks to the wheel like bubble gum and you can’t find it. I think the treasury should go ahead and make change out of plastic and get it over with, A slug has the same vale as today’s quarter.

Guest • December 17th, 2008 at 6:33 pm

I have noticed homes for sale with no takers; the interesting thing is in 2007 many farmers had their land on the market in my area; however since the downturn they have pulled the sale signs.

Guest • December 17th, 2008 at 6:35 pm

I don’t know that the vigilance of individuals is reduced b/c there is an SEC. Most people aren’t in a position to use the courts, as he proposed. It’s too bad the SEC doesn’t do its job and seems to only be a political puppet.

Guest • December 17th, 2008 at 6:41 pm

Everyone running around scratching their heads how to fix this, it’s pretty obvious we’re moving towards huge debt repudiation/inflation, nationalization of big industry and banks. Folks this may not sit well with your religion but socialism is coming soon to a theater near you.

g Anton • December 17th, 2008 at 6:57 pm

To quote myself from a recent comment:”And what about Obama? Economic stimulation has not worked well in the recent past, and there is no reason to believe that it will work well in the near future. The last US president that was loved and respected by the Mexican people was John F. Kennedy (they named schools and bridges in his honor). While many Mexicans have hopes that Obama will be another JFK, the more sophisticated amongst them believe that, although black and an adept politician, he is just another imperialistic and jingoistic gringo. I hope that the latter group is wrong, but I think and fear that they absolutely correct.”I more or less agree with you–we just use differnt words.

Guest • December 17th, 2008 at 7:12 pm

Today’s Wall Street Journal, page 8: “Madoff Investors Unlikely to Find Relief From SIPC — Federally mandated nonprofit has reputation for miserly payouts and generally limits coverage to broker theft”December 17, 2008 — “Investors who lost money with Bernard Madoff shouldn’t count on the Securities Investor Protection Corportation riding to their rescue.“The federally mandated SIPC has a narrow requirement as to what it covers — generally theft in brokerage accounts…”“Losses from theft and proven unauthorized trading are covered. Losses from fraud, churning or manipulation of stock prices are not…”

Brian • December 17th, 2008 at 7:16 pm

My question for you all is this:Do we see GM and/or Chrysler declare bankruptcy on Friday (like when the FDIC shuts down banks) or next week just before markets close for holidays?My money is on Friday after market close into light week, but I’m torn. Waiting until holiday shopping is finished seems like a more sleazy move, and that’s how TPTB seem to operate…

Jason B • December 17th, 2008 at 7:23 pm

Roubini’s diagnosis is excellent, but whenever he speaks of recovery or a bottom to the market there are logical inconsistencies to his arguement. There is not a logical arguement for a recovery at this time. It is unpredictable at best, a new equilibrium low at worst. The level of low is the subject of debate, from a logical POV.

Octavio Richetta • December 17th, 2008 at 7:47 pm

December 17, 2008On Trying to Inflate Four Truck Tires with a Turkey BasterBernanke’s Fatal FlawBy MIKE WHITNEYEver since the two Bear Stearns hedge funds defaulted 17 months ago triggering a global financial crisis, the Federal Reserve has been busy putting out one fire after another. Fed chief Ben Bernanke has slashed interest rates to .25 per cent, handed out billions in emergency funding to teetering insurance companies and mortgage lenders, and provided $8.3 trillion in loan guarantees to keep the financial system from collapsing. Unfortunately, nothing the Fed has done has either stabilized the markets or stopped the contagion from spreading to the broader economy where consumer spending has fallen sharply, unemployment has skyrocketed, manufacturing has slipped to a 30 year low, and housing prices have plummeted. Bernanke, the Princeton academic who is an expert on the Great Depression, is limited in his understanding of the crisis by his “monetarist” bias. He believes that the only way to fight credit contraction is by flooding the financial system with liquidity (“quantitative easing”). But this remedy focuses more on reducing the symptoms rather than curing the disease. Christopher Wood sums it up in an article in the Wall Street Journal article “The Fed is Out of Ammunition”:…http://www.counterpunch.org/whitney12172008.html

Michael • December 17th, 2008 at 7:53 pm

The beauty of the Fed/Treasury Plan (pshaw! to those who say they don’t have a clear plan) is that it is a classic Ponzi scheme: The money for the fiscal stimulus and other growth of government spending will come from more loans (Treasury purchases) from China and Japan. No new taxes needed!Future tax receipts have been irrelevant since 1942, when the U.S. national debt balooned (because of “exigent circumstances”) such that it could never realistically be paid back. Since then permanent, ever-rolled-over, ever-growing fiscal debt has become formalized as the American Paradigm (as Cheney put it, “Reagan proved deficits don’t matter”); the principle was eventually widely adopted by the business and household sectors and came to be called “The Great Moderation” (aka “The Great Leveraging”).Bernanke has publically stated that the Asians “have no choice” but to continue to buy our ever-growing debt, because they already own too much of it to risk devaluing their existing assets by dumping (or merely refusing to continue buying) Treasuries. Let’s hope that, for once, he is right.The Plan calls for using borrowed Asian money to buy Agency debt (since the Asians have stopped buying it), and for any other asset purchases necessary, to keep key interest rates as low as possible. Also, the Fed’s newly-printed dollars are passed through (via the alphabet programs) to banks, which use them to buy…guess what? That’s right, Treasuries!! Ponzi is spasming in pleasure in his grave.So, with the Asians and the Fed providing the money to sustain mushrooming fiscal debt, it is assumed this Ponzi scheme can be sustained forever. They aren’t worried about a devalued dollar or price inflation, since those are actually part of the Plan (they make the value of the debt less as time goes by).Of course, the worst thing that can happen is that they succeed in carrying out this Plan (meaning the Fed and Asians keep supplying the cash to let the national debt expand exponentially). Because, the Ponzi scheme will end (sorry, Mr. Cheney) when the cost of the INTEREST PAYMENTS on the principle owed becomes 100% of all income generated in the nation. But, the geniuses in charge of the Plan figure they won’t be around to worry about that outcome, because “In the long run, we are all dead.”

Guest • December 17th, 2008 at 8:01 pm

I agree, Bair seems to be the only sane one involved.Didn’t Sheila sneak the line in the TARP stating, recipients of TARP must make their “outstanding” contracts available to review?I wonder how those contracts look Sheila? You have asked to see them, haven’t you?Speaking of transparency, or lack of it, didn’t Pelosi say the TARPs transactions would be posted on the web for all the curios to see? Would someone post the URL for me, I missed it.I’d really like to know who got their CDS paid off from AIG. I believe the US Taxpayer owns this company now, so we should see their books on the web also? I wonder if we didn’t give AIG (read USIG) the $150+ Billion, what investment house/ bank would have gone LEH (short for TOAST)? hmmm…Come on Sheila, you know the boyz don’t want you hang’n around. Spill…

blindman • December 17th, 2008 at 8:01 pm

g, great example of total legaleez b.s.. another nail in the coffin.theft is distinguishable from fraud? sounds like a summer home in the f..inghamptons to me. great spot. now i puke.

JLC • December 17th, 2008 at 8:06 pm

I’m in Western WA, and dabble in real estate part time. Land here is still at bubble prices, but isn’t selling. Houses are down about 12% from the peak (Sept. 2007 here), but have another 30-40% to go. I sold my house on acreage early this year before the bottom really fell out of the market. I miss the huge garden.It KILLS me to be renting a small townhouse with a tiny yard that we can’t grow vegetables or raise animals on. I am on the lookout for 5 acres and my goal is self sufficiency. Unfortunately, I think it will be at least another 12-24 months before valuations are back to their historical averages.In the meantime I am looking out for desperate sellers willing to deal. I don’t want to wait two years to become self sufficient. But at least I’m not upside down in my house.

Guest • December 17th, 2008 at 8:08 pm

SICK FEELINGI just looked at the currency in my wallet and noticed at the top of each bill it says: Federal Reserve Note. With the Fed “honoring” it, it just hit me that it’s not worth the paper its printed on.

Guest • December 17th, 2008 at 8:09 pm

King Henry is a gambler…Feeling Lucky today?Hmmm…hope King Henry isn’t gaming with our bailout money.http://www.nytimes.com/2005/12/25/business/25gamble.html?pagewanted=printDecember 25, 2005Wall St. Bets on Gambling on the WebBy MATT RICHTELInternet casinos are outlaw operations in the eyes of the federal government, but they look like solid investments to many of Wall Street’s largest firms.Blue-chip investment houses like Goldman Sachs, Merrill Lynch and Fidelity now hold hundreds of millions of dollars in shares of online casinos and betting parlors, which are publicly traded on the London Stock Exchange and headquartered in places like Costa Rica or Gibraltar.

Michael • December 17th, 2008 at 8:17 pm

Actually, until the end of WWII, all the various American financial panics and business contractions were called “depressions.” Hence, the “Great Depression,” which was larger than its predecessors (similarly, WWI was called “the Great War” because it was bigger than its predecessors – all of which were wars).As a part of manipulating public perception, now widely acknowledged to play a large role in expectations and hence economic behavior, the term “recession” has replaced “depression” (other well-known perception manipulations include changing the parameters for measuring inflation and unemployment so that current official numbers always look good when compared with past crises).The same principle was originally used to name the “Korean Conflict” (not the “Korean War”), but that didn’t catch on as well (even though the Constitutional requirement for Congress to declare “war” has been totally ignored since WWII). Fact is, doesn’t matter what you call it, the current global credit and business contraction, socio-financial panic, and government-on-speed hyper-reaction is a major historical event.

Octavio Richetta • December 17th, 2008 at 8:19 pm

http://online.wsj.com/article/SB122956182184616625.htmlDECEMBER 18, 2008Chasing Bernard MadoffBy GREGORY ZUCKERMANHarry Markopolos, who once worked in a trading firm that competed with Bernard Madoff’s, for nine years has been trying to persuade staffer after staffer at the Securities and Exchange Commission that Mr. Madoff’s operation was a fraud. The agency never brought charges.Yesterday, a week after Mr. Madoff was arrested in an alleged $50 billion Ponzi scheme, Mr. Markopolos was vindicated.Internal SEC documents show how the agency, prompted in 2006 to investigate by Mr. Markopolos’s complaints, found serious violations at Mr. Madoff’s firm, but took no public action. These documents show the SEC found some violations at Mr. Madoff’s firm in 2006-07, but didn’t take action on allegations that it was a Ponzi scheme.Harry MarkopolosIn recent days, Mr. Markopolos has shared with The Wall Street Journal emails, letters and other documents he showed to the SEC, over the better part of a decade, as part of his relentless campaign to persuade regulators that Mr. Madoff’s returns were too good to be true.His allegations were far from bulletproof. Mr. Markopolos had no definitive evidence of a crime. His reports were laden with frothy opinions that suggested he could be on a vendetta.He provided lists of what he called “red flags,” some of which are now believed to be on the mark. But occasionally he got facts and dates wrong. Once he even misstated the start of his own campaign against Mr. Madoff, saying it started in 1999 when in fact it was 2000.”Of course, no one wants to take undue career risk by sticking their head up and saying the emperor isn’t wearing any clothes” Mr. Markopolos wrote to the SEC in 2005. However, he immediately added: “That we have what is effectively the world’s largest hedge fund operating underground is plainly shocking.”In that note, he estimated that “approximately $30 billion is involved.”Markopolos’s DocumentsDocuments Harry Markopolos submitted to the SEC in fall 2005, making a case that Bernard Madoff’s business was a Ponzi scheme.The response Mr. Markopolos received from an SEC official in response to his case against Mr. Madoff.See the SEC’s case opening and closing recommendations.The Madoff Fraud CaseWash Wire: Cox Backs Off Criticism of SECSEC statement about failures in Madoff caseMadoff Bail Conditions | Property collateralList of Victims | Complete CoverageDiscuss: Is the SEC an effective regulator?Mr. Markopolos says his suspicions started in late 1999, after a colleague returned from New York with tales of Bernard Madoff’s impressive trading gains. Whether the markets were up, or down, Mr. Madoff managed to clock in with steady gains. He reportedly used a strategy of trading stocks as well as various options to protect against losses.Liked the LookMr. Markopolos says his bosses liked the look of those returns — and asked him why he couldn’t do the same thing.Under pressure to deliver, Mr. Markopolos and a colleague at their Boston trading outfit tried to reconstruct Mr. Madoff’s purported strategy. Their results paled in comparison.”It doesn’t make any damn sense,” Mr. Markopolos, 43 years old at the time, then told a colleague, who confirmed the conversation. “This has to be a Ponzi scheme.”His bosses told him to go back and check his math. After all, Mr. Madoff by that time was renowned as a legendary investor.Mr. Markopolos turned to Daniel DiBartolomeo, a top financial mathematician in Boston. Mr. DiBartolomeo says he spent hours poring through Mr. Markopolos’s data, and ultimately agreed: The strategy Mr. Madoff said he used couldn’t have achieved the returns he boasted of.’Sounds Serious’In early 2000, Mr. Markopolos shared his explosive concerns with Edward Manion, a staff examiner at the SEC’s Boston office.”This sounds serious,” Mr. Manion told him, inviting Mr. Markopolos in for a meeting.In May, 2000, Mr. Markopolos says he sat down with Mr. Manion and an SEC attorney.Mr. Markopolos argued his case: A key part of Mr. Madoff’s strategy relied on buying and selling options on the Standard & Poor’s 100-stock index. But Mr. Markopolos said his research showed that weren’t enough options on the S&P 100 to support the strategy Mr. Madoff’s stated strategy, given all the money he seemed to be managing. So something else must be going on.Mr. Markopolos, a native of Erie, Pa., who had trained in unconventional warfare as a reservist in the Army, says he came to “consider Madoff a domestic enemy.”Bernard Madoff, accused of running a massive investment fraud, was placed under house arrest Wednesday after a New York court hearing.In the months after the initial meeting with the SEC, Mr. Markopolos kept hearing about Madoff’s outsized gains, and how the firm was growing — sparking frequent calls to Mr. Manion to discuss the case.Over a year passed. Then, in late 2001, Mr. Manion told Mr. Markopolos the case appeared to have fallen through the cracks. He asked Mr. Markopolos to resubmit his documents and arguments, so that they could be passed on to the SEC’s New York office.Mr. Markopolos sent the lengthy documents, adding three pages arguing that the fraud was growing in size as Madoff’s assets under management grew beyond $10 billion.Mr. Markopolos also diagrammed how he believed the Madoff organization seemed to work.Mr. Markopolos continued to receive sympathetic calls from Mr. Manion.But Mr. Manion pointed out to him that any investigation would have to be conducted by the New York office, where Mr. Madoff’s firm was based.Mr. Markopolos says that worried him. “I was told that the relationship between the SEC’s Boston and New York offices is about as warm and cordial as the Yankees-Red Sox rivalry,” Mr. Markopolos says.’Sick of Wall Street’Mr. Markopolos left his firm in 2004 to start his own fraud-investigation practice. “I was sick of Wall Street,” he says, and “wanted to be on the other side.”Mr. Markopolos’s old colleagues, prodding him not to give up, spoke by phone for hours at time about Mr. Madoff.”Some people play fantasy sports, that was how it was with us — Madoff was our fantasy sport,” Mr. Markopolos recalls. “We wanted him nailed.”In 2005, an SEC official in Boston called to say the agency was again looking into the case, and told Mr. Markopolos to contact Meaghan Cheung, a supervisor in SEC’s New York office, Mr. Markopolos recalls.In November 2005, Mr. Markopolos sent Ms. Cheung a 21-page report outlining his concerns.He presented a series of 29 “red flags,” ranging from in-depth mathematical calculations that purported to show the investment strategy couldn’t work, to little more than rumor or innuendo — such as claims that a group of Saudi investors had been denied a chance to examine Mr. Madoff’s books.He also questioned the fact that Mr. Madoff, unlike most money managers of his stripe, didn’t charge his investors a fee for handling their money. (Instead, he seemed to make profits on the commissions generated by the trades on investors’ behalf.)”Bernie Madoff’s returns aren’t real,” Mr. Markopolos said. “And if they are real,” it’s because Mr. Madoff might be engaging in “front running,” an illegal trading practice that would have involved using advance knowledge of a big trade to profit from the stock-price move it causes. (One of Mr. Madoff’s firm’s major businesses was executing large trades for other customers.)Ms. Cheung was a respected attorney known for quickly bringing high-profile charges against executives of cable-television company Adelphia Communications several years earlier, after that company issued a questionable earnings report.Mr. Markopolos’s thought he had a chance for his campaign to succeed.”I had my hopes up, I thought it was a good enough package that they would go and shut this man down,” Mr. Markopolos recalls.He sent an email adding more evidence — noting that he might be eligible for the SEC’s bounty program if it turned out that Mr. Madoff was, in fact, front running.An SEC spokesman wouldn’t comment on the agency’s communication with Mr. Markopolos.An individual close to the SEC staff says the agency did in fact conduct an extensive investigation of Mr. Madoff’s firm after Mr. Markopolos spoke with Ms. Cheung.First, they searched for evidence of “front running.” The SEC found no indications that was happening.Investigators also checked out Mr. Markopolos’s claim that Mr. Madoff was running a Ponzi scheme. But the billions of dollars of assets held by Mr. Madoff’s asset-management unit appeared to match those that various investment firms said they had placed with Madoff, suggesting that there weren’t problems.Today, it is now known that that Mr. Madoff had many more investors — such as individuals and charities — that it didn’t have to disclose in regulatory documents, making it harder for investigators at that time to ascertain precisely how much money he was managing.On Tuesday, SEC Chairman Christopher Cox also said that Madoff kept several sets of books and false documents. That, too, could have thrown of investigators a few years ago.Rules ViolationsAs part of the inquiry, the SEC did find that the firm had violated technical rules about executing trades. In addition, they told Mr. Madoff he needed to register his firm as an investment adviser because it had more than 20 investors, something Mr. Madoff did in 2006.Earlier this year, in March, Mr. Markopolos made one last major effort after receiving an email from Jonathan Sokobin, an official in the SEC’s Washington, D.C., office whose job is to search for big market risks. Mr. Sokobin had heard about Mr. Markopolos and asked him to give him a call, according to an email exchange between them.With low expectations, Mr. Markopolos got in touch. But, he says, “The way I figured it, if they didn’t believe you at $5 billion, and not at $10 billion, they didn’t believe you at $30 billion, then why would they believe you at $50 billion?”Says Mr. Markopolos: “At that point I was just the boy who cried wolf.”Funds PulledShortly thereafter, on April 2, Mr. Markopolos sent Mr. Sokobin an email telling him that an unnamed Wall Street pro recently pulled money from Mr. Madoff’s firm after trying to confirm trades supposedly done in his account, but discovering that no such trades had been made.It was his last try. He never heard back.”I felt pretty low,” Mr. Markopolos recalls.Mr. Sokobin, through an SEC spokesman, declined to comment.Last Thursday, as Mr. Markopolos watched his children take a karate lesson near his home in Whitman, Mass., 20 miles outside Boston, he checked his voice mail, trying to ignore the noise from the children. Walking out to the foyer, Mr. Markopolos returned one of the calls, and heard an old friend tell him that Mr. Madoff had been arrested.Write to Gregory Zuckerman at gregory.zuckerman@wsj.com

Hayes • December 17th, 2008 at 8:29 pm

good article – Ben is a smart guy but lots of smart guys lack wisdom, which was the same problem the quants had (the architects/enablers of this crisis). He views this through the lens of the GD rather than for what it is.

Michael • December 17th, 2008 at 8:32 pm

Paying off debt and stuffing money into a mattress is by far the most intelligent thing one can do at this stage of a credit contraction/deflation. Cash is king in this scenario. If and when a recovery in the credit and business cycles occur, and/or if the dollar tanks as bad as it theoretically could, there will be plenty of opportunity to invest safely for real returns, compared to investing now on pure speculation about an unpredictable future outcome.

Michael • December 17th, 2008 at 8:49 pm

Exactly. Remember that moment – the most important moment of the last 50 years – in 2007 when we were exactly at the “tipping point.” If we didn’t commence a credit contraction we would have continued an upward-spiking inflationary cycle with all its horrible consequences; because we did commence a credit contraction we entered a downward-spiking deflationary cycle with all its horrible consequences. The “Great Moderation” was fraud – an old-fashioned credit bubble that lasted longer (it started in the 1960′s after the savings accumulated during the Great Depression were all spent) and went higher than anything in history. Ever. Swinging wildly back and forth between inflation and deflation may be our forseeable future, since the goal of all the governments in the world is to re-instate the unstable ready-to-explode tipping point of 2007.

Guest • December 17th, 2008 at 8:54 pm

I am sure we will all be happy with whatever we get, we should be since we keep voting for someone in the same two party system as if the next guy in the white house can do anything different than his predecessors. Keep voting for the same parties’ century after century and you will get the same thing every time just wait and see.

Guest • December 17th, 2008 at 9:00 pm

Dr. Roubin writes, “And while traditional fiscal policy (government spending and tax cuts) will be pursued aggressively, non-traditional fiscal policy (expenditures to bail out financial institutions, lenders and borrowers) will also become increasingly important in these advanced economies.”“In the process,” he says, “the role of states and governments in economic activity will be vastly expanded. Traditionally, central banks have been the lenders of last resort, but now they are becoming the lenders of first and only resort… Likewise, with household consumption and business investment collapsing, governments will soon become the spenders of first and only resort, stimulating demand and rescuing banks, firms and households.“The long-term consequences of the resulting surge in fiscal deficits are serious. If the deficits are monetized by central banks, inflation will follow the short-term deflationary pressures; if they are financed by debt, the long-term solvency of some governments may be at stake unless medium-term fiscal discipline is restored.“Nevertheless, in the short run, very aggressive monetary and fiscal policy actions — both traditional and non-traditional — must be undertaken to ensure that the inevitable stag-deflation of next year does not persist into 2010 and beyond.”And so… we trade our freedom so that “stag-flation” does not persist into 2010 and beyond, the same as Esau traded his birthright for a bowl of porridge.The missing word in Dr. Roubini’s summary is “nationalization” – a strange form of nationalism, I might add, whereby our private assets and resources are taken into state ownership to be supported for the use and benefit of a financial and corporate plutocracy. This is a type of socialist fascism that the good doctor used to rail against, i.e., privatization of profits and socialization of losses. I contend that when we the people don’t have any rights of ownership – which we don’t — that when we’re just being made to labor and pay to benefit private profiteers, that it should be called what it really is – stealing and slavery.Why does Dr. Roubini no longer question these people, why does he no longer argue eloquently against moral hazard.? Why does he not attack lack of transparency? Why does he not ask why those who manufactured and packaged this crisis are the ones being handed the trillions under the table to fix it? Why does he fear deflation, more than entrenched corruption and loss of freedom?It is obvious that the American people did not create this mess: they were working, saving, educating their children, paying taxes. Yet, they are being forced to take upon their shoulders the “nationalization” of corrupted and failed entities that made obscene fortunes these past years while the people’s standard of living declined. And, did the people, as “owners” of AIG and Freddie and Fannie mortgages, et al., get a description of what they own, or the details of the health of their new properties, or how much it is going to cost them in the long run, or what percentage of the properties they really own — if any, and what decisions they get to make regarding their new properties, and do they assume the profits if they must assume the losses? If Goldman Sachs profits from the money that Joe Q. Public puts into Freddie and Fannie, does Joe Public get a check in the mail from GS for his percentage of the profits?What kind of bargain did Congress fashion for we the people in exchange for our property rights and freedom? What kind of bargain did it fashion for the billionaire plutocracy? We have a right to know, don’t we? It’s our money, isn’t it? Congress is OUR elected representative, isn’t it?Or is our gain to be our loss? Is it to be the old story again as in Parry’s melody play on Psalm 39:6 in Dorothy Sayers’ Peter Wimsey mystery: ‘For man worketh in a vain shadow . . . he heapeth up riches and cannot tell who shall gather them.”

