Bad Bank - This American Life

If you get a chance... and it took me a while... check out This American Life's take on the Bad Banks... (Feb 27, 2009). Very well done, and that recommendation comes from a cynic.

Psssst... Do Something

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Sources:

This American Life (NPR), February 27, 2009.

Economic Downturn: Deeper and Longer

The central bank of central banks has spoken. The Bank for International Settlements (BIS) had the following to say in its annual report:

While difficult to predict, their interaction [credit crisis and inflation] does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect. [1]

The BIS is not alone. One of President Nixon's chief political advisers has laid out the reasoning in a book. Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. Phillips is saying the US is facing a crisis of historic proportions. He identifies seven contributing factors on which I've written in the recent past. When introducing these factors during interviews, Phillips says:

Normally when a country is—United States is—heading into a recession, there are one or two, sometimes three, factors that you worry about. But at this point in time... there are like six or seven [factors], and you don’t usually see anything like that number.

There is an eighth contributing factor to consider: stagflation. The primary control mechanism of the US Federal Reserve (Fed) is setting interest rates. The inconvenient truth is that we are facing dangerous inflation (controlled by increasing interest rates), while at the same time facing a stalling economy (controlled by cutting interest rates). First we saw evidence that the private sector lost control, as the Fed had to step in with tax-payer backing to support a buy-out of Bear Stearns. Now we see that the Fed itself doesn't really have control.

Update: The BIS perspective on the consensus view is corroborated by the June National Employment Report:

The number of private sector jobs fell by 79,000 in June, according to a payroll report released Wednesday, with the decline exceeding economists' forecasts. Economists polled by Briefing.com had expected jobs to decline by 20,000 in June.[2]

Sources:

1. Associated Press, BIS: Global economy could face deeper downturn, George Frey, June 30, 2008.

2. CNNMoney.com, Payroll report: 79,000 private sector jobs lost in June, July 2, 2008.

The US Meltdown

The current economic troubles are part of a 30-year slide that might be leading toward a brink. In 1995, before Bush policies shifted huge amount wealth from the lower economic strata to the elite, Lester Thurow wrote the following in The Future of Capitalism (He also provides the data to back it up):

No country, not experiencing a revolution or a military defeat, has probably ever had as rapid or as widespread an increase in [wealth] inequality as has occurred in the United States in the last two decades. Never before have Americans seen the current pattern of real-wage reductions in the face of a rising per capita GDP [because the wealth was going to a small minority of wealthy elite].
- Lester Thurow, Economist, 1995.

Now, in his book Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, Kevin Phillips is saying things are worse and the US is facing a crisis of historic proportions. Many empires have fallen throughout history. Why should the US be an exception?

DemocracyNow! introduces Phillips as follows:

A generation ago, Kevin Phillips wrote "The Emerging Republican Majority", which Newsweek described as the “political bible of the Nixon administration.” Throughout the ’70s and ’80s Kevin Phillips was viewed as one of the GOP’s top theoreticians and electoral analysts. But today he’s considered one of the leading critics of US political culture.

Phillips has a lot to say in the full interview with DemocracyNow, but here is a quick synopsis of his prescient views:

Asked for "the most serious signs of this overall global crisis of American capitalism," by DemocracyNow's Amy Goodman, Phillips effectively said the worst 'sign' is the fact that there are so many bad signs all at the same time. Phillips says,

Normally when a country is—United States is—heading into a recession, there are one or two, sometimes three, factors that you worry about. But at this point in time... there are like six or seven [factors], and you don’t usually see anything like that number.

1. Financialized Economy: "We have a financialized economy in which we don’t make much anymore, and finance is up to 20 to 21 percent of the US GDP, and manufacturing down to 12. Finance dominates the US economy." (In simple terms, Finance is the business of making loans, which recently has been exposed as a hollow shell game).

2. Debt (which relates to #1): "We have massive debt, both public and private. It’s gone up about 700 percent since the early 1980s, staggering numbers where there—we basically have $50 trillion worth of credit market debt. It’s not government debts that’s the problem, it’s private sector debt, both financial and corporate and then in the consumer sector with credit cards and then mortgage debt. 340 percent of the gross domestic product, that’s how big debt is. And the last time something was close to this—and it was less—was in the late 1920s and early 1930s. So it’s enormously a vulnerable, dangerous thing.

3. Real Estate Boom/Bust: Spawned by the financialized economy is the collapse of home prices. "They continue to follow the scary trajectory that has people predicting that there’s going to be a 15 to 20 percent decline in home prices, which would be the sharpest since the Great Depression."

4. Global commodity inflation: Consider Oil and food. People are as worried now about the price of milk as they are about the price of a gallon of gasoline. That’s a global problem, but it makes a mockery of the administration’s pretense that there’s no inflation.

