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Another Great Depression Coming Soon?
Please read my latest blog entry and post your comments here:
http://pensionpulse.blogspot.com/2010/03/another-great-depression-coming-soon.html
Thank you,
Leo Kolivakis
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FASB had no problem with hyper=regulating employee stock options out of existence but Repo 105 and suspension of Mark to Market is fine...
Does anyone smell a conspiracy to crush the little guy?
Meanwhile, back at the ranch, ZH is advertising luxury celebrity cruises while discussing the downfall of the world economy. How ironic. (but ya gotta pay the bills right?)
NOW FASB Wants To Do The Right Thing?
This is unbelievable:
The war over mark-to-market accounting is about to get hot, again. In coming weeks, the Financial Accounting Standards Board is likely to propose that banks expand their use of market values for financial assets such as loans, according to people familiar with the matter. That departs from current practices in which banks hold loans at their original cost and create a reserve based on their own view of potential losses.
Let's cut the pump-monkey crap and recall for everyone exactly how that "current practice" came to be, shall we?
Back last spring as I have written about more than once, the dishonorable Mr. Kanjorsky, Barney Frank's stooge, held a hearing in which he basically put a gun to FASB's head and informed them that they would allow banks to mark their loans to model - or Congress would introduce a law overriding FASB.
FASB objected, but it didn't matter. In the end they relented.
This was the catalyst for the huge rally in the stock market. It was a declaration of legalized accounting fraud from the people who oversee financial accounting matters.
Now, a year later, after Barney Frank comes to realize that it was precisely this "gun up your butt" approach to financial regulation that has made all efforts to modify home loans (including cramdowns) worthless, we see some effort to change things.
Why does it make modifications worthless? Simple - a second loan behind an underwater first (e.g. a HELOC) is worth zero if the first is underwater and forecloses. That's because it is a subordinate lien and is only entitled to be paid (at all) if the first is fully recovered. In a case where the first is underwater, it won't be recovered; ergo, the second is worth exactly nothing.
But "mark to fantasy", otherwise known (by me anyway) as legalized accounting fraud, has these banks carrying the loan on their books at or near 100 cents on the dollar. That's because "the loss hasn't happened yet", so since they're entitled to "model" a potential outcome 30 years in the future, they can say "well property prices won't stay down for that long, so we don't have to take the loss!"
It's bogus of course as the odds of someone paying on an underwater loan for a decade are close to zero. Anything that interrupts the borrower's cash flow - a loss of job, a medical problem, or simply being tired of taking it in the cornhole month after month while they could buy a house across town for half the price - results in a foreclosure, because the property isn't worth enough to sell and extinguish the mortgage.
Under mark-to-market rules banks had to price these loans at the current market's appraisal of their worth. Thus, as home prices declined and people were more and more underwater the market price would fall toward the zero that would be recovered if the foreclosure happened. This would in turn make the foreclosure no more damaging to the bank balance sheet than not foreclosing, and thus, the market would tend to clear.
But no! We can't have that! So instead we have this fantasy. The consequence is banks letting people live in a house that they haven't made a payment on in a year - and sometimes two. Nobody cares if the loan is performing or not, because it was probably sold to some poor bastard and the servicer is advancing interest payments anyway! Moody's, S&P and Fitch keep downgrading these bonds in a furious fusillade, but nobody cares at the bank, because the bank doesn't hold that paper - some fool pension fund does.
(What's left unsaid there, of course, is that said pension fund might be getting their interest payments now, but they sure as hell will not get the principal at maturity - because it doesn't exist. What that will do to the pension funds is obvious, but heh, so long as the banks get to lie, it's all ok that pensioners get screwed, right?)
What the bank holds is the HELOC and they are often the servicer as well. They have a terrible conflict of interest in this regard because if they foreclose then the HELOC is worth nothing, and they take the full dollar hit right here and now. If that was to be done across the board with these delinquent loans my analysis shows that many banks Tier 1 common equity levels would be forced below regulatory minimums and in some cases would be destroyed altogether. The latter would force immediate FDIC seizure. It is thus cheaper to advance the interest payment to the bondholder and pretend, even though the payments aren't coming in, praying that somehow the borrower who hasn't made a payment in a year will suddenly come up with $25,000 to "come current." (Yeah, right.)