Hayes • December 17th, 2008 at 9:19 pm

that would be Benny’s preferred approach – a product of his own original thinking:”A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.”http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm#fn11

redleg • December 17th, 2008 at 9:21 pm

The thing about a PhD is you learn everything about one thing. What a catastrophe of this magnitude needs is someone who knows something about everything (i.e. a generalist) who can see the big picture and see likely consequences in the distant ripples. Or someone who can APPLY their knowledge. Reality will trump a model every time.

Guest • December 17th, 2008 at 9:31 pm

I wish you were on a major daily, blindman. The people need a good, old-fashioned, hard hitting people’s advocate in the press — the kind America used to have when she fought for her free speech and freedom, the kind that would ask the hard questions, and a newspaper that would print the answers. BUT — we have the internet, and RGE — where open debate is welcomed and Dr. Roubini is not afraid of the tough questions. Bar none, this is the best econoblog on the worldwide web.Keep up the good work, blindman, and we won’t need the “mainstream” media monopoly.

Guest • December 17th, 2008 at 9:35 pm

And, he also works for the banking cartel. If the big bankers aren’t happy, Bernanke will find himself dealing with unemployment and his own personal depression, without his magic little helicopter.

redleg • December 17th, 2008 at 9:35 pm

Bair seems to be a rare appointee with competence and integrity. I hope she can stay on in some capacity, since she is actually LEADING, or trying to lead.

PeteCA • December 17th, 2008 at 10:17 pm

Sounds like your basic apporach is good. Since you’re a young guy, it’s worth taking a look at John Hussman’s arguments (www.hussmanfunds.com). He’s essentially saying that since P/E values are attractive at historical levels, this is a god time to buy in. You could do that in an incremental way by just putting so much $$ into the stock market in your 401K each month. Your challenge is to decide whether the US market going forwards will behave the same as it has over the last century. If yes, this is a good time for you to buy in (but slowly). The reason being, you can afford to take losses (or no gains) for 5-10 years, and eventually those stocks will appreciate in value. However, the counterpoint is that now the Fed has reduced us to a ZIRP economy, it’s not clear that the USA will repeat the trend of the last century (or at least not for a long time). See Chris Puplava’s most recent article on http://www.financialsense.com There is no-one who can tell you what will happen – because no-one really knows for sure. So you have to decide. But your approach about saving and paying off debt is very good. Buy a house in a couple of years if you can.PeteCA

Pseudothyrum • December 17th, 2008 at 10:19 pm

Idling the factories @ The Failing 3 (temporarily) is exactly what is needed to clear out the glut of already existing inventory.Overproduction/oversupply is a major cause of the current crisis in America – with cars, homes, food, clothes, jewelry, plastic widgets at Wally World.The question is – WHY DO PRICES ON THESE GOODS NOT FALL (DEFLATE) MORE QUICKLY SO THAT PEOPLE WILL START BUYING AGAIN? What not have a firesale of autos, knock 33-50% off the price of a car to clear out all of the excess inventory? Ditto with houses, electronics, clothes, etc.WHAT THE HELL HAPPENED TO THE BASIC LAW OF ECONOMICS – SUPPLY/DEMAND?! I’ll tell you what happened — a RIGGED market and GREEDY producers plus their middle(hench)men are robbing the consumers blind.

blindman • December 17th, 2008 at 10:23 pm

h,.why should a citizen of the u.s. have to pay 400 thousand dollars on a150 thousand dollar loan over 20 years and then see their own governmentin the position of having to tax them and their children to pay for their parent’s medical, health care, etc. we have been charged interest to pay forthe bad speculation of imperial hegemony. Noun 1. hegemony – the dominance or leadership of one social group or nation over others. i this case the banker, international banker, dominating the people, mortgagee, for the sake of their own international significance, which has absolutely nothing to do with the well being of the mortgagee, de-coupled completely, and has shown them to be frauds, thieves and members of the criminal class. alchemist, inventors of precious matter out of precious little, deriding the world of thinkers as dreamers.no matter how you slice it. that is it..the den is full of thieves. the citizen is being exterminated. each of us has to fix it or “to Halloween we go.” imo.

redleg • December 17th, 2008 at 10:43 pm

If you are going to flush bailout money down the toilet, chances are that both the water and the effluent will pass through WPA pipes!

Guest • December 17th, 2008 at 10:59 pm

I agree with you. Indeed, Madoff must have learned Ponzi game from current economic system. Look at Social Security, Medicare, Retirement and Pension System, State Government Financies, etc. As long as there are contributors to the financial systems, the game will go on for a while until severe economic dislocation occurs or a change in the government system takes place. Then, suddenly next beneficiaries get empty-handed even though they have contributed from life time earnings. I think our economic system and government Ponzi game have reached this point now. Sooner or later Social Security , Medficare, Retirement and Pension System, and State Government will become insolvent. Unfortunately We cannot put our government in the prison as we will do for Madoff. What come next?

Guest • December 17th, 2008 at 11:01 pm

Indeed, Madoff must have learned Ponzi game from current economic system. Look at Social Security, Medicare, Retirement and Pension System, State Government Financies, etc. As long as there are contributors to the financial systems, the game will go on for a while until severe economic dislocation occurs or a change in the government system takes place. Then, suddenly next beneficiaries get empty-handed even though they have contributed from life time earnings. I think our economic system and government Ponzi game have reached this point now. Sooner or later Social Security , Medficare, Retirement and Pension System, and State Government will become insolvent. Unfortunately We cannot put our government in the prison as we will do for Madoff. What come next?

Guest • December 17th, 2008 at 11:23 pm

Transparency, noneRepresentation, noneInvestigation, noneRetribution, noneEquality, noneJustice, noneThink of it as the “New Democracy”.

Mandarin • December 17th, 2008 at 11:41 pm

The Crisis Conjuncture – A Marxist PerspectiveIf we penetrate beneath the money and credit illusion currently transfixing the economic specialist,the current crisis presents quite a different picture:During the preceding period of expansion, surplus value extraction (in bourgeois terms, ‘profit-making’) has been centered on the super-exploitation of labor in China, India, and parts of Latin America. The beneficiaries have been the historically imperialist states of North America and Western Europe. Thus the crisis is fundamentally one of the developing world and is centered in the developing world. Its eventual end and the recycling of the accumulation process depends on the ability of these economies to go beyond the manufacture of low technology products, because accumulation via export has reached its limit.The developed world and in particular the US has been living off the proceeds of nonwhite labor since the colonial era, and the recent expansion has been no exception. Grafted onto the proceeds of this labor has been a credit edifice which is about to be zeroed out: the western world cannot make good on its I.O.U.’s to the developing countries; these, as befitting their inferior status in the world system, will be unable to collect.Let us be clear about who the victims are in this crisis. First and foremost, they are the unskilled or semi-skilled worker in the backyard Chinese steel mill or plastics plant; the peasant woman toiling in a Honduran garment sweatshop; the Mexican teenager in the maquiladora. In no sense did these people “take” jobs from Westerners. It is rather that they were press-ganged into dangerous and barely remunerative work by predatory interests in their own countries acting as junior partners to the lords of global capital. Their labor has supported the mass of the population in the developed world, a population increasingly living beyond its means and its ever dwindling fund of skill, self-discipline, common sense, and social responsibility.And now that the laborer in China, Honduras, Mexico, and such places can no longer be called on to give more (given the current set of arrangements), the developed world finds itself with a recession and a credit crisis.It is at root a crisis of production and extraction – of labor – and not of money. And as the focus of production and extraction has been in non-Western countries, the attempt to end the crisis by money manipulation or by deficit fiscal spending in the West will be unsuccessful.A few sectors in the West do contribute to the surplus: aviation, pharmacology, software, alternative energies. However, these are too small in scope to be the basis of a renewed upswing.The global system must make good on the I.O.U.s that have been accumulated by the lesser developed countries. For this to occur, real wealth has to be shifted eastward and southward. The Chinese worker must be taken out of the toy factory and put to work designing software that will be manufactured in Japan or the USA. The unemployed Detroit assembly line worker must become part of a quality-focused production team building assemblies for vehicles designed and finished in Mumbai.Quite literally, recovery in the West depends on the retooling of the East and South: the transformation of these economies into the global locomotives of growth. There is nothing to fear in such a development – provided that the surpluses generated by a new international division of labor are distributed fairly.A socially conscious, globally egalitarian distribution of capital is what is required to end this crisis. There are some glimmerings of awareness in sections of European governance and in the more farsighted thinkers of Asia and North America. The greatest danger, however, lies in the current nexus of power that links financial and banking interests in all advanced countries with the corrupted or conservative members of the ruling classes in China, India, etc. For the established divisions of labor and trade have exhausted their potential to improve the material conditions of life for all countries. And all efforts to resuscitate them will fail.

Guest • December 17th, 2008 at 11:43 pm

My description of these perps since I first looked into the Bailout.I thought, these are Economic Terrorists (Paulson = Mastermind) will bring the WORLD down.I immediately got banned from USAToday…no loss for me there…

Cahill • December 18th, 2008 at 12:00 am

Something has been bothering me lately (aside from the daily financial bombs going off). I think we can all agree we are moving closer to monetizing and socializing the debt and benefits of this country. 2 months ago there was news of a study looking to nationalize private retirement accounts like Argentina has done. At first I thought this is just people overreacting, or talking points for the conservative talk show hosts; however with each drop of bad news and the talking heads slowing admitting things are going to get much worse how hard is it going to be convince the common man the only place his money is safe is with the US government. 1 year ago I think we could have laughed at that proposal and those of us educated enough here would still do so, but tell me that all the auto workers about to be laid off and all the workers that have been laid off would not jump at a chance to “secure” the retirement savings they have left. At this point if we have another big dive or some other piece of horrible news such as the Chinese no longer buying US treasuries or at least one of the Big 3 capitulating I could see the new administration pushing this through and getting very little resistance from the american public.I have seriously considered pulling my IRA out and taking the tax hit on it after the new year. I’m still mulling it over, but I’d rather pay taxes on something I know I have now versus a promise from the good old government.Cahill

irving fphelmp • December 18th, 2008 at 12:08 am

there you have it!at least the stuff they made during the New Deal had and has some staying power. I come across a building or a park or a roadway or a museum or a library or a power plant that was built during the New Deal every day and just about everywhere I go in America. We could use a new rebuild on that scale. Energy and mass transit and health care. One thing you have to agree on, the New Deal was very productive and beneficial to our society for many years after its inception.

artichoke • December 18th, 2008 at 12:49 am

He’s already told us we’re in deep doo doo, that’s fine but no big deal, we knew that already.Tell us which banks placed which collateral at the Fed and received what loans in return: that would be very helpful.Actually do something, claw back this year’s employee and executive bonuses from TARP recipient banks, have a bank holiday and liquidate insolvent banks: that would be heroic.

artichoke • December 18th, 2008 at 1:00 am

Having done a finance PhD, I am very happy when I invent a model that I can solve, that says something interesting. A good model will say something, not everything!Huge macro simulations went out in the 70′s. They didn’t work then and they don’t work now. OR is exactly right, they are interesting but essentially arbitrary and impossible to calibrate. Like any other model, they say something, not everything.Kaufman and Dornbusch’s criticisms were substantive and on point. If a whispered comment from Greenspan caused them to ignore such criticisms, that doesn’t sound good, but unfortunately it’s part of the academic competition for publication. Greenspan’s support may have helped them get the article into a better journal, or helped Bernanke to get a position on Fed Board of Governors. If the modeler starts to believe the model and forget the limitations, that really is dangerous. I am shocked at the naivete, if indeed that is what happened to Bernanke.

Anonymous • December 18th, 2008 at 1:07 am

What do you mean, demand? I demand it!There, that felt good. Totally useless, they just chuckled at me.A lever is needed to get action. Demanding is just a way to get blue in the face. We’re getting to the point where morally, the ends justify the means.

artichoke • December 18th, 2008 at 1:11 am

I’ve seen comments like this before but I don’t see it shaping up. Everyone hates the WS players, but do you mean there will be a revolution against them? I don’t see the old-style civil war, California against Oregon or whatever.

Guest • December 18th, 2008 at 1:21 am

This is a recent post of mine.IMO, will be a war of those that support WRONG vs. those that support RIGHT.The Primes (middle class taxpayer) are where the tire hits the road and distinguish the “moment”.Post:I was discussing this with a colleague today. He was telling me a story he heard on the radio of a teacher in Seattle that designed, built, and landscaped his home of 20 years. He was laid off and was foreclosed on. The man had 20 years of equity in the home and is destitute.This is WRONG.The Primes are going to get sucked into this financial disaster.This is going to be the “tipping” point, realization that things must “change” and not only in rhetoric.When established residents of communities start to see their respected, hard working friends / neighbors being foreclosed on and evicted, they will realize, this is WRONG.Unlike the subprimes, option arms, alt-A’s, who new deep down they were “gaming” the system and were happy to walk away. The Primes are not going to be as willing to leave their homes. Their friends and neighbors are going to realize, am I’m next and decide it’s time to make a stand because what they see happening around them is WRONG.This I see as the breaking point. 3-6 months out.Unemployment, IMO, is going to EXPLODE. This is when the Primes are sucked into the disaster. Until now, they’ve been insulated, mostly experiencing the collapse on TV and in their 401k.I agree with the article, realization of the depth and longevity of the crisis is going to reach critical mass within 6 months.IMO, “crazy” policies are going to have to be implemented, right or wrong to cushion the financial fallout.Savers, investors, bankers, wealth is going to have to realize retaining 1/2 of something is going to be better than salvaging nothing out of this mess. The social/ political consequences of this disaster could very well be catastrophic.The US faces an ENORMOUS challenge, as does the rest of the world. We do not need 40,000,000 homeless people in shelters while confronting a deppression.IMO, a “foreclosure holiday” leading to a “Reverse Mortage Equity Option” has to be implemented to enable relief for home owners that are in distress that want to keep their homes. ASAPDeclare CDS side bets and related instruments null and void, only available to participating parties. ASAPDevalue the USD 25%. ASAPTotal Financial Transparency for ALL institutions including the fed. ASAPIMO, there’s gong to be a train wreck. The question is, are there going to be any survivors.

PeterJB • December 18th, 2008 at 1:48 am

Speaking of being scared; very scared:I have over the last recent few days, had occasion to speak with what I would call, “professional Leadership’. Here is my summary of what these people fell and understand:1. There is nothing much going down; just a mild recession and the American’s will fix that.2. Nobody predicted this mess and anyway, there isn’t anything to predict; it’s just a seasonally mild downturn.3. Next year all will be back to normal; no need to anything more that carry on with what we are doing.4. The next election will be important – as usual.5. Oh, the Banks; never mind; banks to what banks do and we need to keep them intact.6.Pension funds; no problem as all will return to order by mid 20097. Unemployment, well a few will loose their jobs but they will find work in other areas as confidence is building and will accelerate after Xmas.8. China will continue buying our exports.9. Inflation no, not even deflation and house prices are just adjusting.It’s as if these guys are living in a dream world and they believe that they have the skills and competence to man the helm?Even I am getting a bit worried now as there is a huge disconnect here.Ho hum

P&L • December 18th, 2008 at 2:02 am

Farmers were hoping to sell their land to developers. When sales of new homes crashed, potential for new developments evaporated. And so now back to farming.

RED • December 18th, 2008 at 2:50 am

Depends on your view of the dollar, if you think its going down further, buy gold…or buy shares in gold or silver mining companies, they can leverage the increased commodity price to much higher profits.

Lord Sidcup • December 18th, 2008 at 3:02 am

Thanks. Very interesting.But if “The Chinese worker is taken out of the toy factory and put to work designing software. . . ” and so on. Who will be in the garment sweatshops etc etc etc?

Guest • December 18th, 2008 at 3:21 am

“It’s as if these guys are living in a dream world and they believe that they have the skills and competence to man the helm?”They do have the skills and competence. In their dream world, that is. They know they do not have the skills and competence to man the helm if they face reality, so they continue perpetuating their dream world.Of course, denial only goes so far..

jugglingcdos • December 18th, 2008 at 3:34 am

this reminds me of a documentary produced by the army during ww2this is so goebel..excerpt;”This is beautiful, oh my gosh!” said Patti Mazzara, a mortgage broker in the Minneapolis suburb of Edina, who was surprised when she looked up rates and found them well below 5 percent, down at least three-quarters of a percentage point from earlier in the week. “This is a whole new game now. Hopefully it’s going to give people some relief.”http://biz.yahoo.com/ap/081218/financial_meltdown.htmlThursday December 18, 2:00 am ETBy Alan Zibel, AP Real Estate WriterUS homeowners scrambling to refinance mortgages now at lowest rates since early 1960sWASHINGTON (AP) — Homeowners around the country are scrambling to refinance their mortgages at the lowest rates since the early 1960s as the economy staggers through what’s likely to be the worst recession in decades.Mortgage brokers are already reporting a surge of calls from borrowers trying to take advantage of the Federal Reserve’s extraordinary actions this week.The central bank, aiming to free up lending and jolt the economy back to life, on Tuesday cut the federal funds rate from 1 percent to a target range of zero to 0.25 percent and pledged to keep funneling money into the market for mortgage investments.On Wednesday, some mortgage brokers were quoting mortgage rates of close to 4.5 percent for people with strong credit and hefty down payments.”This is beautiful, oh my gosh!” said Patti Mazzara, a mortgage broker in the Minneapolis suburb of Edina, who was surprised when she looked up rates and found them well below 5 percent, down at least three-quarters of a percentage point from earlier in the week. “This is a whole new game now. Hopefully it’s going to give people some relief.”The national average rate on 30-year, fixed mortgages was 5.06 percent on Wednesday, according to financial publisher HSH Associates — the lowest since the 1960s and down from 5.3 percent Tuesday.It was the best news in months for anyone looking to lock in a 30-year, fixed-rate mortgage. But it was not expected to be a cure-all, and borrowers already in danger of foreclosure probably won’t be able to take advantage.”It’s a call to action for homeowners looking to get out of adjustable-rate mortgages,” said Greg McBride, senior financial analyst at Bankrate.com. “Unfortunately, it’s not an equal-opportunity party.”

or • December 18th, 2008 at 3:43 am

Why do we wait for an economic disaster to decide our infraestructure(i.e., falling bridges, etc.) needs renewal? Shouldn’t this be done as part of regular business. During “regular” times we are to busy fighting trillion USD wars that get us nowhere. We are wasting money and we will pay for it.

spitoon • December 18th, 2008 at 3:56 am

How on earth do you call Obama a socialist?????????????????????????????????????????????????????????????????????????????????

spitoon • December 18th, 2008 at 3:59 am

Is this a joke?Social Security and AIG in the same category called socialism?????????????????????????????????????????

Octavio Richetta • December 18th, 2008 at 4:06 am

in retrospect, with ww rates coming down, 11/21, when the usd index topped, would have been a great time to buy some BWX.Will keep an eye on it.

Octavio Richetta • December 18th, 2008 at 4:25 am

Shilling wrote this before the latest Benny copter adventure. It will be interesting to see if he changes his mind. BTW, I am positing the article but you can read it free by subscribing to Forbes. I have not taken a walk around BW for ages will do that next….http://www.forbes.com/financialadvisernetwork/2008/12/09/deflation-lending-saving-fan-ii-in_ags_1209soapbox_inl.htmlAdviser SoapboxDeflation Descends Upon The U.S.A. Gary Shilling, 12.09.08, 12:00 PM ESTA self-perpetuating decline in the price of goods will make debts harder to repay and prolong economic misery.For years, we’ve been forecasting that chronic deflation of 1% to 2% per year would start with the next major global recession. Well, it’s here!In October, the U.S. producer price index fell 2.8% from September, and the consumer price index dropped 1%, the biggest decline since before World War II. Sure, the big driver was the decline in energy costs, but even excluding food and energy, consumer prices dropped 0.1%. As retailers panic in the face of retrenching consumers, prices of many items have nosedived.Beware the bear market rally. Click here for Gary Shilling’s toolkit for navigating through the financial crisis, yours when you try Insight.Dell (nasdaq: DELL – news – people ) is offering 20% to 30% discounts on new notebooks. Nearly empty Hawaiian hotels give free drinks and all sorts of discounts. Retailers like Crate & Barrel have gained pricing power over vendors and are getting 10% to 25% lower prices to pass on to customers. Kohl’s (nyse: KSS – news – people ) is discounting Christmas merchandise up to 75% to attract shoppers. Toys are being discounted 50% to 60%, and sellers are emphasizing low-priced merchandise to attract frugal buyers. Just look at Wal-Mart (nyse: WMT – news – people ).Grocers are also gaining pricing power over suppliers of branded goods, as consumer zeal for house brands gives retailers more leverage with producers of national labels. Upscale retailers are unloading excess inventory on discounters who then offer designer apparel for 45% to 70% off list prices. And luxury goods makers themselves are slashing prices on apparel, shoes and handbags sold in the U.S. Of course, the strong dollar makes that easy for eurozone-based firms. Don’t forget that recent auctions were disappointing and saw prices of contemporary, modern and impressionist art drop 30%.The Fed worries that in deflation, offsetting monetary policy is difficult since its target rate has to stop declining when it reaches zero. Of course, the Fed has other tools, like quantitative easing (juicing the money supply). Nevertheless, all these measures amount to leading the horse to water, but he may not drink.The deflation in Japan in the 1999-2005 years worried the Fed when it appeared imminent in the U.S. early in this decade, and it still does. Japan again faces chronic deflation, and the Bank of Japan forecast zero change in the CPI (excluding food but not energy) for the fiscal year ending March 2010. Fed Vice Chairman Donald Kohn said the lesson from Japan was that “we should be very aggressive in combating deflation.”Deflation encourages saving, since money is worth more in the future than it is today. It also spawns deflationary expectations. Buyers anticipate lower prices later by waiting to buy. That sires excess inventories and capacity, which forces prices down. Buyer suspicions are confirmed so they wait even further to buy, generating a self-feeding downward price spiral, as now seen in autos and houses.Deflation also elevates the cost of debts and debt service since both remain fixed in nominal terms but the revenues and incomes used to repay them tend to fall with overall prices. Deflation fears and other forces have also reduced reducing 30-year Treasury bond yields to our long-held target of 3% and completed what we dubbed in 1981, when the yield was 14.7%, “the bond rally of a lifetime.” The recent financial crisis has also helped as investors abandon everything else, stocks and fixed income alike, in favor of Treasuries.Deflation results from overall supply exceeding general demand. We have been forecasting the good deflation of excess supply, as in the late 1800s and in the 1920s, due to today’s confluence of semiconductors, the Internet, computers, biotech, telecom and other productivity-soaked technologies. But we have allowed for the bad deflation of deficient demand, as in the 1930s, if one of two adverse conditions develops: widespread financial crises and worldwide protectionism. Sadly, both are real possibilities.Inflation? Many, of course, worry not about deflation but inflation, due to all the money being pumped out by central banks and governments globally. They, no doubt, are biased since most have lived only in an era of inflation and don’t agree with us that inflation is the result of excess government spending in wars, both hot and cold. In peacetime, deflation reigns. Starting with rearmament in the late 1930s, then World War II and the Cold War with its hot phases, Korea and Vietnam–wartime and inflation persisted for 60 years. For now, at least, all that money from central banks and governments isn’t getting beyond the financial institutions it’s meant to buoy.We’re in a liquidity trap. The horse isn’t drinking, thank you very much. And if lenders do start to lend, central bankers, with their congenital fear of inflation, will no doubt reel in all that extra credit. Even if the bank reserves stimulate the money supply with the usual multiplier effect, the credit created will pale in comparison to the destruction of derivatives and other privately created liquidity due to persistent de-leveraging and write-downs.Finally, the consumer saving spree we’re forecasting will probably increase the saving rate by one percentage point per year on average for the next decade. That would generate a cumulative $5.5 trillion in savings (read “not spending”) and go a long way to offsetting the intervening fiscal stimuli, and then some.

