Month: April 2010

I’ll Take “Unsustainable” for $500, Alex

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China’s Economy?

China is reporting that its economy grew by 11.9% year over year.

This raises two issues:

  • How reliable are these numbers? The PRC tends to encourage lower level bureaucrats to over-report growth, and these numbers tend to filter up the chain.
  • If these numbers are anywhere near reality, what is driving it, and will it be like Wile E. Coyote discovering that he is standing in thin air when something more sustainable hits?

Chinese real estate is clearly with a bubble, with some areas experiencing appreciation in excess of 50% (!) over the past year.

One of the things driving this is the fact that the Yuan is under-valued: It makes foreign assets more expensive, which drives up demand for local investments, like real estate.

If their currency appreciates, and it does appear to be in the cards in the not-too-distant future, we could see money flowing to non-Chinese assets, and their bubble burst.

This could be yet another shoe to drop (there are many out there) in the current downturn, even though we currently appear to have found a bottom.

The Poor Don’t Pay Taxes………My Ass!

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Yeah, right, only the rich pay all the taxes

The latest right wing meme is that 47% of the population pay no taxes.

Of course, it’s not true, though it is true that that number owe no federal income tax, but the do owe significant amounts of Social Security, Medicare, and state and local taxes.

As this handy, dandy chart shows, it’s simply not true, and my guess would be that if this were broken up into deciles, as opposed to quintiles, that the top 10% would pay even less, since they are above the social security cutoff, and get far more of their income in capital gains and dividends.

Warren Buffet once noted that his receptionist paid a greater percentage of her wages in taxes than he did, and that still holds true.

A Corollary to Saroff’s Rule

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Sex, Lies, and Videotape?

You know Saroff’s Rule:

If a financial transaction is complex enough to require that a news organization use a cartoon to explain it, its purpose is to deceive.

Well, now I have to come up with a corollary for puppet shows, because the always entertaining Dylan Ratigan has added this to the mix.

[on edit]If anyone can give me suggestions, it would be appreciated.

It’s kind of like School House Rock, on a bad acid trip.

Lincoln Follows the Poll Numbers, Goes Hard on Banks

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Blanche Lincoln (D-AR), as head of the Senate Agriculture Committee, has significant input on derivatives legislation, because one of the oldest of the derivatives are commodity futures, things like pork belly futures, which is why it manages the Commodities Futures Trading Commission (CFTC).

The word has been that Lincoln would be almost as much of a road block ad the Republicans on meaningful reform, seeing as how her record is one of doing the bidding of insurance companies and bank.

It turns out that the word is wrong. Lincoln is requiring that derivatives trading be walled off from banking, as well as requiring the trades be done on open exchanges:

Goldman Sachs Group Inc., JPMorgan Chase & Co. and their biggest rivals would be forced to wall off derivatives trading operations from their commercial banks under a measure to be introduced by Senate Agriculture Committee Chairman Blanche Lincoln, a congressional aide said.

Lincoln, an Arkansas Democrat, will propose a “no-bailout provision” as part of an overhaul of derivatives regulation she plans to unveil today, according to the aide, who declined to be identified because the plan isn’t public. The measure aims to ensure banks don’t endanger depositors’ money with risky trading of over-the-counter derivatives, the aide said.

…………

Lincoln’s provision would bar swaps dealers from taking advantage of the Federal Reserve’s discount lending window, emergency liquidity functions and the Federal Deposit Insurance Corp.’s deposit guarantee. “It eliminates all of the advantages with the affiliation with an insured depository institution, which are profound,” said Karen Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc.

…………

It would also increase protections for clients by requiring swaps dealers to treat them as a fiduciary — obligating them to put customers’ interests ahead of the company’s, the aide said.

The measure requires most over-the-counter derivatives to be traded on exchanges or through clearinghouses. Companies that use swaps to hedge the cost of materials or other non-investment purposes would be exempted from the requirements, the aide said. Like the Volcker rule, which would ban commercial banks from proprietary trading, the wall-off provision would separate derivatives trading from traditional banking activities such as taking deposits and making loans.

Let’s be clear, this is very tough stuff, at least by the standards of the Congress, particularly the Senate.

She actually lambasted the administration for being too soft on banks:

“Proposals that I have seen from the administration have not gone far enough to prevent bailouts of ‘too big to fail institutions’ and could contain loopholes,” Lincoln said. “If we pass reform, it needs to be real reform. My proposal will go further than any other congressional or administration proposal to prevent future bailouts.”

