IN THE SCENARIO I’M ABOUT to paint for you, the dialog is fictional, but all the facts and figures are real.

The time: 1 a.m., November 23, 2011, exactly two years from now.
The place: the White House, suddenly and unexpectedly under siege as a new financial crisis erupts.

The economic booms of 2010 have morphed into superbooms … the superbooms into bubbles … and the bubbles into busts.
Large banks are again on the brink. Financial markets are again in turmoil. Wall Street giants like Goldman Sachs, JPMorgan Chase, and Morgan Stanley — the outstanding survivors of an off-again-on-again debt crisis — are now its primary victims. Investments like long-term U.S. Treasury bonds — long sought as safe harbors — are now collapsing in price, turning into torpedoes that can sink even the sturdiest of portfolios. But most important, the government’s too-big-to-fail bailouts, shotgun mergers, and mad money printing — previously hailed as cures that killed the contagion of 2008 — are now widely viewed as far worse than any disease.

President Obama and Treasury Secretary Geithner have huddled in the Oval Office for hours, struggling to find new solutions to old problems: Wall Street meltdowns, renewed threats of a great depression, millions more thrown out of work. After a long and heated debate, the president slumps back into his armchair, signaling it’s time to talk more frankly — to reminisce about past policies and rethink what might have gone wrong.

“With 20-20 hindsight,” he remarks after an introspective pause, “it’s clear we were overly focused on the intended consequences of our efforts — the economic recovery, the bounceback in markets, the jobs saved. Meanwhile, we were blindsided by the unintended consequences, many of which have proven to be bigger, more durable and, ultimately, more impactful than the benefits we did achieve.”

The Treasury Secretary, weary from marathon meetings on precisely the same subject, nods in silent agreement. “So, perhaps one of our tasks,” continues the president, “should be to document two basic issues: What precisely are the unintended consequences? And what exactly did we do to cause them?”

“We don’t have to,” says Geithner sheepishly.
“Why not?”
“Because it’s already been done. Those issues have already been thoroughly documented.”
“Since when?”
“Since the fall of 2009. That’s when SIGTARP — the Special Inspector General for the Troubled Asset Relief Program — revealed the mistakes we made with the giant AIG bailout. And that’s also around the time the public began to react to the enormous contradiction between massive unemployment on Main Street and the monster we helped to create on Wall Street.”

Monster Bonuses
“Monster?” queries Obama. “You mean the giant bonuses?”
“Exactly. We already knew Wall Street execs had been giving themselves megabonuses for most of the decade —
— $29 billion for Citigroup’s Weill in 2003 … $27 billion for Blankfein at Goldman Sachs in 2006 … another $106 billion for Jon Winkelried and Gary Cohn, also at Goldman Sachs, in 2006-2007 … and many more. We already knew how the money from these obscenely large bonuses alone could have been enough to save millions of jobs.”
“Yes.”
“But what we did not know is how soon after the bailouts Wall Street would be at it again — first, dishing out megabonuses to heavy hitters in their trading rooms … then to sluggers in their sales departments … and later, as soon as the public tired of protesting, to themselves.”
“Exactly how soon?”

Geithner answers with questions of his own. “When was Wall Street on the verge of a total meltdown? In September of 2008! When were the record bonuses paid out? In December of 2009! So that’s 14 months. It was just 14 months later that the employee bonuses at the three big Wall Street survivors — Goldman Sachs, JPMorgan Chase, and Morgan Stanley — exceeded all prior records.”
“Even the record bonuses they paid out before the crisis?” the president asks with a mix of disbelief and disdain.
“Yes, even bigger than their record bonuses paid out before the crisis.”
“But why do we blame ourselves for all this?” the president wonders out loud.

The Bungled AIG Bailout
“In public, we don’t … and hopefully never will,” responds Geithner furtively. “But in private, we must admit that we screwed up — particularly with the AIG bailout.”
“Why?”
“For the simple reason that we — the Treasury and FRBNY, the Federal Reserve Bank of New York — didn’t just bail out AIG. Indirectly, we also bailed out all of AIG’s major counterparties, the biggest of which were Société Générale and Goldman Sachs.”
“Said who?”
“Said SIGTARP, the Special Inspector General for the Troubled Asset Relief Program, in its special report of November 2009. I have a copy of the report right here.”
“What precisely did SIGTARP find?” asks the president.
“In essence, they found that AIG’s counterparties — 16 major global banks — should have lost money in their trades with AIG, just like most investors lost money when other companies failed. But instead, AIG’s counterparties did not lose money. We made those creditors whole, practically to the penny.”
“How much did we pay ‘em?”
Before responding, the Treasury secretary flips to page 20 of the SIGTARP report and glances down at Table 2 — Total Payments to AIG Default Swap Counterparties (reproduced below).

