FedUpUSA

Archive for the ‘larry summers’ Category

… into a wood chipper.  Politically and economically of course, not physically.

The title of the linked article is:

The world must insist that Europe act

This is sort of like the world insisted that Germany act, or that Japan act, right?

We know how those episodes ended, which is why my answer to those that argue such things is that they should be fed feet-first into a wood chipper with their pontifications on a political and economic basis.

There can be no return to the pre-crisis status quo. It is now clear that market discipline within monetary union is insufficiently potent and credible to assure sound finance. It is equally clear that the risk of self-fulfilling confidence crises becomes substantial when banks and sovereigns have no access to lender of last resort financing. The responsibilities of the ECB, national financial and regulatory authorities and EU officials can be defined in different ways. But there must now be simultaneously an increase in the central financial commitment to the financial stability of member states, and a reduction in their financial autonomy, if the common currency is to survive.

The real problem that Larry doesn’t want to admit to is that at its core this crisis was a function of his economic policies.  This entire mess (and it’s a big mess) is fundamentally about lying.

Lying to ourselves, lying about solvency, lying about balance sheets, lying about being able to stop drinking from the “cheap credit” well any time we want.

It’s all been a lie, and we’re all suffering from it.

The ridiculous “fear” of the boogeyman deflation is a chimera.  Once one puts together 30 years of massive inflation of credit reversion to the mean is not deflation, it is removing the influence of a massive and pernicious bubble.

Oh sure, those who “profited” from that bubble will get creamed if and when that is done.  But their “wealth” was never real in the first place.  It was not earned, manufactured or innovated – it was stolen through artifice and fraud and in fact never really existed.

Can we avoid recognition of the truth, here or in Europe?  For a while, perhaps.

But forever?

No.

The premise of our so-called “booming economy” was a lie.  Larry was a chief promoter of that lie.  Now that it’s coming apart, in fulfillment of the we’re screwed, they’re screwed worse basic statement of beliefs that I have put forward for the last few years, Larry and many others are cowering under the desk screaming for more booze to calm their shakes.

It won’t work because it can’t work.

Can the EU bail out the banks over there?  Maybe, although doing so will simply goad the markets to press into the next nation in the (correct) belief that the EU’s firepower is finite and the damage to be absorbed exceeds that firepower’s capacity.  But the EU shouldn’t bail out anyone.  Instead they should tell them all to twist and default the bad debt.  Remove the excess liquidity and credit, returning the economy to stability.

Will this require new banks as many of the current ones turn into smoking holes?  Sure.  We have to have a clearing mechanism for commerce.  That is, we need banks but not these specific banks that have manipulated people and nations both with the claim of “easy money” that in fact is nothing but a gigantic pyramid scheme that they knew must eventually fail.

That, in fact, is the key: These institutions knew this scheme could not continue forever.  They understand the math.  They just believe they can force you, the taxpayer, both here and abroad, to pick up the cost of their foolishness.

It is time to stand and say “no” while we still have the ability to determine the path that this cleansing takes, lest it become disorderly and not subject to our desires, whims and control.

The lies are no longer working.  We must choose truth.

I don’t usually post twice in one day, but there is a story which requires our immediate attention (hat tip, Mish). This post’s title is riff on Arthur Fullerton’s Only poor people can be allowed to fail. His story is short & sweet. I believe it speaks for itself.

This post is my pushback.

My regular readers surely remember George Carlin’s Great Big Club, the one you’re not in. The club’s members are the elites who have a large say in how the U.S. (and world) economy is run. They often come from the world of Big Finance. Usually they are former (and future) employees of the big Wall Street banks. There is no overt conspiracy to run the world. Instead, there is a loose but incredibly effective coalition of common interests. Washington politicians, at least the important ones, are often in their pocket.