I’m with David Dayen, this all happened within days of her primary challenger, Bill Halter (Reminder, he’s on My Act Blue Page) releasing ads saying that she was too close to the banking industry.

Everyone on Capitol hill know that her proposals will never go beyond a press release, and that behind the scenes, she will continue to do the big banks’ bidding.

This is just electoral politics, and a full court press from her Congressional Colleagues and the White House.

Economics Update

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Well, we have mostly good news today, with the Summary of Commentary on Current Economic Conditions, aka “The Beige Book”, showed the economy picking up steam in March.

Additionally, the retail sales report for March rose more than expected, and diesel fuel consumption rose indicating increased transportation activities, and the US trade deficit rose, which also indicates an increase in demand.

On the down side, the National Federation of Independent Business’ index of small business optimism fell in March, and since this is where most jobs are created, it does not bode well for jobs in the near term.

In real estate, mortgage applications fell for the 6th straight week, which is not surprising, as mortgage rates have been trending higher and the FHA has started to charge more for mortgage insurance to replenish its depleted reserves.

Finally, inflation seems to remain well under control with the March CPI rising by only 0.1%

That Special Election in Florida?

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Bob Wexler retired, and there was a special election in Florida’s 19th district to replace him last night.

The results? Democrat Ted Deutch trounced Republican Ed Lynch, 62%-36%.

This is very much in line with the district’s PVI D +19, but that’s the point: there was no movement from the existing trends.

So much for “voter backlash” against the HCR bill.

I think that the Republicans may have seen the outrage of their base at losing when they thought that they had won, and thought that it was some sort of mass anger at the bill.

Put a Steak* Through It’s Heart

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We See the problem here

The good folks at Bloomberg, no group of raving socialists have some graph pr0n.

What they are showing is something very basic: That when profits (and not stated, remuneration) in the financial industry skyrocket, this is not a sign of health in the economy, this is a sign of sickness.

It means that enormous amounts of resources are being redistributed to non-productive activities, essentially bankers shafting their customers and pocketing the difference:

In July 2008, [Deutsche Bank AG strategist Jim] Reid said that U.S. banks had made “excess profits” of about $1.2 trillion in the previous decade, compared with how much they should have made based on economic growth, and that those excesses would be wiped out. Since then, U.S. financial firms have written down the value of their assets by about $1.15 trillion, according to Bloomberg data.

“We are now all well aware that rather than overhaul a financial system that arguably contributed to the problems of the last two to three years, the authorities have created the conditions for the industry to thrive,” Reid wrote this week. “Only time will tell how the regulators and politicians will decide to address these imbalances.”

In any case, I spotted it on Kevin Drum’s blog, and he found it at Paul Kedrosky’s blog, but he begs to differ with Mr. Kedrosky’s analysis.

You see, Mr. Kedrosky’s thesis is that with rates at 0%, and the finance industry still not supplying the lubricant that keeps the economy moving particularly well, that even bad bankers can make a profit.

Mr. Drum, and I agree, sees the role of the bankers somewhat differently :

Wall Street is only full of bad bankers if you think the role of bankers is to provide efficient financial services to the rest of the economy. If you adopt the more correct attitude that the role of bankers is to make lots of money for bankers, then America has the best bankers in the world. And they’re proving it yet again.

(emphasis mine)

This is, of course the problem: What is good for the banks is increasingly bad for the country, which is why the finance industry, and all of the FIRE sector (Finance, Insurance, and Real Estate) needs to be shrunk back to historic levels of society.

Until one of the goals of regulation is a recognition that the FIRE sector is basically parasitic once it expands much beyond the bare minimum required, then part of the solution is to shrink it, and this needs to be an explicit goal of any new regulatory regime.

*It’s a reference to Damon Knight’s (very) short story eripmaV. Read the story, or buy the T-shirt with the story printed in full on it.

Saroff’s Rule, Once Again

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Saroff’s rule: If a financial transaction is complex enough to require that a news organization use a cartoon to explain it, its purpose is to deceive

The New York Times has a description of how Lehman Brothers used a front company to obtain credit and conceal debt:

It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers.

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.

Not surprised about their doing this, though I am surprised that this is, at least nominally, legal.

