More Plotting

This morning, Treasury Secretary Geithner will participate in a bilateral meeting with Prime Minister Singh of India.

Inhofe Begins Hadley Center "Climategate" Investigation

Sen. James M. Inhofe (R-OK), Ranking Member of the Senate Committee on Environment and Public Works, today sent letters to several scientists, some of whom allegedly manipulated data to prove the scientific "consensus" of global warming, as well as to the inspectors general of several federal agencies, notifying them to retain documents related to the release of emails from the Hadley Center's Climate Research Unit. He also stated in a press release:

The stakes in this controversy are significant, as it appears that the basis of federal programs, pending EPA rulemakings, and cap-and-trade legislation was contrived and fabricated. Moreover, it appears that, in an attempt to conceal the manipulation of climate data, information disclosure laws may have been violated.

I certainly don't condone the manner in which these emails were released; however, now that they are in the public domain, lawmakers have an obligation to determine the extent to which the so-called ‘consensus' of global warming, formed with billions of taxpayer dollars, was contrived in the biased minds of the world's leading climate scientists.

The letters are the first step in the investigation of the Hadley Center climate scandal. Last week, emails released by a computer hacker revealed that several leading climate scientists allegedly manipulated climate data and research used by the United Nations Intergovernmental Panel on Climate Change (IPCC). These scientists also appear to have refused outside access to their raw data, obstructed freedom of information requests, and plotted ways to prevent the publication of papers in peer-reviewed journals by scientists who question global warming alarmism.

Links to Letters:

Letter to Dr. Wigley

Letter to Dr. Santer

Letter to Dr. Mann

Letter to Ms. Wood

Letter to Ms. McClellan

Letter to Ms. Heatwole

Letter to Mr. Forch

Letter to Mr. Ehlenbach

Letter to Dr. Courtney

Letter to Professor Bradley

Letter to Dr. Wigley

Letter to Dr. Santer

Letter to Dr. Mann

Letter to Dr. Hughes

Letter to Dr. Ammann

Letter to EPA IG

Letter to Dept. of Interior

Letter to Dept. of Energy

Letter to CEQ

Letter to OMB IG

Letter to Commerce IG

A Small D.C. Scrub

Last night I had a dinner meeting at Charlie Palmer Steak which is just off Pennsylvania Ave at 101 Constitution Ave NW (Also home of Goldman Sachs' D.C. offices).

Since I am a walker, I took a leisurely stroll down Pennsylvania Ave, something seemed to be missing. Finally it hit me, there were no homeless on the streets. There are not many on this stretch, but there are a few. They were all gone. Then I noticed police cars blocking the streets. They normally don't do this heavy of a block off unless the president is coming through, but this appeared to be someone coming from the direction of the Capitol towards the White House. There's nothing really beyond the Capitol so it made little sense for it being the President. I asked one of the cops. It was Prime Minister Singh of India coming through.

Then it dawned on me, they scrubbed the streets for the Prime Minister. We'll show him what a country without homeless looks like!

All of which brings me to news late today out of the Treasury that Secretary Geithner and Finance Minister Pranab Mukherjee announced the establishment today of a new U.S.-India Economic and Financial Partnership to strengthen bilateral engagement and understanding on macroeconomic, financial sector, and infrastructure-related issues.

Secretary Geithner will visit India in early 2010 for the Partnership’s launch with Finance Minister Mukherjee.

The Partnership will focus on three broad areas for discussion – macroeconomic policy, the financial sector, and infrastructure development – and will meet at the Cabinet level once a year, alternately in the United States and India, led by Secretary Geithner and Minister Mukherjee. Working group and sub-cabinet level meetings will be held throughout the year to advance discussions on specific economic policy areas.

Got that? Infrastructure development is among the key areas. Building more roads, electricity and sewer systems, so that among other things there will be less homeless in India. Fewer living in squalor. This is a new focus area, of course, for the Carlyle Group.

I am really sorry I missed the actual clean out of the homeless. I wouldn't have been surprised if Carlyle Group co-Founder David Rubenstein, himself, was out there shooing them away. Afterall, he has infrastructure programs to sell.

Fed Minutes Show Confusion

Now just how do Ben Bernanke's new tools work, and should the Fed really use them?

