FedUpUSA

Archive for March 3rd, 2011

Gee, why am I not surprised:

Washington, D.C., March 2, 2011 – The Securities and Exchange Commission today charged a former vice president at Colonial Bank who was the head of its mortgage warehouse lending division with conducting a $1.5 billion securities fraud scheme.

The SEC alleges that Catherine L. Kissick enabled the sale of fictitious and impaired mortgage loans and securities from the mortgage warehouse lending division’s largest customer – Taylor, Bean & Whitaker Mortgage Corp. (TBW) – to Colonial Bank, and she caused these securities to be falsely reported to the investing public as high-quality, liquid assets.

Got the essence of this?  The loans were either bad or non-existent but they were booked as good, performing, and real.

That’s nice.

But in an interesting and “oh my gosh, there’s two” sort of change, we have this:

In a related action today, Kissick pleaded guilty to criminal charges filed by the Department of Justice in the Eastern District of Virginia.

That would be the second time some criminal fun comes.  There’s no update yet on the sentence, of course, but at least the plea appears to have happened.  The maximum sentence for the crimes she pled to is reported to be 30 years in the Federal Lesbotell and a $250,000 fine.

Of course the SEC settled for the usual:

The SEC’s complaint charges Kissick with violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. Without admitting or denying the SEC’s allegations, Kissick consented to the entry of a judgment permanently enjoining her from violation of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Kissick also consented to an order barring her from acting as an officer or director of any public company that has securities registered with the SEC pursuant to Section 12 of the Exchange Act. Kissick also consented to an order prohibiting her from serving in a senior management or control position at any mortgage-related company or other financial institution or from holding any position involving financial reporting or disclosure at a public company. The proposed preliminary settlement, under which the SEC’s requests for financial penalties against Kissick would remain pending, is subject to court approval.

DON’T DO THAT AGAIN!  I SAY, DON’T DO THAT AGAIN!  I WILL SLAP YOUR HANDS!  YOU DO NOT HAVE TO ADMIT GUILT EVEN IF YOU JUST DID IN CRIMINAL COURT, JUST DON’T DO THAT AGAIN!

Such wonderful enforcement by the SEC – that would be “Suckers Executing Crimes”, right?

After all, we know they use their office computers for porn viewing – so there’s the “Suckers” part.

The Market-Ticker

Caroline Baum has an excellent column on Bloomberg today regarding money multipliers and a Goldman Sachs projection of what Republican budget cuts may do to the economy.

There were so many things in her post I wanted to reference that I asked Caroline if I could use her entire post. She graciously replied “Let ‘er rip”.

Goldman’s Model Evokes Blood-Sucking Leeches: Caroline Baum

Macroeconomics really is stuck in the Dark Ages.

Take “fiscal stimulus,” for example, the idea that the government can step in to fill the void when the private sector isn’t spending and boost economic growth in the process.

Economists have been debating the pros and cons of fiscal stimulus since the 1930s, when John Maynard Keynes diagnosed the problem as one of inadequate private investment and prescribed public spending, financed by borrowing, as the cure.

The discussion hasn’t advanced very much in eight decades. Sure, economists have devised elegant mathematical models that purport to show that $1 of government purchases translates into — take your pick — no increase in gross domestic product (the multiplier is zero, according to Harvard’s Robert Barro) or $1.50 of GDP (a multiplier of 1.5, according to Berkeley’s Christina Romer, who was chairman of President Obama’s Council of Economic Advisers when the $814 billion stimulus was crafted in 2009). They haven’t really proven anything.

Keynesian economics went into hibernation in the latter part of the 20th century following an array of stimulus failures on the part of both Democratic and Republican administrations in the 1970s. The only thing the spending stimulated was stagflation.

In the 1980s, inflation came down, the Berlin Wall came down, economists thought the volatility of the business cycle had come down, and the notion of government as the solution went out of vogue.
Keynesians All

All it took was a good financial crisis for the Keynesians to come out of the woodwork.

The debate over fiscal stimulus went viral last week (at least in the geek world) with an economic forecast from Goldman Sachs Group Inc. (GS), a counter from Stanford University economist John Taylor (he of the Taylor rule), and an addenda from Goldman yesterday.