PeterJB • December 18th, 2008 at 4:25 am

Speaking of Moral Hazard:Imagine all the antics and denials that the respective regulators are going through to protect their positions in their associations of professional responsibilities with Mr. Madoff. Imagine the stench of fear emanating from those powerful bureaucrats who covered Madoff’s moves…The question begs: how deep can Madoff penetrate? as a witness? Will he be allowed to testify?Puts another light on that guy in the overcoat – flashing to the crowd… LOLHo hum

Pecos Banker • December 18th, 2008 at 4:32 am

OR–so glad to have you back! Great posts, both on Japan and now Madoff.It seems clear that unless we get transparency, we are goners. I believe that denying transparency will soon become a question of “national security” if it isn’t already and our access to information will be even more curtailed. The people should be fighting for transparency and accountability above all else at this point. Nothing else really matters. Even Roubini isn’t really discussing that issue, so what hope is there?

Octavio Richetta • December 18th, 2008 at 4:33 am

Uncle Sam Wants To Rip You OffDavid Serchuk, 12.16.08, 06:00 AM ESTThe Forbes.com Investor Team is aghast at Treasuries at 0%.http://www.forbes.com/intelligentinvesting/2008/12/15/intelligent-investing-treasuries-etf-moneymarket-paneldec16.htmlThis one was also written before the fed’s latest adventure which is trying to lower long T rates towards zero too. I don’t know what to do. I am paralyzed. IMO, the best strategy may be to just sit tight and wait to see how this plays out for a while. Defensive moves such as currencies, commodities, gold, corporate bonds, may loose you money as you try to defend the value of your assets.

Pecos Banker • December 18th, 2008 at 4:52 am

The trouble with the Marxist point of view is its Hegalian basis. It’s really a con. The con is that by having a powerful over-arching “perspective”, you can explain the facts on the ground without the need to do grubby research. It’s kind of like general relativity without the math, or without the math having been done in the first place and without any real experimental confirmation. Imagine Einstein just asserting the consequences of GR with no basis. Marxism has “the ring of truth” but that’s all. It is entirely ideological. So why bother with this con? Better to fight for transparency in government instead. Look at this awful history that OR presented on Madoff. Much more relevant! Nevertheless, your pointing out that this crisis is really about the exploitation of the “third world” is very interesting, malgre Marx.

Anonymous • December 18th, 2008 at 4:56 am

The long-term consequences of the resulting surge in fiscal deficits are serious. If the deficits are monetized by central banks, inflation will follow the short-term deflationary pressures; if they are financed by debt, the long-term solvency of some governments may be at stake unless medium-term fiscal discipline is restored.Why is Bernanke bringing down mortgage rates to historic lows if the plan is to monetize the debt?

Anonymous • December 18th, 2008 at 5:20 am

Hi Octavio what is a BG? Also wasn’t it Livermore who said buy when the Blood is in the Streets. I know Jim Davidson wrote a book on the subjet (Taxpayers Union) but I have seemed to have misplaced it.thank youBill Griffith

Jason B • December 18th, 2008 at 5:59 am

Its worth what you can exchange it for in a transaction. Exchange it for something that is a store of value, or of permanent utility to you. You could use it to get things you can barter with later, should the dollar become lorth less.

Octavio Richetta • December 18th, 2008 at 6:00 am

I am considering subscribing to James Grant’s Interest Rate observer to see if I can come up with some defensive ideas for 2009. For example, the December issue has what may be an interesting article:December 12, 2008Introducing the Grant’s Supermodel Credit PortfolioCredit is what we are bullish on–cast-off residential mortgage-backed securities, senior bank loans, convertible bonds and corporate debentures, high-rated and middling. And it’s credit that fills the new Grant’s model portfolio. Expectantly, we call it our Supermodel Portfolio. May it deliver superior returns for 2009 and beyond.In the mean time here is a link for a couple of sample issues from July and May of this year.http://www.grantspub.com/archives/samples.cfmCurrent subscribers please advice!

Free Tibet • December 18th, 2008 at 6:23 am

I’m baack… did you miss me?The professor’s generosity has set me up with another free subscription. I don’t know how it happened but some computer thought I was a paying customer who’s subscription had expired.We should never forget what it costs to maintain something like this. Thank you, Professor.

Hayes • December 18th, 2008 at 7:43 am

From NCBlackouts and Cascading Failures of the Global MarketsFeedbacks in the economic network can turn local crises into global onesBy Jeffrey D. Sachs (January 2009 issue of Scientific American)

The global economic crisis is akin to a power blackout. In both cases, a disturbance in one part of a complex “tightly coupled” system results in a cascade of failures through an entire network. In the case of a power blackout, a single downed power line or transient overload causes power to be shunted to another part of the grid, which in turn leads to new overloads, more shunting and ultimately to a cascade of failures that pushes a region into darkness. Similarly, in the current economic crisis, a U.S. banking emergency caused by worsening U.S. market forces has sent shock waves through the world’s financial system, causing a global banking crisis that now threatens to lead to a global economic downturn.Cascading failures are an emergent phenomenon of a network, rather than the independent and coincidental failures of its individual components. Although it is true that many banks in the U.S. and…Read more

Hubbs • December 18th, 2008 at 8:04 am

I guess the question I’m asking is whether the policies of Bernanke and Paulson will ultimately be as bad, or worse than the policies criticized in the prolonging of GD1 (increased interest rates, tariffs etc).The depiction of the converging current downdraft looks more eerily like 1929, not so much on the Y axis but the x axis (duration).

James • December 18th, 2008 at 8:06 am

Markopolos’ original SEC filings are here.I also find it stunning that Madoff’s own sons used other investment firms for their own money. They must have known he was a con! Here is the link for that.

Free Tibet • December 18th, 2008 at 8:38 am

I don’t know what any of this has to do with Marxism. I’ve not studied that and have no reason to.I’ll quibble with this: “And now that the laborer in China, Honduras, Mexico, and such places can no longer be called on to give more…”The completely shocking thing to me is that the crisis began on the demand side. It was the debt that cracked first. The laborer – I would prefer to call him the saver – is being called on to give more. And he will. At least for some time.Anyway, there are two sides to every imbalance. Yes, correcting this one requires retooling the east. But we always thought that was going to happen. The fact that it hasn’t is another shock. With 1300 million potential consumers, China, the largest of the developing countries, is the center of gravity in global demand. It isn’t that we don’t have goods in the west to exchange in return for those savings. Our high standard of living, our high standards for workplace safety, heath care, pollution control and all the rest are, to our minds, part and parcel of a developed economy.So, what explains China’s overinvestment in the export sector? And why has she chosen not to develop in a more balanced manner? And more importantly still, what are we to do in the west given the current nexus of power?

blindman • December 18th, 2008 at 8:43 am

The Nile (Arabic: النيل‎, transliteration: an-nīl, Ancient Egyptian iteru or Ḥ’pī, Coptic piaro or phiaro) is a major north-flowing river in Africa, generally regarded as the longest river in the world.[1]..very far. according to wik.

Octavio Richetta • December 18th, 2008 at 8:45 am

So the ultralow short and long T bill rates coupled with still falling commodities can only mean one thing:At least up until now, the credit at least this two markets are forecasting the mother of all world recessions. As usual, I missed the greastest run: I sold my 30yr stripped Ts way too early!

Guest • December 18th, 2008 at 9:23 am

I have been concentrating on the Professor’s 10 point plan. One of his most important points was removing the Debt Overhang. We are now 3 months into theinsanity of Paulson’s Katrina like management of this crisis. There has been noreal attempt to lower the debt of the borrowers who are behind on payments, andthe recent lowering of rates by buying gse debt may help, but appraisals and tight lending standards would be an impediment. Do they understand that aggregate demand is the key to recovery, or are they short on funds to rescue the banks and have resolved to rescue the banks and the rest can beg on the streets? I am now convinced that they are going to rescue the financial institutions at any cost to the detriment of the general public. The banksmust be declared a utility and the government must concentrate on employmentfor the people. The banks are insolvent and should be nationalized. I realizethat this is not possible with the people who are now in charge. This is a troubling paradox which will lead to extreme actions in the future!!!

PeteCA • December 18th, 2008 at 9:32 am

Hard to believe that we’ve now got 2 major western countries that have been forced into ZIRP (or near-ZIRP) policies. ZIRP is an admission of complete financial failure, and a clear indication that the banking system is bankrupt. Yet that is where Japan and the USA stand today.The Banking systems of the Western Hemisphere are collapsing, and they are dragging down the entire western economy with them.PeteCA

Guest • December 18th, 2008 at 9:34 am

Lucky you weren’t arrested. You know–old Soviet Article 58 for rebellion disagreeing with the cental government, i.e., “banditry.” Better, of course, than disobeying the law of “Seventh-eighths”–which guaranteed a Soviet “bullet for each crumb stolen from the State’s table.” Come to think, banditry drew the same conclusion.

Guest • December 18th, 2008 at 9:55 am

All the poor sheeple scrambling to refinance at new lower rates!Most will find they don’t have enough equity, credit score, d/i, etc. to qualify and I suspect many with ARMS will find even at the new, fully amortized “low rates” they will be paying more each month, even if they do qualify.A big nothingburger. Until and unless principle on these loans is reduced to market values, there is no fix for the housing crisis.

PeteCA • December 18th, 2008 at 9:56 am

Hayes: First, currency speculation is just that. Speculation. A pretty risky game these days when central banks are pushing credit at dangerously low interest rates. Second, a bet on the Canadian or Australian currencies is essentially a bet on commodities. These countries are (hopefully) buoyed up when commodities get good prices. In particular, they do well if China buys their resources. So a bet on Canada and Australia is equivalent to saying that China will succeed in overcming their economic problems, and this will force a turnaround in commodity prices. Question is … do you beleive this is true? It’s one of the key issues facing the world today.A bet on gold is a bet that rampant monetization and liquidity generation by the world’s central banks is going to make its way into the global money system i.e. inflation is going to rise significantly from the current level.PeteCA

2cents • December 18th, 2008 at 9:59 am

@ PseudothyrumThe computers have not made the decision to throw in the towel yet. We’re patiently waiting for the programmers to let the code go gold!

Hayes • December 18th, 2008 at 10:07 am

SEC Nominee (Mary Schapiro) Has Madoff ConnectionWSJ December 17, 2008, 9:53 pm

Mary Schapiro, Barack Obama’s pick to lead the Securities and Exchange Commission, has crossed paths with family members of accused fraudster Bernard Madoff through her career at the head of securities-industry bodies.Madoff and members of his family were active for decades in the National Association of Securities Dealers, which Ms. Schapiro led. His firm was instrumental in founding the Nasdaq stock market created by the association, which merged with the enforcement and regulation arms of the New York Stock Exchange to form the Financial Industry Regulatory Authority last year. Ms. Schapiro now heads Finra.Madoff was chairman of the board of Nasdaq from 1990 to 1993. Schapiro joined the NASD in 1996.Both of Bernard Madoff’s sons, Andrew and Mark, served on one of the NASD’s district committees. In 2004, Mark Madoff was appointed to a mutual-fund task force. He had previously been a member of the National Adjudicatory Council for several years.In a press release announcing new appointments to the adjudicatory council, Schapiro describes it as playing “a critical role in deciding disciplinary matters that set a standard for fairness within the securities industry,” adding “we rely on the NAC’s experience and perspective to help formulate effective membership policy.”Bernard Madoff and his family had relationships with various philanthropic groups and held numerous honorific positions, especially in the financial industry. Those relationships may have allowed Madoff’s company, Bernard L. Madoff Investment Securities, to attract investors and avoid serious scrutiny. Madoff’s brother, Peter, resigned today from the board of the Securities Industry and Financial Markets Association, a trade association of 650 securities firms.Bernard Madoff’s niece, Shana Madoff, served on Finra’s Compliance Advisory Group as Ms. Schapiro was heading Finra. Shana Madoff resigned that position this week.

Link

Guest • December 18th, 2008 at 10:07 am

Agree; they and are also ignoring the fact that house values are continuing to drop while property taxes remain the same and utilities are increasing!

aerial view • December 18th, 2008 at 10:23 am

It appears that the overriding central policy is to preserve the banks, insurance companies and other corporate giants and wall street at any cost by continually buying any and all debt. The banks probably figure that when all of their losses are replenished from the FED, they will use the extra free money from the FED to start making loans again; however, that could take some time. Because FED policy is now fully GLOBAL and not directed in the best interests of the American public, Americans will just be thrown some crumbs to keep surviving from paycheck to paycheck as more and more middle class find their high paying jobs no longer exist. The big knockout punch of depression with inflation may not show up for several more years as the Obama “infinite money machine” will be in full force next year. Interfering and meddling in the free market system by propping up businesses which made poor decisions is completely against the principles of our free market system. Peter Schiff, Ron Paul and others know that as well!

Hayes • December 18th, 2008 at 10:24 am

Nothing like placing an Wall Street insider in charge of Wall Street- an insider who was present during the greatest financial scandals and market turmoil in recent history.

Mary L. Schapiro is CEO of the Financial Industry Regulatory Authority (FINRA), the largest non-governmental regulator for all securities firms doing business with the U.S. public. Ms. Schapiro also serves as Chairman of the FINRA Investor Education Foundation, the largest foundation in the U.S. dedicated to investor education.Created in 2007 through the consolidation of NASD and NYSE Member Regulation, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.FINRA touches virtually every aspect of the securities business—from registering and educating industry participants, to conducting examinations of securities firms; writing rules that govern the conduct of the industry; enforcing those rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms.Ms. Schapiro joined the organization in 1996 as President of NASD Regulation and was named Vice Chairman in 2002. In 2006, she was named NASD’s Chairman and CEO. The following year, Ms. Schapiro led the organization’s consolidation with NYSE Member Regulation to form FINRA. Before assuming her present duties, Ms. Schapiro was Chairman of the federal Commodity Futures Trading Commission. She was appointed by President Clinton in 1994. The CFTC is responsible for regulating the US futures markets, including financial, agricultural and energy markets. As Chairman, she participated in the President’s Working Group on Financial Markets with the Secretary of the Treasury and the Chairmen of the Federal Reserve Board and the SEC.Prior to assuming the CFTC chairmanship, Ms. Schapiro served for six years as a Commissioner of the Securities and Exchange Commission. She was appointed in 1988 by President Reagan, reappointed by President Bush in 1989 and named Acting Chairman by President Clinton in 1993.

James • December 18th, 2008 at 10:29 am

I found a great commentary on this story at Naked Capitalism by Yves Smith. Here it is.He says that the NYT story was too soft on the investment banks. It should be called what it is, looting. He also points to George Akerlof and Paul Romer’s 1993 paper on Bankruptcy for Profit:

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

James • December 18th, 2008 at 10:35 am

I can’t understand how last year’s $1000 per person “stimulus” is considered by some to have been a “waste” because people used it to pay off credit card and other debt. That sounds like a good thing to me. It didn’t go towards purchases, but it was useful in removing some of that debt overhang.

aerial view • December 18th, 2008 at 10:39 am

As someone who loves math and science, I find it remarkable that there are so many different view points about defining the origins and solutions to the current economic crisis. In math, we all use the same numbers and rules and come up with the same answer; 2+2 always equals 4! The problem here is because half of the numbers are missing and the other half are distorted, our equation to understand and solve this problem cannot be completed; _+2=_! So from a mathematical perspective, unless we have a STANDARD UNIVERSAL SET OF MEASURES along with COMPLETE TRANSPARENCY, we will continue to GUESS at how to solve this and all future crises!

Guest • December 18th, 2008 at 10:40 am

I think there are about 1.6 million American workers who would give a month’s free labor to have back the jobs that the plutocrats off-shored to the “Third World” for slave-wage profits – partnering in crime with those “conservative” ruling Communists in China and bandits in Mexico. India’s “federal parliamentary republic” is merely taking lower-wage advantage of a traitorous American Congress that cut a deal with corporate lobbyists to betray and victimize American workers and deprive them of sharing in the economy that they and their forebears built. Congress is working hand in glove with absentee corporate slave masters, headquartered around the world under the protection of the US Marines.

Guest • December 18th, 2008 at 10:48 am

@ Guest:Transparency, noneRepresentation, noneInvestigation, noneRetribution, noneEquality, noneJustice, noneThink of it as the “New Democracy”.~ No justice! As Sir James Mathew said: In England, justice is open to all—like the Ritz Hotel.

James • December 18th, 2008 at 10:51 am

So in a ZIRP environment, why are credit card rates still at 20%???? Today they finally announced new rules to block a few of the most abusive credit card policies, but the new rules won’t take effect until the middle of 2010!.It is that much harder to dig our way out of the financial mess we are in with the current predatory, usurious credit card policies.

Mandarin • December 18th, 2008 at 10:53 am

These comments all have merit. Whether or not Marxism is a “con” hinges on its political manifestations, promising pie in the sky etc. I think it has value as an analytic tool and can provide insights that traditional economics do not. Granted it is tricky to put into practice. As to who will man the sweatshops, I’d like to think, nobody. If that means paying a fair wage and making clothing a little more expensive I’d favor that. As to what explains China’s overinvestment in exports, I can offer an oversimplified and probably inaccurate answer, but one that seems to fit the facts. The revisionist CCP leadership saw that it was the quickest way for them to make money. The coastal cities especially Guangzhou (Canton) always had export connections with the rest of the world, it’s a time-tested model. One can’t overestimate the personal participation of the leadership in these enterprises. They got carried away and along with the rest of the world assumed that the US debt obligations their country was accumulating had some value, an understandable error that they are living to regret. As for accusations of perfidy against the Third World states, again there is some merit but it’s repugnant to use it to justify reprisal. Thinking that taking a hard line is somehow going to set things right is very misguided, in my opinion.

2cents • December 18th, 2008 at 11:00 am

@ aerial view2+2 does not always equal 4! In the world of complex numbers, which real numbers are a subset of, sometimes things are not what they seem.I fully believe that financial institutions generally use complex numbers. You see, with complex numbers there is the real part and an imaginary part. Actually, to be truthful, some complex numbers are considered to be purely imaginary! So you see 2 + 2i = 2 + 2i and not 4You may think I’m jesting, but the above is mathematically true. You see, it’s all mathematically possible, it must be that the accounting standards have not caught up yet!

James • December 18th, 2008 at 11:13 am

From an op-ed by Bruce Raynor in the LA Times on union-busting by the Republicans:

When one compares how the auto industry and the financial sector are being treated by Congress, the double standard is staggering. In the financial sector, employee compensation makes up a huge percentage of costs. According to the New York state comptroller, it accounted for more than 60% of 2007 revenues for the seven largest financial firms in New York.At Goldman Sachs, for example, employee compensation made up 71% of total operating expenses in 2007. In the auto industry, by contrast, autoworker compensation makes up less than 10% of the cost of manufacturing a car. Hundreds of billions were given to the financial-services industry with barely a question about compensation; the auto bailout, however, was sunk on this issue alone.

Guest • December 18th, 2008 at 11:16 am

The govt and corps are going to use every creative trick in the book to continually take our money! We can minimize or eliminate credit card usage, not support predatory businesses, become more self sufficient and use bartering if necessary to purchase services. We must reduce the size of govt and have it run by honest people (easier said than done)!

PeteCA • December 18th, 2008 at 11:17 am

It’s about greed. They are not interested in seeing you thrive or do well. In their system there are a few big winners, and a lot of losers. Guess which group they want you to be in? For that reason the banks are constantly inventing end-runs around the free market system, such as OTC trades, Dark Pools, and off-balance sheet vehicles. By allowing these practises (or not enforcing regulatory policies), our politicians are turnigng the USA into an aristocracy – a ruling class of bankers governing a population of serfs.If these words seem melodramatic, take a look at any long-term chart of the Percent Ownership of Equity for US Homes. In other words, what percentage of a home price does the average American own these days. You’ll see that the number has been dropping steadily over decades. This is vitally important. Home ownership is a major measure of wealth for most American families. So if home owners actually own less and less of their most important asset – then who owns the rest? Answer … the banks do. Under the current system of economics being promoted by the US Congress and the Fed, Americans are enslaved in debt for their entire lives.PeteCA

PeteCA • December 18th, 2008 at 11:21 am

See my above post (a few spaces above). It’s all about keeping you in debt. This is still a war between the banks and the people. Everything that’s done by the Fed is aimed at helping the US banking system. The people don’t have their own “Fed” that’s on their side. This is not a fair fight, and it was never intended to be.PeteCA

Hayes • December 18th, 2008 at 11:33 am

McConnell and Shelby whom Raynor references in the article voted against the Wall Street bailout. So what’s Rayor’s point apart from talking his own book?

Free Tibet • December 18th, 2008 at 11:54 am

Sorry, just getting back to this. It’s late for you. I hope you see this.You are quite right. Apart from all of the mistakes that brought us here, there is no benefit in anybody taking a hard line and require the other to rectify the imbalance alone. Nobody is going to be able to do that.What needs to happen is that the west consumes less and the east consumes more.China’s economy is not large enough to make the adjustment alone and in the best case it will take time. But when the US stimulates its economy (demand) it creates jobs and investment – in China and to now predominantly in the export sector. Leakage. It’s the wrong way to go. The only justification for doing so is to allow time for the Chinese economy to adjust. The US is not likely to change Chinese policy though it would be beneficial to see equally forceful action taken on that side. It is frankly doubtful that the US can support the debt required to restore the present imbalance. Nor should it be thought desirable.

Guest • December 18th, 2008 at 12:03 pm

Why are stocks not tanking on this news flash?”Bush administration seriously considering ‘orderly’ bankruptcy plan for desperately ailing U.S. auto industry”

FAMC • December 18th, 2008 at 12:18 pm

Lend a Laptop to Govt, please!It is much better than this mess.Quotes by Milton Friedman:“Money is too important to be left to central bankers.”"You essentially have a group of unelected people who have enormous power to affect the economy.”" I’ve always been in favor of replacing the Fed with a laptop computer, to calculate the monetary base and expand it annually, through war, peace, feast and famine by a predictable 2%,””The government solution to a problem is usually as bad as the problem.”

Guest • December 18th, 2008 at 12:18 pm

Does anyone disagree with this:Profit, by definition, is the amount in the transaction that is over and above the equal exchange of labor.Please keep in mind: seeking clarity of definition is not the same as an argument for dropping the profit system. I am ONLY interested in the clarity of definition. Does anyone disagree with that sentence? If you do disagree, please say why – give the reasoning that is guiding your conclusion – you find it incorrect or imprecise? Thanks.

Walker • December 18th, 2008 at 12:24 pm

No unequivocally, that is not what is happening. The Federal funds rate is mandated lower to ensure ample liquidity for short term availability. The purchasing of mortgage backed securities is already enabling lower fixed rates for mortgages. Making good on debt securities improves credit markets without regulatory encumbrances to lending institutions. Furthermore, states will be able to raise money from private investment through municipal bond auctions. These AAA bonds will yield higher than treasuries and these bonds will be exempt from state and federal taxes. Of course, the bond holder must reside in the state from where the bond is purchased to receive the exemption. The money from the bonds will purchase targeted foreclosures and hire contractors to renovate these properties. All money that is not used for property purchase and renovation will be accounted for and invested in bank certificates of deposit.Afterwards, these homes will be placed on the market for sale at cost to anyone. The price will reflect only what price the foreclosure was bought plus what the contractors were paid to renovate. Only first time homebuyers will be able to receive a very low fixed step loan. The interest rate on these loans will be substantially lower than normal fixed rate loans and will have 1 to 2% higher rate of interest over a five year step loan average than the municipal bond interest at the time of auction. In this way, these mortgage notes will be bundled in AAA securitized tranches backed by the full faith of our treasury.This is one of many programs that we will see where revenue will come from private investment to ensure investment. The future of our country will be investment in our nation.