Most will focus on the minor changes in 2010 GDP forecasts that are made in the just released Fed minutes, but the real story continues to be Bernanke's new tools. The Fed simply doesn't know what tools will work and how those tools will work, if huge amounts of reserves need to be drained from the system. Reserves that are hanging like a dark cloud over the Federal Reserve building. Here is the commentary directly from the minutes:

Participants expressed a range of views about how the Committee might use its various tools in combination to foster most effectively its dual objectives of maximum employment and price stability. As part of the Committee's strategy for eventual exit from the period of extraordinary policy accommodation, several participants thought that asset sales could be a useful tool to reduce the size of the Federal Reserve's balance sheet and lower the level of reserve balances, either prior to or concurrently with increasing the policy rate. In their view, such sales would help reinforce the effectiveness of paying interest on excess reserves as an instrument for firming policy at the appropriate time and would help quicken the restoration of a balance sheet composition in which Treasury securities were the predominant asset. Other participants had reservations about asset sales--especially in advance of a decision to raise policy interest rates--and noted that such sales might elicit sharp increases in longer-term interest rates that could undermine attainment of the Committee's goals. Furthermore, they believed that other reserve management tools such as reverse RPs and term deposits would likely be sufficient to implement an appropriate exit strategy and that assets could be allowed to run off over time, reflecting prepayments and the maturation of issues. Participants agreed to continue to evaluate various potential policy-implementation tools and the possible combinations and sequences in which they might be used. They also agreed that it would be important to develop communication approaches for clearly explaining to the public the use of these tools and the Committee's exit strategy more broadly.

Does this in anyway indicate a Fed that even knows if Bernanke's tools will work? And what assets are they talking about selling? They have been taking on junk mortgage securities. Who the hell is going to buy them?

And what the hell is this comment in the minutes? :

M2 appeared to have expanded at a moderate rate in September and October.

The only reason the M2 number is positive at all is because of the huge dip in money supply in August. The October money supply number is essentially flat with where money supply stood in July and still down versus June. Take a look for yourself.

One fact that can not be argued is that banks aren't making loans, and the Fed does know that:

Bank credit declined in September and in the first half of October, as the contraction in C&I loans contributed importantly to a further decline in total loans over the period. According to the SLOOS, bank lending standards and terms tightened further and demand continued to decline, on net, for most types of loans in the third quarter. Commercial real estate (CRE) loans also continued to decrease, reportedly because of widespread paydowns and charge-offs. In addition, residential mortgage loans on banks' books fell, and revolving home equity loans and consumer loans also contracted. The pace of decline in total loans at large banks continued to exceed that at smaller banks. The allowance for loan and lease losses rose further at large banks in September, but it was about unchanged at small banks.

However, if they start making loans, it means that they are using some of the excess reserves. What if they get carried away? How exactly is the Fed going to drain reserves? And won't that whack the economy?

Bottom line: The economy is in a very precarious state, and it is not clear if the Fed would be able to effectively withdraw reserves quickly if the need arose.

It would probably take a perfect storm of events, but it is not impossible for the Fed to lose control of money making activities, and the money supply could then take on a life of its own. How so? Step 1. Banks start loaning out against their excess reserves. Step 2. The Fed finds it impossible to sell the mortgage backed securities it owns. to drain reserves. Step 3. It tries the third-party reverse-repo tool, but this jacks interest rates sky high (as envisioned by some Fed members in the minutes). This forces the Fed to halt third-party reverse-repos and causes the Fed to just watch as a trillion in excess reserves are loaned out.

Now, as i said, it would take a perfect storm for this scenario to unfold, but it is not out of the question. And, even under this scenario, the Fed would likely create emergency new lending restrictions to prevent further lending of excess reserves. But, wouldn't speculation that such restrictions were about to be implemented simply cause banks to try and make loans even quicker?

We do live in interesting times. Don't die now, you really need to see how all this plays out.

Lloyd Blankfein Visits Princeton

Business Today's Laiyin Li provides the scoop:

Goldman Sach’s lead man (a.k.a. Chief Executive Officer), Lloyd Blankfein, showed up at GS’ Princeton University recruitment event. He delivered a brief and light speech to a packed room of students, detailing his fortuitous entry into Goldman after the unexpected acquisition of his former employer, which reinforced a main message of the synergism of preparation, talent, timeliness and a bit of sheer luck in the finance industry.

A handful of questions were made by the audience, including two inquiries on what aspects Mr. Blankfein personally enjoyed and “most wanted to change” about the dynamics of his company.

His response to both questions was the balance of work and life in the high-stressed, face-paced environment on Wall Street: he admired the capability of his colleagues to efficiently manage their jobs and leisure simultaneously but “wished they’d enjoy more time off”, although he further goes on to note that high inputs of time and effort are factors that constitute the unbeatable pace of the industry. Mr. Blankfein ended on an optimistic note stating that all majors were considered for jobs/internships, citing his law degree as an example.