The Goldman gang projected an economic drag (that would be the opposite of stimulus) on GDP growth of 1.5 to 2 percentage points in the second and third quarters if House-passed budget cuts of $61 billion for the remainder of fiscal 2011 become the law of the land.

Asked about the Goldman forecast Tuesday following testimony to the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke demurred.

“Our analysis doesn’t get a number quite like that,” he said. “Two percent is an enormous effect.”

He could have added: “especially when the rest of government is growing.”
Wrong on Everything

“Total government spending is up 6.7 percent in 2011 from 2010,” Taylor told me in a telephone interview.

Defense spending is rising, as are non-discretionary outlays for programs such as Medicare and Social Security that are on automatic pilot.

The proposed cuts would reduce non-defense non-security discretionary spending, a teensy share of the federal budget, back to 2008 levels.

In a Feb. 28 blog post, Taylor said Goldman’s analysis was “wrong.” He criticized it for failing to consider the beneficial effects that expectations of lower future deficits and smaller tax increases would have on the economy. He criticized the methodology for relying on the same “large multiplier theory” used to justify the 2009 stimulus. And he criticized the assumption that proposed spending equates with actual spending, which trickles out over time.

Aside from that, Mrs. Lincoln, the Goldman analysis was spot on.

‘Alchemists and Quacks’

This fundamental disagreement among professional economists about whether government spending helps or hurts represents the state of the art, or science, today. In what other science do practitioners design a treatment plan based on inconclusive proof that the medicine does any good?

There are no control studies in economics, no way to hold everything else constant to determine the impact of one variable, no way to falsify conclusions that models spit out. Financial Times columnist John Kay, writing yesterday about risk modelers, referred to them as “alchemists and quacks.”

A bit harsh, perhaps, but he’d probably hold macroeconomic models in the same high regard.

Whenever oil prices spike, modelers instantly project how much the increase will subtract from GDP growth. No mention of why prices are rising. Is it the result of a supply shock, which results in higher prices and reduced quantity demanded, or an outward shift in the demand curve, which equates with higher price and quantity demanded? There is a difference.

Known Knowns

In microeconomics, which is the study of how individuals and firms interact in specific markets, certain truths are self-evident. Which doesn’t mean economic planners can see them. Governments across Asia right now are using subsidies and price controls to ease the pain of higher oil and food prices even though their actions will exacerbate the crisis.

Goldman countered Taylor’s critique with a clarification. The projected 1.5 to 2 percentage point hit to GDP was to the quarterly annualized growth rate, not to the level. Thanks for that.

As I said before, we entered the 21st century with macroeconomics still looking for an Age of Enlightenment.

Five thousand years ago in ancient Egypt, medics used leeches to suck the blood of ill patients, believing the practice could cure everything from fevers to food poisoning.

Today’s physicians have largely forsaken bloodsuckers for modern medicine. It’s about time macroeconomics emerged from the Dark Ages as well.

Caroline Baum, author of “Just What I Said,” is a Bloomberg News columnist. The opinions expressed are her own.)

Dark Ages Indeed

I am wondering “How many times does an economic model have to be discredited before it is discarded?”

This idea that government spending can stimulate the economy is total nonsense. If it worked, we would see something more than 2.8% economic growth for a deficit of $1.4 trillion dollars.

The Fed purchasing Trillions of Fannie Mae and Freddie Mac bonds did nothing for housing, nor did several rounds of housing tax credits.

Government spending accounts for an ever-increasing share of GDP. Moreover, the only reason GDP is up at all is that by definition, government spending adds to GDP. The multiplier is actually negative. It takes an increasing amount of “stimulus” spending just to say in the same spot.

Taylor Model Nonsense

Taylor criticizes the Goldman multiplier model and rightfully so.

However, his own economic model is fatally flawed. He believes all the Fed needs to do is go on autopilot, hiking or lowering interest rates in accordance with the Taylor Rule.