Source: SIGTARP, November 17, 2009. “Factors Affecting Efforts to Limit 
Payments to AIG Counterparties”

“Société Générale,” he says, “got $9.6 billion in collateral payments from the money we had loaned earlier to AIG. Plus, we paid Société Générale another $6.9 billion through a special purpose vehicle we created, called Maiden Lane III. In total, the French bank walked off with $16.5 billion.
“Goldman Sachs,” continues Geithner, “got $8.4 billion in collateral payments, plus another $5.6 billion from Maiden Lane, adding up to $14 billion. “Deutsche Bank got a total of $8.5 billion … Merrill Lynch — $6.2 billion … UBS — $3.8 billion … plus …”
“Please cut to the chase,” says the president impatiently. “How much overall?”
“They got $62.1 billion, plus another $2.5 billion we agreed to pay to compensate them for shortfalls in their collateral. Grand total — $64.6 billion.”
“Wait a minute!” interjects the president. “A lot of these big banks, notably Goldman Sachs, have forever insisted that they never wanted a bailout, never needed one, and never got one.”
Geithner picks up the report and waves it for emphasis. “And SIGTARP has forever disagreed.”
“What’s their conclusion?”
“In effect, SIGTARP concluded that, via this back door, the 16 banks not only got big bailouts … they never had to pay back a dime of the money.”

The Sad Saga of How Taxpayers Were Sold Out
“What do you think really happened?” asks the president.
“I don’t think; I know. Remember, I was not only there, I was mostly in charge. So I can tell you flatly: We had our backs to the wall. Sure, we asked 12 of the biggest AIG counterparties to take haircuts, to accept some losses. But 11 out of the 12 refused. So we had no choice but to give them everything they wanted.”
“Why didn’t you press harder?”
“We had no negotiating leverage. Later, with GM and Chrysler, we forced creditors to make concessions by threatening to let the automakers fail. But with AIG, we had already declared, in effect, that we’d never let it fail.”
“When?”
“Several weeks earlier — when we loaned $86 billion to AIG, the biggest bailout in history. The end result was that, when it came time to negotiate with AIG’s creditors, we could no longer function as unbiased regulators. We were already in deep — as the company’s biggest stakeholder. The creditors knew they had us over a barrel. There was no way we could twist their arms.
“If that wasn’t bad enough,” Geithner continues, “I then compounded the problem by adhering too strictly to one of FRBNY’s core values — the concept of treating all counterparties equally. That doomed the negotiations because it gave each party effective veto power over any possible concession from any other party. The way I set things up, either all the banks had to agree to concessions … or none of the banks would agree to concessions. So, needless to say, none agreed to concessions. They got everything.”

Profound Impacts
My fictional scenario ends here. But the impacts of those fateful decisions of late 2008 and early 2009 do not.
The AIG rescue was the biggest taxpayer rip-off of all time. Worse, it was the master seed that sprouted a whole series of similar taxpayer rip-offs on Wall Street. Just connect a few of the dots, and you’ll see what I mean:

1. The U.S. Treasury rushes to bail out AIG. That alone helps protect AIG’s counterparties from the direct losses they’d otherwise suffer in an AIG failure.

2. The Federal Reserve Bank of New York creates a special entity to pay off AIG’s creditors in full. While ordinary U.S. investors lose fortunes even in companies that are financially viable, 16 major banks don’t lose a penny even in a company that would otherwise be bankrupt — all thanks to the Fed’s largesse.

3. Prominent among these government-blessed banks is Goldman Sachs, Wall Street’s most extravagant giver of executive bonuses in 2006 and 2007 … and also Wall Street’s most lavish payer of employee bonuses in 2009.

The money flow is clear:
• From taxpayers to AIG …
• From AIG and the Fed to big Wall Street investment banks like Goldman Sachs, and then …
• From Goldman Sachs to its employees in the form of lavish bonuses.

It is, by far, the greatest taxpayer rip-off off all time!

By Paul Chong Monday, 23 November 2009

Basic science tells us that to every action there is an equal & opposing reaction. It follows with the natural law of phenomenon of cause & effect. So with solving any problem, consideration lies with the cause not the effect – treating the cause & not the effect is the only logical solution.

US Dollar Being Shot At! Greenspan?

Do you remember the 1970s era of the Pyramid Marketing Schemes as deviously ingeniously devised by the Americans, particularly from the home ground of Utah? There was this mushrooming of the “Get Rich Quick” concept with ‘Holiday Magic’ spearheading & exploding the marketplace. It adversely affected the pockets & lives of many a home & individual. It was banned in Singapore & became restricted, operating as a Multi-Level Marketing Scheme. There are still such Multi-Level Marketing companies around, and in reality all its productivities benefit largely the company itself – the distributors getting the crumbs & pittance. Calling a rose by any other name still makes it smell the same.

Unlike the conservative British, the Americans are undoubtedly the most innovative & progressive with propitious modern ideas of marketing. In a word, they are the greatest “wheelers-dealers”! They preach & practise this philosophy right to the extreme – with success objective at all costs. The underlying theory maybe sound, but in practice it’s invariably unsound, as individuals have differential capability & capacity.