Of course, most of those kids don't have a chance getting a job at GS. They already know who they want.

The Singing Economist

Richard Ebeling emails:

I have posted on Northwood's blog, "In Defense of Capitalism," a new piece today, "The Importance of Economic Freedom and the Dangers from Government Control."

When I was in the Bahamas a couple of weeks ago lecturing for the free-market, Nassau Institute, I appeared on one of the most popular and widely listened to radio talk shows.

I spoke about the meaning and idea of individual liberty and the free society; the nature and role of government; how government monetary and regulatory policies created the economic crisis we are in, and how current government policies are only making recovery more difficult; and I discussed the importance of free enterprise for a small nation such as the Bahamas.

As I mention on the blog, about half way through the radio interview I sing a few bars. If there can be "singing cowboys" like Roy Rogers, why not a "singing economist"?

The link to the audio mp3 of the interview is contained in the blog piece.

For direct access it is here.

Goldman Sachs: A Bunch of Operators Trying to Gaslight the Press

By Janet Tavakoli

Pulitzer Prize winner, Gretchen Morgenson of the New York Times wrote a must read article (“Revisiting a Fed Waltz with AIG,” November 21, 2009) on Sunday in which she recaps salient points from the November 17, 2009 report of the Office of the Special Inspector General (Neil Barofsky) for the Troubled Asset Relief Programs, “Factors Affecting Efforts to Limit Payments to AIG Counterparties,” and wrote:

On the question of whether this payout was what the report describes as a “backdoor bailout” of A.I.G.’s counterparties, Mr. Barofsky concluded: “The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.” [T]his was money the banks might not otherwise have received had A.I.G. gone belly-up.

Timothy Geithner’s interaction with the New York Times, first in his role as President of the FRBNY and later as Treasury Secretary, seems to be that of a bailout enabler and a PR spin doctor for Goldman Sachs. Based on the Sunday article’s revelations, I would not characterize his behavior as that of “a good man in a storm;” he seems a mere water-boy:

According to an e-mail message that Goldman sent to the New York Fed at the time [September of ‘08], Mr. Geithner talked about the article with Mr. Viniar, Goldman’s chief financial officer, before calling me. When Mr. Geithner called, he said that Goldman had no exposure to an A.I.G. collapse and that the article had left an incorrect impression about that. When I asked Mr. Geithner if he, as head of the regulatory agency overseeing Goldman, had closely examined the firm’s hedges, he said he had not. Mr. Geithner told me on Friday that he spoke with Mr. Viniar that day to ensure that Goldman’s hedges were adequate. And, notwithstanding the inspector general’s findings, he said he still believes Goldman was hedged.”

Prior to the article’s publication, Goldman Sachs responded to Ms. Morgenson’s questions about the Barofsky report via an email from its spokesman Luca van Praag. The entire exchange can be found here “Goldman’s Response to Questions About A.I.G.,” November 22, 2009.

Did Goldman Sachs dissemble and equivocate in its responses to the New York Times?

Based on these responses, the answer is yes. Treasury Secretary Geithner may wish to keep that in mind the next time he looks to Goldman Sachs for his answers.

Read the full article here.

With Friends Like George H.W. Bush, James Baker and the Carlyle Group...

Mikhail Khodorkovsky is on trial again in Russia. This means his worldwide PR operation, always operating aggressively, is now working double time.

One result of the Khodorkovsky PR push is a feature article in New York Times Magazine

Khodorkovsky has been sitting in a Russian slammer for the last six years for basically being an oligarch who, before his first trial, openly challenged then-President Vladimier Putin. With his release set to occur in less than two years, it is time for new charges. Which Russian authorities have dutifully brought. The NYT article provides a profile of Khodorkovsky's career and provides a glimpse into perhaps why he thought he could challenge Putin:

Even as Putin sought to curb the oligarchs, Khodorkovsky expanded his influence by new means...In the months before his arrest, he courted the administration of George W. Bush and power brokers like James Baker. His foundation recruited Henry Kissinger and Lord Rothschild for its board. He financed policy groups in D.C. and human rights activists at home, and to the joy of Laura Bush, he gave a million dollars to the Library of Congress. He joined the Carlyle Group’s Energy Advisory board, serving alongside Baker, and met — on separate occasions — with the elder Bush, Condoleezza Rice and Vice President Dick Cheney.

In Houston, Khodorkovsky dangled a 40 percent chunk of Yukos before the oilmen — the sale would have fetched billions and, possibly, ensured protection from the state. But in 2003, in a brazen affront, Khodorkovsky started to finance opposition political parties. Then that fall, he completed a megamerger, the union of Yukos and Sibneft, another Russian major, to create the world’s fourth-largest oil company. His rise was nearly complete.