In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank would or should change the nominal interest rate in response to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP. It was first proposed by the U.S. economist John B. Taylor in 1993. The rule can be written as follows:

In this equation, is the target short-term nominal interest rate (e.g. the federal funds rate in the US), is the rate of inflation as measured by the GDP deflator, is the desired rate of inflation, is the assumed equilibrium real interest rate, is the logarithm of real GDP, and is the logarithm of potential output, as determined by a linear trend.

Unmeasurable Economic Gibberish

The idea that interest rates can be set by mathematical modeling when the variables themselves are subject to debate as to how to measure them is preposterous.

Take the CPI for example. I believe home prices should be in the CPI. They used to be.

Somewhere along the line some theorist decided “owners’ equivalent rent” (OER) was a more valid concept. What is OER? It is the amount one would pay himself if renting a house from himself. It is the single largest component of the CPI. The measure of inflation from 2002 to now would be wildly different if one used actual home prices instead of OER.

Which model is more accurate? Look at the Fed’s chasing-its-tail actions hiking in baby steps on the way up, then lowering interest rates to zero when the economy collapsed.

ECB President Jean-Claude Trichet, a Keynesian Clown Too

Just today, Jean-Claude Trichet is talking about hiking rates in Europe.

His concern is pass-through inflation as noted in the Bloomberg article Trichet Says ECB May Raise Rates, Show `Strong Vigilance’

“There is a strong need to avoid second-round effects,” Trichet said, calling for moderation from wage and price setters. The ECB is “prepared to act in a firm and timely manner.”

This whole idea of pass-through inflation and second-round effects is yet more Keynesian claptrap. If someone pays more for gasoline, they have less to spend on clothes. It is as simple as that, but not to those purposely hiding behind economic models and their multiplier effects.

Alchemists and Quacks Galore

Making decisions on flawed models is bad enough in closed economic society.

Errors in every model are exacerbated by the fact we have a global economy subject to economic pressures of all kinds from countless places.

Financial Times columnist John Kay, writing yesterday about risk modelers, referred to them as “alchemists and quacks.” There are no control studies in economics, no way to hold everything else constant to determine the impact of one variable, no way to falsify conclusions that models spit out.

On that basis, the analyst from Goldman Sachs, Taylor, Bernanke, Krugman, Greenspan (and countless others) are all quacks.

Why Model at All?

There are no control studies because it is impossible to do them.

The real world is constantly changing, while mathematical models, Goldman’s and Taylor’s alike sit there as unmeasurable economic gibberish, when every component is subject to measurement errors and debate about what needs to be measured in the first place.

End the Fed

The free market could not possibly have done a worse job in setting interest rates than the perpetual chasing-their-own-tail central bank tactics that continually create boom-bust bubbles of ever-increasing amplitude in both directions.

If central bankers knew where interest rates should be we would not be in this mess, or at least the mess would be smaller. For further discussion about what the Fed does and does not know, I strongly encourage you to read the Fed Uncertainty Principle.

Ironically, the one thing the Fed never mentions and the ECB seldom mentions is money supply.

Here’s the deal: Inflation is a direct result of the cheapening of money. Strike that, inflation IS the cheapening of money and central bank policy in conjunction with fractional reserve lending is the cause.

Central bankers do not talk about such things because they are at the root of the problem.

The solution of course is to not only get rid of the Taylor rule, but to get rid of the Fed, the ECB, and central bankers around the globe.

Mike “Mish” Shedlock
Global Economic Analysis

Bawhahaha….

A national tea party group is in revolt against House Speaker John Boehner and wants to see him defeated in a 2012 primary, arguing that he looks “like a fool” in the debate over spending cuts and makes less sense than actor Charlie Sheen.

….

Phillips said Boehner has backpedaled on his promise to cut $100 billion from the 2011 budget with a continuing resolution spending bill passed in the House last month that included $61 billion in cuts, and is declaring victory before the House and Senate have agreed on a bill that funds the government for the rest of the year and not just the next two weeks. And the messages coming from the speaker have been confusing and contradictory, Phillips said.

$100 billion eh?

Square with this please:

In the poll, Americans across all age groups and ideologies said by large margins that it was “unacceptable” to make significant cuts in entitlement programs in order to reduce the federal deficit. Even tea party supporters, by a nearly 2-to-1 margin, declared significant cuts to Social Security “unacceptable.”