The Americans are famous for their doomsday & catastrophic shows on the big screen. This time they really hit the real thing – from Wall Street to the Main Street. But it’s not confined or restricted just to the American scene – it’s so monumental that the global economy is reeling & hurting. The cause of the Pyramid practice has evolved & resulted into the Domino effect. Like in a masquerade ball, the Americans have been wearing those loose cloaks with masks to cover up their faces.

Who’s to be blamed? Bush then & now Obama administration would like to attribute the alleged root of this economic crisis to the market itself – speculators, hedge funds, greedy bankers & lax regulators. Passing the buck does not eradicate the fact that it’s one Monumental Policy Failure on the part of the US government.

We are witnessing history unfolding right before our eyes. Two monumental things are glaringly obvious:

1. A dangerous collapse or near breakdown of the capitalist             financial system.

2. A massive outpouring of Free Money by the US government in   bailing out the “Big Boys” who are the real culprits of this             economic calamity. Hundreds of billions are spent in bailing out   the key major players – not at all benefiting the average American & sending the budget deficits going through the roof.

This Monumental Policy Failure of expanding money supply & credit growth is fuelling the economy negatively. The economy is imploding within with the exploding of endless printing of paper money. These two colossal events of the past 24 months with the collapse of Wall Street in 2008 & the irrational response of Washington in the outpouring of free money & the Federal Reserve printing money without restraint.

What happened initially with the huge speculative real estate bubble, which not even Greenspan nor Bernanke would now deny, has triggered off the ramification of the banking problems & the recession.

Many of us to be sure must remember the worthlessness of the Japanese money during the Japanese Occupation in both Malaya & Singapore. The Japanese were also running their printing press overtime to finance their warfare & occupation. Now in the present era, just ask any Zimbabwean what a billion or million dollar note is worth in his country.

US dollar is not backed by anything, not gold or silver or any tangible commodities and with its paper money running off the press like crazy, what can you expect of its worthiness in the final analysis? The confidence of the world for its currency is at a critical point, and all it takes is 24 hours for all the other nations to drop its use as the currency reserve.

As said, US may well be destroyed from within & from without – the wrath & non-confidence of the world may be brought to bear down on US all within the hours before the wake of Wall Street.

]]> http://institutionalfinancialderivatives.com/2009/11/22/reconfirm-bernanke/ Sun, 22 Nov 2009 21:43:22 +0000 Institutional Financial Derivatives, Inc. http://institutionalfinancialderivatives.com/2009/11/22/reconfirm-bernanke/

Ben Bernanke has been scheduled for a confirmation hearing for a second four-year term as Federal Reserve chairman. The Senate Banking Committee will question him on Dec. 3.

Rep. Alan Grayson has come out strongly recently urging an audit of the Fed and has had noteworthy courage to stand up to Bernanke’s lies directly in hearings and the giant ongoing criminal fraud that is the so-called ‘Federal Reserve’.

Thus I suspect fireworks during the confirmation hearing after which powerful special interests will unfortunately again guarantee Bernanke’s bogus reconfirmation regardless. This is wrong and needs to be stopped.

The Fed is wildly ineffective and did nothing to prevent the economic crisis. Why then do we continue to let it go on? And with endless printing of fiat money it has also destroyed the dollar and will obviously continue to do so, costing all of us endless inflation tax by design no less.

The Fed is first and foremost a private bank, a criminal cartel and a complete rip-off on everyone. So says Rep. Ron Paul, his new book “End the Fed”, Rep. Alan Grayson, Sen. Bernie Sanders and Rep. Brad Sherman among many others. Over 300 co-sponsors have signed on for the just passed ‘Audit the Fed’ bill HR 1207.

It is also high time the government took back it’s sovereign right to print it’s own money and not be forced to borrow from the Fed at interest, the biggest scam of all — only serving to systemically wreck all of our lives and doom them to economic slavery to the elite shadow bankers who actually control the Fed as it already has for many generations.

Reconfirm Bernanke? And do it as they certainly will pretending he is some wonderful economic godsend? This is absurd, dangerous and insane and will only insure things get worse. Much worse.

It is not time to reconfirm Bernanke. It is time to call out this ‘Federal Reserve’ criminal empire for what it really is and end it now.

Glenn Beck Talks New World Order with Damon Vickers

I missed the last three failed bank Fridays, so here are all seventeen that failed in the past three weeks in a row. As always, from the FDIC:

The policy blogs are abuzz with the recent news that the Federal Reserve System might finally undergo an audit. The bill, sponsored by Ron Paul and endorsed by nearly everyone else, passed with a lopsided 43-26 victory in the House and would be the first comprehensive inquiry into what the Fed does with the trillions of dollars it commands. Glenn Greenwald has the best dissection of what went down.

Some highlights:

Our leading media outlets are capable of understanding political debates only by stuffing them into melodramatic, trite and often distracting ”right v. left” storylines.  While some debates fit comfortably into that framework, many do not.  Anger over the Wall Street bailouts, the control by the banking industry of Congress, and the impenetrable secrecy with which the Fed conducts itself resonates across the political spectrum, as the truly bipartisan and trans-ideological vote yesterday reflects.  Populist anger over elite-favoring economic policies has long been brewing on both the Right and Left (and in between), but neither political party can capitalize on it because they’re both dependent upon and subservient to the same elite interests which benefit from those policies.