But he was arrested before he could complete any deal in Houston. In other words, he became worthless to the Bush good old boy network. Kordo who? They ditched him faster than Bill Clinton ditched Monica Lewinsky. Obama and McCain have done more for him than Bush's boys. NYT again:

Deliverance, Khodorkovsky and his legal team believe, might lie in the West. In the aftermath of Khodorkovsky’s arrest, President Bush fell silent, and many old friends ran for cover, but in 2005, Senator Barack Obama co-sponsored, with John McCain and Joe Biden, Senate Resolution 322..declaring that “it is the sense of the Senate that the criminal-justice system in Russia has not accorded” Khodorkovsky and Lebedev “fair, transparent and impartial treatment.” After Obama’s inauguration, as the new president pledged to hit the “reset button” on U.S.-Russia relations, the oligarch’s lawyers and lobbyists waited nervously. In July, on the eve of his first Moscow summit, President Obama offered a surprise.

“It does seem odd to me,” Obama told Novaya Gazeta, the last genuine newspaper in Russia, “that these new charges, which appear to be a repackaging of the old charges, should be surfacing now, years after these two individuals have been in prison and as they become eligible for parole.” The president cushioned it — “I would just affirm my support for President Medvedev’s courageous initiative to strengthen the rule of law in Russia.” But to Russian ears, Obama’s statement resounded like a slap in Putin’s face.

So in the end it appears that Khodorkovsky money has gotten the attention of Obama. Money which obviously wasn't enough to keep the attention of the Bush players. The Bush boys are obviously tough SOB's. One day you are negotiating a huge oil deal with them, the next you end up in the slammer, and they don't know who you are.

The stay out of jail card is apparently used only for much closer kin.

HSBC to Retail Gold Buyers: "Get Your Gold the Hell Out of Here"

This is a fascinating report from WSJ's Carolyn Cui, which is probably the best proof yet that institutional buyers are moving into gold:

Fleets of armored trucks piled with gold bars and coins have been streaming out of midtown Manhattan in one unexpected consequence of the gold craze.

Amid gold's rise -- it has gained 32% this year and reached a record on Monday -- investors have been loading up on bullion and coins. One big problem now is where to store it. The solution from HSBC, owner of one of the biggest vaults in the U.S.: somewhere else.

HSBC has told retail clients to remove their small holdings from its fortress beneath its tower on New York City's Fifth Avenue. The bank has decided retail customers aren't profitable enough and is demanding those clients remove their gold to make room for more lucrative institutional customers...

The movement of gold from HSBC has created a stir not only among the bank's clients, but also among owners of warehouses and vaults around the country.

"I have never seen any relocation like this," says Jonathan Potts, managing director of FideliTrade, the parent company of the Delaware Depository Service Co., which has two warehouses in Wilmington. FideliTrade's two vaults have been filling up at an unprecedented pace, in part because it is taking in metal that has been ejected by HSBC...

Dealing with the fallout from HSBC's decision has become a full-time job for David Norris, executive vice president of GoldStar Trust Co., a Canyon, Texas-based retirement-account trustee, which organizes metal storage for its clients.

Mr. Norris says HSBC told GoldStar in July to immediately cease sending coins for storage. GoldStar, which had sent clients' holdings to HSBC for at least 15 years, is now figuring out how to get the coins out of the HSBC vault and down to the Delaware facility. "I can jump up and down and scream all day long about how much I don't like it. But it's their business decision," Mr. Norris says...

HSBC is telling clients to either move their metal, or prepare for it to be delivered to their doorsteps. In a July letter, seen by The Wall Street Journal, HSBC said the precious metal "will be returned to the address of record... at your expense," unless instructed otherwise...

Vault and warehouse owners say retail customers tend to be more expensive in part because of their diverse holdings. They usually buy American Eagle or Canadian Maple Leaf coins, and bars of various weights and sizes, all of which need to be categorized and stored separately. In contrast, institutions typically buy standardized bars of 100 or 400 ounces, making them easier to store. Institutions also tend to hold the metal for long periods...

Typically, a vault is protected with a 27-inch thick steel reinforced wall, surrounded with a "man-trap" -- a series of doors, each of which opens only after the previous door is locked, Mr. Coleman says.

Read the full article here. (Subscription required)

One in Four Borrowers Under Water

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

The best loan to value ratios are in:

New York at 49%
Rhode Island at 51%
Hawaii at 52%
Montana at 55%
Connecticut at 57%
Washington DC at 59%

The worst loan to value ratios are in:

Arizona at 91%
Florida at 87%
Michigan at 84%

The national average is 70%

View all states here.