Ok.

So we have a $1,700 billion deficit and the so-called “fiscally conservative” people want to cut that deficit by less than six percent?

Tea Party:

The Market-Ticker

Despite what Federal Reserve Chairman Ben Bernanke says, rampant inflation is officially here.  The federal government is constantly monkeying with the numbers to keep the “official” rate of inflation below 2 percent, but it is becoming very difficult to deny that the cost of almost everything is really going up these days.  The American people are not stupid.  They notice the difference when they go to the grocery store or stop at the gas station.  The dollar is losing value rapidly now.  The price of gold set another new all-time record today and is currently hovering just above $1430 an ounce.  The price of West Texas crude has moved above 100 dollars several times recently and the price of Brent crude is currently above 116 dollars.  These higher oil prices are really starting to be felt in the United States.  The average price for a gallon of gasoline in the United States has now reached $3.38.  There are some gas stations in the U.S. where the price of a gallon of gas is already over 4 dollars.  But it is not just the American people that are feeling the pain.  The global price of food recently hit a new record high and almost every major agricultural commodity has absolutely skyrocketed in price over the past 12 months.  Meanwhile, Ben Bernanke just told the Senate Banking Committee that he really isn’t concerned about inflation at all.

When it comes to inflation, the key is not to look at the official U.S. government numbers (they are highly manipulated) or how the U.S. dollar is performing against other major currencies (because they are all being devalued as well).  Instead, you can get a truer sense of what is really happening to inflation by looking at what the U.S. dollar is doing against precious metals, commodities and other hard assets.

So are we experiencing rampant inflation right now?  Well, just open up your eyes and look at these 5 charts….

1 – The price of oil is racing back up to record levels.  The chart below from the Federal Reserve is a couple weeks out of date.  As noted above, the current price of West Texas crude is about $100 a barrel….

2 – The price of a gallon of gasoline in the United States seems destined to hit a brand new all-time record at some point this year.  Was it really just a few short years ago when the average price of gas in this country was about a dollar a gallon?….

3 – The value of most precious metals is very consistent over time.  So when you see precious metals go up dramatically in price, it means that the dollar is being devalued.  The price of gold just set another new all-time high and it seems destined to keep going even higher….

4 – The chart below from the Federal Reserve is a measure of the price of all commodities.  These price increases are inevitably going to be passed along to consumers in the United States….

5 – After a couple of years of stable food price, the price of food is starting to take off yet again….

In fact, many analysts are warning that we could experience a major food crisis over the next couple of years.  The global demand for food continues to grow at a very brisk pace, but all of the crazy weather we have been having around the world has caused some very bad harvests.

Unfortunately, the global price of food has gone up substantially in recent months and it is likely to keep going up very rapidly.  Just consider the following five facts….

#1 The United Nations says that the global price of food hit another new all-time high during the month of January.

#2 The price of corn has doubled in the past six months.

#3 The price of wheat has roughly doubled since the middle of 2010.

#4 According to Forbes, the price of soybeans is up about 50% since last June.

#5 The United Nations is projecting that the global price of food will increase by another 30 percent by the end of 2011.

Ouch.

But isn’t there some good economic news?

Yes, there is, but before we cover it, it is important to keep in mind that in an inflationary environment almost all economic numbers go up.

For example, during the recent hyperinflation in Zimbabwe stocks went up like crazy and “economic growth” statistics were very impressive.

Why?

Because those numbers were measured in currency units that were being devalued at a blinding pace.

So please keep that in mind when you hear “good economic statistics” on the evening news.

The truth is that in an inflationary environment such as we have now entered into almost all economic numbers should be going up.

So what is the good news?

Well, last month all three major U.S. car companies reported strong sales gains.  Sales of GM vehicles were up 49%, sales of Chrysler vehicles were up 13%, and sales of Ford vehicles were up 10%.

But just because a few pieces of good economic news come floating our way does not mean that we should forget all of the horrific long-term economic trends that are tearing this country apart.

The truth is that we are still a nation that is absolutely drowning in debt.