Let me be absolutely crystal-clear - this is an outright scam promulgated by the same jackassery in The Government (SEC, Treasury and Congress) and The Fed that led to the destruction of Lehman. Instead of forcing these institutions to take their marks and admit to their losses they were allowed to put forward abjectly false and misleading financial statements. In the case of Lehman it appears the law was broken. But in the case of the big banks today Congress got the rules changed by shoving a gun up FASB's nose so as to make the INTENTIONAL false reporting of asset values a lawful act.
This should have absolutely never, ever happened and those dishonorable knaves in Congress responsible should resign NOW.
These banks should have been taken into receivership by the FDIC and closed. We would still have the $3 trillion we have blown trying to prop up the economy - well more than enough to pay off the depositors when the assets were liquidated. Deposits would have been dispersed to strong community banks, lending them further strength and ability to lend to qualified borrowers. The scam-meisters on Wall Street would have lost their jobs and been closed down, we would have taken a horrific hit in the market but it would now be over and the economy would truly be on the mend.
Instead we lied and pretended, creating a false dawn and a market rally based on nothing more than a scam. This cannot hold indefinitely, and yet the conditions for a true recovery in those asset prices will not happen for over a decade - if ever. If we do not stop this insanity cash flow will force the issue eventually and by then The Government will have blown its wad furiously trying to replace 10% of GDP in the private market, as it has for the last two years, and thus be unable to fund the FDIC deficiency.
The simple fact of the matter is that as I have written about for over three years I absolutely believe that if valued on market prices these banks were insolvent then and are today. Hiding the fact of that insolvency with bogus accounting fictions does nothing to solve the problems that face us and in chokes off lending, prevents markets (especially housing and commercial real estate) from clearing and will absolutely prevent any durable economic recovery from occurring.
Oh yes, it has pumped the stock market to the moon, but the test is not whether the stock market goes to the moon - it is whether the market price reasonably reflects underlying fundamental value, and there the evidence is clear - it does not.
The danger here from continued obfuscation could not be more grave. We may have already passed the point where the government is capable of funding the deficiency to come in the FDIC accounts, but if we do not stop this crap, it is a certainty that such will occur, exactly as did in Iceland.
Leo you're a nice guy and all,
but to some degree you're who
Brian Warner aka
Marilyn manson was talking about
when he said' you can't see the forest
for the trees can't smell your
own SH*T ON YOUR KNEES'
Capitulism has made it this way
Old fashioned fascism will take it away.
Look on the darkside Leo.
It's the only side you'll have available in about 2 or 3 years.
-MB
Calling this a depression is like calling the wound in
JFK's head a depression.
What about the nuclear option, Jubilee? All debts are forgiven. If it was put to a popular vote in the USA, I am guessing it would pass by a wide margin. It is an interesting thought experiment.
It would have to be world-wide in order to work.
Leo...I can pray he is wrong...but we won't get by this one with a prayer.
Wish everyone here to come out the other side of it safe...but you have to be made your homework.
Godspeed ZHers.
Careful Leo, we'll be thinking you're becoming bearish...
DavidC
Leo, are you saying selling volatility is an investment strategy for these times? Levels are already low in most products and event risk seems as high as ever.
If you double the money supply and everything goes up by 70% is it called inflation, deflation or both?
news from GATA. Bill Murphy invited to speak at CFTC meeting in DC on March 25 regarding futures trading.
http://www.gata.org/node/8427
yeah but then how do you explain what I see daily on dailyjobcuts.com ? A Dow at 12000 will not cure this ..
Perma-bear.
The system is a game of musical chairs - as long as the band is playing "free money for all" then the masses aren't scurrying to find a chair. Leo has made a good call on equities. He knows the government wants good stock news on the TV - most people see the market as the economy and the White House won't allow it to collapse big time.
BUT - we have pushed spending forward over the past decade and when cash-flow won't cover interest payments there will be a problem.. No sweat Janet Yellen is coming to help Ben and they both love zero percent rates.