Beyond the specifics, a genuine audit of the Fed would be a major blow to the way Washington typically works.  The Fed is one of those permanent power centers in this country that exert great power with very little accountability and almost no transparency (like much of the intelligence and defense community).  The power they exert has exploded within the last year as a result of the financial crisis, yet they continue to operate in a completely opaque manner and with virtually no limits.  Its officials have been trained to view their unfettered power as an innate entitlement, and they express contempt for any efforts to limit or even monitor what they do.

Please watch.  A video from Knowledge@Wharton, John Mack discusses that fateful weekend in September ‘08.

All signs point to this uncomfortable truth:  small business owners are less likely to get a loan for the capital they need to grow their business than six months ago.  As quoted in CNN Money.com, Ben Bernanke, Federal Reserve Chairman, said in a speech at the Economic Club of New York, “The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further.”  Even established small businesses are seeing their credit lines evaporate under the more restrictive conditions.  This chart from CNN Money.com clearly shows banks pulling back from small business lending even after TARP.

Small B2B businesses must move quickly to find solid alternatives to traditional lines of credit or term loans.   Putting their receivables to work is a strategic solution for a small business.  Receivables, typically a company’s largest asset, can be collateralized with the increased liquidity allowing the business to continue growing.  Receivables financing is the new black.

I read Ben Bernanke’s most recent speech to the Economic Club of New York with great interest.

He offered three reasons that banks are being so Scroogelike with their money.  I offer these explanation not to excuse the banks, but to encourge you, dear borrower, to not take it personally when it seems your bank wants to do anything BUT lend you money!

1.   Some banks are keeping more liquid assets on their books, at the request of regulators.  That reduces cash available to lend.  Analogy:  while you’d love to lend your nephew part of his college tuition, you decide it’s smarter to have a bigger cash cushion in these difficult times.

2.  Banks have already sustained large losses, and don’t know what future regulations will be enacted; they don’t want to take on additional risks until there is more certainty.  Analogy:  you lent your college roommate money to buy her wedding dress but she never paid you back.   So the next time a friend in need calls, you are not exactly in the mood to be  so trusting again.   

3.  Lenders are still having trouble finding a secondary market to securitize the loans already on their books.  Translation:  it’s harder for banks to find fresh money to lend out.  (Bailout money is supposed to help, but that’s different than creating a secondary market, which will be durable and predictable, which bailout money is not!)

To sum up, banks recklessly lent out money that never got paid back, there have been repercussions, and now they are afraid to make foolish mistakes again and lose even more money.  No wonder they are so grouchy!

Does that make you feel any better?

It is becoming apparent that as the end of the year approaches market players are squaring FX positions rather than putting new risk on. The USD has failed to show any sign of sustaining a recovery over recent weeks but may be benefiting from short covering into year end, with the USD index pivoting around the 75.00 level. Supportive comments from US officials and international calls for the US to act to prevent the currency from being debased may also be helping on the margin.

Nonetheless, the USD’s outlook is still mired by a combination of both cyclical and structural concerns and it will fail to recover on a sustainable basis until it loses the mantle of preferred funding currency. This is unlikely to happen soon given the repeated commitment by the Fed to keep interest rates low for long as repeated this week by Fed Chairman Bernanke.

USD/JPY continues to gyrate around the 89-90 level and is showing little inclination to move either side though a run of positive economic surprises and the move in interest rate differentials (versus US) suggest that the JPY will trade on the firmer side of 90 over the short term; USD/JPY has been the most highly correlated currency pair with interest rate differentials over the past month. JPY speculative positioning is not particularly onerous at present, suggesting some room for an increase in JPY positioning.

The EUR continues to struggle to make any headway and is likely not being helped by European policy makers’ attempts to talk the USD higher. ECB President Trichet repeated his comments that a strong USD is in the world’s best interest though by now such comments are nothing new. It will need a clear break above 1.5061 in EUR/USD to renew the uptrend in the currency. For now, a reported 1.48-1.51 option expiring on Friday suggests range trading, with EUR/USD looking heavy on the top side.

GBP is set to remain firm despite the slightly dovish November MPC minutes. GBP looks resilient against the EUR against which it has benefited from a favourable move in interest rate differentials as a well as an adjustment in positioning where the market has decreased its GBP short positions and also decreased EUR long positions. EUR/GBP has been leading the way, and like USD/JPY this currency pair has become increasingly correlated with interest rate differentials, which has played positively for GBP. This has helped it to pivot around the 200 day moving average around 0.8871, a level that will prove important to determine further downside potential in EUR/GBP.

Valutazioni rassicuranti giunte dal presidente della Fed, interventuo all’Economic Club di New York.