Hayes • December 18th, 2008 at 12:28 pm

I think as a proxy for a decline/devaluation of the USD a currency based on commodities denominated in USD could have some upside, particularly if the commodity decline has already been discounted in the currency’s value. example21/11/2008 C$1.2854 per US$117/12/2008 C$1.2058 “Gold in that same period in USD +19.5%Oil in that same period in USD (-41.5%)Cash in that same period C$ vs. US$ +6.6%

David in Seattle • December 18th, 2008 at 12:28 pm

Moody’s sees 70 percent chance of auto bankruptcyA prepackaged bankruptcy filing with government financial aid is the most likely scenario for the three large U.S. automakers, Moody’s Investors Service said on Tuesday.Without a prepackaged plan and government help, the automakers are headed for a “freefall” bankruptcy that would throw the economy into chaos, wiping out 2.5 million jobs by the summer of 2010 and pushing the jobless rate to a Depression-like 11 percent, Moody’s said.In a prepackaged bankruptcy, companies work out a reorganization with creditors before they file.”The Big Three automakers are on the precipice,” the agency said in a report. “Without immediate financial aid from the federal government, GM and Chrysler will soon run out of cash, and Ford will be hobbled as the automakers’ shared supplier and dealer network crumbles.”Ford Motor Co , General Motors Corp and Chrysler LLC have been seeking emergency funding from the federal government to avoid an industry collapse.GM and Chrysler, which is owned by Cerberus Capital Management, have said they need immediate injections of cash to avoid near-term collapse. Ford is seeking a government line of credit to be used if its financial conditions deteriorate more than expected in 2009.The White House and Treasury Department officials are reviewing use of a bank rescue fund for the automakers, with approval possible as early as Wednesday, key lawmakers and other sources said on Monday. For details click on [ID:nLG523837]. A $14 billion lifeline for the companies backed by Democrat lawmakers and President George W. Bush was killed by Republicans in the U.S. Senate last week.Moody’s said there is about a 70 percent chance of a prepackaged bankruptcy coupled with government assistance, and just a 25 percent chance of a government bailout without a bankruptcy.Working out a prepackaged bankruptcy would be “highly challenging” and would not likely happen before the second quarter of next year, Moody’s said.Trying to bail out the automakers without a bankruptcy would be costly and leave the companies vulnerable to failure later, Moody’s said. Keeping them out of bankruptcy would likely cost the government $75 billion to $125 billion over the next two years, it said.Without giving automakers the ability to reject contracts in a bankruptcy reorganization, “the bailout funding would have merely delayed the process,” Moody’s said.Another problem would be deciding who has a first claim on the automakers’ assets, Moody’s said. The government would want its bailout funding to have a priority status over other lenders, but the funding structure could be subject to court challenges, Moody’s said.The rating agency also said it sees just a 5 percent chance of a “freefall” bankruptcy without a prepackaged plan, an outcome that would cause the most disruption to the economy.”Without help from the government, the Big Three will enter bankruptcy and be effectively liquidated,” Moody’s said. “GM and Chrysler are in the worst shape, burning through cash so quickly that they won’t have enough to operate in a matter of weeks.”The automakers would file for a Chapter 11 reorganization, but that would likely turn into an effective Chapter 7 liquidation, Moody’s said. “Their factories and other operations would be shut and their assets sold to pay creditors.”A collapse of the automakers would have a “catastrophic” impact on the industrial Midwest, Mark Zandi, chief economist at Moody’s Economy.com, said in the report.”Michigan and Ohio have been in recession more or less since the beginning of this decade, and the collapse of the Big Three would undermine their economies well into the next decade,” he said.Zandi added that nationwide, real gross domestic product would fall more than 9 percent annualized in the first quarter of 2009. “This reflects the lost output of the Big Three on top of an already very weak economy,” he said. (Reporting by Dena Aubin; Editing by Dan Grebler)

ex VRWC • December 18th, 2008 at 12:30 pm

Can I interject?I hear a theme emerging, and that theme is ‘the system enslaves Americans in debt. Credit card debt, mortgage debt, car debt. The system enslaves Americans in debt, and where is the relief on debt that is needed?’Can I just say – there has been information out there for a long, long time that warns against debt. A mortgage is a joint investment between a home buyer (not home owner, this is a misnomer) and a bank to take joint ownership of a home until such time as the mortgage is paid off. The carrot for paying the mortgage amount plus interest is that the homeowner (not the bank) benefitted from the appreciation. Or lost on the depreciation, which was always a risk. Other than mortgages, most responsible advisors have said ‘live within your means, most debt is bad, etc’. Lets not forget that becoming ‘enslaved in debt’ was not inevitable.So don’t participate in debt. Check out of the system. Pay off a home, or, if this is not possible, get out of the bad joint investment you and the bank have if it is unsustainable for you. This is not meant to be head-in-the-sand optimistic, I am just saying view it as an investment, for that is what it is. And likely a bad investment for many. Businesses will get out of bad investments. View your finances like a business.Our society seems to be going down a path of socializing the losses, and putting out our treasure to those who have not been the best stewards of what they have, or worse, have been reckless gamblers. From banks on down to consumers. This is a bad long term move for a society to make.Lets not fall into victim mentality here. Most share in the culpability for this situation to some degree, if they have participated in it.

Hayes • December 18th, 2008 at 12:37 pm

Santelli on currency just now – worried about currencies and the beggar-thy-neighbour scenario – he linked that to depression type thinking – video clip should be on the CNBC site in the next hour -

Guest • December 18th, 2008 at 12:47 pm

Can I get some of what you are having? I don’t even care if it’s true or not, I’d just like to sleep good at night and not wake up semi depressed for the future of my children!

Brian • December 18th, 2008 at 1:25 pm

This article contains a contradiction. Anyone care to explain?”Moody’s said there is about a 70 percent chance of a prepackaged bankruptcy coupled with government assistance” . . . “GM and Chrysler are in the worst shape, burning through cash so quickly that they won’t have enough to operate in a matter of weeks.” . . . “Working out a prepackaged bankruptcy would be “highly challenging” and would not likely happen before the second quarter of next year, Moody’s said.”If it will take 4-6 months (according to Moody’s) to work out a prepackaged BK, but they have cash to last “a matter of weeks” how does the “rating agency also said it sees just a 5 percent chance of a “freefall” bankruptcy without a prepackaged plan”???The timeline is inconsistent. Moody’s is living in Fairyland!In the Real World, either GM and Chrysler are going in a rapid bankruptcy, or they will have a prepackaged plan that will be so ill-thought through that it will unravel into a freefall bankruptcy.

subgenius • December 18th, 2008 at 1:28 pm

I think it’s now pointless to use the old descriptors of political positions. The only game in town is power, and the quest for power acknowledges no such arbitrary positions. The powerful are quite capable of using these terms to create knee-jerk-type responses from the “proletariat”, who unfortunately are blind to the reality…Call it what it is – an elite who seek to control us “for our own good”…and take the fringe benefits of unimaginable wealth…

subgenius • December 18th, 2008 at 1:32 pm

repost from above…I think it’s now pointless to use the old descriptors of political positions. The only game in town is power, and the quest for power acknowledges no such arbitrary positions. The powerful are quite capable of using these terms to create knee-jerk-type responses from the “proletariat”, who unfortunately are blind to the reality…Call it what it is – an elite who seek to control us “for our own good”…and take the fringe benefits of unimaginable wealth…

David in Seattle • December 18th, 2008 at 1:36 pm

Good analysis from Mish.Bernanke has every intention of keeping rates as low as he can for as long as he can. With that backdrop, banks will continue to borrow from the Fed at the discount rate and buy as many treasuries as they can given that lending makes virtually no sense in an environment of overcapacity, weak demand, and rising unemployment.However, this finally puts some light at the end of the housing tunnel, even though it is extremely premature to be looking for any kind of fast recovery. Unemployment is poised to soar in 2009 and that will offset a great deal of the benefit of falling yields.The ARMs reset problem may go away (as long as rates stay low). However, one problem is an exit strategy from this madness, the second is those underwater still have an incentive to walk away, and a third problem is other severe problems (commercial real estate, credit card defaults, etc) are poised to get much worse. In other words this is a short term cure that delays the eventual recovery, just as happened in Japan.Also bear in mind that given the backdrop of rising unemployment, boomer retirement concerns, and a stock market that has obliterated nearly every IRA and pension plan in the country, this economy rates to be very weak for quite some time, most likely years.http://tinyurl.com/3ptgwm

Hayes • December 18th, 2008 at 1:44 pm

General Electric Outlook Revised to Negative From Stable by S&Phttp://www.bloomberg.com/apps/news?pid=20601087&sid=a.uccm3.qWjQ&refer=home

Guest • December 18th, 2008 at 2:00 pm

good points! I wonder what Moody’s rating is on the viability of our Federal Government? Do they think a pre packaged bankruptcy would be the best option?

economicminor • December 18th, 2008 at 2:10 pm

Change is constant. You can either try and direct it or it just happens to you. Those who fail to plan, plan to fail. To direct change you must have a workable plan. To have a plan you must know how each move affects the whole system.Has any one else ever been to one of those community planning seminar/training sessions where you list all the players (stakeholders) and then transfer them to a huge sheet of paper or a huge board. Then you tie all the relationships together to see who needs to be brought into the picture and sold in order to get the right outcome. That is what we are dealing with here except there are communities and states and the whole country and then other countries as stakeholders. There are resource users and resource producers and energy and transportation and families and …. There are subsets upon subsets.If you move this, it affects that. When you push here, it bulges out there. We aren’t in a do a few things and make it all better mess. It took decades of mismanagement, uncontrolled greed and quite a bit of denial and ignorance to get us to where we are and it will take a decade or a generation to fix the imbalances if they are even fixable. But we must try as the alternative is war and famine and petulance and possibly a world devoid of humans. This is a finite system.. It has limits. And our lifestyles are very dependent upon cheap energy, clean water and good food.The financial crisis isn’t just about liquidity. And it isn’t just about debt either or the insolvency cause by to much debt, it is about the imbalances of a lot of relationships that have started breaking down. Rules set in place that have hindered real innovation that seem to be set in concrete and other rules that were to keep wealth from being to tightly held by a few ignored.Our economy is very complex and all tied together in interesting ways and it isn’t working for most people any longer. There are a lot of people on this earth and we need the earth to sustain all of us with out war and famine. We all need to live meaningful existences. The issues we face are much larger than whether the US GDP is growing or shrinking. But even if it was only about GDP, so many things affect it.It is to bad that Bernanke, Paulson nor most of the others who are in positions of power and influence are so singularly focused and have no concept of the bigger picture. I fully expect things to get much worse before there is recognition that those in charge, who have no clue about what is good or bad or mostly even about right and wrong are pushed aside and more complex thinkers are used. All the current group knows is a very narrow set of truths that may be true under some circumstances but certainly aren’t any longer.Even our Professor is among those who think to narrowly and that is what many of you are noting. He is consistent with his discipline but not open enough nor broad enough to see that the solutions he espouses will not fix the real underlying problems as they are deep and extremely complex and go way beyond just numbers and economics.

David in Seattle • December 18th, 2008 at 2:23 pm

Yes, but what Bernanke does not understand is that many of troubled home buyer have been paying only the interest on their homes, and not the actual mortgage. Once they start paying the mortgage they may not be able to afford it no matter how low the rates are.

TA • December 18th, 2008 at 2:24 pm

David,Please explain “this finally puts some light at the end of the housing tunnel”. I don’t see a glimmer on even the most distant horizon.

Hayes • December 18th, 2008 at 2:34 pm

Banks need more capitalDec 18th 2008From The Economist Alan Greenspan

GLOBAL financial intermediation is broken. That intricate and interdependent system directing the world’s saving into productive capital investment was severely weakened in August 2007. The disclosure that highly leveraged financial institutions were holding toxic securitised American subprime mortgages shocked market participants. For a year, banks struggled to respond to investor demands for larger capital cushions. But the effort fell short and in the wake of the Lehman Brothers default on September 15th 2008, the system cracked. Banks, fearful of their own solvency, all but stopped lending. Issuance of corporate bonds, commercial paper and a wide variety of other financial products largely ceased. Credit-financed economic activity was brought to a virtual standstill. The world faced a major financial crisis Read more

Guest • December 18th, 2008 at 2:34 pm

If it gets to 25 I’m all in on oil, this depressed price will not last, something will give/break and it will spike back up.

PeterJB • December 18th, 2008 at 2:40 pm

Totally disagree;”Profit, by definition, is the amount in the transaction that is over and above the equal exchange of labor.”The direct answer may depend on a definition of the term “definition”; however:Profit is relative whilst qualitative in essence.Profit relies on demand initially but philosophically the best answer is imposed by a question:*Does one give to receive or receive to give?*You will find profit in the consideration of this question.In essence there are two states of being: superficial and qualitative; both these terms are derived from separate derivations and respectively correspond to surface and volume.Ho hum

PeterJB • December 18th, 2008 at 2:53 pm

Hoarding the results of labour (suggesting “savings”)by individuals and organizations, cannot be defined as “productive capital investment”.Intensities (big banks), that is, the collective of labour’s productions are the “black holes” – in practice – of the socio-economic systems’ dilemma; supported and concretized by the ‘moral hazard’ of the incompetent and eager dependence of feral leadership.IOW, institutionalized religion albeit in theory; fascism.Ho hum

PeterJB • December 18th, 2008 at 3:10 pm

“Americans and others have no idea what is going on nor do they understand the gravity of the situation. This is an event that only happens once every 500 to 1,000 years. This is going to be one of the granddaddies of all collapses. “http://www.theinternationalforecaster.com/International_Forecaster_Weekly/A_Devastating_Impact_as_the_Market_Unleverages_and_a_Winter_of_DiscontentHe is absolutely correct – only very few people realize what is about to happen; is happening (see a previous post by me above).Ho hum

phalanges • December 18th, 2008 at 3:11 pm

Nice Theory. This is assuming there will be sufficient first time buyers with good credit ratings to qualify for a mortgage. Oh, and have a job.

David in Seattle • December 18th, 2008 at 3:12 pm

TA,The “light at the end of the tunnel” is the lowering of monthly payments for many struggling Americans who can either refinance their mortgages to a lower rate, or those whose adjustable mortgage rates will adjust lower due to the falling 10-year Treasury Bills (which the mortgages are tied to). Bernanke has threatened to print as many dollars as it takes to buy government debt to push the mortgage rates lower (essentially, the Treasury, a government entity, prints dollars, then the Fed uses the same money the government prints to buy the government debt to influence mortgage rates). If this sounds ridiculous, well, it is, but it will lower mortgage rates at a time when foreclosures are setting monthly records.There is one caveat though… Unemployed people won’t still be able to pay their mortgage no matter how low the rates go. Further, It is a matter of time before the money market funds collapse in this low rate environment since they are hardly making any money.Once the foreigners (who hold about 3 trillion dollars worth of our debt) begin to question the solvency of our government (which they already have), then no one will accept dollars or the government debt. That will truly be the end game for the U.S.

economicminor • December 18th, 2008 at 3:18 pm

If we had true transparency, then I might believe the P/E values today. Even if I did, what will they be like in the future with the contraction in spending that is going on?So I have two issues with current P/E levels, trust and the direction.Maybe some day I will again feel like *investing* but today it is to much of a gamble.

PeterJB • December 18th, 2008 at 3:21 pm

“Political observers need not be cynical to believe that there is something gravely wrong with politics in America…The values of our constitution, which begins with the immortal phrase “We the people,” now appears little more than a cold historical artefact of an age when idealism sprang forth from great ambition and hope, only to give way to the fiercely individualist and self-centred focus groups, consultants, push polls and lobbyists that treat our ideals and aspirations as political props…Americans would be wise to see gross corruption as nothing personal, but as the by-product of a defect in the structure of government which allowed it to happen on such a scale in the first place. All crimes cannot be prevented where there are ingenious criminals, but to ransom the soul of democracy, as Blagojevich did, required a complete institutional failure.”http://www.guardian.co.uk/commentisfree/cifamerica/2008/dec/17/rod-blagojevich-congressHo hum

David in Seattle • December 18th, 2008 at 3:22 pm

The Fed is frantically signaling that it wants asset prices to inflate and will engage in any and all activities that will force asset prices higher. The Fed announced that it will monetize the entire debt market if necessary. As we have asserted, the Fed has bet the entire ranch. Now we get to see if it works.What if the Fed did monetize the entire debt? What if the Fed printed 10 trillion dollars to write off the entire governmental debt, and perhaps 40 trillion to wipe out all debt in the U.S.? The dollar will collapse no doubt. Any other predictions?

Capone • December 18th, 2008 at 3:26 pm

Madoff was among the leaders of another “Ponzi” scheme before this one – the Nasdaq. How many major individual stocks literally were one off Ponzi schemes from 2000 until now? The whole thing is a Ponzi scheme. Dow Jones Industrial Ponzi, Standard and Ponzi 500, Shanghai was a Ponzi of sorts, 401K Ponzi – next is the US dollar the greatest Ponzi of all. Is everybody in yet? Running out of new suckers quickly…Every market is a casino. Every market is manipulated. Speculation was prevalent and widespread in the end days of the Roman Empire. I would say this time marks the end of a global speculative period in history where everything world wide from paper stock certificates to property to art work traded wildly. This speculative frenzy will now move to a fiat monopoly money trading extravaganza ultimately ending with the return of the Dark Ages for the majority of the planet… Violence and wars will take place with lines drawn in the sand based on religious beliefs or ethnic or regional differences. These lines will NOT be the real cause of the war yet a distraction to the masses – a distraction from the truth. The root cause will be the substantial increase in needy humans willing to fight and die versus suffer or starve. The powerful rulers will continue to play the game like chess with real weapons and humans at their disposal. All of this ending ultimately with One World Order.Happy Holidays!

2cents • December 18th, 2008 at 3:27 pm

@blindmanPurely in magnitude only as opposed to the vector quantity(i.e. information is lost).I replied to aerial view because I thought the mathematical word play was dead on with the real situation (complex, imaginary, funky math, etc.). So no, I was not jesting about the math, but rather on its application to the situation.Pure curiosity, what were you aiming at with your question?If you were trying to mathematically “undo” the situation then -2+(-2i) is the additive inverse of 2+2i, but it is not the multiplicative inverse which is 2/16 + (-2/16)i nor is it the opposite in convexity which is the conjugate or 2-2i. Or in reality to the applied situation something respectively akin to going back in time, instantly undoing everything, or applying equivalent but opposite feedback.I’m interested in where you were going blindman.

devils advocate • December 18th, 2008 at 3:29 pm

PeteAustralia depends on food exports and does not import oil – according to Gartmanso it’s a bet on food not oil commodity—will the dollar weaken more in a few days, weeks or months?-maybe not, since the Obama $850+ stimulus package-balloon went up todayand gold dropped and the dollar strengthenedhowever, it is probably only a question of when – not if – the dollar will weakenand gold will up

aerial view • December 18th, 2008 at 3:35 pm

That is the key question! Their economic models or guesses MUST have a threshold or upper limit number in mind or are they are just playing Russian roulette with our future!

devils advocate • December 18th, 2008 at 3:39 pm

it’s obvious: no one at SEC wanted to find anything wrong with Madoffif you really want to uncover a cesspool, it’s very very easy

santa claus • December 18th, 2008 at 3:40 pm

Since he already bought me a new sleigh, I’m sure that Bill Clinton’s foundation which is filled with Saudi and corporate money can help?!

ex VRWC • December 18th, 2008 at 3:42 pm

What Greenspan Thinks (short version)The crisis is a crisis of confidence, not solvency.Banks need more capital, and equities will rebound, providing it.Mortgage securities are too risky, but house prices will stabilize, making them less risky.Government guarantees and money will eventually need to be withdrawn from the system.Lending will eventually resume.He sees no real problem, just a temporary crisis, and offers no solution except more government intervention and hope for the best.

devils advocate • December 18th, 2008 at 3:43 pm

Roubini emphatically implies that he does not have a crystal ball when he says to put your $ into only short term safe treasuries and like instruments-his predicting a shallow U-upturn beginning in 2010 is just a hope for recovery

devils advocate • December 18th, 2008 at 3:46 pm

by the way, Roubini does the same when it comes to the dollarhe is “bearish” for 2009 on the dollarbut says the dollar will take decades to weaken like the English poundmore a hope for the dollar/USA

ex VRWC • December 18th, 2008 at 3:49 pm

Counterpoints for your hopefulness (sorry):Who can refinance if they have negative equity?Many ARMs have already reset.Most borrowers in ARMs were the least qualified anyway. They are likely the ones walking away and being foreclosed on.Underwriting is more strict than it has been in years.Even if everyone refinanced and went out and bought homes, what of the market 5 years from now? Didn’t we just see the auto industry blow its future on sales and zero interest loans after 9/11? Look at them now. And we want to do the same with housing to get out of this crisis? There are no such easy outs.

Guest • December 18th, 2008 at 3:51 pm

I’ll pull my money out of the markets after this so-called “Santa rally.” My intuition is warning me that markets will go to zero under the usurper. The average US person is just a dumb person, with the only difference being that one dumb is dumber than the other one. Just name any US institution — govt. or private? All are filled with dumb people. Disgusting.

Guest • December 18th, 2008 at 3:52 pm

do you give for goodness or glory …it would seem that mr. made-up used both charity to look good and the glorious tax he madeoff with.

Guest • December 18th, 2008 at 4:03 pm

e, you, sir/madam, are another inspiration from which one day will dawn a people who will rightly believe they have achieved that rarefied condition termed “civilized”. or maybe not. but, if not, it will not be on you.peace.

Hayes • December 18th, 2008 at 4:04 pm

CNBC has been going overboard trying to talk around the S&P downgrade of their parent company GE– the following is priceless – as unexpectedly one analyst states on air”anybody whose a credit guy understands that General Electric is just a hedge fund with a light bulb factory tacked on the side – the bottom line is GE cap is at best single A”video starting at minute 2

Hayes • December 18th, 2008 at 4:11 pm

The following is a must watch IMO:The following is an interview with Dan Niles of Neuberger – Over the years from his call of the tech bubble (including the numerous false starts) – he has been on the money – one of the view straight shooters in the order of Meredith Whitney – This is well worth watching.Dan Niles on the markets

Hayes • December 18th, 2008 at 4:28 pm

and this article which I suspect is going to get a lot of distribution in the coming days – courtesy of Bianco ResearchThe Government is MAKING Money on the TARP link

Guest • December 18th, 2008 at 4:31 pm

sorry here’s the text

Despite being widely hated, ridiculed and otherwise smacked down by the public, the $700 billion dollar TARP program may turn out to be the best investment the taxpayer made all year.The folks over at Bianco Research (run by Jim Bianco, one of the smartest and most respected bond analysts in America) published a note today called “Tracking the Trust Cost of the TARP.” This is their conclusion:The Treasury infused $247.26 billion into 184 companies over the span of the credit crisis. In exchange for these bailouts, the Treasury received securities that are currently valued at $255.10 billion. This means the TARP bailouts have actually turned a profit for U.S. taxpayers as of this writing. After factoring in the current value of the securities the Treasury received in exchange for its bailout money, the Treasury has turned a net profit of $7.84 billion for a 3.17% return on investment over the period.There’s a phrase we don’t hear much these days, “turned a profit.”The primary reason, Bianco argues, has to do with the nature of the preferred share investments the government made:Every recipient of TARP funds, AIG and Citigroup excepted, had to agree to the same terms. In return for a capital infusion, the Treasury would receive 100% of the infusion value in the form of preferred shares of that company. This preferred pays a 5% dividend in the first three years and a 9% dividend after that. In addition, each company also would have to give the Treasury warrants equal to 15% of the infusion value.This follows a story earlier this week that government money-receiving insurance firm AIG sold some mortgage related assets to the government. From the story:In the deal announced Monday, the Federal Reserve Bank of New York made a senior loan to Maiden Lane II to buy the residential mortgage-backed securities for an initial purchase price of $19.8 billion. The six-year loan is secured by the $39.3 billion face amount of the securities and bears interest at one-month LIBOR plus 1%.Notice the sale price to the government is about 50% of the face value of the securities. Granted, that face value may be less today than it was when the loans were made, but it is highly unlikely the value of those assets has dropped by half. Additionally the government loaned the money to AIG and is making a few percentage points in interest. If the value of these assets rises, the government will be holding them on the books at more than it paid. Buying low, hopefully selling high.We are still in the early innings of the TARP game, but the very early score indicates that the much-maligned $700 billion dollar rescue program may actually give a little back for the use of your money and, at the minimum, we get to hear a bit of all-too-rare good news.

blindman • December 18th, 2008 at 4:36 pm

P,.”WHAT THE HELL HAPPENED TO THE BASIC LAW OF ECONOMICS – SUPPLY/DEMAND?!”.tarp. wild card. closed system develops linkage to the unknown and other. system freezes in anticipation of ?no one can model it but that’s all right for the right people. as you say.. ” a RIGGED market “. which is not a market, it’s a set up.??