Geithner Headed to First Obama State Dinner

This evening, Treasuey Secretary Geithner will attend the first State Dinner hosted at the White House by President Obama and the First Lady in honor of Prime Minister Singh of India and Mrs. Kaur.

Wikipedia on state dinners:

A state dinner is a dinner or banquet paid by a government and hosted by a head of state in his or her official residence in order to renew and celebrate diplomatic ties between the host country and the country of a foreign head of state or head of government who was issued an invitation. In many countries around the world, there are many different rules governed by protocol. State dinners often consist but are not limited to black tie or white tie dress, military honor guards, a four or five course meal, musical entertainment, dancing, and speeches made on behalf of the head of state hosting the state dinner as well as the foreign head of state

In the United States, a state dinner is a formal dinner, more often black tie in recent years rather than white tie, which is held in honor of a foreign head of state, such as a king, queen, president, or any head of government. A state dinner is hosted by the President of the United States and held in the State Dining Room at the White House. Other formal dinners for important people of other nations, such as a prince or princess, are called official dinners, the difference being that the federal government does not pay for them. State or official dinners are administered by strict diplomatic protocol and are overseen by a United States State Department diplomat or envoy, headed by the Chief of Protocol of the United States who issues and mails printed invitations, configures seating arrangements, as well as supervising state dinners in order to ensure that no diplomatic gaffes occur. A state dinner follows a State Arrival Ceremony which occurs on the South Lawn earlier in the day.

State dinners held in recent years are also given media coverage by the public affairs TV channel, C-SPAN.

Sequence of events

Queen Elizabeth II of the United Kingdom and President George W. Bush share a toast during a 2007 state dinner held in the State Dining Room.During a state dinner, honor guards in full dress uniform from all branches of the United States armed forces will be dispatched for ceremonial duty at the White House. The President of the United States and the first lady will formally greet the visiting head of state and his or her spouse at the north portico of the White House, who have traveled in a motorcade from Blair House, the traditional guest quarters of foreign heads of state and dignitaries. A brief photo opportunity for the media at the top of the staircase will occur. The president and first lady will then escort the visiting head of state and his or her spouse to the residence floor where the president's guests of honor will be served cocktails, wine, or champagne. The president and first lady will also introduce their guests of honor to a wide array of people from the United States such as ambassadors and diplomats, members of Congress and the president's cabinet, and other prominent people who are invited at the discretion of the president and first lady.

After an informal reception on the residence floor, the president and the foreign head of state or honoree, followed by the first lady and the foreign head of state's spouse, will descend the Grand Staircase to the Entrance Hall on the state floor where they will be met by the United States Marine Band, "The President's Own". Four ruffles and flourishes, immediately followed by Hail to the Chief, serves as the fanfare for the president's arrival. Often, the national anthem of the foreign head of state's country as well as the United States national anthem will be performed.

After a receiving line whereby the president introduces the visiting head of state or honoree to all of the guests, the president and the visiting head of state or honoree, his or her spouse, and the first lady, will walk down the Cross Hall and proceed to the State Dining Room where a four or five-course dinner has been meticulously planned and prepared several months in advance by the White House executive chef, his or her team, a pastry chef, and the White House florist, all in the watchful eye and in close consultation with the first lady and her social secretary. During the actual dinner itself, both the president and the foreign head of state or honoree will give a speech on a lectern, paying tribute to diplomatic relations between the United States and the foreign head of state's country. Soon thereafter, the guests are seated in the East Room and are formally entertained by a musical ensemble such as a pianist, a singer, or an orchestra of national notoriety. On past occasions, dancing has also been a component at the conclusion of a state dinner.

The Boom-Bust Cycle Examined (And Why Another Bust Is Coming)

Frank Shostak has a great piece on the boom-bust cycle and why it is Fed money expansion that causes the boom-bust cycle. It is one of the best explanations of Austrian Business Cycle Theory, combined with economic data from recent boom-busts in the economy, that I have seen. Here are key excerpts from his piece:

Irrespective of their psychological disposition, if the pool of money is not expanding, people's ability to generate bubbles in various markets is not tenable.

Recall that [Former Fed Governor and Bernanke confidant Frederic] Mishkin holds that bubbles in the first category — the dangerous bubbles — are set in motion by exuberant expectations about economic prospects or structural changes in financial markets, which trigger a credit boom.

But even if these factors are capable of triggering increases in credit, why must all this produce an expansion in the money supply? The increase in the money supply is the key for the emergence of asset bubbles.