L’economia Usa crescera’ nel 2010 nonostante “i forti venti contrari”, come le condizioni restrittive del credito e la debolezza dell’occupazione.

Il presidente della Federal ha anche sottolineato che la banca centrale e’ impegnata a sostegno del biglietto verde ed opera “affinche’ il dollaro sia forte e sia fonte di stabilita’ finanziaria globale”.

(121 commenti) (116 commenti) (102 commenti) (101 commenti) (94 commenti) (80 commenti) (74 commenti) (66 commenti) (62 commenti) (61 commenti)

Fonte:
http://www.wallstreetitalia.com/articolo.asp?art_id=817547

Bernanke’s Outlook For Recovery and What It Means For Jobs

Courtesy of Mish

Earlier today, At the Economic Club of New York, Fed Chairman Ben Bernanke gave his Outlook for the Economy and Policy.

His speech contains much self-serving claptrap about how Federal Reserve policy save the day. Nowhere has the Fed admitted its role in creating the mess.

Bernanke thinks printing money and borrowing from the future via cash-for-clunkers can have lasting benefits. I think that if anything lasting comes from cash-for-clunkers, it will be net-negative.

Bernanke is still extremely concerned about commercial real estate, bank lending, and jobs. On those issues he is certainly right to be concerned. Here are a few snips from the speech.

Bank Lending Practices

Access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, and the Federal Reserve’s Senior Loan Officer Opinion Survey on Bank Lending Practices shows that banks continue to tighten the terms on which they extend credit for most kinds of loans–although recently the pace of tightening has slowed somewhat. Partly as a result of these pressures, household debt has declined in recent quarters for the first time since 1951. For their part, many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms. The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further.

While I am on the topic of bank lending, I would like to add a few words about commercial real estate (CRE). Demand for commercial property has dropped as the economy has weakened, leading to significant declines in property values, increased vacancy rates, and falling rents. These poor fundamentals have caused a sharp deterioration in the credit quality of CRE loans on banks’ books and of the loans that back commercial mortgage-backed securities (CMBS). Pressures may be particularly acute at smaller regional and community banks that entered the crisis with high concentrations of CRE loans. In response, banks have been reducing their exposure to these loans quite rapidly in recent months. Meanwhile, the market for securitizations backed by these loans remains all but closed. With nearly $500 billion of CRE loans scheduled to mature annually over the next few years, the performance of this sector depends critically on the ability of borrowers to refinance many of those loans. Especially if CMBS financing remains unavailable, banks will face the tough decision of whether to roll over maturing debt or to foreclose.

The Job Market

In addition to constrained bank lending, a second area of great concern is the job market. Since December 2007, the U.S. economy has lost, on net, about 8 million private-sector jobs, and the unemployment rate has risen from less than 5 percent to more than 10 percent.6 Both the decline in jobs and the increase in the unemployment rate have been more severe than in any other recession since World War II.

Besides cutting jobs, many employers have reduced hours for the workers they have retained. For example, the number of part-time workers who report that they want a full-time job but cannot find one has more than doubled since the recession began, a much larger increase than in previous deep recessions. In addition, the average workweek for production and nonsupervisory workers has fallen to 33 hours, the lowest level in the postwar period. These data suggest that the excess supply of labor is even greater than indicated by the unemployment rate alone.

With the job market so weak, businesses have been able to find or retain all the workers they need with minimal wage increases, or even with wage cuts. Indeed, standard measures of wages show significant slowing in wage gains over the past year. Together with the reduction in hours worked, slower wage growth has led to stagnation in labor income. Weak income growth, should it persist, will restrain household spending.

The best thing we can say about the labor market right now is that it may be getting worse more slowly. Declines in payroll employment over the past four months have averaged about 220,000 per month, compared with 560,000 per month over the first half of this year. The number of initial claims for unemployment insurance is well off its high of last spring, but claims still have not fallen to ranges consistent with rising employment.

Although economic pain is widespread across industries and regions, different groups of workers have been affected differently. For example, the unemployment rate for men between the ages of 25 and 54 has risen from less than 4 percent in late 2007 to 10.3 percent in October–nearly double the rise in unemployment among adult women. This discrepancy likely reflects the high concentration of job losses in manufacturing, construction, and financial services, industries in which men make up the majority of workers. From the perspective of America’s economic future, the effect of the recession on young workers is particularly worrisome: The unemployment rate among people between the ages of 16 and 24 has risen to 19 percent–and among African American youths, it is now about 30 percent. When young people are shut out of the job market, they lose valuable opportunities to gain work experience and on-the-job training, potentially reducing their future wages and employment opportunities.

The Outlook for the Economy and Policy

I return now to the outlook for the economy and policy. As I noted, I expect moderate economic growth to continue next year. Final demand shows signs of strengthening, supported by the broad improvement in financial conditions. Additionally, the beneficial influence of the inventory cycle on production should continue for somewhat longer. Housing faces important problems, including continuing high foreclosure rates, but residential investment should become a small positive for growth next year rather than a significant drag, as has been the case for the past several years. Prospects for nonresidential construction are poor, however, given weak fundamentals and tight financing conditions.