Here it is.....
40% of the money used to price all goods and services
left the economy ....
THIS IS WHAT HAPPENED....
Next question....
HAS IT COME BACK ?
Answer ....NO
Well then WHAT has happened ?
The govt. is diluting the money supply and raising taxes....
Will THIS help ?
Answer....NO
It simply dilutes the 60% that is left....and by
making govt. larger....is making it impossible to get it back....
How does THIS make sense ?
IT DOESN'T......
I propose we stop calling an extended period of rest from a frenzied state of conspicuous consumption a depression. We pulled forward demand with credit, now let's all relax and let it all digest. How about the Great Indigestion?
More like the Great Constipation. I think that best describes the feeling.
The Great Disgorgement.
dis·gorge
(ds-gôrj)
v. dis·gorged, dis·gorg·ing, dis·gorg·es v.tr.1. To bring up and expel from the throat or stomach; vomit. 2. To discharge violently; spew. 3. To surrender (stolen goods or money, for example) unwillingly. v.intr.
To discharge or pour forth contents. [Middle English disgorgen, from Old French desgorger : des-, dis- + gorger, to pack (from gorge, throat; see gorge).] dis·gorgement n.
I think we're entering a period of serious instability in state and federal governments. Nothing is more pitiful or useless than a politician with no money to spend, and the old adage "Idle hands are the devil's workshop" comes to mind. There is a limit to what Americans will endure when faced daily with the hypocrisy and childish excuses made by elected officials. They cannot get blood from a stone, but some will surely try.
Against this backdrop we also have unfinished business in the financial sector -- several trillion dollars of debt write-downs that have been systematically hidden and delayed to maintain a facade of stability. The combined guarantees for deposits, pensions, and entitlements are mathematically impossible to fund for if even a fraction of these commitments default. People tend to get angry and rebellious is they are promised something and then denied.
If these two crises converge, almost anything could happen, even in a "civilized" country like ours. Civil war, a break-up and secessions similar to the events that ended the Soviet empire, etc. If the worst of these come to pass, a depression-era scenario might actually be the best outcome.
Gordon. Are you Jim Willie? If so, I love your work. You and Doctor Fekete are my favorite's on Gold Eagle.
Jim Willie is my favorite but is in the company of some top notch writers in the PM world. The only people who actually made sense to me compared to the ad nauseum, ad infinitum optimism of the paper bugs.
I'm not praying he's wrong. I'm praying he's right. As a matter of fact I've been praying for a depression for some time now. I pray every day for this market to get crushed. The rot needs to be rooted out of the system.
I agree but the really scary part is what it's going to take to get us OUT of the next great depression!? Another global war? Another Hitler or maybe two along the way this time?
>>
I agree but the really scary part is what it's going to take to get us OUT of the next great depression!? Another global war? Another Hitler or maybe two along the way this time?
>>
Why in hell do people think like this?
Why do you presume you CAN emerge? Who says you ever emerge at all -- especially with oil production falling.
Yes and he's commenting to you now...Ich Bin Ein FIXER. Hitlers can actually be good for the economy.Our motorways are twice as thick as the "ooh ss ugh".
Below is an anon post from a recent thread that I mailed to a friend of mine. I dont have the time to dig up the specific thread, but it was in the last day or two.
The answer isnt pretty, but, in my mind, this answers your question.
To the post below, I will simply note that technology is neither good nor evil. It is man, weilding this tool, that has the capactity for good or evil. Guns are a great example; defend your home, liberate a nation, or opress a people. InfoTech is no different.
Godpspeed,
Cooter
<< in regards to an Ives Smith post on racial income disparity>>
The corollary is that we also live in a world where items considered luxuries are now cheap and commonplace....
The root of the problem has been technology in all its forms. From medicine, to the transistor - we have skewed the natural selection curve completely out of whack. GDP in US is still trucking along with HUGE unemployment i.e. we need fewer bodies to generate a level of GDP. Problem is the political and benefits landscape (ponzi scheme) is built on an assumption of growing population (tax fodder and votes) that rewards more ankle biters while the free market data is screaming "we don't need any more". Medicine keep people alive that genetics, the environment or stupidity would normally have removed from the gene pool. Even worse - those bad genes expand at a logarithmic rate putting even greater pressure on health care costs.