Brian • December 18th, 2008 at 4:41 pm

IF YOUR SCENARIO UNFOLDS, MY ANSWERS ARE:The dollar loses it’s status as world reserve currency. The US therefore will be unable to afford consumption and imports. No one will lend the US their currencies. The USA becomes bankrupt.The world without a reserve currency is thrust into a period of massive uncertainty. Almost all world wealth is destroyed by the hyperinflation of first the USD, and soon thereafter all other world currencies. No one will trust currencies that are not backed by commodities. No person, company or government will have any credibility or counter-party trust.The USA will then need to deal with being insolvent at federal, state and local levels, just as other world governments in highly unstable regions collapse themselves.Does the USA break apart as did the Soviet Union? Hopefully Obama will be able to stop the total civil unrest that results from famine and disease and the conversion of the US into a broken nation-state. However, the US still has military supremicy. Does it use this military to stabilize other nations that are falling apart? Or does it begin to seize resources?Regional conflicts turn into regional military conflicts. Governments worldwide face rebellion from within and threats from outside. Trust is completely broken, and worldwide military conflicts arise on a level not seen in the modern era (and with modern weaponry ie nuclear).We enter a period of extreme peril. No one can predict further than this imho. Unintended consequences and global chaos reign supreme.That’s what happens if the USA totally monetizes their debt.

blindman • December 18th, 2008 at 4:49 pm

.. main stream media vs. corporate media , a distinction and a difference.http://www.freepress.org/columns/display/7/2008/1632.There’s nothing mainstream about the corporate mediaFebruary 9, 2008As we stumble toward another presidential election, it’s never been more clear that our political process is being warped by a corporate stranglehold on the free flow of information. Amidst a virtual blackout of coverage of a horrific war, a global ecological crisis and an advancing economic collapse, what passes for the mass media is itself in collapse. What’s left of our democracy teeters on the brink.The culprit, in the parlance of the day, has been the “Mainstream Media,” or MSM.But that’s wrong name for it. Today’s mass media is Corporate, not Mainstream, and the distinction is critical.Calling the Corporate Media (CM) “mainstream” implies that it speaks for mid-road opinion, and it absolutely does not.There is, in fact, a discernable, tangible mainstream of opinion in this country. As brilliant analysts such as Jeff Cohen, Norman Solomon and the Fairness and Accuracy in Reporting (FAIR) organization have shown, the “MSM” is very far to the right of it.The mainstream of American opinion wants this country out of Iraq. The Corporate Media does not. It refuses to give serious coverage to the devastating human, spiritual and economic costs of the war, and it marginalizes those demanding it end.The mainstream of American opinion wants national health care. The CM does not.The mainstream of American opinion is deeply distrustful and in many ways hostile to the power of large corporations. Obviously, the CM is not.The mainstream of American opinion strongly questions whether our elections are being manipulated and stolen. The CM treats with contempt those who dare report on the issue.The Corporate Media takes partisan stands (often in favor of the Republican Party, but always in defense of corporate interests) by sabotaging political candidacies, especially those of candidates who challenge corporate power. This year it blacklisted the populist candidacy of John Edwards, suffocating his ability to compete for the Democratic nomination.Mainstream American opinion is no fan of George W. Bush and does not take him seriously as a credible leader. A very substantial percentage has long wanted him and Dick Cheney impeached and removed from office. The CM does not tolerate such a discussion, and utterly marginalizes Rep. Dennis Kucinich, the veteran Congressman who has dared to seriously raise the possibility.Mainstream American opinion is committed to protecting what’s left of the natural environment. The Corporate Media makes an occasional show of sharing that concern, but stops where Corporate interests might be impinged. On the other hand, it promotes failed technologies, such as nuke power, where centralized, corporate profits are huge.Never in our history has the control of the nation’s sources of information been more centralized, or more at odds with what the country as a whole believes.This divergence is not limited to the attack pack fringe of far-right bloviators who dominate the Corporate opinion print columns and talk shows. Virtually all “personal” opinion expressed on the corporate airwaves and in the syndicated big newspaper columns is significantly to the pro-corporate right of moderate American opinion.The “news” pushed by the major radio/TV networks and newspapers slants unerringly toward the interests of the five major corporations that own the bulk of them. They bury stories of vital importance while spewing endless hours and column inches at the mind-deadening likes of Paris Hilton and Britney Spears.Their excuse is that they “give the public what it wants” and are “in business to make a profit.”But the real profit centers of the corporations that own the CM are not in providing news and information. General Electric, Westinghouse, Disney and the other media-financial-industrial behemoths have too much to lose from an accurate reporting of the true news of the world. To protect their core interests, they are bread-and-circus PR/diversion machines, not real news organizations. They resemble the old Soviet official mouthpieces Izvestia and Pravda far more than the news providers envisioned in the First Amendment, by Founders who saw balanced, aggressive reporting as the lifeblood of democracy.Nor does the corporate right never hesitate to attack. Since Vice President Spiro Agnew assaulted those who dared report the truth about the Vietnam War, the absurd myth of a “Liberal Media” has been used to intimidate and silence mainstream opinion.In fact, the term is used to apply to any outlet that harbors even the slightest expression of dissent. Even conservative newspapers or broadcasts that may be overwhelmingly pro-corporate, but which occasionally tolerate a whiff of dissent, are branded as subversive, ungodly and “out of the mainstream.”There are indeed liberal publications and radio shows in this country. But it’s no accident that they struggle financially, and for access to the airwaves.Thankfully, just as the CM solidifies its power over our mass media outlets, the internet has burst forth as an open, wildly diverse medium for mainstream opinion and actual truth. Its preservation will require what Thomas Jefferson called “eternal vigilance.”That includes restoring the Fairness Doctrine, enacted by a Republican Congress in the 1920s to guarantee balanced opinion on the emerging electronic medium of radio. It means a ban on unified corporate ownership of large fleets of radio, TV and print outlets. It means busting up the monopolies that warp public access to information and opinion.The word “mainstream” has nothing to do with the massively monopolized machine that has a chokehold on our democracy. It’s the “Corporate Media,” and there’s nothing mainstream about it.–HARVEY WASSERMAN’S HISTORY OF THE UNITED STATES is at http://www.solartopia.org. He is senior editor of http://www.freepress.org..

OR • December 18th, 2008 at 5:14 pm

I am glad I sold the big banks + GE (12/5) which I held for just two weeks.GS keeps climbing (I sold at 70 now at 80). Nothing like having the treasurer leaving (and the one coming in?) on your side:-)

Hayes • December 18th, 2008 at 5:16 pm

(it seems Wasserman also has an agenda with statements like: “There are indeed liberal publications and radio shows in this country. But it’s no accident that they struggle financially, and for access to the airwaves) – he must have written this before the age of Obama, perhaps he’s never watched ABC, NBC, CBS, CNN or read The Washingpost, NY Times, SF Chronicle, LA Times etc… but he is correct the media is not mainstream by any definition.

Hayes • December 18th, 2008 at 5:19 pm

Meredith Whitney came out with a report on Goldman this week (very unfavorable) but I don’t have a copy – She has been consistently right on her Bank calls except a bit too conservative

Octavio Richetta • December 18th, 2008 at 5:28 pm

Only of of two thigns can be true. We either get the mother of all recessions (yes go ahead call it depression) or long T bills are gonna be a hell of a god short before too long.

economicminor • December 18th, 2008 at 5:32 pm

What bugs me about all this is that a shirt made in China can cost $50+. As much as a Carhartt made in America. And my new shoes are a top brand name and the asking price is in excess of $100, made in China. They aren’t hand stitched, just molded and glued.So the benefits of globalization? None to me as far as I can see. Just that some large multi-national can make a lot at the expense of most Americans in more ways than one.And the food grown out of country? What kind of residues are left from what kind of fertilizers and pesticides? No one knows because most aren’t tested at all.

Octavio Richetta • December 18th, 2008 at 5:34 pm

Fed Loans Guided by Raters Grading Subprime Debt AAA (Update1)http://www.bloomberg.com/apps/news?pid=20601109&sid=ahpPBA8vqN2o&refer=homeI get the feeling Benny and the Feds won’t be able to fool the people too much longer with their tunes. And then what? He is gonna have to go back writing cute simulations. Scratch that, coding the simulations is “slave work” performed by grad assistants. A big professor like him doesn’t do the dirty work.

Octavio Richetta • December 18th, 2008 at 5:37 pm

Bulls tell you the market is a discounting mechanism when it moves in their favor. To me all markets (the credit, commodities and equity markets) are telling a very clear message: the mother of all WW recessions/depressions is coming.

RanMan • December 18th, 2008 at 5:49 pm

OR:You gave me some good advice a couple of months ago about paying off a judgement. what vehicles are out there to short these treasuries? I’ve been shorting LEAPS pretty well so far but don’t now much about treasuries………

RanMan • December 18th, 2008 at 5:57 pm

OR:I’ve read that the bond market is “telling” us a bad recession/depression is coming. However, the equity markets seem to be doing “OK”. What is the signal they are giving that something is coming???? I don’t see it……..Thanks………

Octavio Richetta • December 18th, 2008 at 6:28 pm

Still some Goldilocks left but check out the returns. I have to check but it looks like 2008 will be the worst market in over 100 years!

2cents • December 18th, 2008 at 6:31 pm

GE would be well advised to dump GE CRAPital at any price!It’s not a numbers thing (they know it’s CRAP), it’s an ego thing. Let’s see how much the investors ultimately end up paying for stroking that ego!

Hayes • December 18th, 2008 at 6:32 pm

From RGE contributor Michael PettisGermany is fighting with Europe. Can China be far behind?December 17th, 2008

Earlier this week Ambrose Evans-Pritchard had an article in the UK paper The Telegraph which starts off with “For the first time in my life, I am starting to feel twinges of anti-German sentiment.” The article goes on to lambaste the German government, and especially German finance minister Peer Steinbrück, for what Paul Krugman earlier called “boneheadedness” in refusing to participate in the European fiscal expansion and, worse, for calling British and French programs “crass Keynesianism.” According to Krugman:The world economy is in a terrifying nosedive, visible everywhere. The high degree of European economic integration gives Germany a special strategic role right now, and Mr Steinbrück is doing a remarkable amount of damage. There’s a huge multiplier effect at work; it is multiplying the impact of German boneheadedness. Read more

economicminor • December 18th, 2008 at 6:33 pm

I think you have the theme right.If the educational systems and the media do not educate the populous, the pain of consequences will.I think it is a little late in the game to tell people not to participate. Not that anyone would have listened earlier. And I very much doubt that the most grievous abusers of credit have a much of a choice or opportunity to pay down their debts now. IMHO this is going to run its course and there is little that can be done to alter it now. Except maybe make things worse, deeper and take longer to find balance.

OR • December 18th, 2008 at 6:42 pm

Hi,BTW, I am not recommending to short treasuries, IMO, it may still be too early. The big boys short the actual T bills. This is what they do to perform the carry trade. They short-sell you a 3 month T bill at an almost zero interest rate (talk about a cheap loan!) and use the proceeds to invest at a higher rate. Of course, we all know the carry trade is no longer what it used to be but the USD is becoming an ideal currency for this.The little guy can short the treasury etfs such as TLT IEF SHY. I believe there are short treasury etfs as well but I have not done anay research on this yet.

Markar • December 18th, 2008 at 6:55 pm

Obama hasn’t even taken office yet and Im already disenchanted with him. His votes on FISA, bailouts, his appointment of one Wall St. insider after another reveal a shrewd political animal ala Clinton, not the agent of change he so effectively campaigned as. Denninger is right. He has 6 months to see the light and stop the wholesale looting of our treasury and economy, and restore trust and transparency or it will be too late for him, and for us. So far, I’m not very encouraged.

PKB • December 18th, 2008 at 6:59 pm

Also,Oil is the baramoter of the global economy. 3 months ago, the patient had a ($147) fever. Now, the patient is in shock and body temperature ($37)is dropping like a rock. i.e. the blood is not moving.PKB

Guest • December 18th, 2008 at 7:09 pm

If it comes to that then I say we use the military power to seize the oil fields and run them for ourselves, Raid smaller countries and seize their resources etc. Protect number one at all cost. Every country will be doing the same thing it will only be limited by the military power of its neighbors. America would do it in the name of saving the world and it could be sold that way. You know military strategist have already ran scenarios for this. I do feel sorry for those who live in large cities and are strapped down with debt and unable to move unable to get out; those people are in big trouble if this economy gets much worse.

ex VRWC • December 18th, 2008 at 7:10 pm

Well, we can not participate in their attempts to reinflate the bubble.Sadly, you are right about the time being too late for many.I see a lot of defaults and writedowns at every level. I see bad credit histories being rampant. Perhaps in order for banks to to survive credit will be offered to many who now are numbered among the ‘grievous abusers of credit’ now. They will probably be among the first to line back up. For everyone else will probably be debt shy. Another pessimistic view, I’m afraid. But the response to the crisis so far has been to try and reinflate what is collapsing, why change now?

blindman • December 18th, 2008 at 7:23 pm

c,.it is my understanding that the truth is raw and destructive. i think you have come to the same conclusion.i also have observed that no human group or civilization has ever existed de-coupled from primary illusion.the thing to notice here is that truth shatters illusion, the same illusion that people share to facilitate social and economic intercourse. sounds dirty, but is necessary and good. so when truth comes along, bam. you have distrust among counter parties and deflation dislocation, social fragmentation etc. it looks bad. butit isn’t. it is good. the illusion became thin. i used to call it the silk screen that becomes torn etc..now i prefer reflection, as in a mirror. our illusion is the reflection of our own face, mind, projected out into the world and perceived as if it is the real world. it isn’t. this construction is based on all the factors from birth and a heavy dose of lies from “authority”. it was always an illusion, but it was easy enough and viable enoughto work..now that the primary illusion we have operated under is cracking and reflecting nothing of ourselves, it is again up to us to reconstruct a new primary illusion, one in closer alignment with the truth.of what, you may ask , is this metaphoric mirror constructed. that is our institutions and there stated purpose for existence. and this explains why welook at the representatives of these institutions, human beings, and become confused and disappointed and instinctively know they are liars. that is their function. to lie to perpetuate a functional illusion. we know this but reject it because it makes the primary illusion dysfunctional and this defeats the purpose.simple but complex. hmm. but still , we know it.as you point out, people have historically reverted to old “religious”primary illusions, lines drawn, when “played”, exploited by imperial invading foreign powers. it is a new world and we know better. i hope..not to get sanctimonious, i am no scholar on the subject but one of the most, for me, profound stories of thenew testament is the verse where pilot asks jesus “what is truth”. the response. silence..i see this as an opportunity, or a charge on the back of humanity, to introspect and learn and then become creative.become true and create better illusions for yourself, your neighbor, and your neighbor’s children. america at christmas time, 2008. a gift from the ages..there are so many insightful minds, awake and willing to work. j. lennon ” ..only solutions.”..http://archive.wbai.org/index.php…Thursday, December 18, 2008 1:47 pmPublic Affairs

Guest • December 18th, 2008 at 7:32 pm

g, i could not resist as my narcissism is tempered only by my philosophic suspicion, ie abstract slapstick, humor.

Guest • December 18th, 2008 at 7:33 pm

Ditto, here. If the election were held today, Obama would lose. I hear it everywhere — it’s the same old Clinton retreads, and the Chicago Mob. I was so happy; and now…

Guest • December 18th, 2008 at 7:50 pm

So what just create a new currency. If I own a business that’s in debt up to its ears bankruptcy alleviates the debt I keep my infrastructure and I can now be profitable so too can the U.S. declare bankruptcy. The infrastructure will still be in place, the brain power will still be in place, the government will still be in place. Only problem will be our reputation will be hurt and our dollar will crash, but believe me you other countries would still buy our products and deal with us.People and businesses walk from their debt through bankruptcy all the time and always come out stronger there is no reason why our country can’t do the same. Just implement laws so the infrastructure and corporations can’t up and walk away.

Guest • December 18th, 2008 at 7:51 pm

Germany better come to the fold, or else we will always talk bad about them (since we cannot do anything else).In fact they have not been the only ones calling these type of fiscal stimulus programs Keynesianism. It just looks like after US policy became Keynesian, everyone else is expected to embrace that tactic in solving the issue.

Average Jane • December 18th, 2008 at 7:58 pm

But Fannie and Freddie still only require 3% downpayment. And isn’t that where 80% of new mortgages are coming from? I’m still in the market for a decent townhome, but prices haven’t come down enough here for me to do the prudent two-and-a-half times my annual salary price-to-income ratio. People are convinced the housing market will come roaring back any day now. Or if not today, then in six months.And by the way, ex VRWC, forgive me if someone’s already asked this, but what does the “VRWC” stand for? (If you care to share; if you don’t, that’s okay.)

Guest • December 18th, 2008 at 8:01 pm

So the Two party system keeps living up to its lies and betrayals, wow go figure. You don’t get what you think you voted for every time, term after term I am always amazed that people fall for the two party system every time. Now you know why the economy is in the shape it’s in, it’s not the president or either party it’s both, their one in the same. Republicans or Democrats hum let’s see. How do they continue to pull this off? Consider voting for a third party, what do you really have to lose.

Guest • December 18th, 2008 at 8:07 pm

How about words to the effect: I cannot tell the Federal Reserve what to do. They are an independent agency.Very disappointing. So maybe Ron Paul is correct again. Obama was groomed by the elites and he is now ready to protect them.

Hayes • December 18th, 2008 at 8:13 pm

In reading your post it occurred to me that for holiday reading, a small book titled “The Structure of Scientific Revolutions” (T. Kuhn) might be an appropriate selection. The author coined and defined the (much abused) term “paradigm shift” and I believe it helps to define the place in which we currently find ourselves.

Gloomy • December 18th, 2008 at 8:15 pm

This is the big question. Is Schilling correct and the dollar will be strong for the forseeable future or has he underestimated Bernanke who will kick up the printing presses an order of magnitude and blow out the doors, destroying the dollar in the process (as James Grant, Faber and others predict). Frankly I am scared to death about the latter scenario. I’m keeping most of my money in short term treasuries and SPX put leaps, with about 10% in gold and 5% in far out of the money leap calls on GDX. Still I don’t know if I’m really prepared…

Guest • December 18th, 2008 at 8:17 pm

2c,.first, i thought the original statement by @a was insightful and reminiscent of something else and the mathematical expression of “opacity”. too many unknowns to constitute a relationship. second, i thought your response was not only humorous but perhaps a bridge for further legitimate inquiry. not being schooled in theoretic or “conceptual” mathematics myself, i was wondering if, possibly, some form of abstraction could be employed here, in an interesting if not necessarily functional way..i confess. i made a certain attempt at humor by loading the negatives to the left side of my ridiculousinequality. like the real world? sometimes i am not as funny as i would like to believe. many people have pointed this out to me in the past and i should know better..what i can’t get out of my head is the concept of asymptotic freedom. you may recall? freedom of “motion”at proximity resulting in a function “(mass)” and the inverse at a distance and the suspicion that this relates to markets in a way that should be compared and contrasted from a economic and “physics” perspective..that is that.ps. i enjoy, and attempt to learn from, your posts. keep it going…..so, you did’t think my comment was funny? i thought it was?

Wolf in the Wilds • December 18th, 2008 at 8:20 pm

OR,Totally agree with you. What I fear more is that he has not taken into account the status of the USD as the reserve currency. This fatal exclusion in his theories may doom the world to something far worse than a recession and a depression.The world is poised for the next major crisis, one that would make the credit crisis last year look like walk in the park.And yes I am afraid, very very afraid.

Octavio Richetta • December 18th, 2008 at 8:33 pm

Foreign donors to Clinton charity could prompt Hillary debatehttp://www.guardian.co.uk/world/2008/dec/19/hillary-clinton-charitable-fund-donationsBy far the biggest donor to the William J Clinton Foundation was Saudi Arabia, which gave a a total of $41m (£27m). Bill and Hillary’s good relations with prominent Israeli politicians may defuse the political controversy aroused by Saudi backing, but Pakistani perceptions the US foreign policy establishment is biased towards India are likely to be fuelled by the publication yesterday of the donor list, under a deal agreed with Barack Obama’s incoming administration as a precondition for Senator Clinton’s nomination.So any US president/or powerful politician can start one of these foundations and give herself a salary for managing it?What a mess:-) Me says Hillary is out of a job:-)

Guest • December 18th, 2008 at 8:37 pm

Instead of lowering the interest rates would it not be better to try to force the banks to lend out the money they have? Or if the government nationalizes the banks then they can do so even easier;-) I know this sounds idiotic (as e-z lending is what got us into this situation in the first place) but isn’t ‘more lending’ what the government is hoping with the rate cuts? Or is there some other expected benefit from the rate cut?

Octavio Richetta • December 18th, 2008 at 8:37 pm

A Troubled Asset Becomes a Year-End Bonushttp://www.nytimes.com/2008/12/19/business/worldbusiness/19bonus.html?ref=businessThe bank’s shareholders have already felt the pain from much of the assets that will be put in the vehicle. Credit Suisse has been among the most aggressive in its write-downs. The assets in the new vehicle are already marked at 65 cents on the dollar, on average. That means if the assets recover, the bank’s employees — not shareholders — will be the ones to benefit.Why don’t they get it at par?

Octavio Richetta • December 18th, 2008 at 8:46 pm

DECEMBER 19, 2008 Fairfield Extended Madoff’s ReachInvestment Fund’s Marketing Effort Helped to Raise Billions for Money Managerhttp://online.wsj.com/article/SB122964625164020213.html?mod=testModOuch!“[Fairfield Greenwich Group's] deep, ongoing joint venture relationships with its managers greatly facilitate communication and a continuing dialogue with managers. … Independent information sources aid FGG’s review of portfolios down to the individual security level.”Fairfield Greenwich marketing document, 2006

Octavio Richetta • December 18th, 2008 at 8:48 pm

My dad who only made it to fifth grade always told me: “Son, paper can stand whatever you write on it”

Guest • December 18th, 2008 at 8:50 pm

And, now, even cash in CDs is risky: hold it long enough and it turns right back into the thin air from whence it came. Frankly, I would like to see some “stag-deflation,” but I’m having a hard time finding any. I looked for it on my heating bill, but it was not there; on my drug prescription insurance, but that bill just IN-flated to double last year’s size (due to “increased costs,” they said); I looked for it on my car repair bill but my cheerful car dealer must be planning a trip to Dubai; and, now, after opening today’s mail, I know why my dentist’s gold teeth were all flashing in a wide smile when he found that crack in my capped molar. And I don’t know what we ate for Thanksgiving, but from the grocery bill, they must have mistaken that range turkey for a prime rib cow.Well, I could go on, because I know Dr. Roubini sees stag-deflation everywhere, but, honestly, that sucker has escaped me. I did buy a pair of marked down shoes at a discount warehouse sale just so to see a real, live stag-deflation, but when I peeked under the mark-down label for a glimpse of that critter, dang! if someone hadn’t marked up the “original” price so they could “deflate” it. I call that an imposter.Since I’m not sure I’d know a “stag-deflation” if I ever saw one, if any of you get any sightings of one galloping by, pass it on, will ‘ya?