In the business sector, manufacturing activity has been expanding and should be helped by the continuing strength of the recovery in the emerging market economies, especially in Asia. As the recovery takes hold, enhanced business confidence, together with the low cost of capital for firms with access to public capital markets, should lead to a pickup in business spending on equipment and software, which has already shown signs of stabilizing.

I have discussed two of the principal factors that may constrain the pace of the recovery, namely, restrictive bank lending and the weak job market. Banks’ reluctance to lend will limit the ability of some businesses to expand and hire. I expect this situation to normalize gradually, as improving economic conditions strengthen bank balance sheets and reduce uncertainty; the fallout for banks from commercial real estate could slow that progress, however.

Jobs are likely to remain scarce for some time, keeping households cautious about spending. As the recovery becomes established, however, payrolls should begin to grow again, at a pace that increases over time. Nevertheless, as net gains of roughly 100,000 jobs per month are needed just to absorb new entrants to the labor force, the unemployment rate likely will decline only slowly if economic growth remains moderate, as I expect.

Mapping The Bernanke Recovery

Inquiring mind just might be interested in mapping those statements. Let’s assume it takes 100,000 jobs per month to absorb new entrants, decreasing to 70,000 a month by 2020.

Bernanke says jobs will be scarce for some time. He did not define "scarce" or give a timeline. However, let’s assume jobs will be scarce only for 1 year. Also let’s assume unemployment will rise for about a year (while jobs are scarce), level off, then start dropping in accordance with the paragraphs in red above.

Scenario "B"

Scenario "B" Data

click on chart for sharper image

Scenario "B" Suggests 100,000 jobs per month from 2010 through 2013 will be needed to keep up with birthrate and immigration. I took the liberty of helping out Bernanke by assuming demographics would start lowing the number of jobs requited.

I also assumed no bump in the participation rate as discouraged workers currently out of work start looking. Then again, perhaps Bernanke factored that in to his 100,000 estimate. However, judging from other things he has said in the past, I do not believe that to be the case.

Scenario "B" also assumes no double dip recession or any kind of recession for that matter all the way through the end of 2020 even though the Fed must at some point tighten to reduce its balance sheet.

Moreover, in spite of what Bernanke said in his speech about housing and commercial real estate, I have the Bernanke forecast as assuming +100,000 jobs a month starting in 2011, and adding a minimum of 120,000 jobs a month for 6 consecutive years while simultaneously subtracting jobs needed to keep up with the birth rate and demographics all the way through 2020.

Yet even under this optimistic scenario, unemployment will still be above 10% at the end of 2014 and will not dip below 8% until the end of 2020.

To play around with these parameters in a downloadable spreadsheet, please see the addendum to Mish Unemployment Projections Through 2020.

Mike "Mish" Shedlock

Risk is back on and the liquidity taps are flowing. Fed Chairman Bernanke noted that it is “not obvious” that US asset prices are out of line with underlying values, comments that were echoed by Fed Vice Chairman Kohn, effectively giving the green light to a further run up in risk trades. The last thing the Fed wants to do is ruin a good party and the comments indicate that the surge in equities over recent months will not be hit by a reversal in monetary policy any time soon.  

Aside from comments by Fed officials risk appetite was also boosted by a stronger than forecast rise in US October retail sales, with US markets choosing to ignore the sharp downward revision to the previous month’s sales, the weaker than forecast ex-autos reading and a surprisingly large drop in the Empire manufacturing survey in November.

Fed comments were not just focussed on the economy and equity markets as Bernanke also tried to boost confidence in the beleaguered USD, highlighting that the Fed is “attentive” to developments in the currency.  He added that the Fed will help ensure that the USD is “strong and a source of global financial stability”.  The comments had a brief impact on the USD and may have given it some support but this is likely to prove short lived. 

The reality is that the Fed is probably quite comfortable with a weak USD given the positive impact on the economy and lack of associated inflation pressures and markets are unlikely to take the Fed’s USD comments too seriously unless there is a real threat of the US authorities doing something to arrest the decline in the USD, a threat which has an extremely low probability.

It is perhaps no coincidence that the Fed is attempting to talk up the USD at the same time that US President Obama meets with Chinese officials.  The comments pre-empt a likely push by China for the US not to implement policies that will undermine the value of the USD but comments by Obama appear to be fairly benign, with the President noting that the US welcomes China’s move to a “more market based currency over time”. The relatively soft tone of these comments will further dampen expectations of an imminent revaluation of the CNY.

The Times reports on a recently released audit which concludes, beyond the shadow of a doubt, that Timothy Geithner (now Treasury Secretary, then President of the New York Fed) voluntarily gave up vast negotiating powers when choosing to shower AIG with billions upon billions of dollars.

The article is written in standard Times-ese, which is to say that it seeks to relate truly scandalous information in such a way as to cause as little uproar as possible, but although it must be translated into standard English, some truly damning testimony emerges:

Just two days before the New York Fed paid A.I.G.’s partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut — but it never got the chance.