For example, it was just announced that China now owns 1.16 trillion dollars of U.S. government debt.

The borrower is the servant of the lender.  We should never forget that.

Also, the U.S. economy is slowly but surely becoming of less importance on the global stage.

In 1985, America’s share of global GDP was 33%.  Today, it is just 24%.

Our nation is rapidly being deindustrialized and we are becoming deeply dependent on industrial production from other nations.

Did you know that the new World Trade Center that is being constructed on the site of the September 11, 2001 attacks is going to be made from German steel and Chinese glass?

That says a lot about where we are at as a country.

We have allowed so much of our industrial infrastructure to be exported to China where workers slave away in almost unbelievable conditions.

A reader named Rish recently described what things are like over there….

As a product developer I went to china and saw the way the factory workers lived and worked in person. 50$ a month is about right, but if you are a skilled quality control expert you might make as much as 150$. at least this was true about 2 years ago the last time I went. The barracks were pretty meager, bunk beds with just plywood, no mattresses, if you wanted you could go to a store just outside the factory gate and buy a thick comforter that they sell as a “mattress” .

It will be interesting to see how the next few years changes the face of the USA. Who knows? if the unemployment rate and lack of jobs keeps going and enough people become homeless, we might become the next Bangladesh, and people will be lining up of the 30 cents an hour corporate factory jobs, and living in barracks just like those…

The only way the U.S. has been able to “thrive” during this deindustrialization is by borrowing gigantic amounts of money.  But all of this borrowing is slowly but surely destroying the U.S. dollar, and we are getting closer to the point of absolute catastrophe.

Peter Schiff recently shook folks up when he talked about these issues during a recent interview on CNBC….

But it is not just the United States that is printing tons and tons of money.  All of the major industrialized nations have been firing out gobs of currency.  That is a huge reason why so many investors have been racing to get into hard assets recently.

Now Ben Bernanke and other top Federal Reserve officials have been dropping hints that more quantitative easing may be necessary.

Unfortunately, just like with any other addiction, once you give in a few times it becomes easier and easier to engage in destructive behavior.  Now that the Fed has gotten a taste for quantitative easing it is going to be really hard to stop.

Nor can the Fed stop at this point.  If they did it would be disastrous for the U.S. economy.  But if the Fed continues on this reckless course it will make the eventual collapse of our economy even worse.

Under our current debt-based system there is no way out.  The Federal Reserve can attempt to put off the inevitable for a while by pumping up the debt bubble even more, but at some point it is going to burst.

When that happens we are going to be facing a financial crisis which will blow what happened in 2008 completely out of the water.

So enjoy these good economic times while you still can.  This is about as good as things are going to get from here on out.

The Economic Collapse

First, we have a look at the actual report issued today (upon which the media is slobbering all over themselves cheerleading), from Karl Denninger over at The Market-Ticker:

Claims: Hmmmm.. Do I Believe Them?

Maybe.

In the week ending Feb. 26, the advance figure for seasonally adjusted initial claims was 368,000, a decrease of 20,000 from the previous week’s revised figure of 388,000. The 4-week moving average was 388,500, a decrease of 12,750 from the previous week’s revised average of 401,250.

That’s legitimate improvement.  It suggests we’re getting close to a zero job-loss rate (but unfortunately, that’s also a zero job-gain rate, and we’re still adding ~100,000 people a month coming into the workforce.)

Nonetheless it’s a good number.

The full picture from the middle of the month, however, is more problematic:

There’s a problem here though in that the week related to in this table showed 410k.  That was up a bit, but the fact remains that we’re +74k on this chart, and it’s all in extended benefits.

We’ll see what tomorrow comes up with in the employment report.  I’m not biting on the ADP number; there are a lot of people who are, but not me.  I’m looking for +100k but with a larger-than-normal error band, +/- 50k, and a flat to slightly-down household participation rate.

 

We’ll see how I did tomorrow.

So, a solid ‘maybe’ there’s some improvement in this single report. 

Next let’s consider a report out published at Investors Daily and look at the bigger picture:

Layoffs At Pre-Recession Level; Job Openings Down 30%

Twenty months after the worst recession in decades, job creation remains anemic, weighing on economic growth and making it even harder for the long-term jobless to find work.