Quote of the Day

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This man should spend the rest of his life digging coal a mile below the earth with his bare hands

Crusiing the innerwebz, a member of the by invitation only Stellar Parthenon BBS discovered the following video of Massey CEO Don Blankenship’s.

It’s short, but you will note that he thinks that agencies attempting to make coal mines safer are as “silly as global warming.”

Well, one of the users, Jolly Reaper, on said the following:

If he doesn’t get whacked by a miner, this nation really is full of pussies.

It’s true.

One of the great tragedies of US culture is that when disgruntled employees go on shooting sprees, they target their coworkers, as opposed to upper management, which should then be followed by a few acquittals.

While any loss of life is tragic, if there was a real fear of death among upper management as to their safety, we would see better management.

It seems that even workers going postal give too much deference to the MBA/Banker types.

A Coda on “Collateral Murder”

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A soldier whose unit was involved in the incident captured on video is saying that these actions were business as usual and were fully in accord with the rules of engagement.

The full statement is after the break, but his basic point is that this is an inevitable part of war.

Certainly this is true to some degree, but the incident is also a reflection of some real issues with US doctrine, particularly with the aggressive use of air power, and rules of engagement.

Both of these problems contribute, and continue to contribute to, a situation where we are creating an environment where we create more insurgents, and, in the long run, more dead American soldiers.

Statement follows:

FOR IMMEDIATE RELEASE
April 9, 2010 10:45 AM
CONTACT: Media Advisory

Veteran of “Collateral Murder” Company Speaks Out

WASHINGTON – April 9 – Josh Stieber, who is a former soldier of the “Collateral Murder” Company, says that the acts of brutality caught on film and recently released via Wikileaks are not isolated instances, but were commonplace during his tour of duty.



“A lot of my friends are in that video,” says Stieber. “After watching the video, I would definitely say that that is, nine times out of ten, the way things ended up. Killing was following military protocol. It was going along with the rules as they are.”



Stieber deployed to Baghdad with Bravo Company 2-16, whose members were involved in the incident captured in Wikileaks’ “Collateral Murder” video, which has made international headlines by depicting a July 2007 shooting incident outside of Baghdad in which over a dozen people, including two Reuters employees, were killed. Although he was not present at the scene of the video, he knows those who were involved and is familiar with the environment. Stieber, who now works to promote peace and alternatives to war, is speaking publicly about his time in Iraq and the incident captured in this video.



“If these videos shock and revolt you, they show the reality of what war is like,” says Stieber. “If you don’t like what you see in them, it means we should be working harder towards alternatives to war.”



Stieber currently lives in Washington, D.C.




BACKGROUND ON JOSH STIEBER:
Branch of service: United States Army (USA)

Unit: 1st ID

Rank: Spc.

Home: Laytonsville, Maryland

Served in: Baghdad (Rustamiyah) 07-08 Fort Riley, KS 06-07, 08-09



###

No Outrage From Me At All

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Developing nations are threatening to cut aid to poorer nations that do not sign onto to greenhouse gas reductions:

Rich countries have threatened to cut vital aid to the developing nations if they do not back the deal agreed at the UN climate summit in Copenhagen, it has emerged.

The pressure on poor countries to support the US, EU and UK-brokered Copenhagen accord came as 190 countries resumed UN climate talks in Bonn in an atmosphere of mutual suspicion.

“The pressure to back the west has been intense,” said a senior African diplomat. “It was done at a very high level and nothing was written down. It was made very clear by the EU, UK, France and the US that if they did not back them then they would suffer.”

My heart bleeds borscht for them.

The idea that LDC’s, which for some reason includes two of the industrial powerhouses of the world, India and China, should get a free ride, and basically be allowed to destroy the world is complete crap.

If you want to piss in the punch bowl, don’t expect to be invited to the party.

Not only is such arm twisted to be expected, it is the right thing to do.

The damage that was done by the Kyoto protocols, where the LDC’s were left off the hook, giving polluting industries an incentive to move there and continue to pollute, is huge and ongoing.

We want more of this arm twisting, not less.

Economics Update

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Business orders returning

Well, it’s kind of a slow news day, as the big news was the Euro loans to Greece, but we do have another sign of a recovery, which is that business orders are on an upswing worldwide.

All in all, I think that we are truly in recovery, unless another shoe drops in high end finance, but I’m kind of expecting another shoe to drop there, causing another panic and another bailout.