Larry Summers carries water for those interests. He is their mouthpiece and back in 1999 under Clinton, he was their enforcer. There he is (far right) on the cover of Time Magazine in February, 1999 along with Bob Rubin and Alan Greenspan. And how was this 3-man committee to save the world going to accomplish this great feat? By deregulating derivative securities, repealing Glass-Steagall, etc.

When Barack Obama won the election in 2008, the meltdown of unregulated derivatives (like credit default swaps) had only recently brought the financial system, and the U.S. economy, to its knees. One of Obama’s first acts before he actually assumed the presidency was to appoint Larry Summers to be his chief economic adviser, and Tim Geithner to be his Treasury secretary. (See the video below.) Thus, the Change You Can Believe In was thrown out with the trash even before it had a chance to begin.

I have a small problem with Fullerton’s title. It is incomplete with respect to the true wishes of the financial elites. Perhaps it should read something like this—

Only poor people should be allowed to fail, and if they don’t fail, we should rip them off, just pound the shit out of them, until they do

When you watch this video, and you really should watch it, sit up and take notice at the 3:00 minute mark. You’ll see what I mean. Americans have been f&*ked over to a far greater extent than most of them will ever know.

Decline of Empire

“Banking System Still Quietly Insolvent” ; Larry Summers’ Imagination Reaches Escape Velocity

Inquiring minds are reading an excellent post by John Hussman about Stock Market Valuations, Extend and Pretend Banking, Public Policy on Housing Bailouts, and Solvency of the Banking System. Here are a few snips from Extend and Pretend.

Over the past 12 years or so, I’ve been repeatedly astonished at the tendency of investors to do things that they should have known to avoid simply with the use of a calculator and basic arithmetic. We’ve used numerous metrics during this period to show that the estimation of long-term market returns (7-10 years and beyond) doesn’t require calculus or statistics, but fairly direct methods to normalize earnings, plus a bit of arithmetic. Rich valuations are predictably followed by sub-par returns. As a result, investors have earned an average annual total return of just 2.4% in the S&P 500 over the past 12 years, while enduring two separate instances where they have lost about half of their money as part of the ride. Essentially, we have gone nowhere in an interesting way. At present, investors have priced the market at a level that makes a continuation of this experience likely for several years to come.

As of last week, the S&P 500 remained strenuously overvalued on the basis of normalized fundamentals. From that perspective, even if the trough we observed in March 2009 was the ultimate price low of the secular bear market since 2000, it’s not likely to represent the ultimate valuation trough. Given the current state of valuations, and the likelihood of several years of additional credit deleveraging, it seems that economic conditions, valuations, and the typical duration of secular bear markets converge on the likelihood of several more years of interesting but unrewarding market volatility. Secular bull market periods tend to begin with quite low multiples to normalized earnings (historically, on the order of 7), which is what provides the platform for a very long period of subsequent gains.

Extend and Pretend

With regard to credit conditions, the U.S. financial system continues to pursue a strategy of “extend and pretend.” … The impact of “extend and pretend” is to create a gap between the reported value of assets and the value they would have on the basis of the cash flows that those assets can reasonably be expected to generate over their maturity.

Moreover, regulatory changes over the past year have affected what actually gets reported as “troubled.” As the New York Times recently observed, ” A bank owed, say, $4 million on a property now worth $3 million would previously have had to classify the entire loan as troubled. Now it can do that to the $1 million difference only.”

As for policy efforts to reduce delinquencies, I’ve long argued that it is a bad idea for policy makers to announce delinquency prevention plans that have, as their centerpiece, publicly subsidized reductions in mortgage principal. It’s one thing to extend the loan in a way that preserves its present value, by swapping a claim on future appreciation in return for principal reduction, but it’s quite another to offer to cut the principal outright. The reason is that instead of confining the assistance to presently troubled borrowers, you create a whole new set of borrowers who then choose to be troubled in order to get the assistance. According to a University of Chicago study, “strategic defaults” – where people choose to default on their mortgages even though they can afford to pay – accounted for 35% of all residential defaults in December 2009, up from 23% in March 2009. Offering public subsidies for this behavior, when too many homeowners are already legitimately struggling, does not smack of a bright idea.