Our social safety nets have rewarded having kids and our tax and political world have taken away the risk of failure (child tax credits, capital loss deductions and too big to fail). Now we will get even more healthy people but there is already an oversupply of potentially employable bodies - and all the while the pinheads in D.C. have been doing the circle jerk - technology and productivity have moved ever forward - pushing the bodies needed number ever further downward (and skewing it to the top and bottom).
The end result is what we see - those with brains and/or connections can exploit technology and productivity far greater and far faster than those less well endowed. Technology has pretty well wiped out the middle class - as many of those jobs vaporized out of existence - replaced by push button software or automation. Coupled with the recessionary times its like a double whammy to that group in the middle - you need highly skilled and raw labor - the value add in the middle was taken over by the microchip. Whole product planning departments were wiped out by SAP - custom sales for coders were wiped by salesforce.com - skilled data center dorks were replaced with HP Openview & CA - what took a 90/hr web designer/coder 10 years ago can had by a devry grad will to do it for 20/hr and robotics killed the UAW....
I got no answers - except we (our political reps) just keep glossing over the reality in the data and market. Capitalism really is a mirror of natural selection in nature. Natural selection is brutal in it's efficiency - there are winners and losers - some will become extinct over time. Those equipped survive and prosper - until they are wiped out. They (top of financial food chain) just tried to wipe themselves out - and in the interest of saving the little guy some pain (votes) - we propped them right back up to keep the system going..!!
Repub way - rising tide lifts all boats (assuming everyone has access to a boat)
Dem way - take boats from those that have them and give to those that don't - or tax and spend to divert the tide away from those that need boats
Neither address the fact we have to many people and too few boats
"Technology has pretty well wiped out the middle class - as many of those jobs vaporized out of existence - replaced by push button software or automation. "
The effects of crushing regulation and taxes probably had more to do with vaporizing middle class jobs than technology. Once the gate was lifted with NAFTA, these jobs couldn't get out fast enough.
Your avatar helps me get rid of my Dick Fuld headache.
I'd say some areas are already in a Depression. Here's an interactive map the Sacramento Bee has. Watch the state turn from green to blood red as unemployment spreads.
http://www.sacbee.com/2009/03/19/1698037/unemployment-in-california.html
When the budget cuts that have to be made later this year begin I think we will see social unrest. We are talking about severe limitations on healthcare, family assistance and as hundreds of thousands find their unemployment benefits used up they will be our modern 'hobos'. People without jobs, homes or futures.
Mr. Kolivakis,
What's your opinion on the current Baseline Scenario prediction
http://baselinescenario.com/2010/02/09/revised-baseline-scenario-februar...
that the debt-deflationary day of reckoning will be postponed as the consumer-credit caravan moves on to the developing world? A new credit bubble somewhere else seems to be the only likely way (aside from truly gonzo money-printing) to escape deflation.
The Fed will do whatever it takes to avoid debt deflation.
Exactly right Leo, and the only way to cause debt deflation is to pay down debt by making the promisary notes "good" or "whole". Too bad indeed, because that will never happen.
And the Fed will FAIL.
Question is what are the limits, and the side effects, of "whatever it takes." Wealth cannot be printed - it must first be created, then the FRNs representing it can be created. Not content to merely mortgage the future, we also print the opposite side of the balance sheet, and can get away with the illusion for a time since we print the reserve currency. Will come home to roost.
Nice blogspot by the way.
OK, but then what *will* it take? Do you think it's plausible that the US/Western economies will be able to escape through Door One marked "Emerging Market Consumer-Credit Bubble"? Or will Bernanke have to to open Door Two marked "Gonzo Money-Printing", even though he and everyone else /knows/ that the tiger's behind that door? Or do you see a third exit, and if so what is it? A sudden rebound in Western consumer borrowing based on animal spirits, ie. the Keynesian hair of the dog? Miraculous advances in innovation in the next few years? (I'm pretty enthusiastic about solar too, buuuut...)