The National Bureau of Economic Research (NBER) continues to take a conservative approach, saying that, “The determination of the trough date on the basis of current data would be premature.”

This is not surprising. The folks at the NBER typically take more than a year after the trough bottom to announce that they have determined a trough date.

In energy, gasoline is up nearly 4¢/gallon this over the last three weeks, to $2.85/gallon, and it’s not unreasonable to assume that it will break $3/gallon by the start of the summer driving season.

As to oil, it fell today, as and so did the dollar, largely in reaction to the Greek bailout.

Magnetar: Why a Criminal Pursuit of the Finance Industry Is Necessary

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Criminality as a Broadway musical

Pro Publica, along with the radio folks at Planet Money, have investigated the activities of a hedge fund called Magnetar, which appears to have bankrolled the creation of mortgage backed securities so that they could bet against them.

Note that there are 8 chapters, so you may want to link to the This American Life broadcast, (about 40 minutes) which is less encyclopedic, but rather more streamlined.

Basically, at the end of 2005, it appeared that the housing bubble was moderating, which made people were less interested in investing in the mortgage backed security known as the CDO, because without double digit increases in home prices, the risk levels were higher, and the potential rewards were less.

What Magnetar did was to get banks to write more CDOs by agreeing to buy the worst tranches, the riskiest 3-5% of these instruments, and then everyone else, seeing as how the scum at the bottom of the barrel was taken, would snap up the “higher quality” stuff.

At one point, Magnetar was covering about ½ of the CDO market, and betting against everything that they could get their hands on with credit default swaps (CDS).

And the financial industry noticed their moves into the field, even if they did not know of the CDS bets, to the degree that Business Week predicted that they would be, “shredded”.

The folks at Pro Publica have uncovered emails where they were aggrissively pressuring the agents that they set up for the funds to make them as risky as possible, which makes sense, if you are betting against them.

For what it’s worth, it wasn’t only people like pension funds and municipalities who got burnt by this. J.P. Morgan lost billions by holding onto senior tranches of CDOs that they created for Magnetar, even though it was clear by that time the game that they were playing.

So, why did Morgan do it anyway? Because the people who bought the CDOs generated commissions at the front end, and were then given huge bonuses based on this, so by the time it all went pear shaped, the individual traders had a few tens of millions of dollars in the bank.

By the end of their run, it was so bad that even Moody’s refused to rate their CDOs.

This is deeply and perfidiously corrupt and well organized, and I cannot see why RICO isn’t being applied to anyone who touched this.

But seriously, read the whole thing. It is stunning in its scope and corruption, but this boggles the mind.

This is not taking out insurance on your neighbor’s house and burning it down. Paying for the road out to a sub development so that people will buy houses, and then using a squadron of B-52s to firebomb that development, only that development is our economy.

The Ever Reliable Joseph Lieberman

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Remember when I said that Joe Lieberman would be preening to get his face on the Teevee with regard to the new START Treaty?

Well, I was right. He is now calling for what appears to be a massive buildup in European missile defenses and a his desire for an unprovoked nuclear strike on Iran as a condition for his support:

Appearing on “Fox News Sunday,” [big shocker there] the Connecticut Independent suggested that he himself would oppose ratification of the START II Treaty that Obama signed in Prague this past week, in part because, he reasoned, the language left America vulnerable to a nuclear Iran.

“I don’t believe that there will be 67 votes to ratify the treaty unless the administration does two things,” Lieberman said. “First: commit to modernize our nuclear stockpile, so as we have less nuclear weapons we know that they are capable if, God forbid, we need them. And secondly, to make absolutely clear that the statements by Russian president [Dmitry] Medvedev at the signing in program, that seemed to suggest that if we continue to build ballistic missile defense in Europe they may pull out of this treaty, is just not acceptable to us. We need that defense to protect our allies and ourselves from Iran.”

Basically, Lieberman is saying that unless Obama threatens Iran with nuclear attack, and promises to build up the ill-conceived European missile defense system, he’ll vote no.

Yes, he’s with on everything but Iraq, thanks for keeping him in the tent and pissing in, Harry and Barack.

This is all about Joe Lieberman getting his ego stroked, and the solution to this problem is to make it clear that there will be consequences if he f%$#s with this, not to stroke his ego: that only makes him worse.

Here is hoping that he gets caught buggering an underage hamster and will be forced to resign.