Octavio Richetta • December 18th, 2008 at 8:59 pm

http://online.wsj.com/article/SB122955255403315677.htmlDECEMBER 18, 2008How Cheap Is Too Cheap? Take the Mourning TestLast week, I wrote a column about Christmas spending. I had frugal Christmases as a child and expected to continue doing so when I got married. That has sometimes caused friction with my wife, Clarissa, who sees Christmas as a time of joyous generosity and doesn’t fret about spending too much.The column prompted several memorable emails from readers. Some liked the column, saying it conjured up memories of their own frugal childhood Christmases. But one reader in particular took me to task for, basically, being so cheap.”Do you have a hobby?” she wrote. “Do you ever buy your wife nice jewelry or expensive perfume? Did you ever take the family on a great vacation where the experience played a larger part than the cost? Any one of us could drop dead tomorrow — please don’t have your family be sorry that you never enjoyed life and perhaps breathe a small sigh of relief that they now will.”This may be a tad harsh. But it’s a good letter, and the reader raises some valid points.When I decided to write this column earlier this year, I chose to focus on a single aspect of my personality and its effect on my life. Am I cheap? Yep. Am I capable of acts of generosity?Well, yeah. I could write about the time I spent $400 to give an amber necklace to Clarissa in the early 1990s when that was big money to us. I also sprang for a trip to London with Clarissa several years ago. We saved money by staying with friends. But we still managed to spend $3,000 on plane tickets, and meals, and a two-day trip to Bath because Clarissa loves Jane Austen.And I started bird watching three years ago and spent $1,000 on a pair of $1,800 Swarovski binoculars after a friend offered me a deal. But I sometimes feel embarrassed when I hang them around my neck because I’m not a remotely good enough birder to merit such an extravagance.If the question is whether I ever completely forget about money and just do whatever the heck I feel like — no matter the cost — the answer, I’m afraid, is no.We’ve raised three kids on one salary, and it seemed wrong to me to spend money we don’t have. On top of that, I hate waste. And paying too much for something makes me a little ill.Being cheap isn’t always a virtue. My family can tell you stories of the times I’ve bought bargain steaks at the supermarket that were so tough they were almost inedible. Or when I cast a pall on some outing by fretting about how to do it on the cheap.Is it close to the point where they won’t mourn my death? I sure hope not.So I put the question to our 17-year-old, Brendon, as he sat hunched over the breakfast table, shoveling scrambled eggs into this mouth. “A reader thinks I’m so cheap you’ll breathe a sigh of relief when I die,” I said. “That right?”Brendon paused for a second. “It depends how much money you have,” he said. He resumed shoveling eggs.OK, he’s a wise guy like his father. He didn’t really mean it.But has being tight with a dollar gotten in the way of my enjoying life? Yes, there have been times. But to be perfectly frank, most of the things I enjoy most in life — reading, writing, hiking, spending time with friends and family — aren’t horribly expensive. I actually get paid to write. So I feel fortunate, not deprived.I also know that we live in a society that has lived beyond its means. Much of the wealth around us was created by a huge increase in debt. Now, with the economy shrinking and credit tightening, much of that debt is going to disappear. Like it or not, America may once again become a place where people watch every penny.The trick will be curbing our spending without making life miserable. I draw one line. Readers may draw another.Write to Neal Templin at neal.templin@wsj.com

redleg • December 18th, 2008 at 9:05 pm

My own graduate study is in disaster response. It is fascinating to see how response to all kinds of disasters have common denominators. In physical disasters, one is response vs. rehearsal. It doesn’t matter what disaster actually happens (terrorist attack, bridge failure, tornado, etc), the response will effective if there has been any recent rehearsal to any disaster scenario. It looks like, IMO, that tabletop exercises were not taken very seriously by the Federal Government nor their central banking system.

Hayes • December 18th, 2008 at 9:18 pm

that was always the plan – O is one smart dude (as was Machiavelli)as for your own foundation – great work if you can get it – the ticket to a tax free jet set lifestyle -

redleg • December 18th, 2008 at 9:19 pm

A deceptively easy answer is taxes. Infrastructure is usually public, so it is funded at least in part by tax revenue. When a public agency faces a budget crisis, one easy fix is to cut the capital improvement budget, so projects get put on the back burner or are canceled. Have enough budget crises in succession, and the maintenance budget gets cut. Before you know it, you have crumbling, over- capacity infrastructure without funds to improve it.Adding a level of detail, its inevitable to have everything crumble at once since infrastructure (even if maintained) has a life span. When you build projects at the same time (1930′s water, sewer, and power; 1950′s roads and bridges), they will wear out at the same time. Water & Sewer = 75-100 years, transportation = 50-75 years – guess what! These general systems are wearing out at almost the same time! I see a boom for engineers in the near future, lasting for essentially a career…Read:The Price of Government by Osborne and Hutchinson

TA • December 18th, 2008 at 9:20 pm

David,IMHO, reduced mortgage payments via lower rates aren’t a solution because affordability isn’t the issue. It’s over under homeowners (negative equity) and lenders resistant to accepting short sales’ losses that have created our current dysfunctional real estate market. Although lower payments may forestall rising foreclosures, for all intent and purpose its status quo until mortgage balances are reduced via permanent principal write offs.

Hayes • December 18th, 2008 at 9:28 pm

GM, Chrysler May Get U.S. Loans to Survive to MarchDec. 19 (Bloomberg) — General Motors Corp. and Chrysler LLC would get U.S. loans to stay afloat until March under a Bush administration rescue plan that may be unveiled as soon as today, people familiar with the talks said.http://www.bloomberg.com/apps/news?pid=20601087&sid=aGHdHOHwvZWoInteresting that the market started to finally sell the Autos off today with the whisper that it would be a form of bankruptcy — So tomorrow before the open – back up they will go… nice how that works

Guest • December 18th, 2008 at 9:33 pm

Perhaps AEP is just having twinges from palsy. I’m cheering for the Germans and the breakdown of evil USA hegemony for universal rule under the thumb of a financial plutocracy — which, incidentally, has no loyalty to America or its flag. Europe – particularly Eastern Europe — has suffered enough this past century under the moral treatment of the good ol’ USA. The late, great Aleksandr Solzhenitsyn, who was passionately committed to freedom and paid the price under FDR’s “Uncle Joe,” lived by the old Russian proverb that became his creed: “One word of truth shall outweigh the whole world.”Let Ambrose Evans-Pritchard and Krugman and America’s controlled media lambaste and demonize and throw falsehoods like “boneheadedness” at Germany: it’s falling on deaf ears. Most Americans have a liking for the German people and are not as easily taken in by hate hype as they once were. If Krugman’s economic cadre is experiencing “damage,” it probably is good news for the rest of us.

Octavio Richetta • December 18th, 2008 at 9:37 pm

Gloomy,Sit tight. Trying to do something to protect yourself beyond what you already have will actually make you loose $$$.We all read too much stuff in the Internet. We need to ignore the day-to-day noise which I believe you do pretty well.Me, I will embrace the New Year in cash and CDs unless some fantastic opportunity develops. In the mean time I am trying to develop a big picture of what may work in 2009. If my 2009 return is half of what I got in 2008 I will be a happy camper:-)BTW, I almost subscribed to James Grant letter today but after reading the two sample letters in his website, I gave it a pass. His writing, and thus thinking, didn’t impress me at all. This is a guy who was bullish on AIG in May 2008, and still considered it a speculative bet in July!BTW, your leap strategy is a good one. Somewhere I read taking a certain small fraction of your portfolio and making a bet on something that may give you a big payoff is a good strategy.I don’t trade options but I am seriously considering getting my brokerage account approved for options trading to perhaps buy things like some leaps on gold and oil related etfs, the stocks and the commodities themselves. It is the kind of thing you will be happy if they expire worthless. Call it portfolio insurance.And, BTW, Grant, Faber, and most other fear-mongering talking heads cannot compare to Shilling in terms of economics skills. Shilling may be off in his timing of markets but he gets the economics early but right.

Octavio Richetta • December 18th, 2008 at 9:44 pm

I smell the beginning of the disintegration of the European monetary union, i.e., the Euro. Also, the beginning of actions that will boil down to trade protectionism even if for good intentions. Is it really wrong to demand that workers making goods imported into the US get some fraction of the benefits US workers making these goods in the US get?

Octavio Richetta • December 18th, 2008 at 9:48 pm

Perhaps the Professor can tell us why it would not be a good idea to really go green by slamming a $2.50/gallon gas tax now that the price of oil has come down. That would keep the price of oil in check, help reduce our deficit, and may other wondeful things. I know the economy is in very bad shape but is this the main argument against such tax?

Average Jane • December 18th, 2008 at 9:52 pm

Pablum for the sheeple. Woo-hoo! With mortgage rates in the basement, this means I can afford to buy three times the house I can actually afford to buy! Yay!

David in Seattle • December 18th, 2008 at 10:07 pm

Nice article on Madoff scandal..one of the best I have read.Bernard Madoff: How to Create your own Ponzi Scheme: Consumer Psychology, Behavioral Economics, and Believing in the Free Lunch.The rise and fall of Bernard Madoff is a tipping point for the current market. The market may be captivated next week with the automaker bailout but make no mistake, this will turn out to be a big case rivaling anything we have seen in this current climate. Why? Madoff actually admitted to the existence of fight club. The first rule of investing fight club is to deny its existence. He not only broke this rule but flatly stated that his investment strategy was nothing more than a Ponzi scheme. This case will be important because so far, all we have had is a theatre of bread and circus from our politicians giving lip service to CEOs only to let them go off after a verbal lashing to collect their million dollar golden parachutes.This case has the potential to cement a generation of distrust. Here you have a market maker and former chairman of the Nasdaq. A market maker is essentially a firm that both quotes a buy and sell price. The profit is made on the turn which is the spread. Now this of course requires at least some integrity but here you have a huckster making it to the top at one of the “big 3″ markets in the U.S.; the Dow, Nasdaq, and S & P 500.How big is this? The Enron scandal, one of the biggest of the decade destroyed more than $60 billion of shareholder value. Enron at its peak in 2000 had about 22,000 employees. We already know that Madoff has put up to $50 billion at risk. And from all reports we are now getting, it appears most of it was done with his own hands! It is absolutely stunning. Yet what is equally stunning is how complicit people were to believe his strategy. Welcome to mania, a part of consumer psychology where people want to believe in fairy tales and easy street. As the days go on, more and more reports are coming out with early warning signs being issued yet no one in any enforceable arm of the government wanted to act.It is important to understand a bit of Madoff’s history to gain a bigger perspective of one of the biggest swindles of our time. Madoff was the chairman of Bernard Madoff Investment Securities which he founded in 1960. His firm was one of the top market makers especially in the Nasdaq. Madoff was born in New York in 1938 during the end point of the Great Depression. He has homes in Palm Beach, France, Roslyn New York, and an apartment on Manhattan’s Upper East side with a street value of $5 million. Not to be out done, he has a 55-foot fishing boat with the aptly put name of “Bull.” I think he forgot the last name of the boat that goes very nicely after bull.Madoff tapped into the elite social circles of the east coast. Most of his clientele grew from word of mouth. He had consistent returns although most of his investors had little idea how he was able to yield such consistent returns. I would imagine many didn’t care so long as the money came in. How can they know? It was a Ponzi scheme. Many knew that something was amiss. He either had inside information (illegal) or had some other connections to gain the upper hand for his investors. Instead, we now find out that he was basically stealing from Peter to pay Paul.Many of his investors trusted him to the point where the New York Times had an anonymous quote from a hedge fund executive who nicknamed him the Jewish T-Bill. I’m not sure you want to use that nickname anymore given that some T-Bills are returning zero percent.The criminal complaint filed against Madoff alleges that investors lost $50 billion because of the scheme. That is right. $50 billion. He now faces 20 years in prison and a fine of $5 million if convicted. Madoff did something different. You mean run a $50 billion Ponzi operation? Nope. He confessed. According to the S.E.C. Madoff told the F.B.I. agent that there was “no innocent explanation” for his behavior and here is the kicker, that he “paid investors with money that wasn’t there.” This is the reason this story will gain traction. Not only is it the biggest swindle in U.S. history if things play out like they are going but it will also be the first major player simply admitting criminal activity. The public wants justice and we now start down the painful road of discovering what really went on in the cellar.Why will this have such a big impact? Because on a macro level, collectively the public has been yearning for someone to simply admit to what is going on. We all know that each time some crony capitalist from the big Wall Street firms makes his way to Congress, all we are going to see is some Kabuki theatre. They’ll get nicely dressed up and entertain us for a few hours and then that is it. No one admits any guilt or responsibility. They get a verbal lashing and that is the extent of the punishment. The American public needs some representatives with a stronger spine. With Mr. Madoff, we have our first opportunity for a cathartic societal release of pent up retribution. Make no mistake, this is only the first of many. There is never just one roach.So what is a Ponzi scheme? Named after the lovable Charles Ponzi, it is a fraudulent investment that pays a very high return to investors out of money paid in by subsequent investors. There are no true net revenues or money generated from a legitimate business. Sort of like injecting more and more into banks pretending they actually have valuable assets on their books. Charles Ponzi, went from a nobody to a Boston millionaire in six months in 1920 promising returns of 50% in 45 days in an international postal reply coupon scheme. Approximately 40,000 people jumped on the bandwagon with a total of $15 million. When it collapsed as all Ponzi schemes do, only a third was recovered. He went to jail but got out in time to gamble again in the middle 1920s Florida real estate speculation bubble. Went to jail again and was deported to die broke in Italy.What Madoff did isn’t new. In fact, if you remember the 1920s was a roaring time. People want to believe in the free lunch and that they somehow have privy knowledge that no one else can obtain. The power of Ponzi schemes is they suck in even “bright” people. Think of going to a casino. You sit at a slot machine. You put in a quarter and right off the bat, you win $200. You put in another quarter. Bam! Another $200. Another quarter and a $300 win this time. After a few times, you are conditioned to believe that somehow this machine is lucky or you have some secret skill. You then decide that you are going to put all your winnings in the machine for one max payout play. The machine doesn’t pay out. Game over.I’ll leave you with this great summary from John Kenneth Galbraith that sums up the stage of the collapse we are in:“In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s businesses and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.…Just as the boom accelerated the rate of growth, so the crash enormously advanced the rate of discovery. Within a few days, something close to universal trust turned into something akin to universal suspicion. Audits were ordered. Strained or preoccupied behavior was noticed. Most important, the collapse in stock values made irredeemable the position of the employee who had embezzled to play the market. He now confessed.”Human behavior rarely changes. The crash of 2008 will force many people to reveal their losses. We will be “shocked” at what we find. I am still stunned by crony capitalist calling for a freeze to mark-to-market accounting hoping their nepotism can continue. They want to keep their corrupt internal system hidden. They would like us to believe Madoff was an exceptional case but he is simply the tip of the iceberg. The secret of fight club is now out.

2cents • December 18th, 2008 at 10:26 pm

@ORI think this guy has lived within his “envelope” so to speak and certainly feels that he has taken a tighter and more sacrificial stance toward life. Unfortunately, I think he may have squandered his chance at any fun, because he is just the type of guy who will be called upon to bare the burden of getting us out of this mess. How quaint!

curiousgeorge • December 18th, 2008 at 11:09 pm

To the point of who will buy our Treasuries….I have a theory with a slight twist…maybe the purchaser’s will not be the Asian economies as they proved unreliable when it came time to allow their currencies to appreciate. Maybe the new purchaser’s will in fact be the American taxpayer. I base my theory on the following:1) An out of session congressional hearing was held in October to address our long term liabilities for social security since it will be insolvent sooner than expected. One well received solution was to “nationalize” 401k and pension plans into GRA’s (Guaranteed Retirement Accounts). The GRA’s would purchase government bonds which would pay a 3% yield. Participation would be a mandatory 5% of income earned with 2.5% being contributed by the employee, and 2.5% by the employer. The GRA would supplement social security and unlike 401k and pension plans survivor benefits are reduced by the following: surviving spouse can only receive 50% of plan less payments made by spouse, and you must accept reduced benefit if you elect survivor benefit. This effectively could provide the government with a 50% windfall from the pensions/401k plans (a windfall that normally would have went to your heirs.) Supposedly the intro of a GRA would create “shared prosperity” by eliminating the $80 billion in tax benefits that go only to the top 6% of the populace anyway.2) The Fed’s rate for LT treasuries is 3%.3) Currently news is flooding the airwaves about all of the pension plans that are not funded, and will ultimately need to be bailed out by the government due to the financial crisis.4) Congress just suspended the funding requirements passed into law in 2006 for pensions, due to the unnecessary hardship it would place on employers to fund the accounts. Also, workers do not have to make withdrawals by age 70.5) Many companies over the last 3 months have suspended the 401k matches, and pension contributions for 2008 and beyond.6) Some of the most underfunded pension plans were by held by some of the most profitable businesses…i.e. Exxon Mobile. The government pension fund is only 62% funded.If the such legislation was passed the U.S. taxpayer, in effect, could purchase the toxic assets that have been placed on the balance sheets of the Federal Reserve via their GRA accounts. Future purchases of Treasuries could be meeted out on a monthly basis as needed to finance our debt and meet the federal funds target rate of 3% – until the funds run out…yeah the GRA would be set up just like the social security trust – which basically means once the funds are gone, the government has no obligation to pay the contributors. The bankers who participated in this “great moderation” would be made whole, and the taxpayer would be paying for their debt excesses via their GRA contributions. It sounds good, if you are a bank or central bank.

Rickk • December 18th, 2008 at 11:34 pm

I took a similar defensive position with my retirement savings a year-ago. I agree there are other economic “Black Swans” on the horizon, such as climate change. We can’t change the events that are about the unfold, but we can change our response to them, like learning to hunker-down financially. I’m no rocket-scientist, but if you have some risk capital, a bear-market ETF would be another option.

Guest • December 18th, 2008 at 11:46 pm

Never underestimate the power of the American people: if they ever are really roused they are powerful and can mow down Congress, and the President, and anything else that gets in their way.Which is just to say, be very cautious, Cahill. The American government won’t get away with nationalizing 401(k)s. It tried to privatize Social Security so as to put that money into Wall Street’s manipulative hands, but the people reared up so fast that Bush dropped it like a scared rabbit. The American people are slow to anger, and slow to move, but they aren’t “slow” mentally, as so many would have you believe. Almost all of them act in their own best interest. And when it comes to self-interest they seem to be awfully quick — watch how the welfare queens vote with exact precision for the welfare providers. I don’t know the rules governing your 401(k) plan, but if you’re good at guessing the stock market, you could roll your money into a money market and buy equities when the market goes lower — IF it goes lower. On the other hand, you could hold onto your equities until the market’s back and play the future prudently by investing a portion of your 401K each month into the S&P 500 Index. I’m the last to know. But I know enough to tell you to be very careful: I lost all I had once because I tried to do what I thought was necessary — on professional advice — to protect my stash against inflation. I took the advice of a seasoned broker in one of the big investment houses, asking him only to invest prudently, i.e., geared toward safety rather than big returns. Practically speaking, he lost it all.It is also said that many of those who were invested in good companies during the Great Depression did not lose their money in the long run if they held on through the depression. The secret, of course, is knowing which companies are sound.I am so battle-damaged from the markets, including gold, I’ve tended to stay in CDs for a long while now — and, of course, I’m under water there – about 26% — because of inflation. But I haven’t lost the bulk of the principal. I’m only posting here to advise extreme caution. Investing anything you can’t afford to lose under the current rigged system, IMO, is like walking unarmed over a mined battlefield in the crosshairs of a sniper rifle. You’re lucky to come out unscathed. Good luck!

David in Seattle • December 18th, 2008 at 11:51 pm

… and the global madness to prop up asset prices continues.Japan’s government said Thursday it is submitting a bill to parliament allowing for the purchase of 20 trillion yen ($227 billion) in stock to help stabilize the Japanese stock market, Kyodo news reported. Under the bill, the Banks’ Shareholding Acquisition Corporation, originally created in January 2002, would resume buying shares from banks and other entities, the Japanese news agency reported. The bill would be introduced early next month “with an eye to implementing the measure by the end of March,” the report quoted lawmakers as saying. The Liberal Democratic Party had intially considered just 10 trillion in stock purchases, but the size was roughly doubled to 20 trillion yen at the request of its ruling coalition partner, the New Komeito party, the report said.http://tinyurl.com/4hezbv

Wolf in the Wilds • December 18th, 2008 at 11:56 pm

Ahh, but Pete, this just means the crisis will morph, into something a hell of a lot scarier. Every economic analysis of main stream economics assumes the USD continues to be the reserve currency. By printing money, that assumption must be dumped. The ramifications of that is quite simple: the US as a country, will be totally and utterly broke. The only card it has left is the military one. Lets see if I am right.

Guest • December 19th, 2008 at 12:19 am

The way retired Professor of Finance Michael S. Rozeff sees it:1) The best way to have adjusted in 2008 was not chosen by our officials. That way was bankruptcy and re-organization in the economy. It would have been painful, but it would have led to a better-founded, more free, and healthier natural economy. The government–Fed way risks a breakdown of the economic and political system in a host of ways, leading to virtual dictatorship, economic controls, inflation, and slow growth.2) In the past, these government-engineered revivals have not really worked. Just the opposite, as is happening now with the economy sinking into depression. FDR’s New Deal didn’t work. The Japanese government and central bank have failed to revive the Japanese economy since 1989, for almost 20 years. Their stock market (Nikkei 225) is 8,667 now. The peak in 1989 was 38,916. If the S & P 500 falls by the same percentage, it will fall from a peak of 1,562.47 to 348. It is now 904. Companies can’t make profits in these sick economies. Growth grinds to a halt.3) The Japanese short-term government bonds have yielded near 0 percent for a long time. People borrow them and sell them short. They invest the proceeds in other higher-yielding government bonds, driving down their yields. This makes corporate securities look attractive, so people buy them. We then get over-investment in long-term projects that have very low returns.4) Public works projects are a loser. They are low-return projects. The people working construction make money for a while, while the rest of us lose. The actual welfare of all of the people does not improve even if the GDP holds on or grows a little. Government spending that is included in GDP doesn’t add to the well being of most of us. The actual well being of people is what counts, not GDP growth, not how many pyramids we build in order to keep people “working.”

OR • December 19th, 2008 at 12:41 am

There will be plenty of “stuff” for future PhDs to write dissertations on what will really work if Benny’s copter crashes.

Cahill • December 19th, 2008 at 12:46 am

It’s very much appreciated. That was just a thought I was having last night. It’s all so overwhelming at this point. I hope you have some better luck out there. Right now I’m almost all in cash & money markets in my IRA, with just a few equities that are very long term holds.