Don’t blame layoffs. They spiked in 2009 but have returned to pre-slump levels, according to Labor Department data. But job openings remain 30% below their level when the downturn hit in December 2007. Gross hiring is down by 843,000 jobs.

While the economy has grown modestly in recent quarters, hiring remains depressed due to uncertainty about future demand, concerns about government policies and efficiency gains that have let companies do more with less.

“It’s the drop in job openings, not the increase in job losses that is responsible for so much of the increase in unemployment,” said James Sherk, a labor policy analyst at the Heritage Foundation.

Labor is expected to report Friday that the U.S. added a net 183,000 jobs in February, the most since last May. The jobless rate is seen ticking up 0.1 point to 9.1% as more people entered the labor force. Many of those new or returning job-seekers will likely find only disappointment.

December job openings fell by 139,000 to 3.06 million, the third straight decline, according to Labor’s Job Openings and Labor Turnover Survey. January’s JOLTS survey is due March 11.

There were 4.7 job-seekers for each opening in December, off a peak of 6.3 in July 2009 but still far above the 1.15 ratio typical before the recession, according to the Economic Policy Institute.

“We are still very near the bottom of a very huge crater,” said Heidi Shierholz, an EPI labor economist.

The U.S. has expanded for six quarters, but growth has been modest by historical standards. Strong head winds remain, from a still-moribund housing market to $100 oil and looming fiscal tightening at all levels of government.

Uncertainty about ObamaCare costs have also made firms cautious about hiring, analysts said.

Uh, now that’s not so good.  While companies may have slowed their actual layoffs, new people continue to come into the work force unabated, and cannot find work.   What tempers the government reports is that people who finally give up after months or sometimes years of looking are not counted in their figures.  I don’t know about you, but if I couldn’t find work in two years, it would sure be adding insult to injury to not be included in the unemployment figures.

Now let’s look at some charts from the new Gallup report:

This makes it pretty clear that the employment situation has been deteriorating anew since November 2010.   It is essentially back to the levels of January last year.

Finally, we go to what I consider most reliable, ShadowStats:

The red line is the official government unemployment number (U3), the grey line is the old government measurement of unemployment (U6), which used to include all people, including those who have given up, and the blue line is ShadowStats proprietary measurement (SGS).   

I’d say that REAL unemployment is now just shy of 20% nationwide.  Remember, for historical reference, at the peak of the Great Depression, unemployment reached 25%.

Unemployment improving?  I don’t think so.

I understand these decisions are difficult and people don’t want to talk about – or implement – them.  I get that.  But it doesn’t matter what I want.  What matters is what we can actually do.  And what we can actually do is limited by the revenue we can raise.

There are many people who say “Tax the Rich!” as if it’s some sort of mantra.  But the top 1% of households (which earn $300k and up) is roughly 1.5 million households.  If we taxed all of their income (that is, a 100% tax rate) we couldn’t close the budget deficit.  But we wouldn’t collect any of the money either if we did that, because nobody works for free – you’d have a lot of people earning $299,000 and then going home.  What’s worse is that the extra income they wouldn’t earn also wouldn’t get spent.  When tax rates change so does behavior.

If we’re going to get legal tax avoidance we want it in capital formation, not in people choosing to sit under the beach umbrella with boozed-up pineapples.  Attempts to “soak the rich” will simply cause the latter, not the former.  The wealthy and those who are high-earners, for the most part, can choose to walk off into the sunset and earn nothing from this day forward until they die, erasing any attempt to close the budget gap by taxing them.  The truly stinking-rich can expatriate and give the middle finger to the IRS as well.

We cannot fix the problems we have in this country with our federal budget without addressing entitlements.  It doesn’t matter if people want to ignore entitlements or not – they must be addressed in order to balance the budget, and we must move away from people sucking on Federal transfer payments.

This isn’t optional folks.  We have made promises we cannot keep.  They’re mathematically-impossible to keep, irrespective of what we want to do.  We are left with accepting this and making the necessary adjustments or having them imposed upon us by the market in a disorderly fashion.

The Market-Ticker