For instance, when Joe lends his $100 to Bob via his bank, this means that Joe via the intermediary lends his money to Bob. On the maturity date, Bob transfers the money to the bank, and the bank in turn (after charging a fee) transfers the $100 plus interest to Joe.
Observe that here we don't have any increase in the money supply — the existing $100 was transferred from Joe to Bob. Also note that the $100 loan by Joe to Bob is fully backed up by $100.

Things are however quite different when Joe keeps the $100 in the bank warehouse or demand deposit. Now, by keeping the money in a demand deposit, Joe is ready to employ the $100 in an exchange at any time he deems it is necessary.

If the bank lends Bob $50 by taking it from Joe's deposit, the bank has now created $50 of unbacked credit, i.e., credit "out of thin air." There is now $150 in demand deposits backed by $100. By lending $50 to Bob, the bank creates $50 of demand deposit.

In this sense, the lending here is without a lender as such. The intermediary, i.e., the bank, has created a mirage transaction without any proper lender. On the maturity date, once the money is repaid to the bank, this type of money disappears. The amount of money will revert back to $100.

Hence an increase in the credit created out of thin air, all other things being equal, gives rise to the expansion in money supply. A fall in the credit created out of thin air, all other things being equal, results in the contraction of the money supply.

What then matters for asset price bubbles is the expansion in credit out of thin air. It is this type of credit that boosts the money-supply rate of growth and hence fuels asset-price bubbles.
Again, an increase in normal credit (i.e., credit that has an original lender) doesn't alter the money supply and hence has nothing to do with asset-price bubbles. (When Bob lends $100 to Joe, what we have here is an increase in lending and a transfer of an existing $100 from lender to borrower — and no change in the money supply)...

The modern banking system can be seen as one huge monopoly bank, which is guided and coordinated by the central bank. Banks in this framework can be regarded as the branches of the central bank...

Through ongoing monetary management, i.e., monetary pumping, the central bank makes sure that all the banks engage jointly in the expansion of credit out of thin air...

Once it is realized that the key source for asset bubbles is the monetary pumping of the Fed (i.e., central bank) it becomes clear that there is no need to categorize various bubbles.

What matters is the fact that the Fed's loose monetary policy gives rise to various nonproductive (bubble) activities that undermine the process of real-wealth formation, thereby impoverishing the economy.

The reversal of the Fed's pace of money pumping sets in motion the bursting of bubble activities...

Both the plunge in technology stocks from February 2000 to September 2002 and the October 1987 stock market crash were set in motion by the boom–bust policies of the Fed.

By the end of September 2002, the NASDAQ composite stock-price index closed at 1,172.06 — a fall of 75% from the high of 4,696.69 reached at the end of February 2000.

What set this collapse in motion was a sharp fall in the growth momentum of the Fed's monetary pumping. Year-on-year, the rate of growth of the Fed's balance sheet fell from 16.9% in December 1999 (Y2K pumping) to −3% by December 2000.

In response to this, the yearly rate of growth of our monetary measure AMS[2] fell from 6.7% in January 2000 to −1% by December 2000.

Also note that the yearly rate of growth of commercial-bank lending fell from 13.1% in September 2000 to 1.5% by December 2001. (Given the sharp decline in the growth momentum of commercial-bank lending, it is quite likely that the growth momentum of commercial-bank lending out of thin air had also fallen).

The yearly rate of growth of our measure of monetary liquidity fell from −1.1% in January 2000 to −5.3% by December 2000.

As a result of the plunge in the pace of monetary pumping, the yearly rate of growth of industrial production fell from 5.5% in June 2000 to −5.7% by November 2001.

Also, in the October 1987 stock-market crash, the Fed's monetary policy played a key role. By the end of October 1987 the S&P500 closed at 251.79 — a fall of 23.7% from the end of August 1987.

What set in motion this plunge was the sharp fall in the yearly rate of growth of Fed's balance sheet from 17% in April 1987 to 7.5% by September of that year.

In response to this, the yearly rate of growth of our monetary measure AMS fell from 17.2% in January 1987 to 10.5% by September. (Our measure of liquidity plunged from 15.1% in January to −0.3% in September).

As a result of the decline in the Fed's monetary pumping, the yearly rate of growth of industrial production fell from 7.7% in November 1987 to −0.3% by October 1989.

At present we are observing a repetition of the past boom–bust policies of the Fed. Thus the yearly rate of growth of the Fed's balance sheet jumped from 1.5% in February 2008 to almost 153% by December of last year.