The real concern from my perspective remains the potential for a second wave of delinquencies beginning in data as of the first quarter of 2010 and extending well into 2011. …

In short, my impression is that investors are deluding themselves about the solvency of the banking system. People learned in the 1930′s that when you don’t require the reported value of assets to have a clear and tangible link to the value that the assets would have in liquidation, bad things happen. Yet this is what regulatory and accounting rules are allowing for the banking system at present. While I do believe that bank depositors are safe to the extent of FDIC guarantees, my impression is that the banking system is still quietly insolvent.

There is much more in the article including a series of charts on bank loans, real estate loans, and credit card loans.

Global Banking System Extend and Pretend Insolvency

I happen to agree with John Hussman on all points mentioned. Moreover, it is not just the U.S. banking system that is insolvent, the global banking system is nothing but a giant extend and pretend operation including the PIIGS (Portugal, Ireland, Italy, Greece, Spain), China, the UK, and even Canada as soon Canada’s gigantic housing bubble crashes.

Just as U.S. housing policy encourages more walk-aways, the EU’s subsidized loans to Greece (See Grecian Formula 16 Now On Sale) practically guarantees the EU will need to offer the same deal to Spain and Portugal at a minimum.

Note too, that European banks have their own extend and pretend game going in regards to loans based in Euros to the Baltic states. Those loans cannot possibly be paid back.

George Soros is talking about a pound devaluation for the U.K. Please see Former Fed Gov. Poole Blasts Fed’s Favoritism; Soros Bought More Gold, Says Pound Devaluation is Option for details.

Canada did not avoid a crisis because their banks were better or smarter or used less leverage. Canada avoided a crisis because for whatever reason, their housing bubble did not yet blow sky high. However it will, and Canada’s banking crisis is yet to come.

To understand why, please see California USA vs. Ontario Canada – Which State (Province) Is In Worse Shape? Canadian Banks vs. US Banks Comparison.

There are so many reports on bubbles in China that I hardly know where to begin. Here are a couple of them. GMO has a white paper on 10 Signs of Speculative Mania in China. In response to that paper, please consider an Email from a Chinese on China’s Real Estate Bubble.

Finally, in the US, please consider an interactive map of the $3+ trillion public pension plan deficit, state by state: Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?

In short, consumer and bank debt simply cannot be paid back in a global wage arbitrage economy, with massive consumer and corporate debt and no source of jobs.

Escape Velocity

Amazingly, Larry Summers says that problems with healthcare, education, and even long term fiscal deficits are being addressed. That is proof economists are starting to believe their own nonsense on extend and pretend.

“I think the economy appears to be moving towards escape velocity.” said Summers.

One thing that has reached escape velocity is Larry Summers’ imagination.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

From The Daily Capitalist.

Dear Santa:

Since you give away stuff for free, I hope you aren’t a socialist and ignore my wish list during the annual potlach. By the way, it seems that the Obama Administration is way ahead of you in giving out free stuff to everyone. I hope you can catch up.

I think I’ve been a pretty good boy this year. I have regularly bitten my tongue in my commentary so as not to be accused of being a flamer. I don’t think I’ve defamed anyone. And I try to write as much original material as possible to avoid being labeled a “scraper” (lifting stuff off the Net and publishing it under my own name). And, I haven’t sold out my opinions for mere money. For a blogger, that’s a pretty good record.

Here’s my wish list. I couldn’t find where to post it on Amazon, so here goes:

1. Kill The Bill

No, not the Uma Thurman thing. I’m talking about the health care “reform” bill going through Congress right now. If your magical powers extend that far, please put economic sense into our politicians’ collective heads that government control over the system is not a way to “save money” or create “efficiency.”