I would like to provide a little anecdata about the 'developing world'. In Arequipa there a three new large scale mall complexes slated for construction this year. In 2000-01 the only department store in the city was La Uruguaya. No malls. The Chileans threw up what is known locally as 'Saga' and later some group put up Plaza Vea (Walmarty). The old paradigm of 'mercados de minoristas' is being destroyed and replaced with aspirational mall experiences made possible through the extension of credit- at rates that would break us up here in los Estamos Desunidos. Howzabout 60%. People are buying boots on 12 month installment plans. It's RAC-style 'agiotismo'. Brutal. Reminiscent of 1920s America. "Todos tienen plata!"
My recent visit to Lima was similarly frightening in this regard. The speculative money has gone south and east. We'll see if it ever comes back.
I agree somewhat on the credit caravan moving eastward. Consumers in India (not used to such low rates) are bingeing on goods like never before seen in my childhood there.
Mr. Kolivakis,
What's your opinion on the current Baseline Scenario prediction
http://baselinescenario.com/2010/02/09/revised-baseline-scenario-februar...
that the debt-deflationary day of reckoning will be postponed as the consumer-credit caravan moves on to the developing world?
Leo, it's a DISINTEGRATION, not even a depression.
+
How about a +pi for the b-day?
+ pi for the day indeed! + multiverse for the bday.
Leo,
I can't post charts. If I could, I'd post this one:
http://research.stlouisfed.org/fred2/series/FGEXPND?cid=107
then select Graph: Edit
then "Add Data Series"
New Line
then in the "search" bar I'd type FGRECPT and hit enter.
The resulting simple chart shows the divergence of federal expenditures from tax receipts. Also visible is a similar divergence that started in 2001, which the Fed now famously fought off with 11 consecutive interest rate reductions. Those reductions, along with the widespread use of OTC swaps to hedge everything with nothing, blew the bubble which just burst. The swaps are also blowing up (AIG et al).
My questions: if deflation persists, what happens to the FRED graph above? How does this impact the perceived solvency of the federal dot gov? How do impacts to the perceived solvency of the federal dot gov impact the viability of the currency known as "Federal Reserve Notes"?
Not merely rhetorical questions.
Wow.
It clearly shows Greenshpan's gunning the presses during the dot-bomb, and the present round of attempted bubble-blowing.
Fascinating how similar those events seem, and how much larger the second is... Although it appears a bit more dicey than the first one.
Great chart; worth a thousand words.
Would be good to get that posted.
Zero Hedger's!!
Please give Barry and his team a "shout out" if you are feeling so inclined.
This administration needs to know that there are actually a lot of smart people that GET the corruption being pulled daily...Why does Timmay still have a job?
http://www.whitehouse.gov/contact
barry soetoro, indonesian citizen and fraud upon
the american people is part of the problem....
the only thing i would shout at him is fuck you....
timmy is in office because obamafraud wants him
there.....robert gates is secdef because bush wants
him there....obamafraud is in iraq, afghanistan,
and pakistan because he and and his bosses want
more dead americans....bernanke, financial terrorist
of the universe along with lloyd blankenfiend
and a chorus of others are in office because
obamafraud gets the fraud he can impose upon america
along with his fraudulent treatment of chrysler
senior debt holders and his fraudulent props
underneath general motors....
i'm sorry but there is so much corruption oozing
out of every single pore of that dishonest crooked
whitehouse it makes richard nixon look like
snow white....
fuck you bitch. i suppose you are part of the stasi
enforcement brigade to report everything you hear
to the liar??
Now now... If there was corruption anywhere the feds would be all over it.. All of this stuff is legit.. Ben said so, must be true..
Leo,why use U-3?
It will be "the greatest depression"...first Hyperinflation of the currentseas. Then questions raised as to why food/gas is so spendy. All this while movie prices 'hover' at $10 a pop. Hollywood Futures pumps the last cents (sense) into the market, while people stand idly by, still wondering, why food/gas costs so much. Yes, deflation and inflation can happen at once. Deflation in worthless crap (3D TVs, ipads, movies, and other consumer "goods"), and inflation in goods of necessity (food, oil, gold/silver-real money).