Afterwards, the yearly rate of growth has been in steep decline, closing at 0.3% by mid-November this year. It seems that notwithstanding pronouncements by various Fed officials that the US central bank will keep its easy stance intact, the Fed in fact has already drastically reduced the pace of monetary pumping.

As a result of the wild fluctuations in the pace of money pumping by the Fed, the yearly rate of growth of AMS jumped from 0.8% in January last year to 33.1% by November of 2008. In early November 2009 the yearly rate of growth of AMS stood at −9.1% against −6.2% in October. In short, the Fed has already set in motion another economic bust.

Read the entire article here.

(Thanks to Centermass)

Geithner to Host Roundtable with Business Leaders from India

Treasury Secretary Tim Geithner will hold a roundtable discussion with CEOs and business leaders from India at 3:30 PM on Tuesday in the Secretary’s Large Conference Room at the Treasury Building.

According to the Treasury, Secretary Geithner will discuss "Treasury’s commitment to enhancing U.S.-India engagement on economic and financial issues, and will ask attendees for their views on Indian and global economic developments."

Roller Coaster Housing

Welcome to the world of government manipulated housing.

Buyers rushing to beat the then-deadline, for the tax credit for new home buyers, pushed resales of U.S. homes up by a 10.1% in October to a seasonally adjusted annual rate of 6.10 million, the National Association of Realtors estimated Monday.

The 6.10-million rate was the highest since February 2007.

In the months ahead things might be a bit different, given the rush is over. Mortgage applications for new purchases plunged to a 12-year low last week, and MBS origination activity correspondingly ran at low levels through the first half of the month. So we are likely to see a significant pullback in coming months housing market data.

Also keep in mind that a lot of this housing has been guaranteed by a completely mad FHA financing that could crash land at anytime.

Today's Dow Jones Industrials

While breaking to a new 52-week high, volume on the climb was less than 200 million shares.

This is a very dangerous market. It is floating up with little resistance, not charging like a bull.

I feel like it is 2007 and I am warning about real estate as it put in its final upward kick.

This being Thanksgiving week, trading will become more and more erratic as traders head off for the holiday, and just a few remain trading. Anything can happen, and it won't mean a thing next Monday.

Harvard Business on AIG: The Secret Bailout

By Bob Pozen

When an insolvent AIG paid out $165 million in executive bonuses, the public was outraged. But that is peanuts compared to the $62 billion AIG has quietly paid out to settle its obligations with some of the world's largest banks. Last week, the details of this settlement were finally disclosed.
The financial products subsidiary of AIG had sold these banks a huge volume of credit default swaps (CDS) — obligations of AIG to pay the full face value of designated bonds if the issuers were to default. Many of these bonds were backed by mortgages, whose values deteriorated sharply during the summer of 2008. In response, AIG executives tried to persuade these banks to settle its CDS obligations at a 40 percent discount to the face value of the relevant bonds.
Then, on September 16, 2008, the federal government took over almost 80 percent of AIG's stock in return for an $85 billion line of credit, which was later increased to over $180 billion in other loans and investments.

During the first week of November, 2008, the Federal Reserve Bank of New York — with the current Treasury Secretary Timothy Geithner as its then president — took over the negotiations with the large banks owning CDS contracts with AIG. After a week of negotiations, the New York Fed instructed AIG to settle these CDS contracts by paying the full face value of all the relevant bonds — $62 billion, as compared to their then market value of less than $30 billion.
In my view, these $62 billion in AIG payments were unjustified gifts to sophisticated investors, who had made an error of investment judgment in choosing a weak counterparty for their CDS contracts. The choice of appropriate counterparties is a critical component of risk management at all financial institutions. Even the vice-chair of the New York Fed admitted that the payments "will reduce their incentive to be careful in the future."

Moreover, no one disclosed the existence of these huge payments by AIG until March of 2009, when the US Senate Banking Committee pressed for some details about the AIG settlement. More information emerged last week in a report by a federal auditor, who wrote that the New York Fed "refused to use its considerable leverage" to negotiate discounts with AIG's counterparties. According to Janet Tavakoli, an expert on structured finance, "There is no way they should have paid at par (face value). AIG was basically bankrupt."

If the New York Fed had threatened to put the financial products subsidiary of AIG into bankruptcy, the counterparties would probably have agreed to settle their CDS contracts with AIG at 70 or 80 cents on a dollar. After filing for bankruptcy, the AIG subsidiary would have been allowed to repudiate all its CDS contracts subject to a court-approved reorganization plan. Most investors would accept discounts to settle CDS contracts now, rather than roll the dice in a lengthy legal proceeding.