2. Put in the Fix

Instead of eliminating market forces in health care, please convince Congress to fix it by peeling back the convoluted rules and regulations that have screwed it up in the first place. Suggest these four little things we could try first that actually would work, save billions, and cover more people:

Give Medicare enrollees a voucher and the freedom to choose any health plan on the market;

Give workers control over their health care dollars with “large” health savings accounts which would allow them to purchase secure health coverage from any source;

Break up state monopolies on insurance and allow insurance companies to compete across state lines; and

Block-grant Medicaid and the State Children’s Health Insurance Program to prevent massive waste and encourage states to target resources to the truly needy.

3. Turn the Sausage Makers into Sausage

I understand it’s Christmas and it would be kind of negative to wish political ill fortune on someone, but, there’s this especially despicable sentator, Ben Nelson, that I would like for you to arrange to catch him with a hooker or taking a bribe. Whatever you think would work, Santa. Make sure there are tapes. I have lots more names, but I’d be happy with Ben.

4. Firing Suggestions

Please arrange for Obama to fire Ben Bernanke, Larry Summers, Timmy Geithner, and Christina Romer.

5. Hiring Suggestions

To replace the above, how about Ron Paul at the Fed, and the following economic advisers: Walter Block, Russ Roberts, and Joseph Salerno. They are all fine economic scholars and would steer our President in the right direction.

6. Freeze Congress

Don’t let Congress pass any more bills until they’ve all read, and discussed with the No. 5 guys, Economics in One Lesson by Henry Hazlitt, the best little book on economics, ever. Televise it.

7. Bring Back the Real Constitution

Please have Obama appoint strict constructionists to the Supreme Court. Nominees who understand natural law, and that the Ninth and Tenth Amendments actually mean something. Maybe we’d get our individual sovereignty back.

8. Make Work is No Work

Let Mrs. Pelosi and Mr. Reid see the folly of the American American Recovery and Reinvestment Act of 2009, a useless $787 billion bill that is nothing other than intergenerational theft. Someone has to pay for it and I’m afraid it will be my children, grandchildren, and ten generations of my great-grandchildren.

9. Beautiful Sunsets

Require Congress to sunset every spending law they pass. You know how they promise that a program will be very effective and that it will only cost so much? Make them prove it, say every two years. If the bill fails to cure the perceived ill, get rid of it. If the program exceeds its budget, get rid of it. It will also provide us with a handy voting guide at election time.

10. Let a Thousand Flowers Bloom

Sprinkle some free market magic dust on the economics departments of our major universities. Maybe that will help the sheep break from Keynesian orthodoxy and actually begin to think.

Thank you, Dear Santa. I’m forever hopeful.

Econophile

I was down in Washington on a business trip. That ended at four and I
headed for a bar. I found a spot between Pennsylvania and Kentucky
Avenues. Nice place. Two barkeeps, me and another guy who looked like
he had been drinking gin for the past few hours. Quiet, just the way I
like it.

Sure enough, at five the place fills up. It’s a young crowd. Good
looking. Well dressed. This looked like an Ivy League group. I was
thinking that they could be DOJ, possibly IRS (they looked too happy,
but who knows). They could have been Treasury folks; the headquarters
is not far off. Anyway, they had two drinks gossiped for and hour and
left. I stayed.

At one point I happened to look under the now empty stool next to me.
Some folded up papers. Being the nosey S.O.B. that I am, I picked them
up and took a look. Bingo!

I am just guessing, but these initials could stand for Geithner,
Volker, Summers, Goolsbee and Romer. Of course they could stand for
anything. I will leave it to you to draw any conclusions that might be
appropriate after a look at this. Judging from the notes that were
taken, this must have been an interesting meeting. I am using the
Scribd format so you can enlarge this. Enjoy!

Found Memo

If you haven’t as yet, take a look at the ‘labels for this post’. Life is a comedy. We’re all a part of it. Happy Holiday.
bk