5. Dishonest Economic Statistics: "I don’t think the average American should believe either the inflation numbers, the GDP numbers or the unemployment numbers. The long and the short is that over thirty to forty years, we’ve seen a kind of Pollyanna Creep, and administrations of both parties have done this. They want the figures to be friendlier, not to get them in trouble. And we’re at a point now where the figures lie enough that foreign investors are starting not to believe them." (Trust in the good faith US government backing of Treasury bonds and the dollar is eroding. Why shouldn't faith be unraveling after decades of the right-wing drum beat for "less government"?)

6. Price of Oil: And it’s not just global commodity inflation, it’s the problem that we see of oil production peaking in the world sometime in the next ten to twenty years. And the advance signs of this are scarcity and peaking in certain countries (e.g., US production has already peaked). And the prediction just came out of Goldman Sachs a couple of days ago that within a fairly short period of time, probably this year, you’re going to see $150 or $200 [a barrel] oil.

7. Demise of the US Dollar: The US dollar has been tied historically, since the 1970s, to oil (More). Henry Kissinger and others were involved in getting OPEC to commit that they would sell and buy oil only in dollars and that they would invest their petrodollars in the US, in Treasury debt. So we have a currency that’s profited from the connection to oil, which sustained it in many ways. But now oil has boomeranged on the United States.

We have to spend $400 billion a year to import the oil we need. We don’t have the basis for controlling oil anymore, after the idiocy in Iraq, which was partly put in motion to solve the oil problem, and instead you’ve got oil prices going up 500 percent in five years. (Good for Bush cronies, bad for the average American).

Sources:

“Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism”, an interview with Kevin Phillips on DemocracyNow, May 6, 2008.

DIrty War, Dirty Water

Associated Press reports:

Dozens of U.S. troops in Iraq fell sick at bases using "unmonitored and potentially unsafe" water supplied by the military and a contractor once owned by Vice President Dick Cheney's former company, the Pentagon's internal watchdog says.

... and they weren't even drinking it! The AO continues:

A report obtained by The Associated Press said soldiers experienced skin abscesses, cellulitis, skin infections, diarrhea and other illnesses after using discolored, smelly water for personal hygiene and laundry at five U.S. military sites in Iraq.

According to Wikipedia, "Cellulitis is an inflammation of the connective tissue underlying the skin, that can be caused by a bacterial infection."

The article closes with,

KBR is a former subsidiary of Halliburton Co., the oil services conglomerate that Cheney once led.

Note, the Cheney connection is made twice in this article. That wouldn't have happened earlier in the Bush administration, which says something about our fair and balanced corporatized media system.

Another war profiteer story for the growing file.

Sources:

Associated Press, Water makes US soldiers in Iraq sick, March 9, 2008.

How Bad is the Liquidity Crisis?

How bad is it?

Lets take a simple example. Suppose you're short on cash to pay your bills, because you're between jobs; however, your pay checks will start up again in a month. Then, all you need to do is bridge that one-month gap, and you will survive your "liquidity crisis."

Today's liquidity crisis is founded on bad mortgage loans, which were used as collateral for creating credit that is 5-to-10 times the amount of the underlying value of the mortgages. The magic of leverage... remember, banks are only required to hold a fraction of their outstanding loan value in reserve, because it is very unlikely that everyone will ask for their money back at the same time. Unfortunately, people are effectively asking for their money back at the same time, because they realize the collateral (mortgages) are turning sour. But the banks don't really have that money; the reserves are just a fraction of leveraged loans, hence a liquidity crisis on a large scale.

So, how bad is the liquidity crisis? In the simple example above, of being between pay checks, the "crisis" wasn't so bad, because the funds started flowing again after a month. Aside from the obvious issue of scale, the large scale crisis can be measured in several ways.

First, it is a crisis of leverage. If you a bank has 1 million cash dollars in its vault, and uses that as "reserve" on loans of 10 million dollars, it's taking a risk everyone will demand that $10 million in cash at the same time. it doesn't exist. Only $1 million in cash exists.

Second, if, suddenly, everyone finds out that the $1 million in "cash" is actually bonds "backed up" by mortgages, and those mortgages are bad loans, and they might never see "cash" again, they get panicky and start asking for the cash now... but again, there is no "cash," just worthless mortgage backed bonds.

Now, if only those bonds had some worth, then the panic would end. We'd be back to the normal mode of a fraction of reserves being held by the bank, with the unlikelihood that everyone would demand cash simultaneously.

So, like waiting for the next pay check, "how bad" depends on how long until those mortgages become solid again. One estimate has it as a long gap to fill. Referring to the increasing number of bad loans, Doug Duncan, Mortgage Bankers Association Chief Economist says:

We expect another two to four quarter[s] of modest rises in delinquencies. And foreclosures lag one to two quarters behind that.

So, the current reserves, based on mortgage backed securities, have at least a year's worth of increasing rates of defaults left to play out before the rate of defaults begins to taper off.

That's a very large time gap to fill. We can expect a bail out on the backs of tax payers.

Sources:

Best and Worst U.S. Housing Markets, Forbes, Matt Woolsey, August 22, 2007.