Since federal officials have not explained why they chose to pay in full instead of negotiating discounts, we can only speculate. One theory is that the US Treasury wanted to provide financial assistance to foreign banks suffering the fallout of the American credit crisis. These foreign banks received roughly $40 billion of the $62 billion in payouts from AIG. Perhaps this was an indirect way to achieve the US Treasury's objective since Congress would not authorize a direct bailout of foreign banks.

There are conspiracy theories as well. Some observers point out that Stephen Friedman, the chairman of the New York Fed, is a director of Goldman Sachs. Goldman received almost $13 billion in settlement from AIG and Friedman bought 50,000 shares of Goldman shortly after the federal takeover of AIG. Goldman claims that it was fully hedged against any losses if AIG had failed, but the reliability of these hedges has been questioned by the federal auditor.
Why do you think the New York Fed acted the way it did in dealing with the large exposure of AIG to CDS contracts on mortgage-backed bonds? What do you think the Fed could or should have done instead?

Bob Pozen is a senior lecturer at Harvard Business School and the author of Too Big to Save? How to Fix the US Financial System


The above originally appeared at HarvardBusiness.org

Warren Buffett, Stop Using My Credit Card!

By Janet Tavakoli

I like Warren Buffett. I even wrote a book about the financial crisis contrasting his principles of prudent finance with recent excessive leverage, bad lending, and malfeasance (Dear Mr. Buffett). Buffett is not a regulator, an altruist, a consumer advocate, or an elected official. As CEO and largest shareholder of Berkshire Hathaway, his goal is to maximize shareholder value.

U.S. capitalism has morphed into a financial oligarchy. If Buffett’s choice is between getting along in the financial community or the public interest, public interest loses. But he didn’t cause our financial crisis, and he spoke out in advance about excessive leverage and bad lending. The financial markets are now wildly distorted. Others have funding advantages Buffett can only dream about, so he exploits an advantage when it becomes available.

I have been a trenchant critic of rampant financial malfeasance, and Buffett has only wished me well and told me to “keep writing.” For my part, I try to keep in mind that we view the world through different lenses.

On October 25, 2009, when BBC’s Evan Davis interviewed him, Buffett surprised me : Click here to view the eight minute video. It started out so well, but after six minutes the interview went sideways. [Not shown in this clip Buffett said his $5 billion investment in Goldman Sachs’ preferred stock (plus free warrants) last year was, in part, a bet on a US government bailout.1 He thought the U.S. taxpayer got a good deal, but we got a worse deal than Buffett negotiated, and as I explain here, I feel taxpayers got chump change.]

@ 3:14 min: Buffett explains that if there were only 50 people on a fertile island, we wouldn’t take the five smartest people out of the 50 and give them the most money and tax breaks for trading rice futures and speculating: “Hell no! We’d get everybody producing rice. The idea that people that move money around are some favored class—and they are in this country, even in terms of taxes—strikes me as getting pretty far away from where we should be.”

@ 6:00 minutes: Buffett claims shareholder losses obviated moral hazard. Not true. In control frauds (first identified by William K. Black), financial institutions are destroyed, and shareholders lose. Only the agents: CEOs, CFOs, and highly paid employees are enriched. Unlike Buffett, these agents are “stewards,” not major owners. Moral hazard remains an intractable problem.
@ 6:25 minutes: Buffett claims taxpayers have not bailed out anybody, because tax rates have not gone up (yet), and “tax receipts are way down this year.” Chinese and Japanese buying U.S. government bonds have bailed out financial institutions. Not true unless we default or destructively print inflationary dollars. Tax receipts are down because of unemployment. U.S. taxpayer credit bailed out financial institutions, and we will have to pay back our debts.

Imagine this scenario: Warren grabs my credit card and charges twelve suits. When I object that I don’t want to bail out his wardrobe, he chuckles and says, don’t worry, you haven’t paid anything yet. The bank that issued the credit card bailed out my wardrobe, and it hasn’t even had time to charge you interest on my purchase.

When I protest that I’ll have to eventually pay off both the balance and accrued interest, he tries flattery. You are so productive that by the time you have to pay this off, you’ll have so much more wealth that you won’t even notice these charges. You’ve always been good for it before, and you’ll figure out how to pay!

Don’t fall for it.

Read the rest here.(PdF)

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based consulting firm to financial institutions and institutional investors. She is the author of a book on the cause global financial meltdown: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009), Structured Finance & Collateralized Debt Obligations (Wiley 2003, 2008), and Credit Derivatives & Synthetic Structures (Wiley 1999 and 2001).