UBS, of Switzerland, alone offered to give a break to the New York Fed in the negotiations last November over how to keep A.I.G. from toppling and taking other banks down with it. It would have accepted 98 cents on the dollar.

The Fed “refused to use its considerable leverage,” Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, wrote in a report to be officially released on Tuesday, examining the much-criticized decision to make A.I.G.’s trading partners whole when people and businesses were taking painful losses in the financial markets.

So this means: The New York Fed decided to print 100% of the value of AIG’s investors’ bad loans in order to get them to divest from AIG, and (hopefully) save the money-laundering giant. Realize, now, that the Fed was under no obligation whatsoever to guarantee these loans with taxpayer dollars, and certainly not guarantee them at full value. Given that these CDS loans were later revealed to be totally fraudulent, this decision makes even less sense.

If I convinced you to give me real dollars for Monopoly Money, and then you complained to the government that the Monopoly Money you received was actually worthless, would you expect them to just print 100% of the value and give it to you, no questions asked? Or would you expect them to give you nothing and tell you, in effect, to be smarter next time?

What’s truly astounding about this episode is that some of the banks offered to take less than 100% of the value of their worthless investments, but Geithner refused! He said to them, essentially, that “oh well, it doesn’t matter – it’s taxpayer dollars anyway! Go ahead, take the full value!”

This is the man who is now our Treasury Secretary.

Nov 16 – President Obama and Fed Chairman Ben Bernanke are either confused, liars, or more likely – both. Lately, due to a lack of confidence in the U.S dollar and economic fundamentals, the duo have been making very public comments about the state and future of the U.S dollar and economy. President Obama, during his Asian tour, said a deeper relationship between the U.S. and China is critical to the economic prosperity of both countries. I am amazed he even said that with a straight face. A quick look at his credentials will show he is no friend of free trade. Tariffs on Chinese tires and steel, possibly more tariffs on Chinese glossy paper and phosphates, clearly shows that free trade is not on the agenda – but protectionism is.

Also – President Obama is sending a mixed message to the Chinese government. Obama is trying to encourage the Chinese to let their currency appreciate in value. Yet, on the other hand, he is trying to encourage the Chinese government to keep buying U.S treasuries, so the U.S. can continue to fund their “recovery” programs. So President Obama wants the Chinese to save their money, all awhile lending it to the U.S. simultaneously? It’s one or the other, you’re not going to get it both ways. But the President understands that the U.S economy is completely based on spending borrowed money and without their entire phony economy would come crashing down. Obama is simply saying what he needs to try to retain confidence in the dollar.

Obama also made a comment saying the U.S, in order to re balance, needs to save more and consume less. Of course this is just spin, because all of the U.S policies are geared toward getting Americans to spend more of their money. Think Cash for Clunkers, Home buyers tax credit. Not to mention the dangerously low interest rates.

Speaking of the Fed, Federal Reserve Chairman Ben Bernanke reaffirmed in a midday speech that the central bank would hold interest rates at record-low levels for an “extended period,” and that he didn’t see signs that the money being pumped into the economy by the government was creating speculative bubbles. This is, of course more political spin.  He is simply saying what the speculators hoped he would say, and predictably stocks and bonds got a short boost. The entire “recovery” is one bubble because it is being traded in dollars, which are loosing in value quicker than ever. Predictably, he see’s no problem at all with the inflation in the market. After all if he admitted the truth, that they were inflating they’re way out of recession, the dollar would be quickly abandoned and the U.S would would be worse than where it started.

But maybe, thats what should happen….

- Sober Economist.

sheesh, he basically gave them the green light today - we aren’t sure what to make of this rally in gold other than the HFs seem to be piling in.  There are simply too many Cash For Gold commercials on TV for this thing to be sustainable.  That said we can see it going on for a while longer.  The 1.382 extension of the previous move down looks to 1197.50 and the 1.618 puts it at 1282.50.  Since Gold is now priced higher than the S&P and we are looking for a top around 1230 there we see no reason why we can’t hit 1282.50 on a blow off.  Gold is very illiquid and there is a lot of dumb money chasing. 

Full Disclosure:  WE ARE NOT and WILL NEVER BE LONG GOLD

FedSpeak Proves Correlation *AGAIN*

Courtesy of Karl Denninger at The Market Ticker

Here’s Bernanke’s speech and what he said:

We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.

That’s a new one.  You are attentive to it eh?

Well then about this, Sir Jackass?

An EXACT correlation as soon as Bernanke’s words were released – synchronized EXACTLY as to time.  Dollar spiked, the S&P 500 dropped.

The Fed has the lever to force this carry trade out of the system before it grows large enough to destroy our economy and productivity.  They need only raise rates – not a lot – just enough to make our markets unattractive.  2% should do it nicely.

Who can argue that 2% isn’t "very accommodative" in terms of rates?

Bernanke claims:

My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely.

He’s lying.  If he truly believed this The Fed Funds rate would not be at zero – but it is.