Octavio Richetta • December 19th, 2008 at 12:49 am

Good point. I read all the comments on the article and they were incredibly good. I think you can be smart about money without overdoing it. There was a comment on some-one’s rich father in-law spending thousands of USDs on a Hawaiian vacation and then wasting precious hours of vacation time by bargaining for a couple of hours on bike rentals in the order of 20 bucks each.Also, being frugal and being cheap are not the same thing. There was a comment on someone cheating waitresses out of a fair tip. Now, that is cheap not frugal:-)

Anonymous • December 19th, 2008 at 2:02 am

Half of the Professors words lately are claiming credit for what he predicted….ego tripping. Sure, you were right. But, give it a rest…

David in Seattle • December 19th, 2008 at 2:13 am

Excellent video interview with Marc Faber. He also says that if he had been Bernanke’s adviser bank in college, he would have not let Bernanke get his Ph.D., and he would have further advised him not to join a central bank.http://tinyurl.com/4l5n55

PeterJB • December 19th, 2008 at 2:31 am

Hmmmm – as much as I respect Marc Faber, I think Ben Benanke is a perfect central bank – he’s just not an economist- then you aren’t if you are a central banker.And I like the way he follows Paulson around like a puppy; it’s cute.But, I take Marc Faber’s point, ;-) Ho hum

C. Dispinar • December 19th, 2008 at 3:27 am

Structural rigidities of EurozoneDear Professor, I dig your weblog. I do like to read your comments and analysis very much. But for the first time I m surprised of your hint “the structural rigidities of Eurozone (labor markets in particular)”. This is indeed an argument of the ECB. But it is not correct. As you know the job market traces the economic growth. Not vice versa. The slowdown in Eurozone has nothing to do with “structural rigidities”, in my view. The source of the current distress is the contractive (economic) policy of the EU. Best regards from Zurich.C. Dispinar

Little Saver • December 19th, 2008 at 4:23 am

It can be seen as proof of having been right in unsuspected times. Something other economic advisors, especially those in high positions, can’t say. Seen that way, it’s useful information when repeating earlier predictions. For my part, I find this kind of information useful.

Little Saver • December 19th, 2008 at 4:34 am

>he was basically stealing from Peter to pay Paul<>a hedge fund executive who nicknamed him the Jewish T-Bill<Says something about current T-Bills: stealing from taxpayers to pay Wall Street and other clowns.Free markets? Not if freedom is given to criminals.

Octavio Richetta • December 19th, 2008 at 5:23 am

Even as a lad I always got my own meanings out of such facts as I observed. It is theonly way in which the meaning reaches me. I cannot get out of facts what somebodytells me to get. They are my facts, don’t you see? If I believe some thing you can be sureit is because I simply must. When I am long of stocks it is because my reading ofconditions has made me bullish. But you find many people, reputed to be intelligent,who are bullish because they have stocks. I do not allow my possessions or myprepossessions either to do any thinking for me. That is why I repeat that I never arguewith the tape. To be angry at the market because it unexpectedly or even illogically goesagainst you is like getting mad at your lungs because you have pneumonia.

Guest • December 19th, 2008 at 5:39 am

WWII spending and deficits only resulted in reinflating the dollar to mid-1920s levels, a long overdue correction to depression deflation. If only Hoover had adopted such a policy early on, or FDR had been even more aggressive in reinflation policies which had some success 1933-1937, much of the pain could have been averted. The recession of 1937-1938 came after a premature return to a balanced budget, corrected in 1939 and beyond.

Guest • December 19th, 2008 at 5:45 am

In 1930, Prof. Irving Fisher of Yale wrote about your Hooveresque prescription:”To take another simile, such a disaster is somewhat like the “capsizing’ of a ship which, after being tipped beyond a certain angle, has no longer this tendency to return to equilibrium, but, instead, a tendency to depart further from it… Unless some counteracting cause comes along to prevent the fall in price level, such a depression as that of 1929-33 (namely when the more debtors pay the more they owe) tends to continue, going deeper, in a vicious spiral, for many years. There is then no tendency of the boat to stop tipping until it has capsized. Ultimately, of course, but only after almost universal bankruptcy, the indebtedness must cease to grow greater and begin to grow less. Then comes recovery and a tendency for a new boom-depression sequence. This is the so-called ‘natural’ way out of a depression, via needless and cruel bankruptcy, unemployment and starvation.”His alternative was to reinflate the currency through loose fiscal policy.

RanMan (Randy) • December 19th, 2008 at 5:50 am

AJ:nice comment, “pabblum for the sheeple”. I have a question. I currently have a 6.5% fixed rate mortgage on my home which is at 55% LTV. I’m getting calls from lenders wanting me to refi. I’ve told ‘em if rates go to 4.5% fixed, let me know and I’ll lock in. This will save me quite a bit per month.Should I do it? is there something I’m missing? I’m a little paranoid of the mortgage industry right now. Your thoughts would be appreciated.

Gloomy • December 19th, 2008 at 6:32 am

Your approach is sensible and I agree Shilling is superb. There are of course 2 larger questions here. Does the Fed have the power to cause inflation in this economic situation? If so, will they use it? I don’t think anyone can know the answer to these questions yet in part because they are political in nature. Personally, I am taking no chances.

Lord Sidcup • December 19th, 2008 at 6:42 am

“Public works projects are a loser. They are low-return projects. The people working construction make money for a while, while the rest of us lose.”The rest of us lose? The rest of us that doesn’t use infrastructure?The ones the dont need roads to drive cars on. And flush their toilets without using water?

Hayes • December 19th, 2008 at 7:09 am

How could Madoff have done his deal without the knowledge of both regulatory authorities and other financial institutions? Could Lehman have been covering for him? Are others still covering for him? His “suite” heart bail deal makes one wonder, what could have motivated that?

Hayes • December 19th, 2008 at 7:12 am

Bush to make Auto announcement at 9am — nice that they spent the last 3 days talking pre-packaged bankruptcy to drive the share prices down.

Guest • December 19th, 2008 at 7:25 am

And the S&P just made a nice move up at 8:05; gee, do you think they already know what Bush is gonna say at 9:00 am?!

MM CA • December 19th, 2008 at 7:49 am

Hanky is the interim Car Czar – you have got to be kidding…. I’m sure goldman will end up invloved…

Anonymous • December 19th, 2008 at 8:00 am

Hi,Does anyone have a comment (or knowledge) on recent contango in oil? February futures are app. 20 percent higher than spot prices? I’ve read that big oil companies are storing crude in very big ships instead of selling them on the spot market, thus the difference…But it seems a very dangerous game to me as, if the spot prices do not move up following the futures, the buyers (sharing the same hope with the oil companies) in the futures market will be burned very badly.I can hardly resist going short on oil, (20 percent loss is already covered). the only thing that keeps me is that those big players do know something that I do not know, or the market can continue to be irrational more than i can stay liquid..Any opinions?ITMgr From Turkey

Octavio Richetta • December 19th, 2008 at 8:03 am

To Da man asking how to short long Ts above: If you like thrills try TBT/PST. TBT is best: higher volume and longer maturity makes it more sensitive to changes in rates.http://www.proshares.com/funds/tbt.htmlhttp://media.proshares.com/documents/ProSharesProspectus.pdfhttp://etffundinvesting.com/Rule of thumb, the price change in a bond is approx equal to: (-yield change) x maturity. So if the 10 year bond moves from 2% to 3% the price goes down about 10%. So if TBT has an average maturity of 25 years, then since it is a 2x etf. if the 30 year bond goes down 1% in yield (e.g., from 4% to 3%) then, TBT goes down 25x1x2=50%! Have a look at the 10 year T index vs tbt in the last month. long Ts have been very volatile in the past which is good if you want to trade them.I used to buy stripped Ts when the 10 yr bond yielded close to 4% and sold them when the yield approached 3%. Made nice money that way but of course missed the latest run. I would expect the volatility to continue despite Benny’s intentions which probably means buying a bit of TBT may be fun:-)http://finance.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chdet=1229690841359&chddm=25415&cmpto=TSE:TNX&cmptzos=-18000&q=NYSE:TBT&ntsp=0

MM CA • December 19th, 2008 at 8:04 am

I can spell “I don’t need a car any time soon” and niether do many other people… there is no demand and that cant be be fixed until they address all other economic problems and issues…

Hayes • December 19th, 2008 at 8:18 am

but it feels good knowing that the tax dollars of a person with no health care or pension are going to support those who have both – and the folks at Cerberus will now have a happy holiday yachting in the Caribbean or perhaps skiing at Jackson Hole. (or both depending on who has first dibs on the G-V)

Guest • December 19th, 2008 at 8:19 am

Let’s see, congress would not approve the Auto bailout bill, so W says he can use the funds that congress has already approved for another purpose. Brilliant! Madoff must have been his advisor on this! Why not use funds from the war in Iraq?

David in Seattle • December 19th, 2008 at 8:39 am

DOW up 113 points right out of the shoot after the Bush announcement. Gee, how many more 9:00 AM “feel good” announcements are we going to have to prop up the markets before they open?Insiders are having a great day. I’s very profitable to be corrupt.

MM CA • December 19th, 2008 at 8:39 am

GE, Citi, Wells and BOA are all in trouble- look at thier balanace sheets… so the ? is which one becomes the next AIG or fails?

Hayes • December 19th, 2008 at 8:43 am

explains why Hank needs the next installment of the TARP – notwithstanding quadwitching today – I think this market could roll over today -

aerial view • December 19th, 2008 at 8:48 am

I do know that BOA has a huge default rate on all the HELOCs they encouraged people to take out and they are demanding very strict terms for repayments (most lenders in 2nd position on a short sale will accept several thousand dollars to sign off whereas BOA will redo an appraisal, ask for a minimum of 10% and an agreement to pay the remainder over new terms which are discussed at a later time!) They have been playing GOD and nobody seems to be able to do anything about it!

irving fphelmp • December 19th, 2008 at 9:03 am

“Public works projects are a loser. They are low-return projects. The people working construction make money for a while, while the rest of us lose.”I don’t think that is true. If one were to look at the projects built during the WPA that are still in existence like the Power plants and the buildings and the parks built in the 1930′s you would see they that not only do they still function but are used daily in 2008 all over the country. I’d call that a great investment for our people. Not all public works projects have to be ‘money makers’ at the time of inception but rather over time they turn their ‘profits’. How does one measure profit for a library. Also these works provided job relief for millions.

Canadian • December 19th, 2008 at 9:04 am

Saying ‘Humans cannot affect climate’ over and over, louder and louder does not make it true. Carbon dioxide levels are now 27 percent higher than at any point in the last 650,000 years, according to research into Antarctic ice cores (Science 2 studies http://news.mongabay.com/2005/1124-climate.html#aaas )Current CO2 concentration is 384 parts per million by volume (ppmv). This is 100 ppmv (35%) above the 1832 ice core levels of 284 ppmv ( start of the Industrial Revolution). CO2 is a greenhouse gas – we are affecting the climate.The Arctic ocean will be ice free by 2014 according to latest models.

Canadian • December 19th, 2008 at 9:12 am

Sorry, above should read ‘ice Free in summer’BTW – The US geological survey has just issued a report titled ‘Abrupt Climate Change’; probably better source of information than listening to a TV weather reporter.

PeteCA • December 19th, 2008 at 9:14 am

“Insiders are having a great day. I’s very profitable to be corrupt.”While on that subject, it is very worthwhile to read the following article. Robert McHugh used to be in the banking system. Some of the comments are quite informative.Before starting, please note a couple of things …1) Robert McHugh is a strong follower of Elliot Wave theory. If you don’t beleive in this approach, skip the first 1/3 of the article, but then read the rest. Personally, I don’t use Elliot Wave concepts myself. I’m not saying that they are wrong – I just have never investigated them in depth.2. Be aware that Robert McHugh is considering seriously bad outcomes for the US economy. This is not an uplifting article if you need to cheer up today.Robert McHugh:http://www.321gold.com/editorials/taylor/taylor121808.htmlMcHugh's comments on the manipulation of the US markets seem to jive with my own experience. Since Paulson took over, it really seemed to me that the PPT became much more active in daily manipulation of the system. I noticed the same thing by watching the activities in the futures markets – there were days when the market just should have gone down and it did not. Please note McHugh’s comments about the activities of traders – the floor traders knew this, recognized it, and learned how to profit from it.PeteCA

Hayes • December 19th, 2008 at 9:15 am

Average Arctic sea ice extent for the month of November was 4.1 m sq. miles up from 3.88 m sq. miles in 2007 vs. the 4.36 m sq. mile average between 1979 and 2000.

Guest • December 19th, 2008 at 9:16 am

You are assuming that playing the big insiders in the market is played on a level playing field — it’s a bad tactical error to “never argue with the tape” for an amateur outsider, such as out-maneuvered player Number 401K, who was forced into this game as an untrained and unknowledgeable loner playing against muscled, government-backed professionals who make the rules. This game needs honest rules and an honest referee. A non-questioning, disadvantaged amateur will soon meet the fate of a mouse that ignores an awaiting cat, IMO.

Canadian • December 19th, 2008 at 9:20 am

NSIDC – The National Snow and Ice Data Center, Boulder, Coloradohttp://www.nsidc.org/arcticseaicenews/2008/040708.htmlDespite strong growth of new ice over the winter, sea ice is still in a general state of decline. The ice that grew over the past winter is relatively thin, first-year ice that is susceptible to melting away during the summer. Although natural variability in the atmospheric circulation could prevent the ice pack from breaking last year’s summer record, a closer look at sea ice conditions indicates that the September 2008 minimum extent will almost certainly be well below average.

Guest • December 19th, 2008 at 9:27 am

This market is skitzo! Yeah, good reason for a rally! Maybe CM is right, we are hell-bound for dow 10K to make folks feel good going into next year…10:24 a.m.Egan-Jones still sees eventual bankruptcy for GM

PeteCA • December 19th, 2008 at 9:32 am

Some Comments On OilLet me add a few thoughts. Some of this is pure speculation – and I freely admit it.First, it dawned on me that the oil price must move down in the immediate future – so long as the market sees a build-up in inventory in the short term. And it’s doing just that. Headed towards $30/BL.Make no mistake that these low oil prices will have serious repercussions in the global political system. Oil is not just about commodities. It’s about power politics. The fallout from these big swings in oil prices is real – and growing.Let’s also not kid ourselves that the major players (incl. trading desks at Wall St banks) stand to make a lot of money by playing these swings. They will cover their shorts when they feel they have reached the right time – maximize profits on the subsequent oil upswing.But let’s switch to the more interesting stuff.News reports indicate that the Russians recently sent a large delegation to OPEC. Very clearly, the Russians wanted a deal. And it’s pretty obvious they didn’t get what they wanted. Russia did not chip in and make a big cut to support OPEC – which is exactly what OPEC had hoped for. The Russians made some conciliatory remarks, but all the cuts they mentioned have already been made. It’s “no news” as far as the market is concerned.It’s pretty clear what OPEC wanted … Russian cooperation with a major cut in oil production. But what did the Russians want in exchange??? Well, none of us will probably ever know for certain. But very clearly the Russians were serious – and they wanted something important. So let me speculate here. It’s just guesswork – but I’ll hope that it’s an astute guess. I’d say that Putin wants the Saudi’s to agree to price oil in both dollars and roubles. That would give the Russians real pricing power in the oil markets. And apparently the Saudi’s said NO. No quid-pro-quo. So no agreement on cuts by Russia to help OPEC.And we all see the outcome. Stalemate for OPEC in the prices for oil. OPEC’s ability to move oil prices upwards has failed – for the time being. I get the sneaky suspicion that the Russians knew this was going to happen. They knew they had some leverage on this proposed deal. But it didn’t work this time. Still, the fallout in world politics is significant.Just theories.PeteCA

Hayes • December 19th, 2008 at 9:33 am

sorry to have turned this into a weather blog (I will stop) – the above article is dated – NSIDC is not without bias – but they sometimes say things that appear somewhat contradictory – from their December update:”The daily rate of ice growth has slowed simply because there is less physical room for ice to grow: the area of open water shrinks as ice fills it.” link

crgordon • December 19th, 2008 at 9:34 am

Off topic rant.It is somewhat curious that the concept of three co-equal branches of government has been abandoned without a whimper from the Legislative Branch. The Legislative Branch votes “no” and the Executive Branch says not the right answer – we will do it to save (fill in the blank) “democracy” “the economy” “the American Way” “my buddies in Haliburton” “freedom-loving peoples” etc.The wonderment of how the Nazi’s could come to rule Germany has been a mystery for me in the sense of how could a majority of smart people allow evil-doers (hat tip to W for the simple/stupid term) come to rule. And yet, the evil-doers are doing what they do best – evil – in the Executive Branch with the complicity of both of the major parties. Disgusting.

irving fphelmp • December 19th, 2008 at 9:35 am

I’ll believe the Nobel Scientists not corporate-speak CNNhttp://www.nrdc.org/globalwarming/qthinice.asp”Average temperatures in the Arctic region are rising twice as fast as they are elsewhere in the world. Arctic ice is getting thinner, melting and rupturing. For example, the largest single block of ice in the Arctic, the Ward Hunt Ice Shelf, had been around for 3,000 years before it started cracking in 2000. Within two years it had split all the way through and is now breaking into pieces.The polar ice cap as a whole is shrinking. Images from NASA satellites show that the area of permanent ice cover is contracting at a rate of 9 percent each decade. If this trend continues, summers in the Arctic could become ice-free by the end of the century.”

Guest • December 19th, 2008 at 9:35 am

McHUGH: Yes. There are no minutes to their meetings. There is no disclosure. There is no transcript. It is completely hidden. It was all circumstantial evidence. I would have e-mails from subscribers, from traders, from floor traders. The Working Group is allowed to use Goldman Sachs and a few of the other major investment banking groups to conduct their transactions for them. I had traders on the floor e-mail me saying, “our mystery buyer has ordered Goldman Sachs to buy the market.” Sure enough, it turned it on a dime and the thing flew up. It got to the point, where the traders just followed this mystery buyer operating through Goldman and so on, to make a profit. I realized that at this time, we had an intensified degree of market manipulation throughout the middle of the first decade of the 21st century. So I played around and found a proprietary indicator using data I can measure that can actually predict when it is probable, not guaranteed, but probable that government intervention into the market will occur, and approximately when it is probable that it won’t. I have been using this tool for three or four years. It’s called my plunge protection team indicator, my PPT Indicator. It has been astonishingly accurate at pin-pointing the environment and periods of time when markets are more likely to go up than go down and vice versa. Interestingly, the last six months or so, the PPT has not gotten heavily involved in jacking the markets up to the degree that I expected them too. These indicators allowed for large periods of time where markets could slide, and in fact, they did. I don’t know whether it was a change in philosophy or whether the selling pressure got so great that even the Working Group’s (a.k.a., Plunge Protection Team) efforts were starting to fail.

FAMC • December 19th, 2008 at 9:42 am

The C wave of Prechter would be of Supercycle Degree (he sees evidences of this degree) and that would imply Dow Jones below 1000 points.I am not a follower of Elliott Wave because Prechter (well known specialist in EWT)was wrong several times. Although I have already read books about it (Poser and som Prechter articles)But notice that Prechter’s general outlook is correct (his timing is wrong wrong wrong)Conquer the Crash, written in 2002, predicted several developments that are occurring now.From his site:”It’s Not As Bad As The Great Depression – Yet‘There’s no comparison’ to the Great Depression, says the world’s leading financial authority, U.S. Federal Reserve Chairman Ben Bernanke: ‘I’ve written books about the Depression. We didn’t have the social safety net that we have today. So let’s put that out of our minds.’Unfortunately, what Bernanke’s managed to do is put one important word out of his mind – yet.”

CM • December 19th, 2008 at 9:44 am

AHAHAHAHHAHAHHHAA! Dust off those Dow 10K hats folks…you have been warned, this will be the big one-this one will be Grich-Green through year end. The manipulation dejour begins today…

PeteCA • December 19th, 2008 at 9:49 am

You know that President George Bush dropped a bombshell this past week when he remarked that he had to “sacrifice the free market” in order to save the US economy. What more does anyone need to hear. When the President says that openloy, it’s tantamount to a direct confesion of strong market manipulation. Nothing more or less. None of this is a surprise to people on this blog. But it’s a serious blow to staunch Republicans who have been spouting the party line for years. The free markets are dead in the USA, and it accelerated under Bush. Ironic.I used to worry about this stuff. But then I realized that the global economy will still trade as a free market. US power is waning. Free market forces will win out in the globasl economy, and this still bounces back on the USA. No-one can jive the markets for too long.PeteCA

Cahill • December 19th, 2008 at 9:49 am

It was pure genius to hold off on announcing the auto bailout till today, something offset the quadwitching, we really should have seen that coming. I guarantee the PPT is in full gear today too, let’s see if they can hold it up again.

ex VRWC • December 19th, 2008 at 10:06 am

Average Jane,To respond to your question right below, the name comes from the term Hillary Clinton coined – Vast Right Wing Conspiracy (VRWC) that she saw was working to drag down BC during his presidency. It reflects my political thought, beginning very conservative but becoming disillusioned with the current state of the ‘Right Wing’ these days. Hence ex VRWC.

PeteCA • December 19th, 2008 at 10:13 am

Looks like there was some intervention in the currency markets, when the yen rose to 87/dollar and the euro went to 1.46/dollar. I commented a couple of days ago that the BOJ would get very nervous about the sharp dropoff in the dollar. Won’t do them too much good though. Holders of T-Bills need to move, and the risks in the US stock market are still real.PeteCA

Guest • December 19th, 2008 at 10:17 am

Hey! More bullish news! Wahoooooo!11:01 a.m.[SOV] Sovereign Bancorp to cut 1,000 jobs11:01 a.m.Journal Communications to take up to $240 million charge

JimmyTheBanker • December 19th, 2008 at 10:18 am

Hey! Here is some more great news!! Pile it on!U.S. Recession Set to Worsen SignificantlyReutersDecember 19, 2008(Reuters) – A measure of future economic growth in the United States and its annualized growth rate inched up in the latest week, but are still showing a dark outlook for the U.S. economy, a research group said on Friday.The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose in the week ending December 12 to 106.2 from 105.6 in the previous week, which was revised from 106.9.The index rose due to higher stock prices and lower interest rates, and the gain was partly offset by weaker housing, according to ECRI data.The index’s annualized growth rate edged up to negative 30 percent from an also revised minus 30.3 percent, initially reported at minus 29 percent.”With WLI growth hovering near last week’s all-time low, the U.S. recession is set to worsen significantly in the coming months,” said Lakshman Achuthan, managing director at ECRI.

PeteCA • December 19th, 2008 at 10:19 am

SO HOW’S THE DOW REALLY DOING?Special thanks to dshort.com for this excellent chart that is comparing the current bear market to the markets in 1929, 1973 and 2000. Really excellent work! This chart is being updated daily. Thanks also to the folks at Calculated Risk for posting it and drawing it to peoples’ attention.Before investing, it’s worth getting things into persepctive.This chart is not the whole story – but it does help.http://dshort.com/charts/bears/four-bears-large.gifPeteCA

CM • December 19th, 2008 at 10:20 am

“The index rose due to higher stock prices and lower interest rates”You guys beleive me now???!!!! Gee, PPT + Fed = higher leading indicators!