Bernanke "outs" himself by saying:

The demand for credit also has fallen significantly: For example, households are spending less than they did last year on big-ticket durable goods typically purchased with credit, and businesses are reducing investment outlays and thus have less need to borrow. Because of weakened balance sheets, fewer potential borrowers are creditworthy, even if they are willing to take on more debt.

Here’s the most-recent Z1 credit graph:

Note that The Fed’s "base money" is at present about $1.8 trillion, which is $1 trillion larger than the "normal" $800 billion.

But credit outstanding is some $53 trillion dollars.

Clearly, without credit expansion it is not possible for economic growth to occur.  But credit expansion requires economic activity that in turn allows the coupon payments – interest and principal – to be made.

Where is the evidence that this is, at present, possible?

It’s absent because it hasn’t happened, and that’s a major problem.  By refusing to allow the market to take care of the imprudent, forcing the default of bad loans and thus clearing them from both the lender and borrower’s balance sheets, we have impaired any ability to return to economic growth, as the bad debt and its servicing requirements still exist.

Ben goes on to say:

With nearly $500 billion of CRE loans scheduled to mature annually over the next few years, the performance of this sector depends critically on the ability of borrowers to refinance many of those loans. Especially if CMBS financing remains unavailable, banks will face the tough decision of whether to roll over maturing debt or to foreclose.

These "loans" were made imprudently with dramatically-overstated expectations for rents and occupancy.  There is no solution to this problem that results in sustainable growth without foreclosure and the loss being taken, just as there is not in residential real estate and home mortgages.  Yet the policy of The Fed and government is to "extend and pretend", or worse, take all the trash onto the balance sheet of either The Fed or The Treasury, effectively hiding the losses – for a while.  But again, that debt still requires servicing no matter where it is, and that (once again) precludes safe and sound lending, as the debt-carrying capacity has been consumed.

Besides cutting jobs, many employers have reduced hours for the workers they have retained. For example, the number of part-time workers who report that they want a full-time job but cannot find one has more than doubled since the recession began, a much larger increase than in previous deep recessions. In addition, the average workweek for production and nonsupervisory workers has fallen to 33 hours, the lowest level in the postwar period. These data suggest that the excess supply of labor is even greater than indicated by the unemployment rate alone.

No, really?  You mean that having a McJob isn’t as good as screwing together cars?  And further, that having your boss scream at you "work harder and faster or GET FIRED!" isn’t good for consumer income – and morale?

Weak income growth, should it persist, will restrain household spending.

There is no income growth.  Intentional understatements of inflation – hedonic adjustments and the refusal to include actual house price increases, even though the majority of Americans own homes, mean that we have spent the last ten years watching the average American’s real household purchasing power be destroyed.  Now we add outright job loss and ramping credit card rates to the mix, as if the deception by the government and The Fed was insufficient – kicking people after you’ve managed to shove ‘em in the gutter has become the next great Bankster Sport.

The unemployment rate among people between the ages of 16 and 24 has risen to 19 percent–and among African American youths, it is now about 30 percent.

That’s because currency and interest-rate imbalances have resulted in those front-line jobs, including especially manufacturing, all going over to China – where they will work for $2/day.  This will not go away without addressing the structural imbalances that The Fed, Congress and The Administration have intentionally created.

Final demand shows signs of strengthening, supported by the broad improvement in financial conditions.

How?  Without jobs how does final demand – with 70% of the economy being consumer spending – strengthen?  Yes, the government can (and has thus far) blow money it doesn’t have, so long as China continues to allow it, and transfer that to people.  Is that sustainable? 

The outlook for inflation is also subject to a number of crosscurrents. Many factors affect inflation, including slack in resource utilization, inflation expectations, exchange rates, and the prices of oil and other commodities.

The Fed has directly caused the price of oil to more than double since this spring with its zero interest rates and the establishment of the dollar carry trade.  There is no evidence whatsoever that Bernanke gives a tinker’s damn if your gasoline is north of $3/gallon, so I hope you’re prepared for it to go to $5, $6, $7 or even $8 – because if this game continues, it will.

We have a wide range of tools for removing monetary policy accommodation when the economic outlook requires us to do so, and we will calibrate the timing and pace of any future tightening to best foster maximum employment and price stability.

Along with 30% unemployment, 29.9% credit card interest rates and destroyed futures for your children and grandchildren.

Bernanke, Geithner and the Administration all are trying to do the impossible – return to "economic growth" in a credit-based monetary system where the carrying capacity of debt has been effectively reached, WITHOUT forcing the removal of that bad debt by allowing the default of those poorly-underwritten and issued loans.

The immovable object has met the irresistible force.

PS: Oh, Bernanke just said he sees no problems with valuations in the US Stock market.  Really Ben?  A P/E of nearly 140 is just fine, right?  No valuation bubble there!

US Federal Reserve Chairman Ben Bernanke says significant economic challenges remain, as Commerce Department reports increased sales in October  … From VOA. Full story

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