Guest • December 19th, 2008 at 10:22 am

That’s it!!!! I am moving to Jamaca!! Al Frnken a US Senator?????????????????Franken Opens 1st Lead In Minn. Senate Race

PeteCA • December 19th, 2008 at 10:37 am

Some nice charts on the US bond market by Martin Goldberg here:http://www.financialsense.com/Market/wrapup.htmAlthough the bubble in UST’s will certainly correct, in my opinion it’s risky to bet on this. The Fed can easily buy US debt under their quantitative easing program. They have no compunction in printing money and buying bonds. As Gary Dorsch said quite correctly – this policy is hallucinogenic. Yep, it sure is. But it’s real, and it will make things hard for people who take the opposite trade. Remember that the Fed is trying to insulate the US mortgage markets from sudden increases in long-term debt. A rise in bond yields would push up mortgage rates and cause firther disaster in the US housing market. This idea was discussed on an earlier thread in this blog.I differ from Martin Goldberg in one thing.The people who went LONG on UST’s were not idiots.Nope. Very likely they were our dear friends at the big banks in Wall St who saw a chance to profit from a coming move by the Fed. How brilliant of them to anticipate this move by the Fed into the US credit markets. They must have dialed one of those help lines, like 1-800-PSYCHIC-FINANCIAL-ADVISOR. I just can never seem to find these phone numbers when I really need them. Anyway, it will all resolve in the long term. But making a profit from the resolution is not so easy.PeteCA

North Central Alabama • December 19th, 2008 at 11:04 am

It’s bad out there and getting worse, I know some forecasters are talking up the future of our economy however the people I talk to are having a hard time. I have never seen so many cars, trucks, ATV’s washers and dryers and the like for sale in recent memory. You cannot find aluminum cans on the side of the road as competition for these cans are great. I have also been getting a much higher number of marketing calls from local business, from heat and air companies to roofers and the like looking for business. When I place a UPS order I receive my shipment the next day, I had grown accustom to waiting three days on average. People who I don’t know are approaching me asking for money, I have loaned sixty dollars since Monday to perfect strangers, I do not usually do that however they were regular people who actually needed it, not the beggar types. I have heard comments from others who are trying to get thru the holiday season and then plan to bankrupt in 09. I am in the camp of those who believe the bad news in 09 will be much worse than is expected by most. I haven’t seen any changes to our local economy that would even hint of a recovery any time soon.

tutterfrut • December 19th, 2008 at 11:07 am

According to our leading financial newspaper ‘tijd.be’, the government of our little Kingdumb of Belgium has fallen. It fell over the Fortis-deal-rescue-mess…

Guest • December 19th, 2008 at 11:12 am

Congress givings itself a raise… Have they really done a better job than the CEO’s who have decided not to take a bonus this year?http://thehill.com/leading-the-news/with-economy-in-shambles-congress-gets-a-raise-2008-12-17.html

Hayes • December 19th, 2008 at 11:22 am

here is the correct linkCHICAGO, Dec 19, 2008 (BUSINESS WIRE) — Fitch Ratings has downgraded the Issuer Default Rating (IDR) of General Motors Corporation to ‘C’, indicating that default is imminent.

Mandarin • December 19th, 2008 at 11:28 am

On the occasion of the 30th Anniversary of its “reform and opening-up” the Chinese media congratulates itself on the astuteness of the planning-cum-investing ruling clique. Meanwhile the internet police has blocked access to several American financial websites, including one that posted a 1929 – 2008 stock market chart. There will be no talk of crisis here. But before the patriotic segment of the US population shakes its head and goes tsk-tsk, consider how the behavior of the Chinese rulers parallels that of the American financial elite and its mouthpieces. The two countries are joined at the hip economically and both are going down with this particular ship.

JimmyTheBanker • December 19th, 2008 at 11:37 am

From Comstock Funds:”As for the stock market, it seems that investors have priced in the current bad news, but, perhaps, remain too sanguine about the length and depth of the recession. At today’s close, the S&P 500 was selling 13.4 times trendline reported (GAAP) 2008 earnings of $66, compared to an average P/E ratio of 10.4 at the bottom of the last 10 bear markets associated with recessions. Moreover, in five of these instances the smoothed P/E ratio bottomed at 8 or under. We note that bullish observers are using an operating earnings estimate of over $84 for 2009. However, S&P’s reported (GAAP) earnings estimate for 2009 has now dropped to just over $42 (down $7 this week). In the past, secular bear markets troughed at 8-to-10 times reported earnings, NOT operating earnings, which didn’t even exist until 1984. In terms of timing, on average the market bottomed five months before the end of the recession. Therefore the odds are that unless the economy starts to recover five months from the November 2008 bottom, the market decline is not over, although a bear market rally is always a possibility between now and the eventual low.”

Guest • December 19th, 2008 at 12:01 pm

MOre super bullish news!!!Friday December 19, 5:23 PMGlobal economy to contract in ‘severe’ 2009 recession: banking groupThe global economy likely will contract next year for the first time in decades in a “severe” recession as the credit crunch bites, an international banking group said.The Institute of International Finance (IIF), the Washington-based association representing more than 375 of the world’s major banks and financial institutions, projected the world economy would shrink 0.4 percent in 2009, after 2.0 percent growth this year.Charles Dallara, the managing director of the IIF, called it “the most severe, globally synchronized recession in modern economic history.”

PeteCA • December 19th, 2008 at 12:04 pm

I’ve been working on the theory that Bernie Madoff got onto a “slippery slope” and eventually fell into bad dealings with his hedge fund. But the current article from Bloomberg appears to contradict that idea:Bloomberg: By David Scheer”Dec. 19 (Bloomberg) — U.S. regulators, trying to unravel the breadth of Bernard Madoff’s alleged $50 billion fraud, have found evidence of misconduct stretching back to at least the 1970s, two people familiar with the inquiry said.Madoff’s investment advisory business, where he allegedly operated the biggest Ponzi scheme in history, is now estimated to have had more than 4,000 customers, the people said, declining to be identified because the inquiry isn’t public. An advisory unit Madoff registered with the Securities and Exchange Commission claimed in a January filing to have no more than 25 clients. People familiar with the probe said Dec. 14 he also ran a secret unregistered business. “So it seems that things have been going wrong in that fund for over 30 years.* Question: How reliable is the SEC, if this fraud goes on for over a generation in time?* Question: How many other long-term investors in Wall Street think that their accounts are doing well … but really their money does not even exist?* Question: If 30% of all hedge funds are going to go broke in the next year or so, how many other fund managers are on a “slippery slope” – or are involved in outright Ponzi schemes?PeteCA

Guest • December 19th, 2008 at 12:04 pm

FOX Business Network has filed a lawsuit against the United States Treasury Department over failure to provide information on the bailout funds or respond to FBN’s expedited requests filed under the Freedom of Information Act [FOIA].The initial request, filed on November 25, sought actual data on the use of the bailout funds for American International Group and the Bank of New York Mellon, and an additional request, filed on December 1, sought similar data on the bailout funds for Citigroup, Inc. FBN is asking for the Treasury Department to identify, among other issues, the troubled assets purchased, any collateral extended, and any restrictions placed on these financial institutions for their participation in this program.

Anonymous • December 19th, 2008 at 12:08 pm

We the people are partly to blame as well. We cannot stand idly by while there is a failure of the separation of powers. It is just as much our fault. We have to take responsibility. I have been reading this fabulous blog for a few weeks and I am grateful to all of you for enlightening me on so many current issues. I am not an expert, but many of you are. You can tell us what the workable alternatives are. How they can and should be implemented. Then we just need to get our voices heard. Naive? Perhaps. But I have a strong love of the Constitution and the Bill of Rights and cannot believe that they are no longer viable.Many thanks to all of you for your insights. Keep them coming.

Octavio Richetta • December 19th, 2008 at 12:08 pm

Don’t miss Shilling in Tech Ticker. Gloomy, here you have your possible depression call! I was waiting for his views AFTER the FED meeting.He Saw the Crash Coming: What Gary Shilling Sees for 2009Posted Dec 19, 2008 11:22am EST by Aaron Task in Investing, Recessionhttp://finance.yahoo.com/tech-ticker/article/149057/He-Saw-the-Crash-Coming-What-Gary-Shilling-Sees-for-2009?tickers=%5Edji,%5Egspc,%5Eixic,SPY,DIA,TLT,UUP

some investor guy • December 19th, 2008 at 12:11 pm

I have to disagree with the people who say that models and simulations are of limited use. I do this type of thing for a living. While I admit that such models often have all kinds of problems or simplifications, I have used them to identify all kinds of risk management issues which weren’t apparent otherwise.There are several techniques that I have found useful, which should be applied more often. 1. Take a look at postwar experience and throw in a lot of specific problems and dislocations. See what happens to your deal, credit structure, policy, etc. Breaking the buck occured before. So did strong credit contractions, wild oil price fluctuations, all kinds of term structures. Even big pyramid schemes (Albania in the 1990s). You get really interesting results when you ask questions like “What if you can’t borrow for two years?”, or “What if two counterparties go bankrupt in quick succession?”.2. Set values in your stochastic model which you believe will be trouble (e.g., almost running out of cash). See what combinations of inputs cause problems. For one client, the combination of construction delays, rising construction costs, and rising interest rates was deadly under their old structure. Sound like what happens in a construction boom? This technique is good for identifying problem interactions of variables that are in your model, even if your distributions aren’t spot on. It won’t help you identify a problem caused by a variable you haven’t modeled.3. Find a person with a very different view or different experience who has expertise in your field. Discuss the policy, strategy, or model with them. The most dangerous person to review your model is someone who has a similar degree, uses the same software, and has worked at the same company as you for a long time. The chances for groupthink and ignored variables is huge.

Octavio Richetta • December 19th, 2008 at 12:17 pm

The strategy he used [was supposed to be using] has an implied volatility that should be more or less reflected in his monthly returns. The minute that volatility was consistently gone he started cheating. Me think the guy started Kosher, but didn’t hesitate to start cheating once things didn’t work out the way he thought. The starting of the cheating immediately took him over to the Ponzi.I expect there are other cheaters but I don’t expect it to be as significant as others think. Still, hedge funds will go out of business due to poor results and the Mad-Off nuclear explosion will accelerate that even further. The figure I have seen is a 30% failure rate. IMO, it will be significantly larger than that.

PeteCA • December 19th, 2008 at 12:18 pm

Everyone should probably take a look at this article by Doug Wakefield. It’s a great collection of charts – and he’s trying to put together an overall story of what’s going on in the market.http://www.financialsense.com/fsu/editorials/wakefield/2008/1219.htmlBottom line: A financial earthquake could be coming soon.Completely consistent with what I said here on an earlier thread. We have not yet seen the real Black Swan – but it’s coming.PeteCA

Octavio Richetta • December 19th, 2008 at 12:26 pm

Look at it this way, Mad-Off in theory was doing well but he still had redemption notices that originated by the November 15 deadline (remember I posted a reminder on that?) of 7 billion which is close of 15% of assets, if the 50 billion figure is right. If it is lower, the redemption % is even larger.So can you imagine what the redemption notices in % of assets was for the real losers? And what it will be next quarter for winners and losers alike?Right now investor psychology is such that seeing a hedge fund manager and seeing the devil is about the same. The reputation of the WHOLE industry will suffer greatly. Even before you consider all the regulation that they hate and is coming their way, which among other things will target the off-shore operations of many of these outfits.

Guest • December 19th, 2008 at 12:28 pm

Anything but the ‘free marketers/ the labor exploiters’, maybe now we start spreading the wealth you can’t have an economy when .25% of the population makes 99% of the money. All the credit in the world can’t make up for this fact.

Octavio Richetta • December 19th, 2008 at 12:34 pm

Ouch! I was about to post it. I am glad to see we are getting the hang of the Xmas ritual. I started advertising ECRI’s little book in this blog this time last year.Wow! the most reliable composite leading indicator dropping at an annual rate of 30%+. Wonder why Benny wets his pants everyday:-)?The momentum implied by this acceleration tells you right away the talking heads that started calling for a recovery starting in Q2’09 are smoking something other than Marlboros.

aerial view • December 19th, 2008 at 12:40 pm

Excellent point! We the public and small investor are always the last to know about what our govt does and when we try and find out (latest case of Bloomberg’s request for TARP recipients), we are denied. The difference between the 2 countries in terms of lack of transparency and market manipulation has become slim or none!

Guest • December 19th, 2008 at 12:43 pm

Syndicated talk show host Glenn Beck has pinpointed why the economy is in freefall and why the Mob can’t take a chance on “outsiders.”Said Beck on radio, and I paraphrase: It’s the Fed. They’re cheating us. Barney Frank is in their pocket. The money is being funneled out of our pockets into their pockets…That’s the reason Obama’s Change Cycle is really just a Rinse Cycle of the same old insiders: the DC Mob can’t take a chance on an outsider keeping his mouth shut.The Mob is running a Ponzi scheme: Benny’s actions are the evidence: he can’t keep it balanced. He doesn’t know what to do.The economy was going into recession, but it wasn’t going off the cliff in a freefall until the Fed stole its wheels. The fact that another gun moll, Shapira, was just named to replace outsider Cox, is more evidence that the Mob can’t trust anyone outside the gang. They want their own puppets – who see nuttin, hear nuttin, say nuttin.

Octavio Richetta • December 19th, 2008 at 12:43 pm

:akshman Ashutan on the FEd move. Will the move make any difference? Listen…http://www.businesscycle.com/news/press/1252/Effectiveness of the rate cut marginal these rates were there already. The intention to keep them for a long time will have some effect. He then focused on the non-conventional tools buying mortgages, agency paper, treasuries, etc. as a way to get money into the system. The buying of securities unconventional tool they are unleashing. On that he says that THE HOPE is that that move will work, they are trying to get inflation back into the system when they were worried about it less than a year ago. He was not hot about it at all and this is a guy as neutral as you can get in the game.Bottom line: He never said what the talking heads said immediately after the meeting (i.e., recovery by Q2’09)

Octavio Richetta • December 19th, 2008 at 12:48 pm

If buying TBT (I haven’t) does not work for you, at least you will have the satisfaction that your call on this being the mother of all recessions was right. Anyone who believes in a 2009 recovery should be buying TBT. Even if the recovery does not happen until 2010 I would hope variability should be big enough that it would allow you to make some decent money. IMO, short covering in long Ts may still be going on but this puppy is getting ripe for the taking.

Guest • December 19th, 2008 at 12:51 pm

That’s the way I see it also. I can’t believe that Obama’s “trillion dollar cash bombs” and the PPT have the ability to prevent a minimum of Dow 6000 (09EE42xPE15) and would not rule out 4000 (09EE42xPE10) although it may take 6 mos or so to see it!

AK • December 19th, 2008 at 12:54 pm

Community Reinvestment has been blamed for this mess incorrectly.. There is more to it than is being revealedIn this entire episode there is a winning side and a losing side. Who is really on the winning side that got paid all those CDS’s?

Gloomy • December 19th, 2008 at 12:55 pm

Thanks OR. I don’t get to read the comments here often, so if I don’t reply, it’s not intentional. I get Schilling’s newsleter and think he is very good and very logical. Yet here is the key question: Does the Fed ultimately have the power to cause inflation in this economic situation? In theory the answer is clearly yes (in theory the government could send every American a check for a million dollars, for example), yet Schilling insists the answer is no. Perhaps Schilling reasons that there are practical constraints that would prevent the Fed taking the necessary steps to cause inflation. But has the world ever seen a more determined, inovative,resourceful (and in my opinion foolish) central banker than Bernanke? I am concerned that Schilling is underestimating him. In the end perhaps these questions are political in nature-to what extremes are Obama and Congress willing to go along with foolishness. I am willing to make my bets with Schilling. But, I do not trust Bernanke not to do something foolish. I therefore insure my portfolio with gold.

tutterfrut • December 19th, 2008 at 12:58 pm

Belgian government resigns over Fortis affair: reportBy Wallace WitkowskiLast update: 1:53 p.m. EST Dec. 19, 2008SAN FRANCISCO (MarketWatch) — Belgium’s government has collapsed after a court found it tried to influence a bailout and sale of troubled bank Fortis , Reuters reported Friday. Earlier in the day, Belgian Prime Minister Yves Leterme reportedly proposed that his government resign over the affair. A spokesman for Leterme told Reuters that the cabinet agreed to the resignation proposal. Under the country’s constitution, Belgium’s king, Albert II, must decide whether to accept the resignation.

Guest • December 19th, 2008 at 1:25 pm

TBT is 200% – if you keep it long-term you will lose through slippage…also no way that the US Fed will let the Bond market go down…

Hayes • December 19th, 2008 at 1:27 pm

Nice, a biparisan appointment by O – Republican Ray LaHood as Sec of Transportation. Now he wouldn’t be part of the Illinois political machine would he? And Hilda Solis as labor secretary (UAW will like that)…

Octavio Richetta • December 19th, 2008 at 3:55 pm

This sounds all good and dandy. I agree with you. I wrote stochastic simulations of complex geographical systems, e.g., servicing equipment failures at banks, ATMs, vaults, etc. And they were useful to management in analyzing “what if” scenarios you could not run in your brain, and manning the operation. Calibration is an important step, the assumptions that go into your model are critical or you literally get a garbage in garbage out model.Also I hope you agree, anyone in the field will immediately want to “look under the hood” of the model and Benny’s simulation has not been validated and from his colleague’s comment seems to be ignoring some first order effects.Finally, I wonder why whoever wise *as that picks “best post” for a thread has not picked this one. Perhaps too deep for the audience? The issue is at the hearth of what HeliBen is doing, the subject of the thread. What the heck, lets move on…

Octavio Richetta • December 19th, 2008 at 4:14 pm

If we lose our competitive advantage in terms of investors believeing US markets are the most liquid the most transparent, etc. Then US stock valuations will suffer greatly. We are moving hell fast to a PE of 10, and under, as the norm as opposed to around 15.

Octavio Richetta • December 19th, 2008 at 4:21 pm

You have a window of opportunity, inflation won’t kill you overnite. If is the things you do in a hurry to try to outsmart the system that will loose you money. Nothing wrong with playing the big swings in long T yields every time people get paranoid about inflation.

Anonymous • December 19th, 2008 at 5:45 pm

Even very busy governmental employees have to honor a call from nature now and then. When Ben Bernanke returned to his desk after a ten minute visit to the rest room, he was pleasently surprised to see on his monitor that the DOW had jumped five percentage points in his absense. “Thank God” he said, “I’ve finally found something that works!”.

Average Jane • December 19th, 2008 at 8:43 pm

I ran some numbers for you and maybe this’ll help.Assuming a $500,000 principal with a 55% LTV = $275,000.So using the $275,000 –A 30-year fixed term at 6.5% = total interest over life of loan of $350,750, monthly payment $1,735.A 30-year fixed term at 4.5% – total interest over life of loan of $226,600, monthly payment $1,400.A 15-year fixed term at 6.5% = total interest over life of loan of $156,200, monthly payment $2,400.A 15-year fixed term at 4.5% = total interest over life of loan of $103,700, monthly payment $2,103.Don’t know if this helps–

fedwatcher • December 20th, 2008 at 3:26 am

The Madoff affair has reinforced in the minds of the public just how unfair our system is.Steal $50.00 and you are in Richers awaiting trial, but steal $50 Billion and you get to stay in your multi-million dollar apartment. Only latter, they decide to burden you with the indignity of an ankle bracelet.Wall Street is rescued and bonuses are paid but auto workers are thrown under the bus.The public wants Madoff to share a cell with Mozilla. But that will never happen.Now Paulson wants the next $350 Billion but he refuses to detail how he spent the first $350 Billion.The public is right in not trusting all three branches of government as they have all failed us.If a restoration of confidence is what is needed to get us on the road to recovery, we are not going to get there.

g Anton • December 21st, 2008 at 1:57 pm

The purpose of his present detention is to insure his presence at trial–it is not to punish him, as he has to be convicted before he can be punished. He did give himself up, and it would be very stupid of him to flee at this point in the proceedings. Usually only very dangerous persons or those that are high risks to flee are held without bond.

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Swiss bank Wegelin served with U.S. charges http://t.co/Zl7iYLJL
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34 ideas to make Toronto better - GridTO - http://t.co/OFUX6dom
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tom keene tomkeene
http://t.co/gXkqZ4WN spence on growth #nyu
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Liveblogging World War II: July 20, 1942 http://t.co/VByzIpWU
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Have questions about the future of work? Ask @IntelFuturist Brian David Johnson at 1 pm ET on Thurs. http://t.co/joHpz0Vk
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http://t.co/NOjrCCTN (What It's Like to Photograph Mark Zuckerberg's Wedding)
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zerohedge zerohedge
Frontline On MF Global's Six Billion Dollar Bet http://t.co/y9sYYugQ
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zerohedge zerohedge
China is firing up PMIGoalseek.xls as we speak: this futures weakness will not stand
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tom keene tomkeene
http://t.co/Kofh5XPO Mrs Zuckerberg $FB $$
31 minutes ago
zerohedge zerohedge
To paraphrase: everyone in Europe is for the Fed printing more money
32 minutes ago
The Economist TheEconomist
Russia's new cabinet marks no lurching shift. But the new government will soon face new challenges http://t.co/hPIIUpFg
33 minutes ago
Edward Harrison edwardnh
RT @Suanzes: Tonight's text on #Greece available here http://t.co/fiYM4rNS via @EUCouncilPress
34 minutes ago
tom keene tomkeene
http://t.co/NOjrCCTN $FB $$
35 minutes ago
Neil Hume humenm
We expect that after the elections, the new Greek Government will make that choice -
36 minutes ago
zerohedge zerohedge
This was a sad conference, nothing like the glorious spectacles of summer 2011.
36 minutes ago
Neil Hume humenm
Continuing the vital reforms to restore debt sustainability.... is the best guarantee for a more prosperous future in the euro area.
36 minutes ago
Neil Hume humenm
We are fully aware of the significant efforts already made by the Greek citizens.
37 minutes ago
Neil Hume humenm
We want Greece to remain in the euro area while respecting its commitments - Van Rompuy
37 minutes ago
zerohedge zerohedge
As a repeat, Merkel Stands by Opposition to Euro Bonds After EU Summit - BBG
38 minutes ago
zerohedge zerohedge
THERE HE IS: JUNCKER SAYS EURO BOND TALKS WERE `NOT UNHEATED'
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Neil Hume humenm
24-May-2012 09:43 - EU'S VAN ROMPUY: IDEAS OF EU BANK RESOLUTION AND SUPERVISION WERE ONLY MENTIONED, NOT DISCUSSED IN DEPTH
40 minutes ago
zerohedge zerohedge
VAN ROMPUY SAYS SOURCE OF EIB FUNDS NOT CERTAIN. ........................ ARGHHHH
40 minutes ago
Neil Hume humenm
24-May-2012 09:42 - EU'S VAN ROMPUY: EURO BONDS WERE DISCUSSED IN A LONGER-TERM CONTEXT
40 minutes ago
Neil Hume humenm
EU'S VAN ROMPUY: IDEAS OF EU BANK RESOLUTION AND SUPERVISION WERE ONLY MENTIONED, NOT DISCUSSED IN DEPTH - RTRS
40 minutes ago
zerohedge zerohedge
Looks like Europe will open tomorrow after all
41 minutes ago
Dan Alpert DanielAlpert
That NEW Giant Sucking Sound you hear is coming from Athens? "@LorcanRK: Barosso is now doing a Ross Perot. Holding up a chart"
43 minutes ago
zerohedge zerohedge
Conference over. Mentions of Deposit guarantees: zero
43 minutes ago
zerohedge zerohedge
Quick, we need a rumor. EURUSD sliding
44 minutes ago
zerohedge zerohedge
HOLLANDE SAYS THERE WAS NO DISCUSSION ON FISCAL TREATY
46 minutes ago
Dan Alpert DanielAlpert
Informal dinner insanity"@djfxtrader: Hollande: Not Aware Of Any Contingency Plans For Greek Euro Exit; #Greece Must Honor Commitments [DJ]"
47 minutes ago
zerohedge zerohedge
Barroso: "We stand by Greece." Boring. Where is Juncker: at least he lies with flair
48 minutes ago

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Edward Hugh Don't Shoot the Messenger

Edward is a macro economist, who specializes in growth and productivity theory, demographic processes and their impact on macro performance, and the underlying dynamics of migration flows. Edward is based in Barcelona, and is currently engaged in research on aging, longevity, fertility and migration, and the impact of all of these on economic growth.

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